SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-18849
THE FEMALE HEALTH COMPANY
(Name of Small Business Issuer in Its Charter)
Wisconsin 39-1144397
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
515 N. State Street, Suite 2225, Chicago, Illinois 60610
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(Address of Principal Executive Offices) (Zip Code)
(312) 595-9123
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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None
Securities registered pursuant to Section 12(g) of the Exchange Act:
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Common Stock, $.01 par value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $6,716,174
As of December 20, 2001, 15,883,514 shares of Common Stock were outstanding. As
of December 20, 2001, the aggregate market value of shares of Common Stock held
by non-affiliates was approximately $7.7 million (based upon the last reported
sale price of $0.65 on that date on the Over the Counter Bulletin Board).
FORM 10-KSB INDEX
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters To A Vote Of Security Holders
Part II
Item 5. Market For Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements With Accountants On Accounting and
Financial Disclosure
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership Of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits, List and Reports on Form 8-K
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-KSB which are not
statements of historical fact are intended to be, and are hereby identified as,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to secure
adequate capital to fund operating losses, working capital requirements,
advertising and promotional expenditures and principal and interest payments on
debt obligations; factors related to increased competition from existing and new
competitors including new product introduction, price reduction and increased
spending on marketing; limitations on the Company's opportunities to enter into
and/or renew agreements with international partners, the failure of the Company
or its partners to successfully market, sell, and deliver its product in
international markets, and risks inherent in doing business on an international
level, such as laws governing medical devices that differ from those in the
U.S., unexpected changes in the regulatory requirements, political risks, export
restrictions, tariffs, and other trade barriers, and fluctuations in currency
exchange rates; the disruption of production at the Company's manufacturing
facility due to raw material shortages, labor shortages, and/or physical damage
to the Company's facilities; the Company's inability to manage its growth and to
adapt its administrative, operational and financial control systems to the needs
of the expanded entity and the failure of management to anticipate, respond to
and manage changing business conditions; the loss of the services of executive
officers and other key employees and the Company's continued ability to attract
and retain highly-skilled and qualified personnel; the costs and other effects
of litigation, governmental investigations, legal and administrative cases and
proceedings, settlements and investigations; and developments or assertions by
or against the Company relating to intellectual property rights.
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PART I
Item 1. Description of Business
General
The Female Health Company ("FHC" or the "Company") manufactures, markets and
sells the female condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
The female condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in many countries around
the world. Certain of these studies show that having the female condom
available allows women to have more options, resulting in an increase in
protected sex acts and a decrease in STDs, including HIV/AIDS.
The product is currently sold or available in various venues including
commercial (private sector) and public sector clinics in over 80 countries. It
is commercially marketed in 17 countries by various FHC country specific
partners, including the United States, United Kingdom, Japan, Canada, Holland,
France, Venezuela, Denmark, South Korea, Brazil and India. The company recently
signed an agreement with Hindustan Latex Limited for distribution in India.
As noted above, the female condom is sold to the global public sector. In the
U.S., the product is marketed to city and state public health clinics as well as
not-for-profit organizations such as Planned Parenthood. Under an agreement
with UNAIDS, UNAIDS facilitates the availability and distribution of the female
condom in the developing world and the Company sells the product to developing
countries at a reduced price based on the Company's cost of production. The
current price per unit is approximately 0.38 (Pounds), or approximately $0.55.
Currently over 80 developing countries purchase the female condom under the
terms of this agreement.
Product
The female condom is made of polyurethane, a thin but strong material which is
resistant to rips and tears during use. The female condom consists of a soft,
loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and helps to hold it in place. The other ring remains outside
the vagina after insertion. The female condom lines the vagina, preventing skin
from touching skin during intercourse. The female condom is pre-lubricated and
disposable and is intended for use during only one sex act.
Raw Materials
Polyurethane is the principal raw material the Company uses to produce the
female condom. The Company has entered into a supply agreement with Deerfield
Urethane, Inc. for the purchase of all of the Company's requirements of
polyurethane. Under this agreement, the parties negotiate pricing on an annual
basis. The original term of the agreement extended to December 31, 1995 and
thereafter automatically renews for additional one year periods unless either
party gives at least 12 months prior written notice of termination.
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Global Market Potential
It is more than twenty years since the first clinical evidence of AIDS was
noted. HIV/AIDS is the most devastating pandemic that humankind has faced in
recorded history. UNAIDS and the World Health Organization ("WHO") estimate
that more than 60 million people have been infected with the virus and that, at
the end of 2001, 40 million people globally were living with HIV. And AIDS is
not the only sexually transmitted disease that the global public health
community is battling. In the United States, the Center for Disease Control
noted that one in five Americans over the age of 12 has Herpes and 1 in every 3
sexually active people will get an STD by age 24. Women are currently the
fastest growing group infected with HIV and are expected to comprise the
majority of the new cases in the coming year.
Currently there are only two products that prevent the transmission of HIV/AIDS
through sexual intercourse --the latex male condom and the female condom.
Male Condom Market: It is estimated the global annual market for male condoms is
close to 5 billion units. However, the majority of all acts of sexual
intercourse, excluding those intended to result in pregnancy, are completed
without protection. As a result, it is estimated the potential market for
barrier contraceptives is much larger than the identified male condom market.
Advantages Versus the Male Condom
The female condom is currently the only available barrier contraceptive method
controlled by women which allows them to protect themselves from unintended
pregnancy and STDs, including HIV/AIDS. The most important advantage is that a
woman can control whether or not she is protected as many men do not like to
wear male condoms and may refuse to do so.
The polyurethane material that is used for the female condom offers a number of
benefits over latex, the material that is most commonly used in male condoms.
Polyurethane is 40% stronger than latex, reducing the probability that the
female condom sheath will tear during use. Clinical studies and everyday use
have shown that latex male condoms can tear as much as 4% to 8% of the times
they are used. Unlike latex, polyurethane quickly transfers heat, so the female
condom immediately warms to body temperature when it is inserted, which may
result in increased pleasure and sensation during use. The product offers an
additional benefit to the 7% to 20% of the population that is allergic to latex
and who, as a result, may be irritated by latex male condoms. To the Company's
knowledge, there is no reported allergy to date to polyurethane. The female
condom is also more convenient, providing the option of insertion hours before
sexual arousal and as a result is less disruptive during sexual intimacy than
the male condom which requires sexual arousal for application.
Cost Effectiveness
Various studies have been reported in the literature on the cost-effectiveness
of the female condom. The studies show that making the female condom available
is highly cost effective in reducing public health costs in developing countries
as well as in the U.S. Further studies show that including the female condom in
prevention programs to high risk groups is not only cost-effective but
cost-saving.
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Worldwide Regulatory Approvals
The female condom received Pre-Market Approval ("PMA") as a Class III Medical
Device from the U.S. Food and Drug Administration ("FDA") in 1993. The
extensive clinical testing and scientific data required for FDA approval laid
the foundation for approvals throughout the rest of the world, including receipt
of a CE Mark in 1997 which allows the Company to market the female condom
throughout the European Union ("EU"). In addition to the United States and the
EU, several other countries have approved the female condom for sale, including
Canada, Russia, Australia, Japan, South Korea and Taiwan.
The Company believes that the female condom's PMA and FDA classification as a
Class III Medical Device create a significant barrier to entry. The Company
estimates that it would take a minimum of four to six years to implement,
execute and receive FDA approval of a PMA to market another type of female
condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the manufacture
and distribution of the female condom.
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 Kingdom. The Company has
commercial partners in 17 countries, including the United States, Japan, Canada,
Brazil, Venezuela, Denmark, South Korea, Holland, France and India. The Company
has entered into a distribution agreement with each of its commercial partners.
These agreements are generally exclusive for a single country. Under these
agreements, each partner markets and distributes the female condom in a single
country and the Company manufacturers the female condom and sells the product to
the partner for distribution in that country.
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than 1.5 billion male condoms are distributed
worldwide by the public sector each year. The female condom is seen as an
important addition to prevention strategies by the public sector because studies
show that the availability of the female condom decreases the amount of
unprotected sex by as much as 25% over male condoms alone.
The Company has an agreement with UNAIDS to supply the female condom to
developing countries at a reduced price which is negotiated each year based on
the Company's cost of production. The current price per unit is approximately
0.38 (pounds), or approximately $0.55. Under the agreement, UNAIDS and the
Company cooperate in education efforts and marketing the female condom in
developing countries. Sales of the female condom are made directly to public
health authorities in each country at the price established by the agreement
with UNAIDS. The term of the agreement currently expires on December 31, 2002,
but automatically renews for additional one-year periods unless either party
gives at least 90 days prior written notice of termination. The female condom
is available in over 80 countries through public sector distribution.
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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 significant programs are ongoing in 17 major cities and states.
State-of-the-Art Manufacturing Facility
The Company manufactures the female condom in a 40,000 square-foot leased
facility in London, England. The facility is currently capable of producing 60
million units per year. With additional equipment, this capacity can be
significantly increased.
Government Regulation
In the U.S., the female condom is regulated by the 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 conditions of use
prescribed, recommended or suggested in the labeling. Failure to comply with
the conditions of FDA approval invalidates the approval order. Commercial
distribution of a device that is not in compliance with these conditions is a
violation of the SMA Act.
Competition
The Company's female condom participates in the same market as male condoms but
is not seen as directly competing with male condoms. Rather, the Company
believes that female condoms are additive in terms of prevention and choice.
Latex male condoms cost less and have brand names that are more widely
recognized than the female condom. In addition, male condoms are generally
manufactured and marketed by companies with significantly greater financial
resources than the Company. It is also possible that other parties may develop
a female condom. These competing products could be manufactured, marketed and
sold by companies with significantly greater financial resources than those of
the Company.
Employees
As of December 20, 2001, the Company's operations had 87 full-time employees
within the U.S. and the U.K. and no part-time employees. No Company employees
are represented by a labor union. The Company believes that its employee
relations are good.
Backlog
At December 20, 2001, the Company had unfilled orders of $1,236,000. The
comparable amount as of the same date of the prior year was $821,000. Unfilled
orders can materially fluctuate from quarter to quarter. The Company expects
current unfilled orders to be filled during fiscal 2002.
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, Brazil, South Korea and
Australia. These patents expire between 2005 and 2013. Additional technology
patents are pending in Japan. The patents cover the key aspects of the female
condom, including its overall design and manufacturing process. The Company
terminated its license of the trademark "Reality" in the United States and now
has the registered trademark FC Female Condom in the United States. The
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Company has trademarks on the names "femidom" and "femy" in certain foreign
countries. The Company has also secured, or applied for, 13 trademarks in 26
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
The Company incurred research and development costs from continuing operations
of $67,099 in fiscal 2000. These expenditures were primarily related to
conducting acceptability studies and analyzing second generation products. The
Company did not incur research and development costs in fiscal 2001.
Industry Segments And Financial Information About Foreign And Domestic
Operations
See Note 11 to Notes to Consolidated Financial Statements, included herein.
History
The female condom was invented by a Danish physician who obtained a U.S. patent
for the product in 1988. The physician subsequently sold certain rights to the
condom to Chartex Resources Limited. In the years that followed, Chartex, with
resources provided by a nonprofit Danish foundation, developed the manufacturing
processes and completed other activities associated with bringing the female
condom to market in certain non-U.S. countries. The Company, known as Wisconsin
Pharmacal Company, Inc. (the Company's predecessor), owned certain rights to the
female condom in the U.S., Canada, and Mexico, pursued the pre-clinical and
clinical studies and overall development of the product for worldwide use and
U.S. FDA approval of the product.
The Female Health Company is the successor to Wisconsin Pharmacal Company, Inc.,
a company which previously manufactured and marketed a wide variety of disparate
specialty chemical and branded consumer products in addition to owning certain
rights to the female condom described above.
In fiscal 1995, the Company's Board of Directors approved a plan to complete a
series of actions designed, in part, to maximize the potential of the female
condom. First, the Company restructured and transferred all of the assets and
liabilities of the Company other than those related primarily to the female
condom to a newly formed, wholly-owned subsidiary of the Company, WPC Holdings,
Inc. ("Holdings"). In January 1996, the Company sold Holdings to an unrelated
third party. Then, in February 1996, the Company acquired Chartex (renamed The
Female Health Company - UK in 1997), the manufacturer and owner of certain
worldwide rights to, and the Company's sole supplier of, the female condom. As
a result of the sale of Holdings and the acquisition of Chartex, The Female
Health Company evolved to its current state with its sole business consisting of
the manufacture, marketing and sale of the female condom.
The FDA approved the female condom for distribution in 1993 and the Company's
manufacturing facility in 1994. Since that time, the Company has sold over 46
million female condoms around the world.
Item 2. Description of Property
The Company leases approximately 3,100 square feet of office space at 515 North
State Street, Suite 2225, Chicago, IL 60610. The lease expires September 30,
2006. 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.
8
The Company manufactures the female condom in a 40,000 square foot leased
facility located in London, England under a lease which expires in 2016, with
the right to renew through 2027. The FDA-approved manufacturing process is
subject to periodic inspections by the FDA as well as the EU quality group.
Current capacity at the manufacturing facility is approximately 60 million
female condoms per year. Management believes the properties are adequately
insured.
Item 3. Legal Proceedings.
The Company is not currently involved in any material pending legal proceedings.
Item 4. Submission of Matters To A Vote Of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2001.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
The Company's Common shares are traded on the OTC Bulletin Board under the
symbol "FHCO." The approximate number of record holders of the Company's common
stock at December 20, 2001 was 459. The Company has paid no cash dividends on
its common stock and does not expect to pay cash dividends in the foreseeable
future. The Company anticipates that for the foreseeable future it will retain
any earnings for use in the operation of its business. Information regarding
the Company's high and low reported quarterly closing prices for its common
stock is set forth in the table below. These sales prices reflect inter-dealer
prices, without retail mark-ups, mark downs, or commissions.
