The unaudited consolidated condensed financial statements of Femcare Group as of December 31, 2010 and for the nine months ended December 31, 2010 and 2009 and consolidated notes thereto:
FEMCARE GROUP LIMITED
NOTES TO UNAUDTED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Currency amounts are in thousands except where noted.
Note 1 – Summary of Significant Accounting Policies:
Organization
Femcare Group Limited, and its wholly owned operating subsidiaries, Femcare-Nikomed Limited of Southampton, England and Femcare Australia, (Femcare, or the Company) is a leading global supplier of minimally invasive surgical systems for female sterilization and also sells a range of other medical devices and instruments primarily for gynecology, urology and general surgery. Products are sold in the U.K, Australia, the U.S., and international markets.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although actual results could differ from those estimates, management believes it has considered and disclosed all relevant information in making its estimates that materially affect reported performance and current values.
Principles of Consolidation
The consolidated financial statements include those of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Concentration of Credit Risk
The primary concentration of credit risk consists of trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations.
The Company's customer base consists of hospitals, medical product distributors and dealers, physician practices and others directly related to healthcare providers.
The Company maintains its cash in bank deposit accounts.
Accounts Receivable
Accounts receivable are amounts due on product sales and are unsecured. Accounts receivable are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus accounts receivable do not bear interest. Accounts receivable are periodically evaluated for collectibility based on past credit history of customers. Provisions for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic conditions.
Inventories
Finished products, work-in-process, raw materials inventories are stated at the lower of cost (computed on a first-in, first-out method) or market. Provision is made for obsolete, or slow-moving items where appropriate. Note 1 – Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line and units-of-production methods over estimated useful lives as follows:
| Long leasehold land and buildings | Over lease term |
| Plant and machinery | 1-10 years |
| Furniture, equipment and tooling | 3-10 years |
| Computer equipment | 3-4 years |
| Motor vehicles | 4 years |
Long-Lived Assets
The Company evaluates its long-lived assets in accordance with Accounting Standards Codification (ASC) 360, “Accounting for the Impairment of Long-Lived Assets.” Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made.
Intangible Assets
Costs associated with the acquisition of patents, trademarks, license rights and non-compete agreements are capitalized at cost and are being amortized using the straight-line method over ten years. Intangible assets arising from acquisitions are capitalized and amortized on a straight line basis over their estimated useful economic life, typically ten years.
Revenue Recognition
The Company recognizes revenue at the time of shipment to the customer, net of value added tax and sales discounts.
Income Taxes
The Company accounts for income taxes under ASC 740, “Accounting for Income Taxes,” whereby deferred taxes are computed under the asset and liability method.
Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Deferred tax assets are recognized to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted
Leases
Assets held under finance leases or purchase contracts are capitalized at their fair value on the inception of the leases and depreciated over their estimated useful lives. The present value of future rentals is shown as a liability and the interest on rental obligations is charged to the income statement over the period of the lease in proportion to the capital balance outstanding.
Royalties
Royalties are accounted for when receivable or payable.
Note 1 – Summary of Significant Accounting Policies (continued)
Translation of Foreign Currencies
Assets and liabilities in foreign currencies are translated into sterling at the rates of exchange at the balance sheet date. Transactions in foreign currencies are translated into sterling at the rate on the date of the transaction.
