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As filed with the Securities and Exchange Commission on January 14, 1998
Registration No.333-68515
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
FORM SB-2/A-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
THE FEMALE HEALTH COMPANY
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
-------------------------
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WISCONSIN 3069 39-1144397
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
O.B. PARRISH, CHAIRMAN
875 NORTH MICHIGAN AVENUE OF THE BOARD AND CHIEF
SUITE 3660 EXECUTIVE OFFICER
CHICAGO, ILLINOIS 60611 875 NORTH MICHIGAN AVENUE
(312) 280-1119 SUITE 3660
CHICAGO, ILLINOIS 60611
(312) 280-1119
(ADDRESS AND TELEPHONE NUMBER
OF PRINCIPAL EXECUTIVE OFFICES AND (NAME, ADDRESS AND TELEPHONE
PRINCIPAL PLACE OF BUSINESS) NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
JAMES S. BEDORE, ESQ.
REINHART, BOERNER, VAN DEUREN
NORRIS & RIESELBACH, S.C.
1000 NORTH WATER STREET, SUITE 2100
MILWAUKEE, WI 53202
(414) 298-1000
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. |X|
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(B) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. |_|
<PAGE> 2
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. |_|
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION - DATED _____________
THE FEMALE HEALTH COMPANY
2,413,124 SHARES OF COMMON STOCK
This Prospectus may be used only by Kingsbridge Capital Limited (the
"Selling Stockholder") in connection with its resale, from time to time, of up
to 2,413,124 shares (the "Shares") of Common Stock of The Female Health Company.
The Shares represent 2,213,124 Shares of Common Stock (the "Equity Line Shares")
which may be issued by the Company to the Selling Stockholders pursuant to a
Private Equity Line of Credit Agreement dated November 19, 1998 (the "Equity
Line Agreement") between the Company and the Selling Stockholder and 200,000
Shares of Common Stock which the Selling Stockholder may receive upon exercise
of a warrant (the "Warrant") held by the Selling Stockholder. The Company will
not receive any proceeds from the sale of the Shares by the Selling Stockholder.
The expenses incurred in registering the sale of the Shares, including legal and
accounting fees, will be paid by the Company, except for commissions, transfer
taxes and certain other expenses associated with the sale of the Shares, which
will be paid by the Selling Stockholder.
The Company will sell the Equity Line Shares to the Selling Stockholder
pursuant to the terms of the Equity Line Agreement. On the date of each purchase
under the Equity Line Agreement, the Selling Stockholder will pay the Company a
per Share purchase price equal to (a) 88% of the Share's market price (as
defined in the Equity Line Agreement), if such market price is $2 or more or (b)
82% of the Share's market price if such market price is less than $2. The
Company has agreed to indemnify the Selling Stockholder against certain
liabilities, including liabilities arising under the Securities Act of 1933, as
amended.
The Selling Stockholder may offer, pursuant to this Prospectus, the Shares
to purchasers from time to time in transactions on the American Stock Exchange,
in negotiated transactions, or otherwise, or by a combination of these methods,
at fixed prices that may be changed, at market prices prevailing at the time of
the sale, at prices related to the market prices or at negotiated prices. The
Selling Stockholder may effect these transactions by selling the Shares to or
through broker-dealers, who may receive compensation in the form of discounts or
commissions from the Selling Stockholder or from the purchasers of the Shares
for whom the broker-dealers may act as an agent or to whom they may sell as a
principal, or both. The Selling Stockholder is an "underwriter" within the
meaning of the Securities Act in connection with the sale of the Shares offered
hereby. See "Plan of Distribution."
The Common Stock is listed for quotation on the American Stock Exchange
under the symbol "FHC." On January 7, 1999, the closing sale price of the
Common Stock was $1.75.
YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 7 BEFORE
PURCHASING THE COMPANY'S COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS _______________
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TABLE OF CONTENTS
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Page
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Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
The Equity Line Agreement.................................................. 13
Use of Proceeds............................................................ 15
Price Range of Common Stock................................................ 15
Dividend Policy............................................................ 15
Determination of Offering Price............................................ 15
Capitalization............................................................. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 17
Business................................................................... 23
Management................................................................. 30
Principal Shareholders..................................................... 35
Certain Transactions....................................................... 36
Description of Capital Stock............................................... 37
Selling Stockholder........................................................ 41
Plan of Distribution....................................................... 42
Legal Matters.............................................................. 43
Experts.................................................................... 43
Index to Financial Statements..............................................F-i
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PROSPECTUS SUMMARY
This summary provides an overview of selected information contained
elsewhere in this Prospectus and does not contain all the information you should
consider. Therefore, you should also read the more detailed information set
forth in this Prospectus, the financial statements of the Company and the other
information that is incorporated by reference in this Prospectus.
FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE
We have made forward-looking statements in this Prospectus and in the
documents that we incorporate by reference that are subject to risks and
uncertainties. When we use words such as "believes," "expects," "anticipates" or
similar expressions, we are making forward-looking statements. Because many
factors can materially affect results, including those set forth below, our
inclusion of forward-looking information should not be regarded as a
representation by the Company or any other person that the objectives or plans
for the Company will be achieved. Assumptions relating to budgeting, research,
sales, results and market penetration and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments. The impact of
any of which may cause the Company to alter its capital expenditure or other
budgets, which may in turn affect the Company's business, financial position,
results of operations and cash flows. Therefore, you should not place undue
reliance on forward-looking statements contained herein, which speak as of the
date of this Prospectus. Factors that might cause actual results to differ from
those anticipated in the forward-looking statements include, but are not limited
to, those described in "Risk Factors."
THE COMPANY
The Female Health Company ("FHC" or the "Company") is essentially a global
start-up company. Its business consists solely of the manufacture and sale of
the female condom, known in the United States as REALITY(R) and under various
other trade names in foreign countries. The Company was incorporated in
Wisconsin in 1971 and established in its current form as The Female Health
Company on February 1, 1996.
Initially, the Company expended significant time and resources in the
development of the female condom and securing FDA approval to market the female
condom in the United States. During this time, the Company also operated its
original business of marketing specialty chemical and branded consumer products
for the leisure time, household and institutional health care markets under the
name Wisconsin Pharmacal (the "Recreational Products Business"). After
considering various alternatives, in 1995 the Board of Directors selected the
female condom as the central focus for the Company's strategic direction. As a
result, in January 1996, the Company sold its Recreational Products Business,
changed its name to The Female Health Company and devoted itself solely to the
commercialization of the female condom.
As part of this restructuring, on February 1, 1996, the Company acquired
the stock of Chartex Resources Limited (which, together with its wholly-owned
subsidiary, Chartex International, Plc, is referred to in this Prospectus
collectively as "Chartex"), the manufacturer and owner of certain worldwide
rights to, and the Company's then sole supplier of, the female condom. As a
result of these transactions, the Company's sole business now consists of the
manufacture, marketing and sale of the female condom. The Company owns certain
global intellectual property rights for the female condom, including patents in
the United States, the European Union, Japan and various other countries,
regulatory approvals in certain countries, including a Pre-Market Approval
("PMA") granted by the United States Food and Drug Administration ("FDA")
approving and permitting marketing of the female condom in the United States
(which PMA is required to market the product in the United States since the FDA
determined that the product was a Class III medical device regulated by the
FDA), and CE mark in the European Union ("EU") (representing that the product,
as a medical device, has been approved by the EU for marketing in the member
countries of the EU) and certain proprietary manufacturing technology. In
addition, the Company leases a state of the art manufacturing facility in
London, England, capable of producing 60 million female condoms per year. The
facility has been inspected and approved by the FDA and the EU.
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Clinical trials have established the female condom as safe and effective.
Studies show the following:
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Reduction in STDs(1) 34% (Results when female condom was
Reduction in Acts of Unprotected Sex(1) 25% available as an option vs. when
only the male condom was available.)
Effectiveness in Preventing Pregnancy(2) 95%(3) (When used properly with every
sex act.)
</TABLE>
(1) Supported by UNAIDS
(2) Supported by The U.S. Agency for International Development (USAID) and
conducted by Family Health International (FHI).
(3) Recent studies completed in Japan evaluating the female condom's
effectiveness in preventing pregnancy, which were submitted to the
Japanese regulatory authorities in connection with their review of the
product, showed the female condom to be approximately 98% effective when
used consistently and correctly.
The Company believes the female condom has global potential to help
prevent sexually transmitted diseases ("STDs") and unintended pregnancy. UNAIDS
estimates that 30 million people worldwide now have HIV/AIDS, that there are
16,000 new cases per day, and at the present rate 40 million children will be
orphaned by AIDS by the year 2010. In addition, HIV/AIDS is decimating the
social and economic structures in many developing countries. There are now 13
Sub-Saharan African countries in which 10% or more of the population is
infected. In the United States, the Center for Disease Control notes that five
of the ten most frequently reported diseases are STDs and that one in five
Americans over the age of 12 has Herpes. In a recent study, the National Academy
of Science estimated that $17 billion is spent annually in the United States on
treating STDs. However, for every $1 spent on prevention of STDs, $43 is spent
on treatment of STDs.
The female condom is made of polyurethane which is approximately 40%
stronger than latex, the material of which most male condoms are made. It is
thin, comfortable and, unlike the male condom, can be put in place prior to
sexual arousal. As a result, it is less disruptive to the natural flow of the
sex act. In addition, to date, there have been no reported allergic reactions to
the female condom. However, it is estimated that 7% of all individuals are
allergic to latex, the material most often used in male condoms.
The Company's strategy is to position itself as a manufacturer and
capitalize on its proprietary position by selling the product through global
public sector and country-specific public and private sector partners which have
established female/consumer marketing organizations with sufficient resources to
penetrate the market. Existing global public sector and country-specific
partners purchase the female condom ex-factory and are responsible for all
marketing and shipping expenses.
Global Public Sector: UNAIDS and the Company have entered into a
multi-year global public sector agreement for FHC to provide the female condom
to developing countries at a special reduced price based on worldwide volume.
During the last year, product launches were made in Zimbabwe, Bolivia, Haiti,
South Africa and Zambia. It is anticipated that multiple launches will occur
during the next two years, including launches in Kenya, Nigeria, Uganda, Ghana,
Cambodia, Bangladesh, Columbia and Central America. Population Services
International (PSI), an organization that performs social marketing of various
products in developing countries, launched the product in Zimbabwe under the
UNAIDS agreement. Based on its success in Zimbabwe, PSI, in collaboration with
UNAIDS, is now marketing the female condom in seven countries. In PSI's current
annual report, PSI indicates that, in collaboration with UNAIDS, PSI plans to
launch the female condom worldwide. PSI also notes in its report that, in 1997,
it distributed 539 million male condoms.
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United States Public Sector: In the United States, currently 10 major
cities and 15 states, including the States of New York, Pennsylvania, Florida,
Connecticut, Hawaii, Louisiana, Maryland, New Jersey, South Carolina and
Illinois, and the cities of Miami, Washington, D.C., Chicago, Philadelphia, New
York and Houston, have purchased the female condom. In addition, all of the
cities and states have reordered product since their initial orders.
Commercial Markets: The Company markets the product directly in the
United States and United Kingdom. The Company has commercial partners which have
recently launched the product in Canada, Brazil, Venezuela, Taiwan, South Korea
and Holland. The Company has signed distribution agreements in Japan and
Bangladesh where launches are expected in the coming year. In Japan, the market
for male condoms exceeds 600 million units. In Japan, the Company has entered
into a relationship with Taiho Pharmaceutical Co., Inc. ("Taiho"), a $1 billion
division of a $5 billion Japanese health care company. Taiho will market the
female condom in Japan once it receives Japanese regulatory approval. In October
1997, Taiho submitted an application to Koseisho (the Japanese equivalent of the
United States FDA) seeking approval to market the female condom in Japan. The
application is currently under review, with Taiho expecting to receive approval
to commence marketing the female condom in Japan during the Company's 1999
fiscal year. The Company's partner in Japan has invested more than $2 million to
date in pre-launch development expenses.
The Company is in discussions with potential partners for key European
countries, India, Mexico, the People's Republic of China and Russia.
The Company believes sales volume will continue to grow as more public
health officials and consumers become familiar with the female condom and its
effectiveness in preventing STDs, including HIV/AIDS, and in reducing health
care costs.
As a result of the earlier investment by Chartex, the Company has a $70
million tax loss carryforward in the United Kingdom.
The Company's principal executive offices are located at 875 North
Michigan Avenue, Suite 3660, Chicago, Illinois 60611, and its telephone number
is 312-280-1119.
THE OFFERING
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Securities to be offered
by the Selling Stockholder (1)....................... Up to 2,413,124 Shares of Common Stock
Common Stock outstanding as of November 17, 1998 10,441,227 Shares(2)
American Stock Exchange symbol....................... FHC
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(1) The Company may sell to the Selling Stockholder up to $6 million worth of
the Company's Common Stock in tranches pursuant to the Equity Line
Agreement. The amount and timing of such sales will be determined by the
Company, subject to certain restrictions set forth in the Equity Line
Agreement. See "The Equity Line Agreement."
(2) Does not include (a) 1,408,534 Shares of Common Stock issuable upon
exercise of warrants outstanding as of September 30, 1998 (including
200,000 Shares issuable upon exercise of the Warrant); (b) 1,174,478 Shares
of Common Stock issuable upon exercise of stock options outstanding as of
September 30, 1998; (c) 680,000 Shares of Common Stock issuable upon
conversion of outstanding preferred stock; and (d) Shares of Common Stock
issuable to the Selling Stockholder pursuant to the Equity Line Agreement.
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. This information
should be read in conjunction with such financial statements, including the
notes thereto.
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Year Ended September 30
1997 1998
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STATEMENTS OF OPERATIONS DATA:
Net revenues.................... $2,916,408 $5,451,399
Cost of products sold........... 3,475,709 5,273,369
Advertising and Promotion....... 1,642,347 433,821
Net loss........................ (6,251,149) (3,357,426)
Loss per common and dilutive
common equivalent share........ $(0.74) $(0.43)
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September 30, 1998
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CONSOLIDATED BALANCE SHEET
DATA:
Working capital................. $1,239,641
Total assets.................... 7,558,894
Long-term debt and capital lease
obligations.................... 4,882
Stockholders' Equity............ 2,934,577
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RISK FACTORS
You should carefully consider the risk factors set forth below, as well
as the other information contained in this Prospectus, before purchasing Common
Stock.
ADDITIONAL CAPITAL REQUIRED; POTENTIAL DILUTION
Sales of the Company's sole product, the female condom, are currently
insufficient to cover fixed manufacturing overhead, advertising and general and
administrative costs. Consequently, management recognizes that the Company must
secure additional capital to fund operating losses. At this stage in the
Company's development, the amount and timing of the Company's future capital
requirements cannot be precisely determined. Management believes that the
capital which it may raise through sales of Common Stock under the Equity Line
Agreement will be sufficient to satisfy its current and expected funding
requirements. If the conditions required to sell Common Stock to the Selling
Stockholder under the Equity Line Agreement are not satisfied or the Company
does not receive shareholder approval to increase its authorized Common Stock to
enable it to sell a sufficient number of shares under the Equity Line Agreement,
the Company may need to raise additional capital in the immediate future. The
Company may seek such additional capital through the sale of debt or equity
securities or the sale of Company assets or rights, or by discounting
receivables and/or letters of credit or by other means available to the Company.
However, factors affecting the Company's capital requirements, including new
market launches by the Company's international partners and sales orders from
existing customers, are outside the control of management. Some of these factors
may increase the amount of capital required or accelerate the date when
additional capital will be required, or both. No assurance can be given that the
Company will be successful in raising additional capital. Further, there can be
no assurance that such amount, if raised, will be sufficient to operate the
Company until sales of the female condom generate sufficient revenues to fund
operations. In addition, any such funds raised may be costly to the Company
and/or dilutive to existing shareholders.
RELIANCE ON PRODUCT LINE
The Company expects to derive its future revenues from sales of the
female condom, its sole current product. The product is in the early stages of
its commercialization. Accordingly, the ultimate level of acceptance of the
female condom by public health advocates as well as users around the world,
which includes the decision to use the female condom versus other available
products, is not yet known.
The Company's current level of expenditures has been established to
support a higher level of revenues associated with the female condom. For the
Company to begin generating cash from operations, sales of the female condom
will have to increase approximately two times the current annualized level
($454,000 per month). If sales do not increase from current levels to this
degree or if the cost to obtain this level of sales is prohibitive, the Company
will continue to incur operating losses and, ultimately, the Company's viability
will be in jeopardy.
CONTINUED LISTING ON THE AMERICAN STOCK EXCHANGE
The Company's Common Stock is listed for trading on the American Stock
Exchange (the "Exchange"). The Constitution of the Exchange provides that its
Board of Governors may, in its discretion, at any time, remove any security from
listing. Although the determination as to whether a security warrants delisting
is not based on any precise mathematical formula, the Exchange has adopted a
number of guidelines which it will consider when deciding whether to delist an
Exchange-traded security. Certain of these guidelines address the issuer's
financial condition. For example, the Exchange will consider delisting the
securities of an issuer which has stockholders' equity of less than $2 million
if the Company has sustained losses from continuing operations and/or net losses
in two of its three most recent fiscal years (which the Company has) or which
has stockholders' equity of less than $4 million if the Company has sustained
losses from continuing operations and/or net losses in three of its four most
recent fiscal years (which the Company has). As of June 30, 1998, the Company
had stockholders' equity of approximately $3.6 million. On February 5, 1998, the
Company received a letter from the Exchange noting that the Company has fallen
below certain of the Exchange's continued listing guidelines and indicating that
the Exchange will review the Company's listing eligibility. The letter
specifically noted that the Company has fallen
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below the Exchange's continued listing guidelines triggered by both (1) five
years of losses and (2) equity below $4 million since the Company had losses in
three of its four most recent fiscal years. There can be no assurance that the
Exchange will permit the continued listing of the Company's Common Stock on the
Exchange. If the Exchange delists trading of the Company's Common Stock,
investors would likely 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.
HISTORY OF LOSSES; SUFFICIENCY OF CAPITAL; INDEPENDENT AUDITOR'S GOING
CONCERN OPINION
The Company incurred a loss attributable to common stockholders of $4.3
million for the year ended September 30, 1998 and a loss attributable to common
stockholders of $6.3 million for the year ended September 30, 1997. As of
September 30, 1998, the Company had an accumulated deficit of $41.3 million. At
September 30, 1998, the Company had working capital of $1.2 million and
stockholders' equity of $2.9 million. Historically, the Company has incurred
cash operating losses relating to expenses incurred to develop, manufacture and
promote the female condom. Consistent with the availability of resources, the
Company expects to incur substantial expenditures in fiscal 1999 in an effort to
support its manufacturing operations and increase awareness and distribution of
the female condom around the globe. Until internally generated funds are
sufficient to meet cash requirements, the Company will remain dependent upon its
ability to generate sufficient capital from outside sources. There can be no
assurance that the Company will achieve a profitable level of operations in the
near term or at all.
The independent auditor's report on the Company's consolidated
financial statements for the years ended September 30, 1998 and 1997 was
qualified as to the Company's ability to continue as a going concern. While many
factors are considered by the auditor in reaching its opinion, the primary
reason for the going concern opinion on the Company's financial statements was
due to continued deficit cash flows from operations, driven largely by continued
operating losses. For the year ended September 30, 1998, the Company's net cash
used in operations was $2.8 million. For the year ended September 30, 1997, the
net cash used in operations totalled $5.0 million.
In the near term, the Company's management expects operating costs to
continue to exceed funds generated from operations due principally to the
Company's fixed manufacturing costs relative to current production volumes.
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 be achieved in the near term. Management believes
that the Company must first achieve, on a continuing basis, positive cash flow
from operations and net operating profits in order for the Company's independent
auditors to re-evaluate the going concern opinion.
COMPETITION
The Company believes that there is currently no other female condom
sold in the world. However, other parties may seek to develop an intravaginal
pouch which does not infringe the Company's patents. These products, if
developed, could be distributed by companies with greater financial resources
and customer contacts than the Company.
There are a number of other products currently marketed which have a
higher degree of accepted efficacy for preventing pregnancy. These products
include birth control pills, Norplant and Depo Provera. However, other than the
female condom, only the latex male condom is generally recognized as being
efficacious in preventing unintended pregnancies and STDs. Companies
manufacturing these products are generally larger than the Company and have
access to greater resources than the Company. In addition, the female condom is
generally sold at the retail level at prices comparatively greater than the
price of the latex male condom. Accordingly, the female condom will not be able
to compete with the latex male condom solely on the basis of price.