-------------- Quarters --------------
2001 Fiscal Year FIRST SECOND THIRD FOURTH
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Price per common share - High $ 0.84 $ 0.65 $ 0.59 $ 0.80
Price per common share - Low $ 0.38 $ 0.40 $ 0.34 $ 0.41
2000 Fiscal Year
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Price per common share - High $ 1.50 $ 1.19 $ 1.06 $ 0.72
Price per common share - Low $ 0.81 $ 0.88 $ 0.50 $ 0.41
Recent Sales of Unregistered Securities
On August 1, 2001, the Company issued 1,000,000 shares of common stock to
one accredited investor for a total purchase price of $500,000. The Company
believes it has satisfied the exemption from the securities registration
requirement provided by section 4(2) of the Securities Act and Regulation D
promulgated thereunder in this offering since the securities were sold in a
private placement to a sophisticated, accredited investor, who provided
representations which the Company deemed necessary to satisfy itself that he was
an accredited investor and was purchasing for investment and not with a view to
resale in connection with a public offering.
9
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, and the development of
significant manufacturing capacity. These steps, taken as part of the Company's
plan to develop and sell a product with global commercial and humanitarian
value, have required the expenditure of significant amounts of capital and
resulted in significant operating losses including the period 1996 through the
present.
The Company has begun the process of developing the commercial market for the
female condom around the world. As part of this plan, the Company has completed
a number of distribution agreements and is 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, 2001 ("2001") Compared to Fiscal Year Ended
September 30, 2000 ("2000")
The Company had net revenues of $6.7 million and a net loss attributable to
common stockholders of $(1.3) million or $(0.09) per share in 2001 compared to
net revenues of $5.8 million and a net loss attributable to common stockholders
of $(3.8) million or $(0.30) per share in 2000.
The Company's operating loss for the twelve months ended September 30, 2001 was
$(602,855) compared to $(2,392,631) for the same period last year for a decrease
of 75%. As discussed in more detail in the following paragraphs, the decrease in
the Company's net operating loss was a result of improvements in gross profit
and operating expenses. The decline in net loss was smaller (68%), however, due
to the decrease in non-operating expenses not declining at the same proportion
(56%).
Net revenues increased $0.9 million or 16% in 2001 over the prior year. The
higher net revenues primarily resulted from increased unit sales shipped to
global and domestic public sector customers.
Cost of products sold increased $153,095, or 3%, to $5,337,830 for 2001 from
$5,184,735 for 2000. The increase was not in proportion with the sales increase
due to a reduction of fixed costs per unit which resulted from the increased
unit sales. Costs of products sold as a percentage of sales decreased from 90%
in 2000 to 79% in 2001.
Advertising and promotion expenses relate 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. As a result of the Company entering an agreement
with Mayer Laboratories, Inc. to distribute the female condom to the wholesale
retail trade in the United Sates effective October 1, 2000, the Company was able
to reduce its advertising and promotion expenses from $0.2 million in 2000 to
$0.1 million in 2001.
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Selling, general and administrative expenses declined $875,498 (32%) from $2.7
million in 2000 to $1.9 million in 2001. As a percentage of net revenues,
selling, general and administrative expenses were 28% in 2001 compared with 47%
in 2000. These expenses declined as a result of reductions of sales, financial
and administrative personnel, research and development, investor relations and
consulting costs in 2001.
The Company's strategy is to act as a manufacturer supplying the public sector
and commercial partners throughout the world. The Company's partners pay for
all marketing and shipping costs. Consequently, as the Company's sales volume
increases the Company's operating expenses will not increase significantly.
Non-cash amortization of debt issuance costs decreased from $245,676 in 2000 to
$0 in 2001. The reduction was a result of the completion in 2000 of the
amortization period of debt issuance costs relating to the issuance of
convertible debentures in May and June 1999. See Note 4 of the Notes to
Consolidated Financial Statements for further detail regarding the May and June
1999 convertible debentures.
Net interest and non-operating expenses decreased $483,455, or 46%, to $568,401
for 2001 compared to $1,051,856 for 2000. The decrease exists because the
Company had a lower level of debt outstanding during 2001 than 2000 due to the
issuance of convertible debentures during May and June 1999. The result is a
smaller amount of non-cash expenses incurred from the amortization of discounts
on convertible debentures than the twelve months of the prior year.
The Company was able to cover fixed manufacturing overhead costs and exceeded
the break-even at the gross profit level. However, the Company must achieve
cumulative annual unit sales of approximately 18 million female condoms based
upon the current average selling price per unit in order to cover operating and
non-operating expenses or approximately 30% of manufacturing capacity.
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 and to cost-effectively
manufacture sufficient quantities of the female condom. Inherent in this
process are a number of factors that the Company must successfully manage in
order to achieve favorable future results and improve its financial condition.
Reliance on a Single Product
The Company expects to derive the vast majority, if not all, of its future
revenues from the female condom, its sole current product. While management
believes the global potential for the female condom is significant, the product
is in the early stages of commercialization and, as a result, the ultimate level
of consumer demand around the world is not yet known. To date, sales of the
female condom have not been sufficient to cover the Company's operating costs.
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a global
distribution network for the product by completing partnership arrangements with
companies with the necessary marketing and financial resources and local market
expertise. To date, this strategy has resulted in numerous in-country
distributions in the public sector, 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
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prevention of STDs, including AIDS, by including female condoms in their
programs. The Company is also dependent on finding appropriate partners for the
private sector markets around the world. Once an agreement is completed, the
Company is reliant on the effectiveness of its partners to market and distribute
the product. Failure by the Company's partners to successfully market and
distribute the female condom or failure of country governments to implement
prevention programs which include distribution of barrier methods against the
AIDS crisis, or an inability of the Company to secure additional agreements for
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.
As part of this strategy the Company has entered into two new agreements.
On November 29, 2001, the Company signed a non-binding memorandum of
understanding with Hindustan Latex Limited ("HLL"), an Indian government
organization and India's largest male condom manufacturer. HLL distributes to
public sector customers including government and non-government organizations
and to the public sector through 160,000 retail outlets. Jointly with HLL a
marketing strategy will be developed for the country of India. Over time, the
Company anticipates that HLL and the Company will explore manufacturing options
within India.
On December 18, 2001, the Company announced the appointment of Total Access
Group ("TAG") as the exclusive distributor for public sector sales within a 15
state region in the western United States. TAG is a privately held national
distributor to the United States public sector and serves over 2,500 customers,
which include state and local health departments, community based organizations,
HIV/STD prevention organizations, Planned Parenthood clinics and family planning
organizations. TAG is a full service distributor and will provide marketing,
education and customer service support. TAG is required to purchase 2,190,000
units within a three year period to retain exclusivity distribution rights.
Inventory and Supply
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market and Foreign Currency Risks
The Company manufactures the female condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States dollar. To
date, the Company's management has not deemed it necessary to utilize currency
hedging strategies to manage its currency risks. On an ongoing basis,
management continues to evaluate its commercial transactions and is prepared to
employ currency hedging strategies when it believes such strategies are
appropriate. In addition, some of the Company's future international sales may
be in developing nations where dramatic political or economic changes are
possible. Such factors may adversely affect the Company's results of operations
and financial condition.
Government Regulation
The female condom is subject to regulation by the FDA pursuant to the federal
Food, Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices," which include testing, quality
control and documentation procedures. The
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Company's compliance with applicable regulatory requirements is monitored
through periodic inspections by the FDA. The failure to comply with applicable
regulations may result in fines, delays or suspensions of clearances, seizures
or recalls of products, operating restrictions, withdrawal of FDA approval and
criminal prosecutions. The Company's operating results and financial condition
could be materially adversely affected in the event of a withdrawal of approval
from the FDA.
Liquidity and Sources of Capital
Historically, the Company has incurred significant operating losses. Cash used
in continuing operations was $0.6 million for 2001 and $1.0 million in 2000.
Historically, the Company has funded operating losses and capital requirements,
in large part, through the sale of common stock or debt securities convertible
into common stock.
During 2001, the Company received $0.45 million in proceeds from newly-issued
convertible debentures, and $0.8 million from the issuance of common stock. FHC
used these amounts to fund current operations of the Company, and to repay
existing liabilities including $0.3 million of notes payable.
In the near term, FHC management expects operating losses and capital
requirements to continue to exceed funds generated from operations due
principally to the Company's fixed manufacturing costs relative to current
production volumes and the ongoing need to commercialize the female condom
around the world.
The Company has a $1 million note due March 25, 2002 to Mr. Stephen Dearholt, a
Director of the Company.
On March 30, 2001 the Company issued a $250,000 convertible debenture to one
accredited investor. The debenture is due March 30, 2004, bears interest payable
at a rate of 12% per annum, and is convertible into the Company's common stock
based on a price of $0.50 per share. The Company did not issue warrants in
connection with the issuance of the convertible debenture.
On May 18, 2001 the Company entered into an agreement with Heartland Bank
providing for a $2,000,000 credit facility. The unpaid balances on the credit
facility are due May 18, 2004 and bear interest payable at a rate of 10% per
annum. The agreement contains certain covenants which include restrictions on
the payment of dividends and distributions and on the issuance of warrants. The
Company may borrow under the credit facility from time to time subject to a
number of conditions, including obtaining personal guarantees of 125% of the
amount outstanding under the credit facility. In May 2001, the Company borrowed
a total of $1.5 million under the credit facility, and used the proceeds to
repay convertible debentures that the Company originally issued in May and June
1999 to five investors in the principal amount of $1.5 million. In connection
with the credit facility, the Company issued warrants to Heartland Bank to
purchase the number of shares of the Company's Common Stock equal to $500,000
divided by the warrant purchase price as of the date of exercise. The warrant
purchase price is equal to 70% of the "market price" of the Common Stock as of
the day immediately prior to the date the exercise notice is given to the
Company, but in no event shall the per share price be less than $0.50 or more
than $1.00. The warrants are valued at $270,800 and are recorded by the Company
as additional paid in capital and a discount on the credit facility.
13
Five persons provided guarantees equal in total to the $1.5 million outstanding
under the loan. The guarantors included James R. Kerber, a Director of the
Company, Stephen M. Dearholt, a Director of the Company, Richard E. Wenninger, a
Director of the Company, and a trust for the benefit of O.B. Parrish, the
Chairman of the Board and Chief Executive Officer of the Company. Each
guarantor may be liable to the Heartland Bank for up to 125% of the guarantor's
guarantee amount if the Company defaults under the loan. The Company issued
warrants to the guarantors to purchase the number of shares of the Company's
Common Stock equal to the guarantee amount of such guarantor divided by the
warrant purchase price as of the date of exercise. The warrant purchase price
is the price per share equal to 70% of the market price of the Company's Common
Stock at the time of exercise, but in no event will the warrant purchase price
be less than $0.50 or more than $1.00. The Company also issued additional
warrants to purchase 100,000 shares of Common Stock at an exercise price of
$0.50 per share to each of Stephen M. Dearholt and Richard E. Wenninger because
each of them guaranteed $500,000 under the credit facility. The guarantors'
warrants are valued at $667,578 and are recorded by the Company as additional
paid in capital and a discount on the credit facility.
On June 1, 2001 the Company issued an aggregate of $200,000 of convertible
debentures to two accredited investors. The debentures are due May 30, 2004,
bear interest payable at a rate of 10% per annum, and are convertible into the
Company's common stock based on a price per share equal of $0.50. The Company
did not issue warrants in connection with the issuance of the convertible
debentures.
While the Company 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, the Company can make no
assurance that it will achieve such level of operations in the near term or at
all. Likewise, the Company can make 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 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 its
shareholders. If the Company is unable to raise adequate financing when needed,
the Company may be required to sharply curtail the Company's efforts to promote
the female condom, to attempt to sell certain of its assets and rights or to
curtail certain of its operations and may ultimately be forced to cease
operations. Currently, the Company is focused on growing its business and,
therefore, the Company has made no plans to sell any assets nor has it
identified any assets to be sold or potential buyers. All of the Company's
assets are also subject to a first security interest by the holders of
convertible debentures that the Company issued in May and June 1999. Although
the Company repaid the principal amount outstanding under the convertible
debentures in May 2001, the holders of the convertible debentures have not acted
to terminate the security interest in the Company's assets. Any sale of the
Company's assets would require the release of this security interest. As a
result, in the event that the Company lacks sufficient capital to continue its
operations, neither the Company nor its shareholders may be able to realize any
significant value from the Company's assets.
As of December 20, 2001, the Company had approximately $0.9 million in cash, net
trade accounts receivable of $0.8 million and current trade accounts payable of
$0.7 million. It is estimated that the Company's cash burn rate, with revenues,
is less than $0.1 million per month. The Company's anticipated debt service
obligations for scheduled
14
interest and principal payments are approximately $1.3 million in fiscal 2002,
$220,000 in fiscal 2003 and $2.3 million in fiscal 2004. As of December 28,
2001, the Company was in compliance with all of the covenants relating to its
outstanding debt.
Impact of Inflation and Changing Prices
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased general and administrative expenses.
Historically, the Company has absorbed increased costs and expenses without
increasing selling prices.
New Accounting Pronouncements
Please see new "New Accounting Pronouncements" in Note 1 in financial
statements.
ITEM 7. Financial Statements
The consolidated financial statements of the Company and notes thereto are
filed under this item beginning on page F-1 of this report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of The Exchange Act.
Certain information about the Company's executive officers and directors as of
September 30, 2001, is as follows:
NAME POSITION AGE
O.B. Parrish Chairman of the Board, Chief Executive 68
Officer, and Director
Mary Ann Leeper, Ph.D. President, Chief Operating Officer and 61
Director
William R. Garguilo, Jr. Secretary and Director 73
Jack Weissman Vice President - Sales 54
Michael Pope Vice President and General Manager of
The Female Health Company (UK)Plc 45
Mitchell Warren Vice President - International Affairs 35
Robert R. Zic Principal Accounting Officer 38
David R. Bethune Director 61
Stephen M. Dearholt Director 55
Michael R. Walton Director 63
James R. Kerber Director 69
Richard E. Wenninger Director 54
O. B. PARRISH
Age: 68; Elected Director: 1987; Present Term Ends: 2002 Annual Meeting
O.B. Parrish has served as Chief Executive Officer of the Company since 1994, as
acting Chief Financial and Accounting Officer from February 1996 to March 1999
and as the Chairman of the Board and a Director of the Company since 1987. Mr.
