SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-2
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-18849
THE FEMALE HEALTH COMPANY
(Name of Small Business Issuer in Its Charter)
Wisconsin 39-1144397
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
919 N. Michigan Ave., Suite 2208, Chicago, Illinois 60611
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code
(312) 280-2281
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]
As of December 26, 1997, 9,546,930 shares of Common stock were outstanding. As
of December 26, 1997, the aggregate market value of shares of Common stock held
by non-affiliates was approximately $30 million (based upon the last reported
sale price of $3.4375 on that date on the American Stock Exchange).
Documents Incorporated by Reference
Document Part of Form 10-KSB Into Which Incorporated<PAGE>
- ------------- ------------------------------------------
The Company's Notice of
Annual Meeting of Shareholders
and Proxy Statement for the 1998 Part III, Items 10, 11, 12
and 13 Annual Meeting of Shareholders<PAGE>
FORM 10-KSB/A-2 INDEX
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters To A Vote Of Security Holders
Supplemental Item. Executive Officers Of Registrant
Part II
Item 5. Market For Common Equity and Related
Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements With Accountants On
Accounting and Financial Disclosure
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership Of Certain Beneficial Owners and
Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits, List and Reports on Form 8-K<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-KSB/A-2 which are
not statements of historical fact are intended to be, and are hereby identified
as, "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to secure
adequate capital to fund operating losses, working capital requirements,
advertising and promotional expenditures and principal and interest payments on
debt obligations, factors related to increased competition from existing and
new competitors including new product introduction, price reduction and
increased spending on marketing, limitations on the Company's opportunities to
enter into and/or renew agreements with international partners, the failure of
the Company or its partners to successfully market, sell, and deliver its
product in international markets; and risks inherent in doing business on an
international level, such as laws governing medical devices that differ from
those in the U.S., unexpected changes in the regulatory requirements, political
risks, export restrictions, tariffs, and other trade barriers, and fluctuations
in currency exchange rates. the disruption of production at the Company's
manufacturing facility due to raw material shortages, labor shortages, and/or
physical damage to the Company's facilities, the Company's inability to manage
its growth and to adapt its administrative, operational and financial control
systems to the needs of the expanded entity and the failure of management to
anticipate, respond to and manage changing business conditions, the loss of the
services of executive officers and other key employees and the Company's
continued ability to attract and retain highly-skilled and qualified personnel,
the costs and other effects of litigation, governmental investigations, legal
and administrative cases and proceedings, settlements and investigations, and
developments or assertions by or against the Company relating to intellectual
property rights.<PAGE>
PART I
Item 1. Description of Business
General
The Female Health Company ("FHC" or the "Company") markets, manufactures and
sells the Female Condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
The Female Condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 25 additional
countries. Certain of these studies, some of which were commissioned by or
prepared at the request of the Company, show that having the Female Condom
available allows women to have more options, resulting in an approximately 30%
increase in protected sex acts. Furthermore, the studies showed that when the
Female Condom is available as a choice, there is an approximately 34% decrease
in STDs, including HIV/AIDS.
The Product is currently sold to both commercial (private sector) and public
sector markets in ten countries. It is commercially marketed directly by the
Company in the United States and the United Kingdom and through marketing
partners in Canada, Holland, Brazil, Venezuela, South Korea and Taiwan. The
Company has signed distribution agreements in Japan and Bangladesh, and the
Company anticipates that the product will be marketed in these countries in the
coming months. The Company's partner in Japan, Taiho Pharmaceutical Co., Ltd.,
a $1 billion division of a $5 billion Japanese holding company ("Taiho"),
submitted a formal application for regulatory approval with Koseisho, the
Japanese regulatory agency in October 1997 and expects to receive approval to
begin marketing the Female Condom during 1998. The Company has entered into an
exclusive distribution agreement with Taiho pursuant to which Taiho will market
the female condom in Japan on an exclusive basis provided Taiho sells at least
1.8 million units in the first year after regulatory approval and 1.3 million
units each year thereafter. The price at which Taiho will purchase the product
will be negotiated after Japanese regulatory approval and at the time the
product is launched in Japan. The agreement also requires Taiho to fund
whatever marketing effort they deem appropriate for the female condom in Japan.
The Company is currently in discussions with potential distributors for India
and The People's Republic of China and other countries.
In addition to the commercial market, the Female Condom is sold to the global
public sector. In particular, the Product is marketed to city and state public
health clinics as well as not-for-profit organizations such as Planned
Parenthood in the United States. Following several years of testing the
efficacy and acceptability of the Female Condom, the Product received a formal
endorsement by The World Health Organization (WHO) and the Joint United Nations
Programme on AIDS (UNAIDS). In 1996, the Company entered into a three-year
agreement with UNAIDS, whereby UNAIDS will facilitate the availability and
distribution of the Female Condom in the developing world and the Company will
sell the Product to developing countries at a reduced price. Specifically, the
UNAIDS Agreement provides that UNAIDS, in collaboration with other public
sector partners, will prepare educational material concerning the Female Condom
to be used at different levels of the health system, including communities and
social marketing programs. To help facilitate the preparation of this
educational material, the Company furnished UNAIDS with copies of various
educational and instructional materials concerning the Female Condom which the<PAGE>
Company had in its possession. In addition, UNAIDS is required to promote the
use of the Female Condom at the global level and toward the National AIDS
programs at the country level. UNAIDS is required to use its best reasonable
efforts to promote a social marketing approach by providing to social marketing
programs information on the special reduced price as well as such educational
and promotional material concerning the product as it deems necessary and
appropriate. UNAIDS has also agreed to include the Female Condom in the UNAIDS
supplies and equipment list, which catalogs HIV/AIDS materials. The Company is
not required to make any payments to UNAIDS for its services under the
agreement; rather, the Company has agreed to supply the Female Condom to
developing countries at a special reduced price. The special reduced price at
which the Company has agreed to supply product generally equals the Company's
per unit production costs directly attributable to the manufacture of the
product provided, however, that during an initial three-year term ending
December 31, 1999, if annual sales under the agreement equal at least 3 million
units, the price per unit cannot exceed 0.38 pounds. Although the Company's
1997 fiscal year sales under the agreement were approximately 900,000 units,
the Company has agreed to supply product under the agreement during fiscal year
1998 at 0.38 pounds per unit. Although there are no minimum or maximum numbers
of units which must be purchased under the agreement, the Company has agreed to
reserve sufficient production capacity as is reasonably necessary to provide an
adequate supply of product under the agreement. If necessary, this capacity
will equal up to the greater of 10% of the Company's total annual production
capacity or 6 million units per year. If demand under the agreement exceeds
this level, the Company must use reasonable efforts to meet the additional
demand. Pursuant to this agreement, the Product is currently being marketed in
Zambia and Zimbabwe with plans for 1998 market introductions in South Africa,
Uganda, Tanzania, Cote d' Ivoire and other countries. As part of the UNAIDS
agreement, the South African government recently ordered one and one-half
million Female Condoms which are fully funded for delivery in fiscal year 1998.
Global Market
WHO estimates there are more than 300 million new cases of STDs worldwide each
year, excluding HIV, and most of those diseases are more easily transmitted to
women than to men. Women are currently the fastest growing group infected with
HIV and are expected to comprise the majority of new cases by the year 2000.
Although it is estimated the annual global male condom market now exceeds four
and one-half billion units, the majority of all sex acts are still completed
without protection, resulting in the rapidly increasing incidence of STDs. A
study conducted by UNAIDS showed that having the Female Condom available, as
compared to only having male condoms available, increased the incidence of
protected sex by 25% and, correspondingly, caused a 34% decrease in STDs. A
study conducted by the Philadelphia Department of Public Health showed similar
results with a 30% decrease in unprotected sex. The Company believes that the
Product is positioned to gain market share from the male condom as well as to
achieve substantial sales volume from people who, because there is now an
alternative to the male condom, will use the Product instead of having
unprotected sex.
Advantages vs. the Male Condom
The Female Condom is currently the only available barrier method controlled by
women which allows them to protect themselves from STDs, including HIV/AIDS and
unintended pregnancy. Although latex male condoms also offer protection
against STDs, the Female Condom possesses a certain number of advantages. The<PAGE>
most important advantage is that a woman can control whether or not she is
protected. Many men do not like to wear male condoms and may refuse to do so.
The material that is used for the Female Condom, polyurethane, offers a number
of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability
that the Female Condom sheath will tear during use. Clinical studies and
everyday use have shown that latex male condoms can tear between 4% to 8% of
the times they are used, while studies show that the Female Condom tears in
less than 1% of uses. Unlike latex, polyurethane quickly transfers heat, so
the Female Condom immediately warms to body temperature when it is inserted,
which may result in increased pleasure and sensation during use. The Product
offers an additional benefit to the 7% to 20% of the population that is
allergic to latex and who, as a result, may be irritated by latex male condoms.
There is no reported allergy to date to polyurethane. The Female Condom is
also more convenient, providing the option of insertion hours before sexual
arousal and as a result is less disruptive during sex than the male condom
which requires sexual arousal for application.
Safety and Efficacy
Based on use of the Product in clinical trials and four years of worldwide
marketing, the Female Condom has been proven to be safe and effective. There
have been no safety issues or side effects noted with the Female Condom.
Current studies, some of which were commissioned by or prepared at the request
of the Company, show that the Female Condom is 95% efficacious in protecting
against pregnancy when used correctly and consistently, comparable to male
condoms and other barrier methods like diaphragms and cervical caps. Studies
that were conducted in Japan as part of the regulatory approval process
indicate that the efficacy of the Product may be even higher. As a preventive
measure against STDs, the Female Condom has also proven to be highly effective,
as has been documented by several studies, including the UNAIDS study.
Worldwide Regulatory Approvals
The Female Condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the
world, including receipt of a CE Mark in 1997 which allows the Company to
market the Female Condom throughout the European Union. In addition to the
United States and the European Union, several other countries have approved the
Female Condom for sale, including Canada, Russia, Australia, South Korea and
Taiwan. The Company expects the Female Condom to receive approval in Japan in
1998.
The Company believes that the Female Condom's PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry. The Company estimates that it would take a minimum of four to six years
to implement, execute and receive FDA approval of a PMA to market another type
of Female Condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the
manufacture and distribution of the Female Condom.
Japanese Market Opportunity<PAGE>
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have never been approved in Japan and, as a result, 85% of
Japanese couples seeking protection use condoms. The Female Health Company's
partner in Japan is Taiho Pharmaceuticals, a $1 billion subsidiary of Otsuka
Pharmaceutical Co., Ltd., which is a $5 billion Japanese health care company.
The agreement between the Company and Taiho provides that Taiho perform
clinical testing of the Product in Japan and obtain necessary regulatory
approvals. After approval, expected in 1998, the Company will manufacture the
Product and supply it to Taiho, which will have responsibility for marketing
and distributing the Female Condom in Japan. Results of the clinical tests in
Japan show that the Female Condom may be more effective in preventing pregnancy
than the male condom and has a high acceptance rate of 70% among Japanese
women. Taiho plans to market the Female Condom under the name "Mylura Femy."
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than one billion male condoms are distributed
worldwide by the public sector each year. The Female Condom is seen as an
important addition to prevention strategies by the public sector because
studies show that the availability of the Female Condom decreases the amount of
unprotected sex by as much as a third over male condoms alone.
In the U.S. currently, city and state governments in New York, Pennsylvania,
Washington, Illinois, Chicago, Philadelphia, New York, San Francisco and
Florida, have purchased Female Condoms for distribution, with a number of
others expressing interest.
In November 1996, FHC signed an agreement with UNAIDS regarding the sale of
Female Condoms to developing countries. UNAIDS solicited interest levels from
approximately 180 countries in order to gauge their potential demand for Female
Condoms. To date, more than 80 countries have expressed interest, indicating a
near-term demand for approximately eight million Female Condoms. Several
countries have commenced, or are about to commence, introduction of the Product
under the UNAIDS agreement, including Zambia, Zimbabwe, South Africa, Uganda,
Tanzania and Cote d' Ivoire.
State-of-the-Art Manufacturing Facility
The Company manufactures the Female Condom in a 40,000 square-foot leased
facility in London, England. The facility is currently capable of producing 60
million units per year. With additional equipment, this capacity can be
significantly increased.
Government Regulation
In the U.S., the Female Condom is regulated by the U.S. Food and Drug
Administration ("FDA"). Pursuant to section 515(a)(3) of the Safe Medical
Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend
approval and initiate withdrawal of the Pre-Market Approval ("PMA") if the FDA
finds that the Female Condom is unsafe or ineffective, or on the basis of new
information with respect to the device, which, when evaluated together with
information available at the time of approval, indicates a lack of reasonable
assurance that the device is safe or effective under the conditions of use
prescribed, recommended, or suggested in the labeling. Failure to comply with
the conditions of FDA approval invalidates the approval order. Commercial
distribution of a device that is not in compliance with these conditions is a
violation of the SMA Act.<PAGE>
Competition
The Company's Female Condom competes in part with male condoms. Male condoms
typically cost less and have brand names that are more widely recognized than
the Female Condom. Further, male condoms are generally manufactured and
marketed by companies with significantly greater financial resources than The
Female Health Company.
Further, other parties may develop a Female Condom. These competing products
could be manufactured, marketed and sold by companies with significantly
greater financial resources than those of the Company.
Employees
As of November 30, 1997, the Company's operations had 65 full-time employees
within the U.S. and the U.K. and 1 part-time employee. No Company employees
are represented by a labor union. The Company believes that its employee
relations are good.
Backlog
At November 30, 1997, the Company had unfilled orders of $1,130,134.
Comparable amount as of November 30, 1996 was $155,307. All of these unfilled
orders are expected to be filled during Fiscal 1998.
Patents And Trademarks
The Company currently holds product and technology patents in the United
States, Japan, the United Kingdom, France, Italy, Germany, Spain, the European
Patent Convention, Canada, The People's Republic of China, New Zealand,
Singapore, Hong Kong and Australia. The United States patents have varying
terms extending until February 13, 2013. The Company's foreign patents also
have varying terms with the latest to expire extending until 2008. 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
In 1997 and 1996, the Company incurred research and development costs from
continuing operations of $60,811 and $361,094, respectively. These
expenditures have primarily been related to conducting clinical trials of the
Female Condom.
Industry Segments And Financial Information About Foreign And Domestic
Operations
See Note 11 in financial statements included herein at Part II, Item 7.<PAGE>
History
The Female Condom was invented by a Danish physician who obtained a U.S. patent
for the product in 1988. The physician subsequently sold certain rights to the
condom to Chartex Resources Limited. In the years that followed, Chartex, with
resources provided by a nonprofit Danish foundation, developed the
manufacturing processes and completed other activities associated with bringing
the Female Condom to market in certain non-U.S. countries. Wisconsin Pharmacal
Company, Inc., which then owned certain rights to the Female Condom in the
U.S., Canada, and Mexico, pursued the pre-clinical and clinical studies and
overall development of the product for worldwide use and U.S. FDA approval of
the product.
