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, 1998
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.)
875 N. Michigan Ave., Suite 3660, Chicago, Illinois 60611
(Address of Principal Executive Offices) (Zip Code)
(312) 280-1119
(Issuer's Telephone Number, Including Area Code)
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. [ X ]
As of December 21, 1998, 10,441,227 shares of Common stock were outstanding.
As of December 21, 1998, the aggregate market value of shares of Common stock
held by non-affiliates was approximately $12.5 million (based upon the last
reported sale price of $1.3125 on that date on the American Stock Exchange).<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
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 40 additional
countries. Certain of these studies show that having the female condom
available allows women to have more options, resulting in an approximately 25%
increase in protected sex acts. Furthermore, certain studies show that when
the female condom is available as a choice, there is an approximately 34%
decrease in STDs, including HIV/AIDS.
The product is currently sold or available in either or both commercial
(private sector) and public sector markets in 30 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 the Company's 1999 fiscal year. The Company is currently in discussions
with potential distributors for key European countries, India, The People's
Republic of China and other countries.
As noted above, 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. The current price per unit is approximately $0.64 (Pounds) 0.38.
Pursuant to this agreement, the product is currently being marketed in Zambia,
Zimbabwe, Tanzania, Cote d' Ivoire, Bolivia, Haiti, South Africa and other
countries. The Company anticipates multiple launches will occur during the
next two years under this agreement, including launches in Kenya, Nigeria,
Uganda, Ghana, Cambodia, Bangladesh, Columbia and Central American countries.
Product
The female condom is made of polyurethane, a thin but strong material which is
resistant to rips and tears during use. The female condom consists of a soft,
loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and helps to hold it in place. The other ring remains
outside the vagina after insertion. The female condom lines the vagina,<PAGE>
preventing skin from touching skin during intercourse. The female condom is
prelubricated and disposable and is intended for use during only one sex act.
Global Market Potential
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. UNAIDS estimates that there are currently approximately 33
million people worldwide who are infected with HIV/AIDS and there are
approximately 16,000 people per day who are newly infected. In the Unites
States, the Center for Disease Control noted that in 1995, five of the ten most
frequently reported diseases were STDs. The Center also has noted that one in
five Americans over the age of 12 has Herpes and 1 in every 3 sexually active
people will get an STD by age 24. Women are currently the fastest growing
group infected with HIV and are expected to comprise the majority of the new
cases by the year 2000. The following highlights the substantial and growing
market for protection against STDs.
Worldwide:
Number of people with HIV/AIDS(*) 30 million
Number of new cases of HIV/AIDS daily(*) 16,000
Number of children expected to be orphaned by AIDS
by 2010 (at current rate)(*) 40 million
Examples of decreases in life expectancy due to HIV/AIDS(*)
Zimbabwe 22 years
Cote d'Ivoire 11 years
Number of Sub-Saharan African countries where more
than 10% of population is HIV positive (*) 13
(*) Source: UNAIDS
United States:
Number of top ten most frequently reported diseases
in the United States in 1995 that were STDs(1) 5
Ratio of individuals over 12 years of age with Herpes(1) 1 in 5
Annual expenditures to treat STDs(2) $17 billion
Dollars spent on STD treatment for every $1.00 spent
on prevention(2) $43
The United States has one of the highest rates of teenage pregnancy in Western
nations--Each year one in nine teenage women (ages 15-19) becomes pregnant(3)
(1) Source: Center for Disease Control
(2) Source: National Academy of Sciences
(3) Source: Alan Guttmacher Institute
At the 1998 World AIDS Conference in Geneva, Switzerland, the following points
were emphasized:
- - New drugs help some AIDS patients in Western nations. However, they are of
little value in developing countries due to their cost and the complexity of
their administration.
- - Simple, inexpensive treatments for HIV/AIDS --or a vaccine to prevent
infection from HIV --are unlikely in the near term.
- - Prevention is essential.<PAGE>
Currently there are only two products that prevent the transmission of HIV/AIDS
through sexual intercourse --the latex male condom and the female condom.
MALE CONDOM MARKET: It is estimated the global annual market for male condoms
is 4.7 billion units. However, the majority of all acts of sexual intercourse,
excluding those intended to result in pregnancy, are completed without
protection. As a result, it is estimated the potential market for barrier
contraceptives is much larger than the identified male condom market.
Advantages vs. the Male Condom
The female condom is currently the only available barrier contraceptive 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.
To the Company's knowledge, 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 sexual intimacy than the male condom which requires sexual arousal for
application.
Safety and Efficacy
Based on use of the product in clinical trials and five years of worldwide
marketing, the female condom has been proven to be safe and effective. The
following information reflects the results of various trials:
Reduction in STDs(1) 34% (Results when female
condom was available as
an option vs. when only
the male condom was
available.)
Reduction in Acts of Unprotected Sex(1) 25%
Effectiveness in Preventing Pregnancy(2) 95%(3) (When used properly
with every sex act)
(1) Supported by UNAIDS
(2) Supported by The U.S. Agency for International Development (USAID)
and conducted by Family Health International (FHI) <PAGE>
(3) Recent studies completed in Japan evaluating the female condom's
effectiveness in preventing pregnancy, which were submitted to the
Japanese regulatory authorities in connection with their review of
the product, showed the female condom to be approximately 98%
effective when used consistently and correctly.
Cost Effectiveness
At the 1998 World AIDS Conference held in Geneva, Switzerland, UNAIDS presented
the results from its cost-effectiveness study which indicated that making the
female condom available is highly cost effective in reducing public health
costs in developing countries.
Endorsements
Currently, the female condom is endorsed for use by the World Health
Organization (WHO), the United Nations Joint Programme on AIDS (UNAIDS), the
United States Agency for International Development (USAID), many nongovernment
organizations (NGOs) around the world and a number of city and state public
health departments in the United States.
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 EU. In addition to the United States
and the EU, 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 1999.
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.
Strategy
The Company's strategy is to act as a manufacturer, selling the female condom
to the global public sector, United States public sector and commercial
partners for country-specific marketing. The public sector and commercial
partners assume the cost of shipping and marketing the product. As a result,
as volume increases, the Company's operating expenses will not increase
significantly.
Commercial Markets
The Company markets the product directly in the United States and United
Kingdom. The Company has commercial partners which have recently launched the
product in Canada, Brazil, Venezuela, Taiwan, South Korea and Holland. The<PAGE>
Company has signed agreements with partners in Japan and Bangladesh where
launches are expected during the coming year.
Japanese Market
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 Japanese health care
company. The agreement between the Company and Taiho requires Taiho to perform
clinical testing of the product in Japan and obtain the necessary regulatory
approvals to market the product. After approval, expected during the Company's
1999 fiscal year, the Company will manufacture the product and supply it to
Taiho, which will have responsibility for marketing and distributing the female
condom in Japan. 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 1.5 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 25% over male condoms alone.
The Company has a multi-year agreement with UNAIDS to supply the female condom
to developing countries at a reduced price which is negotiated each year based
on volume. The current price per unit is approximately $0.64 (pounds) 0.38.
During the last year, the female condom has been launched in the countries of
Zimbabwe, Tanzania, Bolivia, Haiti, South Africa and Zambia. It is anticipated
that multiple product launches will occur in several countries during the next
two years, including in the countries of Kenya, Nigeria, Uganda, Ghana,
Cambodia, Bangladesh, Columbia and Central American countries. Population
Services International (PSI), an organization that performs social marketing of
various products in developing countries, launched the female condom in
Zimbabwe under the UNAIDS agreement. Based on its success in Zimbabwe, PSI, in
collaboration with UNAIDS, is now marketing the female condom in seven
countries. In PSI's current annual report, PSI indicated that, in
collaboration with UNAIDS, it plans to launch the female condom worldwide. PSI
also notes in its report that in 1997 it distributed 539 million male condoms.
In the United States, the product is marketed to city and state public health
clinics, as well as not-for-profit organizations such as Planned Parenthood.
Currently 10 major cities and 15 state governments, including the states of
New York, Pennsylvania, Florida, Connecticut, Hawaii, Louisiana, Maryland, New
Jersey, South Carolina and Illinois and the cities of Chicago, Philadelphia,
New York and Houston have purchased the product for distribution with a number
of others expressing interest. All major cities and states have reordered
product after their initial shipments.
State-of-the-Art Manufacturing Facility
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.<PAGE>
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. Latex male
condoms cost less and have brand names that are more widely recognized than the
female condom. In addition, male condoms are generally manufactured and
marketed by companies with significantly greater financial resources than the
Company. It is also possible that 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 December 21, 1998, the Company's operations had 75 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 December 21, 1998, the Company had unfilled orders of $533,000. The
comparable amount as of the same date of the prior year was $962,000. All of
these unfilled orders are expected to be filled during Fiscal 1999.