Parrish is a shareholder and has served as the President and as a Director of
Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois") since 1987.
Phoenix of Illinois owns approximately 295,000 shares of the Company's
outstanding Common Stock. Mr. Parrish also is Chairman and a Director of
ViatiCare, L.L.C., a financial services company, Chairman and a Director of
MIICRO, Inc., a neuroimaging company and Chairman and a Director of Amerimmune
Pharmaceuticals, Inc. 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"), a pharmaceutical/consumer products
company. 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.
16
MARY ANN LEEPER, Ph.D.
Age: 61; Elected Director: 1987; Present Term Ends: 2002 Annual Meeting
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996 and as President and Chief Executive Officer of The Female
Health Company Division from May 1994 until January 1996, as Senior Vice
President - Development of the Company from 1989 until January 1996 and as a
Director of the Company since 1987. Dr. Leeper is a shareholder and has served
as a Vice President and Director of Phoenix of Illinois since 1987. From 1981
until 1986, Dr. Leeper served as Vice President - Market Development for
Searle's Pharmaceutical Group and in various Searle research and development
management positions. As Vice President - Market Development, Dr. Leeper was
responsible for worldwide licensing 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. Dr. Leeper currently serves on the
Board of Advisors of the Temple University School of Pharmacy, the University of
Virginia School of Nursing and the Northwestern University School of Music. Dr.
Leeper is also on the Board of CEDPA, an international not-for-profit
organization working on women's issues in the developing world and is a Director
of Influx, Inc., a pharmaceutical research company. She is also an adjunct
professor at the University of Virginia Darden School of Business.
WILLIAM R. GARGIULO, JR.
Age: 73; Elected Director: 1987; Present Terms Ends: 2002 Annual Meeting
William R. Gargiulo, Jr. has served as Secretary of the Company from 1996 to
present, as Vice President from 1996 to September 30, 1998, as Assistant
Secretary of the Company from 1989 to 1996, as Vice President - International of
The Female Health Company Division from 1994 until 1996, as Chief Operating
Officer of the Company from 1989 to 1994, and as General Manager of the Company
from 1988 to 1994. Mr. Gargiulo has also served as a Director of the Company
since 1987. Mr. Gargiulo is a Trustee of a trust which is a shareholder of
Phoenix of Illinois. From 1984 until 1986, Mr. Gargiulo was the Executive
Vice-President of the Pharmaceutical Group of Searle, in charge of Searle's
European operations. From 1976 until 1984, Mr. Gargiulo was the Vice President
of Searle's Latin American operations.
JACK WEISSMAN
Age: 54; Vice President - Sales
Mr. Weissman has served as Vice President - Sales since June 1995. From 1992 to
1994, Mr. Weissman was Vice President-Sales for Capitol Spouts, Inc., a
manufacturer of pouring spouts for gable paper cartons. During the period from
1989 to 1992, he acted as General Manager-HTV Group, an investment group
involved in the development of retail stores. Mr. Weissman joined Searle's
Consumer Products Group in 1979 and held positions of increasing responsibility,
including National Account and Military Sales Manager. From 1985 to 1989, he was
Director - Retail Business Development for The NutraSweet Company, a Searle
subsidiary. Prior to Searle, Mr. Weissman worked in the consumer products field
as account manager and territory manager for Norcliff Thayer and Whitehall
Laboratories.
MICHAEL POPE
Age: 45; Vice President, General Manager - The Female Health Company (UK) Plc.
Mr. Pope has served as Vice President of the Company since 1996 and as General
Manager of The Female Health Company (UK) Plc. (formerly Chartex International,
Plc.) since the Company's 1996 acquisition of Chartex. Mr. Pope has also served
as a Director of The Female Health Company, Ltd. (formerly Chartex Resources
Limited) and The Female Health Company (UK) Plc. since 1995. From 1990 until
1996, Mr. Pope was Director of Technical Operations for Chartex with
responsibility for manufacturing, engineering, process
17
development and quality assurance. Mr. Pope was responsible for the development
of the high speed proprietary manufacturing technology for the female condom and
securing the necessary approvals of the manufacturing process by regulatory
organizations, including the FDA. Mr. Pope was also instrumental in developing
and securing Chartex's relationship with its Japanese marketing partner. Prior
to joining Chartex, from 1986 to 1990, Mr. Pope was Production Manager and
Technical Manager for Franklin Medical, a manufacturer of disposable medical
devices. During the period from 1982 to 1986, Mr. Pope was Site Manager,
Engineering and Production Manager, Development Manager and Silicon Manager for
Warne Surgical Products.
MITCHELL WARREN
Age: 35; Vice President - International Affairs
Mr. Warren has served as Vice President - International Affairs of the Company
since February 2000 and as Director of International Affairs of the Company from
January 1999 to February 2000. From 1993 to 1998, Mr. Warren was employed by
Population Services International (PSI), an international social marketing and
communications organization, first as Executive Director of PSI/South Africa and
then of PSI/Europe. From 1989 to 1993, Mr. Warren was Program Director of
Medical Education for South Africa Blacks.
ROBERT R. ZIC
Age: 38; Principal Accounting Officer
Mr. Zic has served as Principal Accounting Officer since March 1999. From 1998
to 1999, Mr. Zic held the dual positions of Acting Controller and Acting Chief
Financial Officer at Ladbroke's Pacific Racing Association division. From 1995
to 1998 Mr. Zic served as the Chief Accounting Manager and Assistant Controller
at Argonaut Insurance Company. In this capacity he was responsible for the
financial and accounting operations of Argonaut and its four subsidiaries. From
1990 to 1994 he was the Assistant Controller of CalFarm Insurance Company where
he was responsible for external reporting duties. From 1988 to 1990 Mr. Zic was
a Senior Accountant responsible for the statutory-based financials of Allstate
Insurance Company. Mr. Zic began his career in 1986 as an auditor with Arthur
Andersen & Co.
DAVID R. BETHUNE
Age: 61; Elected Director: 1996; Present Term Ends: 2002 Annual Meeting
Mr. Bethune has served as a Director since January 1996. Mr. Bethune has been
Chairman and Chief Executive Officer of Atrix Laboratories, Inc. since 1999.
From 1997 to 1998, Mr. Bethune held the positions of President and Chief
Operating Officer of the IVAX Corporation. From 1996 to 1997, Mr. Bethune was a
consultant to the pharmaceutical industry. From 1995 to 1996, Mr. Bethune was
President and Chief Executive Officer of Aesgen, Inc., a generic pharmaceutical
company. From 1992 to 1995, Mr. Bethune was Group Vice President of American
Cyanamid Company and a member of its Executive Committee until the sale of the
company to American Home Products. He had global executive authority for human
biologicals, consumer health products, pharmaceuticals and opthalmics, as well
as medical research. Mr. Bethune is on the Board of Directors of the Southern
Research Institute, Atrix Laboratories, Inc. 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.
18
STEPHEN M. DEARHOLT
Age: 55; Elected Director: 1996; Present Term Ends: 2002 Annual Meeting
Mr. Dearholt has served as a director since April 1996. Mr. Dearholt is a
co-founder and partner in Insurance Processing Center, Inc., one of the largest
privately owned life insurance marketing organizations in the United States,
since 1972. He has over 23 years of experience in direct response advertising
and data based marketing of niche products. Since 1985, he has been a 50% owner
of R.T. of Milwaukee, a private investment holding company which operates a
stock brokerage business in Milwaukee, Wisconsin. In late 1995, Mr. Dearholt
arranged, on very short notice, a $1 million bridge loan which assisted the
Company in its purchase of Chartex. Mr. Dearholt is also very active in the
non-profit sector. He is currently on the Board of Directors of Children's
Hospital Foundation of Wisconsin, an honorary board member of the Zoological
Society of Milwaukee, and the national Advisory Council of the Hazelden
Foundation. He is a past board member of Planned Parenthood Association of
Wisconsin, and past Chairman of the Board of the New Day Club, Inc.
MICHAEL R. WALTON
Age: 63; Elected Director: 1999; Present Term Ends 2002 Annual Meeting
Mr. Walton has served as a director since April 1999. Mr. Walton is President
and owner of Sheboygan County Broadcasting Co., Inc., a company he founded in
1972. In addition to its financial assets, Sheboygan County Broadcasting Co.
currently owns four radio stations. The company has focused on start-up
situations, and growing value in under-performing, and undervalued business
situations. It has purchased and sold properties in Wisconsin, Illinois, and
Michigan, and has grown to a multi-million dollar asset base from a start-up
capital contribution of less than $100,000. Prior to 1972, Mr. Walton was owner
and President of Walton Co., an advertising representative firm he founded in
New York City. He has held sales and management positions with Forbes Magazine,
The Chicago Sun Times and Gorman Publishing Co., a trade magazine publisher
specializing in new magazines which was subsequently sold to a large
international publishing concern. Mr. Walton has served on the Boards of the
American Red Cross, the Salvation Army and the Chamber of Commerce.
JAMES R. KERBER
Age: 69; Director: 1999; Present Term Ends 2002 Annual Meeting
Mr. Kerber has served as a director since April 1999. Mr. Kerber has been a
business consultant to the insurance industry since January 1996. He has over 40
years of experience in operating insurance companies, predominately those
associated with life and health. From 1994 to 1996, he was Chairman,
President, Chief Executive Officer and director of the 22 life and health
insurance companies which comprise the ICH Group. In 1990, Mr. Kerber was
founding partner in the Life Partners Group where he was Senior Executive Vice
President and a director. Prior to that, he was involved with operating and
consulting over 200 life and health insurance companies for ICH Corporation, HCA
Corporation and US Life Corporation.
RICHARD E. WENNINGER
Age: 54; Director: 2001: Present Term Ends 2002 Annual Meeting
Mr. Wenninger has served as a Director since July 2001. Mr. Wenninger currently
serves as Chairman of Wenninger Company, Inc., a mechanical contracting and
engineering company. From 1976 to 2001, Mr. Wenninger served as President and
Chief Executive Officer of Wenninger Company, Inc. He is also Secretary of Wenn
Soft, Inc., a software development, sales and service company he founded in
1997. From 1992 to 1999, Mr. Wenninger served as Secretary of Liftco, Inc. Mr.
Wenninger is a current board member of the Boys & Girls Club of Milwaukee, a
former President and board member of the Milwaukee Athletic Club, a former board
member of the Wisconsin Psychoanalytic Foundation, a former board member of
University Lake School, the former President and a current board member of the
Plumbing and Mechanical Contractors Association of Milwaukee, the former
President and a former board member of the Sheet Metal Contractors Association
of Milwaukee and a former board member of the Mechanical Contractors Association
of America.
19
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") on Form 3, 4 and
5. Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during fiscal 2001 all section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with,
except that Mr. Wenninger filed a Form 3 in August 2001 to report his beneficial
ownership of more than 10% of the Company's Common Stock as of May 2001, Dr.
Leeper filed a Form 4 in November 2001 to report a transaction completed in
September 2001 and Mr. Dearholt filed a Form 5 in November 2001 to report a
transaction completed in August 2001.
20
Item 10. Executive Compensation
The following table sets forth the annual and long-term compensation for each of
the last three fiscal years for the Company's Chief Executive Officer and the
highest paid executive officer other than the Chief Executive Officer (the
"named executive officer"), who served in such capacity as of September 30,
2001, as well as the total compensation paid to each individual during the
Company's last three fiscal years. No other senior executive officer of the
Company received salary and bonus in excess of $100,000 during the fiscal year
ended September 30, 2001.
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION
COMPENSATION AWARDS
------------- -------------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING
PRINCIPAL FISCAL SALARY AWARDS OPTIONS/SARS
POSITION YEAR ($) ($) (#)
- ---------------------- ------ ------------- ---------- ------------
O.B. Parrish 2001 90,000 --- ---
Chairman and 2000 90,000 --- ---
Chief Executive 1999 90,000 --- 200,000
Officer
Mary Ann Leeper, Ph.D. 2001 225,000 --- ---
President and 2000 225,000 --- ---
Chief Operating 1999 225,000 --- 500,000
Officer
Options/SAR Grants in Last Fiscal Year
None.
Aggregated Option Values at September 30, 2001
The following table presents the value of unexercised options held by the named
executive officers at September 30, 2001:
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT
SEPTEMBER 30, 2001 FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------- -------------------------------- -------------------------
O.B. Parrish 0 / 464,000 (2) -0-
Mary Ann Leeper, Ph.D. 0 / 790,000 (2) -0-
(1) Values are calculated by subtracting the exercise price from the $0.51
per share closing price of the Company's Common Stock on September 28, 2001.
21
(2) In September 2001, Mr. Parrish and Dr. Leeper each agreed to waive their
rights to exercise outstanding options until the Company amends its articles of
incorporation to increase the number of shares of common stock authorized for
issuance. As of September 30, 2001, Mr. Parrish held options to purchase 88,000
shares of common stock that were exercisable but for the effect of this waiver
and Dr. Leeper held options to purchase 96,667 shares of common stock that were
exercisable but for the effect of this waiver. In consideration for these
waivers, the Company agreed to reduce the exercise price of such options to
$0.56 per share.
Employment Agreements
The Company entered into an employment agreement with Dr. Leeper effective May
1, 1994. The original term of Dr. Leeper's employment extended to April 30,
1997 and after April 30, 1997 her employment term renews automatically for
additional three-year terms unless notice of termination is given. The
employment agreement has automatically renewed for a term ending on April 30,
2003. The Company may terminate the employment agreement at any time for cause.
If Dr. Leeper's employment 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 of our health, life insurance or disability plans
in which Dr. Leeper participated prior to her termination of employment. Dr.