The Female Health Company is the successor to Wisconsin Pharmacal Company,
Inc., a company which previously manufactured and marketed a wide variety of
disparate specialty chemical and branded consumer products in addition to
owning certain rights to the Female Condom described above. A summary of the
Company's origins follows.
In fiscal 1995, the Company's Board of Directors approved a plan to complete a
series of actions designed, in part, to maximize the potential of the female
condom. First, the Company restructured and transferred all of the assets and
liabilities of the Company other than those related primarily to the female
condom to a newly formed, wholly-owned subsidiary of the Company, WPC Holdings,
Inc. ("Holdings"). In January 1996, the Company sold Holdings to an unrelated
third party. Then, in February 1996, the Company acquired Chartex (renamed The
Female Health Company - UK in 1997), the manufacturer and owner of certain
worldwide rights to, and the Company's sole supplier of, the female condom. As
a result of the sale of Holdings and the acquisition of Chartex, The Female
Health Company evolved to its current state with its sole business consisting
of the manufacture, marketing and sale of the Female Condom.
The FDA approved the Female Condom for distribution in 1993 and the Company's
manufacturing facility in 1994. Since that time the Company has sold over
eight million Female Condoms and expanded distribution of the Female Condom to
10 countries around the world.
Item 2. Description of Property
The Company leases approximately 4,500 square feet of office space at 875 North
Michigan Avenue, Suite 3660, Chicago, IL 60611. The lease expires in 2001.
The Company also leases approximately 1,900 square feet for corporate offices
at 919 North Michigan Avenue, Suite 2208, Chicago, Illinois, 60611. The lease
expires January 31, 2001. The Company utilizes warehouse space and sales
fulfillment services of an independent public warehouse located near
Minneapolis, Minnesota for storage and distribution of the Female Condom. The
Company manufactures the Female Condom in a 40,000 square foot leased facility
located in London, England. The FDA-approved manufacturing process is subject
to periodic inspections by the FDA. Current capacity at the manufacturing
facility is approximately 60 million Female Condoms per year. Management
believes the properties are adequately insured.
Item 3. Legal Proceedings.
The Company is not involved in any material pending legal proceedings.<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the Fiscal year ended September 30, 1997.
Supplemental Item. Executive Officers Of Registrant
Certain information about the Company's executive officers as of December 31,
1997, is as follows:
NAME POSITION AGE
- ------------------------------------------------------------------------------
O.B. Parrish Chairman, Chief Executive Officer, Director 64
Mary Ann Leeper, Ph.D. President, Chief Operating Officer, Director 57
William R. Gargiulo, Jr. Vice President - International, Secretary,
Director 69
Jack Weissman Vice President - Trade Sales 49
Michael Pope Vice President - UK Operations 40
Mr. Parrish has served as Chief Executive Officer since 1994 and as Chairman of
the Board and director of the Company since 1987. He is currently acting as the
Chief Financial and Accounting Officer of the Company. Mr. Parrish has been a
shareholder and a director of Phoenix Health Care of Illinois, Inc. ("Phoenix")
since 1987. Phoenix is the owner of approximately 2.83% of the outstanding
common stock of the Company. Mr. Parrish also was the Co-Chairman and a
director of Inhalon Pharmaceuticals, Inc. and is Chairman and a director of
ViatiCare LTD Financial Services LLC. Mr. Parrish is also a Trustee of
Lawrence University. From 1977 until 1986, Mr. Parrish was the President of
the Global Pharmaceutical Group of G.D. Searle & Co. ("Searle"). From 1974
until 1977, Mr. Parrish was the President of Searle International. Prior to
Searle, Mr. Parrish was Executive Vice President of Pfizer's International
Division.
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996 and as an officer and director of the Company since 1987.
From 1994 until 1996, Dr. Leeper served as President and Chief Executive
Officer of The Female Health Company Division, and, from 1989 until 1994, as
Senior Vice President - Development of the Company. Dr. Leeper is a
shareholder and has served as a Vice President and director of Phoenix since
1987. Previously, Dr. Leeper served as Vice President - Market Development and
in other management positions for Searle. As Vice President - Market
Development, Dr. Leeper was responsible for worldwide licensing and
acquisition, marketing and market research.
Mr. Gargiulo has served as Vice President and Secretary of the Company from
1996 to present, as Assistant Secretary of the Company from 1989 to 1996, as
Vice President - International of The Female Health Company Division from 1994
until 1996, as Chief Operating Officer of the Company from 1989 to 1994, and as
General Manager of the Company from 1988 to 1994. Mr. Gargiulo has also served
as a director of the Company since 1987. Mr. Gargiulo is a trustee of a trust
which is a stockholder of Phoenix. From 1984 until 1986, Mr. Gargiulo was the
Executive Vice President of Searle's European operations. From 1976 until
1984, Mr. Gargiulo was the Vice President of Searle's Latin American
operations.
Mr. Weissman has served as Vice President-Trade Sales since June 1995. From
1992 to 1994, Mr. Weissman was Vice President-Sales for Capitol Spouts, Inc.<PAGE>
From 1989-1992, he acted as General Manager-HTV Group, an investment group
involved in the development of retail stores. From 1979 to 1989, Mr. Weissman
held various management positions at Searle's Consumer Products Group and at
The NutraSweet Company, a Searle subsidiary.
Mr. Pope has served as Vice President of the Company since 1996 and as General
Manager of The Female Health Company - UK since its acquisition by FHC in 1996.
Mr. Pope has also served as a director of The Female Health Company - UK since
1995. Previously, Mr. Pope was Director of Technical of Operations for Chartex
which included responsibility for manufacturing, engineering, process
development and quality assurance. Prior to joining Chartex, Mr. Pope was
Production Manager and Technical Manager for Franklin Medical, a manufacturer
of disposable medical devices. <PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the American Stock Exchange under the
symbol "FHC". Prior to January 26, 1995, the Company's common stock traded
over-the-counter on the NASDAQ Small-Cap Market (symbol "WPCI"). The
approximate number of record holders of the Company's common stock at December
9, 1997 was 502. The Company has paid no cash dividends on its common stock
and does not expect to pay cash dividends in the foreseeable future. The
Company anticipates that for the foreseeable future it will retain any earnings
for use in the operation of its business. Information regarding the Company's
high and low reported quarterly closing prices for its common stock is set
forth in the table below.
1997 FIRST SECOND THIRD FOURTH
- ------------ ------ ------- ------- ------
Price per common share - High $6 1/4 $4 1/8 $3 3/8 $4
Price per common share - Low $3 3/4 $1 13/16 $1 11/16 $2 7/8
1996 *
- -------------
Price per common share - High $3 15/16 $4 15/16 $6 1/2 $6 9/16
Price per common share - Low $2 5/8 $2 11/16 $3 15/16 $4 3/8
* Continuing Operations
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview
Over the past few years, the Company completed significant aspects of the
development and commercialization of the Female Condom. These initiatives have
resulted in the attainment of proprietary manufacturing technology and product
design patents, necessary regulatory approvals, endorsements from various
organizations within the world medical community, and the development of
significant manufacturing capacity. These steps, taken as part of the
Company's plan to develop and sell a product with global commercial and
humanitarian value, have required the expenditure of significant amounts of
capital and resulted in significant operating losses including the period 1996
through 1997.
The Company has begun the process of developing the commercial market for the
Female Condom around the world. As part of this plan, the Company has
completed a number of distribution agreements and is pursing other arrangements
for the marketing and sale of the Female Condom. Management believes that as
the number of markets in which the Female Condom is sold increase, sales will
grow and at certain levels the Company will become profitable. However, there
can be no assurance that such level of sales will be achieved in the near term
or at all.
Results Of Operations
Fiscal Year Ended September 30, 1997 ("1997") Compared to Fiscal Year Ended
September 30, 1996 ("1996")<PAGE>
The Company had revenues of $2.9 million and a net loss of $(5.6) million
(($0.67) per share) in 1997 compared to net revenues of $2.1 million and a net
loss of $(8.7) million (($1.31) per share) in 1996.
As discussed more fully below, the 1997 loss principally resulted from fixed
manufacturing overhead and administrative costs, configured to support
significantly greater volume levels. Over the past two years, the Company has
acquired manufacturing capacity and created an organizational structure which
management believes will enable it to increase the sales of the Female Condom
and manage the accompanying growth.
Revenues increased $0.8 million (41%) in 1997 over the prior year. The
increase in revenues principally related to initial shipments to developing
countries under the Company's agreement with UNAIDS and increased US trade
sales, partially offset by a decline in US public sector sales due, in part, to
a reduction in selling price.
In 1997, cost of goods sold declined $1.2 million from $4.7 million in 1996 to
$3.5 million in 1997 principally due to a $1.1 million favorable adjustment to
the Company's inventory reserves in the fourth quarter, a direct result of the
FDA's approval of an extension in the product's useful life to 5 years from 3
years. In 1996, based on the then existing three-year useful life, cost of
goods sold included a $1.0 million charge for a reduction in the expected
realizable value of the Company's inventory.
Excluding the effects of the inventory reserves, cost of goods sold increased
$0.9 million (23%) in 1997 due to both increased sales and the inclusion of a
full year of costs from the Company's manufacturing operations compared to
eight months in 1996. During 1997 and 1996, gross margins were negatively
affected by excess capacity at the Company's UK-based manufacturing facility.
For both 1997 and 1996, output at its manufacturing facility was less than 5%
of the facility's annual capacity.
Advertising and promotion expenditures decreased 17% to $1.6 million in 1997
compared to $2.0 million in 1996. Advertising and promotion relates almost
exclusively to the US market and includes the costs of print advertising, trade
and consumer promotions, product samples and other marketing costs incurred to
increase consumer awareness and purchases of the Female Condom. The Company's
decision to secure a marketing and distribution partner for the US and European
markets limited such spending in the second half of 1997.
Selling, general and administrative expenses totaled $3.0 million for 1997
compared to $3.3 million for 1996 representing a 8% reduction. This reduction
resulted from the Company decreasing research and development expenditures by
$0.3 million (83%) from $0.4 million in 1996 to $0.1 million in 1997. The other
components of selling, general and administrative expenses included decreases
in selling expenses offset by increased expenditures for investor relations,
legal and compensation.
Nonoperating expense for 1997 decreased $0.3 million (49%) to $0.4 million from
$0.7 million in 1996. Additional nonoperating income of $0.1 million for 1997
and a 1996 charge of $0.2 million to reduce the estimated value of warehouse
space provided as part of the consideration for the sale of Holdings accounted
for the overall decrease.
In order for the Company to cover fixed manufacturing overhead costs and
realize a breakeven at the gross profit margin, annual unit sales of<PAGE>
approximately 5.6 million Female Condoms are required based upon the current
average selling price per unit. The Company's unit sales for fiscal 1997 were
3.3 million Female Condoms. Additionally, in order to cover administrative
expenses and achieve a breakeven before advertising and promotion expenses, the
Company must achieve cumulative annual unit sales of approximately 17.8 million
Female Condoms based upon the current average selling price per unit or total
sales revenues of $15.7 million.
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 7 such agreements.
The Company believes this strategy will accelerate the commercialization of the
Female Condom around the world. However, the Company is dependent on finding
appropriate partners in markets around the world and, once an agreement is
completed, reliant on the effectiveness of its partners to market and
distribute the product. While such arrangements typically include minimum
order quantities necessary for the partner to retain the rights afforded it
under the agreement, failure by the Company's partner to successfully market
and distribute the Female Condom or an inability of the Company to secure
additional agreements for new markets could adversely effect the Company's
financial condition and results of operations.
Inventory and Supply
Although certain components essential to the Company's business are generally
available from multiple sources, other key components are currently obtained
from single sources. If the supply of key single-sourced components to the
Company were to be delayed or curtailed, the Company's ability to ship product
in desired quantities in a timely manner could be adversely affected, depending
on the time required to obtain sufficient quantities from the current source or
to obtain sufficient quantities from an alternative source or alternative
sources.
Global Market Risks<PAGE>
The Company manufactures the Female Condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States Dollar. In
addition, some of the Company's future international sales may be in developing
nations where dramatic political or economic changes are possible. Such
factors may adversely affect the Company's results of operations and financial
condition.
Other Factors
The manufacture and marketing of the Female Condom is regulated by the FDA.
Failure to comply with the conditions of FDA approval invalidates the approval
order. Under certain circumstances, failure to comply with the conditions of
FDA approval could result in fines or suspension or withdrawal of FDA approval.
The Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the FDA.
For the Company to begin generating cash from operations, sales of the Female
Condom will have to increase significantly from current levels. The Company's
business and financial condition could be adversely effected by an inability of
the Company to effectively manage its growth and to adapt its administrative,
operational and financial control systems to the needs of the expanded entity
and/or the failure of management to anticipate, respond to, and manage changing
business conditions.
Liquidity and Sources of Capital
Historically, the Company has incurred significant operating losses. Cash used
in continuing operations was $5.0 million and $4.1 million for 1997 and 1996,
respectively. Historically, the Company has funded operating losses and
capital costs, in large part, through the sale of common stock or debt
securities convertible into common stock.
During 1997, the Company received approximately $1.0 million in proceeds from
newly-issued notes payable, $1.9 million (net of transaction costs) from the
issuance of convertible debentures and warrants, and $1.6 million (net of
transaction costs) from the sale of convertible preferred stock and $.2 million
from the issuance of common stock upon exercise of options. The Company also
sold its UK manufacturing building for $3.4 million in a sale leaseback
transaction. FHC used these amounts to fund current operations of the Company
and to repay existing liabilities.
In the near term, FHC management expects operating and capital costs to
continue to exceed funds generated from operations due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize the Female Condom around the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm
specializing in providing advice to healthcare and life companies. Pursuant to
this agreement, for a one-year period, Vector will act as the Company's
exclusive financial advisor for the purposes of identifying and evaluating
opportunities available to the Company for increasing shareholder value. These
opportunities may include selling all or a portion of the business, assets or
stock of the Company or entering into one or more distribution arrangements
relating to the Company's product. However, no specific opportunity has yet<PAGE>
been identified and there can be no assurance that any such opportunities will
be available to the Company or, if so available, that the Company will
ultimately elect or be able to consummate any such transaction.