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 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<PAGE>
In 1998 and 1997, the Company incurred research and development costs from
continuing operations of $2,500 and $60,811, respectively. These expenditures
were primarily related to conducting acceptability studies.
Industry Segments And Financial Information About Foreign And Domestic
Operations
See Note 10 to Notes to Consolidated Financial Statements, included herein.
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. The Company, known
as Wisconsin Pharmacal Company, Inc. (the Company's predecessor), 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.
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 23
million female condoms around the world.
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. However, the Company has subleased these premises to
a third party. 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 under a lease which expires in 2027. The FDA-approved manufacturing
process is subject to periodic inspections by the FDA as well as the EEC<PAGE>
quality group. 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, 1998.<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
11, 1998 was 487. 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.
---------- Quarters ---------
1998 FIRST SECOND THIRD FOURTH
- ------------- --------- --------- --------- ---------
Price per common share - High $ 4 5/16 $ 3 1/2 $ 3 5/8 $ 3 1/2
Price per common share - Low $ 3 $ 2 1/2 $ 2 1/2 $ 1 7/16
1997
- -------------
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
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 the present.
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 increases, 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, 1998 ("1998") Compared to Fiscal Year Ended
September 30, 1997 ("1997")<PAGE>
The Company had revenues of $5.5 million and a net loss attributable to
stockholders of $(4.3) million ($0.43) per share in 1998 compared to net
revenues of $2.9 million and a net loss attributable to common stockholders of
$(6.3) million ($0.74) per share in 1997.
As discussed more fully below, the $2.0 million reduction (31%) in the net loss
attributable to stockholders from $(6.3) million in 1997 to $(4.3) million in
1998 is the result of increasing sales volume, reducing expenditures for
advertising and promotion, reducing interest expense and adjusting reserves for
inventory obsolescence. Net losses for both 1998 and 1997 are attributable to
fixed manufacturing overhead and administrative costs associated with operating
the manufacturing facility configured to support significantly greater volume
levels.
Net revenues increased $2.6 million (87%) in 1998 over the prior year. Rapidly
growing sales into both the global public sector and city and state agencies
within the United States accounted for all of the increase. Net sales to
commercial accounts declined principally as a result of reduced expenditures
for product advertising and promotion support.
The results reflect the Company's strategy to act as a manufacturer supplying
the public sector and commercial partners throughout the world. The Company's
partners pay for all marketing and shipping costs. Consequently, as the
Company's sales volume increases the Company's operating expenses will not
increase significantly.
In 1998, the cost of products sold of $5.3 million was 97% of net sales
compared with 1997 cost of products sold of $3.5 million which was 119% of net
sales. The reduction of costs of products sold as a percentage of net sales
resulted in an increase in gross profit (loss) of $0.8 million from a loss of
$(0.6) million in 1997 to a profit of $0.2 million in 1998. The reduction in
cost of products sold as a percentage of net sales in 1998 resulted from
improved absorption of fixed manufacturing overhead costs over the increased
manufacturing unit volume. The Company's UK-based manufacturing facility
utilized approximately 12% of its capacity in 1998 compared with approximately
5% of its capacity in 1997. In 1997, the Company recorded a favorable
adjustment to its reserves for inventory obsolescence reducing cost of products
sold by $1.1 million. During 1998, the Company further adjusted inventory
obsolescence reserves, reducing cost of products sold by $0.9 million. The
Company's reserve for inventory obsolescence was $40,734 and $894,000 at
September 30, 1998 and 1997, respectively.
Advertising and promotion expenditures decreased 74% to $0.4 million in 1998
compared to $1.6 million in 1997. The 1997 expenditures reflect costs for the
Company's previous print advertising campaign and single market test of the
Company's television commercial which was not repeated in 1998. Advertising and
promotion relates 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. Through expenditures since the product launch, the Company has
established that the female condom is responsive to promotion; but due to the
Company's size, it doesn't possess the resources to conduct a significant
consumer marketing program. Accordingly the Company is seeking potential
partners for the United States that have the resources to conduct such a
marketing program.<PAGE>
Selling, general and administrative expenses decreased $0.1 million, or 5%,
from $3.0 million in 1997 to $2.9 million in 1998. As a percentage of net
revenues, the selling, general and administrative expenses were 53% in 1998
compared with 104% in 1997. The Company's initiatives to reduce spending in
all administrative areas have resulted in reductions in the expenses associated
with telecommunications, legal and financial matters in the United States and
the United Kingdom. These reductions were offset by increased compensation
expense.
Net nonoperating expense for 1998 decreased $0.8 million (80%) to $0.2 million
from $1.0 million in 1997. The decrease is the result of lower interest
expense for 1998 ($0.5 million) compared with 1997 ($1.3 million). The prior
year interest expense included interest paid on convertible debentures which
were all converted during 1997 as well as the amortized cost of a beneficial
conversion feature associated with the issuance of the convertible debentures.
Comparable interest costs were not incurred during 1998.
In order for the Company to cover fixed manufacturing overhead costs and
realize a break-even at the gross profit level, annual unit sales of
approximately 7.1 million female condoms are required based upon the current
average selling price per unit. The Company's unit sales for fiscal 1998 were
7.4 million female condoms. Additionally, in order to cover administrative
expenses and achieve a break-even before advertising and promotion expenses,
the Company must achieve cumulative annual unit sales of approximately 13.0
million female condoms based upon the current average selling price per unit or
approximately 22.0% of manufacturing capacity.
Factors That May Affect Operating Results and Financial Condition
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 numerous in-country
distributions in the public sector, particularly in Africa and Latin America.
Several partnership agreements have been completed for the commercialization of
the female condom in private sector markets around the world. However, the
Company is dependent on country governments as well as city and state public
health departments within the United states to continue their commitment to
prevention of STDs, including AIDS, by including female condoms in their<PAGE>
programs. The Company is also dependent on finding appropriate partners for
the private sector markets around the world. Once an agreement is completed,
the Company is reliant on the effectiveness of its partners to market and
distribute the product. Failure by the Company's partners to successfully
market and distribute the female condom or failure of country governments to
implement prevention programs which include distribution of barrier methods
against the AIDS crisis, or an inability of the Company to secure additional
agreements for AIDS crisis, or an inability of the Company to secure additional
agreements for new markets either in the public or private sectors could
adversely affect the Company's financial condition and results of operations.
Inventory and Supply
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market and Foreign Currency 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. To
date, the Company's management has not deemed it necessary to utilize currency
hedging strategies to manage its currency risks. On an ongoing basis,
management continues to evaluate its commercial transactions and is prepared to
employ currency hedging strategies when it believes such strategies are
appropriate. 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.
Government Regulation
The female condom is subject to regulation by the FDA, pursuant to the federal
Food, Drug and Cosmetic Act ("the FDA Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices," which include testing,
quality control and documentation procedures. The Company's compliance with
applicable regulatory requirements is monitored through periodic inspections by
the FDA. The failure to comply with applicable regulations may result in
fines, delays or suspensions of clearances, seizures or recalls of products,
operating restrictions, withdrawal of FDA approval and criminal prosecutions.
The Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the FDA.
Liquidity and Sources of Capital
Historically, the Company has incurred significant operating losses. Cash used
in continuing operations was $2.8 million and $5.0 million for 1998 and 1997,
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. <PAGE>
During 1998, the Company received approximately $1.0 million in proceeds from
newly-issued notes payable, $1.8 million (net of transaction costs) from the
sale of convertible preferred stock and warrants, $0.4 million from the
issuance of common stock and $0.1 million from the issuance of common stock
upon exercise of options. 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-science 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. This agreement
has been extended for an additional six months. 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.
On November 19, 1998, the Company executed an agreement with a private investor
(the "Equity Line Agreement"). This agreement provides for the Company, at its
sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $6.0 million of the Company's Common Stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires 24 months after the effective date of the pending
registration statement and, among other things, provides for minimum and
maximum puts ranging from $100,000 to $1,000,000 depending on the Company's
stock price and trading volume. Puts cannot occur more frequently than every
20 trading days. Upon a proper put under this agreement, the investor
purchases Common Stock at a discount of (a) 12% from the then current average
market price of the Company's Common Stock, as determined under the Equity Line
Agreement, if such average market price is at least $2 or (b) 18% from the then
current average market price if such average market price is less than $2. In
addition, the Company is required to pay its placement agent sales commissions
in Common Stock or cash, at the placement agent's discretion, equal to 7% of
the funds raised under the Equity Line Agreement and issue warrants to the
placement agent to purchase shares of Common Stock, at an exercise price of
$2.17 per share, equal to 10% of the Shares sold by the Company under the
Equity Line Agreement. Pursuant to the Equity Line Agreement, the Company
issued the investor a Warrant to purchase 200,000 shares of Common Stock at
$2.17 per share.
