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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-18849
THE FEMALE HEALTH COMPANY
(Name of Small Business Issuer in Its Charter)
Wisconsin 39-1144397
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
875 N. Michigan Ave., Suite 3660, Chicago, Illinois 60611
(Address of Principal Executive Offices) (Zip Code)
(312) 280-1119
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ X ]
As of December 16, 1999, 12,291,206 shares of Common stock were outstanding. As
of December 16, 1999, the aggregate market value of shares of Common stock held
by non-affiliates was approximately $11.4 million (based upon the last reported
sale price of $1.125 on that date on the Over the Counter Bulletin Board).
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FORM 10-KSB INDEX
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters To A Vote Of Security Holders
Part II
Item 5. Market For Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 and Reports on Form 8-K
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-KSB which are not
statements of historical fact are intended to be, and are hereby identified as,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievement
expressed or implied by such forward-looking statements. Such factors include,
among others, the following:
- the Company's inability to secure adequate capital to fund
operating losses, working capital requirements, advertising
and promotional expenditures and principal and interest
payments on debt obligations;
- factors related to increased competition from existing and new
competitors, including new product introduction, price
reduction and increased spending on marketing;
- limitations on the Company's opportunities to enter into and/
or renew agreements with international partners;
- the failure of the Company or its partners to successfully
market, sell, and deliver its product in international
markets, and risks inherent in doing business on an
international level, such as laws governing medical devices
that differ from those in the U.S., unexpected changes in the
regulatory requirements, political risks, export restrictions,
tariffs, and other trade barriers, and fluctuations in
currency exchange rates;
- the disruption of production at the Company's manufacturing
facility due to raw material shortages, labor shortages,
and/or physical damage to the Company's facilities;
- the Company's inability to manage its growth and to adapt its
administrative, operational and financial control systems to
the needs of the expanded entity and the failure of management
to anticipate, respond to and manage changing business
conditions;
- the loss of the services of executive officers and other key
employees and the Company's continued ability to attract and
retain highly-skilled and qualified personnel;
- the costs and other effects of litigation, governmental
investigations, legal and administrative cases and
proceedings, settlements and investigations;
- developments or assertions by or against the Company relating
to intellectual property rights; and
- the Company's assessment of the Year 2000 issue, including its
identification, assessment, remediation and testing efforts
and the costs associated with such efforts, is based upon
management's estimates, which were derived from numerous
assumptions regarding future events, third-party remediation
efforts, the accuracy of testing of the affected systems and
other factors, and no assurance can be given that these
estimates will prove correct or that actual results will not
differ materially from currently anticipated.
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PART I
Item 1. Description of Business
General
The Female Health Company ("FHC" or the "Company") manufactures, markets and
sells the female condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
The female condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 40 additional
countries. Certain of these studies show that having the female condom available
allows women to have more options, resulting in an approximately 25% increase in
protected sex acts. Furthermore, certain studies show that when the female
condom is available as a choice, there is an approximately 34% decrease in STDs,
including HIV/AIDS.
The product is currently sold or available in various venues including
commercial (private sector) and public sector clinics in over 31 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, Denmark, and France. The Company has signed distribution
agreements in Japan and Bangladesh, and the Company anticipates that the product
will be marketed in these countries in the coming months. The Company's partner
in Japan, Taiho Pharmaceutical Co., Ltd. ("Taiho"), received regulatory approval
from Koseisho, the Japanese regulatory agency, in November 1999. Taiho plans to
introduce the female condom as "My Femy" in the first half of calendar year
2000. The Company is currently in discussions with potential distributors for
key European countries, India, The People's Republic of China and other
countries.
As noted above, the female condom is sold to the global public sector. In the
U.S., the product is marketed to city and state public health clinics as well as
not-for-profit organizations such as Planned Parenthood. Following several years
of testing the efficacy and acceptability of the female condom, in 1996 the
Company entered into a three-year agreement with the Joint United Nations
Programme on AIDS ("UNAIDS") which has subsequently been renewed. In the
agreement, UNAIDS facilitates the availability and distribution of the female
condom in the developing world and the Company sells the product to developing
countries at a reduced price. The current price per unit is approximately
(pound)0.38 (Pounds), or $0.62. Pursuant to this agreement, the product is
currently being marketed in Zambia, Zimbabwe, Tanzania, Cote d' Ivoire, Bolivia,
Haiti, South Africa and other countries. The Company anticipates multiple
launches will occur during the next two years under this agreement, including
launches in Kenya, Nigeria, Ghana, Cambodia, Bangladesh, Columbia and Central
American countries.
Product
The female condom is made of polyurethane, a thin but strong material which is
resistant to rips and tears during use. The female condom consists of a soft,
loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and helps to hold it in place. The other ring remains outside
the vagina after insertion. The female condom lines the vagina, preventing skin
from touching skin during intercourse. The female condom is prelubricated and
disposable and is intended for use during only one sex act.
Global Market Potential
The World Health Organization ("WHO") estimates there are more than 300 million
new cases of STDs worldwide each year, excluding HIV, and most of those diseases
are more easily transmitted to women than to men. UNAIDS estimates that there
are currently approximately 33 million people worldwide who are infected with
HIV/AIDS and there are approximately 15,000 people per day who are newly
infected. In the United States, the Center for Disease Control noted that in
1995, five of the ten most frequently reported diseases were STDs. The Center
also has noted that one in five Americans over the age of 12 has Herpes and 1 in
every 3 sexually active people will get an STD by age 24. Women are currently
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the fastest growing group infected with HIV and are expected to comprise the
majority of the new cases by the coming year.
Currently there are only two products that prevent the transmission of HIV/AIDS
through sexual intercourse --the latex male condom and the female condom.
MALE CONDOM MARKET: It is estimated the global annual market for male condoms is
4.7 billion units. However, the majority of all acts of sexual intercourse,
excluding those intended to result in pregnancy, are completed without
protection. As a result, it is estimated the potential market for barrier
contraceptives is much larger than the identified male condom market.
Advantages vs. the Male Condom
The female condom is currently the only available barrier contraceptive method
controlled by women which allows them to protect themselves from unintended
pregnancy and STDs, including HIV/AIDS. The most important advantage is that a
woman can control whether or not she is protected as many men do not like to
wear male condoms and may refuse to do so.
The polyurethane material that is used for the female condom 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 as much as 4% to 8% of the times
they are used. Unlike latex, polyurethane quickly transfers heat, so the female
condom immediately warms to body temperature when it is inserted, which may
result in increased pleasure and sensation during use. The product offers an
additional benefit to the 7% to 20% of the population that is allergic to latex
and who, as a result, may be irritated by latex male condoms. To the Company's
knowledge, there is no reported allergy to date to polyurethane. The female
condom is also more convenient, providing the option of insertion hours before
sexual arousal and as a result is less disruptive during sexual intimacy than
the male condom which requires sexual arousal for application.
Cost Effectiveness
At the 1998 World AIDS Conference held in Geneva, Switzerland, UNAIDS presented
the results from its cost-effectiveness study which indicated that making the
female condom available is highly cost effective in reducing public health costs
in developing countries.
Worldwide Regulatory Approvals
The female condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for FDA
approval laid the foundation for approvals throughout the rest of the world,
including receipt of a CE Mark in 1997 which allows the Company to market the
female condom throughout the EU. In addition to the United States and the EU,
several other countries have approved the female condom for sale, including
Canada, Russia, Australia, South Korea and Taiwan. Taiho, the Company's partner
in Japan, received regulatory approval from the Japanese regulatory agency in
November 1999.
The Company believes that the female condom's PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry. The Company estimates that it would take a minimum of four to six years
to implement, execute and receive FDA approval of a PMA to market another type
of female condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the manufacture
and distribution of the female condom.
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Strategy
The Company's strategy is to act as a manufacturer, selling the female condom to
the global public sector, United States public sector and commercial partners
for country-specific marketing. The public sector and commercial partners assume
the cost of shipping and marketing the product. As a result, as volume
increases, the Company's operating expenses will not increase significantly.
Commercial Markets
The Company markets the product directly in the United States and United
Kingdom. The Company has commercial partners which have recently launched the
product in Canada, Brazil, Venezuela, Denmark, South Korea, Holland and France.
The Company has signed agreements with partners in Japan and Bangladesh where
launches are expected during the coming year.
Japanese Market
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have only recently been approved in Japan and, as a result, 85%
of Japanese couples seeking protection use condoms. The Female Health Company's
partner in Japan is Taiho Pharmaceuticals, a $1 billion Japanese health care
company. Taiho has more than 600 salespersons and distribution in 40,000 drug
stores. The agreement between the Company and Taiho required Taiho to perform
clinical testing of the product in Japan and obtain the necessary regulatory
approvals to market the product. Approval was received in November 1999. The
Company will manufacture the product and supply it to Taiho, which will have
responsibility for marketing and distributing the female condom in Japan. Taiho
plans to market the female condom under the name "My Femy" during the first half
of calendar year 2000.
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than 1.5 billion male condoms are distributed
worldwide by the public sector each year. The female condom is seen as an
important addition to prevention strategies by the public sector because studies
show that the availability of the female condom decreases the amount of
unprotected sex by as much as 25% over male condoms alone. Currently, the female
condom is promoted by the WHO, UNAIDS, the United States Agency for
International Development, many nongovernment organizations around the world and
a number of city and state public health departments in the United States.
The Company has a multi-year agreement with UNAIDS to supply the female condom
to developing countries at a reduced price which is negotiated to be equal to
the Company's production costs directly attributable to the production of the
female condom in the prior year, subject to a cap of (pound)0.38 (pounds), or
approximately $0.63, per unit prior to December 31, 1999. The current price is
(pound)0.38 (pounds) per unit. This agreement has been automatically renewed for
a term expiring on December 31, 2000, and will continue to automatically renew
for additional one-year periods unless the Company or UNAIDS gives prior notice
of termination. During the last year, the female condom has been launched in the
countries of Zimbabwe, Tanzania, Bolivia, Haiti, South Africa and Zambia. It is
anticipated that multiple product launches will occur in several countries
during the next two years, including in the countries of Kenya, Nigeria, Ghana,
Cambodia, Bangladesh, Columbia and Central American countries. The Company also
is supplying Brazil's Ministry of Health with two million female condoms under
its agreement with UNAIDS.
In the United States, the product is marketed to city and state public health
clinics, as well as not-for-profit organizations such as Planned Parenthood.
Currently 10 major cities and 15 state governments, including the states of New
York, Pennsylvania, Florida, Connecticut, Hawaii, Louisiana, Maryland, New
Jersey, South Carolina and Illinois and the cities of Chicago, Philadelphia, New
York and Houston have purchased the product for distribution with a number of
others expressing interest. All major cities and states have reordered product
after their initial shipments.
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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.
Competition
The Company's female condom participates in the same market as male condoms but
is not seen as competing - rather additive in terms of prevention and choice.
However, it should be noted that latex male condoms cost less and have brand
names that are more widely recognized than the female condom. In addition, male
condoms are generally manufactured and marketed by companies with significantly
greater financial resources than the Company. It is also possible that other
parties may develop a female condom. These competing products could be
manufactured, marketed and sold by companies with significantly greater
financial resources than those of the Company.
Employees
As of December 16, 1999, the Company's operations had 82 full-time employees
within the U.S. and the U.K. and 1 part-time employee. No Company employees are
represented by a labor union. The Company believes that its employee relations
are good.
Backlog
At December 16, 1999, the Company had unfilled orders of $2,522,000. The
comparable amount as of the same date of the prior year was $533,000. All of
these unfilled orders are expected to be filled during Fiscal 2000. The unfilled
orders are the result of requested shipping dates from the Company's customers
rather than delays in manufacturing.
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. These patents expire between 2005 and 2113. 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 1999 and 1998, the Company incurred research and development costs from
continuing operations of $122,196 and $2,500, respectively. These expenditures
were primarily related to conducting acceptability studies and analyzing second
generation products.
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Industry Segments And Financial Information About Foreign And Domestic
Operations
See Note 10 to Notes to Consolidated Financial Statements, included herein.
History
The female condom was invented by a Danish physician who obtained a U.S. patent
for the product in 1988. The physician subsequently sold certain rights to the
condom to Chartex Resources Limited. In the years that followed, Chartex, with
resources provided by a nonprofit Danish foundation, developed the manufacturing
processes and completed other activities associated with bringing the female
condom to market in certain non-U.S. countries. The Company, known as Wisconsin
Pharmacal Company, Inc. (the Company's predecessor), owned certain rights to the
female condom in the U.S., Canada, and Mexico, pursued the pre-clinical and
clinical studies and overall development of the product for worldwide use and
U.S. FDA approval of the product.
The Female Health Company is the successor to Wisconsin Pharmacal Company, Inc.,
a company which previously manufactured and marketed a wide variety of disparate
specialty chemical and branded consumer products in addition to owning certain
rights to the female condom described above.
In fiscal 1995, the Company's Board of Directors approved a plan to complete a
series of actions designed, in part, to maximize the potential of the female
condom. First, the Company restructured and transferred all of the assets and
liabilities of the Company other than those related primarily to the female
condom to a newly formed, wholly-owned subsidiary of the Company, WPC Holdings,
Inc. ("Holdings"). In January 1996, the Company sold Holdings to an unrelated
third party. Then, in February 1996, the Company acquired Chartex (renamed The
Female Health Company - UK in 1997), the manufacturer and owner of certain
worldwide rights to, and the Company's sole supplier of, the female condom. As a
result of the sale of Holdings and the acquisition of Chartex, The Female Health
Company evolved to its current state with its sole business consisting of the
manufacture, marketing and sale of the female condom.
