SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-18849
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The Female Health Company, Inc.
-------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin 39-1144397
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
919 N. Michigan Avenue, Suite 2208, Chicago, IL 60611
- ----------------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
(312) 280-2281
-------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not applicable
-------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 6,468,312 shares outstanding as of May 13, 1996
FORM 10-Q
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION: PAGE
----
Unaudited Condensed Consolidated Balance Sheets -
March 31, 1996 and September 30, 1995.................. 3
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended March 31, 1996
and March 31, 1995..................................... 4
Unaudited Condensed Consolidated
Statements of Operations -
Six Months Ended March 31, 1996
and March 31, 1995..................................... 5
Unaudited Condensed Consolidated
Statements of Cash Flows -
Six Months Ended March 31, 1996
and March 31, 1995..................................... 6
Notes to Unaudited Condensed Consolidated
Financial Statements................................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 26
Item 6. Exhibits and Reports on Form 8-K............... 26
SIGNATURES....................................................... 28
2
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, September 30,
1996 1995
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,357,150 $ 1,521,344
Trade accounts receivable, net 657,475 415,089
Inventories, net of allowance for obsolescence of
$1,300,000 and $1,000,000 at March 31, 1996 and
September 30, 1995, respectively -- Note 7 2,919,965 3,192,570
Prepaid expenses and other current assets 206,183 233,095
Net current assets of discontinued operations -- Note 3 -- 3,913,511
------------ ------------
Total Current Assets 5,140,773 9,275,609
Prepaid royalties -- 1,875,491
Intangibles and other assets 2,569,030 399,062
Furniture, fixtures and equipment 4,026,220 351,784
Less accumulated depreciation and amortization (217,972) (115,644)
------------ ------------
3,808,248 236,140
Net noncurrent assets of discontinued operations -- Note 3 -- 1,952,269
------------ ------------
$ 11,518,051 $ 13,738,571
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank $ -- $ 109,503
Notes payable to stockholders 2,160,000 --
Trade accounts payable 1,080,042 1,121,549
Accrued royalty and exclusivity fees -- 4,761,198
Accrued expenses and other current liabilities 391,130 29,648
Due to stockholder -- 19,795
Current portion of long-term debt and capital lease
obligations 2,166,513 56,703
------------ ------------
Total Current Liabilities 5,797,685 6,098,396
Long-term debt and capital lease obligations, less current
maturities 633,144 89,017
Stockholders' Equity:
Convertible preferred stock -- --
Common stock 63,928 63,928
Paid-in-capital 29,411,702 29,411,702
Translation (loss) (19,983) --
Accumulated deficit (24,368,425) (21,924,472)
------------ ------------
Total Stockholders' Equity 5,087,222 7,551,158
$ 11,518,051 $ 13,738,571
============ ============
See notes to unaudited condensed consolidated financial statements.
3
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
------------------------------
1996 1995
----------- -----------
Net revenues $ 263,561 $ 426,434
Cost of products sold 661,566 293,681
----------- -----------
(398,005) 132,753
Expenses:
Selling 549,522 1,026,123
General and administrative 894,233 270,776
Research and new product development 82,895 43,469
Reality exclusivity fees -- 869,746
----------- -----------
1,526,650 2,210,114
Operating loss (1,924,655) (2,077,361)
Non operating expense (51,955) (12,364)
----------- -----------
Loss from continuing operations (1,976,610) (2,089,725)
Discontinued operations (Note 3):
Loss from operations, net of
applicable income tax benefit
of $0 and $15,000 (4,461) (315,813)
----------- -----------
Net Loss $(1,981,071) $(2,405,538)
=========== ===========
Net loss per common and dilutive common
equivalent shares outstanding:
Continuing operations $ (0.31) $ (0.39)
Discontinued operations -- (0.06)
----------- -----------
$ (0.31) $ (0.45)
=========== ===========
Weighted average number of common and
dilutive common equivalent
shares outstanding 6,392,732 5,392,693
=========== ===========
See notes to unaudited condensed consolidated financial statements.