In 1998, management will pursue other avenues to obtain financing including
pursuing strategies to secure additional capital from a debt or equity
securities offering. Until internally generated funds are sufficient to meet
cash requirements, FHC will remain dependent upon its ability to generate
sufficient capital from outside sources. While management believes that
revenue from sales of the Female Condom will eventually exceed operating costs
and that ultimately operations will generate sufficient funds to meet capital
requirements, there can be no assurance that such level of operations will
ultimately be achieved, or be achieved in the near term. Likewise, there can
be no assurance that the Company will be able to source all or any portion of
its required capital through the sale of debt or equity or, if raised, the
amount will be sufficient to operate the Company until sales of the Female
Condom generate sufficient revenues to fund operations. In addition, any funds
raised may be costly to the Company and/or dilutive to stockholders. If the
Company is not able to source the required funds or any future capital which
becomes required, the Company may be forced to sell certain of its assets or
rights or cease operations. Further, if the Company is not able to source
additional capital, the lack of funds to promote the Female Condom may
significantly limit the Company's ability to realize value from sale of such
assets or rights or otherwise capitalize on the investments made in the Female
Condom.
As of November 30, 1997, the Company had approximately $1.3 million in cash,
net trade accounts receivable of $0.4 million and current trade accounts
payable of $1.0 million. It is estimated that the Company's cash burn rate,
without revenues, is approximately $0.4 million per month.
Impact Of Inflation And Changing Prices
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased general and administrative expenses.
Historically, the Company has absorbed increased costs and expenses without
increasing selling prices.
New Accounting Pronouncements
Please see "Current Accounting Pronouncements" in Note 14 in financial
statements included herein at Part II Item 7.<PAGE>
ITEM 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT: McGladrey & Pullen, LLP
Consolidated Restated Balance Sheet -September 30, 1997
Consolidated Restated Statements of Operations for each of the two years in the
period ended September 30, 1997
Consolidated Restated Statements of Stockholders' Equity for each of the two
years in the period ended September 30, 1997
Consolidated Restated Statements of Cash Flows for each of the two years in the
period ended September 30, 1997
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Female Health Company and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of The Female
Health Company and subsidiaries, as of September 30, 1997, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended September 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Female Health
Company and subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for the years ended September 30, 1997 and
1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been presented assuming
that the Female Health Company will continue as a going concern. As more fully
described in Note 15, the Company has experienced slower than expected growth
in revenues from its sole product, which has adversely affected the Company's
current results of operations and liquidity. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 15.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts of classification of liabilities that may result from the
outcome of this uncertainty.
As described in Note 16 to the financial statements, the Company changed its
method of accounting for discounts on convertible debentures. This change has
been applied retroactively to 1996 and, accordingly, all prior financial
statements have been restated.
McGLADREY & PULLEN, LLP
Schaumburg, Illinois
November 20, 1997<PAGE>
Consolidated Balance Sheet
"Restated"
September 30
1997
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,633,467
Accounts receivable, net of allowances of
$292,000 610,951
Inventories, net of allowances of $894,000 947,081
Prepaid expenses and other current assets 293,590
-----------
TOTAL CURRENT ASSETS 3,485,089
OTHER ASSETS
Note receivable 750,000
Intellectual property, net of accumulated
amortization of $199,248 996,360
Other assets 243,782
PROPERTY, PLANT AND EQUIPMENT
Equipment, furniture and fixtures 3,863,859
Less: accumulated depreciation (999,735)
-----------
2,864,124
-----------
$8,339,355
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, related party, net of unamortized
discount of $133,209 $866,791
Current maturities of long-term debt and
capital lease obligations 43,996
Accounts payable 874,908
Accrued expenses and other current liabilities 372,323
Preferred dividends payable 14,965
----------
TOTAL CURRENT LIABILITIES 2,172,983
LONG-TERM LIABILITIES
Long term debt and capital lease obligations,
less current maturities 538,969
Deferred gain on sale of facility 1,767,612
Other long term liabilities 305,153
----------
4,784,717
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, par value $.01
per share. Authorized 5,000,000 shares; issued
and outstanding 680,000 shares 6,800
Common Stock, par value $.01 per share.
Authorized 15,000,000 shares; issued and
outstanding 9,514,430 shares 95,145
Additional paid-in capital 40,238,387
Foreign currency translation gain 203,195<PAGE>
Accumulated deficit (36,988,889)
------------
3,554,638
------------
$8,339,355
============
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Operations
"Restated"
Years ended September 30
1997 1996
----------- ----------
NET REVENUES $2,916,408 $2,064,258
COST OF PRODUCTS SOLD:
Cost of goods sold 4,530,185 3,769,979
Change in obsolescence reserve (1,054,476) 950,000
----------- ----------
3,475,709 4,719,979
----------- ----------
GROSS PROFIT (LOSS) (559,301) (2,655,721)
OPERATING EXPENSES
Advertising and promotion 1,642,347 1,976,289
Selling, general and administrative 3,036,765 3,303,717
----------- ----------
Total Operating Expenses 4,679,112 5,280,006
----------- ----------
Operating (loss) (5,238,413) (7,935,727)
NONOPERATING INCOME (EXPENSE)
Interest expense (1,268,980) (662,916)
Interest income 176,717 106,708
Nonoperating income/(expense) 79,527 (301,907)
----------- -----------
(1,012,736) (858,115)
----------- -----------
(LOSS) FROM CONTINUING OPERATIONS (6,251,149) (8,793,842)
Income (loss) from discontinued
operations and gain on sale, net of
applicable income tax expense --- (4,461)
----------- -----------
Net (loss) (6,251,149) (8,798,303)
Preferred dividends 14,965 ---
----------- -----------
Net (loss) attributable to common
stockholders (6,266,114) (8,798,303)
Net (loss) per common share outstanding
Continuing Operations ($0.74) ($1.33)
Discontinued Operations .00 .00
----------- ----------
($0.74) ($1.33)
Weighted average common shares
outstanding 8,453,266 6,611,796
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Stockholders' Equity
"Restated"
Additional
Preferred Common Paid-in
Stock Stock Capital
------- ------- -------
Balance at September 30, 1995 $ --- $63,928 $29,411,702
Net loss --- --- ---
Issuance of 700,000 shares of Common Stock
(net of offering costs of $293,313) --- 7,000 2,779,417
Issuance of 13,350 shares of Common Stock
upon exercise of stock options --- 133 46,741
Issuance of 105,580 shares of Common Stock
for consulting and other services --- 1,056 626,712
Issuance of warrants with convertible
debentures --- --- 90,000
Issuance of beneficial
conversion feature with convertible
debentures --- --- 382,000
Issuance of warrants with short-term
notes payable --- --- 340,000
Issuance of warrants for consulting and
other services --- --- 78,500
Translation adjustment --- --- ---
----------------- -----------
Balance at September 30, 1996 --- $72,117 $33,755,072
Net loss --- --- ---
Issuance of 2,128,371 shares of Common Stock
upon conversion of debt --- 21,284 3,670,281
Issuance of 39,833 shares of Common Stock
upon exercise of stock options --- 398 178,268
Issuance of 124,564 shares of Common Stock
for consulting services --- 1,246 206,617
Issuance of 10,000 shares of Common Stock
under Stock Bonus Plan --- 100 53,025
Issuance of warrants with convertible
debentures --- --- 30,176
Issuance of 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 --- --- ---
Translation adjustment --- --- ---
------ -------- ---------
Balance at September 30, 1997 $6,800 $95,145 $40,238,387
======== ======= ===========<PAGE>
Consolidated Statements of Stockholders' Equity
"Restated"
Foreign
Currency
Accumulated Translation
Deficit Gain (Loss) Total
------- ------- -------
Balance at September 30, 1995 $(21,924,472) --- $7,551,158
Net loss (8,798,303) --- (8,798,303)
Issuance of 700,000 shares of Common Stock
(net of offering costs of $293,313) --- --- 2,786,417
Issuance of 13,350 shares of Common Stock
upon exercise of stock options --- --- 46,874
Issuance of 105,580 shares of Common Stock
for consulting and other services --- --- 627,768
Issuance of warrants with convertible
debentures --- --- 90,000
Issuance of beneficial
conversion feature with convertible
debentures --- --- 382,000
Issuance of warrants with short-term
notes payable --- --- 340,000
Issuance of warrants for consulting and
other services --- --- 78,500
Translation adjustment --- 83,858 83,858
------------- ---------- ----------
Balance at September 30, 1996 (30,722,775) 83,858 3,188,272
Net loss (6,251,149) --- (6,251,149)
Issuance of 2,128,371 shares of Common Stock
upon conversion --- --- 3,691,565
Issuance of 39,833 shares of Common Stock
upon exercise of stock options --- --- 178,666
Issuance of 124,564 shares of Common Stock
for consulting services --- --- 207,863
Issuance of 10,000 shares of Common Stock
under Stock Bonus Plan --- --- 53,125
Issuance of warrants with convertible
debentures --- --- 30,176
Issuance of 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) --- --- 1,603,748
Revaluation of warrants for consulting services --- --- 89,500
Revaluation of options for legal services --- --- 10,500
Preferred stock dividends (14,965) --- (14,965)
Preferred stock dividends --- --- ---
Translation adjustment --- 119,337 119,337
------------- -------- ----------
Balance at September 30, 1997 $(36,988,889) $203,195 $3,554,638
============= ======= ==========
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Cash Flows
"Restated"
Years ended September 30
1997 1996
---------- ----------
OPERATING ACTIVITIES
Net (loss) ($6,251,149)($8,798,303)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 553,298 349,061
Amortization of intellectual
property rights 121,741 76,023
Provision for (recovery of) inventory
obsolescence (1,054,476) 950,000
Provision for doubtful accounts, returns
and discounts 119,274 120,126
Gain on sale of Holdings --- (224,538)
(Gain) loss on disposal of equipment (84,646) 37,576
Issuance and revaluation of warrants
and options 360,988 706,268
Amortization of debenture issuance costs 27,507 4,278
Amortization of discount on note receivable
and interest earned on lease deposit (29,140) (29,703)
Amortization of discounts on notes payable
and convertible debentures 954,820 304,570
Amortization of other assets --- 250,000
Write down of note receivable to
realizable value 92,471 ---
Amortization of deferred gain on sale and
leaseback of building (70,119) ---
Changes in operating assets and liabilities
of continuing operations, excluding effect
of purchase of Chartex in 1996:
Accounts receivable (271,173) 47,269
Inventories 1,086,999 1,935,923
Prepaid expenses and other current assets 28,260 177
Accounts payable 138,532 (914,876)
Accrued expenses and other current
liabilities (730,929) 1,133,407
Due to stockholder --- (19,795)
---------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (5,007,742) (4,072,537)<PAGE>
Consolidated Statements of Cash Flows
"Restated"
Years ended September 30
1997 1996
---------- ----------
INVESTING ACTIVITIES
Capital expenditures (24,597) (596,402)
Purchase of Chartex, less $71,417
cash received --- (5,103,088)
Sale of Holdings, net of expenses and
cash sold --- 5,213,263
Proceeds from sale of property and
equipment 3,376,056 ---
Proceeds from return of lease deposits 91,171 ---
Payments for lease deposits (245,953) ---
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 3,196,677 (486,227)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 1,603,748 ---
Proceeds from issuance of common stock --- 3,080,000
Proceeds from issuance of common stock
upon exercise of options 178,666 46,874
Costs of common stock issuance --- (293,583)
Proceeds from related party notes issued 1,000,000 2,160,000
Proceeds from convertible debentures
issued 2,020,000 2,000,000
Payments on notes payable, related party (2,160,000) ---
Costs to issue convertible debentures (155,400) (154,000)
Increase (decrease) in notes payable --- (109,503)
Payments on long-term debt and capital
lease obligations (1,912,430) (768,613)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 574,584 5,961,175
Effect of exchange rate changes on
cash and equivalents (44,132) (9,675)
---------- ----------
Increase (decrease) in cash and
cash equivalents (1,280,613) 1,392,736
Cash and cash equivalents at
beginning of year 2,914,080 1,521,344
---------- ----------
Cash and cash equivalents at
end of year $1,633,467 $2,914,080
========== ==========
See notes to consolidated financial statements. <PAGE>
Consolidated Statements of Cash Flows
"Restated"
Years ended September 30
1997 1996
---------- ----------
Supplemental cash flow disclosures:
Interest paid $273,714 $457,280
Supplemental schedule of noncash investing and financing activities:
Convertible debentures converted to
common stock, net of unamortized discounts
and issuance costs 3,691,565
Issuance of warrants on convertible
debentures and notes payable 280,176 430,000
Capital lease obligations incurred for
equipment 56,588
Preferred dividends declared 14,965
Sale of manufacturing facility:
Proceeds from sale 3,365,000
Depreciated cost of property (1,398,819)
-----------
Deferred gain on sale 1,966,181
Sale of WPC Holdings, Inc.:
Selling price 8,285,000
Liabilities assumed by buyer (916,060)
Note receivable taken (785,000)
Other assets received (250,000)
----------
Cash received 6,333,940
Expenses on sale and cash sold (1,120,677)
-----------
$5,213,263
Purchase of Chartex:
Assets acquired:
Trade receivables 203,613
Inventories 644,268
Other current assets 82,053
Property and equipment 3,870,167
Intellectual property rights 1,127,469
----------
5,927,570
Liabilities assumed:
Accounts payable and accrued expenses (835,725)
Bank debt (1,615,229)
Other long-term debt (1,109,235)
----------
3,560,189
Net assets acquired, net of cash
received of $71,417 2,367,381
Settlement of intercompany assets <PAGE>
and liabilities:
Prepaid royalties (1,875,491)
Accrued royalties 4,761,198
Option fee paid (150,000)
----------
Cash paid in 1996 $5,103,088
==========
See notes to consolidated financial statements.<PAGE>
Note 1. Nature Of Business and Significant Accounting Policies
Principles of consolidation and nature of operations: The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, The Female Health Company - UK and The Female Health Company -
UK, plc, previously Chartex Resources Limited and Chartex International, plc
("Chartex"), respectively. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Female Health Company
("FHC" or the "Company") is currently engaged in the marketing, manufacture and
distribution of a consumer health care product known as the Reality female
condom, "Reality," in the U.S. and "femidom" or "femy" outside the U.S. The
Female Health Company - UK, is the holding company of The Female Health Company
- - UK, plc, which operates a 40,000 sq. ft. leased manufacturing facility
located in London, England.
The Company changed its name from Wisconsin Pharmacal, Inc. to The Female
Health Company concurrently with the sale of WPC Holdings, Inc. on January 29,
1996.
The Company sells primarily to public sector institutions, wholesalers,
distributors, and drug, general merchandise, and grocery retailers in the U.S.
and United Kingdom.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect certain reported amounts and disclosures.
Actual results may differ from those estimates. Significant accounting
estimates include the following:
Allowances for price discounts and product returns: Receivables include a
provision for sales returns and trade allowances, which is based on
management's estimate of future product returns from customers in connection
with unsold product which has expired or is expected to expire before it is
sold. The estimated cost for product returns, price discounts and trade
allowances are accrued when the initial sale is recorded.