The FDA approved the female condom for distribution in 1993 and the Company's
manufacturing facility in 1994. Since that time, the Company has sold over 29
million female condoms around the world.
Item 2. Description of Property
The Company leases approximately 4,500 square feet of office space at 875 North
Michigan Avenue, Suite 3660, Chicago, IL 60611. The lease expires in 2001. The
Company also leases approximately 1,900 square feet at 919 North Michigan
Avenue, Suite 2208, Chicago, Illinois, 60611. The lease expires January 31,
2001. The Company has subleased these premises to a third party. The Company
utilizes warehouse space and sales fulfillment services of an independent public
warehouse located near Minneapolis, Minnesota for storage and distribution of
the female condom. The Company manufactures the female condom in a 40,000 square
foot leased facility located in London, England under a lease which expires in
2015. The FDA-approved manufacturing process is subject to periodic inspections
by the FDA as well as the EEC quality group. Current capacity at the
manufacturing facility is approximately 60 million female condoms per year.
Management believes the properties are adequately insured.
Item 3. Legal Proceedings.
The Company is not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the Fiscal year ended September 30, 1999.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Historical Trading Information and Dividend Policy
On February 5, 1999, the Company's common stock was delisted from the American
Stock Exchange since it did not meet all of the criteria for continued listing.
Commencing on February 9, 1999, the common stock has been quoted on the OTC
Bulletin Board under the symbol "FHCO." Although the Company believes the OTC
Bulletin Board has and will continue to provide an efficient market for the
purchase and sale of the Company's common stock, investors may find it more
difficult to obtain accurate quotations of the price of the Company's common
stock and to sell the common stock on the open market than was the case when the
stock was listed on the American Stock Exchange. In addition, companies whose
stock is listed on the American Stock Exchange must adhere to the rules of such
exchange. These rules include various corporate governance procedures which,
among other items, require the Company to obtain shareholder approval prior to
completing certain transactions such as, among others, issuances of common stock
equal to 20% or more of the Company's then outstanding common stock for less
than the greater of book or market value or the issuance of certain stock
options. Companies whose stock is quoted on the OTC Bulletin Board are not
subject to these or any comparable rules. Between January 26, 1995, and February
4, 1999, the Company's common stock was 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
14, 1999 was 487. The Company has paid no cash dividends on its common stock and
does not expect to pay cash dividends in the foreseeable future. The Company
anticipates that for the foreseeable future it will retain any earnings for use
in the operation of its business. Information regarding the Company's high and
low reported quarterly closing prices for its common stock is set forth in the
table below.
<TABLE>
<CAPTION>
-------------------- Quarters ----------------------
1999 FIRST SECOND THIRD FOURTH
- ------------- --------- --------- ------- ---------
<S> <C> <C> <C> <C>
Price per common share - High $ 2 $ 2 1/16 $ 2 $ 1 11/16
Price per common share - Low $ 1 1/4 $ 1 1/16 $ 7/8 $ 11/16
1998
- -------------
Price per common share - High $ 4 5/16 $ 3 1/2 $ 3 5/8 $ 3 1/2
Price per common share - Low $ 3 $ 2 1/2 $ 2 1/2 $ 1 7/16
</TABLE>
Recent Sales of Unregistered Securities
On May 19, 1999 and June 3, 1999, the Company issued an aggregate of $1,500,000
of convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. The convertible debentures
bear interest at 8% per annum and have a one-year term; provided, however, that
the Company may extend the repayment term for an additional one year if, upon
such extension, it issues to the investors warrants to purchase 375,000 shares
of the Company's common stock having the same terms and conditions as the
warrants issued to the investors in the private placement. The investors may
convert the convertible debentures into common stock at any time after one year
from the date they were issued as follows: (a) the first 50% of the original
principal balance of the convertible debentures, plus any accrued but unpaid
interest thereon, is convertible into common stock based on a per share price
equal to the lesser of (i) 70% of the market price of the common stock at the
time of conversion or (ii) $1.25; and (b) the second 50% of the original
principal balance plus any accrued but unpaid interest thereon is convertible
into common stock based on the per share price equal to the lesser of (i) 70% of
the market price of the common stock at the time of conversion or (ii) $2.50. As
part of this offering, the Company also issued to the investors warrants to
purchase 1,875,000 shares of the Company's common stock. The warrants are
exercisable by the investors at any time within five years after their date of
issuance at an exercise price per share equal to the lesser of (a) 70% of the
market
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price of the Company's common stock from the date of exercise or (b) $1.00. As
part of the consideration that the Company paid R.J. Steichen & Company, the
Company's placement agent in the private placement of the convertible debentures
and warrants, the Company issued to R.J. Steichen warrants to purchase a total
of 337,500 shares of the Company's common stock. The warrants issued to R.J.
Steichen are exercisable at any time commencing one year after the date of the
private placement and for a period of four years thereafter at an exercise price
of $1.00 per share.
The Company believes it has satisfied the exemption from the securities
registration requirement provided by section 4(2) of the Securities Act and
Regulation D promulgated thereunder in this offering since the securities were
sold in a private placement to only sophisticated, accredited investors, each of
whom provided representations which the Company deemed necessary to satisfy
itself that they were accredited investors and were purchasing for investment
and not with a view to resale in connection with a public offering.
On September 24, 1999, the Company completed a private placement of 666,671
shares of its common stock to nine investors. Each share of common stock was
sold for a purchase price of $0.75, representing a discount of 12% from the
market price on the date that the shares were sold. In connection with this
private placement, the Company agreed to register the investors' resale of these
shares pursuant to this registration statement. The Company raised approximately
$500,000 of proceeds, net of issuance cost of $0 in connection with this private
placement. The Company believes that it has satisfied the exemption from the
securities registration requirement provided by section 4(2) of the Securities
Act and Regulation D promulgated thereunder in this offering since the
securities were sold in a private placement to only accredited investors, most
of whom had a preexisting personal or business relationship with the Company or
its officers or directors and each of whom provided representations which the
Company deemed necessary to satisfy itself that they were accredited investors
and were purchasing for investment and not with a view to resale in connection
with a public offering. In addition, the common stock issued to these investors
contained restrictive legends indicating that the shares had not been registered
and, therefore, cannot be resold unless the resale was registered under the
Securities Act or an exemption from such registration requirement was available.
On February 18, 1999, the Company extended for an additional one-year term its
one-year, $50,000 promissory note payable to O.B. Parrish, the Company's
Chairman and Chief Executive Officer. The extension was completed through the
execution of a promissory note and Note Purchase and Warrant Agreement and Stock
Issuance Agreement. Pursuant to this transaction, Mr. Parrish was granted
warrants to purchase 10,000 shares of common stock at an exercise price of $1.35
per share. The warrants expire upon the earlier of their exercise or five years
after the date of their issuance. Under the Stock Issuance Agreement, if the
Company fails to pay the $50,000 promissory note when due, the Company must
issue 10,000 shares of common stock to Mr. Parrish. The issuance will not,
however, alleviate the Company's liability under the note. The Company also
granted Mr. Parrish securities registration rights with respect to any common
stock he receives from the Company under these warrants or the Stock Issuance
Agreement.
On February 12, 1999, the Company borrowed $250,000 from Mr. Dearholt. The
borrowing was effectuated in the form of a $250,000, one-year promissory note
payable by the Company to Mr. Dearholt. As part of this transaction, the Company
entered into a Note Purchase and Warrant Agreement and a Stock Issuance
Agreement. Pursuant to the Note Purchase and Warrant Agreement, Mr. Dearholt
received a warrant to purchase 50,000 shares of common stock at an exercise
price of $1.25 per share. The warrants expire upon the earlier of their exercise
or five years after the date of their issuance. Under the Stock Issuance
Agreement, if the Company fails to pay the $250,000 under the note when due, the
Company must issue 50,000 shares of common stock to Mr. Dearholt. This issuance
will not, however, alleviate the Company's liability under the note. The Company
also granted Mr. Dearholt securities registration rights with respect to any
common stock he receives from the Company under these warrants or the Stock
Issuance Agreement.
The Company has sold 129,506 shares of common stock on February 26, 1999,
157,356 shares of common stock on March 10, 1999 and 196,102 shares of common
stock on April 10, 1999 to a private investor under an equity line agreement.
The Company received net cash proceeds of $145,500, $145,500 and $154,000,
respectively, from these sales. As part of this offering, the Company also
issued to the investor warrants to purchase 200,000 shares of the Company's
common stock at an exercise price of $2.17 per share. The Company believes it
has satisfied the exemption from the securities registration requirement
provided by section 4(2) of the Securities Act and Regulation D promulgated
thereunder in this offering since the securities were sold in a private
placement to a sophisticated, accredited investor, who provided representations
which the Company deemed necessary to satisfy itself that it was an accredited
investor and was purchasing for investment and not with a view to resale in
connection with a public offering.
10
<PAGE> 11
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to provide an analysis of the Company's
financial condition and results of operations and should be read in conjunction
with the Company's financial statements and the notes thereto contained
elsewhere in this report. The discussion also includes forward-looking
statements. See "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."
Overview
Over the past few years, the Company completed significant aspects of the
development and commercialization of the female condom. These initiatives have
resulted in the attainment of proprietary manufacturing technology and product
design patents, necessary regulatory approvals, endorsements from various
organizations within the world medical community, and the development of
significant manufacturing capacity. These steps, taken as part of the Company's
plan to develop and sell a product with global commercial and humanitarian
value, have required the expenditure of significant amounts of capital and
resulted in significant operating losses including the period 1996 through the
present.
The Company has begun the process of developing the commercial market for the
female condom around the world. As part of this plan, the Company has completed
a number of distribution agreements and is pursing other arrangements for the
marketing and sale of the female condom. Management believes that as the number
of markets in which the female condom is sold increases, sales will grow and at
certain levels the Company will become profitable. However, there can be no
assurance that such level of sales will be achieved in the near term or at all.
Results Of Operations
Fiscal Year Ended September 30, 1999 ("1999") Compared to Fiscal Year Ended
September 30, 1998 ("1998")
The Company had net revenues of $4.7 million and a net loss attributable to
common stockholders of $(3.9) million, or ($0.36) per share in 1999, compared to
net revenues of $5.5 million and a net loss attributable to common stockholders
of $(4.3) million, or ($0.43) per share, in 1998.
Without a prior year, one-time, $817,000 charge for dividend accretion, the
Company would have experienced an increase in net loss principally related to an
increase in non-operating expenses rather than the $0.4 million reduction (10%)
in the net loss attributable to common stockholders from $(4.3) million in 1998
to $(3.9) million in 1999. Net losses for both 1999 and 1998 are attributable to
fixed manufacturing overhead and administrative costs associated with operating
the manufacturing facility configured to support significantly greater volume
levels.
Net revenues decreased $0.7 million (13%) in 1999 over the prior year. Declining
sales in both the global public sector and city and state agencies within the
United States accounted for all of the decrease. The Company believes the
decrease in volume reflects variation in the timing of receipt of significant
public sector orders. This variation should decrease as more countries order and
reorder the female condom. Net sales to commercial accounts increased as a
result of the reinstatement of a major drug store chain and other promotional
chain activity.
The Company's strategy is to act as a manufacturer supplying the public sector
and commercial partners throughout the world. The Company's partners pay for all
marketing and shipping costs. Consequently, as the Company's sales volume
increases the Company's operating expenses will not increase significantly.
In 1999, the cost of products sold of $4.6 million was 98% of net sales compared
with 1998 cost of products sold of $5.3 million which was 97% of net sales. The
reduction of cost of products sold was a result of lower sales volume, offset,
in part, by a change between years in the Company's reserve for inventory
obsolescence. In fiscal year 1998, the obsolescence reserve decreased cost by
$0.9 million. The FDA's decision to extend the
11
<PAGE> 12
useful life of the female condom to five years from three years was a primary
reason for this favorable adjustment. During the current fiscal year, no
material inventory obsolescence reserve adjustment was required. The Company's
UK-based manufacturing facility utilized approximately 11% of its capacity in
1999 compared with approximately 12% of its capacity in 1998. The Company's
reserve for inventory obsolescence was $34,340 and $40,734 at September 30, 1999
and 1998, respectively.
Advertising and promotion expenditures decreased 42% to $0.3 million in 1999
compared to $0.4 million in 1998. Advertising and promotion relates exclusively
to the US market and includes the costs of print advertising, trade and consumer
promotions, product samples and other marketing costs incurred to increase
consumer awareness and purchases of the female condom. Through expenditures
since the product launch, the Company has established that demand for the female
condom is responsive to promotion; but due to the Company's size, it does not
possess the resources to conduct a significant consumer marketing program.
Accordingly the Company is seeking potential partners for the United States that
have the resources to conduct such a marketing program.
Selling, general and administrative expenses were $2.9 million in 1999 and 1998.
As a percentage of net revenues, selling, general and administrative expenses
were 61% in 1999 compared with 53% in 1998. The increase as a percentage of net
revenues was due to the decline in net revenues in 1999 as compared to 1998.
Selling, general and administrative expenses did not proportionately decline
with the decline in net revenues because the reduction in compensation expenses
was offset by higher costs from consulting, investor relations, sales and legal.
Net interest and non-operating expenses for 1999 increased $0.5 million (251%)
to $0.7 million from $0.2 million in 1998. As a result of the Company incurring
higher levels of debt in the current fiscal year principally due to the issuance
of convertible debentures and two notes payable, the Company experienced an
increase in interest expenses.