4
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended March 31,
--------------------------
1996 1995
----------- -----------
Net revenues $ 730,508 $ 982,902
Cost of products sold 988,164 690,972
----------- -----------
(257,656) 291,930
Expenses:
Selling 797,334 3,092,224
General and administrative 1,140,209 603,575
Research and new product
development 154,612 67,415
Reality exclusivity fees -- 1,727,390
----------- -----------
2,092,155 5,490,604
----------- -----------
Operating loss (2,349,811) (5,198,674)
Non operating expense (89,681) (16,066)
----------- -----------
Loss from continuing operations (2,439,492) (5,214,740)
Discontinued operations (Note 3):
Loss from operations, net of
applicable income tax benefit of
$0 and $15,000 (4,461) (619,747)
----------- -----------
Net Loss $(2,443,953) $(5,834,487)
=========== ===========
Net loss per common and dilutive common equivalent
shares outstanding:
Continuing operations $ (0.38) $ (0.92)
Discontinued operations -- (0.11)
----------- -----------
$ (0.38) $ (1.03)
=========== ===========
Weighted average number of common and
dilutive common equivalent shares
outstanding 6,392,732 5,666,522
=========== ===========
See notes to unaudited condensed consolidated financial statements
5
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended March 31,
1996 1995
----------- -----------
Operating Activities:
Net (loss) $(2,443,953) $(5,834,487)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Provision for Reality exclusivity fees -- 1,727,390
Depreciation and amortization 217,185 30,193
Provision for doubtful accounts and returns 83,168 46,857
Provision for inventory obsolescence 300,000 --
Changes in operating assets and
liabilities of continuing operations (1,431,776) (907,517)
Discontinued operations -- noncash
charges and working capital changes -- (334,590)
----------- -----------
Net cash provided by (used in) operating
activities (3,275,376) (5,272,154)
Investing Activities:
Equipment purchases, net of disposals (268,803) (2,064)
Purchase of Chartex (5,191,565) --
Other -- (8,448)
Investing activities of discontinued operations -- (176,687)
Sale of WPC Holdings 7,250,000 --
Expenses incurred with sale of WPC Holdings (681,608) --
----------- -----------
Net cash provided by (used in) 1,108,024 (187,199)
investing activities
Financing Activities:
Proceeds from issuance of Common Stock and other -- 3,167,715
Costs of Common Stock issuance -- (25,200)
Proceeds from issuance of notes to stockholders 2,160,000 --
Decrease in notes payable (109,503) --
Payments of long-term capital lease obligations (27,544) (17,386)
Payment to shareholder (19,795)
Financing activities of discontinued operations -- (3,379)
----------- -----------
Net cash provided by financing activities 2,003,158 3,121,750
----------- -----------
Increase (decrease) in cash and cash equivalents (164,194) (2,337,603)
Cash and cash equivalents at beginning of period 1,521,344 3,525,145
----------- -----------
Cash and cash equivalents at end of period $ 1,357,150 $ 1,187,542
=========== ===========
See notes to unaudited condensed consolidated financial statements.
6
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 - BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended September 30,
1995.
NOTE 2 - NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
--------------------------------------------------------
Income (loss) per Common and Common Equivalent share is based on the
weighted average number of shares of Common Stock and common stock equivalents,
if dilutive, outstanding during the period.
NOTE 3 - DISCONTINUED OPERATIONS
-----------------------
On March 10, 1995, the Company's Board of Directors approved a formal
plan to sell WPC Holdings, Inc. ("Holdings"). On June 20, 1995, the Company
entered into a definitive agreement with a third party to sell Holdings for
total consideration of $8.75 million, valued for accounting purposes at $8.285
million. The definitive agreement (as amended) required that the sale of
Holdings close in early 1996. The Company completed the sale of Holdings on
January 29, 1996. See Note 5.
As a result of adopting a formal plan of disposition of Holdings
(which contained the leisure time, institutional health care and other products
segments), the Company has accounted for Holdings as a discontinued operation,
using a March 10, 1995 measurement date and, accordingly, prior period financial
statements have been reclassified to reflect the discontinuation of these
segments. The Company has realized income from discontinued operations during
the period from the measurement date (March 10, 1995) through the date of
disposal (January 29, 1996) and ultimately realized a loss on the sale of
Holdings. Since the measurement date and through September 30, 1995, the Company
has recorded income from discontinued operations of $684,346. The Company
deferred recognition of its 100% share of Holdings loss of $(229,000)
7
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 3 - DISCONTINUED OPERATIONS - CONTINUED
-----------------------------------
for the period from October 1, 1995 through January 29, 1996. The deferred loss
has been included with other expenses incurred and in connection with the sale
of Holdings.
Net revenues of the discontinued operations were as follows:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net revenues $1,167,396 $2,933,238 $3,258,346 $4,445,412
Net assets of Holdings have been segregated on the consolidated
balance sheets from their historic classifications to separately identify them.
Details of such amounts (exclusive of cash of $1,297,766 as of September 30,
1995) were as follows:
September 30
1995
------------
Accounts receivable-net.............. $ 1,436,736
Inventory............................ 3,030,483
Prepaid expense and other............ 339,310
Trade accounts payable............... (439,640)
Accrued expenses..................... (328,715)
Current maturities of capital lease
obligations......................... (124,663)
-----------
Net current assets of discontinued
operations.......................... $ 3,913,511
===========
Property, plant and equipment-net.... $ 2,469,898
Intangibles-net...................... 890,843
Other assets......................... 75,340
Long-term portion of capital lease
obligations......................... (1,458,204)
Minority interest.................... (25,608)
-----------
Net noncurrent assets of discontinued
operations.......................... $ 1,952,269
===========
8
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 4 - FINANCIAL CONDITION
-------------------
Historically, the Company has utilized capital to: a) fund losses from
continuing operations due principally to paying minimum royalties ("exclusivity
fees"), initiating the product launch of the female condom and obtaining FDA
approval; and b) purchase finished goods inventory related to the
licensing/royalty agreements with Chartex.
As discussed in Notes 3, 5 and 6, the Company has recently completed
the sale of Holdings and utilized the proceeds from the sale to purchase the
manufacturer and the Company's supplier of the female condom, Chartex
International, PLC and its parent, Chartex Resources Limited (collectively --
"Chartex"). The Company together with Chartex have fixed cash expenses of
approximately $400,000 per month before capital expenditures and debt repayment.
The Company had approximately $2.4 million of cash available for working capital
purposes immediately following the Chartex Acquisition on February 1, 1996. If
the Company meets its operating plans, it will need to source at least
approximately $2 million within the 4 months following March 31, 1996 and a
cumulative amount of approximately $8.1 million by March 31, 1997.