The timing and amount of drawdowns on this line of credit are totally at the
Company's discretion, subject to certain conditions. The Company is required
to draw down a minimum of $1 million during the two-year period. If the
Company does not draw down the minimum, the Company is required to pay the
investor a 12% fee on that portion of the $1 million minimum not drawn down at
the end of the two-year period.<PAGE>
While the Company believes that its existing capital resources (including
expected proceeds from sales of Common Stock pursuant to the Equity Line
Agreement) will be adequate to fund its currently anticipated capital needs, if
they are not or the Company does not receive shareholder approval to amend its
Articles of Incorporation to increase its authorized Common Stock, enabling the
Company to sell sufficient Shares under the Equity Line Agreement, the Company
may need to raise additional capital until its sales increase sufficiently to
cover operating expenses. In addition, there can be no assurance that the
Company will satisfy the conditions required for it to exercise puts under the
Equity Line Agreement. Accordingly, the Company may not be able to realize all
or any of the funds available to it under the Equity Line Agreement.
The Company has a $1 million note from a director, Mr. Stephen Dearholt, due in
March 1999. Mr. Dearholt has agreed to extend this note one year to March 2000
on the same terms and conditions if the Company requests such extension.
Until internally generated funds are sufficient to meet cash requirements, FHC
will remain dependent upon its ability to generate sufficient capital from
outside sources. While management believes that revenue from sales of the
female condom will eventually exceed operating costs and that ultimately
operations will generate sufficient funds to meet capital requirements, there
can be no assurance that such level of operations will ultimately be achieved,
or be achieved in the near term. Likewise, there can be no assurance that the
Company will be able to source all or any portion of its required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of the female condom generate sufficient
revenues to fund operations. In addition, any funds raised may be costly to
the Company and/or dilutive to stockholders. If the Company is not able to
source the required funds or any future capital which becomes required, the
Company may be forced to sell certain of its assets or rights or cease
operations.
As of December 21, 1998, the Company had approximately $1.0 million in cash,
net trade accounts receivable of $0.5 million and current trade accounts
payable of $0.7 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 absorbed increased costs and expenses without
increasing selling prices.
Year 2000 Issues
The Company's State of Readiness. The Company's main financial and
manufacturing hardware and software systems have been tested and are either now
Year 2000 compliant or are expected to be by December 31, 1998. This was
accomplished primarily through systems upgrades and maintenance done over the
last few years. The Company is in the process of surveying major customers and
suppliers regarding their Year 2000 readiness and, to date, the Company is not
aware of any significant Year 2000 issues at these entities that would
materially affect the Company's business. The Company believes that if a Year
2000 problem develops at any of the Company's vendors whereby the vendor
becomes unable to address the Company's needs, alternative vendors are readily<PAGE>
available that could furnish the Company with the same or similar suppliers or
services without material undue delay or expense.
Costs to Address the Company's Year 2000 Issues. The majority of the Company's
Year 2000 issues were corrected either through systems upgrades or normal
maintenance contracts. The cost of these improvements to date has been
approximately $20,000.
Risks to the Company for Year 2000 Issues. With regard to systems under the
Company's control, the Company knows of no significant exposure that the
Company has to the Year 2000 issue since, if necessary, the Company's systems
are capable of accepting manually entered data. The Company believes the worst
case scenario is that the Company would have to revert back to certain manual
systems. The Company believes that its customers and vendors are at various
stages of compliance but the Company has not been made aware of significant
Year 2000 issues that would materially affect its business with them. The
Company will continue to monitor Year 2000 compliance with its customers and
vendors throughout 1999 but it will not be able to achieve the same degree of
certainty that it can with its own internal systems.
The Company's Contingency Plan. To the extent that the Company discovers minor
internal systems that are not Year 2000 compliant by mid-1999, it will have
time to implement manual systems by year-end 1999 which the Company believes
will significantly reduce the financial risk to the Company.
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, 1998
Consolidated Statements of Operations for each of the two years in the period
ended September 30, 1998
Consolidated Statements of Stockholders' Equity for each of the two years in
the period ended September 30, 1998
Consolidated Statements of Cash Flows for each of the two years in the period
ended September 30, 1998
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, 1998, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended September 30, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 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, 1998, and the results of their
operations and their cash flows for the years ended September 30, 1998 and
1997, 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.
/s/ McGLADREY & PULLEN, LLP
Schaumburg, Illinois
November 5, 1998, except for the fourth paragraph
of Footnote 15 as to which the date is
November 19, 1998<PAGE>
Consolidated Balance Sheet
September 30
1998
------------
ASSETS
CURRENT ASSETS
Cash $ 1,480,287
Accounts receivable, net of allowance for doubtful accounts
of $80,000 and allowance for product returns of $230,000 1,138,274
Inventories 925,425
Prepaid expenses and other current assets 395,293
------------
TOTAL CURRENT ASSETS 3,939,279
OTHER ASSETS
Intellectual property, net of accumulated amortization of
$336,098 924,319
Other assets 165,701
PROPERTY, PLANT AND EQUIPMENT
Equipment, furniture and fixtures 4,114,371
Less: accumulated depreciation (1,584,776)
------------
2,529,595
------------
$ 7,558,894
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, related party, net of unamortized discount of
$162,861 $ 837,139
Current maturities of long-term debt and capital lease
obligations 626,066
Accounts payable 473,979
Accrued expenses and other current liabilities 614,820
Preferred dividends payable 147,634
----------
TOTAL CURRENT LIABILITIES 2,699,638
LONG-TERM LIABILITIES
Long term debt and capital lease obligations, less current
maturities 4,882
Deferred gain on sale of facility 1,766,611
Other long term liabilities 153,186
----------
4,624,317
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, Series I, 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 10,417,757 shares. 104,158
Additional paid-in capital 43,833,843
Foreign currency translation gain 304,980
Accumulated deficit (41,295,874)
------------ <PAGE>
2,953,907
Treasury Stock, at cost, 10,000 shares (19,330)
------------
Total Stockholders' Equity 2,934,577
------------
$ 7,558,894
============
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Operations
Years ended September 30
1998 1997
------------ -----------
NET REVENUES $ 5,451,399 $ 2,916,408
COST OF PRODUCTS SOLD:
Cost of goods sold 6,130,819 4,530,185
Change in obsolescence allowance (857,450) (1,054,476)
------------ ------------
Total Cost of Products Sold 5,273,369 3,475,709
------------ ------------
GROSS PROFIT (LOSS) 178,030 (559,301)
OPERATING EXPENSES
Advertising and promotion 433,821 1,642,347
Selling, general and administrative 2,895,108 3,036,765
------------ ------------
Total Operating Expenses 3,328,929 4,679,112
------------ ------------
Operating (loss) (3,150,899) (5,238,413)
NONOPERATING INCOME (EXPENSE)
Interest expense (456,662) (1,268,980)
Interest income 133,104 176,717
Nonoperating income/(expense) 117,141 79,527
------------ ------------
(206,417) (1,012,736)
------------ ------------
Net (loss) (3,357,316) (6,251,149)
Preferred dividends accreted, Series 2 817,000 ---
Preferred dividends, Series 1 132,669 14,965
------------ ------------
Net (loss) attributable to common stockholders $(4,306,985) $(6,266,114)
Net (loss) per common share outstanding $ (0.43) $ (0.74)
Weighted average common shares outstanding 9,971,493 8,453,266
See notes to consolidated financial statements.<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
<CAPTION> Foreign
Additional Currency
Preferred Common Paid-inTranslationAccumulated
Stock Stock Capital Gain (Loss) Deficit
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 $ -- $72,117 $33,755,072 $83,858($30,722,775
Net loss -- -- -- -- (6,251,149)
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 beneficial conversion
feature with convertible debentures -- -- 398,000 -- --
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 -- -- -- -- (14,965)
Translation adjustment -- -- -- 119,337 --
------ --------- --------- --------- --------- -
Balance at September 30, 1997 $6,800 $95,145 $40,238,387 $203,195 ($36,988,8<PAGE>
Consolidated Statements of Stockholders' Equity
Foreign
Additional Currency
Preferred Common Paid-inTranslationAccumulated