The Company was able to cover fixed manufacturing overhead costs and reached
above the break-even at the gross profit level. However, based on the current
average selling price per unit, the Company must achieve cumulative annual unit
sales of approximately 22 million female condoms, or 37% of manufacturing
capacity, to cover operating and non-operating expenses. Non-operating expense
includes interest and non-cash charges reflecting discounts on warrants and
convertible debentures related to financing. It is anticipated that
non-operating expense will decrease as unit sales volume increases, fixed
overhead costs are covered and the Company's need for funding decreases.
Excluding non-operating expense relating to the Company's funding requirements,
the Company believes its cash flows would achieve a break-even level at
approximately 15.9 million units.
Factors That May Affect Operating Results and Financial Condition
The Company's future operating results and financial condition are dependent on
the Company's ability to increase consumer demand for and to cost-effectively
manufacture sufficient quantities of the female condom. Inherent in this process
are a number of factors that the Company must successfully manage in order to
achieve favorable future results and improve its financial condition.
Reliance on a Single Product
The Company expects to derive the vast majority, if not all, of its future
revenues from the female condom, its sole current product. While management
believes the global potential for the female condom is significant, the product
is in the early stages of commercialization and, as a result, the ultimate level
of consumer demand around the world is not yet known. To date, sales of the
female condom have not been sufficient to cover the Company's fixed operating
costs.
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a global
distribution network for the product by completing partnership arrangements with
companies with the necessary marketing and financial resources and local market
expertise. To date, this strategy has resulted in numerous in-country
distributions in the public sector,
12
<PAGE> 13
particularly in Africa and Latin America. Several partnership agreements have
been completed for the commercialization of the female condom in private sector
markets around the world. However, the Company is dependent on country
governments as well as city and state public health departments within the
United States to continue their commitment to prevention of STDs, including
AIDS, by including female condoms in their programs. The Company is also
dependent on finding appropriate partners for the private sector markets around
the world. Once an agreement is completed, the Company is reliant on the
effectiveness of its partners to market and distribute the product. Failure by
the Company's partners to successfully market and distribute the female condom
or failure of country governments to implement prevention programs which include
distribution of barrier methods against the AIDS crisis, or an inability of the
Company to secure additional agreements for AIDS crisis, or an inability of the
Company to secure additional agreements for new markets either in the public or
private sectors could adversely affect the Company's financial condition and
results of operations.
Inventory and Supply
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market and Foreign Currency Risks
The Company manufactures the female condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States dollar. To
date, the Company's management has not deemed it necessary to utilize currency
hedging strategies to manage its currency risks. On an ongoing basis, management
continues to evaluate its commercial transactions and is prepared to employ
currency hedging strategies when it believes such strategies are appropriate. In
addition, some of the Company's future international sales may be in developing
nations where dramatic political or economic changes are possible. Such factors
may adversely affect the Company's results of operations and financial
condition.
Government Regulation
The female condom is subject to regulation by the FDA, pursuant to the federal
Food, Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices," which include testing, quality
control and documentation procedures. The Company's compliance with applicable
regulatory requirements is monitored through periodic inspections by the FDA.
The failure to comply with applicable regulations may result in fines, delays or
suspensions of clearances, seizures or recalls of products, operating
restrictions, withdrawal of FDA approval and criminal prosecutions. The
Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the FDA.
Liquidity and Sources of Capital
Historically, the Company has incurred significant operating losses. Cash used
in continuing operations was $2.8 million for 1999 and 1998. Historically, the
Company has funded operating losses and capital requirements, in large part,
through the sale of common stock or debt securities convertible into common
stock.
During 1999, the Company received approximately $1.3 million in proceeds from
newly-issued notes payable, $1.5 million (net of transaction costs) from the
sale of convertible debentures and warrants, $1.0 million from the issuance of
common stock and $0.1 million from the issuance of common stock upon exercise of
options. FHC used these amounts to fund current operations of the Company and to
repay existing liabilities.
In the near term, FHC management expects operating losses and capital
requirements to continue to exceed funds generated from operations due
principally to the Company's fixed
13
<PAGE> 14
manufacturing costs relative to current production volumes and the ongoing need
to commercialize the female condom around the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. ("Vector"), an investment banking firm
specializing in providing advice to healthcare and life-science companies.
Pursuant to this agreement, Vector will act as the Company's exclusive financial
advisor for the purposes of identifying and evaluating opportunities available
to the Company for increasing shareholder value. These opportunities may include
selling all or a portion of the business, assets or stock of the Company or
entering into one or more distribution arrangements relating to the Company's
product. This agreement has been extended through December 31, 1999. There can
be no assurance that any such opportunities will be available to the Company or,
if so available, that the Company will ultimately elect or be able to consummate
any such transaction.
On November 19, 1998, the Company executed a private equity line agreement with
a private investor (the "Equity Line Agreement"). This agreement provides for
the Company, at its sole discretion, subject to the conditions described below,
to sell ("put") to the investor up to $6.0 million of the Company's common
stock, subject to a minimum put of $1.0 million over the duration of the
agreement. The Equity Line Agreement expires on February 12, 2001 and, among
other things, provides for minimum and maximum puts ranging from $100,000 to
$1,000,000 depending on the Company's stock price and trading volume. Puts
cannot occur more frequently than every 20 trading days. Upon a proper put under
this agreement, the investor purchases common stock at a discount of (a) 12%
from the then current average market price of the Company's common stock, as
determined under the Equity Line Agreement, if such average market price is at
least $2 or (b) 18% from the then current average market price if such average
market price is less than $2. In addition, the Company is required to pay its
placement agent sales commissions in common stock or cash, at the placement
agent's discretion, equal to 7% of the funds raised under the Equity Line
Agreement and issue warrants to the placement agent to purchase shares of common
stock, at an exercise price of $2.17 per share, equal to 10% of the shares of
common stock sold by the Company under the Equity Line Agreement. Pursuant to
the Equity Line Agreement, the Company issued the investor a Warrant to purchase
200,000 shares of common stock at $2.17 per share.
The Company is required to draw down a minimum of $1 million during the term of
the Equity Line Agreement. If the Company does not draw down the minimum, the
Company is required to pay the investor a 12% fee on that portion of the $1
million minimum not drawn down at the end of the term of the Equity Line
Agreement. As of September 30, 1999, the Company has placed three puts for the
combined cash proceeds of $485,000 providing the investor with a total of
482,964 shares of the Company's common stock. Each put was executed while the
Company's stock price was below $2.00 per share. The timing and amount of the
stock sales under the agreement are totally at the Company's discretion, subject
to the Company's compliance with each of the following conditions at the time
the Company requests a stock sale under the agreement:
- the registration statement the Company filed with the SEC for
resales of stock by the investor under the Equity Line
Agreement must remain in effect;
- all of the Company's representations and warranties in the
Equity Line Agreement must be accurate and the Company must
have complied with all of the Company's obligations in the
Equity Line Agreement;
- there may not be any injunction, legal proceeding or law
prohibiting the Company's sale of the stock to the investor;
- the Company's counsel must issue a legal opinion to the
investor;
- the sale must not cause the investor's ownership of the
Company's common stock to exceed 9.9% of the outstanding
shares of the Company's common stock;
- the trading price of the Company's common stock over a five
trading day preceding the date of the sale must equal or
exceed $1.00 per share; and
14
<PAGE> 15
- the average daily trading volume of the Company's common stock
for a 20 trading day period preceding the date of the sale
must equal or exceed 17,000 shares.
The Company has a $1 million note due March 25, 2000 and a $250,000 note payable
due February 12, 2000 to Mr. Stephen Dearholt, a Director of the Company. The
Company also secured a $50,000 note payable due February 18, 2000 to Mr. O.B.
Parrish, the Chairman of the Board and Chief Executive Officer of the Company.
The Company estimates that it may need up to $2.0 million before the end of 2000
to fund its anticipated cash needs for working capital, capital expenditures and
debt obligations, depending on the level of sales of the female condom. However,
at this stage in the Company's development, the amount and timing of its future
capital requirements cannot be precisely determined. Many of the factors
affecting the Company's capital requirements, including new market launches by
its international partners and sales orders from existing customers, are outside
of the Company's control. While the Company believes that its existing capital
resources (including expected proceeds from sales of common stock pursuant to
the Equity Line Agreement if the Company is able to satisfy the conditions for
its use) will be adequate to fund its currently anticipated capital needs, if
they are not, the Company may need to raise additional capital until its sales
increase sufficiently to cover operating expenses. In addition, there can be no
assurance that the Company will satisfy the conditions required for it to
exercise puts under the Equity Line Agreement. Accordingly, the Company may not
be able to realize all or any of the funds available to it under the Equity Line
Agreement. For example, between September 30, 1999 and December 23, 1999, the
Company's common stock trading price closed below $1 per share on 20 of 60
trading days.
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. The Company may also find it difficult to raise
funds from any debt financing because its existing creditors hold a first
security interest in all of its assets. Any funds raised may be costly to the
Company and/or dilutive to stockholders. If the Company is not able to source
the required funds or any future capital which becomes required, the Company may
be forced to sell certain of its assets or rights or cease operations.
As of December 15, 1999, the Company had approximately $1.0 million in cash, net
trade accounts receivable of $0.5 million and current trade accounts payable of
$0.7 million. It is estimated that the Company's cash burn rate, without
revenues, is approximately $0.6 million per month.
Impact Of Inflation And Changing Prices
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased general and administrative expenses.
Historically, the Company has absorbed increased costs and expenses without
increasing selling prices.
Year 2000 Compliance
The Year 2000 issue is the potential for system and processing failures of date
related data and is the result of the computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in system failure or
miscalculations causing disruptions of
15
<PAGE> 16
operations, including, among other things, a temporary inability manufacture its
product, send invoices or engage in similar normal business activities.
The Company's State of Readiness. The Company may be affected by the Year 2000
issue related to non-compliant information technology ("IT") systems or non-IT
systems operated by the Company or by third parties. The Company has completed
its assessment of internal IT systems and non-IT systems. The Company's internal
systems are located at its manufacturing facility in the United Kingdom and at
its headquarters in Chicago, Illinois.
The Company's Year 2000 compliance project for its manufacturing facility was
divided into four areas:
- Manufacturing Process. The Company has assessed the Year 2000
compliance of each individual piece of equipment. For most of
the Company's equipment, it has received assurances from the
manufacturer or supplier that the equipment is Year 2000
compliant. For other equipment, the Company has been able to
test the equipment for compliance. Based on these tests and
the assurances of the manufacturers or suppliers, the Company
believes that its manufacturing equipment is Year 2000
compliant.
- Building and Site Facilities. The Company has tested the
central computers which control building and site services
such as heating and air conditioning, chilled water and vacuum
systems supporting manufacturing, fire alarms and intruder
alarms. The Company believes that these systems are Year 2000
compliant. Also, even if these systems do fail, the central
controls can be manually overridden to ensure that they
continue to function.
- Site Administration. The Company has completed an upgrade of
its accounting system for Year 2000 compliance. The Company
also has received assurances of Year 2000 compliance from the
manufacturers or suppliers of equipment such as photocopiers,
personal computers, facsimile machines and other officer
equipment. In addition, the Company believes that a failure of
these systems would cause minimal disruption to its
manufacturing operations.
- Suppliers. The Company has obtained Year 2000 compliance
assurances from most of its key suppliers, including single
source suppliers of raw materials.
The Company's U.S. headquarters is not directly involved in the manufacturing of
its product. The Year 2000 compliance assessment for the Company's U.S.
operations is as follows:
- The Company has completed a compliance assessment with the
outside vendor of its software package for personal computer
and desktop applications. The Company has made necessary
upgrades for its accounting software to be Year 2000
compliant.
- The Company has received assurances from the lessor of its
headquarters building that the significant building systems
are Year 2000 compliant.
Costs to Address the Company's Year 2000 Issues. The majority of the Company's
Year 2000 issues were corrected either through systems upgrades or normal
maintenance contracts. The costs associated with remediating the Company's
non-compliant IT systems and non-IT systems have not been material.
Risks to the Company for Year 2000 Issues. With regard to systems under the
Company's control, the Company knows of no significant exposure that it has to
the Year 2000 issue since, if necessary, the Company's systems are capable of
accepting manually entered data. The worst case scenario is that the Company
would have to revert back to manual systems. The Company believes that its
customers and vendors are at various stages of compliance but the Company has
not been made aware of significant Year 2000 issues that would materially affect
the Company's business with them. The Company will continue to monitor
16
<PAGE> 17
Year 2000 compliance with its customers and vendors throughout 1999 but will not
be able to achieve the same degree of certainty that it can with its own
internal systems.
The Company's Contingency Plan. Over the January 1, 2000 weekend, the Company
expects to make personnel available to handle issues that may arise. To the
extent that unanticipated compliance issues arise with respect to the Company's
internal systems, the Company believes that it will be able to implement
alternative IT systems or manual systems. The Company's ability to respond to
non-compliance by its key suppliers will be limited, and therefore could
significantly harm the Company's business.
New Accounting Pronouncements
Please see new "Current Accounting Pronouncements" in Note 1 in financial
statements.
17
<PAGE> 18
THE FEMALE HEALTH COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 7. Financial Statements
<TABLE>
<CAPTION>
Document Page No.
- -------- --------
<S> <C>
Audited Consolidated Financial Statements.
Report of McGladrey & Pullen, LLP, Independent Auditors. 19
Consolidated Balance Sheet as of September 30, 1999. 20
Consolidated Statements of Operations for the years ended
September 30, 1999 and 1998. 21
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999 and 1998. 22 and 23
Consolidated Statements of Cash Flows for the years ended
September 30, 1999 and 1998. 24 and 25
Notes to Consolidated Financial Statements. 26 through 41
</TABLE>
18
<PAGE> 19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Female Health Company
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of The Female Health
Company and subsidiaries, as of September 30, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended September 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Female Health
Company and subsidiaries as of September 30, 1999, and the results of their
operations and their cash flows for the years ended September 30, 1999 and 1998,
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 13, 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 13. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
of classification of liabilities that may result from the outcome of this
uncertainty.