Allowances against inventories: The market value of inventory is based on
management's best estimate of future sales and the time remaining before the
existing inventories reach their expiration dates.
Intellectual property: The Company evaluates intellectual property rights for
impairment by comparing the net present value of the asset's estimated future
income stream to the asset's carrying value.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on the
Company's future results of operations and financial condition.
Cash equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Substantially all of the Company's cash was on deposit with one financial
institution.
Inventories: Inventories are valued at the lower of cost or market. The cost
is determined using the first-in, first-out (FIFO) method.<PAGE>
Foreign currency translation: In accordance with Financial Accounting
Standards No. 52, "Foreign Currency Translation", the financial statements of
the Company's international subsidiaries are translated into U.S. dollars using
the exchange rate at each balance sheet date for assets and liabilities, the
historical exchange rate for stockholders' equity and a weighted average
exchange rate for each period for revenues, expenses, and gains and losses.
Translation adjustments are recorded as a separate component of stockholders'
equity as the local currency is the functional currency.
Building, equipment, furniture and fixtures and assets under capital leases:
Depreciation and amortization is computed by the estimated useful lives of the
respective assets which range as follows:
Equipment 5 - 10 years
Furniture and fixtures 3 years
Amortization of assets under capital lease is included with depreciation and
amortization for owned assets.
Intellectual property rights: The Company holds patents on the Female Condom
in the United States, the European Union, Japan, Canada, Australia and The
People's Republic of China and holds patents on the manufacturing technology in
various countries. The Company also licenses the trademark "Reality" in the
United States and has trademarks on the names "femidom" and "femy" in certain
foreign countries. Intellectual property rights are amortized on a
straight-line basis over their estimated useful life of twelve years.
Financial instruments: The Company has no financial instruments for which the
carrying value materially differs from fair value.
Revenue Recognition: Revenues from product sales are recognized as the
products are shipped to the customers.
Research and Development Costs: Research and development costs are expensed as
incurred. The amount of costs expensed for the years ended September 1997 and
1996 was $60,811 and $361,094, respectively.
Stock-Based Compensation: The value of stock options awarded to employees is
measured using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The
Company has provided pro forma disclosures of net income as if the fair
value-based method prescribed by Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", ("FAS 123"). was used in measuring
compensation expense in Note 7.
Income Taxes: The Company files separate income tax returns for its foreign
subsidiaries. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109) requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are also provided for carryforwards for income
tax purposes. In addition, the amount of any future tax benefits is reduced by
a valuation allowance to the extent such benefits are not expected to be
realized.<PAGE>
Advertising: The Company's policy is to expense production costs in the period
in which the advertisement is initially presented to consumers.
Net (Loss) Per Common Share: Net (loss) per common share is computed using the
weighted average number of shares of common stock outstanding. Fully diluted
income per share is not presented for each of the periods since the effect of
including common equivalent shares would be anti-dilutive.
Reclassifications: Certain prior year amounts have been reclassified on the
Consolidated Statements of Operations and the Consolidated Statements of Cash
Flows to conform to the 1997 presentation.
Note 2. Inventories
The components of inventory consist of the following at September 30, 1997:
Raw material $ 237,315
Work in process 60,879
Finished goods 1,542,887
Less allowance for obsolescence (894,000)
---------
Net Inventory $ 947,081
=========
Note 3. Leases
Property, plant and equipment include the following amounts for leases which
have been capitalized at September 30, 1997:
Leasehold interest in equipment, furniture
and fixtures $189,124
Less accumulated amortization 148,478
--------
$ 40,646
========
The Company entered into a seven year operating lease with a third party for
office space effective September 12, 1994. The lease is cancelable at the end
of the 60th month of the term of the lease upon payment of a termination fee of
$63,867. The Company also has an informal agreement to reimburse an affiliate
for office space used by the officers of the Company. The affiliate's lease is
with an unrelated third party which expires January 31, 2001.
On December 10, 1996, the Company entered into what is in essence a sale and
leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received $3,365,000 (Pounds)
1,950,000 for leasing the facility to a third party for a nominal annual rental
charge and for providing the third party with an option to purchase the
facility for one pound during the period December 2006 to December 2027.
As part of the same transaction, the Company entered into an agreement to lease
the facility back from the third party for base rents of $336,000 (Pounds)
195,000 per year payable quarterly until 2016. The lease is renewable through
December 2027. The Company was also required to make a security deposit of
$336,000 (Pounds) 195,000 to be reduced in subsequent years. The facility had
a net book value of $1,398,819 (Pounds) 810,845 on the date of the transaction.
The $1,966,181 (Pounds) 1,139,155 gain which resulted from this transaction<PAGE>
will be recognized ratably over the initial term of the lease. Unamortized
deferred gain as of September 30, 1997 was $1,767,612 (Pounds) 1,096,441.
Concurrent with this transaction, the Company repaid the mortgage loan on this
property of $1,834,000 (Pounds) 1,062,500.
In 1987, a subsidiary entered into a lease for office space expiring March 3,
1999. In 1993, these offices were vacated and subsequently this space was
subleased to a third party for a period expiring February 28, 1999. At the
time the sublease was entered into a liability was established for all future
costs to the end of the lease, net of expected sublease receipts. Details of
lease rent expense in total and separately for transactions with related
parties is as follows:
September 30
1997 1996
-------- --------
Operating lease expense:
Factory and office leases $579,197 $ --
Office space used by officers 51,255 57,640
Other 88,772 114,684
-------- --------
Total lease expense 719,224 172,324
Discontinued operations --- 32,035
-------- --------
Continuing operations $719,224 $140,289
======== ========
Future minimum payments under capital and operating leases, including planned
reimbursement of affiliate for office space used by officers, consisted of the
following at September 30, 1997:
Rentals
Receivable
Under
Capital Operating Subleases
-------- ---------- --------
1998 $44,897 $ 592,741 $65,664
1999 23,156 485,201 12,038
2000 --- 459,607 ---
2001 --- 431,983 ---
2002 --- 320,110 ---
Thereafter --- 4,401,513 ---
-------- ---------- --------
Total minimum payments 68,053 $6,691,155 $77,702
========== ========
Amount representing interest (901)
--------
$67,152
========
Note 4. Notes Payable and Long-Term Debt
During 1997, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt, a current director of the Company. The outstanding note payable
bears interest at 12% and is payable in full in 1998. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000
shares of the Company's common stock at $1.848 per share, which represented the
average trading price for the five trading days prior to the closing date for<PAGE>
the transaction and resulted in an initial discount on the note of $250,000.
Any stock issued under the warrants carry certain registration rights. The
warrants expire in 2004. In addition, if the Company defaults on its obligation
under the note, the Company is required to issue an additional 200,000 shares
of its common stock to Mr. Dearholt in addition to all other remedies to which
Mr. Dearholt may be entitled. The note is recorded at September 30, 1997, net
of unamortized discount of $133,209. The discount in combination with the
note's 12% coupon resulted in an effective interest rate of 53 percent on the
note.
During 1997, the Company repaid $1,000,000 borrowed from an affiliate of Mr.
Dearholt, and $160,000 borrowed from Mr. Parrish, a current officer and
director of the Company.
Long-term debt and capital lease obligations at September 30, 1997, consisted
of the following:
Foundation note, noninterest bearing, due 1999,
net of unamortized discount of $80,676,
interest imputed at 11% $ 515,813
Capital lease obligations 67,152
---------
Total long-term debt and capital leases 582,965
Less current maturities 43,996
---------
Long-term portion $ 538,969
=========
The Foundation note for $515,813 (Pounds) 319,957 is a noninterest bearing
Economic Development Grant provided by the United Kingdom Regional Selective
Assistance Program. The grant is repayable by the Company if certain
conditions of the grant are not satisfied.
On February 20, 1997, the Company issued convertible debentures for $1,989,824
which is net of $30,176 in unamortized discount; (the Debentures) at 8%
maturing in 1999. These Debentures are convertible in the Company's common
stock at the lesser of $2.875 (representing the average market price for the
five days preceding the date the Debentures were sold) or 80% of the market
price at the time the debentures are converted into FHC common stock. The
discount relates to the valuation of the detachable warrants for 67,333 shares
of common stock. During fiscal 1997, the debentures were all converted into
1,364,625 shares of common stock.
At September 30, 1996, there were convertible debentures of $1,910,000 (net of
$90,000 in unamortized discount) with detachable warrants for 40,201 shares of
common stock (the Debentures) at 8% maturing in 1999. These Debentures were
convertible into the Company's common stock at the lesser of $5.275
(representing the average market price for the five days preceding the date the
Debentures were sold) or 80% of the market price at the time the debentures are
converted into FHC common stock. All of these debentures were converted in
763,746 shares of common stock in fiscal 1997.
Upon conversion of the debentures, $277,610 of issuance costs and $110,007 of
unamortized discount were charged to equity and $59,182 of accrued interest was
credited to equity.
Note 5. Income Taxes<PAGE>
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss from continuing operations before
income taxes as of September 30, 1997 and 1996, are as follows:
September 30
1997 1996
---------- ----------
Tax credit statutory rates $(2,130,479) $(2,942,986)
Nondeductible expenses 223,368 ---
State income tax, net of federal benefits (241,660) (231,219)
Benefit of net operating loss not
recognized, increase in valuation
allowance 2,073,129 3,153,062
Other 75,642 (21,143)
---------- ----------
$ --- $ ---
========== ==========
As of September 30, 1997, the Company had federal net operating loss
carryforwards of approximately $25,700,000 and state net operating loss
carryforwards of $28,400,000, respectively, for income tax purposes expiring in
years 2005 to 2013. The benefit relating to $1,489,218 of these net operating
losses relates to exercise of Common stock options and will be credited
directly to stockholders' equity when realized. The Company also has
investment tax and research and development credit carryforwards for income tax
purposes aggregating approximately $181,000 at September 30, 1997, expiring in
years 1998 to 2008. The Company's Chartex subsidiary has U.K. net operating
loss carryforwards of approximately $68,900,000 as of September 30, 1997.
These U.K. net operating loss carryforwards can be carried forward indefinitely
to be used to offset future U.K. taxable income. Significant components of the
Company's deferred tax assets and liabilities are as follows at September 30,
1997:
Deferred tax assets:
Federal net operating loss carryforwards $8,727,724
State net operating loss carryforwards 1,843,911
Foreign net operating loss carryforwards 22,752,873
Tax credit carryforwards 181,210
Inventory obsolescence 328,043
Accounts receivable allowances 90,373
Other 22,330
----------
Total gross deferred tax assets 33,946,464
Valuation allowance for deferred tax assets (33,930,605)
----------
Deferred tax assets net of valuation allowance 15,859
Deferred tax liabilities: Equipment, furniture
and fixtures (15,859)
---------
Net deferred tax assets $ ---
=========
Reconciliations of the valuation allowance for deferred tax assets for the year
ended September 30, 1997, is as follows:
Balance, beginning $(31,857,476)<PAGE>
Increase in valuation allowance charged
to current operations (2,073,129)
------------
Balance, ending $(33,930,605)
============
The valuation allowance reported in the financial statements for the year ended
September 30, 1996, was decreased by approximately $559,000 due primarily to
changes in the deferred tax asset related to net operating loss carryforwards
acquired in the purchase of Chartex.
Note 6. Royalty and Licensing Agreements
The Company has an exclusive license (except for licenser's rights) with
Meijers Inc. to use the trademark "Reality" in the U.S. and Canada. For this
exclusive license to the Reality trademark, the Company agreed to pay the
licenser the greater of (a) $0.015 per Female Condom sold in the U.S.
thereafter or (b) a minimum annual royalty equal to 50% of the average annual
royalties paid during the period beginning five years immediately preceding the
year for which the royalties are due or $4,500 whichever is greater. The amount
of trademark royalty expense was approximately $5,700 and $8,900 for 1997 and
1996, respectively.
Effective September 24, 1992, the Company entered into an agreement with Family
Health International ("FHI"), a nonprofit organization. FHI, in conjunction
with the Contraceptive Research and Development Program ("CONRAD"), conducted a
major study to assess the safety and efficacy of the Female Condom. The
agreement with FHI provides that FHI may not use, or permit the use of, the
data supporting the study in connection with any company competitive with the
Company or product competitive with the Female Condom. The agreement also
provides that FHI will be paid a royalty on U.S. private sector sales of the
Female Condom. The royalty is calculated on a sliding scale based on the
number of units sold beginning with quantities sold over 10 million units and
subject to a cumulative maximum royalty of $10 million. Since less than 10
million units have been sold to date no royalties have been incurred.
Prior to the 1996 acquisition of Chartex, the Company paid royalties under a
series of licensing agreements to market the Female Condom in the United
States, Canada and Mexico. These royalty agreements have ceased upon the
acquisition and unpaid royalties were settled at the acquisition date.
Note 7. Common Stock
Stock Option Plans
In October 1989, in conjunction with an amendment of the officer/stockholder's
employment agreement, the Company adopted the 1989 Stock Option Plan which
granted the officer/stockholder (now "former officer") options to purchase up
to 50,000 shares of Common Stock at the price per share in the Company's
initial public offering ($6.00). During a previous year, 30,000 of these
options were canceled. The remaining options for 20,000 shares are currently
exercisable.
On April 6, 1991 the Company entered into a stock option agreement with this
same former officer. Under the agreement, the Company granted the former
officer the option to purchase up to 130,000 shares of Common Stock at the
market price at the date of the grant ($4.75 per share). Exercise of the
option was contingent upon the market price of the Common Stock equaling at<PAGE>
least $9.50 per share within a three-day period immediately preceding the date
of exercise. On July 31, 1996, the Board of Directors amended the plan
entitling the exercise of these options for 130,000 shares of Common Stock at
any time prior to the expiration of the option period. In October, 1996 36,000
of these shares were exercised. At September 30, 1997 options to purchase
94,000 shares of Common Stock were outstanding under this agreement.
In 1990, the Company provided for the award of options to purchase up to
200,000 shares of the Company's common stock to key Company employees. The
options generally expire in eight years from date of grant and become
exercisable evenly over a four-year period. At September 30, 1997, 108,279
options are outstanding under the 1990 plan, 97,779 of which are exercisable.
The Company has various stock option plans established in 1994 and 1997 under
which it may grant to employees responsible for the growth and financial
success of the Company options to purchase shares of Common Stock. These
options generally expire ten years from the date of grant and become
exercisable based on continued employment in one-third increments as follows:
(i) on the first anniversary of the grant date (ii) on the date when the
average sale price of the Company's common stock is at least $7.50 per share
and (iii) on the date when the Company and its subsidiaries, on a consolidated
basis, achieve a positive cash flow for a six-month period, as determined by
the Company's independent auditors.
