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, 2002
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 1-13602
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:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and 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: $8,416,512
As of December 20, 2002, 18,377,798 shares of the Company's common stock were
outstanding. As of December 20, 2002, the aggregate market value of shares of
the Company's common stock held by non-affiliates was approximately $21.6
million (based upon the last reported sale price of $1.65 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 and
Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits, List and Reports on Form 8-K
Item 14. Controls and Procedures
2
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.
3
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 100 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, and Brazil. On November 29, 2001, the Company signed a
non-binding memorandum of understanding 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. The product is
available to developing countries under the umbrella of an agreement with the
Joint United Nations Programme on HIV/AIDs ("UNAIDS"). This agreement
facilitates the availability and distribution of the female condom at a reduced
price based on the Company's cost of production. The current price per unit is
approximately 0.38 (Pounds), or approximately $0.60. Currently 87 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 a supply agreement with Deerfield Urethane, Inc.
for the purchase 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. 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 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 2002, 44 million people globally were living with HIV. Women now
comprise the majority of the new cases. 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 and Protection 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.
4
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
using the female condom, a woman has a prevention method she controls 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 much stronger than latex, reducing the probability that the
female condom sheath will tear during use. 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
A study entitled "Cost-effectiveness of the female condom in preventing HIV and
STDs in commercial sex workers in South Africa" was reported in the Journal of
Social Science and Medicine in 2001. This study shows 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.
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.
5
Commercial Markets
The Company markets the product directly in the United Kingdom. The Company has
distribution agreements with commercial partners in 17 countries including the
United States, Japan, Canada, Brazil, Venezuela, Denmark, Holland, and France,
and on November 29, 2001, the Company signed a non-binding memorandum of
understanding with Hindustan Latex Limited in India. The 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 $0.60. 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 87 countries through public sector distribution. Twenty seven
countries have significant programs and are using The Female Condom - the Guide
To Programming and Planning, published by UNAIDS and WHO with the Company's
input. This is up from eight countries the previous year.
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.
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 providing the female condom is 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.
6
Employees
As of December 20, 2002, the Company had 117 full-time employees, all located
within the U.S. or 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, 2002, the Company had unfilled orders of $2,002,000. The
comparable amount as of the same date of the prior year was $1,236,000. Unfilled
orders materially fluctuate from quarter to quarter. The Company expects
current unfilled orders to be filled during fiscal 2003.
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 Company
has trademarks on the names "femidom" and "femy" in certain foreign countries.
The Company has also secured, or applied for, 12 trademarks in 22 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 did not incur research and development costs from continuing
operations in fiscal 2001 or 2002. Historically the Company has incurred
expenditures primarily related to conducting acceptability studies and analyzing
second generation products.
Industry Segments and Financial Information About Foreign And Domestic
Operations
See Note 12 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. The Company was originally
incorporated in Wisconsin in 1971.
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 58
million female condoms around the world.
7
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. 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, 2002.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Shares of the Company's common stock 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, 2002 was 470. 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. The Company's
credit facility contains a provision restricting the Company's ability to pay
dividends and distributions. 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 ------------
2002 Fiscal Year FIRST SECOND THIRD FOURTH
---------------- --------- --------- ------- ----------
Price per common share - High $ 0.79 $ 1.50 $ 2.09 $ 2.16
Price per common share - Low $ 0.38 $ 0.70 $ 1.24 $ 1.30
2001 Fiscal Year
----------------
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
Recent Sales of Unregistered Securities
Effective September 26, 2002, the holders of outstanding options to purchase a
total of 2,365,980 shares of the Company's common stock agreed to exchange their
options for (i) a total of 469,000 shares of restricted common stock in the case
of U.S. option holders or the right to receive a total of 122,495 shares of
deferred common stock on September 26, 2003 in the case of U.K. option holders;
and (ii) the right to receive a grant of new options to purchase a total of
2,365,980 shares of common stock on the first business day that is at least six
months and one day after the effective date of the exchange. The Company
believes that it satisfied the exemption from the securities registration
requirement provided by Section 3(a)(9) of the Securities Act of 1933, as
amended (the "Securities Act") in connection with this option exchange.
8
Effective September 20, 2002, a total of 594,000 shares of the Company's Series
1 Preferred Stock were converted into a total of 824,911 shares of the Company's
common stock. The Company believes that it satisfied the exemption from the
securities registration requirement provided by Section 3(a)(9) of the
Securities Act in connection with these conversions.
The Company issued 183,150 shares of common stock to a single investor on
September 19, 2002 upon exercise of warrants at an exercise price of $0.546 per
share. The Company believes that it has satisfied the exemption from the
securities registration requirement provided by Section 4(2) of the Securities
Act in connection with this issuance.
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.