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FUTURE SALES OF COMMON STOCK
Sales of the Company's Common Stock in the public market or the
perception that such sales may occur, could adversely affect the market price of
the Company's Common Stock. As of November 17, 1998, the Company had outstanding
10,441,227 shares of Common Stock and 680,000 shares of convertible preferred
stock which are convertible into an equal number of shares of Common Stock. All
of these shares are eligible for resale in the public market by persons other
than "affiliates" of the Company (generally, a person who has a control
relationship with the Company) without regard to any resale limitations under
Rule 144 of the Securities Act. In addition, the Equity Line Agreement provides
that the Company will issue at least $1 million (up to a maximum of $6 million)
of Common Stock during its term, which commences on the effective date of the
registration statement of which this Prospectus is a part (the "Effective Date")
and continues until the earlier of (1) the date the Company sells $6 million of
Common Stock to the Selling Stockholder under the Equity Line Agreement, (2) the
date the Company fails to meet certain obligations under the Equity Line
Agreement or (3) 24 months after the Effective Date. (If the Company does not
issue the minimum $1 million of stock to the Selling Stockholder, the Company
must pay the Selling Stockholder an amount equal to the portion of the $1
million not sold, multiplied by 12% (17% if the failure to sell the required
minimum is due to certain specified events).) The Shares of Stock which the
Company may sell to the Selling Stockholder under the Equity Line Agreement will
be available for immediate resale to the public pursuant to this Prospectus.
Further, the Company has issued options and warrants to purchase an aggregate of
2,383,012 shares of Common Stock. The Company has filed or intends to file
registration statements under the Securities Act to register the sale of the
shares underlying these options and warrants and, accordingly, any shares
received upon exercise of these options or warrants will also be freely tradable
without restriction by persons other than affiliates. The resale of the Shares
pursuant to the Equity Line Agreement and the outstanding stock options and
warrants, or the prospect of such resales, may have an adverse effect on the
market price of the Common Stock.
DILUTIVE AND OTHER EFFECTS OF EQUITY LINE AGREEMENT
While the equity line arrangement governed by the Equity Line Agreement
will help provide the Company with additional future financing, the sale of
Shares thereunder will have a dilutive impact on other stockholders of the
Company. As a result, the Company's net income (loss) per share could be
materially decreased (increased) in future periods, and the market price of the
Common Stock could be materially and adversely affected. In addition, the Common
Stock to be issued under the Equity Line Agreement will be issued at a discount
to the then prevailing market price of the Common Stock. These discounted sales
could have an immediate adverse effect on the market price of the Common Stock.
The Company has also agreed to pay Hartinvest-Medical Ventures ("HMV"),
the entity that solicited the Selling Stockholder, a commission of 7% on all
amounts received by the Company under the Equity Line Agreement. This commission
may, at the option of HMV, be paid in shares of the Company's Common Stock
valued at the same price at which Shares of Common Stock are sold to the Selling
Stockholder under the Equity Line Agreement. As further consideration, the
Company has agreed to issue to HMV warrants to purchase Shares of Common Stock
equal to 10% of the number of Shares actually sold by the Company to the Selling
Stockholder under the Equity Line Agreement. The warrants will have a three-year
term and be exercisable at a price per share equal to $2.17 (which was 120% of
the last sale price of the Company's Common Stock on the date the Equity Line
Agreement was executed). As further consideration for entering into the Equity
Line Agreement, the Company issued to the Selling Stockholder the Warrant, which
is exercisable over a three-year period at an exercise price of $2.17 (which was
equal to 120% of the last sale price of the Company's Common Stock on the date
the Equity Line Agreement was executed). The issuance or resale of the Shares
would have a further dilutive effect on the Company's stockholders and could
have an adverse effect on the Company's stock price. The Equity Line Agreement
will not be available under certain conditions which could require the Company
to seek funds from other sources (with the intendent risk factor set forth in
the preceding paragraph).
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been and may
continue to be affected by quarter-to-quarter variations in the Company's
operating results, announcements by the Company's competitors and other factors.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations,
9
<PAGE> 12
particularly among emerging growth company stock, which have often been
unrelated to the operating performance of particular companies. Factors not
directly related to the Company's performance, such as governmental regulation
or negative industry reports, may also have a significant adverse impact on the
market price of the Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon its ability to
attract and retain highly qualified personnel. The Company is particularly
dependent upon the services of O.B. Parrish, its Chairman of the Board and Chief
Executive Officer, and Mary Ann Leeper, Ph.D., its President and Chief Operating
Officer. The Company has entered into an employment agreement with Dr. Leeper.
The loss of the services of these or certain other key individuals, or the
failure of the Company to attract and retain other skilled personnel, could have
a material adverse impact on the Company. The Company has not purchased keyman
life insurance insuring the lives of any of its executive officers or key
employees.
PENNY STOCK RULES
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The Securities and Exchange Commission's regulations generally define a
penny stock to be an equity security that has a price of less than $5.00 per
share, subject to certain exceptions (including equity securities listed on the
American Stock Exchange) or issued by an issuer that has (1) net tangible assets
in excess of $2 million, if such issuer has been in continuous operation for at
least three years; (2) net tangible assets in excess of $5 million, if such
issuer has been in continuous operation for less than three years; or (3)
average annual revenues of at least $6 million for the last three years. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, if the Company's Common Stock falls within the definition
of "penny stock," trading in the Company's securities would be covered by Rule
15g-9 promulgated under the Exchange Act. Under this rule, generally
broker-dealers who recommend such securities to persons other than established
customers and certain accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale of such securities.
Although the Company believes that its securities will, as of the date
of this Prospectus, be outside the definitional scope of a penny stock, as they
will be listed on the American Stock Exchange, in the event the Common Stock
were subsequently to become characterized as penny stock, the market liquidity
for the Company's securities could be adversely affected. In such an event, the
regulations on penny stocks could limit the ability of broker-dealers to sell
the Company's securities and thus the ability of purchasers in this offering to
sell their securities in the secondary market.
CONTINGENT LIABILITIES
The Company has entered into an exclusive North American licensing
agreement with the owner of the "reality" trademark and a royalty agreement with
a nonprofit organization that previously conducted a major study to assess the
safety and efficacy of the female condom. The Company's fiscal 1997 trademark
royalty expense was approximately $5,700. During fiscal 1998, the Company
incurred a royalty expense to the nonprofit organization of approximately
$1,600.
PRODUCT LIABILITY
The nature of the Company's product may expose the Company to
significant product liability risks. The Company maintains product liability
insurance with coverage limits of $5 million per year on the female condom.
There can be no assurance that the Company will be able to maintain such
insurance on acceptable terms or that such insurance will provide adequate
coverage against product liability claims. While no product liability claims
10
<PAGE> 13
on the female condom have been brought against the Company to date, a successful
product liability claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect on the Company.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures the female condom in a 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 and criminal prosecutions and could have a material adverse effect
on the Company.
MANAGEMENT OF OPERATIONS
The Company's future short-term and long-term success will be dependent
upon its ability to effectively anticipate, respond to and manage changing
business conditions. The Company believes that current management will be able
to properly manage the Company's future operations. However, there can be no
assurance that the Company will be able to adapt its manufacturing operations or
administrative and financial functions to manage the Company's growth or to
otherwise address the future needs of the business.
YEAR 2000 ISSUES
The Company's State of Readiness. The Company's main financial and
manufacturing hardware and software systems have been tested and are either now
Year 2000 compliant or are expected to be by December 31, 1998. This was
accomplished primarily through systems upgrades and maintenance done over the
last few years. The Company is in the process of surveying major customers and
suppliers regarding their Year 2000 readiness and, to date, the Company is not
aware of any significant Year 2000 issues at these entities that would
materially affect the Company's business. The Company believes that if a Year
2000 problem develops at any of the Company's vendors whereby the vendor becomes
unable to address the Company's needs, alternative vendors are readily available
that could furnish the Company with the same or similar supplier or services
without material undue delay or expense.
Costs to Address the Company's Year 2000 Issues. The majority of the
Company's Year 2000 issues were corrected either through systems upgrades or
normal maintenance contracts. The cost of these improvements to date has been
approximately $20,000.
Risks to the Company for Year 2000 Issues. With regard to systems under
the Company's control, the Company knows of no significant exposure that the
Company has to the Year 2000 issue since, if necessary, the Company's systems
are capable of accepting manually entered data. The worst case scenario is that
the Company has to revert back to certain manual systems. The Company believes
that its customers and vendors are at various
11
<PAGE> 14
stage of compliance but the Company has not been made aware of significant Year
2000 issues that would materially affect its business with them. The Company
will continue to monitor Year 2000 compliance with its customers and vendors
throughout 1999 but it will not be able to achieve the same degree of certainty
that it can with its own internal systems.
The Company's Contingency Plan. To the extent that the Company
discovers minor internal systems that are not Year 2000 compliant by mid-1999,
it will have time to implement manual systems by year-end 1999 which the Company
believes will significantly reduce the financial risk to the Company.
12
<PAGE> 15
THE EQUITY LINE AGREEMENT
Effective November 19, 1998, the Company entered into the Equity Line
Agreement with Kingsbridge Capital Limited, a private investor (the "Selling
Stockholder"), pursuant to which the Company may issue and sell, from time to
time, shares of its Common Stock for cash consideration up to an aggregate of $6
million. Pursuant to the requirements of the Equity Line Agreement, the Company
has filed a registration statement, of which this Prospectus forms a part, in
order to permit the Selling Stockholder to resell to the public any Shares that
it acquires pursuant to the Equity Line Agreement. Commencing as of the date the
registration statement of which this Prospectus forms a part is declared
effective by the Securities and Exchange Commission and continuing for a period
of 24 months thereafter, the Company may from time to time at its sole
discretion, and subject to certain restrictions set forth in the Equity Line
Agreement, sell ("put") Shares of its Common Stock to the Selling Stockholder at
a price equal to (a) 88% of the then current average market price of a Share of
the Company's Common Stock, as determined under the Equity Line Agreement, if
such average market price is at least $2 or (b) 82% of such average market price
if the average market price is less than $2. Puts can be made every 20 trading
days in amounts ranging from a minimum of $100,000 to a maximum of $1,000,000,
depending on the trading volume and the market price of the Common Stock at the
time of each put. The Company is required to put at least $1,000,000 of its
Common Stock to the Selling Stockholder over the two-year life of the Equity
Line Agreement. If the Company does not put at least $1 million of the Common
Stock to the Selling Stockholder during the term of the Equity Line Agreement,
the Company must pay the Selling Stockholder at the end of such two-year term an
amount equal to the portion of the $1 million not so put, multiplied by 12% (17%
if the failure to put the required minimum occurs as a result of certain
specified events). As of the date of this Prospectus, no Shares of Common Stock
have been sold to the Selling Stockholder under the Equity Line Agreement.
Under the Equity Line Agreement, the average market price of the
Company's Common Stock for purposes of calculating the purchase price to be paid
by the Selling Stockholder will be calculated as the average of the lowest bid
prices of the Common Stock (as reported by Bloomberg L.P.) on each of the five
days on which the Exchange is open for business (a "trading day"), during the
period which includes the two trading days preceding the day on which the
Company delivers notice to the Selling Stockholder that the Company is
exercising a put (a "Put Notice"), the trading day on which the Put Notice is
delivered, and the two trading days following the trading day on which the Put
Notice is delivered.
The Company's ability to put Shares of its Common Stock, and the
Selling Stockholder's obligation to purchase the Shares, is conditioned upon the
satisfaction of certain conditions. These conditions include: (1) the
registration statement of which this Prospectus forms a part must have been
declared effective by the Securities and Exchange Commission; (2) the
representations and warranties of the Company set forth in the Equity Line
Agreement must be accurate as of the date of each put; (3) the Company must have
performed and complied with all obligations under the Equity Line Agreement, the
Registration Rights Agreement entered into between the Company and the Selling
Stockholder in connection with the Equity Line Agreement and the Warrant
required to be performed as of the date of each put; (4) no statute, rule,
regulation, executive order, decree, ruling or injunction may be in effect which
prohibits or directly and adversely affects any of the transactions contemplated
by the Equity Line Agreement; (5) at the time of a put, there may not have been
any material adverse change in the Company's business, operations, properties,
prospects or financial condition since the date of fling of the Company's most
recent periodic report filed with the Securities and Exchange Commission
pursuant to the Exchange Act; (6) the Company's Common Stock must not have been
delisted from the Exchange nor suspended from trading; (7) the number of Shares
to be put to the Selling Stockholder, together with any Shares then held by the
Selling Stockholder, may not exceed 9.9% of all shares of Common Stock of the
Company that would be outstanding upon completion of the put; (8) the Company's
Common Stock must have a minimum bid price of $1.00 per share at the time of the
put; and (9) the average trading volume of the Company's Common Stock for 20
consecutive trading days immediately preceding a put must be at least 17,000
shares per day. In addition, at present the Company has approximately 1,300,000
shares of Common Stock authorized but unissued and unreserved. Accordingly,
until the Company increases its authorized Common Stock by amending its Articles
of Incorporation (which requires shareholder approval), the Company cannot sell
more than approximately 1,300,000 shares of Common Stock to the Selling
Stockholder. The Company intends to seek shareholder approval to amend its
Articles of Incorporation to increase its authorized Common Stock at its 1999
annual shareholder meeting.
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<PAGE> 16
The Selling Stockholder has agreed that it will not engage in short
sales of the Company's Common Stock except that the Selling Stockholder may
enter into any short sale or other hedging arrangement it deems appropriate with
respect to Shares it receives under the Equity Line Agreement after it receives
a Put Notice with respect to such Shares so long as such short sales or
arrangements do not involve more than the number of such Shares with respect to
that Put Notice.
In conjunction with the Equity Line Agreement, effective November 19,
1998, the Company issued to the Selling Stockholder the Warrant, which entitles
the holder to purchase 200,000 shares of the Company's Common Stock at a price
of $2.17 per share (which represents 120% of the closing price of a share of the
Company's Common Stock on the date the Equity Line Agreement was executed). The
Warrant is exercisable at any time beginning on May 19, 1999 and ending on May
19, 2002. The Warrant contains provisions that protect against dilution by
adjustment of the exercise price and the number of shares issuable thereunder
upon the occurrence of certain events, such as a merger, stock split or reverse
stock split, stock dividend or recapitalization. The exercise price of the
Warrant is payable either (a) in cash or (b) by a "cashless exercise," in which
that number of Shares of Common Stock underlying the Warrant having a fair
market value at the time of exercise equal to the aggregate exercise price are
cancelled as payment of the exercise price.
Prior to entering into the Equity Line Agreement, on May 1, 1998 and
renewed on November 13, 1998, the Company entered into a Fund-Raising Agreement
with Hartinvest-Medical Ventures ("HMV"). Pursuant to this agreement, HMV agreed
to solicit potential purchasers of the Company's Common Stock and the Company
agreed to pay HMV a commission if it was successful in attracting such
purchasers. Pursuant to this agreement, HMV solicited the Selling Stockholder.
Accordingly, HMV is entitled to receive a commission equal to 7% of the amount
of funds received by the Company under the Equity Line Agreement. HMV may elect
to receive this commission in cash or stock valued at the same price as the
Selling Stockholder pays under the Equity Line Agreement. As further
consideration, pursuant to this agreement, the Company is required to issue to
HMV three-year warrants to purchase shares of the Company's Common Stock equal
to 10% of the number of Shares purchased by the Selling Stockholder under the
Equity Line Agreement. The exercise price per share under these warrants is
$2.17, representing 120% of the closing price of a share of the Company's Common
Stock on the date the Equity Line Agreement was executed.
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<PAGE> 17
USE OF PROCEEDS
The proceeds from the sale of the Shares will be received directly by
the Selling Stockholder. No proceeds will be received by the Company from the
sale of the Shares offered hereby.
However, the Company will receive the put price paid pursuant to the
Equity Line Agreement if and to the extent Common Stock is sold by the Company
pursuant thereto. The put price equals 88% of 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 and 82% of the average
market price if such average market price is less than $2. The Company will also
receive the proceeds, if any, relating to the exercise of the Warrant and the
warrants issued to HMV. The exercise price of the Warrant is $2.17 per share.
See "The Equity Line Agreement."
The funds received by the Company will be used for general working
capital purposes.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently listed on the American Stock
Exchange under the symbol "FHC." As of November 17, 1998, there were
approximately 480 holders of record of the Common Stock.
The following table sets forth the historical high and low sale prices
of a share of Common Stock on the Exchange for the periods indicated:
<TABLE>
<CAPTION>
Common Stock Sale Price
High Low
<S> <C> <C>
Year ended September 30, 1997
Quarter ended:
December 31, 1996 6-1/4 3-3/4
March 31, 1997 4-1/8 1-13/16
June 30, 1997 3-3/8 1-11/16
September 30, 1997 4 2-7/8
Year ended September 30, 1998:
Quarter ended:
December 31, 1997 4-5/16 3
March 31, 1998 3-1/2 2-1/2
June 30, 1998 3-5/8 2-1/2
September 30, 1998 3-1/2 1-7/16
</TABLE>
The foregoing sale price quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions.
DIVIDEND POLICY
The Company has not paid a dividend on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.
DETERMINATION OF OFFERING PRICE
The Common Stock offered by this Prospectus may be offered for sale
from time to time in transactions on the Exchange, in negotiated transactions,
or otherwise, or by a combination of these methods, at fixed prices which may be
changed, at market prices at the time of sale, at prices related to market
prices or at negotiated prices. As such, the offering price is indeterminate as
of the date of this Prospectus. See "Plan of Distribution."
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<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of September 30, 1998. This financial information has been derived from the
financial statements appearing elsewhere in this Prospectus. This information
should be read in conjunction with such financial statements, including the
notes thereto.
<TABLE>
<S> <C>
Short-term indebtedness:
Current portion of long-term debt and
capital lease obligations................................... $ 626,066
Notes payable, related party ................................. 837,139
-----------
$1,463,205
Long-term debt and capital lease obligations,
less current maturities.......................................... $ 4,882
Stockholders' equity:
Class A Preferred Stock, par value $.01
per share, 5,000,000 shares of Series 1 Preferred
authorized, 680,000 shares outstanding ................... 6,800
Common Stock, par value $.01 per share,
15,000,000 shares authorized
10,415,757 shares issued and outstanding.................. 104,158
Additional paid-in capital.................................... 43,833,843
Foreign currency translation gain............................. 304,980
Accumulated deficit........................................... (41,295,874)
-----------
2,953,907
Less -- Treasury Stock, at cost, 10,000 Shares................ (19,330)
-----------
Total stockholders' equity.................................. 2,934,577
-----------
Total Capitalization............................................... $4,402,664
===========
</TABLE>
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<PAGE> 19
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 Prospectus. The discussion also includes certain
forward-looking statements. See "PROSPECTUS SUMMARY--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 market for the
female condom around the world. As part of this plan, the Company has completed
a number of distribution agreements and is pursuing other arrangements for the
marketing and sale of the female condom. Management believes that as the number
of markets in which the female condom is sold increases, sales will grow and, at
certain levels, the Company will become profitable. However, there can be no
assurance that such level of sales will be achieved in the near term or at all.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1998 ("1998") COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1997 ("1997")
The Company had revenues of $5.5 million and a net loss attributable to
stockholders of $(4.3) million ($0.43) per share in 1998 compared to net
revenues of $2.9 million and a net loss attributable to common stockholders of
$(6.3) million ($0.74) per share in 1997.
As discussed more fully below, the $2.0 million reduction (31%) in the
net loss attributable to stockholders from $(6.3) million in 1997 to $(4.3)
million in 1998 is the result of increasing sales volume, reducing expenditures
for advertising and promotion, reducing interest expense and adjusting reserves
for inventory obsolescence. Net losses for both 1998 and 1997 are attributable
to fixed manufacturing overhead and administrative costs associated with
operating the manufacturing facility configured to support significantly greater
volume levels.
Net revenues increased $2.6 million (87%) in 1998 over the prior year.
Rapidly growing sales into both the global public sector and city and state
agencies within the United States accounted for all of the increase. Net sales
to commercial accounts declined principally as a result of reduced expenditures
for product advertising and promotion support.