/s/ McGladrey & Pullen LLP
Schaumburg, Illinois
November 11, 1999
19
<PAGE> 20
THE FEMALE HEALTH COMPANY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash $ 570,709
Accounts receivable, net of allowance for doubtful accounts
of $108,000 and allowance for product returns of $227,000 1,572,455
Inventories 1,015,202
Prepaid expenses and other current assets 477,482
--------------
TOTAL CURRENT ASSETS 3,635,848
--------------
Other Assets
Intellectual property, net of accumulated amortization of
$455,600 756,902
Other assets 157,111
--------------
914,013
--------------
Property, Plant and Equipment
Equipment, furniture and fixtures 3,943,710
Less accumulated depreciation 1,986,428
--------------
1,957,282
--------------
$ 6,507,143
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable, related party, net of unamortized discount of
$115,377 $ 1,184,623
Convertible debentures, net of unamortized discount of $680,645 819,355
Accounts payable 612,043
Accrued expenses and other current liabilities 424,193
Preferred dividends payable 73,553
--------------
Total current liabilities 3,113,767
--------------
Long-Term Liabilities
Deferred gain on sale of facility 1,583,260
Other long term liabilities 87,146
--------------
1,670,406
--------------
Stockholders' Equity
Convertible Preferred Stock, Series 1, par value $.01 per share.
Authorized 5,000,000 shares; issued and outstanding 660,000
shares. 6,600
Common Stock, par value $.01 per share. Authorized 22,000,000
shares; issued and outstanding 11,929,580 shares. 119,297
Additional paid-in capital 46,820,778
Unearned consulting fees (201,374)
Accumulated other comprehensive income 189,847
Accumulated deficit (45,180,102)
--------------
1,755,046
Treasury Stock, at cost, 20,000 shares of common stock (32,076)
--------------
1,722,970
--------------
$ 6,507,143
==============
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 21
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 4,715,477 $ 5,451,399
---------------------------------------
Cost of products sold:
Cost of goods sold 4,605,141 6,130,819
Change in obsolescence allowance (6,394) (857,450)
---------------------------------------
Total cost of products sold 4,598,747 5,273,369
---------------------------------------
GROSS PROFIT 116,730 178,030
---------------------------------------
Operating expenses:
Advertising and promotion 251,867 433,821
Selling, general and administrative 2,890,860 2,895,108
---------------------------------------
Total operating expenses 3,142,727 3,328,929
---------------------------------------
OPERATING (LOSS) (3,025,997) (3,150,899)
---------------------------------------
Nonoperating income (expense):
Interest expense (860,523) (456,662)
Interest income 36,030 133,104
Nonoperating income 100,181 117,141
---------------------------------------
(724,312) (206,417)
---------------------------------------
NET (LOSS) (3,750,309) (3,357,316)
Preferred dividends accreted, Series 2 -- 817,000
Preferred dividends, Series 1 133,919 132,669
---------------------------------------
Net (loss) attributable to common stockholders $ (3,884,228) $ (4,306,985)
=======================================
Net (loss) per common share outstanding (0.36) (0.43)
Weighted average common shares outstanding 10,890,173 9,971,493
</TABLE>
See Notes to Financial Statements.
21
<PAGE> 22
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Unearned
Preferred Common Additional Paid- Consulting
Stock Stock in Capital Fees
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 $ 6,800 $ 95,145 $40,238,387 --
Issuance of 729,927 shares of Preferred Stock 7,299 -- 1,836,085 --
(net of offering costs of $156,616)
Issuance of 729,927 shares of Common Stock (7,299) 7,299 -- --
upon conversion of Preferred Stock
Issuance of 29,400 shares of Common Stock upon -- 294 58,506 --
exercise of stock options
Issuance of 25,000 shares of Common Stock for -- 250 93,500 --
consulting services
Issuance of 107,000 shares of Common Stock -- 1,070 306,555 --
under stock bonus plan
Issuance of 10,000 shares of Common Stock upon -- 100 19,900 --
exercise of warrants
Issuance of 18,000 options to employees -- -- 51,660 --
Issuance of warrants with short-term notes -- -- 297,500 --
payable
Issuance of warrants for professional services -- -- 114,750 --
Preferred Stock dividends -- -- -- --
Preferred Stock dividends accreted -- -- 817,000 --
Purchase of 10,000 shares of Common Stock held -- -- -- --
in Treasury
Comprehensive income (loss):
Net (loss) -- -- -- --
Foreign currency translation adjustment -- -- -- --
Comprehensive income (loss)
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 (balance forward) $ 6,800 $104,158 $43,833,843 --
<CAPTION>
Accumulated
Other Cost of
Comprehensive Accumulated Treasury
Income Deficit Stock Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 $203,195 $(36,988,889) -- $ 3,554,638
Issuance of 729,927 shares of Preferred Stock -- -- -- 1,843,384
(net of offering costs of $156,616)
Issuance of 729,927 shares of Common Stock -- -- -- --
upon conversion of Preferred Stock
Issuance of 29,400 shares of Common Stock upon -- -- -- 58,800
exercise of stock options
Issuance of 25,000 shares of Common Stock for -- -- -- 93,750
consulting services
Issuance of 107,000 shares of Common Stock -- -- -- 307,625
under stock bonus plan
Issuance of 10,000 shares of Common Stock upon -- -- -- 20,000
exercise of warrants
Issuance of 18,000 options to employees -- -- -- 51,660
Issuance of warrants with short-term notes -- -- -- 297,500
payable
Issuance of warrants for professional services -- -- -- 114,750
Preferred Stock dividends -- (132,669) -- (132,669)
Preferred Stock dividends accreted -- (817,000) -- --
Purchase of 10,000 shares of Common Stock held -- -- (19,330) (19,330)
in Treasury
Comprehensive income (loss): --
Net (loss) -- (3,357,316) -- (3,357,316)
Foreign currency translation adjustment 101,785 -- -- 101,785
-----------
Comprehensive income (loss) (3,255,531)
- ---------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 (balance forward) $304,980 $(41,295,874) $(19,330) $ 2,934,577
</TABLE>
22
<PAGE> 23
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Additional Unearned
Preferred Common Paid-in Consulting
Stock Stock Capital Fees
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1998 (balance $6,800 $104,158 $43,833,843 --
forwarded)
Issuance of 482,964 shares of Common Stock -- 4,685 480,315 --
under equity line of credit
Issuance of 20,718 shares of Common Stock (200) 200 -- --
upon conversion of Preferred Stock
Issuance of 120,000 shares of Common Stock -- 1,200 128,760 --
upon exercise of warrants
Issuance of 175,000 shares of Common Stock -- 1,750 184,188 (185,938)
for consulting services
Issuance of warrants with convertible -- -- 1,276,300 --
debentures
Issuance of 15,000 shares of Common Stock -- 150 23,288 --
under stock bonus plan
Issuance of 18,000 shares of Common Stock -- 180 16,695 --
upon exercise of stock options
Issuance of warrants with short-term notes -- -- 253,515 --
payable
Issuance of 30,691 shares of Common Stock as -- 307 31,058 --
payment of preferred stock dividends
Issuance of warrants for consulting services -- -- 99,483 (99,483)
Preferred Stock dividends -- -- -- --
Purchase of 10,000 Shares of Common Stock -- -- -- --
held in Treasury
Issuance of 666,671 shares of Common Stock -- 6,667 493,333 --
Amortization of unearned consulting fees -- -- -- 84,047
Comprehensive income (loss):
Net (loss) -- -- -- --
Foreign currency translation adjustment -- -- -- --
Comprehensive income (loss)
-----------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $6,600 $119,297 $46,820,778 $(201,374)
-----------------------------------------------------------------------------------------------------------
<CAPTION>
Accumulated
Other Cost of
Comprehensive Accumulated Treasury
Income Deficit Stock Total
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1998 (balance $304,980 $(41,295,874) $(19,330) $ 2,934,577
forwarded)
Issuance of 482,964 shares of Common Stock -- -- -- 485,000
under equity line of credit
Issuance of 20,718 shares of Common Stock -- -- -- --
upon conversion of Preferred Stock
Issuance of 120,000 shares of Common Stock -- -- -- 129,960
upon exercise of warrants
Issuance of 175,000 shares of Common Stock -- -- -- --
for consulting services
Issuance of warrants with convertible -- -- -- 1,276,300
debentures
Issuance of 15,000 shares of Common Stock -- -- -- 23,438
under stock bonus plan
Issuance of 18,000 shares of Common Stock -- -- -- 16,875
upon exercise of stock options
Issuance of warrants with short-term notes -- -- -- 253,515
payable
Issuance of 30,691 shares of Common Stock as -- -- -- 31,365
payment of preferred stock dividends
Issuance of warrants for consulting services -- -- -- --
Preferred Stock dividends -- (133,919) -- (133,919)
Purchase of 10,000 Shares of Common Stock -- -- (12,746) (12,746)
held in Treasury
Issuance of 666,671 shares of Common Stock -- -- -- 500,000
Amortization of unearned consulting fees -- -- -- 84,047
Comprehensive income (loss):
Net (loss) -- (3,750,309) -- (3,750,309)
Foreign currency translation adjustment (115,133) -- -- (115,133)
Comprehensive income (loss) (3,865,442)
-----------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $189,847 $(45,180,102) $(32,076) $ 1,722,970
-----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
23
<PAGE> 24
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $ (3,750,309) $ (3,357,316)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation 468,758 533,994
Amortization of intellectual property rights 119,501 123,437
Provision for (recovery of) inventory obsolescence (6,394) (857,450)
Provision for doubtful accounts, returns and discounts 22,460 24,717
Issuance of common stock for bonuses and
consulting services 23,438 401,375
Issuance and revaluation of warrants and options
Amortization of unearned consulting fees 84,047 -
Amortization of discounts on notes payable
and convertible debentures 671,854 329,327
Amortization of deferred income realized
on U.K. grant (142,723) (61,274)
Amortization of deferred gain on sale and leaseback
of building (91,772) (94,795)
Amortization of debt issuance costs 174,124 --
Changes in operating assets and liabilities:
Accounts receivable (507,929) (538,219)
Inventories (105,433) 891,421
Prepaid expenses and other current assets 149,617 (92,058)
Accounts payable 128,165 (411,286)
Accrued expenses and other current liabilities (78,733) 188,798
---------------------------------------
Net cash (used in) operating activities (2,841,329) (2,752,919)
---------------------------------------
INVESTING ACTIVITIES
Capital expenditures (22,637) (58,827)
Proceeds from repayment of note receivable -- 750,000
Proceeds from return of lease deposits -- 90,859
---------------------------------------
Net cash (used in) provided by investing activities (22,637) 782,032
---------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock -- 1,843,384
Proceeds from issuance of common stock 500,000 --
Proceeds from issuance of common stock upon exercise
under the equity line of credit 485,000 --
Proceeds from issuance of common stock upon exercise
of options and warrants 146,835 78,800
Proceeds from related party notes issued 1,300,000 1,000,000
Proceeds from convertible debentures issued 1,305,000 --
Purchase of common stock held in treasury (12,746) (19,330)
Dividend paid on preferred stock (161,670) --
Payments on notes payable, related party (1,000,000) (1,000,000)
Payments on long-term debt and capital lease obligations (638,620) (113,131)
---------------------------------------
Net cash provided by financing activities 1,923,799 1,789,723
---------------------------------------
</TABLE>
24
<PAGE> 25
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect of exchange rate changes on cash $ 30,589 $ 27,984
---------------------------------------
Net (decrease) in cash (909,578) (153,180)
Cash at beginning of year 1,480,287 1,633,467
---------------------------------------
Cash at end of year $ 570,709 $ 1,480,287
=======================================
Supplemental Cash Flow Disclosures:
Interest paid $ 190,444 $ 125,246
Supplemental Schedule of Noncash Investing and
Financing Activities:
Issuance of warrants on convertible debentures and
notes payable $ 1,529,815 $ 297,500
Common stock issued for payment of preferred stock dividends 31,365 --
Preferred dividends declared, Series 1 133,919 132,669
Preferred dividends accreted, Series 2 -- 817,000
</TABLE>
See Notes to Financial Statements.
25
<PAGE> 26
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and nature of operations: The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, The Female Health Company - UK and The Female Health Company - UK,
plc. All significant intercompany transactions and accounts have been eliminated
in consolidation. The Female Health Company ("FHC" or the "Company") is
currently engaged in the marketing, manufacture and distribution of a consumer
health care product known as the Reality female condom, "Reality," in the U.S.
and "femidom" or "femy" outside the U.S. The Female Health Company - UK, is the
holding company of The Female Health Company - UK, plc, which operates a 40,000
sq. ft. leased manufacturing facility located in London, England.
The product is currently sold or available in either or both commercial (private
sector) and public sector markets in 30 countries. It is commercially marketed
directly by the Company in the United States and the United Kingdom and through
marketing partners globally.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect certain reported amounts and disclosures. Actual
results may differ from those estimates.
Significant accounting estimates include the following:
Trade receivables include a provision for sales returns and trade allowances,
which is based on management's estimate of future product returns from customers
in connection with unsold product which has expired or is expected to expire
before it is sold. The estimated cost for product returns, price discounts and
trade allowances are accrued when the initial sale is recorded.
The market value of inventory is based on management's best estimate of future
sales and the time remaining before the existing inventories reach their
expiration dates.