Leeper's employment agreement provided for a base salary of $175,000 for the
first year of her employment term, $195,000 for the second year of her
employment term and $225,000 for the third year of her employment term, subject
to the achievement of performance goals established by Dr. Leeper and the Board
of Directors. If the employment agreement is renewed beyond the initial
three-year term, it requires her base salary to be increased annually by the
Board of Directors based upon her performance and any other factors that the
Board of Directors considers appropriate. For fiscal 2000 and 2001, Dr.
Leeper's base salary was $225,000 per year. The employment agreement also
provides Dr. Leeper with various fringe benefits including an annual cash bonus
of up to 100% of her base salary. The Board of Directors may award the cash
bonus to Dr. Leeper in its discretion. To date, Dr. Leeper has not been awarded
a cash bonus.
Change of Control Agreements
In fiscal 1999, the Company entered into Change of Control Agreements with each
of O.B. Parrish, the Company's Chairman and Chief Executive Officer, Mary Ann
Leeper, the Company's President and Chief Operating Officer, and Michael Pope,
the Company's Vice President. In fiscal 2000, the Company entered into a Change
of Control Agreement with Mitchell Warren, the Company's Vice President -
International Affairs. These agreements essentially act as springing employment
agreements which provide that, upon a change of control, as defined in the
agreement, the Company will continue to employ the executive for a period of
three years in the same capacities and with the same compensation and benefits
as the executive was receiving prior to the change of control, in each case as
specified in the agreements. If the executive is terminated without cause or if
he or she quits for good reason, in each case as defined in the agreements,
after the change of control, the executive is generally entitled to receive a
severance payment from the Company equal to the amount of compensation remaining
to be paid to the executive under the agreement for the balance of the
three-year term.
22
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of December 20, 2001 with
respect to (a) each person known to the Company to own beneficially more than 5%
of the Company's Common Stock, (b) each named executive officer and each
director of the Company and (c) all directors and executive officers as a group.
The Company has determined beneficial ownership in accordance with the rules of
the SEC. Unless otherwise indicated, the persons and entities included in the
table have sole voting and investment power with respect to all shares
beneficially owned, except to the extent authority is shared by spouses under
applicable law. Shares of Common Stock subject to options or warrants that are
either currently exercisable or exercisable within 60 days of December 20, 2001,
and shares of Common Stock subject to the conversion of preferred stock or
convertible debentures outstanding as of December 20, 2001, are treated as
outstanding and beneficially owned by the holder for the purpose of computing
the percentage ownership of the holder. However, these shares are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person.
Shares Beneficially
Owned
---------------------
Name of Beneficial Owner Number Percent
---------- ---------
O. B. Parrish (1)(2) . . . . . . 832,501 5.1%
William R. Gargiulo, Jr. (1)(2). 335,001 2.1%
Mary Ann Leeper, Ph.D. (1)(2). . 370,901 2.3%
Stephen M. Dearholt (2)(3) . . . 4,101,612 22.1%
David R. Bethune (2) . . . . . . 0 0%
James R. Kerber (2)(4) . . . . . 543,710 3.4%
Michael R. Walton (5). . . . . . 509,000 3.1%
Richard E. Wenninger (2)(6). . . 3,361,470 19.2%
Gary Benson (7). . . . . . . . . 1,701,450 9.8%
All directors, nominees and
executive officers, as a group
(12 persons) (1)(2)(3)(4)(5)(6) 9,420,193 44.4%
(1) Includes 294,501 shares owned by and 30,000 shares under option to Phoenix
of Illinois. Under the rules of the SEC, 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 46,400 shares owned by
her; for Mr. Parrish, also includes 71,500 shares owned by him, 36,500
shares under warrants to him and 400,000 shares under warrants held by the
Geneva O. Parrish 1996 Living Trust of which Mr. Parrish is beneficiary and
for which Mr. Parrish may be deemed to share voting and investment power;
and for Mr. Gargiulo, also includes 10,500 shares owned by him.
(2) Does not include the following shares under options that were exercisable
but for the effect of a waiver by the holder of his or her rights to
exercise such options until the Company amends its articles of
incorporation to increase the number of shares of common stock authorized
for issuance: Mr. Parrish, 88,000 shares under such options; Mr. Gargiulo,
16,667 shares under such options; Dr. Leeper, 96,667 shares under such
options; Mr. Dearholt, 50,000 shares under such options;
23
Mr. Bethune, 50,000 shares under such options; Mr. Kerber, 30,000 shares
under such options; and all directors, nominees and executive officers as a
group, 331,334 shares under such options. In consideration for these
waivers, the Company agreed to reduce the exercise price of such options to
$0.56 per share.
(3) Includes 703,605 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, 13,700 shares held in a
self-directed IRA, 186,427 shares held by the Mary C. Dearholt Trust of
which Mr. Dearholt, a sibling and his mother are trustees, 18,100 shares
held by Mr. Dearholt's minor child, 418,100 shares held by the John W.
Dearholt Trust of which Mr. Dearholt is a co-trustee with a sibling, and
60,000 shares of preferred stock held by the Mary C. Dearholt Trust, of
which Mr. Dearholt, a sibling and his mother are trustees, that are
convertible share-for-share into shares of Common Stock. Mr. Dearholt
shares the power to vote and dispose of 640,998 shares of Common Stock
(including 60,000 shares of preferred stock convertible into Common Stock)
held by the Mary C. Dearholt Trust and the John W. Dearholt Trust. Mr.
Dearholt has sole power to vote and dispose of the remaining shares of
common stock, except that North Central Trust has the sole power to vote
and dispose of the 9,680 shares of common stock held by the Response
Marketing Money Purchase Plan. Also includes warrants to purchase 2,622,500
shares of common stock (of which warrants to purchase up to 1,100,000
shares have been pledged to a bank to secure a guarantee by Mr. Dearholt on
behalf of the Company).
(4) Includes 200,000 shares subject to exercise of warrants. The warrants have
been pledged to a bank to secure a guarantee by Mr. Kerber on behalf of the
Company.
(5) Includes 200,000 shares of Common Stock owned directly by Mr. Walton,
173,030 shares of preferred stock owned by Mr. Walton and 135,970 shares of
preferred stock held by a trust of which Mr. Walton is trustee.
(6) Includes (a) 500,000 shares of Common Stock subject to conversion of a
convertible debenture due March 30, 2004 (based upon $250,000 of principal
under such convertible debenture, divided by the conversion rate of $0.50),
(b) 5,000 shares of common stock held by Mr. Wenninger's spouse (Mr.
Wenninger disclaims beneficial ownership of the shares held by his spouse),
(c) 1,100,000 shares of common stock subject to exercise of warrants,
consisting of a warrant to purchase 100,000 shares and a warrant to
purchase a maximum of 1,000,000 shares and (d) 60,000 shares of preferred
stock held by Mr. Wenninger. The warrants described in (c) above have been
pledged to a bank to secure a guarantee by Mr. Wenninger on behalf of the
Company.
(7) Includes warrants to purchase 1,500,000 shares of Common Stock and 21,000
shares of preferred stock.
24
Item 12. Certain Relationships and Related Transactions
On March 25, 1997, 1998, 1999, 2000, and 2001 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, 2002 and bears interest at 12% per annum
payable monthly. The borrowing transactions were effected in the form of a
promissory note from the Company to Mr. Dearholt and related Note Purchase and
Warrant Agreements and Stock Issuance Agreements. Under the 1997, 1998 and 1999
Note Purchase and Warrant Agreements, the Company issued to Mr. Dearholt
warrants to purchase 200,000 shares of the Company's Common Stock for each of
the three years respectively, at exercise prices of $1.848, $2.25 and $1.16 per
share, respectively. In 2000, the Company issued to Mr. Dearholt warrants to
purchase 250,000 shares of the Company's Common Stock at an exercise price of
$0.71 per share. In 2001, the Company issued to Mr. Dearholt warrants to
purchase 280,000 shares of the Company's Common Stock at an exercise price of
$0.40 per share. The warrants expire upon the earlier of their exercise or on
March 25, 2005 for the warrants issued in 1997, March 25, 2007 for the warrants
issued in 1998, March 25, 2998 for the warrants issued in 1999, March 25, 2010
for the warrants issued in 2000, and March 25, 2011 for the warrants issued in
2001. Under the Stock Issuance Agreements, if the Company fails to pay the $1
million under the note when due, the Company must issue 280,000 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, 2003 upon the same terms as the prior note extension.
Additionally, during 2000 and 2001 the Company extended notes of $250,000 from
Stephen Dearholt and $50,000 from O.B. Parrish, each a current director of the
Company. Each note payable bears interest at 12% and was payable in full in
2002. As part of the 2000 renewal, the Company issued Mr. Dearholt and Mr.
Parrish warrants to purchase 62,500 and 12,500 shares of the Company's common
stock at $0.77 and $0.72 per share, respectively. As part of the 2001 renewal,
the Company issued Mr. Dearholt and Mr. Parrish warrants to purchase 70,000 and
14,000 shares of the Company's common stock at $0.40 and $0.40 per share,
respectively. Any stock issued under the warrants carry certain registration
rights. The warrants expire in 2011. Each of these notes was subsequently paid
off in June 2001.
On June 14, 2000, the Company completed a private placement of 400,000 shares of
its Common Stock to The John W. Dearholt Trust at a price of $0.50 per share,
representing a discount of 6% from the closing price of the Common Stock on the
Over the Counter Bulletin Board on that date. Stephen M. Dearholt is a
co-trustee of this trust. As part of this private placement, the Company
granted the investor registration rights which require that the Company register
the investor's resale of those shares.
The Company entered into a loan agreement on May 18, 2001, providing for a
three-year loan commitment from a bank of up to $2,000,000. The Company may
borrow under this loan agreement from time to time subject to a number of
conditions, including obtaining personal guarantees of 125% of the amount
outstanding under the loan. In May 2001, the Company borrowed a total of $1.5
million under this loan agreement. Five persons provided guarantees equal in
total to the $1.5 million outstanding under the loan. The guarantors included
James R. Kerber, Stephen M. Dearholt, Richard E. Wenninger and a trust for the
benefit of O.B. Parrish. Each guarantor may be liable to the lender for up to
125% of the guarantor's guarantee amount if the Company defaults under the loan.
The Company issued warrants to the guarantors to purchase the number of shares
of the Company's Common Stock equal to the guarantee amount of such guarantor
divided by the warrant purchase price as of the date of exercise. The warrant
purchase price is the price per share equal to 70%
25
of the market price of our common stock at the time of exercise, but in no event
will the warrant purchase price be less than $0.50 per share or more than $1.00
per share. The Company also issued additional warrants to purchase 100,000
shares of Common Stock at an exercise price of $0.50 per share to each of
Stephen M. Dearholt and Richard E. Wenninger because each of them guaranteed
$500,000 under the loan. The Company granted all of the guarantors registration
rights which require that the Company register the shares of common stock
underlying the warrants.
Effective March 30, 2001, the Company issued a $250,000 convertible debenture to
Richard E. Wenninger. Mr. Wenninger subsequently became a member of the
Company's board of directors in July 2001. The convertible debenture bears
interest at 12% per annum and has a three-year term. Mr. Wenninger may convert
the convertible debenture into common stock at any time based on a conversion
rate of $0.50 per share.
In August 2001, the Company issued 1,000,000 shares of Common Stock to Richard
E. Wenninger for a total purchase price of $500,000. The Company granted Mr.
Wenninger registration rights which require that the Company register the shares
of Common Stock it issued to Mr. Wenninger.
During fiscal 2001, the Board of Directors of the Company elected to extend
warrants held by Mr. Dearholt, including 1995 and 1996 warrants totaling 240,000
priced between $3.00 and $3.10 an additional five years. The Board of Directors
elected to extend the warrants because they felt that due to changed
circumstances, including the reduction in the price of the Company's Common
Stock, the warrants were no longer providing the incentive they were designed to
provide.
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.
Item 13. Exhibits and Reports On Form 8-K.
A. Documents Filed as a Part of This Report:
1. Financial Statements.
The following consolidated financial statements of the Company are included in
Item 8 hereof:
Consolidated Balance Sheet - September 30, 2001
Consolidated Statements of Operations - Years ended September 30, 2001 and 2000
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended
September 30, 2001 and 2000
Consolidated Statements of Cash Flows - Years ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
None.
26
3. Exhibits Filed:
EXHIBIT NO. DESCRIPTION
- ------------ --------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the
Company.(20)
3.2 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Company. (26)
3.3 Amended and Restated By-Laws of the Company.(3)
4.1 Amended and Restated Articles of Incorporation (same as Exhibit
3.1).
4.2 Articles of Amendment to Amended and Restated Articles of
Incorporation of the Company (same as Exhibit 3.2).
4.3 Articles II, VII and XI of the Amended and Restated By-Laws of
the Company (included in Exhibit 3.3).