Stock Stock Capital Gain (Loss) Deficit
--------- --------- -------- -------- --------
Net loss -- -- -- -- (3,357,316)
Issuance of 729,927 shares of
Preferred Stock (net of offering
costs of $156,616) 7,299 -- 1,836,085 -- --
Issuance of 729,927 shares of
Common Stock upon conversion of
Preferred Stock (7,299) 7,299 -- -- --
Issuance of 29,400 shares of
Common Stock upon exercise of
stock options -- 294 58,506 -- --
Issuance of 25,000 shares of
Common Stock for consulting
services -- 250 93,500 -- --
Issuance of 107,000 shares of
Common Stock under stock bonus plan -- 1,070 306,555 -- --
Issuance of 10,000 shares of
Common Stock upon exercise of
warrants -- 100 19,900 -- --
Issuance of 18,000 options to
employees -- -- 51,660 -- --
Issuance of warrants with short-
term notes payable -- -- 297,500 -- --
Issuance of warrants for
professional services -- -- 114,750 -- --
Preferred Stock dividends -- -- -- -- (132,669)
Preferred Stock dividends accreted -- -- 817,000 -- (817,000)
Purchase of 10,000 Shares of
Common Stock held in Treasury -- -- -- -- --
Translation adjustment -- -- -- 101,785 --
------ -------- -------- -------- --------
Balance at September 30, 1998 $6,800 $104,158 $43,833,843 $304,980 ($41,295,87
$2,934,577
====== ======== ======== ======== ========
/TABLE
<PAGE>
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Cash Flows
Years ended September 30
1998 1997
----------- ----------
OPERATING ACTIVITIES
Net (loss) ($3,357,316) ($6,251,149)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation 533,994 553,298
Amortization of intellectual property rights 123,437 121,741
Provision for (recovery of) inventory obsolescence (857,450) (1,054,476)
Provision for doubtful accounts, returns and discounts 24,717 119,274
(Gain) loss on disposal of equipment -- (84,646)
Issuance of common stock for bonuses and
consulting services 401,375 --
Issuance and revaluation of warrants and options 166,410 360,988
Amortization of debenture issuance costs -- 27,507
Amortization of discounts on notes payable
and convertible debentures 329,327 954,820
Amortization of deferred income realized
on U.K. grant (61,274) (39,870)
Write down of note receivable to realizable value -- 92,471
Amortization of deferred gain on sale and leaseback
of building (94,795) (70,119)
Changes in operating assets and liabilities:
Accounts receivable (538,219) (271,173)
Inventories 891,421 1,086,999
Prepaid expenses and other current assets (92,058) 28,260
Accounts payable (411,286) 138,532
Accrued expenses and other current liabilities 188,798 (730,929)
--------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (2,752,919) (5,018,472)
INVESTING ACTIVITIES
Capital expenditures (58,827) (24,597)
Proceeds from sale of property and equipment -- 3,376,056
Proceeds from repayment of note receivable 750,000 --
Proceeds from return of lease deposits 90,859 62,031
Payments for lease deposits -- (245,953)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 782,032 3,167,537
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 1,843,384 1,603,748
Proceeds from issuance of common stock upon exercise
of options and warrants 78,800 178,666
Purchase of Common Stock held in Treasury (19,330) --
Proceeds from related party notes issued 1,000,000 1,000,000
Proceeds from convertible debentures issued -- 2,020,000
Payments on notes payable, related party (1,000,000) (2,160,000)
Costs to issue convertible debentures -- (155,400)
Payments on long-term debt and capital lease obligations(113,131) (1,872,560)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,789,723 614,454
Effect of exchange rate changes on cash 27,984 (44,132)
---------- ---------- <PAGE>
(Decrease) in cash (153,180) (1,280,613)
Cash at beginning of year $1,633,467 2,914,080
--------- ----------
Cash at end of year $1,480,287 $1,633,467
========== ==========
See notes to consolidated financial statements. <PAGE>
Consolidated Statements of Cash Flows
Years ended September 30
1998 1997
----------- ----------
Supplemental cash flow disclosures:
Interest paid $125,246 $273,714
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 297,500 280,176
Capital lease obligations incurred for equipment -- 56,588
Preferred dividends declared, Series 1 132,669 14,965
Preferred dividends accreted, Series 2 817,000 --
Sale of manufacturing facility:
Proceeds from sale -- 3,365,000
Depreciated cost of property -- (1,398,819)
----------- -----------
Deferred gain on sale -- 1,966,181
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. 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 product is currently sold or available in either or both commercial
(private sector) and public sector markets in 30 countries. It is commercially
marketed directly by the Company in the United States and the United Kingdom
and through marketing partners globally.
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:
Trade 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.
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.
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: 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.
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 the 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.<PAGE>
Translation adjustments are recorded as a separate component of stockholders'
equity as the local currency is the functional currency.
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 1998 and
1997 was $2,500 and $60,811, 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.
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<PAGE>
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 Cash Flows to conform to the 1998 presentation.
Note 2. Inventories
The components of inventory consist of the following at September 30, 1998:
Raw material $ 309,390
Work in process 138,409
Finished goods 518,360
Less allowance for obsolescence (40,734)
--------
Net Inventory $ 925,425
=========
Note 3. Leases
Equipment, furniture and fixtures include the following amounts for leases
which have been capitalized at September 30, 1998:
Leasehold interest in equipment, furniture
and fixtures $ 73,539
Less accumulated depreciation (28,727)
--------
$ 44,812
========
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. Reimbursement for the
affiliate rent expense was $48,146 and $51,256 in 1998 and 1997, respectively.
The affiliate's lease is with an unrelated third party which expires January
31, 2001. On November 1, 1998 the affiliate sublet the office space for the
remaining term of the lease.
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 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, 1998 was $1,766,611 (Pounds) 1,039,489.
Concurrent with this transaction, the Company repaid the mortgage loan on this
property of $1,834,000 (Pounds) 1,062,500.<PAGE>
In 1987, a subsidiary entered into a lease for office and factory space
expiring January 31, 2001. These offices and factory space were vacated and
subsequently this space was subleased to a third party for a period expiring
January 31, 2001. 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 operating lease expense in total and separately
for transactions with related parties is as follows:
September 30
1998 1997
-------- -------
Operating lease expense: Factory and office leases $820,695 $579,197
Office space used by officers 48,146 51,255
Other 17,811 88,772
-------- -------
Total lease expense $886,652 $719,224
======== ========
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, 1998:
Rentals
Receivable
Under
Capital Operating Subleases
------------------- --------
1999 $ 19,526$ 514,502 $46,850
2000 4,882 490,416 39,204
2001 --- 459,839 13,068
2002 --- 331,403 ---
2003 --- 331,403 ---
Thereafter --- 4,376,536 ---
--------- --------- ---------
Total minimum payments $ 24,408$6,504,099 $99,122
========== ========
Amount representing interest (5,138)
---------
$ 19,270
=========
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 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 was repaid in full in 1998. The discount
in combination with the note's 12% coupon resulted in an effective interest
rate of 53 percent on the note.<PAGE>
During 1998, 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 1999. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000
shares of the Company's common stock at $2.25 per share, which represented 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 $297,500.
Any stock issued under the warrants carry certain registration rights. The
warrants expire in 2006. 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, 1998, net
of unamortized discount of $162,861. The discount in combination with the
note's 12% coupon resulted in an effective interest rate of 63 percent on the
note.
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. These convertible debentures included a
beneficial conversion feature valued at $398,000. The Company recorded the
value of the beneficial conversion feature as additional paid-in capital and
interest expense during the year ended September 30, 1997.
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.
Long-term debt and capital lease obligations at September 30, 1998, consisted
of the following:
Foundation note, noninterest bearing, due 1999,
net of unamortized discount of $22,275,
interest imputed at 11% $ 606,540
Capital lease obligations 24,408
--------
Total long-term debt and capital leases 630,948
Less current maturities 626,066
--------
Long-term portion $ 4,882
========<PAGE>
The Foundation note for $606,450 (Pounds) 356,893 is a noninterest bearing
$628,815 (Pounds) 370,000 loan note payable to the Aage V. Jensen Charity
Foundation and due on January 31, 1999.