The Company evaluates intellectual property rights for impairment by comparing
the net present value of the asset's estimated future income stream to the
asset's carrying value.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on the
Company's future results of operations and financial condition.
Cash: Substantially all of the Company's cash was on deposit with one financial
institution.
Inventories: Inventories are valued at the lower of cost or market. The cost
is determined using the first-in, first-out (FIFO) method.
26
<PAGE> 27
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Equipment and furniture and fixtures: 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
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 1999 and
1998 was $122,196 and $2,500, 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.
27
<PAGE> 28
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising: The Company's policy is to expense production costs in the period
in which the advertisement is initially presented to consumers.
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 bases 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.
Earnings per share (EPS): The Company has adopted the provisions of Statement of
Financial Accounting Standards (FAS) No. 128, Earnings Per Share. FAS No. 128
requires the presentation of "basic" and "diluted" EPS. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is computed giving
effect to all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of the incremental common
shares issuable upon conversion of convertible preferred or convertible debt and
the exercise of stock options and warrants for all periods. Fully diluted (loss)
per share is not presented since the effect would be anti-dilutive.
New Accounting Pronouncements: The Financial Accounting Standards Board has
issued Statement No. 130, Reporting Comprehensive Income, that the Company
adopted during its year ended September 30, 1999. The Statement establishes
standards for 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, 1999 and 1998, the Company's components of
comprehensive income (loss) consisted of its reported net (loss) and foreign
currency translation adjustments.
Effective December 31, 1998, the Company adopted FAS No. 131, Disclosures of an
Enterprise and Related Information (FAS 131). FAS 131 superseded FAS No. 14,
Financial Reporting for Segments of a Business Enterprise. FAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. FAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
operates primarily in one industry segment while operating in both foreign and
domestic regions. See Note 10.
28
<PAGE> 29
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1998, the Financial Accounting Standards Board issues FAS 133,
Accounting for Derivative Instruments and Hedging Activities (FAS 133), which is
required to be adopted in years beginning after June 15, 1999. FAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Management believes that the
adoption of FAS No. 133 will have no material impact on the Company.
NOTE 2. INVENTORIES
The components of inventory consist of the following at September 30, 1999:
<TABLE>
<S> <C>
Raw materials
Work in process $ 230,765
Finished goods 270,184
546,473
Less allowance for obsolescence (32,220)
--------------
$ 1,015,202
==============
</TABLE>
NOTE 3. LEASES
The Company entered into a seven-year operating lease with a third party for
office space effective September 12, 1994. The Company also had an informal
agreement to reimburse an affiliate for office space used by the officers of the
Company through October 31, 1998. The affiliate's lease is with an unrelated
third party which expires January 31, 2001. On November 1, 1998 the office space
was sublet for the remaining term of the lease. Reimbursement for the affiliate
rent expense was $14,999 and $48,146 in 1999 and 1998, respectively, which in
1999 is net of sublease rentals of $35,018.
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 (Pound
Sterling 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 ( Pound
Sterling 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 ( Pound Sterling 195,000) to be reduced in subsequent years. The
facility had a net book value of $1,398,819 (Pound Sterling 810,845) on the date
of the transaction. The $1,966,181 (Pound Sterling 1,139,155) gain which
resulted from this transaction will be recognized ratably over the initial term
of the lease. Unamortized deferred gain as of September 30, 1999 was $1,583,260
(Pound Sterling 982,537).
29
<PAGE> 30
- --------------------------------------------------------------------------------
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LEASES (CONTINUED)
In 1987, a subsidiary entered into a lease for office and factory space expiring
January 31, 2001. These offices and factory space were vacated and subsequently
this space was subleased to a third party for a period expiring January 31,
2001. At the time the sublease was entered into a liability was established for
all future costs to the end of the lease, net of expected sublease receipts.
Details of operating lease expense in total and separately for transactions with
related parties is as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
-----------------------------------
<S> <C> <C>
Operating lease expense:
Factory and office leases $ 691,399 $ 820,695
Office space previously used by officers (net of sublease rentals) 14,999 48,146
Other 22,231 17,811
----------------------------------
$ 728,629 $ 886,652
==================================
</TABLE>
Future minimum payments under operating leases, including planned reimbursement
of an affiliate for office space previously used by officers, consisted of the
following at September 30, 1999:
<TABLE>
<CAPTION>
Rentals
Receivable
Under
Operating Subleases
----------------------------------
<S> <C> <C>
2000 $ 481,063 $ 39,204
2001 443,513 13,068
2002 321,778 -
2003 321,778 -
2004 320,893 -
Thereafter 3,884,472 -
----------------------------------
Total minimum payments $ 5,773,497 $ 52,272
==================================
</TABLE>
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
During 1998, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt, a current director of the Company. The outstanding note payable
had an interest rate of 12% and was paid in full in 1999. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000 shares
of the Company's common stock at $2.25 per share, which represented 80% of the
average trading price for the five trading days prior to the closing date for
the transaction and resulted in an initial discount on the note of $297,500. Any
stock issued under the warrants carry certain registration rights. The warrants
expire in 2006.
30
<PAGE> 31
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The discount in combination with the note's 12% coupon resulted in an effective
interest rate of 63 percent on the note. During 1999, the Company repaid and
then subsequently borrowed $1,000,000 from Mr. Dearholt. The outstanding note
payable bears interest at 12% and is payable in full in 2000. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000 shares
of the Company's common stock at $1.16 per share, which represented 80% of the
average trading price for the five trading days prior to the closing date for
the transaction and resulted in an initial discount on the note of $194,574. Any
stock issued under the warrants carry certain registration rights. The warrants
expire in 2008. 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, 1999, net of
unamortized discount of $93,626. The discount in combination with the note's 12%
coupon resulted in an effective interest rate of 35 percent on the note.
Additionally, during 1999 the Company borrowed $250,000 from Mr. Dearholt and
$50,000 from O.B. Parrish, also a current director of the Company. Each note
payable bears interest at 12% and is payable in full in 2000. As part of the
transactions, the Company issued Mr. Dearholt and Mr. Parrish warrants to
purchase 50,000 and 10,000 shares of the Company's common stock at $1.35 and
$1.25 per share, respectively, which represented 80% of the average trading
price for the five trading days prior to the closing date for the transaction
and resulted in an initial discount on the notes of $49,219 and $9,722,
respectively. Any stock issued under the warrants carry certain registration
rights. The warrants expire in 2008 and 2007, respectively. Also if the Company
defaults on its obligation under the note, the Company is required to issue an
additional 50,000 and 10,000 shares of its common stock to Mr. Dearholt and Mr.
Parrish, respectively, in addition to all other remedies to which each is
entitled. The notes are recorded at September 30, 1999, net of unamortized
discounts of $18,018 and $3,733, respectively. The discount in combination with
the notes' 12% coupon resulted in an effective interest rate of 35 percent for
each note.
On June 1, 1999 the Company completed a private placement of convertible
debentures in the principal amount of $1,500,000 and warrants to purchase
1,875,000 shares of common stock. The convertible debentures are convertible
into shares of the Company's common stock as follows: the first 50% of the
original principal balance and any accrued but unpaid interest thereon is
convertible into common stock at the investor's election, at any time after one
year, based on a per share price equal to the lesser of 70% of the market price
of the Company's common stock at the time of conversion or $1.25, the second 50%
of the original principal balance and, any accrued but unpaid interest thereon,
is convertible into common stock at the investor's election at any time after
one year based on a per share price equal to the lesser of 70% of the market
price of the Company's common stock at the time of conversion or $2.50. The
convertible debentures are payable one year after issuance or, if the Company
elects, two years after issuance. If the term extended for the extra one year,
the Company must issue to the investor at the time of execution, 375,000
additional warrants to purchase shares of the Company's common stock on the same
terms as the other warrants. Interest on the convertible debentures is due at a
rate of 8% per annum, payable quarterly in either cash or, at the
debentureholder's option, common stock of the Company.
The convertible debentures are collateralized by a first security interest in
all of the Company's assets. In addition, if the Company defaults in payment of
the principal or interest due on the convertible
31
<PAGE> 32
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
debentures in accordance with their terms, the Company must immediately issue
1,500,000 shares of its common stock to the investor at no cost. The issuance of
these shares will not affect any of the outstanding warrants then held by the
investor, which warrants will continue in effect in accordance with their terms.
Additionally, warrants to purchase 337,500 shares of the Company's common stock
were issued to the Company's placement agent in this offering. The warrants have
a term of five years and are exercisable at an exercise price equal to the
lesser of 70% of the market price of the common stock at the time of the
exercise or $1.00. The warrants were valued at $224,500 which was recorded as
additional paid-in capital.
The convertible debentures beneficial conversion feature is valued at $336,400
and the warrants to purchase 1,875,000 shares of the Company's common stock are
valued at $715,100. In accordance with SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants (a total of $1,051,500) as additional paid in capital. The
corresponding amount of $1,051,500 was recorded as a discount on convertible
debentures and is amortized over 1 year using the interest rate method. The note
is recorded net of a discount of $680,645 at September 30, 1999. The discount in
combination with the debenture's 8% coupon resulted in an effective interest
rate of 159 percent for the debentures. Upon completion of the convertible
debenture private placement $195,000 of issuance costs were charged to equity.
On April 6, 1999 the Company restructured its $602,360 (Pound Sterling 370,000)
Aage V. Jensen Charity Foundation note payable. The terms included immediate
payment of $177,000 (Pound Sterling 110,000) as of the date of the restructuring
agreement and required nine installment payments beginning April 15, 1999 and
concluding on December 10, 1999. To avoid incurring additional interest related
to the loan, the Company paid off the entire loan on June 10, 1999.
NOTE 5. INCOME TAXES
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss before income taxes as of September
30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
---------------------------------
<S> <C> <C>
Tax credit statutory rates $ (1,275,100) $ (1,141,490)
Nondeductible expenses 59,300 47,900
State income tax, net of federal benefits (177,700) (159,100)
Benefit of net operating loss not recognized, increase in valuation allowance 1,374,500 1,252,690
Other 19,000 -
=================================
$ - $ -
=================================
</TABLE>
32
<PAGE> 33
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. INCOME TAXES (CONTINUED)
As of September 30, 1999, the Company had federal and state net operating loss
carryforwards of approximately $32,853,000 for income tax purposes expiring in
years 2005 to 2015. The benefit relating to $1,537,800 of these net operating
losses relates to exercise of common stock options and will be credited directly
to stockholders' equity when realized. The Company also has investment tax and
research and development credit carryforwards for income tax purposes
aggregating approximately $150,000 at September 30, 1999, expiring in years 2000
to 2010. The Company's U.K. subsidiary, The Female Health Company - UK, plc
subsidiary has U.K. net operating loss carryforwards of approximately
$68,010,000 as of September 30, 1999. 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, 1999:
<TABLE>
<S> <C>
Deferred tax assets:
Federal net operating loss carryforwards $ 11,170,000
State net operating loss carryforwards 2,166,000
Foreign net operating loss carryforwards 20,403,000
Foreign capital allowances 4,008,000
Tax credit carryforwards 150,000
Accounts receivable allowances 138,000
Other 17,000
-------------------
Total gross deferred tax assets 38,052,000
Valuation allowance for deferred tax assets 38,036,000
-------------------
Deferred tax assets net of valuation allowance 16,000
Deferred tax liabilities:
Equipment, furniture and fixtures (16,000)
-------------------
Net deferred tax assets $ -
===================
</TABLE>
The valuation allowance increased by $1,711,000 and $1,252,690 for the years
ended September 30, 1999 and 1998, respectively.
NOTE 6. ROYALTY AGREEMENTS
The Company has royalty agreements for sales of its products which provide for
royalty payments based on sales quantities and achievement of specific sales
levels. The amount of royalty expense was $38,451 for the year ended September
30, 1998. There was no royalty expense for the year ended September 30, 1999.
33
<PAGE> 34
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. COMMON STOCK
Stock Option Plans
The Company has various stock option plans that authorize the granting of
options to officers, key employees and directors to purchase the Company's
common stock at prices generally equal to the market value of the stock at the
date of grant. Under these plans, the Company has 58,128 shares available for
future grants as of September 30, 1999. The Company has also granted options to
one of its legal counsel and an affiliate. Certain options are vested and
exercisable upon issuance, others over periods up to four years and still others
based on the achievement of certain performance criteria by the Company and
market prices of its common stock.
Summarized information regarding all of the Company's stock options is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
-----------------------------------
<S> <C> <C>
Outstanding at September 30, 1997 1,460,746 $ 2.92
Granted 18,000 0.01
Exercised (29,400) 2.00
Expired or canceled (274,868) 5.50
----------------
Outstanding at September 30, 1998 1,174,478 2.29
Granted 1,876,000 .86
Exercised (18,000) .01
Expired or canceled (79,178) 6.75
----------------
Outstanding at September 30, 1999 2,953,300 $ 1.27
================
</TABLE>
Options shares exercisable at September 30, 1999 and 1998 are 425,766 and
463,410, respectively.
Options Outstanding and Exercisable
<TABLE>
<CAPTION>
Range of Number Wghted. Avg. Wghted. Avg. Number Wghted. Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices At 9/30/99 Life Price at 9/30/99 Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.85 1,860,000 8.9 $.85 - $ -
1.5625 16,000 6.3 1.5625 - -
2.00 1,077,300 4.8 2.00 425,766 2.00
- --------------------------------------------------------------------------------------------------------------------
$.85 to $2.00 2,953,300 7.4 $1.27 425,766 $2.00
====================================================================================================================
</TABLE>
34
<PAGE> 35
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. COMMON STOCK (CONTINUED)
During 1998, the Company granted options to employees to purchase 18,000 shares
of the Company's common stock at $.01. Compensation expense of $51,660 was
recognized regarding this issuance.