The results reflect the Company's strategy to act as a manufacturer
supplying the public sector and commercial partners throughout the world. The
Company's partners pay for all marketing and shipping costs. Consequently, as
the Company's sales volume increases the Company's operating expenses will not
increase significantly.
In 1998, the cost of products sold of $5.3 million was 97% of net sales
compared with 1997 cost of products sold of $3.5 million which was 119% of net
sales. The reduction of costs of products sold as a percentage of net sales
resulted in an increase in gross profit (loss) of $0.8 million from a loss of
$(0.6) million in 1997 to a profit of $0.2 million in 1998. The reduction in
cost of products sold as a percentage of net sales in 1998 resulted from
improved absorption of fixed manufacturing overhead costs over the increased
manufacturing unit volume. The Company's UK-based manufacturing facility
utilized approximately 12% of its capacity in 1998 compared with approximately
5% of its capacity in 1997. In 1997, the Company recorded a favorable adjustment
to its reserves for inventory obsolescence reducing cost of products sold by
$1.1 million. During 1998, the Company further adjusted inventory obsolescence
reserves, reducing cost of products sold by $0.9 million. The Company's reserve
for inventory obsolescence was $40,734 and $894,000 at September 30, 1998 and
1997, respectively.
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<PAGE> 20
Advertising and promotion expenditures decreased 74% to $0.4 million in
1998 compared to $1.6 million in 1997. The 1997 expenditures reflect costs for
the Company's previous print advertising campaign and single market test of the
Company's television commercial which was not repeated in 1998. Advertising and
promotion relates exclusively to the US market and includes the costs of print
advertising, trade and consumer promotions, product samples and other marketing
costs incurred to increase consumer awareness and purchases of the female
condom. Through expenditures since the product launch, the Company has
established that the female condom is responsive to promotion; but due to the
Company's size, it doesn't possess the resources to conduct a significant
consumer marketing program. Accordingly the Company is seeking potential
partners for the United States that have the resources to conduct such a
marketing program.
Selling, general and administrative expenses decreased $0.1 million, or
5%, from $3.0 million in 1997 to $2.9 million in 1998. As a percentage of net
revenues, the selling, general and administrative expenses were 53% in 1998
compared with 104% in 1997. The Company's initiatives to reduce spending in all
administrative areas have resulted in reductions in the expenses associated with
telecommunications, legal and financial matters in the United States and the
United Kingdom. These reductions were offset by increased compensation expense.
Net nonoperating expense for 1998 decreased $0.8 million (80%) to $0.2
million from $1.0 million in 1997. The decrease is the result of lower interest
expense for 1998 ($0.5 million) compared with 1997 ($1.3 million). The prior
year interest expense included interest paid on convertible debentures which
were all converted during 1997 as well as the amortized cost of a beneficial
conversion feature associated with the issuance of the convertible debentures.
Comparable interest costs were not incurred during 1998.
In order for the Company to cover fixed manufacturing overhead costs
and realize a break-even at the gross profit level, annual unit sales of
approximately 7.1 million female condoms are required based upon the current
average selling price per unit. The Company's unit sales for fiscal 1998 were
7.4 million female condoms. Additionally, in order to cover administrative
expenses and achieve a break-even before advertising and promotion expenses, the
Company must achieve cumulative annual unit sales of approximately 13.0 million
female condoms based upon the current average selling price per unit or
approximately 22.0% of manufacturing capacity.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 ("FY1997") COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996 ("FY1996")
The Company had revenues of $2.9 million and a net loss of ($5.6)
million (($0.67) per share) in FY1997 compared to net revenues of $2.1 million
and a net loss of ($8.7) million (($1.31) per share) in FY1996.
As discussed more fully below, the FY1997 loss principally resulted
from fixed manufacturing overhead and administrative costs, configured to
support significantly greater volume levels. Over the past two years, the
Company has acquired manufacturing capacity and created an organizational
structure which management believes will enable it to increase the sales of the
female condom and manage the accompanying growth.
Revenues increased $0.8 million (41%) in FY1997 over the prior year.
The increase in revenues principally related to initial shipments to developing
countries under the Company's agreement with UNAIDS and increased U.S. trade
sales, partially offset by a decline in U.S. public sector sales due, in part,
to a reduction in selling price.
In 1997, cost of goods sold declined $1.2 million from $4.7 million in
FY1996 to $3.5 million in FY1997, principally due to a $1.1 million favorable
adjustment to the Company's inventory reserves in the fourth quarter, as a
result of the FDA's approval of an extension in the product's useful life to
five years from three years. In FY1996, based on the then existing three-year
useful life, cost of goods sold included a $1.0 million charge for a reduction
in the expected realizable value of the Company's inventory.
Excluding the effects of the inventory reserves, cost of goods sold
increased $0.9 million (23%) in FY1997 due to both increased sales and the
inclusion of a full year of costs from the Company's manufacturing operations
compared to eight months in FY1996. During FY1997 and FY1996, gross margins were
negatively affected by excess capacity at the Company's U.K.-based manufacturing
facility. For both FY1997 and FY1996, output at its manufacturing facility was
less than 5% of the facility's annual capacity.
Advertising and promotion expenditures decreased 17% to $1.6 million in
FY1997 compared to $2.0 million in FY1996. Advertising and promotion relates
almost exclusively to the U.S. market and includes the costs of print
advertising, trade and consumer promotions, product samples and other marketing
costs incurred to increase consumer awareness and purchases of the female
condom. The Company's decision to secure a marketing and distribution partner
for the U.S. and European markets limited such spending in the second half of
FY1997.
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<PAGE> 21
Selling, general and administrative expenses totalled $3.0 million for
FY1997 compared to $3.3 million for FY1996 representing an 8% reduction.
Research and development expenditures decreased by $0.3 million (83%) from $0.4
million in FY1996 to $0.1 million in FY1997 while reductions in selling expenses
were offset by increased expenditures for investor relations, legal and
compensation.
Nonoperating expense for FY1997 decreased $0.3 million (49%) to $0.4
million from $0.7 million in FY1996. Additional nonoperating income of $0.1
million for FY1997 and a FY1996 charge of $0.2 million to reduce the estimated
value of warehouse space provided as part of the consideration for the sale of
the Recreational Products Business accounted for the overall decrease.
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
successful 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 female condom through forming relationships
with representatives of city, state and country public health agencies in the
global public sector and by completing partnership arrangements with private
sector companies who have the necessary marketing and financial resources for
local market distribution. To date, this strategy has resulted in numerous
in-country distributions in the public sector, particularly in Africa and Latin
America. Several partnership agreements have been completed for the
commercialization of the female condom in private sector markets around the
world. However, the Company is dependent on country governments as well as city
and state public health departments within the United States to continue their
commitment to prevention of STDs, including AIDS, by including female condoms in
their 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 the 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
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 Risks
The Company manufactures the female condom in a leased facility located
in London, England. Further, a material portion of the Company's future sales
are likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States dollar. In
addition, some of the Company's future international sales may
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<PAGE> 22
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.
Regulatory Risks
The manufacture and marketing of the female condom is regulated by the
FDA. Failure to comply with the conditions of FDA approval invalidates the
approval order. Under certain circumstances, failure to comply with the
conditions of FDA approval could result in fines or suspension or withdrawal of
FDA approval. The Company's operating results and financial condition could be
materially adversely affected in the event of a withdrawal of approval from the
FDA.
LIQUIDITY AND SOURCES OF CAPITAL
Historically, the Company has incurred significant operating losses.
Cash used in continuing operations was $2.8 million and $5.0 million in FY1998
and FY1997, respectively. Historically, the Company has funded operating losses
and capital costs, in large part, through the sale of Common Stock or debt
securities convertible into Common Stock.
During FY1998, the Company received approximately $1.0 million in
proceeds from newly-issued notes payable, $1.8 million (net of transaction
costs) from the issuance of convertible preferred stock and warrants, $0.4
million from the issuance of Common Stock and $0.1 million from the issuance of
Common Stock upon exercise of options. FHC used these amounts to
fund current operations of the Company and to repay existing liabilities.
In the near term, FHC management expects operating and capital costs to
continue to exceed funds generated from operations due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize the female condom around the world.
On September 29, 1997, the Company entered into an agreement with
Vector Securities International, Inc. ("Vector"), an investment banking firm
specializing in providing advice to heath care and life companies. Pursuant to
this agreement, for a one-year period, Vector will act as the Company's
exclusive financial advisor for the purposes of identifying and evaluating
opportunities available to the Company for increasing shareholder value. These
opportunities may include selling all or a portion of the business, assets or
stock of the Company or entering into one or more distribution arrangements
relating to the Company's product. However, no specific such opportunity has yet
been identified and there can be no assurance that any such opportunities will
be available to the Company or, if so available, that the Company will
ultimately elect or be able to consummate any such transaction.
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 million of the Company's Common Stock, subject to a minimum
put of $1 million over the duration of the agreement. The Equity Line Agreement
expires 24 months after the effective date of the registration statement of
which this Prospectus is a part and, among other things, provides for minimum
and maximum puts ranging from $100,000 to $1,000,000 depending on the Company's
stock price and trading volume. Puts cannot occur more frequently than every 20
trading days. Upon a proper put under this agreement, the investor purchases
Common Stock at a discount of (a) 12% from the then current average market price
of the Company's Common Stock, as determined under the Equity Line Agreement, if
such average market price is at least $2 or (b) 18% from the then current
average market price if such average market price is less than $2. In addition,
the Company is required to pay its placement agent sales commissions in Common
Stock or cash, at the placement agent's discretion, equal to 7% of the funds
raised under the Equity Line Agreement and issue warrants to the placement agent
to purchase shares of Common Stock, at an exercise price of $2.17 per share,
equal to 10% of the Shares sold
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<PAGE> 23
by the Company under the Equity Line Agreement. In addition, pursuant to the
Equity Line Agreement, the Company issued the investor the Warrant to purchase
200,000 shares of Common Stock at $2.17 per share.
While the Company believes that its existing capital resources
(including expected proceeds from sales of Common Stock pursuant to the Equity
Line Agreement) will be adequate to fund its currently anticipated capital
needs, if they are not or the Company does not receive shareholder approval to
amend its Articles of Incorporation to increase its authorized Common Stock,
enabling the Company to sell sufficient Shares under the Equity Line Agreement,
the Company may need to raise additional capital until its sales increase
sufficiently to cover operating expenses. In addition, there can be no assurance
that the Company will satisfy the conditions required for it to exercise puts
under the Equity Line Agreement. Accordingly, the Company may not be able to
realize all or any of the funds available to it under the Equity Line Agreement.
The Company has a 1.0 million note from a director, Mr. Stephen
Dearholt, due in March 1999. Mr. Dearholt has agreed to extend this note one
year to March 2000 on the same terms and conditions if the Company requests such
extension.
Until internally generated funds are sufficient to meet cash
requirements, FHC will remain dependent upon its ability to generate sufficient
capital from outside sources. While management believes that revenues from sales
of the female condom will eventually exceed operating costs, and that ultimately
operations will generate sufficient funds to meet capital requirements, there
can be no assurance that such level of operations will ultimately be achieved,
or be achieved in the near term. Likewise, there can be no assurance that the
Company will be able to source all or any portion of its required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of the female condom generate sufficient
revenues to fund operations. In addition, any funds raised may be costly to the
Company and/or dilutive to stockholders. If the Company is not able to source
the required funds or any future capital which becomes required, the Company may
be forced to sell certain of its assets or rights or cease operations.
As of December 21, 1998, the Company had approximately $1.0 million in
cash, net trade accounts receivable of $0.5 million and current trade accounts
payable of $0.7 million. It is estimated that the Company's cash burn rate,
without revenues, is approximately $0.4 million per month.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, suppliers,
salaries and benefits, and increased general and administrative expenses.
Historically, the Company has absorbed increased costs and expenses without
increasing selling prices.
NEW ACCOUNTING PRONOUNCEMENTS
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
supersedes APB Opinion No 15, was issued in February 1997 by the Financial
Accounting Standards Board. The Statement changes the computation and
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that have only common
stock outstanding are required to present basic earnings per-share amounts. All
other entities are required to present basic and diluted per-share amounts.
Diluted per share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a loss or
increase the income per common share from continuing operations. All entities
required to present per-share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 15, 1997. Earlier application
is not permitted.
The Company has numerous issues of potential common stock outstanding, including
options to employees and stock purchase warrants that become exercisable if
certain conditions are met and preferred stock that is convertible to common
stock. Each of these potential common stock instruments must be separately
evaluated to determined whether they are dilutive, and various adjustments to
income and share amounts are computed. Due to the complexities involved,
management has not completed its assessment of the effects that the application
of Statement No. 128 will have on the per-share information presented in the
accompanying financial statements.
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<PAGE> 24
Capital Structure
Statement of Financial Accounting Standard No. 129, "Disclosure of Information
about Capital Structure," was issued in February 1997 by the Financial
Accounting Standards Board. The Statement requires an entity to explain the
pertinent rights and privileges of the various securities outstanding. The
standard is effective for financial statement periods ending after December 15,
1997. The Company does not believe the adoption of the Standard will have a
material impact on the consolidated financial statements.
Comprehensive Income
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," that the Company will be required to adopt for
its year ended September 30, 1998, and disclose in its interim financial
statements beginning with the period ending December 31, 1997. This
pronouncement is not expected to have a significant impact on the Company's
financial statements. The Statement establishes standards for the reporting and
presentation of comprehensive income and its components. The statement requires
that items recognized as components of comprehensive income be reported in a
financial statement. The statement also requires that a company classify items
of other comprehensive income by their nature in a financial statement, and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. For the years ended September 30, 1997 and
1996, the Company's components of comprehensive income (loss) consisted of its
reported net (loss) and foreign currency translation adjustments.
Segments of an Enterprise
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued in July 1997 by the
Financial Accounting Standards Board. The Statement requires the Company to
disclose the factors used to identify reportable segments including the basis of
organization, differences in products and services, geographic areas, and
regulatory environments. The Statement additionally requires financial results
to be reported in the financial statements for each reportable segment. The
Statement is effective for financial statement periods beginning after December
15, 1997. The Company does not believe the adoption of the statement will have a
material impact on the consolidated financial statements.
Derivatives
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 requires companies to
record derivatives onthe balance sheet as assets or liabilities at fair value.
Depending on the use of the derivative and whether it qualifies for hedge
accounting, gains or losses resulting from changes in the value of those
derivatives would either be recorded as a component of net income or as a change
in stockholders' equity. The Company is required to adopt this new standard for
the quarter and year beginnin October 1, 1999. The Company currently has no
derivative instruments and, accordingly, the adoption of this statement has no
impact on its consolidated financial statements.
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<PAGE> 25
BUSINESS
GENERAL
The Female Health Company ("FHC" or the "Company") markets,
manufactures and sells the female condom, the only FDA-approved product under a
woman's control which can prevent unintended pregnancy and sexually transmitted
diseases ("STDs"), including HIV/AIDS.
The female condom has undergone extensive testing for efficacy, safety
and acceptability, not only in the United States but also in over 25 additional
countries. Certain of these studies show that having the female condom available
allows women to have more options, resulting in an approximately 30% increase in
protected sex acts. Furthermore, studies show that when the female condom is
available as a choice, there is an approximately 35% decrease in STDs, including
HIV/AIDS.
The product is currently sold or available in either or both commercial
(private sector) and public sector markets in 30 countries. It is commercially
marketed directly by the Company in the United States and the United Kingdom and
through marketing partners in Canada, Holland, Brazil, Venezuela, South Korea
and Taiwan. The Company has signed distribution agreements in Japan and
Bangladesh, and the Company anticipates that the product will be marketed in
these countries in the coming months. The Company's partner in Japan, Taiho
Pharmaceutical Co., Ltd. ("Taiho"), submitted a formal application for
regulatory approval with Koseisho, the Japanese regulatory agency in October
1997 and expects to receive approval to begin marketing the female condom during
the Company's 1999 fiscal year. The Company is currently in discussions with
potential distributors for key European countries, India, The People's Republic
of China and other countries.
As noted above, the female condom is sold to the public sector. In
particular, the product is marketed to city and state public health clinics as
well as not-for-profit organizations such as Planned Parenthood in the United
States. Following several years of testing the efficacy and acceptability of the
female condom, the product received a formal endorsement by The World Health
Organization ("WHO") and the Joint United Nations Programme on AIDS ("UNAIDS").
In 1996, the Company entered into a three-year agreement with UNAIDS, whereby
UNAIDS will facilitate the availability and distribution of the female condom in
the developing world and the Company will sell the product to developing
countries at a reduced price based on the total number of units purchased. The
current price is 38 pence sterling (approximately $0.64 per unit). Pursuant to
this agreement, the product is currently being marketed in Zambia, Zimbabwe,
Tanzania, Cote d' Ivoire, Bolivia, Haiti, South Africa and other countries. The
Company anticipates multiple launches will occur during the next two years under
this agreement, including launches in Kenya, Nigeria, Uganda, Ghana, Cambodia,
Bangladesh, Columbia and Central American countries.
PRODUCT
The female condom is made of polyurethane, a thin but strong material
which is resistant to rips and tears during use. The female condom consists of a
soft, loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and 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
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 30 million people worldwide who are infected with HIV/AIDS and
there are approximately 16,000 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. Women are currently the
fastest growing group infected with
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<PAGE> 26
HIV and are expected to comprise the majority of new cases by the year 2000. The
following highlights the substantial and growing market for protection against
STDs.
<TABLE>
<S> <C>
Worldwide:
Number of people with HIV/AIDS(1) 30 million
Number of new cases of HIV/AIDS daily(1) 16,000
Number of children expected to be orphaned by AIDS by 40 million
2010 (at current rate)(1)
Examples of decreases in life expectancy due to
HIV/AIDS(1)
Zimbabwe 22 years
Cote d'Ivoire 11 years
Number of Sub-Saharan African countries where more 13
than 10% of population is HIV positive(1)
(1) Source: UNAIDS
United States:
Number of top ten most frequently reported diseases 5
in the United States in 1995 that were STDs(1)
Ratio of individuals over 12 years of age with Herpes(1) 1 in 5
Annual expenditures to treat STDs(2) $17 billion
Dollars spent on STD treatment for every $1.00 spent on prevention(2) $43
The United States has one of the highest rates of teenage pregnancy in
Western nations--Each year one in nine teenage women (ages 15-19)
becomes pregnant(3)
</TABLE>
(1) Source: Center for Disease Control
(2) Source: National Academy of Sciences
(3) Source: Alan Guttmacher Institute
At the 1988 World AIDS Conference, the following points were emphasized:
- - New drugs help some AIDS patients in Western nations. However, they are of
little value in developing countries due to cost and complexity of
administration.
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<PAGE> 27
- - Simple, inexpensive treatments for HIV/AIDS--or a vaccine to prevent
infection from HIV--are unlikely in the near term.
- - Prevention is essential.
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 protection is
much larger than the identified male condom market.
ADVANTAGES VERSUS THE MALE CONDOM
The female condom is currently the only available barrier method which
is controlled by the woman and allows her to protect herself against STDs,
including HIV/AIDS and unintended pregnancy. Although latex male condoms also
offer protection against STDs, the female condom possesses a certain number of
advantages. The most important advantage is that a woman can control whether or
not she is protected. Many men do not like to wear male condoms and may refuse
to do so.
The material that is used for the female condom, polyurethane, offers a
number of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability that
the female condom sheath will tear during use. Clinical studies and everyday use
have shown that latex male condoms can tear between 4% to 8% of the times they
are used, while studies show that the female condom tears in less than 1% of
uses. Unlike latex, polyurethane quickly transfers heat, so the female condom
immediately warms to body temperature when it is inserted, which may result in
increased pleasure and sensation during use. The product offers an additional
benefit to the 7% to 10% of the population that is allergic to latex and who, as
a result, may be irritated by latex male condoms. There is no reported allergy
to date to polyurethane. The female condom is also more convenient, providing
the option of insertion hours before sexual arousal and as a result is less
disruptive during sex than the male condom which requires sexual arousal for
application.
SAFETY AND EFFICACY
Based on use of the product in clinical trials and approximately five
years of worldwide marketing, the female condom has been proven to be safe and
effective. The following information reflects the results of various trials:
<TABLE>
<S> <C> <C>
Reduction in STDs(1) 34% (Results when female condom was
Reduction in Acts of Unprotected Sex(1) 25% available as an option vs. when
only the male condom was available.)
Effectiveness in Preventing Pregnancy(2) 95%(3) (When used properly with every sex act.)