In 1997, the exercise price for The Female Health Company employee stock
options granted under the 1997 Plan and the 1994 Stock Option Plan (the "1994
Plan") were amended to $2.00 per share (the last sale price of the Company's
common stock as of April 22, 1997).
Under the 1994 plan, the Company provided for the award of options to purchase
up to 449,000 shares of the Company's common stock. At September 30, 1997,
433,867 options were granted and are outstanding under the 1994 plan, 143,734
of which were exercisable.
Under the 1997 plan, the Company provided for the award of options to purchase
up to 600,000 shares of the Company's common stock. At September 30, 1997,
444,600 options were granted and are outstanding under the 1997 Plan, none of
which were exercisable.
Directors who are employees of the Company do not receive compensation for
serving in such capacity. Directors who are not employees of the Company each
receive $1,000 for attendance at each Board meeting or a meeting of a committee
of which he or she is a member. In addition, during 1996 the Company
established a stock option plan for outside directors (the "Outside Director
Plan"). The Outside Director Plan provides each director who is not an
employee of the Company receives a grant of options to purchase 30,000 shares,
150,000 total shares, of the Company's common stock at an exercise price equal
to the last sale price on the date of grant. The options generally expire ten
years after the grant date and vest in one-third increments on the grant date
and each of the two successive anniversaries thereafter provided the director
continues to serve on the Board. In 1997, options to purchase 60,000 shares of
common stock at $2.00 per share were granted and the exercise price on 60,000
options granted in 1996 was lowered to $2.00. At September 30, 1997, 120,000
options were outstanding under the Outside Director Plan, of which 60,000 were
exercisable. <PAGE>
During 1995, Phoenix Health Care of Illinois, Inc. ("Phoenix"), a related party
was awarded options to purchase 90,000 shares of Common Stock at $6.00 per
share. The options vest in accordance with the same vesting criteria as the
1990 and 1994 stock option plan above. During 1997, the exercise price was
amended to $2.00 per share (the last sale price of the Company's common stock
as of April 22, 1997). No compensation expense was recognized. At September
30, 1997, 30,000 shares were exercisable.
During 1996, the Compensation Committee of the Board granted special stock
options to outside legal counsel to purchase 30,000 shares and an officer of
the Company to purchase 120,000 shares at an exercise price of $3.875. The
Company recognized a charge to income of $91,000 in connection with the
issuance of options to a nonemployee under FAS 123. During 1997, the Company
amended the exercise price on the 30,000 options to outside legal counsel to
$2.00 per share resulting in additional expense of $10,500. The options vest
in accordance with the same vesting criteria under the 1994 Plan as described
above. At September 30, 1997, 150,000 options were outstanding, 50,000 of
which were exercisable.
Summarized information regarding all of the Company's stock options is as
follows:
Weighted-
Average
Number Exercise
of Shares Price
--------- --------
Outstanding at September 30, 1995 837,638 6.04
Granted 350,900 4.17
Exercised (13,350) 3.51
Expired or canceled (160,384) 4.75
---------
Outstanding at September 30, 1996 1,014,804 4.89
Granted 504,600 2.00
Exercised (39,833) 4.49
Expired or canceled (18,825) 6.53
---------
Outstanding at September 30, 1997 1,460,746
--------- 2.92
Exercisable at September 30, 1997 495,513 $4.30
September 30
1997 1996
------- -------
Exercisable shares 495,513 396,904
Available for future grants 200,533 92,100
Stock options have been granted to employees at, or in excess of, fair market
value at the date of grant. Accordingly, in accordance with APB 25 and related
interpretations, no compensation cost has been recognized related to such stock
option grants.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for all awards during Fiscal 1996<PAGE>
and 1997 consistent with the method set forth under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") the Company's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
Year ending September 30
Earnings Earnings
1997 per share 1996 per share
--------------------------------------------
Net loss attributable to
common stockholders $(6,266,114) (.74) $(8,798,303) (1.33)
Compensation expense related
to stock options granted (688,975) (.08) $(566,487) (.09)
------------ ------- --------- ---------
$(6,955,089) (.82) $(9,364,790) (1.42)
============ ======= ============ =========
As the provisions of FAS 123 have been applied only to options granted since
September 30, 1995, the resulting pro forma compensation cost is not
representative of that to be incurred in future years, when the pro forma cost
would be fully reflected.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model assuming expected volatility of 69.1% and
74.1%, risk-free interest rates of 5.86% and 5.51% for 1997 and 1996,
respectively, and expected lives of one to three years and 0.0% dividend yield
in both periods. The weighted average fair value of options granted or options
with reduced exercise price was $.84 and $1.57 for the years ended September
30, 1997 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. Because the Company's employee stock options have
characteristics different from those of traded options, and because changes in
the input assumptions can materially affect the fair value estimate, the model
may not provide a reliable single measure of the fair value of its employee
stock options.
Stock Bonus Plan
During 1997, the Company adopted the 1997 Stock Bonus Plan ("1997 Bonus Plan")
to provide stock bonuses in lieu of cash bonuses to key employees who are
responsible for the Company's future growth and financial success. The 1997
Bonus Plan provides for the award of up to 200,000 shares which are
nontransferable and subject to a risk of forfeiture for one year subsequent to
grant date. At September 30, 1997, 10,000 shares of restricted stock had been
issued to one employee under the 1997 Bonus Plan.
Common Stock Purchase Warrants
During 1996, the Company entered into a consulting agreement (the "Consulting
Agreement") with a third party to provide investor relations services. In
connection with the Consulting Agreement, the Company granted the consultant
common stock purchase warrants to purchase 150,000 shares of the Company's
common stock. In 1997, the Company amended the consulting agreement, reducing
the exercise price to $2.00 per share. The Company recognized compensation of
$89,500 and $78,500 in 1997 and 1996, respectively, under FAS 123 in connection<PAGE>
with the exercisable shares. At September 30, 1997, 50,000 warrants were
exercisable.
No warrants were exercised during 1997. At September 30, 1997, the following
warrants were outstanding:
Number
Outstanding
-----------
Warrant in connection with the consulting
agreement 150,000
Warrant to the lender and the guarantor
in connection with a $1,000,000 note 20,000
Warrant to the lender and the guarantor
in connection with a $1,000,000 note 220,000
Warrants issued in connection with
Convertible Debentures 40,201
---------
Warrants outstanding as of September 30, 1996 430,201
Issued during 1997 in connection with:
Note payable (Note 4) 200,000
Convertible Debentures (See Note 4) 67,333
Convertible Preferred Stock (See Note 8) 52,000
--------
Outstanding at September 30, 1997 749,534
At September 30, 1997, the Company had reserved a total of 2,610,813 shares of
its common stock for the exercise of options and warrants outstanding. This
amount includes shares reserved to satisfy obligations due if the Company
defaults on the payment of interest or principal on an $1 million note due
March 25, 1998.
Issuance of Stock
During 1997, the Company issued 124,564 shares of common stock with a market
value of approximately $330,000. The stock was issued to various consultants
for providing investor relation services. Consulting expense of $206,617 and
$127,188 was recognized during the years ended September 30, 1997 and 1996,
respectively.
In 1996, the Company sold in a public offering 700,000 shares of common stock.
The proceeds were used to repay a (Pounds) 312,000 promissory note and make a
partial prepayment on another promissory note and to fund the Company's
operating and working capital requirements. Net proceeds to the Company from
the offering, after deduction of associated expenses were $2.8 million. In
addition, 27,000 shares of common stock were issued to the placement agent in
November, 1996 for accrued offering expenses.
Note 8. Preferred Stock
In 1997, FHC raised approximately $1.6 million proceeds, net of issuance costs
of $96,252, in a private placement of 680,000 shares of 8% cumulative
convertible preferred stock. In addition, 52,000 common stock purchase
warrants were issued to the placement agents. Each share of preferred stock is
convertible into one share of the Company's common stock on or after August 1,
1998. Annual preferred stock dividends will be paid if and as declared by the
Company's Board of Directors. No dividends or other distributions will be
payable on the Company's common stock unless dividends are paid in full on the<PAGE>
preferred stock. The preferred stock may be redeemed at the option of FHC, in
whole or in part, on or after August 1, 2000, subject to certain conditions, at
$2.50 per share plus accrued and unpaid dividends. In the event of a
liquidation or dissolution of the Company, the preferred stock would have
priority over the Company's common stock.
Note 9. Acquisition and Disposition
In 1996, the Company sold WPC Holdings, Inc. ("Holdings"), which owned all of
the assets and liabilities of the Company other than those related primarily to
the Female Condom, and purchased Chartex Resources Limited ("Chartex"), the
owner of certain worldwide rights to, and sole manufacturer of, the Female
Condom.
In 1996, the Company completed the sale of the net assets of Holdings for total
consideration of $8.75 million, valued for accounting purposes at $8.285
million. Total consideration included a $1 million note receivable with
interest at 8 percent, principal due in four equal annual installments
beginning January 1999. This note receivable was discounted using an effective
rate of interest of 15 percent and, as a result, was valued at inception at
$785,000. The carrying value of the note was reduced to $750,000 at September
30, 1997 in expectation of early repayment of the note for an amount less than
face value.
During the period beginning with the Company's Board of Directors approval of
the plan to sell Holdings until the sale was completed, Holdings was accounted
for as a discontinued operation. Results of Holdings for the period October 1,
1995 through January 29, 1996 were as follows:
Net revenues $3,258,346
Gross profit 1,524,302
Operating expenses 1,623,100
---------
Operating income (loss) (98,798)
Nonoperating expense (130,201)
---------
Income (loss) from operations (228,999)
Gain on sale of discontinued operations 224,538
---------
Income (loss) from discontinued operations $ (4,461)
=========
Interest expense included in discontinued operations totaled $81,731 for the
year ended September 30, 1996. The purchaser of Holdings has assumed
responsibility for all of Holdings obligations. However, the Company remains
contingently liable for certain obligations incurred prior to the sale of
Holdings (See Note 12 - Contingent Liabilities).
In, 1996, the Company completed its purchase of all of the issued and
outstanding share capital of Chartex Resources Limited the parent company and
sole owner of stock in Chartex International, PLC (collectively referred to as
"Chartex"). Chartex is based in London, England and owns certain worldwide
intellectual property and proprietary manufacturing technology for the female
condom.
The acquisition of Chartex was accounted for as a purchase. The purchase price
of $5.2 million was less than the fair value of net assets purchased by $7.5<PAGE>
million. The excess of the fair value of the net assets acquired over the
purchase price was allocated to reduce long-term assets on a pro rata basis in
order to arrive at the purchase accounting values for the assets and
liabilities acquired.
The results of Chartex are combined with the Company after the February 1, 1996
acquisition date. The following unaudited summary, prepared on a pro forma
basis, combines the operating results of the Company and Chartex as if the
acquisition of Chartex had occurred on October 1, 1995:
(millions, except per share data)
Net revenues $2.1
Net loss (9.3)
Net loss per share ($1.41)
The above amounts reflect adjustments for amortization of intangibles and
depreciation based upon purchase accounting values, imputed interest on
borrowed funds, and elimination of intercompany transactions. The pro forma
information is not necessarily indicative of the results that would have
occurred had the purchase been made at the beginning of the period or of the
future results of the combined operations.
Note 10. Employee Retirement Plan
Effective October 1, 1997, the Company adopted a Simple Individual Retirement
Account (IRA) plan for its employees. Employees are eligible to participate in
the plan if their compensation reaches certain minimum levels and are allowed
to contribute up to a maximum of $6,000 annual compensation to the plan. The
Company has elected to match 100% of employee contributions to the plan up to a
maximum of 1% of employee compensation for the year.
Note 11. Industry Segments And Financial Information About Foreign and
Domestic Operations
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
Since the Company's 1996 acquisition of Chartex, the Company has operated in
foreign and domestic regions. Information about the Company's operations in
different geographic areas (determined by the location of the operating unit)
is as follows.
September 30
(Amounts in thousands) 1997 1996
------- -------
Net revenues:
United States $2,050 $1,514
International 866 550
Operating profit (loss):
United States (3,120) (6,071)
International (2,118) (1,865)
Identifiable assets:
United States 3,349 4,946
International 4,990 6,320<PAGE>
On occasion, the Company's U.S. unit sells product directly to customers
located outside the U.S. Were such transaction reported by geographic
destination of the sale rather than the geographic location of the unit, U.S.
revenues would be decreased and International revenues increased by $293,000 in
1997.
Note 12. Contingent Liabilities
Prior to the sale of Holdings, the Company entered into an employment agreement
with Mr. Wundrock and an agreement for the lease of the Holdings' facilities.
Each of these agreements was assigned to Holdings and assumed by the buyer of
Holdings. However, because the third party creditor did not release the
Company from any future liability under these employment and lease agreements
at the time of their assignment, the Company remains contingently liable if
Holdings defaults in making any payments under the agreements. At September
30, 1997, the total future payments for these contingent liabilities was $3.1
million for the lease of Holdings' facilities and $.6 million for the
employment agreement.
The testing, manufacturing and marketing of consumer products by the Company
entail an inherent risk that product liability claims will be asserted against
the Company. The Company maintains product liability insurance coverage for
claims arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the
century date change occurs, date-sensitive systems may either fail or not
operate properly unless the underlying programs are modified or replaced. The
Company is assessing the extent of programming changes required to address this
issue. Although final cost estimates have not been determined, it is not
expected that these expenses will have a material impact on the Company's
financial condition, liquidity, or results of operations.
Note 13. Related Party Transactions
For 1997, the Company paid the rent for office space leased by Phoenix but used
by two officers of the Company. No agreement currently exists between the
Company and Phoenix regarding the lease, however, it is the Company's intention
to continue paying the rent in order to provide office space for its employees.
It has been and currently is the policy of the Company that transactions
between the Company and its officers, directors, principal shareholders or
affiliates are to be on terms no less favorable to the Company than could be
obtained from unaffiliated parties. The Company intends that any future
transactions between the Company and its officers, directors, principal
shareholders or affiliates will be approved by a majority of the directors who
are not financially interested in the transaction.
Note 14. Current Accounting Pronouncements
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
which supersedes APB Opinion No 15, was issued in February 1997 by the
Financial Accounting Standards Board. The Statement changes the computation<PAGE>
and presentation of earnings per share by all entities that have common stock
or potential common stock, such as options, warrants and convertible
securities, outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic earnings
per-share amounts. All other entities are required to present basic and
diluted per-share amounts. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless the
effect is to reduce a loss or increase the income per common share from
continuing operations. All entities required to present per-share amounts must
initially apply Statement No. 128 for annual and interim periods ending after
December 15, 1997. Earlier application is not permitted.