10.1 Employment Agreement between John Wundrock and the Company dated
October 1, 1989.(3)
10.2 Wisconsin Pharmacal Company, Inc. (k/n/a The Female Health
Company) 1990 Stock Option Plan.(4)
10.3 Reality Female Condom Clinical Trial Data Agreement between the
Company and Family Health International dated September 24,
1992.(6)
10.4 Trademark License Agreement for Reality Trademark.(7)
10.5 Office space lease between the Company and John Hancock Mutual
Life Insurance Company dated June 1, 1994.(8)
10.6 Employment Agreement dated September 10, 1994 between the
Company and Dr. Mary Ann Leeper.(9)
10.7 1994 Stock Option Plan.(10)
10.8 Investor relations and development services Consulting Agreement
between the Company and C.C.R.I. Corporation dated March 13,
1995.(11)
10.9 Consultant Warrant Agreement dated March 13, 1995 between the
Company and C.C.R.I. Corporation, as amended on April 22,
1996.(12)
10.10 Company Promissory Note payable to Stephen M. Dearholt for $1
million dated March 25, 1996 and related Note Purchase and
Warrant Agreement, warrants and Stock Issuance Agreement.(13)
10.11 Outside Director Stock Option Plan.(12)
10.12 Exclusive Distribution Agreement between Chartex International
Plc and Taiho Pharmaceutical Co., Ltd. dated October 18,
1994.(14)
27
10.13 Supply Agreement between Chartex International Plc and Deerfield
Urethane, Inc. dated August 17, 1994.(14)
10.14 Employment Letter dated February 28, 1990 from Chartex Resources
Ltd. to Michael Pope and Board Amendments thereto.(14)
10.15 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)
10.16 Letter Amendment to Asset Sale Agreement dated April 29, 1996
between the Company and Dowty Seals Limited and Chartex
International Plc.(14)
10.17 Form of Warrant issued by the Company to certain foreign
investors as of September 12, 1996.(15)
10.18 Fund Raising Agreement dated May 1, 1998 by and between
Hartinvest-Medical Ventures and the Company. (12)
10.19 Change of Control Agreement dated January 27, 1999, between The
Female Health Company and Michael Pope.(16)
10.20 Company Promissory Note to Stephen M. Dearholt for $250,000
dated February 1, 1999 and related Note Purchase And Warrant
Agreement, warrants and Stock issuance Agreement.(16)
10.21 Company Promissory Note to O.B. Parrish for $50,000 dated
February 1, 1999 and related Note Purchase And Warrant
Agreement, warrants and Stock issuance Agreement.(16)
10.22 Company Promissory Note to Stephen M. Dearholt for $1 million
dated March 25, 1999 and related Note Purchase and Warrant
Agreement, Warrant and Stock Issuance Agreement.(16)
10.23 Form of Registration Rights Agreement between the Company and
certain private placement investors dated as of June 1,
1999.(17)
10.24 Amendment to Registration Rights Agreement between the Company
and Private Placement Investors dated as of June 1, 1999.(17)
10.25 $1 million Convertible Debenture issued by the Company to Gary
Benson dated May 19, 1999.(17)
10.26 $100,000 Convertible Debenture issued by the Company to Daniel
Bishop dated June 3, 1999.(17)
10.27 $100,000 Convertible Debenture issued by the Company to Robert
Johander dated June 3, 1999.(17)
10.28 $100,000 Convertible Debenture issued by the Company to Michael
Snow dated June 3, 1999.(17)
10.29 $100,000 Convertible Debenture issued by the Company to W.G.
Securities Limited Partnership dated June 3, 1999.(17)
10.30 Warrant to purchase 1,250,000 shares of the Company's common
stock issued to Gary Benson on May 19, 1999.(17)
28
10.31 Warrant to purchase 125,000 shares of the Company's common stock
issued to Daniel Bishop on June 3, 1999.(17)
10.32 Warrant to purchase 125,000 shares of the Company's common stock
issued to Robert Johander on June 3, 1999.(17)
10.33 Warrant to purchase 250,000 shares of the Company's common stock
issued to Michael Snow on June 3, 1999.(17)
10.34 Warrant to purchase 125,000 shares of the Company's common stock
issued to W.G. Securities Limited Partnership on June 3,
1999.(17)
10.35 Form of Common Stock Purchase Warrant to acquire 337,500 shares
issued to R.J. Steichen as placement agent.(17)
10.36 Form of Change of Control Agreement between the Company and each
of O.B. Parrish and Mary Ann Leeper.(20)
10.37 Lease Agreement among Chartex Resources Limited, P.A.T.
(Pensions) Limited and The Female Health Company.(18)
10.38 Agreement dated March 14, 1997, between the Joint United Nations
Programme on HIV/AIDS and Chartex International PLC.(19)
10.39 Company promissory note payable to Stephen M. Dearholt for $1
million dated March 25, 1997, and related stock purchase and
warrant agreement, warrants and stock issuance agreement.(21)
10.40 1997 Stock Option Plan.(19)
10.41 Employee Stock Purchase Plan.(19)
10.42 Agreement dated September 29, 1997, between Vector Securities
International and The Female Health Company.(19)
10.43 Private Equity Line of Credit Agreement between the Company and
Kingsbridge Capital Limited dated November 19, 1998.(2)
10.44 Registration Rights Agreement between the Company and
Kingsbridge Capital Limited dated as of November 19, 1998.(2)
10.45 Warrant to Purchase up to 200,000 shares of common stock of the
Company issued to Kingsbridge Capital Limited as of November 19,
1998.(2)
10.46 Agreement between Kingsbridge Capital Limited and the Company
dated February 12, 1999.(23)
10.47 Consulting Agreement between the Company and Kingsbridge Capital
Limited dated February 12, 1999.(23)
10.48 Registration Rights Agreement between Kingsbridge Capital
Limited and the Company dated February 12, 1999.(23)
10.49 Warrant for 100,000 shares of the Company's common stock issued
to Kingsbridge Capital Limited as of February 12, 1999.(23)
10.50 Company Promissory Note to Stephen M. Dearholt for $250,000
dated February 12, 2000 and related Warrants.(24)
29
10.51 Company Promissory Note to O.B. Parrish for $50,000 dated
February 18, 2000 and related Warrants.(24)
10.52 Company Promissory Note to Stephen M. Dearholt for $1 million
dated March 25, 2000 and related Warrants.(24)
10.53 Stock Purchase Agreement, dated as of June 14, 2000, between The
Female Health Company and The John W. Dearholt Trust.(25)
10.54 Warrant to purchase 250,000 shares of the Company's common stock
issued to Gary Benson on May 19, 2000. (25)
10.55 Warrant to purchase 25,000 shares of the Company's common stock
issued to Daniel Bishop on June 3, 2000. (25)
10.56 Warrant to purchase 25,000 shares of the Company's common stock
issued to Robert Johander on June 3, 2000. (25)
10.57 Warrant to purchase 50,000 shares of the Company's common stock
issued to Michael Snow on June 3, 2000. (25)
10.58 Warrant to purchase 25,000 shares of the Company's common stock
issued to W.G. Securities Limited Partnership on June 3, 2000.
(25)
10.59 Stock Purchase Agreement, dated as of June 14, 2000, between the
Company and The John W. Dearholt Trust. (25)
10.60 Exclusive Distribution Agreement, dated as of ______, 2000,
between the Company and Mayer Laboratories, Inc. (26)
10.61 Amended and Restated Convertible Debenture issued by the Company
to Richard E. Wenninger dated March 30, 2001. (27)
10.62 Amended and Restated Promissory Note to Stephen M. Dearholt for
250,000 dated February 12, 2001 and related warrants. (5)
10.63 Amended and Restated Promissory Note to O.B. Parrish for $50,000
dated February 18, 2001 and related warrants. (5)
10.64 Amended and Restated Promissory Note to Stephen M. Dearholt for
1,000,000 dated March 25, 2001 and related warrants. (27)
10.65 Loan Agreement, dated as of May 18, 2001, between the Company
and Heartland Bank. (27)
10.66 Registration Rights Agreement, dated as of May 18, 2001, between
the Company and Heartland Bank. (27)
10.67 Warrant dated May 18, 2001 from the Company to Heartland Bank.
(27)
10.68 Warrants dated May 18, 2001 from the Company to Stephen M.
Dearholt. (28)
10.69 Warrant dated May 18, 2001 from the Company to James R. Kerber.
(28)
10.70 Warrant dated May 18, 2001 from the Company to Tom Bodine. (28)
30
10.71 Warrant dated May 18, 2001 from the Company to The Geneva O.
Parrish 1996 Living Trust. (28)
10.72 Warrants dated May 23, 2001 from the Company to Richard E.
Wenninger. (28)
10.73 Registration Rights Agreement, dated as of May 18, 2001, among
the Company and certain guarantors. (28)
21 Subsidiaries of Registrant. (22)
____________
(1) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
(2) Incorporated herein by reference to the Company's Form SB-2 Registration
Statement filed December 8, 1998.
(3) 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.
(4) Incorporated herein by reference to the Company's December 31, 1990 Form
10-Q.
(5) Incorporated herein by reference to the Company's March 31, 2001 Form
10-QSB.
(6) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration No. 33-51586, as
filed with the Securities and Exchange Commission on September 28, 1992.
(7) Incorporated herein by reference to the Company's 1992 Form 10-KSB.
(8) Incorporated herein by reference to the Company's June 30, 1994 Form 10-Q.
(9) Incorporated herein by reference to the Company's Registration Statement on
Form S-2, Registration No. 33-84524, as filed with the Securities and
Exchange Commission on September 28, 1994.
(10) Incorporated herein by reference to the Company's 1994 Form 10-KSB.
(11) Incorporated herein by reference to the Company's March 31, 1995 Form 10-Q.
(12) Incorporated herein by reference to the Company's Form S-1 Registration
Statement filed with the Securities and Exchange Commission on April 23,
1996.
(13) Incorporated herein by reference to the Company's June 30, 1995 Form 10-Q.
(14) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Company's Form S-1 Registration Statement filed with the Securities and
Exchange Commission on June 5, 1996.
(15) Incorporated herein by reference to the Company's 1996 Form 10-K.
(16) Incorporated herein by reference to the Company's March 31, 1999 Form
10-QSB.
(17) Incorporated herein by reference to the Company's June 30, 1999 Form
10-QSB.
31
(18) Incorporated herein by reference to the Company's December 31, 1996 Form
10-QSB.
(19) Incorporated herein by reference to the Company's Form 10-KSB/A-2 for the
year ended September 30, 1997.
(20) Incorporated herein by reference to the Company's Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on October 19,
1999.
(21) Incorporated herein by reference to the Company's March 31, 1997 Form
10-QSB.
(22) Incorporated herein by reference to the Company's Form 10-KSB for the year
ended September 30, 1999.
(23) Incorporated herein by reference to the Company's December 31, 1998 Form
10-QSB.
(24) Incorporated herein by reference to the Company's March 31, 2000 Form
10-QSB.
(25) Incorporated herein by reference to the Company's June 30, 2000 Form
10-QSB.
(26) Incorporated herein by reference to the Company's Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on September
21, 2000.
(27) Incorporated herein by reference to the Company's June 30, 2001 Form
10-QSB.
(28) Incorporated herein by reference to the Company's Form SB-2 Registration
Statement filed November 13, 2001.
B. Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the last quarter of the
period covered by this report.
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE FEMALE HEALTH COMPANY
BY: /s/ O.B. Parrish
-------------------------
O.B. Parrish, Chairman,
Chief Executive Officer
/s/ Robert R. Zic
-------------------------
Robert R. Zic, Principal
Accounting Officer
Date: December 26, 2001
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
Signature Title Date
/s/ O.B. Parrish Chairman of the Board December 26, 2001
- ----------------------- Chief Executive Officer,
O.B. Parrish and Director
/s/ Mary Ann Leeper President, Chief Operating December 26, 2001
- --------------------------- Officer and Director
Mary Ann Leeper, Ph.D.
/s/ Robert R. Zic Principal Accounting Officer December 26, 2001
- ------------------------
Robert R. Zic
/s/ William R. Gargiulo Secretary and Director December 26, 2001
- -------------------------
William R. Gargiulo
33
Director December 26, 2001
- -------------------------
David R. Bethune
/s/ Stephen M. Dearholt Director December 26, 2001
- -------------------------
Stephen M. Dearholt
/s/ Michael R. Walton Director December 26, 2001
- -------------------------
Michael R. Walton
/s/ James R. Kerber Director December 26, 2001
- ------------------------
James R. Kerber
/s/ Richard E. Wenninger Director December 26, 2001
- ------------------------
Richard E. Wenninger
34
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Document Page No.
- ----------------------------------------------------------- ----------------
Audited Consolidated Financial Statements.
Report of McGladrey & Pullen, LLP, Independent Auditors.. F-1
Consolidated Balance Sheet as of September 30, 2001.. . . F-2
Consolidated Statements of Operations for the years ended
September 30, 2001 and 2000. . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended September 30, 2001 and 2000. . . . . F-4 and F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 2001 and 2000. . . . . . . . . . . . . . . F-6 and F-7
Notes to Consolidated Financial Statements. . . . . . . . F-8 through F-24
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, 2001, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended September 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001, and the results of their
operations and their cash flows for the years ended September 30, 2001 and 2000,
in conformity with accounting principles generally accepted in the United States
of America.
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 14, 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 14. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts of classification of liabilities that may result from the outcome of
this uncertainty.
Schaumburg, Illinois
November 21, 2001 except for
the waiver of a loan covenant
violation discussed in Note 4
as to which the date is
December 28, 2001
F-1
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
- -------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 469,406
Accounts receivable, net of allowance for doubtful accounts
of $20,000 and allowance for product returns of $7,500 . . . . . . 1,430,643
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603,665
Prepaid expenses and other current assets. . . . . . . . . . . . . . 119,895
-------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . 2,623,609
-------------
Other Assets
Certificate of deposit . . . . . . . . . . . . . . . . . . . . . . . 115,000
Intellectual property, net of accumulated amortization of $605,150 . 462,763
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,890
-------------
721,653
-------------
Equipment and Furniture and Fixtures
Equipment, furniture and fixtures. . . . . . . . . . . . . . . . . . 3,635,625
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . 2,650,109
-------------
985,516
-------------
$ 4,330,778
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable, related party, net of unamortized discount of $54,600. $ 945,400
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 459,248
Accrued expenses and other current liabilities . . . . . . . . . . . 382,162
Preferred dividends payable. . . . . . . . . . . . . . . . . . . . . 133,814
-------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . 1,920,624
-------------
Long-Term Liabilities
Note payable, bank, net of unamortized discount of $842,869. . . . . 657,131
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . 450,000
Deferred gain on sale of facility. . . . . . . . . . . . . . . . . . 1,250,700
-------------
2,357,831
-------------
Stockholders' Equity
Convertible preferred stock, Series 1, par value $.01 per share.