</TABLE>
(1) Supported by UNAIDS
(2) Supported by The U.S. Agency for International Development (USAID)
and conducted by Family Health International (FHI).
(3) Recent studies completed in Japan evaluating the female condom's
effectiveness in preventing pregnancy, which were submitted to the
Japanese regulatory authorities in connection with their review of
the product, showed the female condom to be approximately 98%
effective when used consistently and correctly.
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<PAGE> 28
COST EFFECTIVENESS
At the 1998 World AIDS Conference held in Geneva, Switzerland, UNAIDS
presented the results from its cost-effectiveness study which indicated that
making the female condom available is highly cost effective in reducing public
health costs in developing countries.
ENDORSEMENTS
Currently, the female condom is endorsed for use by the World Health
Organization (WHO), the United Nations Joint Programme on AIDS (UNAIDS), the
United States Agency for International Development (USAID), many nongovernment
organizations around the world and a number of city and state public health
departments in the United States.
WORLDWIDE REGULATORY APPROVALS
The female condom received PMA approval as a Class III Medical Device
from the FDA in 1993. The extensive clinical testing and scientific data
required for FDA approval laid the foundation for approvals throughout the rest
of the world, including receipt of a CE Mark in 1997 which allows the Company to
market the female condom throughout the EU. In addition to the United States and
the EU, several other countries have approved the female condom for sale,
including Canada, Russia, Australia, South Korea and Taiwan. The Company expects
the female condom to receive approval in Japan in fiscal year 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 by competitive products. The Company estimates that it would take a
minimum of four to six years to implement, execute and receive FDA approval or a
PMA to market another type of female condom.
The Company believes there are no material issues or material costs
associated with the Company's compliance with environmental laws related to the
manufacture and distribution of the female condom.
STRATEGY
The Company's strategy is to act as a manufacturer, selling the female
condom to the global public sector, United States public sector and commercial
partners for country-specific marketing. The public sector and commercial
partners assume the cost of shipping and marketing the product. As a result, as
volume increases, the Company's operating expenses will not increase
significantly.
COMMERCIAL MARKETS
The Company markets the product directly in the United States and
United Kingdom. The Company has commercial partners which have recently launched
the product in Canada, Brazil, Venezuela, Taiwan, South Korea and Holland. The
Company has signed agreements with partners in Japan and Bangladesh where
launches are expected during the coming year.
JAPANESE MARKET
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have never been approved in Japan and, as a result, 85% of
Japanese couples seeking protection use condoms. FHC's partner in Japan is
Taiho, a $1 billion subsidiary of Otsuka Pharmaceutical Co., Ltd., a $5 billion
Japanese health care company. The agreement between the Company and Taiho
requires Taiho to perform clinical testing of the product in Japan and obtain
the necessary regulatory approvals. After approval, expected during the
Company's 1999 fiscal year, the Company will manufacture the product and supply
it to Taiho, which will have responsibility for marketing and distributing the
female condom in Japan. Studies completed in Japan show an acceptance rate of
70% among Japanese women. Taiho plans to market the female condom under the name
"Mylura Femy."
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<PAGE> 29
RELATIONSHIPS AND AGREEMENTS WITH PUBLIC SECTOR ORGANIZATIONS
Currently, it is estimated that 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 incidence
of unprotected sex by as much as 30% over male condoms alone.
The Company has a multi-year agreement with UNAIDS to supply the female
condom to developing countries at a reduced price which is negotiated each year
based on volume. The current price is 38 pence sterling (approximately $0.64)
per unit. During the last year, the female condom has been launched in the
countries of Zimbabwe, Tanzania, Bolivia, Haiti, South Africa and Zambia. It is
anticipated that multiple product launches will occur in several countries
during the next two years, including in the countries of Kenya, Nigeria, Uganda,
Ghana, Cambodia, Bangladesh, Columbia and Central America. Population Services
International (PSI), an organization that performs social marketing of various
products in developing countries, launched the female condom in Zimbabwe under
the UNAIDS agreement. Based on its success in Zimbabwe, PSI, in collaboration
with UNAIDS, is now marketing the female condom in seven countries. In PSI's
current annual report, PSI indicates that, in collaboration with UNAIDS, it
plans to launch the female condom worldwide. PSI also notes in its report that
in 1997 it distributed 539 million male condoms.
In the United States, the product is marketed to city and state public
health clinics, as well as not-for-profit organizations such as Planned
Parenthood. Currently, 10 major cities and 15 state governments, including New
York, Pennsylvania, Florida, Connecticut, Hawaii, Louisiana, Maryland, New
Jersey, South Carolina, Illinois, 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 re-ordered product after their
initial shipments.
STATE-OF-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 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 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 condition of
use prescribed, recommended or suggested in the labeling. Failure to comply with
the conditions of FDA approval invalidates the approval order. Commercial
distribution of a device that is not in compliance with these conditions is a
violation of the SMA Act.
COMPETITION
The Company's female condom competes in part with male condoms. Latex
male condoms typically 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.
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<PAGE> 30
EMPLOYEES
As of December 21, 1998, the Company's operations had 75 full-time
employees within the U.S. and the U.K. and 1 part-time employee. No Company
employees are represented by a labor union. The Company believes that its
employee relations are good.
BACKLOG
At December 21, 1998, the Company had unfilled orders of $533,000. The
comparable amount as of the same date of the prior year was $962,000. All of
these unfilled orders are expected to be filled during fiscal 1999.
PATENTS AND TRADEMARKS
The Company currently holds product and technology patents in the
United States, Japan, the United Kingdom, France, Italy, Germany, Spain, the
European Patent Convention, Canada, The People's Republic of China, New Zealand,
Singapore, Hong Kong and Australia. Additional product and technology patents
are pending in Brazil, South Korea, Germany, Japan and several other countries.
The patents cover the key aspects of the female condom, including its overall
design and manufacturing process. The Company licenses the trademark "Realty" 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 FY1998 and FY1997, the Company incurred research and development
costs from continuing operations of $2,500 and $60,811, respectively. These
expenditures were related to conducting acceptability studies.
INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
See Note 10 to Notes to Consolidated Financial Statements, included
herein.
HISTORY
The female condom was invented by a Danish physician who obtained a
U.S. patent for the product in 1988. The physician subsequently sold certain
rights to the condom to Chartex Resources Limited. In the years that followed,
Chartex, with resources provided by a nonprofit Danish foundation, developed the
manufacturing processes and completed other activities associated with bringing
the female condom to market in certain non-U.S. countries. Wisconsin Pharmacal
Company, Inc., which then owned certain rights to the female condom in the U.S.,
Canada and Mexico, pursued the pre-clinical and clinical studies and overall
development of the product for worldwide use and U.S. FDA approval of the
product.
FHC is the successor to Wisconsin Pharmacal Company, Inc., a company
which previously manufactured and marketed a wide variety of disparate specialty
chemical and branded consumer products in addition to owning certain rights to
the female condom described above. A summary of the Company's origins follows.
In fiscal 1995, the Company's Board of Directors approved a plan to
complete a series of actions designed, in part, to maximize the potential of the
female condom. First, the Company restructured and transferred all of the assets
and liabilities of the Company, other than those related primarily to the female
condom, to a newly-formed, wholly-owned 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 then sole
28
<PAGE> 31
supplier of, the female condom. As a result of the sale of Holdings and the
acquisition of Chartex, FHC evolved to its current state with its sole business
consisting of the manufacture, marketing and sale of the female condom.
The FDA approved the female condom for distribution in 1993 and the
Company's manufacturing facility in 1994. Since that time, the Company has sold
over 23 million female condoms around the world.
PROPERTIES
The Company leases approximately 4,500 square feet of office space at
875 North Michigan Avenue, Suite 3660, Chicago, Illinois 60611 under a lease
that expires in 2001. The Company also leases approximately 1,900 square feet
for corporate offices at 919 North Michigan Avenue, Suite 2208, Chicago,
Illinois 60611 under a lease that expires January 31, 2001. However, the Company
has subleased these premises to a third party. The Company utilizes warehouse
space and sales fulfillment services of an independent public warehouse located
near Minneapolis, Minnesota, for storage and distribution of the female condom.
The Company manufactures the female condom in a 40,000 square foot leased
facility located in London, England. The FDA-approved manufacturing process is
subject to periodic inspections by the FDA. Current capacity at the
manufacturing facility is approximately 60 million female condoms per year.
Management believes the properties are adequately insured.
LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The Company files reports, proxy statements and other information with
the Commission. You may read and copy any reports, proxy statements or other
information we file at the Commission's public reference room at 450 Fifth
Street, N.W., Washington, D.C. or at the Commission's public reference rooms in
Los Angeles, California, New York, New York and Chicago, Illinois. You can
obtain information concerning the operation of the public reference rooms by
calling the Commission at 1-800-SEC-0330. In addition, the Company has filed the
registration statement of which this Prospectus is a part and other filings
pursuant to the Exchange Act with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system, and such filings are
publicly available through the Commission's site on the World Wide Web on the
Internet located at http://www.sec.gov. The Company's Common Stock is traded on
the American Stock Exchange and copies of the foregoing materials may also be
inspected and copied at such exchange.
This Prospectus does not contain all of the information set forth in
the registration statement of which this Prospectus is a part and which the
Company has filed with the Commission. For further information with respect to
the Company and the securities offered hereby, you should review the
registration statement, including the exhibits filed as a part thereof, at the
public reference rooms. We may update information with respect to the Company by
filing appendices or supplements to this Prospectus.
29
<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Title Age
<S> <C> <C>
O.B. Parrish Chairman of the Board, Chief
Executive Officer, acting Chief Financial
Officer and Director 65
Mary Ann Leeper, Ph.D. President, Chief Operating Officer
and Director 58
William R. Gargiulo, Jr. Secretary and Director 70
Jack Weissman Vice President-Trade Sales 51
Michael Pope Vice President of the Company,
Director of Chartex
Resources Limited, Director and
General Manager of Chartex
International, Plc 42
David R. Bethune Director 58
Stephen M. Dearholt Director 52
</TABLE>
O.B. Parrish has served as Chief Executive Officer of the Company since
1994, as acting Chief Financial Officer since February 1996 and as the Chairman
of the Board and a Director of the Company since 1987. Mr. Parrish is a
shareholder and has served as the President and as a Director of Phoenix Health
Care of Illinois, Inc. ("Phoenix of Illinois") since 1987. Phoenix of Illinois
owns approximately 270,000 shares of the Company's outstanding Common Stock. Mr.
Parrish also was the Co-Chairman and a Director of Inhalon Pharmaceuticals, Inc.
until its sale to Medeva, Plc. and is Chairman and a Director of ViatiCare,
L.L.C. and a director of Microbyx. Mr. Parrish is also a trustee of Lawrence
University. From 1977 until 1986, Mr. Parrish was the President of the Global
Pharmaceutical Group of G.D. Searle & Co. ("Searle"). From 1974 until 1977, Mr.
Parrish was the President of Searle International, the foreign sales operation
of Searle. Prior to that, Mr. Parrish was Executive Vice President of Pfizer's
International Division.
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.
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
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<PAGE> 33
Pharmaceutical Group and in various Searle research and development management
positions. As Vice President - Market Development, Dr. Leeper was responsible
for worldwide licensing and acquisition, marketing and market research. In
earlier positions, she was responsible for preparation of new drug applications
and was a liaison with the FDA.
Mr. Weissman has served as Vice President - Trade Sales of The Female
Health Company since June 1995. From 1992 until 1994, Mr. Weissman was Vice
President - Sales for Capital Spouts, Inc., a small manufacturing company.
During the period from 1989 to 1992, Mr. Weissman acted as General Manager - HTV
Group, an investment group involved in the development of retail stores. Mr.
Weissman joined Searle's consumer products group in 1979 and held positions of
increasing responsibility, including National Account Manager and Military Sales
Manager from 1985 to 1989. Mr. Weissman was Account Manager - Retail Business
Development, for the NutraSweet Company, a Searle subsidiary. Prior to Searle,
Mr. Weissman worked in the consumer field as Account Manager and Territory
Manager for Norfolk Thayer & Whitehall Laboratories.
Mr. Pope has served as Vice President of the Company since 1996 and as
General Manager of Chartex International, Plc since the Company's 1996
acquisition of Chartex. Mr. Pope has also served as a Director of Chartex
Resources Limited and Chartex International, Plc since 1995. Previously, Mr.
Pope was Director of Technical Operations for Chartex which included
responsibility for manufacturing, engineering, process development and quality
assurance. Mr. Pope was responsible for the development of the high speed
proprietary manufacturing technology for the female condom and securing the
necessary approvals of the manufacturing process by regulatory organizations,
including the FDA. Mr. Pope was also instrumental in developing and securing
Chartex's relationship with its Japanese marketing partner. Prior to joining
Chartex, Mr. Pope was Production Manager and Technical Manager for Franklin
Medical, a manufacturer of disposable medical devices. Prior to that, Mr. Pope
was Site Manager, Engineering and Production Manager, Development Manager and
Silicon Manager for Warne Surgical Products.
Mr. Bethune has served as a Director of the Company since January 1996.
Mr. Bethune is a business consultant to the pharmaceutical industry and
previously held the position of President and Chief Operating Officer of the
IVAX Corporation. Prior to IVAX, Mr. Bethune was Group Vice President of
American Cyanamid Company and a member of its Executive Committee until the sale
of the company to American Home Products. He had global executive authority for
human biologicals, consumer health products, pharmaceuticals and opthalmics, as
well as medical research. Previously, he was President of the Lederle
Laboratories Division of American Cyanamid Company. Mr. Bethune rejoined Lederle
from Searle, where he was President of Operations in the United States, Canada
and the Caribbean since December 1986. From 1984 until his appointment as
President of Operations, Mr. Bethune served as Vice President and General
Manager, United States Pharmaceuticals. Mr. Bethune is on the Board of Directors
of the Southern Research Institute, Atrix Pharmaceuticals and the American
Foundation for Pharmaceutical Education, Partnership for Prevention. He is a
founding trustee of the American Cancer Society Foundation and an associate
member of the National Wholesale Druggists' Association and the National
Association of Chain Drug Stores. He is the 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.
Mr. Dearholt has served as a Director of the Company since April 1996.
Mr. Dearholt is a co-founder and partner in Response Marketing, one of the
largest privately owned life insurance marketing organizations in the United
States. He has over 23 years of experience in direct response advertising and
data based marketing of niche products. Since 1985, he has been a 50% owner of
R.T. of Milwaukee, a private investment holding company which operates a stock
brokerage business in Milwaukee, Wisconsin. In late 1995, Mr. Dearholt arranged,
on very short notice, a $1 million bridge loan which assisted the Company in its
purchase of Chartex.
The Company's Board of Directors has an Audit Committee and a
Compensation Committee. The Board's Audit Committee is comprised of Messrs.
Bethune and Dearholt. The responsibilities of the Audit Committee, in addition
to such other duties as may be specified by the Board of Directors, include the
following: (1) recommendation to the Board of Directors of independent auditors
for the Company; (2) review of the timing, scope and results of the independent
auditors' audit examination; (3) review of periodic comments and recommendations
by the auditors and of the Company's response thereto; and (4) review of the
scope and adequacy
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<PAGE> 34
of internal accounting controls. The Audit Committee did not meet during the
fiscal year ended September 30, 1998.
The Board's Compensation Committee is comprised of Messrs. Gargiulo and
Bethune. The responsibility of the Compensation Committee, in addition to such
other duties as may be specified by the Board of Directors, is to make
recommendations to the Board of Directors with respect to compensation for the
executive officers and to administer the Company's 1989, 1990, 1994 and Outside
Director Stock Option Plans. The Compensation Committee met two times during the
fiscal year ended September 30, 1998.
There is no standing nominating or similar committee of the Board of
Directors.
Directors who are not also employees of the Company receive a one-time
grant of options to purchase 30,000 shares of the Company's Common Stock upon
their initial election to the Company's Board of Directors. The options are
granted at an exercise price equal to the last sale price of the Company's
Common Stock on the date of grant. The Company also pays each such outside
director $1,000 for each meeting of the Board of Directors attended by such
director and reimburses the outside director for his expenses incurred in
attending the meeting.
All directors serve until the next annual meeting of the Company's
shareholders and until his or her successor has been duly elected or until his
or her prior death, resignation or removal. Each executive officer holds office
until his or her successor has been duly appointed or until his or her prior
death, resignation or removal.
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<PAGE> 35
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth all annual, long-term and other compensation
paid by the Company to each of its executive officers whose total annual salary
and bonus exceeded $100,000 for services rendered during any of the years
indicated below. The foregoing individuals are referred to herein as the "named
executive officers."
<TABLE>
<CAPTION>
Annual Long-Term Compensation
Compensation Awards
Restricted Securities
Name and Stock Underlying
Principal Fiscal Salary Awards(1) Options/SARs
Position Year ($) ($) (#)
<S> <C> <C> <C> <C>
O.B. Parrish 1998 90,000 117,955(2) --
Chairman and 1997 90,000 -- 100,000
Chief Executive 1996 90,000 -- 120,000
Officer
Mary Ann Leeper, 1998 225,000 84,210(2) --
Ph.D. President and 1997 225,000 -- 90,000
Chief Operating 1996 225,000 -- --
Officer
</TABLE>
(1) Represents fair market value of restricted Common Stock on the date of grant
based on the $2.88 closing price of the Company's Common Stock on such date.
(2) At September 30, 1998, the named executive officer owned 25,000 shares of
restricted Common Stock, having a fair market value of $71,875 on such date,
based on the closing price of the Company's Common Stock on such date. For Mr.
Parrish, also includes his pro rata portion of 25,000 shares of restricted stock
granted to Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois"), based
on his 64% ownership of such entity. For Dr. Leeper, also includes her pro rata
portion of such restricted stock based on her approximately 16.7% ownership of
such entity. All of these shares were granted on May 5, 1998 and vest in full on
the first anniversary of the grant date. The owner is entitled to receive any
dividends declared on these shares of restricted stock.
FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth the number and value of unexercised options
held by the named executive officers at September 30, 1998:
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options at Value of Unexercised In-the-Money
Fiscal Year End September 30, 1998 Options at Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C>
O.B. Parrish 88,000/176,000 $0
Mary Ann Leeper, Ph.D. 96,667/193,333 $0
</TABLE>
33
<PAGE> 36
EMPLOYMENT AGREEMENTS
Dr. Leeper entered into an employment agreement with the Company effective
May 1, 1994. The original term of Dr. Leeper's employment extended to April 30,
1997 and thereafter her employment term renews automatically for additional
three-year terms unless notice of termination is given. The employment agreement
is terminable by the Company at any time if such termination is for cause (as
defined in the employment agreement). If Dr. Leeper is terminated without cause,
the Company is obligated to continue to pay Dr. Leeper her base salary and any
bonus to which she would otherwise have been entitled for a period equal to the
longer of two years from date of termination or the remainder of the then
applicable term of the employment agreement. In addition, the Company is
obligated to continue Dr. Leeper's participation in any health, life insurance
or disability plan sponsored by the Company and in which Dr. Leeper participated
prior to her termination of employment. Dr. Leeper's employment agreement
provides for a base salary of $175,000, $195,000 and $225,000, respectively, for
each of the first three years of her employment term, subject to the achievement
of certain performance goals established by Dr. Leeper and the Company. If the
employment agreement is renewed beyond the initial three-year term, the base
salary will be increased annually by the Board of Directors based upon Dr.
Leeper's performance and such other factors as the Board of Directors deems
appropriate. For fiscal 1998, Dr. Leeper's base salary was set at $225,000 and
for fiscal 1999 it was set at $225,000. The employment agreement also provides
Dr. Leeper with certain fringe benefits including an annual cash bonus of up to
100% of her base salary if certain performance goals established by the Board of
Directors are achieved.
34
<PAGE> 37
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of January 5, 1999 by (1) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the Common Stock; (2) each director; (3) each named executive officer; and (4)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Beneficially Owned
Name Number Percent
<S> <C> <C>
O.B. Parrish (1) 494,001 4.68%
William R. Gargiulo, Jr. (1) 351,668 3.35%
Mary Ann Leeper, Ph.D. (1) 455,668 4.31%
David R. Bethune (2) 50,000 *
Phoenix Health Care of
Illinois, Inc.(3) 324,501 3.10%
Stephen M. Dearholt (4) 1,235,466 11.07%
State of Wisconsin
Investment Board 635,000 6.08%
All directors and
executive officers as a
group (seven persons)(1)(2)(4) 1,972,801 17.24%
</TABLE>
* Less than 1%.