All other stock options have been granted to employees at, or in excess of, fair
market value at the date of grant. Accordingly, in accordance with APB 25 and
related interpretations, no compensation cost has been recognized related to
such stock option grants.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for all awards during Fiscal 1997 and 1998
consistent with the method set forth under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123") the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ending September 30,
Loss Loss
1999 Per Share 1998 Per Share
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders
$ (3,884,228) $ (.36) $ (4,306,985) $ (0.43)
Compensation expense related to stock options
granted (371,902) (.03) (615,776) (0.06)
===============================================================
$ (4,256,130) $ (0.39) $ (4,922,731) $ (0.49)
===============================================================
</TABLE>
As the provisions of FAS 123 have been applied only to options granted since
September 30, 1995, the resulting pro forma compensation cost is not
representative of that to be presented in future years, when the pro forma cost
would be fully reflected.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model assuming expected volatility of 63.4% and
69.1% and risk-free interest rates of 5.0% and 4.43% for 1999 and 1998,
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 was $.61 and
$2.87 for the years ended September 30, 1999 and 1998, 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.
35
<PAGE> 36
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. COMMON STOCK (CONTINUED)
Stock Bonus Plan
During 1997, the Company adopted a stock bonus plan ("1997 Bonus Plan") to
provide stock bonuses in lieu of cash bonuses to key employees who are
responsible for the Company's future growth and financial success. The 1997
Bonus Plan provides for the award of up to 200,000 shares which are
nontransferable and subject to a risk of forfeiture for one year subsequent to
grant date. During the year ended September 30, 1998, 107,000 shares of
restricted stock had been issued to key employees and consultants. During the
year ended September 30, 1999, 15,000 shares of restricted stock were issued to
key employees. Expense under the plan was $23,438 and $307,625 for the years
ended September 30, 1999 and 1998, respectively.
Common Stock Purchase Warrants
The Company enters into consulting agreements with separate third party
professionals to provide investor relations services and financial advisory
services. In connection with the consulting agreements, the Company granted
warrants to purchase common stock. At September 30, 1999, 165,000 warrants were
exercisable.
In 1998, the Company issued 165,000 warrants and recognized consulting expense
and additional paid-in capital of $114,750. In 1999, the Company issued 100,000
warrants. The value of the warrants of $99,483 was recognized as unearned
consulting fees and additional paid-in capital and the expense is being
recognized over the term of the agreement.
There were 120,000 warrants exercised during 1999. At September 30, 1999, the
following warrants were outstanding:
<TABLE>
<CAPTION>
Number
Outstanding
--------------
<S> <C>
Warrants issued in connection with:
Investor relations services contract 90,000
Financial advisory services contract 175,000
Convertible Debentures 2,320,034
Convertible Preferred Stock 176,000
Equity Line of Credit 200,000
Notes Payable 900,000
--------------
Outstanding at September 30, 1999 3,861,034
==============
</TABLE>
At September 30, 1999, the Company had reserved a total of 7,132,462 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 $1.3 million of notes due
between February and March 2000.
36
<PAGE> 37
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. COMMON STOCK (CONTINUED)
Issuance of Stock
The Company has issued common stock to consultants for providing investor
relation services. In 1998, the Company issued 25,000 shares of common stock
with a market value of $93,750 which was recognized as consulting expense. In
1999, the Company issued 175,000 shares of common stock with a market value of
$185,938 which was recorded as unearned consulting fees which is being
recognized over the term of the agreement.
NOTE 8. PREFERRED STOCK
The Company has outstanding 660,000 shares of 8% cumulative convertible
preferred stock (Series 1). Each share of preferred stock is convertible into
one share of the Company's common stock on or after August 1, 1998. Annual
preferred stock dividends will be paid if and as declared by the Company's Board
of Directors. No dividends or other distributions will be payable on the
Company's common stock unless dividends are paid in full on the preferred stock.
The preferred stock may be redeemed at the option of FHC, in whole or in part,
on or after August 1, 2000, subject to certain conditions, at $2.50 per share
plus accrued and unpaid dividends. In the event of a liquidation or dissolution
of the Company, the preferred stock would have priority over the Company's
common stock. During 1999, 20,000 shares were converted into common stock.
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and warrants to purchase 240,000 shares of common stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.84 million, net of issuance costs of $156,616.
The Series 2 Preferred Stock automatically converted into common stock on a
one-for-one basis, on April 3, 1998, the date in which the registration
statement registering the resale of the common stock was declared effective by
the SEC. The investors received four-year warrants to purchase 240,000 shares of
common stock exercisable at a price per share equal to the lesser of $3.425 or
the average of the three closing bid prices per share of common stock for any
three consecutive trading days chosen by the investor during the 30 trading day
period ending on the trading day immediately prior to the exercise of the
warrants. Individuals providing services to the Company's placement agent for
the above convertible Preferred Stock received warrants to purchase 4,000 shares
of common stock exercisable at any time prior to December 31, 2001, at $4.11 per
share.
37
<PAGE> 38
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. PREFERRED STOCK (CONTINUED)
The Company's private placement of convertible Preferred Stock - Series 2 on
December 31, 1997 included a beneficial conversion feature valued at $500,000
and four-year warrants to purchase additional shares of common stock valued at
$317,000. In accordance with new SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants, a total of $817,000 as additional paid-in capital. The
corresponding discount of $817,000, associated with the issuance of the
convertible preferred stock is a one-time, non-recurring charge that has been
fully amortized and reflected as preferred dividends accreted in the
consolidated statements of operations for the year ended June 30, 1998. The
dividend accretion had no impact on the Company's cash flow from operations.
NOTE 9. 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. Company contributions were
$6,541 and $11,947 for 1999 and 1998, respectively.
NOTE 10. INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations in different geographic areas (determined by the location
of the operating unit) is as follows.
<TABLE>
<CAPTION>
September 30,
(Amounts in Thousands) 1999 1998
--------------------------------
<S> <C> <C>
Net revenues:
United States $ 2,350 $ 2,481
International 2,365 2,970
Operating profit (loss):
United States (2,665) (2,731)
International (361) (420)
Identifiable assets
United States 1,760 2,088
International 4,747 5,471
</TABLE>
38
<PAGE> 39
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS
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 $177,000 and $396,000 in 1999
and 1998, respectively.
NOTE 11. CONTINGENT LIABILITIES
The Company's future obligations under the terms of a facilities lease were
assigned by the Company and assumed by the buyer as part of the 1996 sale of the
Company's subsidiary WPC Holdings, Inc. However, because the third party
creditor did not release the Company from any future liability under the lease
agreement at the time of their assignment, the Company remains contingently
liable if Holdings defaults in making any payments under the agreement. At
September 30, 1999, the total future payments under the lease agreement were
$2.5 million.
The testing, manufacturing and marketing of consumer products by the Company
entail an inherent risk that product liability claims will be asserted against
the Company. The Company maintains product liability insurance coverage for
claims arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
NOTE 12. RELATED PARTY TRANSACTIONS
For 1998, the Company paid the rent for office space leased by Phoenix Health
Care of Illinois, Inc. ("Phoenix"), a company that owns approximately 270,000
shares of the Company's outstanding common stock and has three officers and
directors that are also officers and directors of the Company. This leased space
was subleased as of November 1, 1998.
During 1998 the Company awarded Phoenix 25,000 shares of restricted common stock
with a market value of approximately $93,750 for consulting services provided to
the Company. No such amount was awarded in 1999.
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.
39
<PAGE> 40
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. CONTINUING OPERATIONS AND SUBSEQUENT EVENT
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a loss of $3.8 million for the year ended September 30, 1999, and as of
September 30, 1999, had an accumulated deficit of $45.2 million. At September
30, 1999, the Company had working capital of $.4 million and stockholders'
equity of $1.7 million. In the near term, the Company expects operating and
capital costs to continue to exceed funds generated from operations, due
principally to the Company's fixed manufacturing costs relative to current
production volumes and the ongoing need to commercialize the female condom
around the world. As a result, operations in the near future are expected to
continue to use working capital. Management recognizes that the Company's
continued operations depend on its ability to raise additional capital through a
combination of equity or debt financing, strategic alliances and increased sales
volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the female condom. Management believes that
recent developments, including the Company's agreement with the UNAIDS, a joint
United Nations program on HIV/AIDS, provide an indication of the Company's early
success in broadening awareness and distribution of the female condom and may
benefit efforts to raise additional capital and to secure additional agreements
to promote and distribute the female condom throughout other parts of the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm specializing
in providing advice to healthcare and life-science companies. Pursuant to this
agreement, as extended, 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. 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. Management is currently determining
whether the Company should seek to extend this arrangement.
On November 19, 1998, the Company executed an agreement with a private investor
(the Equity Line Agreement). This agreement provides for the Company, at its
sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $6.0 million of the Company's common stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires 24 months after the effective date of the pending registration
statement and, among other things, provides for minimum and maximum puts ranging
from $100,000 to $1,000,000 depending on the Company's stock price and trading
volume. The Company is required to draw down a minimum of $1 million during the
two-year period. If the Company does not draw down the minimum, the Company is
required to pay the investor a 12% fee on that portion of the $1 million minimum
not drawn down at the end of the two-year period. As of September 30, 1999, the
Company had placed three puts for the combined cash proceeds of $485,000
providing the investor with a total of 482,964 shares of the Company's common
stock.
The timing and amounts of the stock sales under the agreement are totally at the
Company's discretion, subject to the Company's compliance with each of the
following conditions at the time the Company requests a stock sale under the
agreement:
- the registration agreement the Company filed with the SEC for
sales of stock under the agreement must remain in effect;
- all of the Company's representation and warranties in the
agreement must be accurate and the Company must have complied with
all of the obligations in the agreement;
- there may not be any injunction, legal proceeding or law
prohibiting the Company's sale of the stock to Kingsbridge;
- the Company's counsel must issue a legal opinion to Kingsbridge;
- the sale must not cause Kingsbridge's ownership of the Company's
common stock to exceed 9.9% of the outstanding shares of our
common stock;
- the trading price of the Company's common stock over a five
trading day period preceding the date of the date of the sale must
equal or exceed $1.00 per share; and
- the average daily trading volume of the Company's common stock for
a 20 trading day period preceding the date of the sale must equal
or exceed 17,000 shares.
40
<PAGE> 41
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. CONTINUING OPERATIONS AND SUBSEQUENT EVENT (CONTINUED)
Between September and November 1999 the Company completed a private placement
where 983,333 shares of the Company's common stock were sold for $737,500, of
which $500,000 was received through September 30, 1999. The stock sales were
directly with accredited investors and included one current director of the
Company. The Company provided the shares to these investors at a $.75 share
price.
While the Company believes that its existing capital resources will be adequate
to fund its currently anticipated capital needs, if they are not the Company may
need to raise additional capital until its sales increase sufficiently to cover
operating expenses. In addition, there can be no assurance that the Company will
satisfy the conditions required for it to exercise puts under the Equity Line
Agreement. Accordingly, the Company may not be able to realize all or any of the
funds available to it under the Equity Line Agreement.
Further, there can be no assurance, assuming the Company successfully raises
additional funds or enters into business agreements with third parties, that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate financing, management will be required to sharply
curtail the Company's efforts to promote the female condom and to curtail
certain other of its operations or, ultimately, cease operations.
41
<PAGE> 42
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
42
<PAGE> 43
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act.
Certain information about the Company's executive officers and directors as of
September 30, 1999, is as follows:
<TABLE>
NAME POSITION AGE
<S> <C> <C>
O.B. Parrish Chairman of the Board, Chief Executive 66
Officer, and Director
Mary Ann Leeper, Ph.D. President, Chief Operating Officer and 59
Director
William R. Garguilo Secretary and Director 71
Jack Weissman Vice President - Trade Sales 52
Michael Pope Vice President of the Company, Director 43
of Chartex Resources Limited, Director
and General Manager of Chartex
International, Plc
Robert R. Zic Chief Financial Officer 36
David R. Bethune Director 59
Stephen M. Dearholt Director 53
Michael R. Walton Director 61
James R. Kerber Director 67
</TABLE>
O. B. PARRISH
Age: 66; Elected Director: 1987; Present Term Ends: 1999 Annual Meeting
O.B. Parrish has served as Chief Executive Officer of the Company since 1994, as
acting Chief Financial and Accounting Officer from February 1996 to March 1999
and as the Chairman of the Board and a Director of the Company since 1987. Mr.
Parrish is a shareholder and has served as the President and as a Director of
Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois") since 1987.
Phoenix of Illinois owns approximately 295,000 shares of the Company's common
stock. Mr. Parrish also was the Co-Chairman and a Director of Inhalon
Pharmaceuticals, Inc. until its sale to Medeva, Plc. and is Chairman and a
Director of ViatiCare, L.L.C. and a director of Microbyx. Mr. Parrish is also a
trustee of Lawrence University. From 1977 until 1986, Mr. Parrish was the
President of the Global Pharmaceutical Group of G.D. Searle & Co. ("Searle").
From 1974 until 1977, Mr. Parrish was the President of Searle International, the
foreign sales operation of Searle. Prior to that, Mr. Parrish was Executive Vice
President of Pfizer's International Division.
MARY ANN LEEPER, Ph.D.
Age: 59; Elected Director: 1987; Present Term Ends: 1999 Annual Meeting
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996 and as President and Chief Executive Officer of The Female
Health Company Division from May 1994 until January 1996, as Senior Vice
President - Development of the Company from 1989 until January 1996 and as a
Director of the Company since 1987. Dr. Leeper is a shareholder and has served
as a Vice President and Director of Phoenix of Illinois since 1987. Previously,
Dr. Leeper served as Vice President - Market Development for Searle's
Pharmaceutical Group and in various Searle research and development management
positions. As Vice President - Market Development, Dr. Leeper was responsible
for worldwide licensing
43
<PAGE> 44
and acquisition, marketing and market research. In earlier positions, she was
responsible for preparation of new drug applications and was a liaison with the
FDA.