The Company has numerous issues of potential common stock outstanding,
including options to employees and stock purchase warrants that become
exercisable if certain conditions are met and preferred stock that is
convertible to common stock. Each of these potential common stock instruments
must be separately evaluated to determined whether they are dilutive, and
various adjustments to income and share amounts are computed. Due to the
complexities involved, management has not completed its assessment of the
effects that the application of Statement No. 128 will have on the per-share
information presented in the accompanying financial statements.
Capital Structure
Statement of Financial Accounting Standard No. 129, "Disclosure of Information
about Capital Structure," was issued in February 1997 by the Financial
Accounting Standards Board. The Statement requires an entity to explain the
pertinent rights and privileges of the various securities outstanding. The
standard is effective for financial statement periods ending after December 15,
1997. The Company does not believe the adoption of the Standard will have a
material impact on the consolidated financial statements.
Comprehensive Income
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," that the Company will be required to adopt
for its year ended September 30, 1998, and disclose in its interim financial
statements beginning with the period ending December 31, 1997. This
pronouncement is not expected to have a significant impact on the Company's
financial statements. The Statement establishes standards for the reporting
and presentation of comprehensive income and its components. The statement
requires that items recognized as components of comprehensive income be
reported in a financial statement. The statement also requires that a company
classify items of other comprehensive income by their nature in a financial
statement, and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. For the years ended September 30,
1997 and 1996, the Company's components of comprehensive income (loss)
consisted of its reported net (loss) and foreign currency translation
adjustments.
Segments of an Enterprise
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. The Company does not believe the adoption of the statement
will have a material impact on the consolidated financial statements.
Note 15. Continuing Operations
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred a loss of $6.3 million for the year ended September 30, 1997, and as
of September 30, 1997, had an accumulated deficit of $37.0 million. At
September 30, 1997, the Company had working capital of $1.3 million and
stockholders' equity of $3.6 million. The Company expects to incur substantial
expenditures in an effort to increase consumer awareness and acceptance of the
Female Condom. As a result, operations in the near future are expected to
continue to use working capital. Management recognizes that the Company's
continued operations depend on its ability to raise additional capital through
a combination of equity or debt financing, strategic alliances and increased
sales volumes.
At various points during the developmental stage of the product, the Company
was able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the Female Condom. Management believes
that recent developments, including the Company's agreement with the UNAIDS, a
joint United Nations program on HIV/AIDS, provide an indication of the
Company's early success in broadening awareness and distribution of the Female
Condom and may benefit efforts to raise additional capital and to secure
additional agreement to promote and distribute the Female Condom throughout
other parts of the world.
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated
requirements. Specifically, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking company
specializing in providing advice to pharmaceutical medical devices and managed
care companies. Pursuant to this agreement, for a one-year period, Vector will
act as the Company's exclusive financial advisor for the purpose of identifying
and evaluating opportunities available to the Company for increasing
shareholder value. These opportunities may include selling all or a portion of
the business, assets or stock of the Company or entering into one or more
distribution arrangements relating to the Company's product. However, no
specific opportunity has yet been identified and there can be no assurance that
any such opportunities will be available to the Company or, if so available,
that the Company will ultimately elect to consummate any such transaction.
Further, there can be no assurance, assuming the Company 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>
Note 16. Restatement of 1996 and 1997 Financial Statements.
In March 1998, the Company discovered that it did not properly report a charge
to interest expense for the amortization of discounts associated with a
"beneficial conversion feature" on two sets of convertible debentures issued in
August 1996 and February 1997.
As disclosed in Note 4, the first set of debentures was issued in August 31,
1996 for $2,000,000 at 8% and the second set of debentures was issued February
20, 1997 for $2,020,000 at 8%, both maturing after 3 years. Both sets of
convertible debentures included a conversion feature that was "in the money" as
of the date of issuance ( a "beneficial conversion feature"). The beneficial
conversion feature allowed the debentures to be converted into company stock at
the lesser of $5.275 per share for debentures No. 1 and $2.875 per share for
debentures No. 2 (representing the average market price for the five preceding
days of the date the debentures were sold) or 80% of the market price at the
time the conversion occurs. Fifty percent of the debentures could be converted
into company stock after 45 days and the remainder after 65 days for both
debentures.
In March 1997, the SEC staff concluded that a beneficial conversion feature
should be recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in capital. That
amount should be calculated at the date of issue as the difference between the
conversion price and the fair value of the common stock into which the security
is convertible, multiplied by the number of shares into which the security is
convertible. Any discount resulting from the beneficial conversion feature
increases the effective interest rate of the security and should be reflected
as charge to interest expense.
The intrinsic value of the beneficial conversion feature as of date of issuance
was $382,000 on debentures No. 1 and $398,000 on debentures No. 2 and, as a
result, the Company has restated the previously reported financial statements
for 1997 and 1996 as follows:
September 30,
---------------
1997 1996
Restated statement of operations: ----------- ----------
Increase in interest expense and increase
in net (loss) attributable to common
stockholders $642,000 $138,000
Increase in net (loss) per common share ($0.07) ($0.02)
Restated balance sheet:
Increase in accumulated deficit and
increase in additional paid-in capital 780,000<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act.
Certain information in response to this item is incorporated herein by
reference to "Election of Directors" in the Company's Proxy Statement for its
1998 Annual Meeting of Shareholders (the "Proxy Statement"), which will be
filed with the Securities and Exchange Commission within 120 days after the end
of the Company's fiscal year ended September 30, 1997, and to "Executive
Officers of the Registrant" in Part I hereof.
Item 10. Executive Compensation
Information in response to this item is incorporated herein by reference to
"Executive Compensation" in the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information in response to this item is incorporated herein by reference to
"Principal Security Holders and Security Holdings of Management" in the Proxy
Statement.
Item 12. Certain Relationships and Related Transactions
Information in response to this item is incorporated herein by reference to
"Certain Transactions" in the Proxy Statement.<PAGE>
Item 13. Exhibits, List and Reports On Form 8-K.
A. Documents Filed as a Part of This Report:
1. Financial Statements.
The following restated consolidated financial statements of the Company are
included in Item 8 hereof:
Consolidated Restated Balance Sheet - September 30, 1997
Consolidated Restated Statements of Operations --Years ended September 30, 1997
and 1996
Consolidated Restated Statements of Stockholders' Equity --Years ended
September 30, 1997 and 1996
Consolidated Restated Statements of Cash Flows -- Years ended September 30,
1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
None.<PAGE>
3. Exhibits Filed:
Number Description
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws of the Company. (2)
4.1 Amended and Restated Articles of Incorporation same as Exhibit 3.1 (1)
4.2 Articles II, VII, and XI of the Amended and restated By-Laws of the
Company. (included in Exhibit 3.2)
10.1 Employment Agreement between John Wundrock and the Company dated
October 1, 1989. (1)
10.2 Wisconsin Pharmacal Company, Inc. (k/n/a The Female Health Company)
1990 Stock Option Plan. (3)
10.3 Commercial Building Lease dated May 1, 1992 covering the Jackson,
Wisconsin office and manufacturing facility. (4)
10.4 Reality Female Condom Clinical Trial Data Agreement between the Company
and Family Health International dated September 24, 1992. (5)
10.5 Trademark License Agreement for Reality Trademark. (6)
10.6 Office space lease between the Company and John Hancock Mutual Life
Insurance Company dated June 1, 1994. (7)
10.7 Employment Agreement dated September 10, 1994 between the Company and
Dr. Mary Ann Leeper. (8)
10.8 1994 Stock Option Plan. (9)
10.9 Investor relations and development services Consulting Agreement
between the Company and CCRI Corporation dated March 13, 1995. (10)
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company
and CCRI Corporation, as amended on April 22, 1996. (11)
10.11 Offshore Securities Subscription Agreement for the sale of 370,000
shares of Company Common stock dated February 7, 1995. (10)
10.12 Offshore Securities Subscription Agreement for the sale of 100,000
shares of Company Common stock dated February 7, 1995. (10)
10.13 Offshore Securities Subscription Agreement for the sale of 500,000
shares of Company Common stock dated February 7, 1995. (10)
10.14 Settlement Agreement and Mutual Release of All Claims between WPC
Holdings, Inc., Reflect, Inc. and the Company dated June 15, 1995. (11)
10.15 Stock Purchase Agreement by and between WPC Acquisition Corporation and
the Company dated June 20, 1995. (12)
10.16 Agreement relating to the acquisition of the entire issued share
capital of Chartex Resources Limited and exhibits thereto. (13)
10.17 Company Promissory Note payable to Stephen M. Dearholt for $1 million
dated March 25, 1996 and related Note Purchase and Warrant Agreement,
Warrants and Stock Issuance Agreement. (12)
10.18 Outside Director Stock Option Plan (11)
10.19 Exclusive Distribution Agreement between Chartex International Plc and
Taiho Pharmaceutical Co., Ltd. dated October 18, 1994. (14)
10.20 Supply Agreement between Chartex International Plc and Deerfield
Urethane, Inc. dated August 17, 1994. (14)
10.21 Employment Letter dated February 28, 1990 from Chartex Resource Ltd. to
Michael Pope, and Board amendments thereto. (14)
10.22 Grant Letter dated March 7, 1996 from the Government office for London
of the Secretary of State of Trade and Industry regarding economic
development grant to the Company. (14)
10.23 Letter Amendment to Asset Sale Agreement dated April 29, 1996 between
the Company and Dowty Seals Limited and Chartex International Plc. (14)
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)<PAGE>
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.
10.32 Agreement dated September 29, 1997 between Vector Securities
International and The Female Health Company.
21.0 Subsidiaries of Registrant (19)
27.0 Financial Data Schedule (19)
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-18, Registration No. 33-35096, as filed with the
Securities and Exchange Commission on May 25, 1990.
(2) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
(3) Incorporated herein by reference to the Company's December 31, 1990
Form 10-Q.
(4) Incorporated herein by reference to the Company's June 30, 1992 Form
10-Q.
(5) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration No.
33-51586, as filed with the Securities and Exchange Commission on
September 28, 1992.
(6) Incorporated herein by reference to the Company's 1992 Form 10-KSB.
(7) Incorporated herein by reference to the Company's June 30, 1994 Form
10-Q.
(8) Incorporated herein by reference to the Company's Registration
Statement on Form S-2, Registration No. 33-84524, as filed with the
Securities and Exchange Commission on September 28, 1994.
(9) Incorporated herein by reference to the Company's 1994 Form 10-KSB.
(10) Incorporated herein by reference to the Company's March 31, 1995 Form
10-Q.
(11) Incorporated herein by reference to the Company's Form S-1 Registration
Statement filed with the Securities and Exchange Commission on April
23, 1996.
(12) Incorporated herein by reference to the Company's June 30, 1995 Form
10-Q.
(13) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated November 20, 1995.
(14) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Form S-1 Registration Statement filed with the Securities
and Exchange Commission on June 5, 1996.
(15) Incorporated herein by reference to the Company's 1996 Form 10-K.
(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.<PAGE>
(19) Incorporated herein by reference to the Company's Form 10-KSB for the
year ended September 30, 1997, as amended.
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: March 31, 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 March 31, 1998
- ----------------------- Chief Executive Officer,
O.B. Parrish Acting Chief Financial and
Accounting Officer,
and Director
/s/Mary Ann Leeper President, Chief Operating March 31, 1998
- ------------------------- Officer and Director
Mary Ann Leeper, Ph.D.
/s/William R. Gargiulo Secretary, Vice-President March 31, 1998
- ------------------------- International and Director
William R. Gargiulo, Jr.<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- -----------------------------------------------------------------------------
10.31 Agreement dated March 14, 1997 between the Joint United Nations
Programme on HIV/AIDS and Chartex International Plc.
10.32 Agreement dated September 29, 1997 between Vector Securities
International and The Female Health Company.
<PAGE>
<PAGE>
Exhibit 10.31
AGREEMENT
UNAIDS Chartex International
THIS AGREEMENT made this _____ date of ______, 1996 between the Jointed United
Nations Programme on HIV/AIDS (referred to as "UNAIDS") and Chartex
International Plc (referred to as "Chartex");
WHEREAS UNAIDS is interested in introducing new methods for prevention of HIV
infection and Sexually Transmitted Diseases (referred as "STDs"), particularly
in Developing Countries (as hereinafter defined);
WHEREAS Chartex has developed and makes available on a world-wide basis the
female condom which is one such a method;
WHEREAS Chartex is committed and willing to make the female condom available to
the public sector of Developing Countries at preferential and reasonable
prices; and
WHEREAS UNAIDS and Chartex are willing to provide the appropriate resources and
support to enhance the availability and use of the female condom in Developing
Countries and assist developing countries in identifying potential donors to
purchase female condoms.
NOW THEREFORE, in consideration of the foregoing premises and the terms and
conditions set forth herein, the parties agree as follows:
1. Definitions. For purposes of this Agreement, the following words and
phrases shall have the meanings as set forth below:
"Developing Countries" means any country other than Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland,
Ireland, Italy, Japan, Luxembourg, Monaco, the Netherlands, New Zealand,
Norway, Portugal, San Marino, Spain, Sweden, Switzerland, the United
Kingdom, and the United States of America. For the purpose of this
Agreement, any republic previously included in the former Union of the
Soviet Socialist Republics and the former Federal Socialist Republic of
Yugoslavia and not otherwise referred to above, as well as of Albania,
Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slovak
Republic shall be considered a Developing Country until classified or listed
by the United Nations system either a developed, developing, or a least
developed country. Republics classified or listed as a developing or least
developed country shall be deemed as developing country under this
Agreement.
"Product" means the female condom as manufactured and made available by or
on behalf of Chartex;<PAGE>
"Cost Reduction Programme" means any activity undertaken by or on behalf of
Chartex to reduce the production costs of the Product.
"Public Sector Agencies" means a government, or a department or agency
thereof, a recognised non-profit organization or entity, including
non-governmental organizations, intergovernmental organisations and UNAIDS
"Public Sector Activities" means activities decided and undertaken by or on
behalf of Public Sector Agencies in Developing Countries with regard to the
purchase, distribution and use of the Product, including Social Marketing
Programs which are defined as programs undertaken by or on behalf of Public
Sector Agencies to sell the Product at subsidised prices.
2. Objective of the Agreement. The parties shall, each within the framework
of their respective responsibilities, use their reasonable best efforts to
facilitate the implementation of Public Sector Activities as set forth in this
Agreement.
3. Pricing Strategy. It is the expressed intention of both parties that the
Product (1) shall be made available to the public sector of Developing
Countries as widely as possible in accordance with the terms of this Agreement
and (2) shall be provided by or on behalf of Chartex to Public Sector Agencies
for distribution through the public sector of Developing Countries at
affordable supply prices. UNAIDS recognises that such supply prices
(hereinafter referred to as "Public Sector Price") for the Product should make
the undertaking of this Agreement by Chartex viable, meaning that the sales of
the Product in the public and private sectors of developed and Developing
countries as a whole should be a reasonable undertaking from a commercial
perspective. Without prejudice to the foregoing, the Public Sector Price shall
always be preferential compared to private sector price, it being agreed that
the private sector price shall be set at such level as desired by Chartex.