(1) Includes 294,501 shares owned by and 30,000 shares under option to
Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois"). Messrs.
Parrish and Gargiulo and Dr. Leeper may be deemed to share voting and
dispositive power as to such shares since Mr. Gargiulo is a trustee of
a trust which is a shareholder, and Mr. Parrish and Dr. Leeper are
officers, directors and shareholders, of Phoenix of Illinois. For Dr.
Leeper, also includes 34,500 shares owned by and 96,667 shares under
option to her (which options are exercisable within 60 days); for Mr.
Parrish, also includes 81,500 shares owned by and 88,000 shares under
option to him (which options are exercisable within 60 days); and for
Mr. Gargiulo, also includes 500 shares held by a trust (of which Mr.
Gargiulo is a trustee), 10,000 shares owned by and 16,667 shares under
option to him, which options are exercisable within 60 days.
(2) Represents options which are currently exercisable.
(3) Includes 294,501 shares owned by and 30,000 shares under options to
Phoenix of Illinois.
(4) Includes 238,057 shares owned directly by Mr. Dearholt. Also
includes 69,500 shares held by the Dearholt, Inc. Profit Sharing Plan,
9,680 shares held by Response Marketing Money Purchase Plan, 5,000 and
148,129 shares and 60,000 shares of Class A Convertible Preferred Stock
-- Series 1 held by trusts (of which Mr. Dearholt is a trustee) and
45,100 shares held by Mr. Dearholt's minor children. Also includes
warrants to purchase 610,000 shares of Common Stock and options to
purchase 30,000 shares.
35
<PAGE> 38
CERTAIN TRANSACTIONS
On March 25, 1997 and again on March 25, 1998, 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, 1999 and bears interest at 12% per
annum payable monthly. The note proceeds were initially used by the Company to
provide working capital needed to fund the initial stages of the Company's U.S.
marketing campaign ($0.2 million) and to fund operating losses ($0.8 million).
The borrowing transactions were effected in the form of a promissory note from
the Company to Mr. Dearholt and related Note Purchase and Warrant Agreements and
Stock Issuance Agreements. Under the 1997 and 1998 Note Purchase and Warrant
Agreements, the Company issued to Mr. Dearholt warrants to purchase 200,000 and
200,000 shares of the Company's Common Stock in 1997 and 1998, respectively, at
exercise prices of $1.848 and $2.25 per share, respectively. The warrants expire
upon the earlier of their exercise or five years after the date of their
issuances. Under the Stock Issuance Agreements, if the Company fails to pay the
$1 million under the note when due, the Company must issue 200,000 shares of its
Common Stock to Mr. Dearholt. This issuance will not, however, alleviate the
Company from its liability under the note. The Company also granted Mr. Dearholt
certain securities registration rights with respect to any Common Stock he
receives from the Company under these warrants or the Stock Issuance Agreement.
Mr. Dearholt has agreed that, if the Company requests, he will extend the
promissory note for an additional one-year term to be due and payable on March
25, 2000 upon the same terms as the prior note extensions. In consideration of
this agreement, the Company extended the term of certain warrants held by Mr.
Dearholt to purchase 200,000 shares of the Company's Common Stock which expire
March 25, 2001 to March 25, 2002.
On July 27, 1997, a trust of which Stephen M. Dearholt, a director of
the Company, is a trustee, purchased 60,000 shares of the Company's Class A
Convertible Preferred Stock--Series 1 at a price of $2.50 per share, which
represented the per share price offered to all subscribers in the private
placement of these shares.
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.
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<PAGE> 39
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000
shares of Common Stock, $.01 par value per share and 5,000,000 shares of Class A
Preferred Stock, $.01 par value per share (the "Class A Preferred Stock"). The
Class A Preferred Stock may be issued in series, at such times and with such
terms, as the Board of Directors deems appropriate. To date, the Board of
Directors has authorized for issuance 1,040,000 shares of Class A Preferred
Stock--Series 1, of which 680,000 shares are currently outstanding and 1,500,000
shares of Class A Preferred Stock--Series 2, of which no shares are currently
issued and outstanding since the 729,927 shares of Class A Preferred
Stock--Series 2 which were previously issued have all converted into a like
number of shares of Common Stock. The Company's Amended and Restated Articles of
Incorporation provide that any shares of Class A Preferred Stock which are
issued and subsequently converted into Common Stock may not be reissued by the
Company. Accordingly, the Company currently has 2,460,000 shares of Class A
Preferred Stock authorized and available for issuance in series designated by
the Board.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the shareholders. Subject to the prior
rights of the holders of Class A Preferred Stock, as described below, holders of
Common Stock are entitled to receive dividends when and as declared by the Board
of Directors out of funds legally available therefor. Upon liquidation or
dissolution of the Company, holders of Common Stock are entitled to share
ratably in the remaining assets of the Company which may be available for
distribution after payment of the Company's creditors and satisfaction of any
accrued but unpaid dividends on, and the liquidation preferences, if any, of,
the Class A Preferred Stock. Holders of Common Stock have no preemptive,
subscription or redemption rights. The Common Stock has no cumulative voting
rights. As a result, holders of more than 50% of the outstanding shares of
Common Stock can elect all of the directors of the Company.
All outstanding shares of Common Stock, including the Shares to be sold
in this offering, are, or upon payment therefor, will be, fully paid and
nonassessable. Wisconsin law, however, may make shareholders of the Company
personally liable for unpaid wages due employees for up to six months' services,
but not in an amount greater than the consideration paid for such shares.
CLASS A PREFERRED STOCK
The Company's Board of Directors is authorized, subject to the
limitations described below, to issue from time to time, without shareholder
authorization, in one or more designated series, shares of Class A Preferred
Stock and to determine the dividend, redemption, liquidation, sinking fund and
conversion rights of each particular series. No dividends or other distributions
will be payable on the Common Stock unless dividends are paid in full on the
Class A Preferred Stock and all sinking fund obligations for the Class A
Preferred Stock, if any, are fully funded. Dividends on the Class A Preferred
Stock will be cumulative from the date of issuance. In the event of a
liquidation or dissolution of the Company, the Class A Preferred Stock would
have priority over the Common Stock to receive the amount of the liquidation
preference as specified in each particular series, together with any accrued but
unpaid dividends thereon out of the remaining assets of the Company. Holders of
shares of Class A Preferred Stock will have the right, at any time on or before
the redemption of such shares, to surrender the certificate evidencing the
shares of Class A Preferred Stock and receive upon conversion thereof, a
certificate evidencing one share of Common Stock for each share of Class A
Preferred Stock so surrendered. The holders of Class A Preferred Stock shall be
entitled to cast one vote per share held of record by them at all meetings of
the shareholders of the Company.
Class A Preferred Stock--Series 1
Pursuant to the Company's Articles of Incorporation, on August 15,
1997, the Board of Directors by resolution designated the relative rights and
preferences of the first series of Class A Preferred Stock which was designated
"Class A Preferred Stock--Series 1." The Board authorized for issuance 1,040,000
shares of this Series 1 Preferred Stock and 680,000 shares were issued and are
currently outstanding. The Company has no
37
<PAGE> 40
present intention of issuing any additional shares of Series 1 Preferred Stock.
The Series 1 Preferred Stock accrues dividends on a daily basis at the rate of
8% per year on the "liquidation value" of the Series 1 Preferred Stock ($2.50
per share subject to adjustment and increase for accrued dividends). The
dividends will accrue through the earliest of the date of repurchase of the
Series 1 Preferred Stock, its conversion into Common Stock or the liquidation of
the Company. Dividends on the Series 1 Preferred Stock must be paid in full
before dividends may be paid on any other class of stock of the Company or
before any sums may be set aside for the redemption or purchase of any of the
Preferred Stock. Dividends will accrue whether or not they have been declared
and whether or not there are funds legally available therefore. Dividends are
payable on October 1 of each year. Dividends which are not paid on such dividend
reference date will accrue and be added to the liquidation value of each share
of Series 1 Preferred Stock. No dividends can be declared and set aside for any
shares of Common Stock unless the Board declares a dividend payable on the
outstanding shares of Series 1 Preferred Stock, in addition to the dividends
which the Series 1 Preferred Stock is otherwise entitled as described above.
Such additional dividends on the Series 1 Preferred Stock must be declared in
the same amount per share of Series 1 Preferred Stock as would be declared
payable on the shares of Common Stock into which each share of Series 1
Preferred Stock could be converted.
On or after August 1, 1998, each share of Series 1 Preferred Stock is
convertible into one share of Common Stock. Upon conversion, certificates for
shares of Common Stock will be issued together with, to the extent legally
available, an amount of cash equal to the remaining accrued but unpaid dividends
on the shares of Series 1 Preferred Stock so converted. The Series 1 Preferred
Stock is redeemable by the Company on or after August 1, 2000 (subject to prior
conversion by the holder) at a price of $2.50 per share plus all accrued but
unpaid dividends. Upon a liquidation of the Company, the Series 1 Preferred
Stock is entitled to a liquidation preference equal to $2.50 per share plus any
accrued but unpaid dividends. This amount must be paid prior to any distribution
on shares of Common Stock. Except as provided above, the Series 1 Preferred
Stock will have the same rights, preferences and limitations as any other series
of Preferred Stock to be issued in the future, whenever designated and issued
Class A Preferred Stock--Series 2
On December 30, 1997, the Company's Board of Directors by resolution
designated the relative rights and preferences of the second series of Class A
Preferred Stock which is designated "Class A Preferred Stock--Series 2." The
Board authorized for issuance 1,500,000 shares of this Series 2 Preferred Stock
and, shortly thereafter, 729,927 shares were issued. However, as of the date of
this Prospectus, no shares of Series 2 Preferred Stock are issued and
outstanding since they all converted into shares of Common Stock on a
one-for-one basis on April 3, 1998. The Series 2 Preferred Stock does not carry
any dividend preference. Upon a liquidation of the Company, each share of the
Series 2 Preferred Stock outstanding at the time of such liquidation is entitled
to a liquidation preference equal to the purchase price paid for such share.
This amount must be paid prior to any distribution on shares of Common Stock,
however, the liquidation preference on the Series 1 Preferred Stock must be paid
before the liquidation preference on the Series 2 Preferred Stock is paid.
The issuance of one or more series of Class A Preferred Stock could
have an adverse effect on certain rights, including voting rights, of the
holders of Common Stock. Such shares are also available for issuance to defend
against the threat of a takeover, if the Board of Directors deems such takeover
not to be in the best interests of the Company or its shareholders. This could
occur even if such a takeover of the Company was favored by a majority of
shareholders and was at a premium to the market price of the Common Stock. The
Company has no current plans or intention to issue additional shares of Class A
Preferred Stock.
WARRANTS
The Warrant issued to the Selling Stockholder entitles the holder to
purchase 200,000 Shares of Common Stock at a price of $2.17 per share. The
Warrant is exercisable at any time beginning on May 19, 1999 and ending three
years thereafter. The Shares of Common Stock underlying the Warrant, when issued
upon exercise of the Warrant in whole or in part, will be fully
38
<PAGE> 41
paid and nonassessable (subject to the last sentence under "Common Stock"
above), and the Company will pay any transfer tax incurred as a result of the
issuance of Common Stock to the holder upon its exercise.
The Warrant contains provisions that protect the holder against
dilution by adjustment of the exercise price and number of shares to be received
upon exercise. Such adjustments will occur in the event, among others, of a
merger, stock split or reverse stock split, stock dividend or recapitalization.
The Company is not required to issue fractional shares upon the exercise of the
Warrant. The holder of the Warrant will not possess any rights as a stockholder
of the Company until such holder exercises the Warrant.
The Warrant may be exercised upon surrender on or before the expiration
date of the Warrant at the offices of the Company, with an exercise form
completed and executed as indicated, accompanied by payment of the exercise
price for the number of shares with respect to which the Warrant is being
exercised. The exercise price is payable either (i) by check or bank draft
payable to the order of the Company or by wire transfer to an account designated
by the Company or (ii) by a "cashless exercise," in which that number of shares
of Common Stock underlying the Warrant having a fair market value equal to the
aggregate exercise price are cancelled as payment of the exercise price.
For the life of the Warrant, the holder thereof has the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares of Common stock issuable upon the exercise of
the Warrant. The Warrant holder may be expected to exercise the Warrant at a
time when the Company would, in all likelihood, be able to obtain any needed
capital by an offering of Common Stock on terms more favorable than those
provided for by the Warrant. Furthermore, the terms on which the Company could
obtain additional capital during the life of the Warrant may be adversely
affected.
In addition to the Warrant issued to the Selling Stockholder, the
Company is required to issue warrants to its placement agent in connection with
the Equity Line Agreement. Such warrants will be issued at such time or times as
the Company receives funds from the Selling Stockholder under the Equity Line
Agreement. The placement agent is entitled to receive warrants exercisable for
Shares of Common Stock representing 10% of the Shares of Common Stock sold by
the Company to the Selling Stockholder under the Equity Line Agreement. Each
warrant will have a three-year term and will be exercisable at the same price
per share and will have terms and conditions similar to the Warrant issued to
the Selling Stockholder described above.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Firstar Trust
Company, Milwaukee, Wisconsin.
CERTAIN STATUTORY PROVISIONS
Section 180.1150 of the Wisconsin Business Corporation Law provides
that the voting power of shares of public corporations, such as the Company,
which are held by any person holding in excess of 20% of the voting power of
such Company shall be limited to 10% of the full voting power of such shares.
This statutory voting restriction is not applicable to shares acquired directly
from the Company, acquired in a transaction incident to which the shareholders
of the Company vote to restore the full voting power of such shares and under
certain other circumstances more fully described in section 180.1150. In
addition, this statutory voting restriction is not applicable to shares of
Common Stock acquired before April 22, 1986.
Section 180.1141 of the Wisconsin Business Corporation Law provides
that a "resident domestic corporation," such as the Company, may not engage in a
"business combination" with an "interested shareholder" (a person beneficially
owning 10% or more of the aggregate voting power of the stock of the Company)
for three years after the date (the "stock acquisition date") the interested
shareholder acquired his 10% or greater interest, unless the business
combination (or the acquisition of the 10% or greater interest) was approved
before the stock acquisition date by the Company's Board of Directors. After the
three-year period, a business combination that was not so approved can be
consummated only if it is approved by a majority of the outstanding voting
shares not held by the interested shareholder or is made at a specified price
intended to provide a fair price for the shares held by
39
<PAGE> 42
noninterested shareholders. Section 180.1141 is not applicable to shares of
Common Stock acquired by a shareholder prior to the registration of the Common
Stock under the Exchange Act and shares acquired before September 10, 1987.
INDEMNIFICATION
The Company's directors and officers are entitled to certain statutory
rights to be indemnified by the Company against certain litigation-related
liabilities and expenses, provided the director or officer is either successful
in the defense of such litigation or is otherwise determined not to have engaged
in willful misconduct, knowingly violated the law, failed to deal fairly with
the Company or its shareholders or derived an improper personal benefit in the
performance of his duties to the Company. These rights are incorporated in the
Company's By-Laws. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
40
<PAGE> 43
SELLING STOCKHOLDER
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock by the Selling Stockholder as of January
8, 1999. Upon the completion of the offering and assuming the sale by the
Selling Stockholder of all of the Shares of Common Stock available for resale
under this Prospectus, the Selling Stockholder will not own more than 1% of the
outstanding Common Stock of the Company.
<TABLE>
<CAPTION>
Shares Owned Shares Being Shares Owned After
Before Offering Offered Offering
Number Percent
<S> <C> <C> <C> <C>
Kingsbridge Capital Limited 2,413,124(1) 20%(2) 2,413,124(1) 0(3)
P.O. Box 3340
Dawson Building
Main Street
Tortola,
British Virgin Islands
Total
</TABLE>
(1) Includes 2,213,124 Shares of Common Stock which may be issued pursuant
to the Equity Line Agreement and 200,000 Shares of Common Stock which
are issuable upon exercise of the Warrant.
(2) As of the date of this Prospectus, the Selling Stockholder does not own
any shares of the Company's Common Stock. If all of the Shares offered
hereby were purchased and held by the Selling Stockholder, it would
hold approximately 20% of the outstanding Common Stock of the Company.
(3) Assumes that all Shares acquired pursuant to the Equity Line Agreement
and the Warrant are sold pursuant to this Prospectus.
The Selling Stockholder has not had any material relationship with the
Company or any of its affiliates within the past three years other than as a
result of the ownership of Common Stock or as a result of the negotiation and
the execution of the Equity Line Agreement.
The Shares offered hereby by the Selling Stockholder are to be acquired
pursuant to the Equity Line Agreement between the Company and the Selling
Stockholder or upon exercise of the Warrant. Under the Equity Line Agreement,
the Company agreed to register the Shares for resale by the Selling Stockholder
to permit the resale of such Shares from time to time by the Selling Stockholder
in the market or in privately-negotiated transactions. The Company will prepare
and file such amendments and supplements to the registration statement as may be
necessary in accordance with the rules and regulations of the Securities Act to
keep it effective for a period of approximately 30 months.
The Company has agreed to bear certain expenses (other than broker
discounts and commissions, if any) in connection with the registration
statement.
41
<PAGE> 44
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Stockholder that the
Selling Stockholder may sell the Shares from time to time in transactions on the
American Stock Exchange, in negotiated transactions, or otherwise, or by a
combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices or at negotiated
prices. The Selling Stockholder may effect these transactions by selling the
Shares to or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholder or the
purchasers of the Shares for whom the broker-dealer may act as an agent or to
whom they may sell the Shares as a principal, or both. The compensation to a
particular broker-dealer may be in excess of customary commissions.
The Selling Stockholder is an "underwriter" within the meaning of the
Securities Act in connection with the sale of the Shares offered hereby.
Broker-dealers who act in connection with the sale of the Shares may also be
deemed to be underwriters. Profits on any resale of the Shares as a principal by
such broker-dealers and any commissions received by such broker-dealers may be
deemed to be underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in such transactions as agent may
receive commissions from the Selling Stockholder (and, if they act as agent for
the purchaser of such Shares, from such purchaser). Broker-dealers may agree
with the Selling Stockholder to sell a specified number of Shares at a
stipulated price per share and, to the extent such a broker-dealer is unable to
do so acting as agent for the Selling Stockholder, to purchase as principal any
unsold Shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholder. Broker-dealers who acquire Shares as principal may
thereafter resell such Shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) on the American Stock Exchange, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Shares commissions computed as described above. To the extent required under the
Securities Act, a supplemental prospectus will be filed, disclosing (a) the name
of any such broker-dealers; (b) the number of Shares involved; (c) the price at
which such Shares are to be sold; (d) the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable; (e) that such
broker-dealers did not conduct any investigation to verify the information set
out or incorporated by reference in this Prospectus, as supplemented; and (f)
other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Shares may not simultaneously engage in
market making activities with respect to such securities for a period beginning
when such person becomes a distribution participant and ending upon such
person's completion of participation in a distribution, including stabilization
activities in the Common Stock to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition and without
limiting the foregoing, in connection with transactions in the Shares, the
Company and the Selling Stockholder will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
imitation, Rule 10b-5 and, insofar as the Company and the Selling Stockholder
are distribution participants, Regulation M and Rules 100, 101, 102, 103, 104
and 105 thereof. All of the foregoing may affect the marketability of the
Shares.
The Selling Stockholder has agreed that it will not engage in short
sales of the Company's Common Stock except that the Selling Stockholder may
enter into any short sale or other hedging arrangement it deems appropriate with
respect to Shares it receives under the Equity Line Agreement after it receives
a Put Notice with respect to such Shares so long as such short sales or
arrangements do not involve more than the number of such Shares with respect to
that Put Notice.
The Selling Stockholder will pay all commissions and certain other
expenses associated with the sale of the Shares. The Shares offered hereby are
being registered pursuant to contractual obligations of the Company, and the
Company has paid the expenses of the preparation of this Prospectus. The Company
has also agreed to indemnify the Selling Stockholder with respect to the Shares
offered hereby against certain liabilities, including,
42
<PAGE> 45
without limitation, certain liabilities under the Securities Act, or, if such
indemnity is unavailable, to contribute toward amounts required to be paid in
respect of such liabilities.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.,
Milwaukee, Wisconsin.