Note 5. Income Taxes
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss before income taxes as of September
30, 1998 and 1997, are as follows:
September 30
1998 1997
--------- ----------
Tax credit statutory rates $(1,141,490) ($2,130,479)
Nondeductible expenses 47,900 223,368
State income tax, net of federal benefits (159,100) (241,660)
Benefit of net operating loss not recognized,
increase in valuation allowance 1,252,690 2,073,129
Other --- 75,642
---------- ----------
$ -- $ ---
========== ==========
As of September 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $29,675,000 for income tax purposes expiring in
years 2005 to 2014. The benefit relating to $1,537,800 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 $173,000 at September 30, 1998, expiring in
years 1999 to 2009. The Company's U.K. subsidiary, The Female Health Company -
UK, plc subsidiary has U.K. net operating loss carryforwards of approximately
$71,910,000 as of September 30, 1998. 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, 1998:
Deferred tax assets:
Federal net operating loss carryforwards $10,089,000
State net operating loss carryforwards 1,938,000
Foreign net operating loss carryforwards 21,573,000
Foreign capital allowances 3,886,000
Tax credit carryforwards 173,000
Accounts receivable allowances 119,000
Other 15,000
---------
Total gross deferred tax assets 37,793,000
Valuation allowance for deferred tax assets (37,775,000)
---------
Deferred tax assets net of valuation allowance 18,000
Deferred tax liabilities:
Equipment, furniture and fixtures (18,000)
---------
Net deferred tax assets $ ---
=========
Reconciliations of the valuation allowance for deferred tax assets for the year
ended September 30, 1998, is as follows:<PAGE>
Balance, beginning $(36,522,310)
Increase in valuation allowance charged
to current operations (1,252,690)
-----------
Balance, ending $(37,775,000)
============
The beginning of the year valuation allowance balance has been revised due to a
change in the foreign net operating loss carryforward and the foreign capital
allowances deferred tax asset. This change has no impact on the Company's net
loss for 1998 or 1997.
Note 6. Royalty Agreements
The Company has royalty agreements for sales of its products which provide for
royalty payments based on sales quantities and achievement of specific sales
levels. The amount of royalty expense was $38,451 and $24,894 for 1998 and
1997, respectively.
Note 7. Common Stock
Stock Option Plans
The Company has various stock option plans that authorize the granting of
options to officers, key employees and directors to purchase the Company's
Common Stock at prices generally equal to the market value of the stock at the
date of grant. Under these plans, the Company has 282,000 shares available for
future grants as of September 30, 1998. The Company has also granted options to
one of its legal counsel and an affiliate. Certain options are vested and
exercisable upon issuance, others over periods up to four years and still
others based on the achievement of certain performance criteria by the Company
and market prices of its Common Stock.
During 1997 the option prices of 749,865 options outstanding which were
exercisable at prices ranging from $5.9375 to $3.875 per share were lowered to
$2.00 per share. In connection therewith, additional expense of $10,500 was
recognized related to options that had been granted to legal counsel.
Summarized information regarding all of the Company's stock options is as
follows:
Weighted-
Average
Number Exercise
of Shares Price
--------- -------
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
Granted 18,000 0.01
Exercised (29,400) 2.00
Expired or canceled (274,868) 5.50
---------
Outstanding at September 30, 1998 1,174,478 2.29<PAGE>
The following table summarizes information about the Company's stock options
outstanding and exercisable at September 30, 1998.
Options Outstanding Options Exercisable
-------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
prices at 9/30/98 Life Price at 9/30/98 Price
$0.01 18,000 2.5 $ 0.01 - $ -
2.00 1,109,600 6.6 2.00 416.532 2.00
3.50 1,689 2.5 3.50 1,689 3.50
7.75 8,089 3.0 7.75 8,089 7.75
9.50 19,000 5.5 9.50 19,000 9.50
10.50 11,700 4.0 10.50 11,700 10.50
15.25 6,400 4.0 15.25 6,400 15.25
------- ---------- ------ ------ ------- -------
$.01 to $15.25 1,174,478 6.5 $ 2.29 463,410 $ 2.81
During 1998, the Company granted options to employees to purchase 18,000 shares
of the Company's common stock at $.01. Compensation expense of $51,660 was
recognized regarding this issuance.
All other 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 1997
and 1998 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
1998 per share 1997 per share
Net loss attributable to
common stockholders $(4,306,985) ($0.43)($6,266,114) ($0.74)
Compensation expense
related to stock options granted (615,776) ($0.06) ($688,975) ($0.08)
----------- ------- --------- ------
$(4,922,761) ($0.49)($6,955,089) ($0.82)
=========== ====== ========== ======
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 presented 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
risk-free interest rates of 4.43% and 5.86% for 1998 and 1997, respectively;<PAGE>
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 $2.87 and $0.84 for the years ended September 30,
1998 and 1997, 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 a 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, 1998, 107,000 shares of restricted stock had been
issued to key employees and consultants. Expense under the plan was $307,625
and $53,125 for the years ended September 30, 1998 and 1997, respectively.
Common Stock Purchase Warrants
During 1997 and 1998 the Company entered into consulting agreements with
separate third party professionals to provide investor relations services and
financial advisory services. In connection with the consulting agreements, the
Company granted common stock purchase warrants to purchase an aggregate 225,000
shares of the Company's common stock. In 1997, the Company adjusted warrants
previously issued under consulting agreements reducing the exercise price to
$2.00 per share. The Company recognized expense of $114,750 and $89,500 in
1998 and 1997, respectively, under FAS 123 in connection with the exercisable
shares. At September 30, 1998, 165,000 warrants were exercisable.
10,000 warrants were exercised during 1998. At September 30, 1998, the
following warrants were outstanding:
Number Outstanding
-----------
Warrants issued in connection with:
Investor relations services contract 90,000
Financial advisory services contract 75,000
Convertible Debentures (See Note 4) 107,534
Convertible Preferred Stock (See Note 8) 296,000
Notes Payable (See Note 4) 640,000
--------
Outstanding at September 30, 1998 1,208,534
=========
At September 30, 1998, the Company had reserved a total of 2,955,813 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, 1999.
Issuance of Stock<PAGE>
The Company issued 25,000 shares of common stock with a market value of
approximately $93,750, and 124,564 shares of common stock with a market value
of approximately $207,863 in 1998 and 1997, respectively. The stock was issued
to consultants for providing investor relation services. Consulting expense of
$93,750 and $207,863 was recognized during the years ended September 30, 1998
and 1997, respectively.
Note 8. Preferred Stock
In 1997, FHC raised approximately $1.6 million of proceeds, net of issuance
costs of $96,252, in a private placement of 680,000 shares of 8% cumulative
convertible preferred stock (Series I) sold at $2.50 per share. 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 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.
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.84 million, net of insurance costs of
$156,616. The Series 2 Preferred Stock automatically converted into Common
Stock on a one-for-one basis, on April 3, 1998, the date in which the
registration statement registering the resale of the Common Stock was declared
effective by the SEC. The investors received four-year Warrants to purchase
240,000 shares of Common Stock exercisable at a price per share equal to the
lesser of $3.425 or the average of the three closing bid prices per share of
Common Stock for any three consecutive trading days chosen by the investor
during the 30 trading day period ending on the trading day immediately prior to
the exercise of the Warrants. Individuals providing services to the Company's
placement agent for the above convertible Preferred Stock received Warrants to
purchase 4,000 shares of Common Stock exercisable at any time prior to December
31, 2001, at $4.11 per share.
The Company's private placement of convertible Preferred Stock - Series 2 on
December 31, 1997 included a beneficial conversion feature valued at $500,000
and four-year warrants to purchase additional shares of common stock valued at
$317,000. In accordance with new SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants, a total of $817,000 as additional paid-in capital. The
corresponding discount of $817,000, associated with the issuance of the
convertible preferred stock is a one-time, non-recurring charge that has been
fully amortized and reflected as preferred dividends accreted in the
consolidated statements of operations for the year ended June 30, 1998. The
dividend accretion had no impact on the Company's cashflow from operations.
Note 9. Employee Retirement Plan<PAGE>
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. Company contributions were
$11,947 for 1998.
Note 10. 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.
The Company operates 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) 1998 1997
------- ------
Net revenues:
United States $2,481 $2,050
International 2,970 866
Operating profit (loss):
United States (2,731) (3,120)
International (420) (2,118)
Identifiable assets:
United States 2,088 3,349
International 5,471 4,990
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 $396,000
and $293,000 in 1998 and 1997, respectively.