The Company intends to seek to source the foregoing amounts from one
or more of the following sources: refinance of the Chartex manufacturing
facility (including extraction of $1 million of cash from equity (appraised
value in excess of current loan value) totaling up to $2.7 million; up to
$768,000 from an economic development grant from the U.K. Regional Selective
Assistance Program (the "Program") which has been awarded to the Company. It is
anticipated that $300,000 will be received under this grant in 1996 and the
remainder in future years based on the achievement of certain employment,
operational and investment goals. The Company is required to utilize 50% of any
amounts it receives from this grant to prepay a portion of the (Pounds)520,000
note which the Company issued as part of the consideration of the Chartex
Acquisition; in addition, the grant is repayable by the Company to the Program
if certain conditions to the grant are not satisfied; up to $0.6 million from a
working capital credit facility which would be based on eligible accounts
receivable; and approximately $6.0 million from sales of Common Stock. However,
there can be no assurance that the Company will be able to source all or any
portion of this required capital through these or other sources or 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.
9
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 4 - FINANCIAL CONDITION - CONTINUED
-------------------------------
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. The Company has had preliminary contacts
with two possible sources for a refinancing of the Chartex facility. Based on
these discussions, management believes that the Company will be able to complete
a refinancing before the end of 1996. The Company does not currently have in
place any accounts receivable financing or other line of credit financing.
NOTE 5 - SALE OF HOLDINGS
----------------
On June 20, 1995 the Company entered into a stock purchase agreement
(the "Purchase Agreement") with WPC Acquisition Corporation ("Buyer"), an
affiliate of JLS Investment Group, Inc. and M & I Ventures Corporation for the
sale of 100% of the issued and outstanding common stock of its wholly-owned
subsidiary, Holdings.
The Company believed the Holdings and Female Health businesses were
disparate in nature and that selling Holdings and concentrating on the Female
Health business represented the best long term opportunity.
The sale of Holdings was approved by the Company's shareholders on
January 18, 1996. The total consideration received was $8.75 million and the
fair value of the aggregate consideration to the Company in connection with the
sale was $8.285 million. On January 29, 1996 the sale was completed. The excess
of the Company's investment in Holdings at closing (adjusted for intercompany
amounts and the reimbursement to Holdings of certain expenses and after
deducting the net deferred operating losses of Holdings for the period October
1, 1995 through the date of sale) over the fair value of the consideration
received was $4,461. The Company recorded the excess as a loss on sale of
discontinued operations during the quarter ended March 31, 1996.
In connection with the Sale and except as specifically indicated in
the Purchase Agreement, Buyer automatically assumed all of the liabilities of
Holdings. However, the Company remains contingently liable for any obligations
of the Company incurred in connection with Holdings if the Company is not able
to get a release of such liability from the third-party creditor (the
"Contingent Liabilities"). These Contingent Liabilities include the lease of
Holdings' facilities (approximately $3.6 million of future payments) and
employment agreements (with future payments of approximately $1.1 million) for
10
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 5 - SALE OF HOLDINGS - CONTINUED
----------------------------
certain officers of Holdings. Accordingly, if Buyer fails to pay any of the
Contingent Liabilities, the Company would be required to pay them and then seek
to collect from Buyer the amount paid by the Company.
NOTE 6 - ACQUISITION OF CHARTEX
----------------------
On November 20, 1995 the Company entered into an agreement (the
"Agreement") to purchase all of the issued and outstanding share capital of
Chartex Resources Limited the parent company and sole owner of stock in Chartex
International, PLC from Stamina Investments Limited ("Stamina"), a company
incorporated in the British Virgin Islands. Completion of the acquisition of
Chartex was conditioned on the Company's completion of its sale of Holdings (see
Note 5). The acquisition of Chartex closed on February 1, 1996.
Chartex is based in London, England and owns certain world-wide
intellectual property and proprietary manufacturing technology for the female
condom. Chartex licenses the rights to sell the female condom to marketing
partners throughout the world, including the Company in the U.S., Canada and
Mexico and owns a manufacturing facility in London to supply the world-wide
needs of the female condom.
The Agreement provided for total consideration of (Pounds)4.0 million
($6.1 million) with a fair value of $5.9 million. Consideration included
nonrefundable payments to fund Chartex's operating losses (Pounds)0.7 million
($1.1 million), (Pounds)2.45 million ($3.7 million) in cash at closing plus
interest on (Pounds)2.45 million at LIBOR plus 1% from December 1, 1995 through
closing ($0.05 million). In addition, the Company agreed to issue notes payable
of (Pounds)312,500 ($0.5 million) due 6 months after closing with interest at
LIBOR plus 1 1/8%, and a non-interest bearing note payable of (Pounds)520,000
($0.8 million) with a discounted present value of (Pounds)375,000 or $0.6
million due three years after closing.
Prior to closing, Stamina and a nonprofit foundation which has
provided Stamina and Chartex with debt funding waived repayment of approximately
(Pounds)20 million ($30 million) in notes payable by Chartex to them and paid
(Pounds)10 million ($15 million) in outstanding notes payable from Chartex to a
third party bank which were guaranteed by this nonprofit foundation.