EXPERTS
The consolidated financial statements of the Company at September 30,
1998 and for the two years in the period ended September 30, 1998 included in
this Prospectus have been audited by McGladrey & Pullen LLP, independent
auditors, as set forth in their report (which contains an explanatory paragraph
with respect to conditions which raise substantial doubt about the Company's
ability to continue as a going concern), in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
amounts and classification of liabilities that might result from the outcome of
that uncertainty.
43
<PAGE> 46
THE FEMALE HEALTH COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Document Page No.
<S> <C>
Audited Consolidated Financial Statements.
Report of McGladrey & Pullen, LLP, Independent Auditors. F-1
Consolidated Balance Sheet as of September 30, 1998. F-2
Consolidated Statements of Operations for the years ended September 30,
1998 and 1997. F-3
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1998 and 1997. F-4
Consolidated Statements of Cash Flows for the years ended September 30,
1998 and 1997. F-7
Notes to Consolidated Financial Statements. F-10
</TABLE>
F-i
<PAGE> 47
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Female Health Company and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of The
Female Health Company and subsidiaries, as of September 30, 1998, and
the related statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Female Health Company and subsidiaries as of September 30, 1998, and
the results of their operations and their cash flows for the years
ended September 30, 1998 and 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been presented
assuming that The Female Health Company will continue as a going
concern. As more fully described in Note 15, the Company has
experienced slower than expected growth in revenues from its sole
product, which has adversely affected the Company's current results of
operations and liquidity. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 15. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
McGLADREY & PULLEN, LLP
/s/ MCGLADREY & PULLEN, LLP
Schaumburg, Illinois
November 5, 1998, except for the fourth
paragraph of Footnote 15 as to which
the date is November 19, 1998
F-1
<PAGE> 48
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, 1998
------------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash $1,480,287
Accounts receivable, net of allowance for doubtful accounts of
$80,000 and allowance for product returns of $230,000 1,138,274
Inventories 925,425
Prepaid expenses and other current assets 395,293
-----------
TOTAL CURRENT ASSETS 3,939,279
OTHER ASSETS
Intellectual property, net of accumulated amortization of $336,098 924,319
Other assets 165,701
PROPERTY, PLANT AND EQUIPMENT
Equipment, furniture and fixtures 4,114,371
Less: accumulated depreciation (1,584,776)
-----------
2,529,595
-----------
$7,588,894
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, related party, net of unamortized discount of $162,861 $837,139
Current maturities of long-term debt and capital lease obligations 626,066
Accounts payable 473,979
Accrued expenses and other current liabilities 614,820
Preferred dividends payable 147,634
-----------
TOTAL CURRENT LIABILITIES 2,699,638
LONG-TERM LIABILITIES
Long term debt and capital lease obligations, less current maturities 4,882
Deferred gain on sale of facility 1,766,611
Other long term liabilities 153,186
-----------
4,624,317
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, Series 1, par value $.01
per share. Authorized 5,000,000 shares; issued and outstanding 680,000 shares 6,800
Common Stock, par value $.01 per share.
Authorized 15,000,000 shares; issued and outstanding 10,417,757 shares 104,158
Additional paid-in capital 43,833,843
Foreign currency translation gain 304,980
Accumulated deficit (41,295,874)
-----------
2,953,907
Treasury Stock, at cost, 10,000 shares (19,330)
-----------
Total Stockholders' Equity 2,934,577
-----------
$7,558,894
===========
</TABLE>
See notes to consolidated financial statement
F-2
<PAGE> 49
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended September 30
1998 1997
---------- -----------
<S> <C> <C>
NET REVENUES $5,451,399 $2,916,408
COST OF PRODUCTS SOLD:
Cost of goods sold 6,130,819 4,530,185
Change in obsolescence reserve (857,450) (1,054,476)
---------- -----------
Total Costs of Products Sold 5,273,369 3,475,709
---------- -----------
GROSS PROFIT (LOSS) 178,030 (559,301)
OPERATING EXPENSES
Advertising and promotion 433,821 1,642,347
Selling, general and administrative 2,895,108 3,036,765
---------- -----------
Total Operating Expenses 3,328,929 4,679,112
---------- -----------
Operating (loss) (3,150,899) (5,238,413)
NONOPERATING INCOME (EXPENSE)
Interest expense (456,662) (1,268,980)
Interest income 133,104 176,717
Nonoperating income/(expense) 117,141 79,527
----------- -----------
(206,417) (1,012,736)
----------- -----------
Net (loss) (3,357,316) (6,251,149)
Preferred dividends accreted, Series 2 817,000 ---
Preferred dividends, Series 1 132,669 14,965
----------- -----------
Net (loss) attributable to common
stockholders (4,306,985) (6,266,114)
Net (loss) per common share outstanding ($0.43) (0.74)
Weighted average common shares outstanding 9,971,493 8,453,266
</TABLE>
See notes to consolidated financial statement
F-3
<PAGE> 50
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in
Stock Stock Capital
<S> <C> <C> <C>
Balance at September 30, 1996 $ --- $72,117 $33,755,072
Net loss --- --- ---
Issuance of 2,128,371 shares of Common Stock
upon conversion of debt --- 21,284 3,670,281
Issuance of 39,833 shares of Common Stock
upon exercise of stock options --- 398 178,268
Issuance of 124,564 shares of Common Stock
for consulting services --- 1,246 206,617
Issuance of 10,000 shares of Common Stock
under Stock Bonus Plan --- 100 53,025
Issuance of warrants with convertible debentures --- --- 30,176
Issuance of beneficial conversion feature
with convertible debentures --- --- 398,000
Issuance of warrants with short-term notes payable --- --- 250,000
Issuance of 680,000 shares of Preferred Stock
(net of offering costs of $96,252) 6,800 --- 1,596,948
Issuance of warrants for consulting services --- --- 89,500
Revaluation of options for legal services --- --- 10,500
Preferred stock dividends --- --- ---
Translation adjustment --- --- ---
------- -------- -----------
Balance at September 30, 1997 $6,800 $95,145 $40,238,387
Net Loss --- --- ---
Issuance of 729,927 shares of Preferred Stock
(net of offering costs of $156,616) 7,299 --- 1,836,085
Issuance of 729,927 shares of Common Stock upon
conversion of Preferred Stock (7,299) 7,299 ---
Issuance of 29,400 shares of Common Stock
upon exercise of stock options --- 294 58,506
Issuance of 25,000 shares of Common Stock
for consulting services --- 250 93,500
Issuance of 107,000 shares of Common Stock
under stock bonus plan --- 1,070 306,555
Issuance of 10,000 shares of Common Stock
upon exercise of warrants --- 100 19,900
Issuance of 18,000 options to employees --- --- 51,660
Issuance of warrants with short-term notes payable --- --- 297,500
Issuance of warrants for professional services --- --- 114,750
Preferred Stock dividends --- --- ---
Preferred Stock dividends accreted --- --- 817,000
Purchase of 10,000 Shares of Common
Stock held in Treasury --- --- ---
Translation adjustment --- --- ---
------- -------- -----------
Balance at September 30, 1998 $ 6,800 $104,158 $43,833,843
======= ======== ===========
</TABLE>
F-4
<PAGE> 51
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Foreign
Currency Cost of
Translation Accumulated Treasury
Gain (Loss) Deficit Stock Total
------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at
September 30, 1996 $83,858 ($30,722,775) --- $3,188,272
Net loss --- (6,251,149) --- (6,251,149)
Issuance of 2,128,371 shares
of Common Stock upon conversion
of debt --- --- --- 3,691,565
Issuance of 39,833 shares of
Common Stock upon exercise
of stock options --- --- --- 178,666
Issuance of 124,564 shares of
Common Stock for consulting
services --- --- --- 207,863
Issuance of 10,000 shares of
Common Stock under Stock
Bonus Plan --- --- --- 53,125
Issuance of warrants with
convertible --- --- --- 30,176
Issuance of beneficial
conversion feature with
convertible debentures --- --- --- 398,000
Issuance of warrants with
short-term notes --- --- --- 250,000
Issuance of 680,000 shares
of Preferred Stock (net
of offering costs of $96,252) --- --- --- 1,603,748
Issuance of warrants for
consulting --- --- --- 89,500
Revaluation of options for
legal services --- --- --- 10,500
Preferred stock dividends --- (14,965) --- (14,965)
Translation adjustment 119,337 --- --- 119,337
--------- ------------- ----- ------------
Balance at
September 30, 1997 $203,195 ($36,988,889) --- $3,554,638
Net loss --- (3,357,316) --- (3,357,316)
Issuance of 729,927
shares of Preferred
Stock (net of offering
costs of $156,616) --- --- --- 1,843,384
Issuance of 729,927
shares of Common Stock
upon conversion of
Preferred Stock --- --- --- - --
Issuance of 29,400 shares
of Common Stock upon
exercise of stock options --- --- --- 58,800
Issuance of 25,000 shares
of Common Stock for
consulting services --- --- --- 93,750
Issuance of 107,000 shares
of Common Stock under
stock bonus plan --- --- --- 307,625
Issuance of 10,000 shares of
Common Stock upon exercise
of warrants --- --- --- 20,000
Issuance of 18,000 options
to employees --- --- --- 51,660
Issuance of warrants with
short-term notes --- --- --- 297,500
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 in
Treasury --- --- (19,330) (19,330)
Translation adjustment 101,785 --- --- 101,785
--------- ------------ -------- ------------
Balance at
September 30, 1998 $304,980 ($41,295,874) ($19,330) $2,934,577
========= ============ ======== ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 52
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) ($3,357,316) ($6,251,149)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation 533,994 553,298
Amortization of intellectual property rights 123,437 121,741
Provision for (recovery of) inventory obsolescence (857,450) (1,054,476)
Provision for doubtful accounts, returns and discounts 24,717 119,274
(Gain) loss on disposal of equipment -- (84,646)
Proceeds from issuance of common stock for bonuses and consulting services 401,375 --
Issuance and revaluation of warrants and options 166,410 360,988
Amortization of debenture issuance costs -- 27,507
Amortization of discounts on notes payable and convertible debentures 329,327 954,820
Amortization of deferred income realized on U.K. grant (61,274) (39,870)
Write down of note receivable to realizable value -- 92,471
Amortization of deferred gain on sale and leaseback of building (94,795) (70,119)
Changes in operating assets and liabilities:
Accounts receivable (538,219) (271,173)
Inventories 891,421 1,086,999
Prepaid expenses and other current assets (92,058) 28,260
Accounts payable (411,286) 138,532
Accrued expenses and other current liabilities 188,798 (730,929)
---------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (2,752,919) (5,018,472)
INVESTING ACTIVITIES
Capital expenditures (58,827) (24,597)
Proceeds from sale of property and equipment -- 3,376,056
Proceeds from repayment of note receivable 750,000 --
Proceeds from return of lease deposits 90,859 62,031
Payments for lease deposits -- (245,953)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 782,032 3,167,537
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 1,843,384 1,603,748
Proceeds from issuance of common stock upon exercise of options and warrants 78,800 178,666
Purchase of Common Stock held in Treasury (19,330) --
Proceeds from related party notes issued 1,000,000 1,000,000
Proceeds from convertible debentures issued -- 2,020,000
Payments on notes payable, related party (1,000,000) (2,160,000)
Costs to issue convertible debentures -- (155,400)
Payments on long-term debt and capital lease obligations (113,131) (1,872,560)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,789,723 614,454
Effect of exchange rate changes on cash 27,984 (44,132)
---------- ----------
Increase (decrease) in cash (153,180) (1,280,613)
Cash at beginning of year $1,633,467 2,914,080
---------- ----------
Cash at end of year $1,480,287 $1,633,467
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 53
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30
1998 1997
---------- ----------
<S> <C> <C>
Supplemental cash flow disclosures:
Interest paid $125,246 $273,714
Supplemental schedule of noncash investing and financing activities:
Convertible debentures converted to common stock, net of unamortized
discounts and issuance costs -- 3,691,565
Issuance of warrants on convertible debentures and notes payable 297,500 280,176
Capital lease obligations incurred for equipment -- 56,588
Preferred dividends declared Series 1 132,669 14,965
Preferred dividends accreted, Series 2 817,000 --
Sale of manufacturing facility:
Proceeds from sale -- 3,365,000
Depreciated cost of property -- (1,398,819)
---------- -----------
Deferred gain on sale -- 1,966,181
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 54
Note 1. Nature Of Business and Significant Accounting Policies
Principles of consolidation and nature of operations: The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, The Female Health Company - UK and The Female Health Company - UK,
plc, previously Chartex Resources Limited and Chartex International, plc
("Chartex"), respectively. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Female Health Company ("FHC"
or the "Company") is currently engaged in the marketing, manufacture and
distribution of a consumer health care product known as the Reality female
condom, "Reality," in the U.S. and "femidom" or "femy" outside the U.S. The
Female Health Company - UK, is the holding company of The Female Health Company
- - UK, plc, which operates a 40,000 sq. ft. leased manufacturing facility located
in London, England.
The 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 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 equivalents: Substantially all of the Company's cash was on deposit
with one financial institution.
Inventories: Inventories are valued at the lower of cost or market. The
cost is determined using the first-in, first-out (FIFO) method.
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, furniture and fixtures and assets under capital leases:
Depreciation and amortization is computed by the estimated useful lives of the
respective assets which range as follows:
<TABLE>
<S> <C>
Equipment 5 - 10 years
Furniture and fixtures 3 years
</TABLE>
F-9
<PAGE> 55
Amortization of assets under capital lease is included with depreciation and
amortization for owned assets.
Intellectual property rights: The Company holds patents on the Female
Condom in the United States, the European Union, Japan, Canada, Australia and
The People's Republic of China and holds patents on the manufacturing technology
in various countries. The Company also licenses the trademark "Reality" in the
United States and has trademarks on the names "femidom" and "femy" in certain
foreign countries. Intellectual property rights are amortized on a straight-line
basis over their estimated useful life of twelve years.
Financial instruments: The Company has no financial instruments for which
the carrying value materially differs from fair value.
Revenue Recognition: Revenues from product sales are recognized as the
products are shipped to the customers.
Research and Development Costs: Research and development costs are expensed
as incurred. The amount of costs expensed for the years ended September 1998 and
1997 was $2,500 and $60,811, respectively.
Stock-Based Compensation: The value of stock options awarded to employees
is measured using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The
Company has provided pro forma disclosures of net income as if the fair
value-based method prescribed by Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", ("FAS 123"). was used in measuring
compensation expense in Note 7.
Income Taxes: The Company files separate income tax returns for its foreign
subsidiaries. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109) requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are also provided for carryforwards for income tax purposes.
In addition, the amount of any future tax benefits is reduced by a valuation
allowance to the extent such benefits are not expected to be realized.
Advertising: The Company's policy is to expense production costs in the
period in which the advertisement is initially presented to consumers.
Net (Loss) Per Common Share: Net (loss) per common share is computed using
the weighted average number of shares of common stock outstanding. Fully diluted
income per share is not presented for each of the periods since the effect of
including common equivalent shares would be anti-dilutive.
Reclassifications: Certain prior year amounts have been reclassified on the
Consolidated Statements of Cash Flows to conform to the 1998 presentation.
Note 2. Inventories
The components of inventory consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Raw material $ 309,390
Work in process 138,409
Finished goods 518,360
Less allowance for obsolescence (40,734)
---------
Net Inventory $ 925,425
=========
</TABLE>
F-10
<PAGE> 56
Note 3. Leases
Equipment, furniture and fixtures include the following amounts for leases
which have been capitalized at September 30, 1998:
<TABLE>
<S> <C>
Leasehold interest in equipment, furniture and fixtures $ 73,539
Less accumulated amortization (28,727)
--------
$ 44,812
========
</TABLE>
The Company entered into a seven year operating lease with a third party
for office space effective September 12, 1994. The lease is cancelable at the
end of the 60th month of the term of the lease upon payment of a termination fee
of $63,867. The Company also has an informal agreement to reimburse an affiliate
for office space used by the officers of the Company. Reimbursement for the
affiliate rent expense was $48,146 and $51,256 in 1998 and 1997, respectively.
The affiliate's lease is with an unrelated third party which expires January 31,
2001. On November 1, 1998 the affiliate sublet the office space for the
remaining term of the lease.
On December 10, 1996, the Company entered into what is in essence a sale
and leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received $3,365,000 (Pounds)
1,950,000 for leasing the facility to a third party for a nominal annual rental
charge and for providing the third party with an option to purchase the facility
for one pound during the period December 2006 to December 2027.
As part of the same transaction, the Company entered into an agreement to
lease the facility back from the third party for base rents of $336,000 (Pounds)
195,000 per year payable quarterly until 2016. The lease is renewable through
December 2027. The Company was also required to make a security deposit of
$336,000 (Pounds) 195,000 to be reduced in subsequent years. The facility had a
net book value of $1,398,819 (Pounds) 810,845 on the date of the transaction.
The $1,966,181 (Pounds) 1,139,155 gain which resulted from this transaction will
be recognized ratably over the initial term of the lease. Unamortized deferred
gain as of September 30, 1998 was $1,766,611 (Pounds) 1,039,489. Concurrent with
this transaction, the Company repaid the mortgage loan on this property of
$1,834,000 (Pounds) 1,062,500.
In 1987, a subsidiary entered into a lease for office and factory space
expiring January 31, 2001. These offices 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 lease rent expense in total and separately for transactions with
related parties is as follows:
<TABLE>
<CAPTION>
September 30
1998 1997
-------- --------
<S> <C> <C>
Operating lease expense:
Factory and office leases $820,695 $579,197
Office space used by officers 48,146 51,255
Other 17,811 88,772
-------- --------
Total lease expense $140,289 $719,224
======== ========
</TABLE>
F-11
<PAGE> 57
Future minimum payments under capital and operating leases, including planned
reimbursement of affiliate for office space used by officers, consisted of the
following at September 30, 1998:
<TABLE>
<CAPTION>
Rentals
Receivable
Under
Capital Operating Subleases
-------- ---------- ----------
<S> <C> <C> <C>
1999 $19,526 $ 514,502 $46,850
2000 4,882 490,416 39,204
2001 --- 459,839 13,068
2002 --- 331,403 ---
2003 --- 331,403 ---
Thereafter --- 4,376,537 ---
-------- ---------- -------
Total minimum payments $24,408 $6,504,099 $99,122
========== =======
Amount representing interest ($ 5,138)
--------
$19,270
========
</TABLE>
Note 4. Notes Payable and Long-Term Debt
During 1997, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt, a current director of the Company. The outstanding note payable
bears interest at 12% and is payable in full in 1998. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000 shares
of the Company's common stock at $1.848 per share, which represented the average
trading price for the five trading days prior to the closing date for the
transaction and resulted in an initial discount on the note of $250,000. Any
stock issued under the warrants carry certain registration rights. The warrants
expire in 2004. In addition, if the Company defaults on its obligation under the
note, the Company is required to issue an additional 200,000 shares of its
common stock to Mr. Dearholt in addition to all other remedies to which Mr.
Dearholt may be entitled. The note was repaid in full in 1998. The discount in
combination with the note's 12% coupon resulted in an effective interest rate of
53 percent on the note.
During 1998, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt, a current director of the Company. The outstanding note payable
bears interest at 12% and is payable in full in 1999. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000 shares
of the Company's common stock at $2.25 per share, which represented the average
trading price for the five trading days prior to the closing date for the
transaction and resulted in an initial discount on the note of $297,500. Any
stock issued under the warrants carry certain registration rights. The warrants
expire in 2006. In addition, if the Company defaults on its obligation under the
note, the Company is required to issue an additional 200,000 shares of its
common stock to Mr. Dearholt in addition to all other remedies to which Mr.
Dearholt may be entitled. The note is recorded at September 30, 1998, net of
unamortized discount of $162,861. The discount in combination with the note's
12% coupon resulted in an effective interest rate of 63 percent on the note.
On February 20, 1997, the Company issued convertible debentures for $1,989,824
which is net of $30,176 in unamortized discount; (the Debentures) at 8% maturing
in 1999. These Debentures are convertible in the Company's common stock at the
lesser of $2.875 (representing the average market price for the five
F-12
<PAGE> 58
days preceding the date the Debentures were sold) or 80% of the market price at
the time the debentures are converted into FHC common stock. The discount
relates to the valuation of the detachable warrants for 67,333 shares of common
stock. During fiscal 1997, the debentures were all converted into 1,364,625
shares of common stock. These convertible debentures included a beneficial
conversion feature valued at $398,000. The Company recorded the value of the
beneficial conversion feature as additional paid in capital and interest
expense during the year ended September 30, 1997.