Note 11. Contingent Liabilities
The Company's future obligations under the terms of an employment agreement and
a facilities lease were assigned by the Company and assumed by the buyer as
part of the 1996 sale of the Company's subsidiary WPC Holdings, Inc. 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, 1998, the total
future payments for these contingent liabilities was $2.8 million for the lease
of Holdings' facilities and $0.3 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.<PAGE>
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's main financial and manufacturing hardware and software systems
have been tested and are either now Year 2000 compliant or are expected to be
by December 31, 1998. This was accomplished primarily through systems upgrades
and maintenance done over the last few years. The Company is in the process of
surveying major customers and suppliers regarding their Year 2000 readiness
and, to date, the Company is not aware of any significant Year 2000 issues at
these entities that would materially affect the Company's business. The Company
believes that if a Year 2000 problem develops at any of the Company's vendors
whereby the vendor becomes unable to address the Company's needs, alternative
vendors are readily available that could furnish the Company with the same or
similar suppliers or services without material undue delay or expense.
The majority of the Company's Year 2000 issues were corrected either through
systems upgrades or normal maintenance contracts. The cost of these
improvements to date has been approximately $20,000.
With regard to systems under the Company's control, the Company knows of no
significant exposure that the Company has to the Year 2000 issue since, if
necessary, the Company's systems are capable of accepting manually entered
data. The Company believes the worst case scenario is that the Company would
have to revert back to certain manual systems. The Company believes that its
customers and vendors are at various stages of compliance but the Company has
not been made aware of significant Year 2000 issues that would materially
affect its business with them. The Company will continue to monitor Year 2000
compliance with its customers and vendors throughout 1999 but it will not be
able to achieve the same degree of certainty that it can with its own internal
systems.
To the extent that the Company discovers minor internal systems that are not
Year 2000 compliant by mid-1999, it will have time to implement manual systems
by year-end 1999 which the Company believes will significantly reduce the
financial risk to the Company.
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 12. Related Party Transactions
For 1998, the Company paid the rent for office space leased by Phoenix Health
Care of Illinois, Inc. ("Phoenix"), a company that owns approximately 270,000
shares of the Company's outstanding Common Stock and has two officers and
directors that are also officers and directors of the Company. This leased
space was used by an officer of the Company.
During 1998 the Company awarded Phoenix 25,000 shares of restricted Common
stock with a market value of approximately $93,750 for consulting services
provided to the Company.
It has been and currently is the policy of the Company that transactions
between the Company and its officers, directors, principal shareholders or<PAGE>
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.
Note 13. Earnings Per Share
Net (loss) per Common share outstanding and diluted net (loss) per Common share
outstanding is based on the weighted average of shares of Common Stock
outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully dilutive
earnings per share. All earnings per share in the accompanying financial
statements have been presented to conform to Statement No. 128 requirements.
The Company has "in the money" options and warrants outstanding of 200,000 and
764,319 as of September 30, 1998 and 1997, respectively (see Note 7). The
Company also has preferred stock outstanding as of September 30, 1998, which is
convertible into 680,000 shares of Common Stock (see Note 8). The inclusion of
the options, warrants and convertible preferred stock in the computation of
diluted earnings per share would have resulted in a reduction of the loss per
share (antidilutive) and therefore both basic and diluted earnings per share
amounts were the same for each of the periods presented in the accompanying
financial statements.
Note 14. Current Accounting Pronouncements
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, 1999, and disclose in its interim financial
statements beginning with the period ending December 31, 1998. 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
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<PAGE>
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.
Derivatives
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities at fair value.
Depending on the use of the derivative and whether it qualifies for hedge
accounting, gains or losses resulting from changes in the value of those
derivatives would either be recorded as a component of net income or as a
change in stockholders' equity. The Company is required to adopt this new
standard for the quarter and year beginning October 1, 1999. The Company
currently has no derivative instruments and, accordingly, the adoption of this
statement has no impact on its consolidated financial statements.
Note 15. Continuing Operations and Subsequent Event
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 net loss of $3.4 million for the year ended September 30, 1998, and
as of September 30, 1998, had an accumulated deficit of $41.3 million. At
September 30, 1998, the Company had working capital of $1.2 million and
stockholders' equity of $2.9 million. In the near term, the Company 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. 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.
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-science 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<PAGE>
distribution arrangements relating to the Company's product. This agreement
has been extended for an additional six months. 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.
On November 19, 1998, the Company executed an agreement with a private investor
("the Equity Line Agreement"). This agreement provides for the Company, at its
sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $6.0 million of the Company's Common Stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires 24 months after the effective date of the pending
registration statement and, among other things, provides for minimum and
maximum puts ranging from $100,000 to $1,000,000 depending on the Company's
stock price and trading volume. The timing and amount of drawdowns on this
line of credit are totally at the Company's discretion, subject to certain
conditions. The Company is required to draw down a minimum of $1 million
during the two-year period. If the Company does not draw down the minimum, the
Company is required to pay the investor a 12% fee on that portion of the $1
million minimum not drawn down at the end of the two-year period.
While the Company believes that its existing capital resources (including
expected proceeds from sales of Common Stock pursuant to the Equity Line
Agreement) will be adequate to fund its currently anticipated capital needs, if
they are not or the Company does not receive shareholder approval to amend its
Articles of Incorporation to increase its authorized Common Stock, enabling the
Company to sell sufficient Shares under the Equity Line Agreement, the Company
may need to raise additional capital until its sales increase sufficiently to
cover operating expenses. In addition, there can be no assurance that the
Company will satisfy the conditions required for it to exercise puts under the
Equity Line Agreement. Accordingly, the Company may not be able to realize all
or any of the funds available to it under the Equity Line Agreement.
Further, there can be no assurance, assuming the Company successfully raises
additional funds or enters into business agreements with third parties, that
the Company will achieve profitability or positive cash flow. If the Company
is unable to obtain adequate financing, management will be required to sharply
curtail the Company's efforts to promote the female condom and to curtail
certain other of its operations 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 about the Company's executive officers as of September 30,
1998, is as follows:
NAME POSITION AGE
O.B. Parrish Chairman of the Board, Chief Executive
Officer, acting Chief Financial
and Accounting Officer and Director 65
Mary Ann Leeper, Ph.D. President, Chief Operating Officer and
Director 58
Jack Weissman Vice President - Trade Sales 51
Michael Pope Vice President of the Company, Director
of Chartex Resources Limited, Director
and General Manager of Chartex
International, Plc 42
David R. Bethune Director 58
Stephen M. Dearholt Director 52
O. B. PARRISH
Age: 65; Elected Director: 1987; Present Term Ends: 1999 Annual Meeting
O.B. Parrish has served as Chief Executive Officer of the Company since 1994,
as acting Chief Financial and Accounting Officer since February 1996 and as the
Chairman of the Board and a Director of the Company since 1987. Mr. Parrish is
a shareholder and has served as the President and as a Director of Phoenix
Health Care of Illinois, Inc. ("Phoenix of Illinois") since 1987. Phoenix of
Illinois owns approximately 295,000 shares of the Company's outstanding Common
Stock. Mr. Parrish also was the Co-Chairman and a Director of Inhalon
Pharmaceuticals, Inc. until its sale to Medeva, Plc. and is Chairman and a
Director of ViatiCare, L.L.C. and a director of Microbyx. 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,
the foreign sales operation of Searle. Prior to that, Mr. Parrish was Executive
Vice President of Pfizer's International Division.
MARY ANN LEEPER, Ph.D.
Age: 58; Elected Director: 1987; Present Term Ends: 1999 Annual Meeting
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996 and as President and Chief Executive Officer of The Female
Health Company Division from May 1994 until January 1996, as Senior Vice
President - Development of the Company from 1989 until January 1996 and as a
Director of the Company since 1987. Dr. Leeper is a shareholder and has served
as a Vice President and Director of Phoenix of Illinois since 1987. Previously,
Dr. Leeper served as Vice President - Market Development for Searle's
Pharmaceutical Group and in various Searle research and development management
positions. As Vice President - Market Development, Dr. Leeper was responsible
for worldwide licensing and acquisition, marketing and market research. In<PAGE>
earlier positions, she was responsible for preparation of new drug applications
and was a liaison with the FDA.
WILLIAM R. GARGIULO, JR.
Age: 70; Elected Director: 1987; Present Terms Ends: 1999 Annual Meeting
William R. Gargiulo, Jr. has served as Secretary of the Company from 1996 to
present, as Vice President from 1996 to September 30, 1998, as Assistant
Secretary of the Company from 1989 to 1996, as Vice President - International
of The Female Health Company Division from 1994 until 1996, as Chief Operating
Officer of the Company from 1989 to 1994, and as General Manager of the Company
from 1988 to 1994. Mr. Gargiulo has also served as a Director of the Company
since 1987. Mr. Gargiulo is a Trustee of a trust which is a shareholder of
Phoenix of Illinois. From 1984 until 1986, Mr. Gargiulo was the Executive
Vice-President of Searle's European operations. From 1976 until 1984, Mr.