Authorized 5,000,000 shares; issued and outstanding 660,000 shares 6,600
Common stock, par value $.01 per share. Authorized 27,000,000
shares; issued and outstanding 15,692,929 shares.. . . . . . . . . 156,929
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 50,264,602
Unearned consulting fees . . . . . . . . . . . . . . . . . . . . . . (60,817)
Accumulated other comprehensive income . . . . . . . . . . . . . . . 23,801
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (50,306,716)
-------------
84,399
Treasury Stock, at cost, 20,000 shares of common stock . . . . . . . . (32,076)
-------------
52,323
-------------
$ 4,330,778
=============
See Notes to Consolidated Financial Statements.
F-2
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
- -----------------------------------------------------------------------------------
Net revenues. . . . . . . . . . . . . . . . . . . . . . $ 6,716,174 $ 5,766,868
Cost of products sold . . . . . . . . . . . . . . . . . 5,337,830 5,184,735
------------ ------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . 1,378,344 582,133
------------ ------------
Operating expenses:
Advertising and promotion . . . . . . . . . . . . . . 129,155 247,222
Selling, general and administrative . . . . . . . . . 1,852,044 2,727,542
------------ ------------
Total operating expenses. . . . . . . . . . . . 1,981,199 2,974,764
------------ ------------
OPERATING (LOSS). . . . . . . . . . . . . . . . (602,855) (2,392,631)
------------ ------------
Nonoperating income (expense):
Amortization of debt issuance costs . . . . . . . . . - (245,676)
Interest expense. . . . . . . . . . . . . . . . . . . (702,039) (1,231,832)
Interest income . . . . . . . . . . . . . . . . . . . 12,669 34,772
Nonoperating income . . . . . . . . . . . . . . . . . 120,969 145,204
------------ ------------
(568,401) (1,297,532)
------------ ------------
NET (LOSS). . . . . . . . . . . . . . . . . . . (1,171,256) (3,690,163)
Preferred dividends, Series 1 . . . . . . . . . . . . . 133,000 132,195
------------ ------------
Net (loss) attributable to common stockholders. $(1,304,256) $(3,822,358)
============ ============
Net (loss) per common share outstanding . . . . $ (0.09) $ (0.30)
Weighted average common shares outstanding. . . . . . . 14,630,970 12,764,498
See Notes to Consolidated Financial Statements.
F-3
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Accumulated
Additional Unearned Other
Preferred Common Paid-in Consulting Comprehensive Accumulated
Stock Stock Capital Fees Income Deficit
------------ --------- ------------ ---------- ------------- -------------
Balance at September 30, 1999. . . . . . . $ 6,600 $119,296 $46,820,779 $(201,374) $ 189,847 $(45,180,102)
Issuance of 197,093 shares of
Common Stock under
the equity line of credit. . . . . . . - 1,971 95,029 - - -
Issuance of 200,000 shares of
Common Stock for consulting
services . . . . . . . . . . . . . . . - 2,000 112,055 (114,055) - -
Issuance of warrants with convertible
debentures . . . . . . . . . . . . . . - - 157,700 - - -
Forfeiture of 6,000 shares of Common
Stock under stock bonus plan . . . . . - (60) (17,190) - - -
Issuance of warrants with short-term
notes payable. . . . . . . . . . . . . - - 193,289 - - -
Issuance of 20,005 shares of Common
Stock as payment of interest
on debentures. . . . . . . . . . . . . - 200 16,356 - - -
Issuance of 41,352 shares of Common
Stock as payment of preferred
stock dividends. . . . . . . . . . . . - 413 33,185 - - -
Preferred Stock dividends. . . . . . . . - - - - - (132,195)
Issuance of 1,421,669 shares of
Common Stock . . . . . . . . . . . . . - 14,217 820,783 - - -
Amortization of unearned consulting fees . - - - 224,614 - -
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . - - - - - (3,690,163)
Foreign currency translation adjustment. - - - - (134,186) -
Comprehensive income (loss). . . . . . . .
------------ --------- ------------ ---------- ------------- -------------
Balance at September 30, 2000. . . . . . . $ 6,600 $138,037 $48,231,986 $ (90,815) $ 55,661 $(49,002,460)
============ ========= ============ ========== ============= =============
Cost of
Treasury
Stock Total
--------- ------------
Balance at September 30, 1999. . . . . . . $(32,076) $ 1,722,970
Issuance of 197,093 shares of
Common Stock under
the equity line of credit. . . . . . . - 97,000
Issuance of 200,000 shares of
Common Stock for consulting
services . . . . . . . . . . . . . . . - -
Issuance of warrants with convertible
debentures . . . . . . . . . . . . . . - 157,700
Forfeiture of 6,000 shares of Common
Stock under stock bonus plan . . . . . - (17,250)
Issuance of warrants with short-term
notes payable. . . . . . . . . . . . . - 193,289
Issuance of 20,005 shares of Common
Stock as payment of interest
on debentures. . . . . . . . . . . . . - 16,556
Issuance of 41,352 shares of Common
Stock as payment of preferred
stock dividends. . . . . . . . . . . . - 33,598
Preferred Stock dividends. . . . . . . . - (132,195)
Issuance of 1,421,669 shares of
Common Stock . . . . . . . . . . . . . - 835,000
Amortization of unearned consulting fees . - 224,614
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . - (3,690,163)
Foreign currency translation adjustment. - (134,186)
------------
Comprehensive income (loss). . . . . . . . (3,824,349)
--------- ------------
Balance at September 30, 2000. . . . . . . $(32,076) $ (693,067)
========= ============
F-4
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Accumulated
Additional Unearned Other
Preferred Common Paid-in Consulting Comprehensive Accumulated
Stock Stock Capital Fees Income Deficit
------------ -------- ----------- ---------- ------------- -------------
Balance at September 30, 2000
(balance forwarded). . . . . . . . . . . . . . $ 6,600 $138,037 $48,231,986 $ (90,815) $ 55,661 $(49,002,460)
Issuance of 200,000 shares of Common
Stock for consulting services. . . . . . . . - 2,000 91,760 (93,760) - -
Issuance of warrants with note payable,
bank . . . . . . . . . . . . . . . . . . . . - - 938,378 - - -
Issuance of warrants with short-term
notes payable. . . . . . . . . . . . . . . . - - 144,813 - - -
Renewal of expired warrants. . . . . . . . . . - - 22,661 - - -
Issuance of 54,322 shares of Common
Stock as payment of interest
on debentures. . . . . . . . . . . . . . . . - 543 27,353 - - -
Issuance of 34,908 shares of Common
Stock as payment of preferred
stock dividends. . . . . . . . . . . . . . . - 349 23,651 - - -
Preferred Stock dividends. . . . . . . . . . . - - - - - (133,000)
Issuance of 1,600,000 shares of
Common Stock . . . . . . . . . . . . . . . . - 16,000 784,000 - - -
Amortization of unearned consulting fees . . . . - - - 123,758 - -
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . . . . - - - - - (1,171,256)
Foreign currency translation adjustment. . . . - - - - (31,860) -
Comprehensive income (loss). . . . . . . . . . .
------------ -------- ----------- ---------- ------------- -------------
Balance at September 30, 2001. . . . . . . . . . $ 6,600 $156,929 $50,264,602 $ (60,817) $ 23,801 $(50,306,716)
============ ======== =========== ========== ============= =============
See Notes to Consolidated Financial Statements.
Cost of
Treasury
Stock Total
--------- ------------
Balance at September 30, 2000
(balance forwarded). . . . . . . . . . . . . . $(32,076) $ (693,067)
Issuance of 200,000 shares of Common
Stock for consulting services. . . . . . . . - -
Issuance of warrants with note payable,
bank . . . . . . . . . . . . . . . . . . . . - 938,378
Issuance of warrants with short-term
notes payable. . . . . . . . . . . . . . . . - 144,813
Renewal of expired warrants. . . . . . . . . . - 22,661
Issuance of 54,322 shares of Common
Stock as payment of interest
on debentures. . . . . . . . . . . . . . . . - 27,896
Issuance of 34,908 shares of Common
Stock as payment of preferred
stock dividends. . . . . . . . . . . . . . . - 24,000
Preferred Stock dividends. . . . . . . . . . . - (133,000)
Issuance of 1,600,000 shares of
Common Stock . . . . . . . . . . . . . . . . - 800,000
Amortization of unearned consulting fees . . . . - 123,758
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . . . . - (1,171,256)
Foreign currency translation adjustment. . . . - (31,860)
------------
Comprehensive income (loss). . . . . . . . . . . (1,203,116)
--------- ------------
Balance at September 30, 2001. . . . . . . . . . $(32,076) $ 52,323
========= ============
See Notes to Consolidated Financial Statements.
F-5
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . $(1,171,256) $(3,690,163)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 425,795 425,899
Amortization of intellectual property rights. . . . . . . 106,779 110,025
(Recovery of) provision for inventory obsolescence. . . . (28,623) 40,286
(Recovery of) doubtful accounts, returns and discounts. . (135,593) (224,846)
Amortization of unearned consulting fees. . . . . . . . . 123,758 224,614
Amortization of discounts on notes payable
and convertible debentures. . . . . . . . . . . . . . . 375,541 957,192
Amortization of deferred income realized on UK grant. . . (25,956) (53,490)
Amortization of deferred gain on sale and leaseback
of building . . . . . . . . . . . . . . . . . . . . . . (82,000) (84,495)
Amortization of debt issuance costs . . . . . . . . . . . - 245,676
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (466,630) 869,242
Inventories . . . . . . . . . . . . . . . . . . . . . . (97,696) 438,442
Prepaid expenses and other current assets . . . . . . . (41,565) 30,676
Accounts payable. . . . . . . . . . . . . . . . . . . . 135,609 (222,543)
Accrued expenses and other current liabilities. . . . . 256,818 (98,352)
------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES . . . . . . . (625,019) (1,031,837)
------------ ------------
INVESTING ACTIVITIES
Purchase of certificate of deposit. . . . . . . . . . . . . (115,000) -
Capital expenditures. . . . . . . . . . . . . . . . . . . . (57,791) (11,284)
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES . . . . . . . (172,791) (11,284)
------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock. . . . . . . . . . . 800,000 835,000
Proceeds from issuance of common stock under the
equity line of credit . . . . . . . . . . . . . . . . . . - 97,000
Proceeds from note payable, bank. . . . . . . . . . . . . . 1,500,000 -
Proceeds from convertible debentures issued . . . . . . . . 450,000 -
Dividend paid on preferred stock. . . . . . . . . . . . . . (107,186) (40,150)
Payments on related party notes . . . . . . . . . . . . . . (300,000) -
Payments on convertible debentures. . . . . . . . . . . . . (1,500,000) -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . 842,814 891,850
------------ ------------
(continued)
F-6
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
----------- -----------
Effect of exchange rate changes on cash. . . . . . . . . . . $ (32,720) $ 37,684
----------- -----------
Net increase (decrease) in cash. . . . . . . . . . . 12,284 (113,587)
Cash at beginning of year. . . . . . . . . . . . . . . . . . 457,122 570,709
----------- -----------
Cash at end of year. . . . . . . . . . . . . . . . . . . . . $ 469,406 $ 457,122
=========== ===========
Supplemental Cash Flow Disclosures:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . $ 650,400 $ 191,634
Supplemental Schedule of Noncash Financing Activities
Issuance of warrants on convertible debentures and
notes payable. . . . . . . . . . . . . . . . . . . . . . $1,105,852 $ 350,989
Common stock issued for payment of preferred stock dividends
and convertible debenture interest . . . . . . . . . . . . 51,896 50,154
Preferred dividends declared, Series 1 . . . . . . . . . . . 133,000 132,195
Renewal of notes payable with related parties. . . . . . . . 1,300,000 1,300,000
See Notes to Consolidated Financial Statements.
F-7
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and nature of operations: The consolidated
- ----------------------------------------------------------
financial statements include the accounts of the Company and its wholly owned
subsidiaries, The Female Health Company - UK and The Female Health Company - UK,
plc. All significant intercompany transactions and accounts have been eliminated
in consolidation. The Female Health Company ("FHC" or the "Company") is
currently engaged in the marketing, manufacture and distribution of a consumer
health care product known as the Reality female condom, "Reality," in the U.S.
and "femidom" or "femy" outside the U.S. The Female Health Company - UK, is the
holding company of The Female Health Company - UK, plc, which operates a 40,000
sq. ft. leased manufacturing facility located in London, England.
The product is currently sold or available in either or both commercial (private
sector) and public sector markets in 80 countries. The product is marketed in
17 countries by various country-specific commercial partners. The Company's
credit terms are primarily on a net 30-day basis.
Use of estimates: The preparation of financial statements 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 costs for product returns, price discounts and
trade allowances are accrued when the initial sale is recorded.
The market value of inventory is based on management's best estimate of future
sales and the time remaining before the existing inventories reach their
expiration dates.
The Company evaluates intellectual property rights for impairment by comparing
the net present value of the asset's estimated future income stream to the
asset's carrying value.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on the
Company's future results of operations and financial condition.
Cash: Substantially all of the Company's cash was on deposit with one financial
- ----
institution.
Cash equivalents: For purposes of determining cash flows, all highly liquid
- -----------------
debt instruments with a term of three months or less are considered cash
equivalents.
Inventories: Inventories are valued at the lower of cost or market. The cost
- -----------
is determined using the first-in, first-out (FIFO) method. Inventories are also
written down for management's estimates of product which will not sell prior to
its expiration date. Write downs of inventories establish a new cost basis
which is not increased for future increases in the market value of inventories
or changes in estimated obsolescence.
F-8
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation: In accordance with Financial Accounting Standards
- ----------------------------
No. 52, Foreign Currency Translation, the financial statements of the Company's
international subsidiaries are translated into U.S. dollars using the exchange
rate at each balance sheet date for assets and liabilities, the historical
exchange rate for stockholders' equity and a weighted average exchange rate for
each period for revenues, expenses, and gains and losses. Translation
adjustments are recorded as a separate component of stockholders' equity as the
local currency is the functional currency.