At September 30, 1996, there were convertible debentures of $1,910,000 (net of
$90,000 in unamortized discount) with detachable warrants for 40,201 shares of
common stock (the Debentures) at 8% maturing in 1999. These Debentures were
convertible into the Company's common stock at the lesser of $5.275
(representing the average market price for the five days preceding the date the
Debentures were sold) or 80% of the market price at the time the debentures are
converted into FHC common stock. All of these debentures were converted in
763,746 shares of common stock in fiscal 1997.
Upon conversion of the debentures, $277,610 of issuance costs and $110,007 of
unamortized discount were charged to equity and $59,182 of accrued interest was
credited to equity.
Long-term debt and capital lease obligations at September 30, 1998, consisted of
the following:
<TABLE>
<S> <C>
Foundation note, noninterest bearing, due 1999,
net of unamortized discount of $22,275, interest imputed at 11% $606,540
Capital lease obligations 24,408
--------
Total long-term debt and capital leases 630,948
Less current maturities 626,066
--------
Long-term portion $ 4,882
========
</TABLE>
The Foundation note for $606,450 (Pounds) 356,893 is a noninterest bearing
$628,815 (Pounds) 370,000 loan note payable to the Aage V. Jensen Charity
Foundation and due on January 31, 1999.
Note 5. Income Taxes
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss before income taxes as of September
30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
September 30
1998 1997
----------- -----------
<S> <C> <C>
Tax credit statutory rates $(1,141,490) $(2,130,479)
Nondeductible expenses 47,900 223,368
State income tax, net of federal benefits (159,100) (241,660)
Benefit of net operating loss not
recognized, increase in valuation allowance 1,252,690 2,073,129
Other --- 75,642
----------- -----------
$ --- $ ---
=========== ===========
</TABLE>
As of September 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $29,675,000 for income tax purposes expiring in
years 2005 to 2014. The benefit relating to $1,537,800 of these net operating
losses relates to exercise of Common stock options and will be credited directly
to stockholders' equity when realized. The Company also has investment tax and
research and development credit carryforwards for income tax purposes
aggregating approximately $173,000 at September 30, 1998, expiring in years 1999
to 2009. The Company's U.K. subsidiary, The Female Health Company-UK, plc has
U.K. net operating loss carryforwards of approximately $71,910,000 as of
September 30, 1998. These U.K. net operating loss carryforwards can be carried
forward indefinitely to be used to offset future U.K. taxable income.
Significant components of the Company's deferred tax assets and liabilities are
as follows at September 30, 1998:
F-13
<PAGE> 59
<TABLE>
<S> <C>
Deferred tax assets:
Federal net operating loss carryforwards $10,089,000
State net operating loss carryforwards 1,938,000
Foreign net operating loss carryforwards 21,573,000
Foreign capital allowances 3,886,000
Tax credit carryforwards 173,000
Accounts receivable allowances 119,000
Other 15,000
-----------
Total gross deferred tax assets (37,795,000)
Valuation allowance for deferred tax assets
----------
Deferred tax assets net of valuation allowance 18,000
Deferred tax liabilities: Equipment, furniture
and fixtures (18,000)
---------
Net deferred tax assets $ ---
=========
</TABLE>
Reconciliations of the valuation allowance for deferred tax assets for the year
ended September 30, 1998, is as follows:
<TABLE>
<S> <C>
Balance, beginning $(36,522,310)
Increase in valuation allowance charged
to current operations (1,252,690)
------------
Balance, ending $(37,775,000)
============
</TABLE>
The beginning of the year valuation allowance balance has been revised due to a
change in the foreign net operating loss carryforward and the foreign capital
allowances deferred tax asset. This change has no impact on the Company's net
loss for 1998 or 1997.
Note 6. Royalty Agreements
The Company has royalty agreements for sales of its products which provide for
royalty payments based on sales quantities and achievement of specific sales
levels. The amount of royalty expense was $38,451 and $24,894 for 1998 and 1997,
respectively.
F-14
<PAGE> 60
Note 7. Common Stock
Stock Option Plans
The Company has various stock option plans that authorize the granting of
options to officers, key employees and directors to purchase the Company's
Common Stock at prices generally equal to the market value of the stock at the
date of grant. Under these plans, the Company has 282,000 shares available for
future grants as of September 30, 1998. The Company has also granted options to
one of its legal counsel and an affiliate. Certain options are vested and
exercisable upon issuance, others over periods up to four years and still others
based on the achievement of certain performance criteria by the Company and
market prices of its Common Stock.
During 1997 the option prices of 749,865 options outstanding which were
exercisable at prices ranging from $5.9375 to $3.875 per share were lowered to
$2.00 per share. In connection therewith, additional expense of $10,500 was
recognized related to options that had been granted to legal counsel.
Summarized information regarding all of the Company's stock options is as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Shares Price
--------- -------
<S> <C> <C>
Outstanding at September 30, 1996 1,014,804 4.89
Granted 504,600 2.00
Exercised (39,833) 4.49
Expired or canceled (18,825) 6.53
--------
Outstanding at September 30, 1997 1,460,746 2.92
Granted 18,000 0.01
Exercised (29,400) 2.00
Expired or canceled (274,868) 5.50
---------
Outstanding at September 30, 1998 1,174,478 2.29
</TABLE>
The following table summarizes information about the Company's stock options
outstanding and exercisable at September 30, 1998.
F-15
<PAGE> 61
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
prices at 9/30/98 Life Price at 9/30/98 Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 18,000 2.5 $ 0.01 -- $ --
2.00 1,109,600 6.6 2.00 416.532 2.00
3.50 1,689 2.5 3.50 1,689 3.50
7.75 8,089 3.0 7.75 8,089 7.75
9.50 19,000 5.5 9.50 19,000 9.50
10.50 11,700 4.0 10.50 11,700 10.50
15.25 6,400 4.0 15.25 6,400 15.25
- -------------- ---------- ------ ------ ------- -------
$.01 to $15.25 1,174,478 6.5 $ 2.29 463,410 $ 2.81
</TABLE>
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
----------------------------------------------------------
Earnings Earnings
1998 per share 1997 per share
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss attributable to
common stockholders $(4,306,985) ($0.43) ($6,266,114) ($0.74)
Compensation expense
related to stock options granted (615,776) ($0.06) ($688,975) ($0.08)
----------- ------ ----------- ------
$(4,922,761) ($0.49) ($6,955,089) ($0.82)
=========== ====== =========== ======
</TABLE>
F-16
<PAGE> 62
As the provisions of FAS 123 have been applied only to options granted since
September 30, 1995, the resulting pro forma compensation cost is not
representative of that to be presented in future years, when the pro forma cost
would be fully reflected.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model assuming expected volatility of 69.1% and
risk-free interest rates of 4.43% and 5.86% for 1998 and 1997, respectively; and
expected lives of one to three years and 0.0% dividend yield in both periods.
The weighted average fair value of options granted or options with reduced
exercise price was $2.87 and $0.84 for the years ended September 30, 1998 and
1997, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
different from those of traded options, and because changes in the input
assumptions can materially affect the fair value estimate, the model may not
provide a reliable single measure of the fair value of its employee stock
options.
Stock Bonus Plan
During 1997, the Company adopted a stock bonus plan ("1997 Bonus Plan") to
provide stock bonuses in lieu of cash bonuses to key employees who are
responsible for the Company's future growth and financial success. The 1997
Bonus Plan provides for the award of up to 200,000 shares which are
nontransferable and subject to a risk of forfeiture for one year subsequent to
grant date. At September 30, 1998, 107,000 shares of restricted stock had been
issued to key employees and consultants. Expense under the plan was $307,625 and
$53,125 for the years ended September 30, 1998 and 1997, respectively.
Common Stock Purchase Warrants
During 1997 and 1998 the Company entered into consulting agreements with
separate third party professionals to provide investor relations services and
financial advisory services. In connection with the consulting agreements, the
Company granted common stock purchase warrants to purchase an aggregate 225,000
shares of the
F-17
<PAGE> 63
Company's common stock. In 1997, the Company adjusted warrants previously issued
under consulting agreements reducing the exercise price to $2.00 per share. The
Company recognized expense of $114,750 and $89,500 in 1998 and 1997,
respectively, under FAS 123 in connection with the exercisable shares. At
September 30, 1998, 165,000 warrants were exercisable.
10,000 warrants were exercised during 1998. At September 30, 1998, the following
warrants were outstanding:
<TABLE>
<CAPTION>
Number
Outstanding
-----------
<S> <C>
Warrants issued in connection with:
Investor relations services contract 90,000
Financial advisory services contract 75,000
Convertible Debentures (See Note 4) 107,534
Convertible Preferred Stock (See Note 8) 296,000
Notes Payable (See Note 4) 640,000
--------
Outstanding at September 30, 1998 1,208,534
=========
</TABLE>
At September 30, 1998, the Company had reserved a total of 2,955,813 shares of
its common stock for the exercise of options and warrants outstanding. This
amount includes shares reserved to satisfy obligations due if the Company
defaults on the payment of interest or principal on an $1 million note due March
25, 1999.
Issuance of Stock
The Company issued 25,000 shares of common stock with a market value of
approximately $93,750, and 124,564 shares of common stock with a market value of
approximately $207,863 in 1998 and 1997, respectively. The stock was issued to
consultants for providing investor relation services. Consulting expense of
$93,750 and $207,863 was recognized during the years ended September 30, 1998
and 1997, respectively.
Note 8. Preferred Stock
In 1997, FHC raised approximately $1.6 million proceeds, net of issuance costs
of $96,252, in a private placement of 680,000 shares of 8% cumulative
convertible preferred stock (Series 1) sold at $2.50 per share. In addition,
52,000 common stock purchase warrants were issued to the placement agents. Each
share of preferred stock is convertible into one share of the Company's common
stock on or after August 1, 1998. Annual preferred stock dividends will be paid
if and as declared by the Company's Board of Directors. No dividends or other
distributions will be payable on the Company's common stock unless dividends are
paid in full on the preferred stock. The preferred stock may be redeemed at the
option of FHC, in whole or in part, on or after August 1, 2000, subject to
certain conditions, at $2.50 per share plus accrued and unpaid dividends. In the
event of a liquidation or dissolution of the Company, the preferred stock would
have priority over the Company's common stock.
F-18
<PAGE> 64
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.84 million, net of insurance costs of
$156,616. The Series 2 Preferred Stock automatically converted into Common Stock
on a one-for-one basis, on April 3, 1998, the date in which the registration
statement registering the resale of the Common Stock was declared effective by
the SEC. The investors received four-year Warrants to purchase 240,000 shares of
Common Stock exercisable at a price per share equal to the lesser of $3.425 or
the average of the three closing bid prices per share of Common Stock for any
three consecutive trading days chosen by the investor during the 30 trading day
period ending on the trading day immediately prior to the exercise of the
Warrants. Individuals providing services to the Company's placement agent for
the above convertible Preferred Stock received Warrants to purchase 4,000 shares
of Common Stock exercisable at any time prior to December 31, 2001, at $4.11 per
share.
The Company's private placement of convertible Preferred Stock - Series 2 on
December 31, 1997 included a beneficial conversion feature valued at $500,000
and four-year warrants to purchase additional shares of common stock valued at
$317,000. In accordance with new SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants, a total of $817,000 as additional paid-in capital. The
corresponding discount of $817,000, associated with the issuance of the
convertible preferred stock is a one-time, non-recurring charge that has been
fully amortized and reflected as preferred dividends accreted in the
consolidated statements of operations for the year ended June 30, 1998. The
dividend accretion had no impact on the Company's cashflow from operations.
F-19
<PAGE> 65
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
$11,947 for 1998.
Note 10. Industry Segments And Financial Information About Foreign and
Domestic Operations
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations in different geographic areas (determined by the location
of the operating unit) is as follows.
<TABLE>
<CAPTION>
September 30
----------------------------
(Amounts in thousands) 1998 1997
------ ------
<S> <C> <C>
Net revenues:
United States $2,481 $2,050
International 2,970 866
Operating profit (loss):
United States (2,731) (3,120)
International (420) (2,118)
Identifiable assets:
United States 2,088 3,349
International 5,471 4,990
</TABLE>
On occasion, the Company's U.S. unit sells product directly to customers located
outside the U.S. Were such transaction reported by geographic destination of the
sale rather than the geographic location of the unit, U.S. revenues would be
decreased and International revenues increased by $396,00 and $293,000 in 1998
and 1997, respectively.
Note 11. Contingent Liabilities
The Company's future obligations under the terms of an employment agreement and
a facilities lease were assigned by the Company and assumed by the buyer as part
of the 1996 sale of the Company's subsidiary WPC Holdings, Inc. However, because
the third party creditor did not release the Company from any future liability
under these employment and lease agreements at the time of their assignment, the
Company remains contingently liable if Holdings defaults in making any payments
under the agreements. At September 30, 1998, the total future payments for these
contingent liabilities was $2.8 million for the lease of Holdings' facilities
and $0.3 million for the employment agreement.
The testing, manufacturing and marketing of consumer products by the Company
entail an inherent risk that product liability claims will be asserted against
the Company. The Company maintains product liability insurance coverage for
claims arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the century
date change occurs, date-sensitive systems may either fail or not operate
properly unless the underlying programs are modified or replaced. The Company is
assessing the extent of programming changes required to address this issue.
Although final cost estimates have not been determined, it is not expected that
these expenses will have a material impact on the Company's financial condition,
liquidity, or results of operations.
The Company's main financial and manufacturing hardware and software systems
have been tested and are either now Year 2000 compliant or are expected to be by
December 31, 1998. This was accomplished primarily through systems upgrades and
maintenance done over the last few years. The Company is in the process of
surveying major customers and suppliers regarding their Year 2000 readiness and,
to date, the Company is not aware of any significant Year 2000 issues at these
entities that would materially affect the Company's business. The Company
believes that if a Year 2000 problem develops at any of the Company's vendors
whereby the vendor becomes unable to address the Company's needs, alternative
vendors are readily available that could furnish the Company with the same or
similar suppliers or services without material undue delay or expense.
The majority of the Company's Year 2000 issues were corrected either through
systems upgrades or normal maintenance contracts. The cost of these improvements
to date has been approximately $20,000.
With regard to systems under the Company's control, the Company knows of no
significant exposure that the Company has to the Year 2000 issue since, if
necessary, the Company's systems are capable of accepting manually entered data.
The Company believes the worst case scenario is that the Company would have to
revert back to certain manual systems. The Company believes that its customers
and vendors are at various stages of compliance but the Company has not been
made aware of significant Year 2000 issues that would materially affect its
business with them. The Company will continue to monitor Year 2000 compliance
with its customers and vendors throughout 1999 but it will not be able to
achieve the same degree of certainty that it can with its own internal systems.
To the extent that the Company discovers minor internal systems that are not
Year 2000 compliant by mid-1999, it will have time to implement manual systems
by year-end 1999 which the Company believes will significantly reduce the
financial risk to the Company.
Although final cost estimates have not been determined, it is not expected that
these expenses will have a material impact on the Company's financial condition,
liquidity, or results of operations.
F-20
<PAGE> 66
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 Common Stock and has two officers and directors that are
also officers and directors of the Company. This lease space was used by an
officer of the Company. No agreement currently exists between the Company and
Phoenix regarding the lease, however, it is the Company's intention to continue
paying the rent in order to provide office space for its employees.
During 1998 the Company awarded Phoenix 25,000 shares of restricted Common Stock
with a market value of approximately $93,750 for consulting services provided to
the Company.
It has been and currently is the policy of the Company that transactions between
the Company and its officers, directors, principal shareholders or affiliates
are to be on terms no less favorable to the Company than could be obtained from
unaffiliated parties. The Company intends that any future transactions between
the Company and its officers, directors, principal shareholders or affiliates
will be approved by a majority of the directors who are not financially
interested in the transaction.
Note 13. Earnings Per Share
Net (loss) per Common share outstanding and diluted net (loss) per Common share
outstanding is based on the weighted average of shares of Common Stock
outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully dilutive
earnings per share. All earnings per share in the accompanying financial
statements have been presented to conform to Statement No. 128 requirements. The
Company has "in the money" options and warrants outstanding of 200,000 and
764,319 as of September 30, 1998 and 1997, respectively (see Note 7). The
Company also has preferred stock outstanding as of September 30, 1998, which is
convertible into 680,000 shares of Common Stock (see Note 8). The inclusion of
the options, warrants and convertible preferred stock in the computation of
diluted earnings per share would have resulted in a reduction of the loss per
share (antidilutive) and therefore both basic and diluted earnings per share
amounts were the same for each of the periods presented in the accompanying
financial statements.
Note 14. Current Accounting Pronouncements
Derivatives
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 requires companies to
record derivatives on the balance sheet as assets or liabilities at fair value.
Depending on the use of the derivative and whether it qualifies for hedge
accounting, gains or losses resulting from changes in the value of those
derivatives would either be recorded as a component of net income or as a change
in stockholders' equity. The Company is required to adopt this new standard for
the quarter and year beginning October 1, 1999. The Company currently has no
derivative instruments and, accordingly, the adoption of this statement has no
impact on its consolidated financial statements.
Comprehensive Income
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," that the Company will be required to adopt for
its year ended September 30, 1998, and disclose in its interim financial
statements beginning with the period ending December 31, 1997. This
pronouncement is not expected to have a significant impact on the Company's
financial statements. The Statement establishes standards for the reporting and
presentation of comprehensive income and its components. The statement requires
that items recognized as components of comprehensive income be reported in a
financial statement. The statement also requires that a company classify items
of other comprehensive income by their nature in a financial statement, and
display the accumulated balance of
F-21
<PAGE> 67
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. For
the years ended September 30, 1997 and 1996, the Company's components of
comprehensive income (loss) consisted of its reported net (loss) and foreign
currency translation adjustments.
Segments of an Enterprise
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued in July 1997 by the
Financial Accounting Standards Board. The Statement requires the Corporation to
disclose the factors used to identify reportable segments including the basis of
organization, differences in products and services, geographic areas, and
regulatory environments. The Statement additionally requires financial results
to be reported in the financial statements for each reportable segment. The
Statement is effective for financial statement periods beginning after December
15, 1997.
Note 15. Continuing Operations
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a loss of $3.4 million for the year ended September 30, 1998, and as of
September 30, 1998, had an accumulated deficit of $41.3 million. At September
30, 1998, the Company had working capital of $1.2 million and stockholders'
equity of $2.9 million. In the near term, the Company expects operating and
capital costs to continue to exceed funds generated from operations due
principally to the Company's fixed manufacturing costs relative to current
production volumes and the ongoing need to commercialize the female condom
around the world. As a result, operations in the near future are expected to
continue to use working capital. Management recognizes that the Company's
continued operations depend on its ability to raise additional capital through a
combination of equity or debt financing, strategic alliances and increased sales
volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the Female Condom. Management believes that
recent developments, including the Company's agreement with the UNAIDS, a joint
United Nations program on HIV/AIDS, provide an indication of the Company's early
success in broadening awareness and distribution of the Female Condom and may
benefit efforts to raise additional capital and to secure additional agreement
to promote and distribute the Female Condom throughout other parts of the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm specializing
in providing advice to healthcare and life-science companies. Pursuant to this
agreement, for a one-year period, Vector will act as the
F-22
<PAGE> 68
Company's exclusive financial advisor for the purposes of identifying and
evaluating opportunities available to the Company for increasing shareholder
value. These opportunities may include selling all or a portion of the business,
assets or stock of the Company or entering into one or more distribution
arrangements relating to the Company's product. This agreement has been extended
for an additional six months. There can be no assurance that any such
opportunities will be available to the Company or, if so available, that the
Company will ultimately elect or be able to consummate any such transaction.
On November 19, 1998, the Company executed an agreement with a private investor
("the Equity Line Agreement"). This agreement provides for the Company, at its
sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $6.0 million of the Company's Common Stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires 24 months after the effective date of the pending registration
statement and, among other things, provides for minimum and maximum puts ranging
from $100,000 to $1,000,000 depending on the Company's stock price and trading
volume. The timing and amount of drawdowns on this line of credit are totally at
the Company's discretion, subject to certain conditions. The Company is required
to draw down a minimum of $1 million during the two-year period. If the Company
does not draw down the minimum, the Company is required to pay the investor a
12% fee on that portion of the $1 million minimum not drawn down at the end of
the two-year period.