Gargiulo was the Vice President of Searle's Latin American operations.
STEPHEN M. DEARHOLT
Age: 52; Elected Director: 1996; Present Term Ends: 1999 Annual Meeting
Mr. Dearholt is a co-founder and partner in Response Marketing, one of the
largest privately owned life insurance marketing organizations in the United
States. He has over 23 years of experience in direct response advertising and
data based marketing of niche products. Since 1985, he has been a 50% owner of
R.T. of Milwaukee, a private investment holding company which operates a stock
brokerage business in Milwaukee, Wisconsin. In late 1995, Mr. Dearholt
arranged, on very short notice, a $1 million bridge loan which assisted the
Company in its purchase of Chartex. Mr. Dearholt is also very active in the
non-profit sector. He is currently on the Board of Directors of Children's
Hospital Foundation of Wisconsin, an honorary board member of the Zoological
Society of Milwaukee, and the national Advisory Council of the Hazelden
Foundation. He is a past board member of Planned Parenthood Association of
Wisconsin, and past Chairman of the Board of the New Day Club, Inc.
DAVID R. BETHUNE
Age: 58; Elected Director: 1996; Present Term Ends: 1999 Annual Meeting
Mr. Bethune is a business consultant to the pharmaceutical industry and
previously held the position of President and Chief Operating Officer of the
IVAX Corporation. Prior to IVAX, Mr. Bethune was Group Vice President of
American Cyanamid Company and a member of its Executive Committee until the
sale of the company to American Home Products. He had global executive
authority for human biologicals, consumer health products, pharmaceuticals and
opthalmics, as well as medical research. Previously, he was President of the
Lederle Laboratories Division of American Cyanamid Company. Mr. Bethune
rejoined Lederle from Searle, where he was President of Operations in the
United States, Canada and the Caribbean since December 1986. From 1984 until
his appointment as President of Operations, Mr. Bethune served as Vice
President and General Manager, United States Pharmaceuticals. Mr. Bethune is on
the Board of Directors of the Southern Research Institute, Atrix
Pharmaceuticals and the American Foundation for Pharmaceutical Education,
Partnership for Prevention. He is a founding trustee of the American Cancer
Society Foundation and an associate member of the National Wholesale Druggists'
Association and the National Association of Chain Drug Stores. He is the<PAGE>
founding chairman of the Corporate Council of the Children's Health Fund in New
York City and served on the Arthritis Foundation Corporate Advisory Council.
Jack Weissman
Vice President - Trade Sales, Age: 51
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., a
manufacturer of pouring spouts for gable paper cartons. During the 1989-1992
period, he acted as General Manager-HTV Group, an investment group involved in
the development of retail stores. Mr. Weissman joined Searle's Consumer
Products Group in 1979 and held positions of increasing responsibility,
including National Account and Military Sales Manager. From 1985-1989 he was
Director - Retail Business Development for The NutraSweet Company, a Searle
subsidiary. Prior to Searle, Mr. Weissman worked in the consumer products
field as account manager and territory manager for Norcliff Thayer and
Whitehall Laboratories.
Michael Pope
Vice President, General Manager - The Female Health Company (UK) Plc., Age: 42
Mr. Pope has served as Vice President of the Company since 1996 and as General
Manager of The Female Health Company (UK) Plc. (formerly Chartex International,
Plc.) since the Company's acquisition of Chartex. Mr. Pope has also served as
a Director of The Female Health Company, Ltd. (formerly Chartex Resources
Limited) and The Female Health Company (UK) Plc. since 1995. From 1990 until
1996, Mr. Pope was Director of Technical Operations for Chartex with
responsibility for manufacturing, engineering, process development and quality
assurance. Mr. Pope was responsible for the development of the high speed
proprietary manufacturing technology for the female condom and securing the
necessary approvals of the manufacturing process by regulatory organizations,
including the FDA. Mr. Pope was also instrumental in developing and securing
Chartex's relationship with its Japanese marketing partner. Prior to joining
Chartex, from 1986 to 1990 Mr. Pope was Production Manager and Technical
Manager for Franklin Medical, a manufacturer of disposable medical devices.
During the period from 1982 to 1986, Mr. Pope was Site Manager, Engineering and
Production Manager, Development Manager and Silicon Manager for Warne Surgical
Products.
Item 10. Executive Compensation
The following table sets forth the annual and long-term compensation for each
of the last three fiscal years for the Company's Chief Executive Officer and
the two highest-paid executive officers other than the Chief Executive Officer
(the "named executive officers"), who served in such capacity as of September
30, 1998, as well as the total compensation paid to each individual during the
Company's last three fiscal years. No other executive officers of the Company
received salary and bonus of in excess of $100,000 during the fiscal year ended
September 30, 1998.
SUMMARY COMPENSATION TABLE
Long-TermRestricted
Annual Compensation Stock
Compensation Awards Awards
Securities<PAGE>
Name and Principal Fiscal Underlying Bonus
Position Year Salary Options/SARs Compensation
O. B. Parrish 1998 $90,000 --- $71,875(c)
Chairman, Chief 1997 $90,000 264,000(a)
Executive Officer and 1996 $90,000 164,000(b)
Acting Chief Financial Officer
Mary Ann Leeper, Ph.D. 1998 $225,000 --- $71,875(c)
President and Chief 1997 $225,000 290,000(a)
Operating Officer 1996 $215,833 200,000(b)
William R. Gargiulo, Jr. 1998 $84,792 --- $28,750(d)
Vice President - International 1997 $100,000 50,000
1996 $100,000 ---
(a) Includes 164,000 and 200,000 options for Mr. Parrish and Dr. Leeper,
respectively, which were granted in 1995 and 1996 fiscal years but
repriced in 1997.
(b) Includes 44,000 and 200,000 options for Mr. Parrish and Dr. Leeper,
respectively, which were granted in the 1995 fiscal year but repriced in
1996.
(c) At September 30, 1998, the named executive officer owned 25,000 shares of
restricted Common Stock, having a fair market value of $71,875 on such
date, based on the closing price of the Company's Common Stock on such
date. For Mr. Parrish, also includes his pro rata portion of 25,000 shares
of restricted stock granted to Phoenix Health Care of Illinois, Inc.
("Phoenix of Illinois"), based on his 64% ownership of such entity. For
Dr. Leeper, also includes her pro rata portion of such restricted stock
based on her approximately 16.7% ownership of such entity. All of these
shares were granted on May 5, 1998 and vest in full on the first
anniversary of the grant date. The owner is entitled to receive any
dividends declared on these shares of restricted stock.
Options/SAR Grants in Last Fiscal Year
None.
Aggregated Option Values at September 30, 1998
The following table presents the value of unexercised options held by the named
executive officers at September 30, 1998:
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at September 30, The-Money Options at
1998 September 30, 1998(1)
Name Exercisable / Unexercisable Exercisable/Unexercisable
O. B. Parrish 88,000 / 176,000 -0-
Mary Ann Leeper, Ph.D. 96,667 / 193,333 -0-
William R. Gargiulo, Jr. 16,667 / 50,000 -0-
Values are calculated by subtracting the exercise price from the $1.4375 per
share closing price of the Company's Common Stock on September 30, 1998.<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP
The following table sets forth certain information as of December 17, 1998 with
respect to (a) each person known to the Company to own beneficially more than
5% of the Company's Common Stock, (b) each named executive officer and each
director of the Company and (c) all directors and executive officers as a
group:
Amount of Beneficial Ownership
Name of Beneficial Owner Shares Percent
O. B. Parrish (1) 494,001 4.68%
William R. Gargiulo, Jr. (1) 356,668 3.40%
Mary Ann Leeper, Ph.D. (1) 455,668 4.31%
Stephen M. Dearholt (4) 1,235,466 11.07%
David R. Bethune (2) 50,000 *
Phoenix Health Care of Illinois, Inc. (3) 324,501 3.10%
State of Wisconsin Investment Board 635,000 6.08%
All directors, nominees and
executive officers, as a group
(seven persons) (1)(2)(4) 1,924,801 16.97%
* Less than 1%.
(1) Includes 294,501 shares owned by and 30,000 shares under option to
Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois"). Messrs.
Parrish and Gargiulo and Dr. Leeper may be deemed to share voting and
dispositive power as to such shares since Mr. Gargiulo is a trustee of
a trust which is a shareholder, and Mr. Parrish and Dr. Leeper are
officers, directors and shareholders, of Phoenix of Illinois. For Dr.