The Public Sector Price shall be calculated as specified in paragraph 5 and
fixed for each calendar year. In addition, the parties agree that, provided
that the annual volume of sales for Public Sector Activities equals or exceeds
three million units per fiscal year, the Public Sector Price shall, during an
initial three-year term ending December 31, 1999, in no event be greater that
0.38 Pounds Sterling per unit. Based on estimated purchases for 1997, Chartex
agrees to fix the Public Sector Price for the 1997 calendar year at 0.38 Pounds
Sterling per unit.
4. Monitoring of sales. On or before January 31 of each calendar year,
beginning in 1998, Chartex shall provide to UNAIDS a confidential
representation letter, signed and certified by the external auditors of
Chartex's parent company, The Female Health Company, stating the production
costs of the Product as defined herein below, as well as the volume of
production for sales in the private and public sectors of developed and
Developing countries, respectively, over the preceding fiscal year. However,
the parties agree that during the initial three-year term ending 31 December
1999, and provided that (1) the annual volume of sales for Public Sector
Activities equals or exceeds three million units per fiscal year and (2) the
production costs of the Product as defined hereinbelow exceed 0.38 Pounds
Sterling per unit, the aforesaid representation letter may be limited to a
statement of the volume of sales of the Product for Public Sector Activities<PAGE>
over the preceding fiscal year and a confirmation that the production costs of
the Product as defined hereinbelow exceed 0.38 Pounds per unit. In the event
the production costs over the preceding fiscal year are to be stated in the
confidential representation letter, the letter shall also state the projected
production costs of the Product for the running fiscal year, calculated in
accordance with the definition contained in paragraph 5 below, with the
confirmation that such projected costs are the same as the projected production
costs used in Chartex's annual operating plan as approved by the board of
directors of the Female Health Company. At UNAIDS' request, Chartex shall
provide UNAIDS within 30 days, on a confidential basis, with a copy of
pertinent sections of the approved annual operation plan as related to the
projected production costs of the Product as well as any other additional
information UNAIDS may reasonably require in support of the production costs
and volume of production for sales of the Product as set forth in any such
representation letter. The calculation of the Public Sector Price will be
based on the information provided under this paragraph 4, in accordance with
the provisions of paragraph 5 below.
5. Calculation of the annual Public Sector Price. In accordance with
paragraphs 3 and 4, Chartex and UNAIDS shall fix the Public Sector Price for
each calendar year within sixty days of reception of the above mentioned
representation letter. The Public Sector Price shall be equal to the
production costs directly attributable to the manufacture of the Product,
defined, in accordance with generally accepted accounting principles, as the
direct costs of material and labour as well as indirect production costs namely
quality control and safety to comply with Good Manufacturing and Laboratory
Practices, logistics, maintenance, research and development costs and
administration expenses, directly incurred by Chartex in relation with the
Product, but excluding amortisation of capital investment solely related to
manufacture and sale of the Product for the private sector, marketing, sales
and public relation costs. The aforesaid production costs shall be calculated
on the basis of the total volume of production for sales for the private and
public sectors of developed and Developing countries as a whole in the
preceding fiscal year. In the event the projected costs to manufacture the
Product under Chartex's annual operating plan are 10% greater than the
aforementioned calculation, then the Public Sector Price will be the lesser of
0.38 Pounds per unit or the projected cost to manufacture the Product.
However, if at the end of the running fiscal year it appears that the actual
production costs were less than the agreed upon Public Sector Price, the Public
Sector Price for the coming calendar year will be reduced by this lesser
amount. The Public Sector Price shall be reduced each year by the amount of
cost reduction achieved as a result of (1) the Cost Reduction Programme and (2)
increased production economies resulting from increased sales of the Product
worldwide. The agreed Public Sector Price shall be included in an Annex hereto
and become an integral part of this Agreement. The Product shall be made
available at the agreed Public Sector Price ex works (unless otherwise agreed
with the buyers) for any Public Sector Activities.
6. Current Demand Assessment. UNAIDS has prepared, in collaboration with the
WHO Special Programme of Research in Human Reproduction, and delivered to the
Developing Countries, a letter attached hereto in Appendix I, dated 30 August
1996, together with a "Fact Sheet" on the Product and other enclosures thereto,
soliciting expressions of interest in the Product and requesting information as<PAGE>
to estimated purchases of the Product during the calendar years 1997 and 1998.
With regard to that UNAIDS an Chartex shall take the following actions:
a) UNAIDS shall provide such further communications as may be necessary and
appropriate to obtain the information anticipated in the letter and its
annexes, and provide Chartex with a summary thereof for each Developing
Country that has responded (including a list of the Product destinations and
estimated quantities), as applicable, and provide regular follow-ups with
these Developing Countries during the first three (3) months of the term of
the Agreement;
b) UNAIDS shall provide Chartex with a database which includes the names and
contacts of persons responsible for potential purchase of the Product in the
Developing Countries that have responded, independent of whether these
countries have anticipated to purchase the Product in 1997 or not;
c) With respect to purchases made further to the letter at 30 August 1996,
UNAIDS shall provide Chartex with such cooperation and assistance as may be
reasonably requested in obtaining information with respect to forwarding the
Product to the Developing Countries.
7. Product Supply. With respect to supply of the Product for Developing
Counties:
a) Chartex shall assure that its manufacturing facility in London shall
reserve sufficient production capabilities as may be reasonably necessary to
provide an adequate supply of the Product for Public Sector Activities, if
required up to ten percent (10%) of Chartex' total annual production
capacity per year or 6 million units per year, whichever is greater. In the
event that the demand of the Product for the Public Sector Activities
exceeds 10% of Chartex' total annual production capacity or 6 million units
per year, whichever is greater, Chartex shall use reasonable best efforts to
meet such additional demand.
b) In the event the demand for the Product for Public Sector Activities
shall surpass Chartex' production capabilities, Chartex shall use its best
efforts to enhance production capacity at its manufacturing facility within
such period of time as may be reasonably required to achieve the objective
of meeting such demand. In the event Chartex is not able to meet the demand
for Public Sector Activities under the circumstances, Chartex shall
cooperate with UNAIDS in establishing alternative ways to ensure that the
demand for Public Sector activities is met. Chartex shall use all
reasonable efforts to implement these alternatives.
c) Chartex shall be responsible for arrangements for all shipments and
invoicing with respect to purchases of the Product. In this respect,
Chartex shall provide each of the buying Public Sector Agencies with copies
of Chartex's standard forms required for purchases of the Product, including
order request form, product specification, and letter of credit
specification, substantially as set forth in Appendix II attached hereto or
as then currently used by Chartex. Chartex may require that any one order
of Product shall consist of a minimum quality of 1000 units.<PAGE>
d) Chartex, or its parent company on behalf of Chartex, maintains and shall
maintain adequate product liability insurance during the term of this
Agreement.
8. Cost Reduction Programme. Chartex shall review its manufacturing, quality
assurance and testing operations to identify changes to current materials and
manufacturing procedures which will result in possible reductions in related
costs and expenses. Chartex shall implement such changes, provided that they
can be accomplished in a cost-effective and commercially reasonable manner.
9. Special Labeling and packaging. Unless a Public Sector Agency requires
otherwise, Chartex shall make the Product available for Public Sector
Activities under a special labeling as specified in Appendix III. Chartex is
furthermore authorised to include on the external packaging carton for the
Product the following wording:
"This product has been specially prepared and packaged for public sector health
programs"
Chartex shall supply the Product in a bulk package of 1000 female condoms per
box.
10. Education and Social Marketing Support.
a) Education support: UNAIDS, in collaboration with other public sector
partners, will be preparing appropriate educational material for Public
Sector Activities concerning the female condom to be used at different
levels of the health system, including communities and social marketing
programs. Chartex shall furnish to UNAIDS copies of available educational
and instructional materials that facilitate the preparation of Advocacy:
UNAIDS shall promote the use of the female condom at the global level and
toward the National IDS Programs at the country level, insofar as the female
condom can be considered an efficient method for prevention of HIV infection
and STDs. UNAIDS shall also use best reasonable efforts to promote social
marketing approach of the female condom by providing information on the
Public Sector Price as well as such educational and promotional material to
social marketing programs, as UNAIDS may reasonably deem necessary and
appropriate.
b) Public relation and publicity: Chartex shall develop appropriate
advertising strategy, using the usual private sector channels to make the
Product known to the end-users, to the extent as may be commercially
reasonable.
c) Supplies list: Subject to the usual requirements concerning safety,
efficacy, etc., the female condom will be included in the UNAIDS supplies
and equipment list, which catalogues HIV/AIDS materials, at the earliest
opportunity.
d) Overview: From time to time, as may be reasonably appropriate, UNAIDS
shall provide Chartex with an overview of its activities mentioned in the
Agreement.<PAGE>
11. Relationship of the Parties. Nothing in this Agreement shall be deemed to
constitute a partnership between the parties or to constitute either party as
the agent of the other. Without the prior written consent of the other,
neither party shall, in any statement or material of an advertising or
promotional nature refer to the relationship of the other party pursuant to
this Agreement, or to the relationship of the other party to the Product,
unless expressly authorised in this Agreement.
12. Confidentiality. If either party shall receive confidential or
proprietary information of the other party, it shall take all reasonable
measures to keep such information confidential and shall ensure that any
persons having access to such information shall be made aware of and be bound
by the obligations of the receiving party hereunder. However, there shall be
no obligation of confidentiality where:
a) the information is publicly available, or become publicly available
otherwise than by action of the receiving party; or
b) the information was already known to the receiving party (as evidence by
its written records) other than under an obligation of confidentiality prior
to its receipt; or
c) the information was received from a third party not in breach of an
obligation of confidentiality owed to the other party; or
d) the parties have agreed in writing upon the disclosure of the information
The obligations of this paragraph 12 shall continue for a period of five years
after the termination of this Agreement. The terms and conditions contained in
this Agreement shall be subject to the foregoing obligation of confidentiality.
13. Notices. Any notice given under this Agreement must be in writing and
delivered in person, by recognised international courier, by registered mail
postage-prepaid, or by facsimile transmittal (with original confirmation
mailed, as provided above, within two (2) business days of transmittal), to the
following address for each party or to any other address either party
designatees in writing:
a) if to UNAIDS:
20 avenue Appia
CH-1211 Geneva 27
Switzerland
Attention: Director Policy Strategy and Research
Facsimile No: 41 22 791 4165
b) If to Chartex:
1 Sovereign Park
Coronation Road
London NW10 7QP
England
Attention: General Manager
Facsimile No. 44 181 453 0324<PAGE>
with copy to: The Female Health Company
Suite 3660, 875 N. Michigan Ave.
Chicago, Illinois 60611
USA
Attention: President
Facsimile No. 1 312 280 9360
14. Successor and Assigns. This Agreement shall be binding upon the
successors and assignees of the parties hereto and the name of a party
appearing in the Agreement shall be deemed to include the names of its
successors and assignees, provided that nothing herein shall permit any
assignment of this Agreement by either Party without the prior written
agreement of the other (such agreement not to be unreasonably withheld).
15. Term and Termination. The initial term of this Agreement shall be for a
period starting on signature of this Agreement by both parties and ending
December 31, 1999. Thereafter, this Agreement shall automatically continue in
effect, unless terminated by either party effective as of the end of the
initial term or December 31, of any calendar year thereafter, upon not less
than ninety (90) days prior written notice.
16. Survival clause. Notwithstanding any termination of this Agreement, the
rights and obligations of the parties set forth in paragraphs 1,3,4,5,7,11,12,
and 19 shall survive the termination of this Agreement.
17. Force Majeure. A party shall be relieved of its obligations under this
Agreement to the extent and for so long as that party is prevented from
fulfilling such obligations by causes outside its reasonable control, including
but not limited to governmental or official actions or law, labour strikes and
serious adverse weather conditions.
18. Waiver. Neither party waives any breach, or later breach, by failing to
insist on the strict performance of any term or condition of this Agreement or
to exercise any right or remedy available for a breach of this Agreement. If
either party waives any breach, it will not affect this Agreement, and all
terms of this Agreement continue in full force and effect with respect to any
other then existing or later breach.
19. Dispute Resolution. Any dispute relating to the interpretation or
execution of this Agreement shall, unless amicably settled, be subject to
conciliation. In the event of failure of the latter, the dispute shall be
settled by arbitration. The arbitration shall be conducted in accordance with
the modalities to be agreed upon by the parties or, in absence of agreement,
with the rules of arbitration of the International Chamber of Commerce. The
parties shall accept the arbitral award as final.
20. Amendments. Any amendments made to this Agreement shall be agreed by both
parties in writing.
21. Compliance with Laws. The parties shall comply with all applicable laws
and regulations to which they may be subject in the implementation of this
Agreement.<PAGE>
22. Announcement. It is agreed that Chartex shall have the opportunity to
receive public recognition for its commitment made under this Agreement through
a press release to be made by UNAIDS regarding the conclusion of this
Agreement.
Accepted and agreed on behalf of Accepted and agreed on behalf
of
UNAIDS Chartex International Plc
/s/ Peter Piot /s/ Mary Ann Leeper, Ph.D
- ---------------------------- -------------------------------
Name: Peter Piot Name: Mary Ann Leeper, Ph.D.
Title: Executive Director Title: Director
Date: 14 March 1997 Date: 20 December 1996<PAGE>
Exhibit 10.32
September 29, 1997
The Female Health Company
875 North Michigan Avenue
Suite 3660
Chicago, IL 60611
Ladies and Gentlemen:
(I) This is to confirm our understanding that Vector Securities
International, Inc. ("Vector) has been engaged as exclusive financial advisor
of The Female Health Company (the "Company") for a period of one year
commencing with the Company's acceptance of this agreement (the "Initial
Period") for the purpose of assisting the Company in conducting discussions and
negotiations leading to the consummation of (i) a sale of all or a portion of
the business, assets, or stock of the Company to an "Acquiror" or (ii) one or
more distribution arrangement(s) (each a "Distribution Arrangement") (as
further defined in Paragraph (V) below) relating to any of the Company's
products with one or more partners (each a "Partner"). In its role as
exclusive financial advisor, Vector will diligently assist the Company in: (a)
identifying prospective Acquirors or Partners; (b) preparing appropriate
marketing materials; and c) at the Company's request, conducting discussion and
negotiations looking toward the consummation of a transaction(s). Upon mutual
agreement, the parties can consent that Vector's engagement hereunder will be
extended for additional six-month periods under the terms set forth herein.