11
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 6 - ACQUISITION OF CHARTEX - CONTINUED
----------------------------------
The Company had the following recorded assets and (liabilities) at
September 30, 1995 which arose in connection with transactions with Chartex
before its purchase by the Company:
Prepaid royalty asset............................. $ 1,830,578
Capitalized option fee (included in other assets.. $ 150,000
Accrued minimum royalties......................... $(4,761,198)
-----------
Net liability................................. $(2,780,620)
===========
These assets and liabilities were eliminated at the date of purchase
of Chartex (February 1, 1996) and effectively reduced the aggregate fair value
of consideration paid for Chartex (including expenses) from $6.3 million to $3.5
million. The fair value of the net assets purchased was $11.7 million.
The acquisition of Chartex is accounted for as a purchase. The fair
value of total consideration paid for Chartex (plus transaction expenses of
$0.35 million) is less than the fair value of net assets purchased by $8.2
million ("bargain purchase"). The Company reduced the fair value of Chartex's
long-term assets by the amount of the bargain purchase on a pro-rata basis.
Costs incurred in connection with the acquisition of Chartex and payments for
pre-close funding of Chartex's operating losses have included as part of the
total cost of the Chartex acquisition.
At December 31, 1995, Chartex had tax losses of approximately
(Pounds)39 million ($59.2 million) that may be available to be carried forward
and set off against future taxable profits.
The results of Resources and Chartex are combined with the Company
after the February 1, 1996 acquisition date.
12
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 6 - ACQUISITION OF CHARTEX - CONTINUED
----------------------------------
Unaudited proforma consolidated results of operations for the three
months ended March 31, 1996 and 1995 and for the six months ended March 31, 1996
and 1995 as though Chartex had been aquired as of October 1, 1994 follow:
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net revenues $ 287,000 $ 791,000 $ 786,000 $ 1,466,000
Net loss (2,522,000) (5,392,000) (3,828,000) (8,977,000)
Net loss per share $ (0.39) $ (1.00) $ (0.60) $ (1.58)
=========== =========== =========== ===========
Weighted average number of common and
dilutive common equivalent shares
outstanding 6,392,732 5,392,693 6,392,732 5,666,522
=========== =========== =========== ===========
The above amounts reflect adjustments for amortization of intangibles,
and depreciation based upon revalued purchased assets, imputed interest on
borrowed funds, and elimination of intercompany transactions.
NOTE 7 - INVENTORIES
-----------
The components of inventory consist of the following:
March 31, September 30,
1996 1995
---------- -------------
Raw Material $ 617,590 $ --
Finished Goods 2,302,375 3,192,570
---------- ----------
$2,919,965 $3,192,570
========== ==========
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
-------
On March 10, 1995 the Company's Board of Directors (the "Board")
approved a formal plan to dispose of the Company's Holdings subsidiary which
included the leisure-time, institutional health care and other products
segments. As a result of the Board's decision, the Company has reclassified
financial information to reflect Holdings' operations as a discontinued segment.
The sale of Holdings closed on January 29, 1996. See Note 5 to the Notes to
Unaudited Condensed Consolidated Financial Statements.
On November 20, 1995, the Company signed a definitive agreement to
purchase Chartex. Chartex is the owner of certain intellectual property and
proprietary manufacturing technology for the Company's sole continuing product,
the female condom. Prior to the acquisition of Chartex, the Company licensed its
rights to market and distribute Reality in its territories from Chartex. The
acquisition of Chartex closed on February 1, 1996. See Note 6 to the Notes to
Unaudited Condensed Consolidated Financial Statements.
Continuing operations reflect the corporate and Female Health Company
("FHC") operations and Chartex operations from February 1, 1996.
The purchase of Chartex provides the Company with certain worldwide
intellectual property relating to the female condom, including patents which
have been issued in the U.S., Japan and the European Union; proprietary
manufacturing technology; and a state-of-the-art manufacturing facility. The
purchase also resulted in the elimination of all previously booked and
contingent liabilities, including royalties, from the Company to Chartex, and
any prepaid royalties on the books of the Company. The acquisition enables the
Company to develop worldwide strategies for the production and marketing of the
female condom to consumers and the public sector. In addition, the acquisition
of Chartex permits the Company to consider U.S. and worldwide partners on an
unencumbered basis. The Company believes opportunity exists as the product has
yet to be launched in most major global markets including Germany, France,
Italy, Brazil, Mexico, Canada, India and China. The Company has an agreement
with a $1.0 billion distribution division of a $5.0 billion Japanese company to
launch the product in Japan. The launch will occur after Japanese regulatory
approval which is expected in late 1996 or early 1997.
As a result of the recent Chartex acquisition and sale of Holdings,
the Company does not believe that its historical results of operations are
necessarily indicative of future results.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL - CONTINUED
- -------------------
The Company's only current product in continuing operations is the
female condom, which is sold in the United States under the tradename
"Reality(R)".
As the only product commercially available which is controlled by the
woman and which offers protection against unintended pregnancy and sexually
transmitted disease, including AIDS, management believes the female condom
provides a significant global opportunity to the Company.