Equipment and furniture and fixtures: Depreciation and amortization are
- ----------------------------------------
computed using primarily the straight-line method. Depreciation and
amortization are computed over the estimated useful lives of the respective
assets which range as follows:
Equipment 5 - 10 years
Furniture and fixtures 3 years
Intellectual property rights: The Company holds patents on the female condom in
- ----------------------------
the United States, the European Union, Japan, Canada, Australia and The People's
Republic of China and holds patents on the manufacturing technology in various
countries. The Company also licenses the trademark "Reality" in the United
States and has trademarks on the names "femidom" and "femy" in certain foreign
countries. Intellectual property rights are amortized on a straight-line basis
over their estimated useful life of twelve years.
Financial instruments: The Company has no financial instruments for which the
- ----------------------
carrying value materially differs from fair value.
Revenue recognition: Revenues from product sales are recognized as the products
- -------------------
are shipped to the customers.
Research and development costs: Research and development costs are expensed as
- -------------------------------
incurred. The amount of costs expensed for the year ended September 30, 2000 was
$67,099. There were no research and development costs incurred for the year
ended September 30, 2001.
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 in Note 7 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.
Advertising: The Company's policy is to expense production costs in the period
- -----------
in which the advertisement is initially presented to consumers.
F-9
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes: The Company files separate income tax returns for its foreign
- -------------
subsidiaries. Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (FAS 109), requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are also provided for carryforwards for income
tax purposes. In addition, the amount of any future tax benefits is reduced by a
valuation allowance to the extent such benefits are not expected to be realized.
Earnings per share (EPS): Basic EPS is computed by dividing income available to
- ------------------------
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential
common shares consist of the incremental common shares issuable upon conversion
of convertible preferred shares or convertible debt and the exercise of stock
options and warrants for all periods. Fully diluted (loss) per share is not
presented since the effect would be anti-dilutive.
Other comprehensive income: Accounting principles generally require that
- ----------------------------
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as foreign currency
translation adjustments, are reported as a separate component of the equity
section of the balance sheet, such items, along with net income, are components
of comprehensive income.
New accounting pronouncements: SFAS 140, Accounting for Transfers and Servicing
- -----------------------------
of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without reconsideration. SFAS 140 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The provisions of SFAS 140 are effective for transfers
after March 31, 2001. It was effective for disclosures about securitizations
and collateral and for recognition and reclassification of collateral for fiscal
years ending after December 15, 2000. The Company adopted SFAS 140 and the
implementation of this standard did not have a material impact on the Company's
financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141
addresses financial accounting and reporting for business combinations and is
effective for all business combinations initiated after June 30, 2001. SFAS 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and is effective for fiscal years beginning after December 15,
2001. The Company has not yet quantified the impact of adopting these
statements on its financial position or results of operations.
F-10
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, Asset Retirement Obligations.
This Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. SFAS 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. As used in this Statement, a legal obligation
is an obligation that a party is required to settle as a result of an existing
or enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. This
Statement amends FASB Statement No. 19, Financial Accounting and Reporting by
Oil and Gas Producing Companies and is effective for financial statements issued
for fiscal years beginning after June 15, 2002. Management does not anticipate
that the adoption of this Statement will have a significant effect on the
Company's financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
SFAS 144 also amends ARB No. 51, Consolidated Financial Statements, to eliminate
the exception to consolidation for a subsidiary for which control is likely to
be temporary. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001.
Management does not anticipate that the adoption of this Statement will have a
significant effect on the Company's financial statements.
NOTE 2. INVENTORIES
The components of inventory consist of the following at September 30, 2001:
Raw materials . . . . . . . . . $257,303
Work in process . . . . . . . . 248,660
Finished goods. . . . . . . . . 140,897
Less allowance for obsolescence (43,195)
---------
$603,665
=========
F-11
NOTE 3. LEASES
The Company had a seven-year operating lease with a third party for office space
which expired September 30, 2001. Subsequent to year-end, the Company entered
into a new lease agreement for office space with an unrelated third party which
expires September 2006. The new lease requires monthly payments of $5,623 plus
real estate taxes, utilities, and maintenance expenses. The Company was
required to make a security deposit of $115,000 to be reduced in subsequent
years. The security deposit is collateralized by an irrevocable letter of
credit from a bank. The Bank required the Company to hold a $115,000
certificate of deposit as collateral for the letter of credit.
The Company guaranteed an affiliate's lease with an unrelated third party which
expired January 31, 2001. On November 1, 1998, the office space was sublet for
the remaining term of the lease. Rental expense under the affiliate lease was
$3,495 and $15,797 in 2001 and 2000, respectively, which is net of sublease
rentals of $9,891 and $39,204 in 2001 and 2000, respectively.
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 (1,950,000
pounds) 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 $304,000 (195,000
pounds) per year payable quarterly until 2016. The lease is renewable through
December 2027. The Company was also required to make a security deposit of
$304,000 (195,000 pounds) to be reduced in subsequent years. The facility had a
net book value of $1,398,819 (810,845 pounds) on the date of the transaction.
The $1,966,181 (1,139,155 pounds) gain which resulted from this transaction will
be recognized ratably over the initial term of the lease. Unamortized deferred
gain as of September 30, 2001, was $1,250,700 (868,633 pounds).
The Company also leases various equipment under various lease agreements which
expire at various dates through October 2004. The aggregate monthly rental was
$2,231 at September 30, 2001.
Details of operating lease expense in total and separately for transactions with
related parties are as follows:
September 30,
2001 2000
-------- --------
Operating lease expense:
Factory and office leases . . . . . . . . $551,039 $614,333
Affiliate lease (net of sublease rentals) 3,495 15,797
Other . . . . . . . . . . . . . . . . . . 20,000 19,063
-------- --------
$574,534 $649,193
======== ========
F-12
NOTE 3. LEASES (CONTINUED)
Future minimum payments under operating leases, including the affiliate lease
guarantee, consisted of the following at September 30, 2001:
Operating
----------
2002 . . . . . . . . . $ 365,536
2003 . . . . . . . . . 367,223
2004 . . . . . . . . . 365,157
2005 . . . . . . . . . 352,482
2006 . . . . . . . . . 354,292
Thereafter . . . . . . 2,855,924
----------
Total minimum payments $4,660,614
==========
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
During 2000, the Company renewed a $1,000,000 note with Mr. Dearholt, a current
director of the Company. The outstanding note payable bears interest at 12
percent. As part of the transaction, the Company issued Mr. Dearholt warrants to
purchase 250,000 shares of the Company's common stock at $0.71 per share which
represented 80 percent of the average trading price for the five trading days
prior to the closing date for the transaction and resulted in an initial
discount on the note of $148,999. Any stock issued under the warrants carries
certain registration rights. The warrants expire in 2010. The discount in
combination with the note's 12 percent coupon resulted in an effective interest
rate of 27 percent on the note.
Additionally, during 2000 the Company renewed a $250,000 note with Mr. Dearholt
and a $50,000 note with O.B. Parrish, also a current director of the Company.
Each note payable bears interest at 12 percent. As part of the transactions, the
Company issued Mr. Dearholt and Mr. Parrish warrants to purchase 62,500 and
12,500 shares of the Company's common stock at $0.77 and $0.72 per share,
respectively, which represented 80 percent of the average trading price for the
five trading days prior to the closing date for the transaction and resulted in
an initial discount on the notes of $36,853 and $7,437, respectively. Any stock
issued under the warrants carries certain registration rights. The warrants
expire in 2010 for each note. The discount in combination with the notes' 12
percent coupon resulted in an effective interest rate of 27 percent for each
note.
F-13
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
During 2001, the Company renewed the $1,000,000 note with Mr. Dearholt. The
outstanding note payable bears interest at 12 percent and is payable in full in
2002. As part of the transaction, the Company issued Mr. Dearholt warrants to
purchase 280,000 shares of the Company's common stock at $0.40 per share which
represented 80 percent of the average trading price for the five trading days
prior to the closing date for the transaction and resulted in an initial
discount on the note of $113,881. Any stock issued under the warrants carries
certain registration rights. The warrants expire in 2011. In addition, if the
Company defaults on its obligation under the note, the Company is required to
issue an additional 280,000 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, 2001, net of unamortized discount of $54,600. The
discount in combination with the note's 12 percent coupon resulted in an
effective interest rate of 25 percent on the note.
Additionally, during 2001 the Company renewed the $250,000 note with Mr.
Dearholt and the $50,000 note with O.B. Parrish. Each note payable bears
interest at 12 percent and is payable in full in 2002. As part of the
transactions, the Company issued Mr. Dearholt and Mr. Parrish warrants to
purchase 70,000 and 14,000 shares of the Company's common stock at $0.40 per
share, which represented 80 percent of the average trading price for the five
trading days prior to the closing date for the transaction and resulted in an
initial discount on the notes of $25,238 and $5,694, respectively. Any stock
issued under the warrants carries certain registration rights. The warrants
expire in 2011 for each note. The discount in combination with the notes' 12
percent coupon resulted in an effective interest rate of 23 percent for each
note. Both notes were paid off in June 2001.
On May 19 and June 3, 1999, the Company issued an aggregate of $1,500,000 of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. These warrants expire in
2004. Interest on the convertible debentures is due at a rate of 8 percent per
annum, payable quarterly in either cash or, at the investor's option, common
stock of the Company at its then current market value. From December 2, 1999 to
February 11, 2000, interest on the convertible debentures was at the rate of 10
percent annually, and then returned to 8 percent annually. Repayment of the
convertible debentures is collateralized by a first security interest in all of
the Company's assets. In addition, if the Company defaults in payment of the
principal or interest due on the convertible debentures in accordance with their
terms, the Company must immediately issue 1,500,000 shares of its common stock
to the investor at no cost. The issuance of these shares will not affect any of
the outstanding warrants then held by the investor, which warrants will continue
in effect in accordance with their terms.
Additionally, warrants to purchase 337,500 shares of the Company's common stock
were issued to the Company's placement agent in this offering. The warrants have
a term of five years and are exercisable at an exercise price equal to the
lesser of 70 percent of the market price of the common stock at the time of the
exercise or $1.00. The warrants were valued at $224,800 which was recorded as
additional paid-in capital.
F-14
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The convertible debentures' beneficial conversion feature is valued at $336,400
and the warrants to purchase 1,875,000 shares of the Company's common stock are
valued at $715,100. In accordance with SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants (a total of $1,051,500) as additional paid-in capital. The
corresponding amount of $1,051,500 was recorded as a discount on convertible
debentures and is amortized over 1 year using the interest rate method. The
discount in combination with the debentures' 8 percent coupon resulted in an
effective interest rate of 159 percent for the debentures.
The original principal balance plus any accrued but unpaid interest of the
convertible debentures may be converted into shares of the Company's common
stock at the investor's election, at any time after one year, based on a per
share price equal to the lesser of 70 percent of the market price of the
Company's common stock at the time of conversion or $1.00. The convertible
debentures were originally payable one year after issuance. However, the Company
elected, under the terms of the convertible debentures, to extend the due date
to two years after issuance. As a result of the Company making this election,
the Company issued to the investors at the time of the extension 375,000
additional warrants to purchase shares of the Company's common stock on the same
terms as the previously issued warrants. These warrants expire in 2005. The
warrants were valued at $157,700 and recorded as additional paid-in capital.
Concurrent with obtaining the below credit facility, the Company paid off
$1,500,000 of convertible debentures which were due between May 19 and June 3,
2001.
On May 18, 2001, the Company entered into an agreement with Heartland Bank
providing for a $2,000,000 credit facility. The Company may borrow under this
credit facility from time to time subject to a number of conditions, including
obtaining personal guarantees of 125 percent of the amount outstanding under the
credit facility. The unpaid balances on the credit facility are due May 18,
2004, and bear interest payable at an annual rate of 10 percent. The agreement
contains certain covenants which include restrictions on the payment of
dividends and distributions and on the issuance of warrants. Subsequent to
year-end, the Company paid dividends on the Company's Class A Preferred Stock -
Series 1, which was a covenant violation of the credit facility. This was
waived by the bank on December 28, 2001. For entering into the credit facility,
Heartland Bank was issued warrants to purchase the number of shares of the
Company's common stock equal to $500,000 divided by the warrant purchase price
as of the date of exercise. The warrant purchase price is equal to 70 percent of
the "market price" of the common stock as of the day immediately prior to the
date the exercise notice is given to the Company, but in no event shall the per
share price be less than $0.50 or more than $1.00. In accounting for Heartland
Bank's warrants, the Company has designated 1,000,000 warrants valued at
$270,800 and these are recorded by the Company as additional paid-in capital and
a discount on the credit facility. The Company has currently borrowed
$1,500,000 under the credit facility and has obtained personal guarantees of a
total of 125% of the amount outstanding on the loan from five persons, three of
which are current directors of the Company and one of which is a trust for the
benefit of a current officer and director of the Company. For giving their
personal guarantees, the Company issued to the five guarantors warrants to
purchase the number of shares of the Company's Common Stock equal to the
guarantee amount of each guarantor divided by the warrant purchase price as of
the date of exercise. The warrant purchase price is equal to 70 percent of the
"market price" of the common stock as of the day immediately prior to the date
the exercise notice is given to the Company, but in no event shall the per share
price be less than $0.50 or more than $1.00. The Company also issued additional
warrants to purchase 100,000 shares of Common Stock to two guarantors with a
warrant purchase price of $0.50 per share. In accounting for the guarantors'
warrants, the Company has designated 3,200,000 warrants valued at $667,578 and
these are recorded by the Company as additional paid-in capital and a discount
on the credit facility. The credit facility is recorded at September 30, 2001,
net of unamortized discount of $842,869. The value of the warrants in
combination with the credit facility's 10 percent coupon resulted in an
effective interest rate of 50 percent on the note.
F-15
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
On March 30, 2001, the Company issued a $250,000 convertible debenture to one
accredited investor. The debenture is due March 30, 2004, bears interest payable
at a rate of 12 percent and is convertible into the Company's common stock based
on a price of $0.50 per share. The Company's common stock was trading at less
than $0.50 per share at the commitment date of this transaction.