Leeper, also includes 9,500 shares owned by and 96,667 shares under
option to her (which options are exercisable within 60 days); for Mr.
Parrish, also includes 56,500 shares owned by and 88,000 shares under
option to him (which options are exercisable within 60 days); and for
Mr. Gargiulo, also includes 500 shares owned by and 16,667 shares
under option to him, which options are exercisable within 60 days.
(2) Represents options which are currently exercisable.
(3) Includes 294,501 shares owned by and 30,000 shares under options to
Phoenix of Illinois.
(4) Includes 238,057 shares owned directly by Mr. Dearholt. Also includes
69,500 shares held by the Dearholt, Inc. Profit Sharing Plan, 9,680
shares held by Response Marketing Money Purchase Plan, 5,000 and
148,129 shares held by trusts (of which Mr. Dearholt is a trustee) and
45,100 shares held by Mr. Dearholt's minor children. Also includes
warrants to purchase 610,000 shares of Common Stock and options to
purchase 30,000 shares.
Item 12. Certain Relationships and Related Transactions
On March 25, 1997 and again on March 25, 1998, the Company extended a<PAGE>
$1 million one-year promissory note payable by the Company to Mr. Dearholt in
connection with a previous loan Mr. Dearholt made to the Company. The
promissory note is now payable in full on March 25, 1999 and bears interest at
12% per annum payable monthly. The note proceeds were initially used by the
Company to provide working capital needed to fund the initial stages of the
Company's U.S. marketing campaign ($0.2 million) and to fund operating losses
($0.8 million). The borrowing transactions were effected in the form of a
promissory note from the Company to Mr. Dearholt and related Note Purchase and
Warrant Agreements and Stock Issuance Agreements. Under the 1997 and 1998 Note
Purchase and Warrant Agreements, the Company issued to Mr. Dearholt warrants to
purchase 200,000 and 200,000 shares of the Company's Common Stock in 1997 and
1998, respectively, at exercise prices of $1.848 and $2.25 per share,
respectively. The warrants expire upon the earlier of their exercise or five
years after the date of their issuances. Under the Stock Issuance Agreements,
if the Company fails to pay the $1 million under the note when due, the Company
must issue 200,000 shares of its Common Stock to Mr. Dearholt. This issuance
will not, however, alleviate the Company from its liability under the note. The
Company also granted Mr. Dearholt certain securities registration rights with
respect to any Common Stock he receives from the Company under these warrants
or the Stock Issuance Agreement. Mr. Dearholt has agreed that, if the Company
requests, he will extend the promissory note for an additional one-year term to
be due and payable on March 25, 2000 upon the same terms as the prior note
extensions. In consideration of this agreement, the Company extended the term
of certain warrants held by Mr. Dearholt to purchase 200,000 shares of the
Company's Common Stock which expire March 25, 2001 to March 25, 2002.
On July 27, 1997, a trust of which Stephen M. Dearholt, a director of
the Company, is a trustee, purchased 60,000 shares of the Company's Class A
Convertible Preferred Stock--Series 1 at a price of $2.50 per share, which
represented the per share price offered to all subscribers in the private
placement of these shares.
Mr. O. B. Parrish and Mr. William R. Gargiulo, Jr. work out of office space at
919 N. Michigan Avenue, Chicago, Illinois which is leased by Phoenix Health
Care of Illinois from a third party. The Company paid the monthly lease
payments of $51,256 and $48,146 for this lease in fiscal 1997 and fiscal 1998,
respectively.
During fiscal 1998 the Company awarded Phoenix 25,000 shares of restricted
Common stock with a market value of approximately $71,875 at September 30,
1998, for consulting services provided to the Company.
During fiscal 1997, the Board of Directors of the Company repriced options
granted to certain employees of the Company on November 21, 1994, March 19,
1996 and on April 22, 1997, including 1994 options for 200,000 shares to Dr.
Leeper, 1994 options for 44,000 shares to Mr. Parrish, 1994 options for 90,000
shares to Phoenix Health Care of Illinois, Inc., a corporation in which Mr.
Parrish and Dr. Leeper are officers, directors and shareholders, 1996 options
for 120,000 to Mr. Parrish, 1997 options for 90,000 shares to Dr. Leeper, 1997
options for 100,000 shares to Mr. Parrish and 1997 options for 50,000 shares to
Mr. Gargiulo. The option exercise price for the 1994 and 1996 options was
reduced from $3.875 to $2.00 and the option exercise price for the 1997 options
was reduced from $2.75 to $2.00 (which was the last sale price of the Company's
Common Stock on the American Stock Exchange on the date of the repricing) and
the vesting criterion has changed. The Compensation Committee elected to
reprice the options and change the final vesting criteria because the Committee
felt that due to changed circumstances, including the reduction in the trading<PAGE>
price of the Company's Common Stock, the options were no longer providing the
incentive they were designed to provide.
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.
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, 1998
Consolidated Statements of Operations - Years ended September 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended September 30,
1998 and 1997
Consolidated Statements of Cash Flows - Years ended September 30, 1998 and
1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
None.<PAGE>
3. Exhibits Filed:
Number Description
3.1 Amended and Restated Articles of Incorporation of the Company of the
Company. (1)
3.2 Amended and Restated By-Laws of the Company. (2)
4.1 Amended and Restated Articles of Incorporation (same as Exhibit 3.1).
(1)
4.2 Articles II, VII and XI of the Amended and Restated By-Laws of the
Company (included in Exhibit 3.2). (2)
4.3 Private Equity Line of Credit Agreement between the Company and
Kingsbridge Capital Limited dated November 19, 1998.
4.4 Registration Rights Agreement between the Company and Kingsbridge
Capital Limited dated as of November 19, 1998.
4.5 Warrant to Purchase up to 200,000 shares of Common Stock of the
Company issued to Kingsbridge Capital Limited as of November 19,
1998.
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 C.C.R.I. Corporation dated March 13, 1995.
(10)
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company
and C.C.R.I. 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)<PAGE>
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 Resources 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)
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)
10.27 Lease Agreement between Chartex Resources Limited, P.A.T. (Pensions)
Limited and the Female Health Company. (16)
10.28 Company promissory note payable to Stephen M. Dearholt for $1 million
dated March 25, 1997, and related note purchase and warrant
agreement, warrants and stock issuance agreement. (17)
10.29 1997 Stock Option Plan. (18)
10.30 Employee Stock Purchase Plan. (18)
10.31 Agreement dated March 14, 1997, between the Joint United Nations
Programme on HIV/AIDS and Chartex International PLC. (18)
10.32 Agreement dated September 29, 1997 between Vector Securities
International and The Female Health Company. (18)
10.33 Fund Raising Agreement dated May 1, 1998 by and between
Hartinvest-Medical Ventures and the Company. (19)
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.<PAGE>
(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.
(16) Incorporated herein by reference to the Company's December 31, 1996 Form
10-QSB.
(17) Incorporated herein by reference to the Company's March 31, 1997 Form
10-QSB.
(18) Incorporated herein by reference to the Company's Form 10-KSB/A-1 for the
year ended September 30, 1997 filed March 25, 1998.
(19) Incorporated herein by reference to the Company's Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on December
8, 1998.
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 28, 1998<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 28, 1998
- ----------------------- Chief Executive Officer,
O.B. Parrish Acting Chief Financial and
Accounting Officer,
and Director
/s/Mary Ann Leeper President, Chief Operating December 28, 1998
- ------------------------- Officer and Director
Mary Ann Leeper, Ph.D.
/s/William R. Gargiulo Secretary and Director December 28, 1998
- -------------------------
William R. Gargiulo
Director December 28, 1998
- -------------------------
David R. Bethune
Director December 28, 1998
- -------------------------
Stephen M. Dearholt<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,480,287
<SECURITIES> 0
<RECEIVABLES> 1,138,274
<ALLOWANCES> (310,000)
<INVENTORY> 925,425
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<PP&E> 4,114,371
<DEPRECIATION> (1,584,776)
<TOTAL-ASSETS> 7,558,894
<CURRENT-LIABILITIES> 2,699,638
<BONDS> 4,882
0
6,800
<COMMON> 104,158
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<SALES> 5,451,399
<TOTAL-REVENUES> 5,451,399
<CGS> 5,273,369
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<OTHER-EXPENSES> (250,245)
<LOSS-PROVISION> (3,850,323)
<INTEREST-EXPENSE> 456,662
<INCOME-PRETAX> (4,306,985)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,306,985)
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<CHANGES> 0
<NET-INCOME> (4,306,985)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