WILLIAM R. GARGIULO, JR.
Age: 71; Elected Director: 1987; Present Terms Ends: 1999 Annual Meeting
William R. Gargiulo, Jr. has served as Secretary of the Company from 1996 to
present, as Vice President from 1996 to September 30, 1998, as Assistant
Secretary of the Company from 1989 to 1996, as Vice President - International of
The Female Health Company Division from 1994 until 1996, as Chief Operating
Officer of the Company from 1989 to 1994, and as General Manager of the Company
from 1988 to 1994. Mr. Gargiulo has also served as a Director of the Company
since 1987. Mr. Gargiulo is a Trustee of a trust which is a shareholder of
Phoenix of Illinois. From 1984 until 1986, Mr. Gargiulo was the Executive
Vice-President of Searle's European operations. From 1976 until 1984, Mr.
Gargiulo was the Vice President of Searle's Latin American operations.
STEPHEN M. DEARHOLT
Age: 53; Elected Director: 1996; Present Term Ends: 1999 Annual Meeting
Mr. Dearholt is a co-founder and partner in Response Marketing, one of the
largest privately owned life insurance marketing organizations in the United
States. He has over 23 years of experience in direct response advertising and
data based marketing of niche products. Since 1985, he has been a 50% owner of
R.T. of Milwaukee, a private investment holding company which operates a stock
brokerage business in Milwaukee, Wisconsin. In late 1995, Mr. Dearholt arranged,
on very short notice, a $1 million bridge loan which assisted the Company in its
purchase of Chartex. Mr. Dearholt is also very active in the non-profit sector.
He is currently on the Board of Directors of Children's Hospital Foundation of
Wisconsin, an honorary board member of the Zoological Society of Milwaukee, and
the national Advisory Council of the Hazelden Foundation. He is a past board
member of Planned Parenthood Association of Wisconsin, and past Chairman of the
Board of the New Day Club, Inc.
DAVID R. BETHUNE
Age: 59; Elected Director: 1996; Present Term Ends: 1999 Annual Meeting
Mr. Bethune has been Vice Chairman and interim Chief Executive Officer of Atrix
Laboratories since 1999. From 1997 to 1998, Mr. Bethune held the position of
President and Chief Operating Officer of the IVAX Corporation. From 1996 to
1997, Mr. Bethune was a consultant to the pharmaceutical industry. From 1995 to
1996, Mr. Bethune was President and Chief Executive Officer of Aesgen, Inc. a
generic pharmaceutical company. From 1992 to 1995, Mr. Bethune was Group Vice
President of American Cyanamid Company and a member of its Executive Committee
until the sale of the company to American Home Products. He had global executive
authority for human biologicals, consumer health products, pharmaceuticals and
opthalmics, as well as medical research. Mr. Bethune is on the Board of
Directors of the Southern Research Institute, Atrix Pharmaceuticals and the
American Foundation for Pharmaceutical Education, Partnership for Prevention. He
is a founding trustee of the American Cancer Society Foundation and an associate
member of the National Wholesale Druggists' Association and the National
Association of Chain Drug Stores. He is the founding chairman of the Corporate
Council of the Children's Health Fund in New York City and served on the
Arthritis Foundation Corporate Advisory Council.
JACK WEISSMAN
Age: 52; Vice President - Trade Sales
Mr. Weissman has served as Vice President-Trade Sales since June 1995. From 1992
to 1994, Mr. Weissman was Vice President-Sales for Capitol Spouts, Inc., a
manufacturer of pouring spouts for gable paper cartons. During the 1989-1992
period, he acted as General Manager-HTV Group, an investment group involved in
the development of retail stores. Mr. Weissman joined Searle's Consumer Products
Group in 1979 and held positions of increasing responsibility, including
National Account and Military Sales Manager. From 1985-1989 he was Director -
Retail Business Development for The NutraSweet Company, a Searle subsidiary.
Prior to Searle, Mr. Weissman worked in the consumer products field as account
manager and territory manager for Norcliff Thayer and Whitehall Laboratories.
44
<PAGE> 45
MICHAEL POPE
Age: 43; Vice President, General Manager - The Female Health Company (UK) Plc.
Mr. Pope has served as Vice President of the Company since 1996 and as General
Manager of The Female Health Company (UK) Plc. (formerly Chartex International,
Plc.) since the Company's acquisition of Chartex. Mr. Pope has also served as a
Director of The Female Health Company, Ltd. (formerly Chartex Resources Limited)
and The Female Health Company (UK) Plc. since 1995. From 1990 until 1996, Mr.
Pope was Director of Technical Operations for Chartex with responsibility for
manufacturing, engineering, process development and quality assurance. Mr. Pope
was responsible for the development of the high speed proprietary manufacturing
technology for the female condom and securing the necessary approvals of the
manufacturing process by regulatory organizations, including the FDA. Mr. Pope
was also instrumental in developing and securing Chartex's relationship with its
Japanese marketing partner. Prior to joining Chartex, from 1986 to 1990 Mr. Pope
was Production Manager and Technical Manager for Franklin Medical, a
manufacturer of disposable medical devices. During the period from 1982 to 1986,
Mr. Pope was Site Manager, Engineering and Production Manager, Development
Manager and Silicon Manager for Warne Surgical Products.
ROBERT ZIC
Age: 36; Chief Financial Officer
Mr. Zic has served as Chief Financial Officer since March 1999. Prior to joining
the Company, from 1998 to 1999, Mr. Zic held the dual positions of Acting
Controller and Acting Chief Financial Officer at Ladbroke's Pacific Racing
Association division. From 1995 to 1998 Mr. Zic served as the Chief Accounting
Manager and Assistant Controller at Argonaut Insurance Company. In this capacity
he was responsible for the financial and accounting operations of Argonaut and
its four subsidiaries. From 1990 to 1994 he was the Assistant Controller of
CalFarm Insurance Company where he was responsible for external reporting
duties. From 1988 to 1990 Mr. Zic was a Senior Accountant responsible for the
statutory-based financials of Allstate Insurance Company. Mr. Zic began his
career in 1986 as an Auditor with Arthur Andersen & Co.
MICHAEL R. WALTON
Age: 61; Elected Director: 1999; Present Term Ends 2002 Annual Meeting
Mr. Walton has served as a director since April 1999. Mr. Walton is President
and owner of Sheboygan County Broadcasting Co., Inc., a company he founded in
1972. In addition to its financial assets, Sheboygan County Broadcasting Co.
currently owns four radio stations. The company has focused on start-up
situations, and growing value in under-performing, and undervalued business
situations. It has purchased and sold properties in Wisconsin, Illinois, and
Michigan, and has grown to a multi-million dollar asset base from a start-up
capital contribution of less than $100,000. Prior to 1972, Mr. Walton was owner
and President of Walton Co., an advertising representative firm he founded in
New York City. He has held sales and management positions with Forbes Magazine,
The Chicago Sun Times and Gorman Publishing Co., a trade magazine publisher
specializing in new magazines which was subsequently sold to a large
international publishing concern. Mr. Walton has served on the Boards of the
American Red Cross, the Salvation Army and the Chamber of Commerce.
JAMES R. KERBER
Age: 67; Director: 1999; Present Term Ends 2002 Annual Meeting
Mr. Kerber has served as a director since April 1999. Mr. Kerber is currently a
business consultant to the insurance industry since 1996. He has over 40 years
of experience in operating insurance companies, predominately those associated
with life and health. From 1994 to 1996, he was Chairman, President, Chief
Executive Officer and director of the 22 life and health insurance companies
which comprise the ICH Group. In 1990, Mr. Kerber was founding partner in the
Life Partners Group where he was Senior Executive Vice President and a director.
Prior to that, he was involved with operating and consulting over 200 life and
health insurance companies for ICH Corporation, HCA Corporation and US Life
Corporation.
45
<PAGE> 46
Item 10. Executive Compensation
The following table sets forth the annual and long-term compensation for each of
the last three fiscal years for the Company's Chief Executive Officer and the
highest paid executive officer other than the Chief Executive Officer (the
"named executive officer"), who served in such capacity as of September 30,
1999, as well as the total compensation paid to each individual during the
Company's last three fiscal years. No other executive officers of the Company
received salary and bonus of in excess of $100,000 during the fiscal year ended
September 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term Compensation
Compensation Awards
------------ ---------------------------------
Restricted Securities
Name and Stock Underlying
Principal Fiscal Salary Awards Options/SARs
Position Year ($) ($) (#)
-------------------- ------ ------------- --------------- ---------------
<S> <C> <C> <C> <C>
O.B. Parrish 1999 90,000 --
Chairman and 1998 90,000 117,955(a) 264,000
Chief Executive 1997 90,000 -- 164,000(b)
Officer
Mary Ann Leeper, 1999 225,000 --
Ph.D. President and 1998 225,000 84,210(a) 290,000
Chief Operating 1997 225,000 -- 200,000(b)
Officer
</TABLE>
(a) At September 30, 1999, the named executive officer owned 25,000 shares
of restricted common stock, having a fair market value of $40,625 on
such date, based on the closing price of the Company's common stock on
such date, and having a fair market value of $40,625 as of September
30, 1999, based on the closing price of the Company's common stock on
such date. For Mr. Parrish, also includes his pro rata portion of
25,000 shares of restricted stock granted to Phoenix Health Care of
Illinois, Inc. ("Phoenix of Illinois"), based on his 64% ownership of
such entity. For Dr. Leeper, also includes her pro rata portion of such
restricted stock based on her approximately 16.7% ownership of such
entity. All of these shares were granted on May 5, 1998 and vest in
full on the first anniversary of the grant date. The owner is entitled
to receive any dividends declared on these shares of restricted stock.
(b) Includes 164,000 and 200,000 options for Mr. Parrish and Dr. Leeper,
respectively, which were granted in 1995 and 1996 fiscal years but
repriced in 1997.
Options/SAR Grants in Last Fiscal Year
None.
Aggregated Option Values at September 30, 1999
The following table presents the value of unexercised options held by the named
executive officers at September 30, 1999:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at September 30, The-Money Options at
1999 September 30, 1999(1)
Name Exercisable / Unexercisable Exercisable/Unexercisable
<S> <C> <C>
O. B. Parrish 88,000 / 376,000 -0-
Mary Ann Leeper, Ph.D. 96,667 / 693,333 -0-
</TABLE>
46
<PAGE> 47
Values are calculated by subtracting the exercise price from the $.8125 per
share closing price of the Company's common stock on September 30, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP
The following table sets forth certain information as of December 17, 1999 with
respect to (a) each person known to the Company to own beneficially more than 5%
of the Company's common stock, (b) each named executive officer and each
director of the Company and (c) all directors and executive officers as a group:
<TABLE>
<CAPTION>
Amount of Beneficial Ownership
Name of Beneficial Owner Shares Percent
<S> <C> <C>
O. B. Parrish (1) 484,001 3.90%
William R. Gargiulo, Jr. (1) 351,668 2.85%
Mary Ann Leeper, Ph.D. (1) 460,668 3.70%
Stephen M. Dearholt (4) 1,714,451 12.72%
David R. Bethune (2) 50,000 *
James R. Kerber 343,710 2.80%
Michael R. Walton 527,810 4.26%
All directors, nominees and
executive officers, as a group
(ten persons) (1)(3)(4) 3,327,696 23.91%
* Less than 1%.
</TABLE>
(1) Includes 294,501 shares owned by and 30,000 shares under option to
Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois").
Messrs. Parrish and Gargiulo and Dr. Leeper may be deemed to share
voting and dispositive power as to such shares since Mr. Gargiulo
is a trustee of a trust which is a shareholder, and Mr. Parrish
and Dr. Leeper are officers, directors and shareholders, of
Phoenix of Illinois. For Dr. Leeper, also includes 38,900 shares
owned by and 96,667 shares under option to her; for Mr. Parrish,
also includes 71,500 shares owned by and 88,000 shares under
option to him; and for Mr. Gargiulo, also includes 10,500 shares
owned by and 16,667 shares under option to him.
(2) Represents options which are currently exercisable.
(3) Includes 544,511 shares owned directly by Mr. Dearholt. Also
includes 69,500 shares held by the Dearholt, Inc. Profit Sharing
Plan, 9,680 shares held by Response Marketing Money Purchase Plan,
5,000 and 148,129 shares held by trusts (of which Mr. Dearholt is
a trustee) and 42,400 shares held by Mr. Dearholt's minor
children. Also includes warrants to purchase 860,000 shares of
common stock and options to purchase 30,000 shares.
(4) Includes 50,000 shares under option to Mr. Bethune.
Item 12. Certain Relationships and Related Transactions
On March 25, 1997, 1998 and 1999, the Company extended a $1 million one-year
promissory note payable by the Company to Mr. Dearholt in connection with a
previous loan Mr. Dearholt made to the Company. The promissory note is now
payable in full on March 25, 2000 and bears interest at 12% per annum payable
monthly. The note proceeds were initially used by the Company to provide working
capital needed to fund the initial stages of the Company's U.S. marketing
campaign ($0.2 million) and to fund operating losses ($0.8 million). The
borrowing transactions were effected in the form of a promissory note from the
Company to Mr. Dearholt and related Note Purchase and Warrant Agreements and
Stock Issuance Agreements. Under the 1997, 1998, and 1999 Note Purchase and
Warrant Agreements, the Company issued to Mr. Dearholt warrants to purchase
200,000 and shares of
47
<PAGE> 48
the Company's common stock for each of the three years respectively, at
exercise prices of $1.848, $2.25, $1.16 per share, respectively, which
represented 80% of the average trading price of the common stock for the five
trading days prior to the closing date. The warrants expire upon the earlier of
their exercise or five years after the date of their issuances. Under the Stock
Issuance Agreements, if the Company fails to pay the $1 million under the note
when due, the Company must issue 200,000 shares of its common stock to Mr.