This Initial Period any an extensions thereof are hereinafter referred to as
the "Engagement Period."
(II) The Company will pay Vector a nonrefundable retainer fee of $75,000,
such fee to be paid in the form of a five-year common stock warrant (the
"Warrant") exercisable into 75,000 shares of Common Stock of the Company, at an
exercise price of $2.00 per share. The Warrant will be issued immediately upon
the earlier to occur of (i) a good faith determination by the Company and
Vector that a party has been identified that has a serious interest in
acquiring the Company; (ii) the Company's request of Vector to assist it
negotiating (a) a Distribution Arrangement with one or more parties identified
by either Vector or the Company, or (b) a distribution arrangement that does
not fall within the definition of a Distribution Arrangement with respect to
which Vector's assistance is required in accordance with Paragraph (VI); of
(iii) consummation of a Distribution Arrangement with respect to which Vector
would be entitled to a Success Fee (defined below) as set forth in Paragraph
(V), regardless of whether Vector assisted in the negotiations regarding such
Distribution Arrangement. The specific terms and conditions relating to such
Warrant shall be set forth in a separate warrant agreement to be negotiated
between the parties. It is understood that such terms and conditions will
include standard anti-dilution and piggyback rights and, commencing 180 days
after the issuance of such arrant, one demand registration right. Any
registration statement filed with respect to the 75,000 shares of Common Stock
shall be kept effective by the Company until the earlier to occur of: (i) all
75,000 shares of Common Stock registered with respect thereto being sold (as<PAGE>
further described in the warrant agreement); or (ii) one year elapsing from the
date of the registration of such shares. The Company also agrees to pay all of
our reasonable out-of-pocket expenses, including fees and disbursements of our
outside counsel; provided, however, that such expenses shall not include the
preparation of this letter agreement and shall be limited to expenses directly
related to Vector's services provided under Paragraphs (III), (IV) and (V), and
shall be paid in cash upon submission of a bill or bills by us from time to
time. It is understood that Vector's expenses, including the fees and
disbursements shall not exceed $40,000 without the prior approval of the
Company, and such approval shall not be unreasonably withheld. Furthermore, it
is understood that outside counsel will not be hired by Vector without prior
written approval of the Company except for outside counsel used in connection
with Vector's services pursuant to preparing an opinion of fairness as
described in Paragraph III below.
(III) If an agreement for a sale, merger, consolidation, tender offer,
business combination or similar transaction involving all or a portion of the
business, assets, or stock of the Company (a "Sale") is entered into or a Sale
is consummated (i) within the Engagement Period with any party, or (ii) not
later than eighteen months after the termination of such Engagement Period (the
"Continuing Rights Period") with a party (or any entity controlled by or
affiliated with such party) as to which Vector rendered any services under this
agreement (a "Protected Party"), the Company agrees to pay Vector a fee (a
"Success Fee") equal to 4.0% of the aggregate consideration to be received by
the Company and/or its shareholders in such transaction, such fee to be payable
in cash promptly upon the closing or with more than one Acquiror, the Company
agrees that the aggregate consideration used to calculate Vector's fee
hereunder shall be the sum total of the aggregate consideration received or to
be received in each such closing from each such Acquiror. For the purpose of
calculating our fee under this Paragraph (III), the aggregate consideration
received with respect to the business, assets, stock, options, warrant or other
securities of the Company shall be equal to the total of all cash, assets,
stock, options, warrants or other securities paid, issued, granted,
transferred, contributed or the like ("Paid") by the Acquiror. Aggregate
consideration shall also include, without duplication, (a) any commercial bank,
capital lease obligations, convertible indebtedness or other indebtedness of
the Company that is repaid or for which the responsibility to pay is assumed by
the Acquiror in connection with the Sale; (b) the greater of the stated value
or the liquidation value of preferred stock of the Company that is assumed or
acquired by the Acquiror that is not converted into common stock upon the
consummation of such transaction; and (c) future payments for which the
Acquiror is obligated either absolutely or upon the attainment of milestones,
financial results, or other future events ("Acquiror Future Payments"). The
fee paid to Vector as a result of Acquiror Future Payments shall be paid when
such Acquiror Future Payments are Paid. It is further understood that
aggregate consideration shall not be reduced by the amount of the fee due
Vector hereunder. For the purpose of calculating our fee, securities
constituting part of aggregate consideration that are traded on a national
securities exchange of the Nasdaq National Market System shall be valued at the
last closing price thereof prior to the date of the consummation or closing of
any such transaction. Such securities which are traded over the counter shall
be valued at the mean between the latest bid and ask prices prior to such date.
Any debt or other securities of the Acquiror shall be valued at their fair<PAGE>
market value. In the event a Sale of the Company is consummated through a
multiple-step transaction wherein the Acquiror is not obligated either
absolutely or upon the attainment of milestones, financial results, or other
future events to make future payments to further increase its ownership in the
Company the ("Acquiror Multiple-Step Payments"), the Company agrees to pay
Vector a fee on such Acquiror Multiple-Step Payments, and such fee shall be
calculated pursuant to this Paragraph (III). Such fee shall be payable when
such Acquiror Multiple-Step Payments are Paid and shall be in addition to the
fees paid to Vector in the earlier step(s) of such transaction. Vector shall,
at the Company's request and without further compensation hereunder, provide to
the Board of Directors of the Company (or any special committee charged
thereby). Vector's opinion as to the fairness, from a financial point of view,
of any Sale transaction involving greater than a majority of the business
assets or stock of the Company to be voted on by the Company's Board of
Directors.
(IV) Notwithstanding the foregoing, in the event a Sale transaction (as
described in Paragraph (III)) takes the form of a minority equity investment in
the Company by Taiho Pharmaceutical Co., Ltd. or its affiliates, then Vector's
Success Fee shall be reduced to equal 4% of the amount by which the aggregate
consideration exceeds $4 million.
(V) If an agreement for a Distribution Arrangement is entered into or a
Distribution Arrangement is consummated (i) within the Engagement Period with
any Party, or (ii) during the Continuing Rights Period with a Protected Party,
the Company agrees to pay Vector a Success Fee equal to $200,000 payable in
cash at the time of closing of each such Distribution Arrangement, plus, at
Vector's option, either (a) a warrant to purchase 200,000 shares of the
Company's Common Stock at an exercise price of the greater of $2.00 per share
or 80% of the average closing price of the Company's Common Stock for the five
days immediately preceding the date on which such Distribution Arrangement is
announced, such warrant having the same terms and conditions as the Warrant
(except the warrants paid as part of the Success Fee shall be exercisable for
a period of five years from the date of issue); or (b) 5% of net sales
resulting from the Distribution Arrangement, subject to a maximum fee to
Vector, pursuant to this subsection (b), of $300,000 per Distribution
Arrangement, resulting in a total fee to Vector pursuant to this subsection (b)
of a maximum of $500,000 per Distribution Arrangement (calculated as the sum of
$200,000 payable at the time of closing and $300,000 pursuant to subsection
(b)). A Distribution Arrangement is a joint venture, partnership, license or
other contract or agreement relating to the development, manufacturing,
marketing, distribution, sale or other activity relating to any of the
Company's products on a worldwide or regional basis, where regional is defined
as the United States, major regions of Europe, major regions of Latin America,
or major regions of Asia (excluding such regions of Asia for which the Company
has existing distribution arrangements in place). Notwithstanding the
foregoing, a Distribution Arrangement for a major region of Asia will not
include arrangements entered into with companies with which the Company is
currently in discussions, unless the Company requests Vector's assistance in
consummating such arrangement(s).
(VI) In the event Vector identifies a potential transaction which would not
qualify as a Distribution Arrangement as defined above, prior to disclosure of<PAGE>
such prospective partner or partners (i) Vector shall first advise the Company
as to the proposed country or territory and (ii), if the Company desires to
pursue an arrangement with respect to such country or territory, Vector and the
Company shall negotiate in good faith the appropriate fee due Vector; provided
that Vector shall not be entitled to any fee with respect to any party with
which the Company had previously, or is then currently, engaged in discussions
regarding an arrangement unless, at the Company's request, Vector provides
services in connection with such arrangements.
(VII) Subject to the consummation of a Distribution Arrangement, if the
Company elects to undertake any private placement(s) or public offering(s) of
equity securities for an amount exceeding $5,000,000, Vector shall have the
right of first refusal to represent the Company as exclusive placement agent in
the case of a private placement(s) or as a lead-manager in the case of a public
offering(s). The right of first refusal shall terminate eighteen months after
its commencement date. It is understood that the fees payable to Vector shall
be normal and customary for transactions of such type among firms qualified to
perform such services. It is also understood that the economic terms and
conditions for Vector in the case of a public offering shall be at least as
favorable to Vector as they are for any other co-manager in such offering. The
terms and conditions of any offering(s), as well as the timing of such
offering(s) shall be subject to general market conditions.
(VIII) In order to coordinate the efforts to effect a transaction
satisfactory to the Company during the Engagement Period, in the event that the
Company or its directors, management or shareholders initiate or receive any
meaningful inquiry or are otherwise aware of the interest of any third party
concerning any transaction as contemplated in this agreement, the Company
agrees to promptly inform Vector of the third party and its interest and
request that Vector perform its services as contemplated hereunder.
(IX) Notwithstanding anything herein to the contrary, either party may
terminate the Engagement Period upon a material breach by the other party of
the terms and conditions set forth herein, provided that the party claiming
such material breach has given the breaching party 30-days' prior written
notice detailing the cause of such material breach, thereby allowing the
breaching party an opportunity to cure. Notwithstanding any early termination
of the Engagement Period in accordance with the preceding sentence, Vector
shall still be entitled to receive its Success Fee (as set forth in Paragraphs
(III), (IV) and (V) above) with respect to transactions consummated with
Protected Parties, which transactions were agreed to or consummated during the
Engagement Period or the Continuing Rights Period.
(X) Any financial advice rendered by us pursuant to this agreement may not
be disclosed publicly in any manner without our prior written approval, except
as required by law, and will be treated by us as confidential. The Company will
provide us with all financial and other information requested by us for the
purposes of rendering our services pursuant to this agreement.
(XI) All nonpublic information given to us by the Company will be treated
by us as confidential. We may rely, without independent verification, on the
accuracy and completeness of all information furnished to us by the Company or
any other party or potential party to any transaction contemplated hereunder.<PAGE>
(XII) Since Vector will be acting on behalf of the Company in connection
with its engagement hereunder, the Company and Vector have entered into a
separate letter agreement, dated the date hereof, providing for the
indemnification by the Company of Vector and certain related entities. A copy
of such letter agreement is attached to this letter.
Please confirm that the foregoing is in accordance with your understanding
by signing and returning to us the enclosed duplicate of this letter.
Sincerely yours,
VECTOR SECURITIES INTERNATIONAL, INC.
By: /s/ Barry M. Deutsch
----------------------------
Barry M. Deutsch
Vice President
Confirmed as of the date hereof:
THE FEMALE HEALTH COMPANY
By: /s/ O.B. Parrish
- ------------------------------
O.B. Parrish
Chairman and Chief Executive Officer<PAGE>
September 29, 1997
Vector Securities International, Inc.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Gentlemen:
In connection with your engagement by us as set forth in the engagement letter
dated the date hereof (the "Engagement Letter"), we hereby agree to indemnify
and hold harmless you and your affiliates, the respective directors, officers,
stockholders, agents and employees of you and your affiliates and each other
person, if any, controlling you or any of your affiliates (collectively
referred to as "you" and "your"), to the full extent lawful, from and against
all losses, claims, damages, liabilities and expenses (collectively, "Losses")
incurred by you (including fees and disbursements of counsel) which (i) are
related to or arise out of actions taken or omitted to be taken (including any
untrue statements made or any statements omitted to be made) by us or by you
with our consent or in conformity with our actions or omissions or (ii) are
otherwise related to or arise out of your activities on our behalf in
connection with your engagement by us, and we will reimburse you for all
expenses (including fees and disbursements of counsel) as they are incurred by
you in connection with investigating, preparing or defending any such action or
claim, whether or not in connection with pending or threatened litigation in
which you are a party. We will not be responsible, however, for any Losses
pursuant to clause (ii) of the preceding sentence which are finally judicially
determined to have resulted primarily from your willful misfeasance or gross
negligence. We also agree that you shall not have any liability to us for or in
connection with such engagement except for Losses incurred by us which are
finally judicially determined to have resulted primarily from your willful
misfeasance or gross negligence. We further agree that we will not, without
the prior written consent of Vector Securities International, Inc. ("Vector"),
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not you are an actual or
potential party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of you from
all liability arising out of such claim, action, suit or proceedings. Payments
pursuant to this paragraph shall be paid by us promptly upon our receipt of a
statement(s) from Vector setting forth the amounts with respect to which
indemnification and/or reimbursement is sought pursuant to this paragraph.
We agree if any indemnification sought by you pursuant to this letter agreement
is unavailable or insufficient to hold you harmless, then (whether or not
Vector is the indemnified person), we and Vector will contribute to the Losses
for which such indemnification is unavailable or insufficient in such
proportion as is appropriate to reflect the relative benefits to us, on the one
hand, and Vector, on the other hand, in connection with Vector's engagement
referred to above, subject to the limitation tat in any event Vector's
aggregate contribution to all Losses with respect to which contribution is
available hereunder will not exceed the amount of fees actually received by
Vector from us pursuant to Vector's engagement referred to above.<PAGE>
Our indemnity, reimbursement and contribution obligations under this letter
agreement shall be in addition to any rights that you may have at common law or
otherwise. We hereby consent to personal jurisdiction and service and venue in
any court in which any claim which is subject to this letter agreement is
brought against you. This letter agreement shall be governed by and construed
in accordance with the laws of the State of Illinois without regard to
principles of conflicts of laws. Any right to trial by jury with respect to
any claim or proceeding related to or arising out of Vector's engagement by us
or this agreement is waived.
It is understood that, in connection with Vector's above-mentioned engagement,
Vector may also be engaged to act in one or more additional capacities, and
that the terms of the original engagement or any such additional engagements
may be embodied in one or more separate written agreements. The provisions of
this letter agreement shall apply to the original engagement, any such
additional engagement(s)) and any modification of the original engagement or
such additional engagement(s) and shall remain in full force and effect
following the completion or termination of Vector's engagement(s).
Very truly yours,
THE FEMALE HEALTH COMPANY
By: /s/ O.B. Parrish
-----------------------------
O.B. Parrish
Chairman and Chief Executive Officer
Accepted:
VECTOR SECURITIES INTERNATIONAL, INC.
By: /s/ Barry M. Deutsch
- ----------------------------
Barry M. Deutsch
Vice President
Date: September 29, 1997
- --------------------------<PAGE>