On June 1, 2001, the Company issued an aggregate $200,000 of convertible
debentures to two accredited investors. The debentures are due May 30, 2004,
bear interest payable at a rate of 10 percent per annum, and are convertible
into the Company's common stock based on a price per share equal to $0.50 which
was the market price at the commitment date of this transaction.
Interest expense to related parties was $528,769 and $1,231,832 for the years
ended September 30, 2001 and 2000, respectively.
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, 2001 and 2000, is as follows:
September 30,
2001 2000
---------- ------------
Income tax credit at statutory rates. . . . . . . . . . . $(398,000) $(1,254,700)
Nondeductible expenses. . . . . . . . . . . . . . . . . . 58,700 59,100
State income tax, net of federal benefits . . . . . . . . (55,700) (175,900)
Benefit of net operating loss not recognized, increase in
valuation allowance . . . . . . . . . . . . . . . . . . 395,000 1,371,500
---------- ------------
$ - $ -
========== ============
F-16
NOTE 5. INCOME TAXES (CONTINUED)
As of September 30, 2001, the Company had federal and state net operating loss
carryforwards of approximately $38,220,000 for income tax purposes expiring in
years 2005 to 2021. 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 $105,000 at September 30, 2001, expiring in years 2006
to 2010. The Company's UK subsidiary, The Female Health Company - UK, plc
subsidiary has UK net operating loss carryforwards of approximately $63,397,000
as of September 30, 2001. These UK net operating loss carryforwards can be
carried forward indefinitely to be used to offset future UK taxable income.
Significant components of the Company's deferred tax assets and liabilities are
as follows at September 30, 2001:
Deferred tax assets:
Federal net operating loss carryforwards. $ 12,995,000
State net operating loss carryforwards. . 2,444,000
Foreign net operating loss carryforwards. 19,019,000
Foreign capital allowances. . . . . . . . 474,000
Tax credit carryforwards. . . . . . . . . 105,000
Accounts receivable allowances. . . . . . 11,000
Other . . . . . . . . . . . . . . . . . . 41,000
-------------
Total gross deferred tax assets . . . . . . 35,089,000
Valuation allowance for deferred tax assets (35,089,000)
-------------
Net deferred tax assets . . . . . . . . . . $ -
=============
The valuation allowance decreased by $(105,000) and $(4,213,500) for the years
ended September 30, 2001 and 2000, respectively.
NOTE 6. ROYALTY AGREEMENTS
The Company has royalty agreements for sales of its products which provide for
royalty payments based on sales quantities and achievement of specific sales
levels. Royalty expense was $27,102 and $31,761 for the years ended September
30, 2001 and 2000, respectively.
F-17
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 131,628 shares available for
future grants as of September 30, 2001. 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.
In September 2001, certain option holders waived their rights to exercise their
options until the Company amends its articles of incorporation to increase the
number of shares of common stock authorized for issuance. If the shareholders
approve this amendment, the exercise price of these options will be reduced to
$0.56 per share. The Company's common stock was trading at less than $0.56 per
share when these waivers were obtained.
The total number of options that were waived at September 30, 2001, was
2,659,800. The exercise price of $0.56 per share is reflected in the related
option plan disclosures.
Summarized information regarding all of the Company's stock options is as
follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ---------
Outstanding at September 30, 1999 2,953,300 $ 1.27
Granted . . . . . . . . . . . . 50,000 0.50
Exercised . . . . . . . . . . . - -
Expired or canceled . . . . . . (85,900) 0.93
----------
Outstanding at September 30, 2000 2,917,400 1.27
Granted . . . . . . . . . . . . - -
Exercised . . . . . . . . . . . - -
Expired or canceled . . . . . . (37,600) 2.00
----------
Outstanding at September 30, 2001 2,879,800 $ 0.64
==========
Options shares exercisable at September 30, 2001 and 2000, are 40,000 and
438,300, respectively.
F-18
NOTE 7. COMMON STOCK (CONTINUED)
Options Outstanding and Exercisable
Range of. . . Number Wghted. Avg. Wghted. Avg. Number Wghted. Avg.
Exercise. . . Outstanding Remaining Exercise Exercisable Exercise
Prices. . . . At 9/30/01 Life Price at 9/30/01 Price
- -----------------------------------------------------------------------------------
$ 0.50 50,000 7 $ 0.50 - $ -
0.56 2,659,800 5.2 0.56 - -
0.85 50,000 6.9 0.85 - -
2.00 120,000 3.2 2.00 40,000 2.00
- -----------------------------------------------------------------------------------
$.50 to $2.00 2,879,800 5.6 $ 0.63 40,000 $ 2.00
============= =========== ============ ============= =========== =============
Stock options have been granted to employees with exercise prices at, or in
excess of, fair market value at the date of grant. The Company has accounted
for the stock options in accordance with variable plan accounting guidance
provided in APB No. 25 and related interpretations. To date, no compensation
expense has been recognized related to the stock options granted because their
exercise prices are in excess of fair market value.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for all awards consistent with the method
set forth under FASB Statement No. 123, Accounting for Stock-Based Compensation
(FAS 123), the Company's net loss and loss per share would have been increased
to the pro forma amounts indicated below:
Year Ending September 30,
Loss Loss
2001 Per Share 2000 Per Share
----------------------------------------------------
Net loss attributable to common
stockholders. . . . . . . . . $(1,304,256) $ (0.09) $(3,822,355) $ (0.30)
Compensation expense related to
stock options granted . . . . (355,753) (0.02) (413,656) (0.03)
----------------------------------------------------
$(1,660,009) $ (0.11) $(4,236,011) $ (0.33)
====================================================
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model assuming expected volatility of 63.4 percent
and risk-free interest rates of 5.38 percent, respectively, and expected lives
of one to three years and no dividend yield for the year ended September 30,
2000. The weighted average fair value of options granted for the year ended
September 30, 2000, was $0.35. There were no options granted for the year ended
September 30, 2001.
F-19
NOTE 7. COMMON STOCK (CONTINUED)
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.
Common Stock Purchase Warrants
The Company enters into consulting agreements with separate third party
professionals to provide investor relations services and financial advisory
services. In connection with the consulting agreements, the Company granted
warrants to purchase common stock.
No warrants were exercised during 2001. At September 30, 2001, the following
warrants were outstanding and exercisable:
Number
Outstanding
-----------
Warrants issued in connection with:
Financial advisory services contract 175,000
Convertible debentures . . . . . . . 2,587,500
Convertible preferred stock. . . . . 176,000
Equity line of credit. . . . . . . . 200,000
Note payable, bank . . . . . . . . . 4,200,000
Notes payable. . . . . . . . . . . . 1,589,000
-----------
Outstanding at September 30, 2001. . 8,927,500
===========
Warrants Outstanding and Exercisable
Range of Number Wghted. Avg. Wghted. Avg
Exercise Outstanding Remaining Exercise
Prices At 9/30/01 Life Price
- -------------- ----------- ------------ ------------
0.40 to $0.50 4,564,000 7.9 $ 0.49
0.51 to $1.00 2,912,500 3.5 0.97
1.01 to $4.11 1,451,000 3.2 2.16
- -------------- ----------- ------------ ------------
0.40 to $4.11 8,927,500 5.6 $ 0.92
============== =========== ============ ============
At September 30, 2001, the Company had reserved a total of 9,427,500 shares of
its common stock for the exercise of options and warrants outstanding, exclusive
of the 2,659,800 options waived by the option holders discussed above. This
amount includes shares reserved to satisfy obligations due if the Company
defaults on the payment of interest or principal on $1.0 million of notes due in
March 2002.
F-20
NOTE 7. COMMON STOCK (CONTINUED)
Issuance of Stock
The Company has issued common stock to consultants for providing investor
relation services. In 2000, the Company issued 200,000 shares of common stock
with a market value of $114,055 which was recorded as unearned consulting fees
and is being recognized over the term of the agreement. In 2001, the Company
issued 200,000 shares of common stock with a market value of $93,760 which was
recorded as unearned consulting fees and is being recognized over the term of
the agreement.
NOTE 8. PREFERRED STOCK
The Company has outstanding 660,000 shares of 8 percent cumulative convertible
preferred stock (Series 1). Each share of preferred stock is convertible into
one share of the Company's common stock on or after August 1, 1998. Annual
preferred stock dividends will be paid if and as declared by the Company's Board
of Directors. No dividends or other distributions will be payable on the
Company's common stock unless dividends are paid in full on the preferred stock.
The preferred stock may be redeemed at the option of FHC, in whole or in part,
on or after August 1, 2000, subject to certain conditions, at $2.50 per share
plus accrued and unpaid dividends. In the event of a liquidation or dissolution
of the Company, the preferred stock would have priority over the Company's
common stock.
NOTE 9. EQUITY LINE OF CREDIT
On November 19, 1998, the Company executed an agreement with a private investor
(the "Equity Line Agreement"). The Equity Line Agreement provided 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 Equity Line
Agreement. The Equity Line Agreement expired on February 12, 2001. As of the
expiration date, the Company had placed four puts for the combined net cash
proceeds of $582,000 and issued a total of 680,057 shares of the Company's
common stock to the investor. Since the Company was not able to satisfy the
minimum put of $1.0 million, the Company was required to pay the investor a fee
on the portion not drawn. The Company paid the investor approximately $50,000
during the year ended September 30, 2001, which is included in interest expense
on the statement of operations.
NOTE 10. EMPLOYEE RETIREMENT PLAN
The Company has 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 $6,500 annual compensation to the plan. The Company has elected to
match 100 percent of employee contributions to the plan up to a maximum of 3
percent of employee compensation for the year ended September 30, 2001. Company
contributions were $15,303 and $17,539 for 2001 and 2000, respectively.
F-21
NOTE 11. INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations by geographic area is as follows.
(Amounts in Thousands)
Net Sales to
External Customers Long-Term Assets
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
United States. . . . . . . . . . . . . . . . . . $ 2,715 $ 2,197 $ 136 $ 51
Brazil . . . . . . . . . . . . . . . . . . . . . 766 1,446 - -
South Africa . . . . . . . . . . . . . . . . . . 733 - - -
Ghana. . . . . . . . . . . . . . . . . . . . . . 547 * - -
Japan. . . . . . . . . . . . . . . . . . . . . . 382 895 - -
United Kingdom . . . . . . . . . . . . . . . . . * * 1,571 2,081
Other. . . . . . . . . . . . . . . . . . . . . . 1,573 1,229 - -
-------- -------- -------- --------
$ 6,716 $ 5,767 $ 1,707 $ 2,132
======== ======== ======== ========
* Less than 5 percent of total net sales
NOTE 12. CONTINGENT LIABILITIES
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.
A former holder of the $1,500,000 convertible debentures (see Note 4 for
additional details on the debentures) has alleged that the Company is in default
with respect to the perfection of the investors' security interest in the
Company's assets. The investor has demanded the issuance of 1,500,000 shares of
the Company's common stock to the investors due to this default. The Company
disputes this claim and intends to vigorously defend its position.
F-22
NOTE 13. RELATED PARTIES
It has been and currently is the policy of the Company that transactions between
the Company and its officers, directors, principal shareholders or affiliates
are to be on terms no less favorable to the Company than could be obtained from
unaffiliated parties. The Company intends that any future transactions between
the Company and its officers, directors, principal shareholders or affiliates
will be approved by a majority of the directors who are not financially
interested in the transaction.
NOTE 14. 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 $1.3 million for the year ended September 30, 2001, and as of
September 30, 2001, had an accumulated deficit of $50.3 million. At September
30, 2001, the Company had working capital of $0.7 million and stockholders'
equity of less than $0.1 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 may depend on its ability to raise additional capital
through a combination of equity or debt financing, strategic alliances and
increased sales volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the female condom.
Management believes that recent developments, including the Company's agreement
with the UNAIDS, a joint United Nations program on HIV/AIDS, provide an
indication of the Company's early success in broadening awareness and
distribution of the female condom and may benefit efforts to raise additional
capital and to secure additional agreements to promote and distribute the female
condom throughout other parts of the world.
Between September and November 1999 the Company completed a private placement
where 983,333 shares of the Company's common stock were sold for $737,500. The
stock sales were directly with accredited investors and included one current
director of the Company. The Company sold the shares to these investors at a
price of $0.75 per share.
F-23
NOTE 14. CONTINUING OPERATIONS (CONTINUED)
During the year ended September 30, 2000, the Company completed private
placements where 1,421,669 shares of the Company's common stock were sold for
$835,000. The stock sales were directly with accredited investors and included
two current directors of the Company. The Company sold the shares to these
investors at prices which ranged from $0.50 and $0.75 per share.
During the year ended September 30, 2001, the Company completed private
placements where 1,600,000 shares of the Company's common stock were sold for
$800,000. The stock sales were directly with accredited investors and included
one current director of the Company. The Company sold the shares to these
investors at the price of $0.50 per share.
On May 18, 2001, the Company entered into an agreement with Heartland Bank
providing for a $2,000,000 credit facility. The Company may borrow under the
credit facility from time to time, subject to certain conditions, including
obtaining personal guarantees of 125 percent of the amount outstanding under the
credit facility. The Company has currently borrowed $1,500,000 under the credit
facility. The unpaid balances on the credit facility are due May 18, 2004, and
bear interest payable at a rate of 10 percent.
On March 30, 2001, the Company issued a $250,000 convertible debenture to one
accredited investor. The debenture is due March 30, 2004, bears interest payable
at a rate of 12 percent and is convertible into the Company's common stock based
on a price of $0.50 per share.
On June 1, 2001, the Company issued an aggregate $200,000 of convertible
debentures to two accredited investors. The debentures are due May 30, 2004,
bear interest payable at a rate of 10 percent per annum, and are convertible
into the Company's common stock based on a price of $0.50 per share which was
the market price at the commitment date of this transaction.
While the Company believes that its existing capital resources will be adequate
to fund its currently anticipated capital needs, if they are not, the Company
may need to raise additional capital until its sales increase sufficiently to
cover operating expenses.
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-24