Dearholt. This issuance will not, however, alleviate the Company from its
liability under the note. The Company also granted Mr. Dearholt certain
securities registration rights with respect to any common stock he receives from
the Company under these warrants or the Stock Issuance Agreement. Mr. Dearholt
has agreed that, if the Company requests, he will extend the promissory note for
an additional one-year term to be due and payable on March 25, 2001 upon the
same terms as the prior note extensions. In consideration of this agreement, the
Company extended the term of certain warrants held by Mr. Dearholt to purchase
200,000 shares of the Company's common stock which expire March 25, 2001 to
March 25, 2002.
Additionally, during 1999 the Company borrowed $250,000 from Stephen Dearholt
and $50,000 from O.B. Parrish, each a current director of the Company. Each note
payable bears interest at 12% and is payable in full in 2000. As part of the
transactions, the Company issued Mr. Dearholt and Mr. Parrish warrants to
purchase 50,000 and 10,000 shares of the Company's common stock at $1.35 and
$1.25 per share, respectively, which represented 80% of the average trading
price for the five trading days prior to the closing date for the transaction
and resulted in an initial discount on the notes' of $49,219 and $9,722,
respectively. Any stock issued under the warrants carry certain registration
rights. The warrants expire in 2008 and 2007, respectively. Also if the Company
defaults on its obligation under the note, the Company is required to issue an
additional 50,000 and 10,000 shares of its common stock to Mr. Dearholt and Mr.
Parrish, respectively, in addition to all other remedies to which each is
entitled.
On July 27, 1997, a trust of which Stephen M. Dearholt, a director of the
Company, is a trustee, purchased 60,000 shares of the Company's Class A
Convertible Preferred Stock--Series 1 at a price of $2.50 per share, which
represented the per share price offered to all subscribers in the private
placement of these shares.
During fiscal 1998, the Company awarded Phoenix of Illinois, a corporation which
is owned in part and controlled by O.B. Parrish, Mary Ann Leeper and William R.
Gargiulo, Jr., 25,000 shares of restricted common stock with a market value of
approximately $93,750 for consulting services provided to the Company. No such
amount was awarded in 1999.
On September 24, 1999, the Company completed a private placement of 666,671
shares of common stock to various investors at a purchase price of $0.75 per
share, representing a discount of 12% from the closing price of a share of the
Company's common stock on the Over the Counter Bulletin Board on that date.
Stephen M. Dearholt, one of the Company's directors, purchased 266,667 shares
for $200,000 in this private placement. The terms of Mr. Dearholt's purchase
were identical to the terms offered to the other, unrelated investors. As part
of this private placement, the Company granted all of the investors, including
Mr. Dearholt, registration rights which require that the Company register the
investors' resale of these shares.
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.
48
<PAGE> 49
Item 13. Exhibits and Reports On Form 8-K.
A. Documents Filed as a Part of This Report:
1. Financial Statements.
The following consolidated financial statements of the Company are included in
Item 8 hereof:
Consolidated Balance Sheet - September 30, 1999
Consolidated Statements of Operations - Years ended September 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity - Years ended September 30,
1999 and 1998
Consolidated Statements of Cash Flows - Years ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
None.
<TABLE>
<CAPTION>
3. Exhibits Filed:
<S> <C>
Number Description
3.1 Amended and Restated Articles of Incorporation of the Company of the Company. (22)
3.2 Amended and Restated By-Laws of the Company. (2)
4.1 Amended and Restated Articles of Incorporation (same as Exhibit 3.1). (22)
4.2 Articles II, VII and XI of the Amended and Restated By-Laws of the Company (included in Exhibit
3.2). (2)
4.3 Private Equity Line of Credit Agreement between the Company and Kingsbridge Capital Limited
dated November 19, 1998. (3)
4.4 Registration Rights Agreement between the Company and Kingsbridge Capital Limited dated as of
November 19, 1998. (3)
4.5 Warrant to Purchase up to 200,000 shares of Common Stock of the Company issued to Kingsbridge
Capital Limited as of November 19, 1998. (3)
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. (4)
10.3 Commercial Building Lease dated May 1, 1992 covering the Jackson, Wisconsin, office and
manufacturing facility. (5)
10.4 Reality Female Condom Clinical Trial Data Agreement between the Company and Family Health
International dated September 24, 1992. (6)
10.5 Trademark License Agreement for Reality Trademark. (7)
10.6 Office space lease between the Company and John Hancock Mutual Life Insurance Company dated
June 1, 1994. (8)
10.7 Employment Agreement dated September 10, 1994 between the Company and Dr. Mary Ann Leeper. (9)
10.8 1994 Stock Option Plan. (10)
10.9 Investor relations and development services Consulting Agreement between the Company and
C.C.R.I. Corporation dated March 13, 1995. (11)
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company and C.C.R.I. Corporation,
as amended on April 22, 1996. (12)
10.11 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. (13)
10.12 Outside Director Stock Option Plan. (12)
10.13 Exclusive Distribution Agreement between Chartex International Plc and Taiho Pharmaceutical
Co., Ltd. dated October 18, 1994. (15)
10.14 Supply Agreement between Chartex International Plc and Deerfield Urethane, Inc. dated
August 17, 1994. (15)
</TABLE>
49
<PAGE> 50
<TABLE>
<S> <C>
10.15 Employment Letter dated February 28, 1990 from Chartex Resources Ltd. to Michael Pope and Board
amendments thereto. (15)
10.16 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. (15)
10.17 Letter Amendment to Asset Sale Agreement dated April 29, 1996 between the Company and Dowty
Seals Limited and Chartex International Plc. (15)
10.18 Form of 8% Convertible Debenture due August 31, 1999 issued by the Company to certain foreign
investors on September 12, 1996. (16)
10.19 Form of Warrant issued by the Company to certain foreign investors as of September 12, 1996.
(16)
10.20 Lease Agreement between Chartex Resources Limited, P.A.T. (Pensions) Limited and the Female
Health Company. (17)
10.21 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. (18)
10.22 1997 Stock Option Plan. (19)
10.23 Employee Stock Purchase Plan. (19)
10.24 Agreement dated March 14, 1997, between the Joint United Nations Programme on HIV/AIDS and
Chartex International PLC. (19)
10.25 Agreement dated September 29, 1997 between Vector Securities International and The Female
Health Company. (19)
10.26 Fund Raising Agreement dated May 1, 1998 by and between Hartinvest-Medical Ventures and the
Company. (20)
10.27 Agreement between Kingsbridge Capital Limited and the Company dated February 12, 1999. (20)
10.28 Consulting Agreement between the Company and Kingsbridge Capital Limited dated February 12,
1999. (20)
10.29 Registration Rights Agreement between Kingsbridge Capital Limited and the Company dated
February 12, 1999. (20)
10.30 Warrant for 100,000 shares of the Company's Common Stock issued to Kingsbridge Capital Limited
as of February 12, 1999. (20)
10.31 Change of Control Agreement dated January 27, 1999 between The Female Health Company and
Michael Pope. (20)
10.32 Company Promissory Note to Stephen M. Dearholt for $250,000 dated February 12, 1999 and related
Note Purchase and Warrant Agreement, Warrants and Stock Issuance Agreement. (20)
10.33 Company Promissory Note to O.B. Parrish for $50,000 Dated February 18, 1999 and related Note
Purchase and Warrant Agreement, Warrants and Stock Issuance Agreement. (20)
10.34 Company Promissory Note to Stephen M. Dearholt for $1 Million dated March 25, 1999 and related
Note Purchase and Warrant Agreement, Warrants and Stock Issuance Agreement. (20)
10.35 Form of Registration Rights Agreement, dated as of June 1, 1999, between the Company and
investors in the Company's private placement. (21)
10.36 Amendment to Registration Rights Agreement, dated as of June 1, 1999, between the Company and
investors in the Company's private placement. (21)
10.37 $1 Million convertible debenture issued by the Company to Gary Benson dated May 19, 1999. (21)
10.38 $100,000 convertible debenture issued by the Company to Daniel Bishop dated June 3, 1999. (21)
10.39 $100,000 convertible debenture issued by the Company to Robert Johander dated June 3, 1999. (21)
10.40 $200,000 convertible debenture issued by the Company to Michael Snow dated June 3, 1999. (21)
10.41 $100,000 convertible debenture issued by the Company to W.G. Securities Limited Partnership
dated June 3, 1999. (21)
10.42 Warrant to purchase 1,250,000 shares of the Company's common stock issued to Gary Benson on
May 19, 1999. (21)
10.43 Warrant to purchase 125,000 shares of the Company's common stock issued to Daniel Bishop on
June 3, 1999. (21)
10.44 Warrant to purchase 125,000 shares of the Company's common stock issued to Robert Johander on
June 3, 1999. (21)
</TABLE>
50
<PAGE> 51
<TABLE>
<S> <C>
10.45 Warrant to purchase 250,000 shares of the Company's common stock issued to Michael Snow on
June 3, 1999. (21)
10.46 Warrant to purchase 125,000 shares of the Company's common stock issued to W.G. Securities
Limited Partnership on June 3, 1999. (21)
10.47 Form of Common Stock purchase warrant to acquire 337,500 shares issued to R.J. Steicher,
placement agent. (21)
10.48 Form of 0hange of Control Agreement between the Company and each of O.B. Parrish and Mary Ann
Leeper. (22)
</TABLE>
21.0 Subsidiaries of Registrant.
27.0 Financial Data Schedule.
<TABLE>
<S> <C>
(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 Form SB-2
Registration Statement filed with the Securities and Exchange
Commission on December 8, 1998.
(4) Incorporated herein by reference to the Company's December 31, 1990 Form 10-Q.
(5) Incorporated herein by reference to the Company's June 30, 1992 Form 10-Q.
(6) 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.
(7) Incorporated herein by reference to the Company's 1992 Form 10-KSB.
(8) Incorporated herein by reference to the Company's June 30, 1994 Form 10-Q.
(9) 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.
(10) Incorporated herein by reference to the Company's 1994 Form 10-KSB.
(11) Incorporated herein by reference to the Company's March 31, 1995 Form 10-Q.
(12) Incorporated herein by reference to the Company's Form S-1 Registration Statement filed with the
Securities and Exchange Commission on April 23, 1996.
(13) Incorporated herein by reference to the Company's June 30, 1995 Form 10-Q.
(14) Incorporated herein by reference to the Company's Current Report on Form
8-K dated November 20, 1995. (15) 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.
(16) Incorporated herein by reference to the Company's 1996 Form 10-K.
(17) Incorporated herein by reference to the Company's December 31, 1996 Form 10-QSB.
(18) Incorporated herein by reference to the Company's March 31, 1997 Form 10-QSB.
(19) Incorporated herein by reference to the Company's Form 10-KSB/A-1 for the year ended September 30,
1997 filed March 25, 1998.
(20) Incorporated by reference to the Company's March 31, 1999 Form 10-QSB.
(21) Incorporated by reference to the Company's June 30, 1999 Form 10-QSB.
(22) Incorporated by reference to the Company's Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on
October 19, 1999.
</TABLE>
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.
51
<PAGE> 52
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
/s/ Robert R. Zic
--------------------
Robert R. Zic, Chief Financial Officer
Date: December 19, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/O.B. Parrish Chairman of the Board December 21, 1999
- ----------------------- Chief Executive Officer,
O.B. Parrish and Director
/s/Mary Ann Leeper President, Chief Operating December 21, 1999
- ------------------------- Officer and Director
Mary Ann Leeper, Ph.D.
/s/Robert Zic Chief Financial Officer December 21, 1999
- ------------------------
Robert Zic
/s/William R. Gargiulo Secretary and Director December 21, 1999
- -------------------------
William R. Gargiulo
/s/David R. Bethune Director December 21, 1999
- -------------------------
David R. Bethune
/s/Stephen M. Dearholt Director December 21, 1999
- -------------------------
Stephen M. Dearholt
Director December 21, 1999
- -------------------------
Michael R. Walton
/s/ James R. Kerber Director December 21, 1999
- ------------------------
James R. Kerber
</TABLE>
52
<PAGE> 1
EXHIBIT 21
Subsidiaries of The Female Health Company
The Female Health Company - UK
The Female Health Company - UK, plc
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 570,709
<SECURITIES> 0
<RECEIVABLES> 1,572,455
<ALLOWANCES> (335,000)
<INVENTORY> 1,015,202
<CURRENT-ASSETS> 3,635,848
<PP&E> 3,943,710
<DEPRECIATION> (1,986,428)
<TOTAL-ASSETS> 6,507,143
<CURRENT-LIABILITIES> 3,113,767
<BONDS> 0
0
6,600
<COMMON> 119,297
<OTHER-SE> 1,597,073
<TOTAL-LIABILITY-AND-EQUITY> 6,507,143
<SALES> 4,715,477
<TOTAL-REVENUES> 4,715,477
<CGS> 4,598,747
<TOTAL-COSTS> 3,142,727
<OTHER-EXPENSES> (136,211)
<LOSS-PROVISION> (3,023,705)
<INTEREST-EXPENSE> 860,523
<INCOME-PRETAX> (3,884,228)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,884,228)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,884,228)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