The female condom is a revolutionary new product which is in the early
stages of commercialization. The female condom has been on retailers shelves in
the United States since approximately September 1994 and has been launched in 14
other countries between 1992 and 1995 and since such time sales have been
substantially lower than management's expectations. Accordingly, the ultimate
level of consumer acceptance of the female condom is not yet known. Although
management believes that with additional marketing and consumer education, sales
will increase, if sales do not significantly increase, the Company will continue
to report operating losses and may experience significant inventory write downs
in the future and, ultimately, the Company's viability may be in jeopardy.
For the period beginning with the commercial launch of Reality in the
United States in the fourth quarter of fiscal 1994 and ending on March 31, 1996,
the Company sold approximately 3.4 million Reality devices. The Company's
average selling price during this period was $1.33 per device, including 250,000
devices sold to Family Health International for a clinical acceptability study
(supported by the United States Agency for International Development) at a
discounted price. From 1992 through March 31, 1996, Chartex sold approximately
5.4 million devices (exclusive of sales to the Company) at an average selling
price of less than $1.00 per device. Post acquisition, the Company estimates
that approximately 18.8 million female condoms would be required to be sold
worldwide at an average selling price of $1.00 each to break even on a cash
basis. This is equivalent to use of the female condom by approximately 525,000
women, world-wide, on an average of three times per month. The $1.00 per device
average selling price is based on the Company's estimate of projected mix in
sales of devices based on current prices.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL - CONTINUED
- -------------------
Reality devices sold by the Company were as follows for the periods indicated:
Three Months ended Six Months ended
March 31, March 31,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
Number of Reality devices sold 201,234 292,122 597,128 666,588
======= ======= ======= =======
The Company is particularly dependent upon the services of Mary Ann
Leeper, Ph.D., President and Chief Operating Officer and O.B. Parrish, Chairman
and Chief Executive Officer. The Company has an employment agreement with Dr.
Leeper. The loss of the services of either Mr. Parrish or Dr. Leeper could
adversely impact the Company's operations. The manufacture, sale and
distribution of the Company's products is regulated by a number of governmental
agencies. The Company is not aware of any actions by these regulating agencies
which would adversely impact the Company's financial condition or results of
operations.
COMMERCIAL LAUNCH OF REALITY
- ----------------------------
The launch of Reality began in September 1994. The introductory
promotion was education based and included seminars, roundtable discussions,
sales calls and print promotion to physicians, nurse practioners, and other
appropriate health care providers. Consumer advertising was directed to college
age students. Subsequent to January 1995, FHC's promotional efforts were reduced
due to limited capital availability. Efforts were focused primarily on print and
radio consumer advertising along with retail trade support. Marketing research
confirms that the target users are sexually active young adults who are
concerned about contracting sexually transmitted diseases and preventing
unintended pregnancy. A new marketing campaign was initiated in March 1996. The
program continues to be education based but is more specific regarding use of
the female condom. It is directed to the private and public sectors and includes
outreach programs, seminars, workshops, advertising in young adult magazines and
on urban music radio stations. The educational components answer the questions
of what the female condom is, how it is used, how it protects, why it's
important to practice
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMERCIAL LAUNCH OF REALITY - CONTINUED
- ----------------------------------------
safer sex, who should try the female condom and that using the female condom
feels good.
The outreach program has been augmented in several cities and states
by the respective departments of health. Examples are ongoing programs in
Philadelphia, Pennsylvania and Chicago, Illinois. These cities have purchased
large quantities of the female condom and use them in on-the-street outreach
programs in communities at high risk to sexually transmitted diseases.
Currently Reality is distributed in all 50 states; it is available in
over 35,000 pharmacies; is listed in 38 Medicaid or similar state programs and
is available free or at a significantly discounted price in over 1000 public
clinics.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
CONTINUING OPERATIONS
- ---------------------
The Company recorded a $162,873 decrease in net revenues to $263,561
for the three months ended March 31, 1996 compared to the same period in the
previous year. Net revenues pertain exclusively to sales of Reality, the female
condom. Current year net revenues were negatively impacted due to the Company's
inability to sustain marketing expenditures and management's focus on the
Company's reorganization that was achieved with the sale of Holdings and
acquisition of Chartex. Approximately 67% of the number of Reality devices sold
during the current year quarter were sold in the "private" sector and 33% were
sold to the "public" sector. This compares with approximately 53% to the
"private" sector and 47% to the "public" sector in the prior year quarter. Sales
in the "private" sector have been less than management's expectations.
Management believes that lower than expected sales are the result of reduced
marketing and promotion of Reality due to limited capital availablity.
The Company recorded a charge to cost of products sold of $300,000 for
inventory obsolescence reserve in the current year quarter. This charge,
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUING OPERATIONS - CONTINUED
- ---------------------------------
along with significantly higher trade discounts and returns, resulted in a loss
of $(398,005) at the gross margin level for the three months ended March 31,
1996.
Sales and marketing expense decreased $476,601 from $1,026,123 in the
prior year quarter to $549,522 in the current year quarter. Beginning in March
1996, the Company initiated a new advertising campaign in the United States
offering consumers the opportunity to call for a free sample of the female
condom, a manufacturer's coupon and various product information. Since beginning
this program, the Company has received approximately 1,200 calls per day in
response to the advertising. April net revenues increased 88% to $166,000, an
increase of $78,000 over net revenues of $88,000 for April 1995. The Company
believes this sales increase reflects the renewed marketing initiative and that
sustained promotional programs will result in continued increases in sales.