Note 2 – Inventories
Inventories at December 31, 2010 and March 31, 2010 consisted of the following:
| | | December 31, | | | March 31, | |
| | | 2010 | | | 2010 | |
| Finished goods | | £ | 58 | | | £ | 60 | |
| Work-in-process | | | 28 | | | | 26 | |
| Raw materials | | | 577 | | | | 584 | |
| Total | | £ | 663 | | | £ | 670 | |
Note 3 – Property and Equipment
| Property and equipment consists of the following: | | | | | | |
| | | December 31 | | | March 31 | |
| | | 2010 | | | 2010 | |
| Land and buildings | | £ | 66 | | | £ | 66 | |
| Plant, machinery, tooling and motor vehicles | | | 757 | | | | 743 | |
| Furniture, fittings, computer and other equipment | | | 335 | | | | 330 | |
| | | | 1,158 | | | | 1,140 | |
| | | | | | | | | |
| Accumulated depreciation | | | (764 | ) | | | (684 | ) |
| | | £ | 394 | | | £ | 456 | |
Note 4 – Long-term Debt
Long-term debt consists of the following:
| | | December 31 | | | March 31 | |
| | | 2010 | | | 2010 | |
| Secured loan notes | | £ | 3,620 | | | £ | 3,800 | |
| Unsecured loan notes, net of loan issue costs | | | 11,670 | | | | 11,670 | |
| Accrued interest on unsecured loan notes | | | 9,674 | | | | 8,189 | |
| | | £ | 24,964 | | | £ | 23,659 | |
The secured loan notes are secured by fixed and floating charges over all property and assets current and future and bear interest at between 2% and 7% per annum above LIBOR. The unsecured loan notes bear interest between 5% and 10%, with interest on a £1,320 note rolled up and payable on redemption. Loan notes of £10,350 are redeemable on 1 January 2015, or earlier subject to outstanding financial commitments. Interest on the £10,350 notes for the first two years is rolled up and is payable on redemption. Thereafter, interest is payable twice yearly (in May and November), although may be deferred with agreement. It has been agreed that payment of all interest payable is deferred until no earlier than 31 March 2011 or redemption of the loan note if earlier.
Note 5 - Forward-Looking Information
This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by management based on information currently available. When used in this document, the words “anticipate,” “believe,” “project,” “estimate,” “expect,” “intend” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company respecting future events and are subject to certain risks, uncertainties, and assumptions, including the risks and uncertainties noted throughout this document. Although the Company has attempted to identify important factors that could cause the actual results to differ materially, there may be other factors that cause the forward statement not to come true as anticipated, believed, projected, expected, or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those described herein as anticipated, believed, projected, estimated, expected, or intended. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and the Company assumes no obligation to update or disclose revisions to those estimates.
Risk Factors:
Competitive marketplace may result in loss of revenues:
The Company operates in a competitive market which could result in losing sales to its key competitors, however Femcare manages this risk by continually assessing and strengthening its product portfolio, in particular its own brand products and by investment in a strong customer service and support infrastructure, complemented by its outstanding product track record and history. Furthermore the Company aims to distribute product only under distribution contracts that meet its criteria.
Healthcare reform may increase administrative costs and lead to decreased revenues:
Healthcare reform in the United States and elsewhere may place additional burdens on small medical device companies in the form of excise taxes, additional oversight of marketing and sales activities and new reporting requirements, likely resulting in reducing Femcare’s ability to effectively compete and support continued investments in new product development and marketing of specialty devices.
As the healthcare industry becomes increasingly bureaucratic it puts smaller companies like Femcare at a competitive disadvantage:
An aging population and an extended global economic recession are placing greater burdens on healthcare systems, particularly hospitals. The length of time and number of administrative steps required in adopting new products for use in hospitals has grown substantially in recent years. Smaller companies like Femcare typically do not have the administrative resources to deal with broad new administrative requirements, resulting in either loss of revenue or increased costs. As the Company introduces new products it believes are safer and more effective, it may find itself excluded from certain customers because of the existence of long term supply agreements for preexisting products, particularly from competitors which offer hospitals a broader range of products. Restrictions used by hospital administrators to limit clinician involvement in device purchasing decisions makes communicating Femcare’s clinical advantages much more difficult.
A product liability lawsuit could result in significant legal expenses and a large award against the Company:
Femcare’s devices are frequently used in inherently risky situations to help physicians achieve a more positive outcome than what might otherwise be the case. In any lawsuit where an individual plaintiff suffers permanent physical injury, the possibility of a large award for damages exists whether or not a causal relationship exists.
The Company’s reliance on third parties to market its products outside the U.K. results in less predictable revenues:
Femcare’s distributors have varying expertise in marketing and selling specialty medical devices. They also sell other devices that may result in less focus on the Company’s products. Revenues may be negatively impacted by other factors of unpredictable magnitude, including: 1) liquidity of distributors, 2) strength and timing of economic recovery in worldwide markets, 3) value of the U.K. Sterling in foreign exchange, 4) changes in U.K. trade policies and the resulting reactions of other governments, and 5) changes in international regulatory requirements, including in the U.S., and possible restrictions for medical devices.
The loss of one or more key employees could negatively affect Femcare performance:
In a small company with limited resources, the distraction or loss of key personnel at any point in time may be disruptive to performance.