While the Company believes that its existing capital resources (including
expected proceeds from sales of Common Stock pursuant to the Equity Line
Agreement) will be adequate to fund its currently anticipated capital needs, if
they are not or the Company does not receive shareholder approval to amend its
Articles of Incorporation to increase its authorized Common Stock, enabling the
Company to sell sufficient Shares under the Equity Line Agreement, the Company
may need to raise additional capital until its sales increase sufficiently to
cover operating expenses. In addition, there can be no assurance that the
Company will satisfy the conditions required for it to exercise puts under the
Equity Line Agreement. Accordingly, the Company may not be able to realize all
or any of the funds available to it under the Equity Line Agreement.
Further, there can be no assurance, assuming the Company successfully raises
additional funds or enters into business agreements with third parties, that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate financing, management will be required to sharply
curtail the Company's efforts to promote the female condom and to curtail
certain other of its operations or, ultimately, cease operations.
F-23
<PAGE> 69
You should rely only on the information contained in this document or other
information we referred you to. We have not authorized anyone to provide you
with information that is different. This Prospectus does not constitute an offer
to sell or the solicitation of an offer to buy any securities other than those
specifically offered hereby or an offer to sell, or a solicitation of an offer
to buy, to any person in any jurisdiction in which such offer or solicitation
would be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since any of the dates as of which
information is furnished or since the date of this Prospectus.
THE FEMALE HEALTH COMPANY
2,413,124 SHARES OF COMMON STOCK
--------------------------------
PROSPECTUS
-------------------------------
__________, 1999
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Pursuant to sections 180.0850 to 180.0859 of the Wisconsin
Business Corporation Law, directors and officers of the Company are entitled to
mandatory indemnification from the Company against certain liabilities and
expenses (i) to the extent such officers or directors are successful in the
defense of a proceeding and (ii) in proceedings in which the director or officer
is not successful in the defense thereof, unless (in the latter case only) it is
determined that the director or officer breached or failed to perform his duties
to the Company and such breach or failure constitute: (a) willful failure to
deal fairly with the Company or its shareholders in connection with a matter in
which the director or officer had a material conflict of interest; (b) a
violation of the criminal law unless the director or officer had reasonable
cause to believe his or her conduct was lawful or had no reasonable cause to
believe his or her conduct was unlawful; (c) a transaction from which the
director or officer derived an improper personal profit; or (d) willful
misconduct. It should be noted that section 180.0859 of the Wisconsin Business
Corporation Law specifically states that it is the public policy of Wisconsin to
require or permit indemnification in connection with a proceeding involving
securities regulation, as described therein, to the extent required or permitted
under sections 180.0850 to 180.0858 as described above. Additionally, under the
Wisconsin Business Corporation law, directors of the Company are not subject to
personal liability to the Company, its shareholders or any person asserting
rights on behalf thereof for certain breaches or failures to perform any duty
resulting solely from their status as such directors, except in circumstances
paralleling those in subparagraphs (a) through (d) outlined above.
Consistent with sections 180.0850 to 180.0859 of the Wisconsin
Business Corporation Law, Article VIII of the Company's By-Laws provides that
the Company shall indemnify any person in connection with legal proceedings
threatened or brought against him by reason of his present or past status as an
officer or director of the Company in the circumstances described above. Article
VIII of the By-Laws also provides that the directors of the Company are not
subject to personal liability to the Company, its shareholders or persons
asserting rights on behalf thereof, as provided in the Wisconsin Business
Corporation Law. The By-Laws also contain a nonexclusivity clause which provides
in substance that the indemnification rights under the By-Laws shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any agreement with the Company, any By-Law or otherwise.
The indemnification provided as set forth above is not
exclusive of any other rights to which a director or an officer of the Company
may be entitled.
The general effect of the foregoing provisions is to reduce
the circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
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<PAGE> 71
Item 25. Other Expenses of Issuance and Distribution.
The expenses in connection with the offering are as follows:
<TABLE>
<CAPTION>
Item Amount*
<S> <C>
Registration
fee................................................................................. $ 1,026
American Stock Exchange Listing expenses............................................ 17,500
Printing expenses................................................................... 5,000
Legal fees and expenses............................................................. 25,000
Accounting fees and expenses........................................................ 10,000
Miscellaneous expenses.............................................................. 5,000
-------
Total................................................................. $63,526
=======
</TABLE>
- ----------
* All amounts estimated except the registration fee and the American Stock
Exchange Listing expenses.
Item 26. Recent Sales of Unregistered Securities.
On November 21, 1995, the Company borrowed $1 million from an affiliate
of Mr. Dearholt, a current director of the Company, under a one-year note
payable in full on November 20, 1996. As part of this transaction, Mr. Dearholt
guaranteed the Company's obligations under the $1 million promissory note. In
consideration of the transaction, the Company issued warrants to each of Mr.
Dearholt and the lender, which entitle each of them to purchase 10,000 shares of
the Company's Common Stock at $3.00 per share, which represented the average
trading price of the Company's Common Stock for the five trading days prior to
the issuance of such warrants. The warrants expire on November 20, 2000.
On March 12, 1996, the Company entered into an agreement with John A.
Wundrock and Thomas J. Bonesho, two of its former directors. Pursuant to this
agreement, the Company acknowledged the Mr. Wundrock and Mr. Bonesho incurred
$67,186.87 of expenses in connection with the Company's special meeting proxy
related to the approval of the sale of WPC Holdings, Inc., a former subsidiary
of the Company, and the change in the Company's name. In accordance with this
agreement, the Company agreed to reimburse Messrs. Wundrock and Bonesho for such
expenses by issuing them 15,580 shares of the Company's Common Stock,
representing the number of shares required to reimburse them for such expenses
based on the last sale price of the Company's Common Stock on March 11, 1996.
On March 25, 1996, the Company borrowed $1 million form Mr. Dearholt
under a one-year note payable in full on April 25, 1997. As part of the
transaction, the Company issued to Mr. Dearholt and his affiliate, warrants to
purchase 200,000 and 20,000 shares of the Company's Common Stock, respectively,
at $3.10 per share. The $3.10 per share price represented the average trading
price of the Company's Common Stock for the five trading days immediately prior
to the transaction. The warrants expire on March 25, 2001.
On March 25, 1997, the Company refinanced its $1 million borrowing from
Mr. Dearholt by extending the one-year note payable for an additional year to be
payable in full on March 25, 1998. Then again on March 25, 1998, the Company and
Mr. Dearholt agreed to extend the promissory note for an additional one year to
be payable in full on March 25, 1999. As part of these transactions, on the date
of each extension, the Company issued to Mr. Dearholt warrants to purchase
200,000 shares of the Company's Common Stock at exercise prices of $1.848 and
$2.25 per share, respectively. These exercise prices represented the average
trading price of the Company's Common Stock for the five trading days
immediately prior to each of the refinancings. The warrants expire on the
earlier of their exercise or five years after the date of their issuance.
II-2
<PAGE> 72
The Company believes that the sales described above were exempt from
registration under section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act because such sales were made to a limited
group of persons, each of whom was believed to have been a sophisticated
investor and each of whom had a pre-existing business or personal relationship
with the Company or its management and since each person was purchasing for
investment without a view to further distribution. Restrictive legends were
placed on all instruments evidencing the securities described above.
On September 12, 1996, the Company completed a Regulation S offering to
five offshore institutional investors selling to such investors 8% cumulative
convertible debentures for an aggregate principal amount of $2 million. The
debentures are convertible into the Company's Common Stock. In addition, the
debenture holders received warrants to purchase 40,201 shares of the Company's
Common Stock at an exercise price of $5.72 per share.
On February 20, 1997, the Company sold $2,020,000 of 8% convertible
debentures and related warrants to eight foreign investors pursuant to the
exemption from the securities registration requirement provided by Regulation S
promulgated under the Securities Act of 1933, as amended. The convertible
debentures mature on January 31, 2000 and bear interest at 8% per annum, payable
semiannually. The convertible debentures are convertible at the election of the
holders into shares of Common Stock in accordance with their terms. As required
by Regulation S, the Company offered and sold the convertible debentures and
warrants in an offshore transaction only to non-U.S. persons. The Company did
not use the services of an underwriter in this offering but, rather, European
American Services, Inc. acted as a distributor for the offering. For its
services as the distributor, European American Services, Inc. received a
placement fee of 7% of the principal amount of the debentures sold. In
connection with this Regulation S offering, the investors also received warrants
to purchase a total of 67,333 shares of the Company's Common Stock at an
exercise price of $5.00 per share.
The warrants expire on October 30, 1999.
The Company believes the above transactions were exempt from the
securities registration requirement pursuant to Regulation S promulgated under
the Securities Act because such sales were made to nonresidents of the United
States in an offshore transaction without any directed selling efforts made in
the United States by the Company, any distributor or any of their respective
affiliates or any persons acting on behalf of any of such parties. In addition,
the Company believes it implemented all offering restrictions and complied with
all of the terms and conditions of Regulation S which were imposed on the issuer
of the securities as of the date of each offering.
On July 29, 1997, the Company completed a private placement of 680,000
shares of Class A Convertible Preferred Stock--Series 1 (the "Series 1 Preferred
Stock") to a group of accredited investors. Each share of the Series 1 Preferred
Stock was sold for $2.50. In connection with this private placement, the Company
issued to the placement agents in the offering warrants exercisable for a total
of 52,000 shares of Common Stock at an exercise price of $2.50 per share. The
Company also paid the placement agents a cash commission equal to 7% of the
proceeds received by the Company from sales made by the placement agents. The
Company raised approximately $1.6 million of proceeds, net of issuance costs of
$96,252. 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 in that the
securities were sold in a private placement to only accredited investors, most
of whom had a pre-existing 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.
On December 31, 1997, the Company sold 729,927 shares of Class A
Convertible Preferred Stock--Series 2 ("Series 2 Preferred Stock") and warrants
to purchase 240,000 shares of the Company's Common Stock to three institutional
accredited investors pursuant to section 4(2) of the Securities Act and
Regulation D promulgated thereunder. Each share of Series 2 Preferred Stock
was sold for $2.74. This
II-3
<PAGE> 73
private placement netted the Company $1.82 million, after deduction for expenses
and commissions. in connection with this private placement, the Company issued
to its placement agent in the offering warrants to purchase 4,000 shares of the
Company's Common Stock at an exercise price of $4.11 per share. The Company also
paid the placement agent a commission equal to 7% of the gross proceeds raised
by the Company in this offering. The warrants issued to the investors are
exercisable at an exercise price per share equal to the lesser of (a) $3.25 or
(b) the average of the three closing bid prices per share of the Company's
Common Stock for any three consecutive trading days selected by the holder in
the 30 consecutive trading day period ending on the trading day immediately
prior to the date of exercise. Both the warrants issued to the investors and the
warrants issued to the Company's placement agent in this offering expire on
December 31, 2001. 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 in that
the securities were sold in a private placement to only sophisticated,
institutional, 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.
Item 27. Exhibits. The following exhibits are filed as part of this
Registration Statement.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company.1
3.2 Amended and Restated By-Laws of the Company.2
4.1 Amended and Restated Articles of Incorporation (same as Exhibit 3.1).1
4.2 Articles II, VII and XI of the Amended and Restated By-Laws of the
Company (included in Exhibit 3.2).2
4.3 Private Equity Line of Credit Agreement between the
Company and Kingsbridge Capital Limited dated
November 19, 1998.*
4.4 Registration Rights Agreement between the Company and
Kingsbridge Capital Limited dated as of November 19,
1998.*
4.5 Warrant to Purchase up to 200,000 shares of Common
Stock of the Company issued to Kingsbridge Capital
Limited as of November 19, 1998.*
5 Opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, s.c. regarding legality of securities
being issued.
10.1 Employment Agreement between John Wundrock and the Company dated
October 1, 1989.1
10.2 Wisconsin Pharmacal Company, Inc. (k/n/a The Female Health Company)
1990 Stock Option Plan.3
10.3 Commercial Building Lease dated May 1, 1992 covering
the Jackson, Wisconsin, office and manufacturing
facility.4
10.4 Reality Female Condom Clinical Trial Data Agreement between the
Company and Family Health International dated September 24, 1992.5
10.5 Trademark License Agreement for Reality Trademark.6
</TABLE>
II-4
<PAGE> 74
<TABLE>
<S> <C>
10.6 Office space lease between the Company and John Hancock Mutual Life
Insurance Company dated June 1, 1994.7
10.7 Employment Agreement dated September 10, 1994 between the Company and
Dr. Mary Ann Leeper.8
10.8 1994 Stock Option Plan.9
10.9 Investor relations and development services Consulting Agreement
between the Company and C.C.R.I. Corporation dated March 13, 1995.10
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company
and C.C.R.I. Corporation, as amended on April 22, 1996.11
10.11 Offshore Securities Subscription Agreement for the
sale of 370,000 shares of Company Common Stock dated
February 7, 1995.10
10.12 Offshore Securities Subscription Agreement for the
sale of 100,000 shares of Company Common Stock dated
February 7, 1995.10
10.13 Offshore Securities Subscription Agreement for the
sale of 500,000 shares of Company Common Stock dated
February 7, 1995.10
10.14 Settlement Agreement and Mutual Release of All Claims between WPC
Holdings, Inc., Reflect, Inc. and the Company dated June 15, 1995.11
10.15 Stock Purchase Agreement by and between WPC Acquisition Corporation
and the Company dated June 20, 1995.12
10.16 Agreement relating to the acquisition of the entire
issued share capital of Chartex Resources Limited and
exhibits thereto.13
10.17 Company Promissory Note payable to Stephen M. Dearholt for $1 million
dated March 25, 1996 and related Note Purchase and Warrant Agreement,
Warrants and Stock Issuance Agreement.12
10.18 Outside Director Stock Option Plan.11
10.19 Exclusive Distribution Agreement between Chartex International Plc
and Taiho Pharmaceutical Co., Ltd. dated October 18, 1994.14
10.20 Supply Agreement between Chartex International Plc and Deerfield
Urethane, Inc. dated August 17, 1994.14
10.21 Employment Letter dated February 28, 1990 from Chartex Resources Ltd.
to Michael Pope and Board amendments thereto.14
</TABLE>
II-5
<PAGE> 75
<TABLE>
<S> <C>
10.22 Grant Letter dated March 7, 1996 from the Government Office for
London of the Secretary of State of Trade and Industry regarding
economic development grant to the Company.14
10.23 Letter Amendment to Asset Sale Agreement dated April 29, 1996 between
the Company and Dowty Seals Limited and Chartex International Plc.14
10.24 Form of Offshore Securities Subscription Agreement entered into
between the Company and certain foreign investors on September 12,
1996.15
10.25 Form of 8% Convertible Debenture due August 31, 1999
issued by the Company to certain foreign investors on
September 12, 1996.15
10.26 Form of Warrant issued by the Company to certain foreign investors as
of September 12, 1996.15
10.27 Fund Raising Agreement dated May 1, 1998 by and
between Hartinvest-Medical Ventures and the Company.*
21 Subsidiaries of Registrant.*
23 Consent of McGladrey & Pullen, LLP
</TABLE>
- -----------------------
[FN]
* previously filed.
1 Incorporated herein by reference to the Company's Registration
Statement on Form S-18, Registration No. 33-35096, as filed with the
Securities and Exchange Commission on May 25, 1990.
2 Incorporated herein by reference to the Company's 1995 Form 10-KSB.
3 Incorporated herein by reference to the Company's December 31, 1990
Form 10-Q.
4 Incorporated herein by reference to the Company's June 30, 1992 Form
10-Q.
5 Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration No.
33-51586, as filed with the Securities and Exchange Commission on
September 28, 1992.
6 Incorporated herein by reference to the Company's 1992 Form 10-KSB.
7 Incorporated herein by reference to the Company's June 30, 1994 Form
10-Q.
8 Incorporated herein by reference to the Company's Registration
Statement on Form S-2, Registration No. 33-84524, as filed with the
Securities and Exchange Commission on September 28, 1994.
9 Incorporated herein by reference to the Company's 1994 Form 10-KSB.
10 Incorporated herein by reference to the Company's March 31, 1995 Form
10-Q.
</FN>
II-6
<PAGE> 76
[FN]
11 Incorporated herein by reference to the Company's Form S-1 Registration
Statement filed with the Securities and Exchange Commission on April
23, 1996.
12 Incorporated herein by reference to the Company's June 30, 1995 Form
10-Q.
13 Incorporated herein by reference to the Company's Current Report on
Form 8-K dated November 20, 1995.
14 Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Form S-1 Registration Statement filed with the Securities
and Exchange Commission on June 5, 1996.
15 Incorporated herein by reference to the Company's 1996 Form 10-K.
[FN]
Item 28. Undertakings.
The small business issuer hereby undertakes as follows:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) File, during any period in which offers and sales of securities may be
made pursuant to this registration, a post-effective amendment to this
registration statement to:
(i) include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and
(iii) include any additional or changed material information on the plan of
distribution.
(c) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(d) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-7
<PAGE> 77
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Chicago, State of Illinois, on the 12th day of January, 1999.
THE FEMALE HEALTH COMPANY
BY /s/ O.B. Parrish
Its Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ O.B. Parrish Chairman of the Board, Chief January 12, 1999
_________________________________ Executive Officer, acting
O.B. Parrish Principal Financial Officer,
acting Principal Accounting
Officer and Director
/s/ William R. Gargiulo, Jr. Secretary and Director January 12, 1999
_________________________________
William R. Gargiulo, Jr.
/s/ Mary Ann Leeper, Ph.D. President and Chief Operating January 12, 1999
_________________________________ Officer and Director
Mary Ann Leeper, Ph.D.
_________________________________ Director __________, 1999
David R. Bethune
/s/ Stephen M. Dearholt
_________________________________ Director January 12, 1999
Stephen M. Dearholt
</TABLE>
II-8
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit Number Description Number
<S> <C>
5 Option of Reinhart, Boerner, Van Decren, Norris & Rieselbach, s.c.
regarding legality of securities being issued.
23 Consent of McGladrey & Pullen, LLP
</TABLE>
<PAGE> 1
EXHIBIT 5
January 12, 1999
The Female Health Company
875 North Michigan Avenue
Suite 3660
Chicago, IL 60611
Gentlemen: Re: Registration Statement on Form SB-2
We have acted as counsel for The Female Health Company, a Wisconsin
corporation (the "Company"), in connection with the Company's registration of
2,413,124 shares (the "Shares") of its $.01 par value common stock at the
request of the Selling Stockholder listed in the Registration Statement (defined
below). Capitalized terms not otherwise defined have the meanings assigned to
them in the Registration Statement.
In such capacity we have examined, among other documents, the Amended
and Restated Articles of Incorporation of the Company and the Registration
Statement on Form SB-2 initially filed by the Company with the Securities and
Exchange Commission on December 8, 1998 covering the sale by the Selling
Stockholder of the Shares (the "Registration Statement"). Based on the foregoing
and such additional investigation as we have deemed necessary, it is our opinion
that:
1. The Company is a corporation existing under the laws of the State
of Wisconsin and, based solely on a certificate of the Department of Financial
Institutions of the State of Wisconsin; (a) has filed with the Department of
Financial Institutions during its most recently completed report year the
required annual report; (b) is not the subject of a proceeding under Wisconsin
Statutes Section 180.1421 to cause its administrative dissolution; (c) no
determination has been made by the Department of Financial Institutions that
grounds exist for such action; (d) no filing has been made with the Department
of Financial Institutions of a decree of dissolution with respect to the
Company; and (e) Articles of Dissolution of the Company have not been filed with
the Department of Financial Institutions.
<PAGE> 2
The Female Health Company
January 12, 1999
Page 2
2. The Shares are (or, after issuance upon exercise of the Warrant,
will be) legally issued, fully-paid and nonassessable, except as set forth in
Wisconsin Statutes section 180.0622(2)(b), as interpreted.
We consent to the filing of a copy of this opinion as an exhibit to the
Registration Statement on Form SB-2.
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, s.c.
BY /s/ David R. Krosner
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David R. Krosner
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EXHIBIT 23
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form
SB-2 (No.333-68515)of our report, dated November 5, 1998, except for the
fourth paragraph of footnote 15, as to which the date is November 19, 1998,
which includes an emphasis paragraph relating to an uncertainty as to the
Company's ability to continue as a going concern, on the consolidated financial
statements of The Female Health Company and subsidiaries. We also consent to
the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ McGLADREY & PULLEN, LLP
Schaumburg, Illinois
January 12, 1999