Prior year quarter amounts included the continuation of the marketing and
promotion associated with the national commercial "launch" of Reality in the
U.S. Sales and marketing expense for the current year quarter were lower due to
the Company's limited working capital availability.
General and administrative expenses increased by $578,457 to $894,233
for the current year period compared to $270,776 for the same period of the
preceding year. The addition of Chartex's general and administrative expenses
accounted for approximately $351,000 of this increase, and depreciation and
amortization of Chartex fixed assets and intangibles added $186,000.
Research and new product development expense increased $39,426 to
$82,895 for the current year quarter compared to $43,469 for the same period of
the preceding year. Current year expense relates to costs incurred in connection
with on-going government-funded clinical trials and a study evaluating the use
of the female condom in preventing sexually - transmitted diseases (STDs). As a
condition of the FDA approval of Reality, the Company agreed to provide product
and assistance (but not funding) in conjunction with studies to be conducted and
funded by the National Institute of Health ("NIH"). The Company is providing
funding and product in connection with the on-going STD study.
The Company has not recorded any exclusivity fees for the current year
quarter. Prior year amounts totaled $869,746. The Company ceased accruing
further exclusivity fees under its licensing agreements with Chartex beginning
with the fourth quarter of fiscal 1995 due to events which occurred in the
fourth quarter which made payment of any exclusivity amounts unlikely. See Note
6 of the Notes to Unaudited Condensed Consolidated Financial Statements
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUING OPERATIONS - CONTINUED
- ---------------------------------
for a discussion of the treatment of the remaining accrued exclusivity amounts.
Nonoperating expense increased $39,591 to $51,955 for the current year
quarter compared to the same period of the prior year. This increase is due to
interest on borrowings from shareholders incurred during the quarter in addition
to the interest on Chartex debt obligations of $35,252.
The Company recorded a $113,115 reduction in losses to a $1,991,071
loss from continuing operations for the current year quarter compared to a
$2,089,725 loss for the same period of the prior year. This reduced loss is
generally due to lower sales and marketing expense and the elimination of the
accrual for exclusivity expense associated with the Reality license agreement,
both as explained above.
DISCONTINUED OPERATIONS
- -----------------------
During the second quarter the Company recognized a loss of $4,461 on
the sale of Holdings as a result of the January 1996 sale of Holdings (see Note
5 to the Notes to Unaudited Condensed Consolidated Financial Statements).
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
CONTINUING OPERATIONS
- ---------------------
The Company reported a $252,394 decrease in net revenues to $730,508
for the six months ended March 31, 1996 compared to the same period of the
preceding year. Net revenues pertain exclusively to sales of the female condom.
The prior period included a portion of the initial stocking for the national
launch of the female condom in the U.S. As previously indicated, current year
net revenues were negatively impacted due to reduced marketing and promotion of
Reality due to limited funds available to promote Reality. Approximately 63% of
the female condom sales dollars for the six months ended March 31, 1996 were
sales to the public sector and 37% were trade sales compared with 33% to the
public sector and 67% trade sales for the same period in the preceding year.
The Company reported a 6% gross margin for the six month period ended
March 31, 1996 before the $300,000 inventory writedown compared to 30% gross
margin for the same period of the preceding year. As mentioned above, a
significant change in the sales mix occurred between the "public" sector and
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUING OPERATIONS - CONTINUED
- ---------------------------------
"trade" sector. The average selling price per device decreased from $1.47 per
device to $1.22 per device. This is reflective of the lower "public" sector
pricing associated with bulk purchases of the product by governmental agencies.
Sales and marketing expenses decreased $2,294,890 from $3,092,224 for
the six month period ended March 31, 1995 to $797,334 for the six month period
ended March 31, 1996. Prior year amounts included the marketing and promotion
associated with the national launch of Reality in the U.S. Because of the
Company's limited working capital availability, marketing and promotion
activities were curtailed during the current period.
General and administrative expense totaled $1,140,209 for the six
month period ended March 31, 1996 compared to $603,575 for the same period of
the preceding year. As previously mentioned, the acquisition of Chartex and the
addition of Chartex's general and administrative expenses, including
depreciation and amortization, account for this increase.
Research and development expense increased $87,197 to $154,612 for the
current six month period compared to $67,415 for the same period of the prior
year. The increase relates to costs incurred in connection with on-going
government-funded clinical trials as previously discussed.
The Company has not recorded any exclusivity fees for the current
year. Prior year amounts totaled $1,727,390. The Company ceased accruing further
exclusivity fees under its licensing agreements with Chartex beginning with the
fourth quarter of fiscal 1995 due to events which occurred in the fourth quarter
which made payment of any exclusivity amounts unlikely. See Note 6 of the Notes
to Unaudited Condensed Consolidated Financial Statements for a discussion of the
treatment of the remaining accrued exclusivity amounts.
Nonoperating expenses increased $73,615 to $89,681 for the current
six month period compared to the same period of the prior year. This increase is
due to interest on borrowings from shareholders incurred during the current year
in addition to the interest on Chartex debt obligations since acquisition.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
- -----------------------
The loss from discontinued operations decreased from $619,747 for the
six month period ended March 31, 1995 to $4,461 for the six month period ended
March 31, 1996. The Company has not included any of Holdings loss from
operations for the period from October 1, 1995 through January 29, 1996. The
Company recognized a loss of $4,461 on the sale of Holdings as a result of the
January 1996 sale of Holdings (see Note 5 to the Notes to Unaudited Condensed
Consolidated Financial Statements).
FINANCIAL CONDITION
- -------------------
The following discussion covers significant changes in certain balance
sheet accounts between September 30, 1995 and March 31, 1996.
Cash used in operations totaled $3,275,376 and was offset as the
result of net proceeds from new borrowings of $2,003,158 and $1,108,024 of net
cash remaining after the sale of Holdings and acquisition of Chartex.
Trade accounts receivable increased $242,386 to $657,475 primarily as
a result of the acquisition of Chartex.
The Chartex acquisition added $626,034 of inventory at March 31, 1996.
This increase was offset by the additional reserve of $300,000 and the $598,639
reduction of U.S. inventory as the Company continues to sell on-hand product
resulting in a net inventory reduction of $272,605 at March 31, 1996.
Intangibles and other assets increased $2,169,968 to $2,569,030 at
March 31, 1996 as a result of the acquisition of Chartex intellectual property
rights and patents of $1,488,060 and the receipt of a long-term note and
warehousing credit with a combined fair value of $1,035,000 as part of the
Holdings sale.
Furniture, fixtures and equipment, net of accumulated depreciation
increased $3,572,108 primarily as a result of the Chartex acquisition.
Net current assets of discontinued operations of $3,913,511 and net
noncurrent assets of discontinued operations of $1,952,269 were eliminated in
conjunction with the sale of Holdings. See Note 3 and Note 5 to the Notes to
Unaudited Condensed Consolidated Financial Statements.
Notes payable to shareholders increased by $2,160,000 as a result of
bridge financing incurred during the current fiscal year. Proceeds were used
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION - CONTINUED
- -------------------------------
to fund pre-closing and on-going funding commitments to Chartex; to pay certain
expenses associated with the sale of Holdings and the purchase of Chartex; and
to provide working capital for current operations.
LIQUIDITY AND SOURCES OF CAPITAL
- --------------------------------
Historically, the Company has incurred cash operating losses relating
to developmental expenses incurred and royalties paid in connection with the
female condom. Cash used in operations for the six month period ended March 31,
1995 reflect substantial sales and marketing expenses incurred in the commercial
launch of Reality in the U.S. combined with lower than expected sales during
this period. For the six month period ended March 31, 1996 the Company incurred
substantial operating expenses that include operating cash for Chartex since
February 1, 1996. Due to a shortage of available cash, the Company was able to
spend only nominal amounts on marketing Reality in the six months ended March
31, 1996.
Although female condom sales to date have been significantly lower
than management anticipated, management believes that with additional marketing
and consumer education, sales will increase. Accordingly, the Company expects
that it will need to incur a significant amount of marketing and promotion
expenditures related to the female condom in fiscal 1996. The Company's ability
to continue marketing and promoting the female condom is dependent upon the
Company sourcing additional cash to stimulate consumer sales. Initial marketing
efforts will be directed at encouraging consumer trial of the product. Because
the Company has a significant level of "paid-for" inventory, proceeds from
increased sales of the female condom are expected to be able to fund a
meaningful portion of the estimated $2 million marketing and promotion effort in
the U.S. in fiscal 1996. The ultimate level of marketing expenditures required
after fiscal 1996 will depend in large part on the results of the Company's
fiscal 1996 marketing effort. Management believes it will be able to reasonably
predict the probable ultimate potential level of future sales by the end of
fiscal 1996 or soon thereafter and will, accordingly, be able to make
appropriate adjustments to the Company's marketing budget thereafter. At
present, the Company believes that its sales and marketing budget in the U.S.
for fiscal years after 1996 will be approximately $2.5 million to $3.5 million
per year and will be primarily funded through sales of its female condom.
In November 1995, the Company signed an agreement to purchase 100% of
the outstanding stock of Chartex for cash and notes payable. The Chartex
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED
- --------------------------------------------
Acquisition was completed on February 1, 1996. See Note 6 of the Notes to
Unaudited condensed consolidated Financial Statements.
In October and November 1995, the Company received $1,160,000 in
proceeds from newly-issued notes payable. In March 1996 the Company received an
additional $1 million in proceeds from a one-year note payable from a
shareholder.
Due to the Company's January 1996 sale of Holdings and its February
1996 acquisition of Chartex, the Company does not believe that its historical
liquidity and capital structure are necessarily representative of future
structure or requirements.
On November 30, 1995 the Company's working capital credit facility
with its bank terminated. The Company did not have any borrowings outstanding
under the facility at termination. Until the Company sources additional working
capital, the Company's and Chartex's operations will be required to be funded
from operations and from cash generated from the sale of Holdings, less cash
used to purchase Chartex.
The Company realized approximately $6.1 million in cash from the sale
of Holdings (net of transaction expenses). The total cash cost of the Chartex
Acquisition (including expenses) was approximately $5.2 million. The Company had
paid transaction expenses and certain pre-closing funding commitments to Chartex
(which amounts have already been included in arriving at the above amounts)
totaling approximately $1.3 million. The $6.1 million in cash from the sale of
Holdings less the $5.2 million in cash used to acquire Chartex plus $1.3 million
of cash expenses paid results in approximately $2.2 million of net cash which
the Company generated during its second fiscal quarter as a result of these
transactions.
At March 31, 1996 the Company had current liabilities of $5.8 million.
This amount includes $1.16 million of notes payable to shareholders which are
due in November 1996, $1.0 million of notes payable to shareholders which are
due in March 1997, a mortgage loan of $1.7 million due in October 1996 and a
$0.5 million note payable to the former owner of Chartex due in July 1996.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED
- --------------------------------------------
The Company's operating plan for the 12 month-period ending March 31,
1997 calls for cash needs as follows:
Cash used in operations $2.8 million
Investing activities
--Chartex purchase of equipment from ring supplier 0.7 million
--other capital expenditures 0.2 million
Financing activities
--repay notes payable to shareholders and
capital lease amounts 2.2 million
--repay note from Chartex Acquisition 0.5 million
--repay mortgage on Chartex manufacturing plant 1.7 million
------------
EXPECTED CASH NEEDS $8.1 million
============
Management's plans call for raising additional working capital within
the next 12 months. The combined company (Chartex and the Company) post-
acquisition is expected to have negative cash flows until the third quarter of
fiscal 1997. The Company believes that it will need at least $0.4 million in
cash per month during the first year to fund the Company's operations and as a
result will need to source approximately $8.1 million within the next 12 months,
with approximately $2.0 million required within the first 4 months.
The Company intends to seek additional capital from the following
sources: refinance of the Chartex manufacturing facility (including extraction
of up to $1.0 million of cash from equity (appraised value in excess of current
loan value) totaling up to $2.7 million; up to $768,000 from a U.K. economic
development grant (which is subject to certain investment and employment
targets) and 50% of such amounts would be required to be utilized to prepay a
(Pounds)520,000 note which was issued in connection with the Chartex
Acquisition; up to $0.6 million from a working capital credit facility which
would be based on eligible accounts receivable; and approximately $6.0 million
from sales of Common Stock.
However, there can be no assurance that the Company will be able to
source all or any portion of this required capital through these or other
sources or 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. If the Company is not able to
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED
- --------------------------------------------
source the funds, the future of the Company would be in substantial jeopardy.
Depending on the level of sales of the female condom and estimated operating
losses, it may initially be difficult to source accounts receivable financing.
Management is not aware of any material outstanding product liability
claims or lawsuits which would have a material effect on the Company's results
of operations, financial position or cashflow.
The Company's current level of expenditures has been established to
support a higher level of revenues associated with the female condom. The
Company will continue to report operating losses until such revenues
significantly increase or the Company significantly reduces its cost structure.
If the Company is not able to source additional capital, the lack of funds to
promote the female condom may significantly limit the Company's ability to
realize value from its existing female condom inventory and to capitalize on the
existing investments in the female condom's development, FDA approval and
marketing to date in the normal course of business.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased general and administrative expenses. The
Company attempts to pass on increased costs and expenses by increasing selling
prices, when possible, and by improved efficiencies of operations.
25
PART II - OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company held a special meeting of its shareholders on January 18, 1996. At
the special meeting shareholders were asked to approve the sale of the Company's
Holdings subsidiary and to approve an amendment to the Company's Articles of
Incorporation to change the Company's name to The Female Health Company. Both
such matters were approved by the Company's shareholders. The Company's Form 8-K
filed on February 14, 1996 specifies the voting results of such meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a.) Exhibits
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation, as amended./1/
3.2 Amended and Restated By-Laws of Company, as amended./1/
4.1 Articles of Incorporation, as amended (same as Exhibit 3.1)./1/
4.2 Articles II, VII, and XI of the By-Laws of the Company (included in
Exhibit 3.2)./1/
10.1 Consultant Warrant Agreement between the Company and C.C.R.I.
Corporation dated March 13, 1995, as amended on April 22, 1996./2/
10.2 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./2/
10.3 Outside Director Stock Option Plan./2/
26
PART II - OTHER INFORMATION
---------------------------
22 Form 8-K filed with the Securities and Exchange Commission on
February 14, 1996./3/
27 Financial Data Schedule
_____________
/1/ Incorporated herein by reference to the Company's December 31, 1995
Form 10-Q.
/2/ Incorporated herein by reference to the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission ("SEC") on
April 23, 1996.
/3/ Incorporated herein by reference to the Form 8-K filed by the Company with
the SEC on February 14, 1996.
b.) Reports on Form 8-K filed in the second quarter of fiscal 1996:
On February 14, 1996 the Company filed a Form 8-K with the SEC
reporting under Item 5, Other Events, that the Company's
shareholders voted and approved a sale of all of the stock of the
Company's wholly-owned subsidiary, WPC Holdings, Inc. and that the
shareholders voted and approved an amendment to the Company's
Amended and Restated Articles of Incorporation to change the
Company's name from Wisconsin Pharmacal Company, Inc. to The Female
Health Company.
On March 5, 1996 the Company filed a Form 8-K with the SEC reporting
under Item 4, Changes in Registrant's Certifying Accountant, that
Ernst & Young LLP, the former independent auditors for the Company,
formally resigned as independent auditors of the Company on February
21, 1996.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FEMALE HEALTH COMPANY
DATE: May 15, 1996 /s/ O. B. Parrish
-------------------------------------
O. B. Parrish, Chairman, Chief
Executive Officer and
Principal Accounting Officer
28