Effective September 26, 2002, the holders of outstanding options to purchase a
total of 2,365,980 shares of common stock agreed to exchange all of their
outstanding stock options for (i) a total of 469,000 shares of restricted common
stock in the case of U.S. option holders or the right to receive a total of
122,495 shares of deferred common stock on September 26, 2003 in the case of
U.K. option holders and (ii) the right to receive new options to purchase a
total of 2,365,980 shares of common stock on the first business day that is at
least six months and one day after the effective date of the exchange. The
Company expects to have approximately $641,000 of amortized compensation expense
in fiscal 2003 relating to issuance of the restricted common stock and the
deferred common stock. See "Options" in Note 8 in the financial statements for
additional information regarding the option exchange.
Results Of Operations
Fiscal Year Ended September 30, 2002 ("2002") Compared to Fiscal Year Ended
September 30, 2001 ("2001")
The Company had net revenues of $8.4 million and a net loss attributable to
common stockholders of $(3.6) million or $(0.22) per share in 2002 compared to
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. During 2002, the Company
recorded non cash charges of $3.1 million consisting of an out of court of
settlement of a dispute ($1,258,210) and stock compensation ($1,863,956)
primarily related to accounting for stock options under variable plan accounting
guidance. During 2001, the Company recorded non cash charges of $123,758
consisting of stock compensation primarily for consulting services. Excluding
these non-cash charges in both fiscal years, the net loss attributable to common
stockholders in 2002 would be $(491,001) or $(0.03) per share compared to a net
loss attributable to common stockholders in 2001 which would be $(1,180,498) or
$(0.08) per share.
Gross profit increased $1,251,127, or 54%, to $3,561,191 for 2002 from
$2,310,064 for 2001. The increase was a result of improved net revenues
combined with a less than proportionate increase in cost of products sold.
Net revenues increased $1.7 million, or 25%, in 2002 over the prior year. The
higher net revenues resulted from increased unit sales shipped to global public
sector customers.
Cost of products sold increased $449,211, or 10%, to $4,855,321 for 2002 from
$4,406,110 for 2001. 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 66%
in 2001 to 58% in 2002.
9
Advertising and promotional expenditures decreased $85,323 to $43,832 from
$129,155 for the same period in the prior year. The decline resulted from a
reduction in advertising costs between these periods and reflects the Company's
strategy as a manufacturer.
Selling, general and administrative expenses increased $525,646, or 21%, from
$2.5 million in 2001 to $3.0 million in 2002. The increase was not in proportion
with the sales increase due to the primarily fixed nature of the selling,
general and administrative costs. As a percentage of net revenues, selling,
general and administrative expenses decreased from 37% in 2001 to 36% in 2002.
The Company's operating loss increased $(2,187,604) from $(481,886) in 2001 to
$(2,669,490) in 2002 as a result of the increase in operating expenses.
Operating expenses increased $3,438,731 from $2,791,950 in 2001 to $6,230,681 in
2002. $2,998,408, or 87%, of this increase represents the change in non-cash
costs pertaining to out of court settlement costs and stock compensation
expenses incurred during 2002 compared to 2001. Excluding the non-cash charges
for the out of court settlement and stock compensation, the Company would have
recorded operating income of $452,676 in 2002 compared to an operating loss of
$(358,128) in 2001.
Net interest and non-operating expenses increased $122,302, or 18%, to $811,672
for 2002 compared to $689,370 for 2001. The increase exists because the Company
had a higher level of debt outstanding during 2002 than 2001 due to the issuance
of convertible debentures during May 2001. The result is a higher amount of
non-cash expenses incurred from the amortization of discounts on convertible
debentures in 2002 than in 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 14 million female condoms based
upon the current average selling price per unit in order to cover operating and
non-operating expenses or approximately 23% 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
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.
10
As part of this strategy the Company entered into two agreements in the year
ended September 30, 2002.
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 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 cash operating losses relating to
expenses to develop, manufacture, and promote the female condom. Cash used in
continuing operations was $0.4 million for 2002 and $0.6 million in 2001.
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.
11
During 2002, the Company received $60,000 from the issuance of common stock and
$500,000 of additional borrowings under its credit facility. FHC used these
amounts to fund current operations of the Company, repay existing liabilities
and pay down $100,000 of borrowings under the credit facility.
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, 2003 to Mr. Stephen Dearholt, a
Director of the Company.
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
year. The agreement contains certain covenants which include restrictions on the
payment of dividends and distributions and on the issuance of warrants, which
the Company was in violation of at September 30, 2002. Under the terms of the
agreement, Heartland Bank would have had the right to demand payment of the
entire balance of the credit facility as a result of this violation. On December
13, 2002, the Company obtained a waiver from Heartland Bank through the entire
fiscal year ending September 30, 2003. 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 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
Company's 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 as additional paid in capital and a discount on the credit facility.
During 2002, the Company borrowed the remaining $500,000 under the credit
facility. Eight persons provided guarantees equal in total to the $2.0 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 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. In September 2002, one of the guarantors
exercised stock warrants to purchase 183,150 shares of the Company's common
stock and the proceeds were utilized to pay down $100,000 on the credit
facility. The Company also issued additional warrants to purchase a total of
300,000 shares of the Company's common stock at an exercise price of $0.50 per
share to three of the guarantors including both 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.
In accounting for the guarantors' warrants related to the $500,000 borrowed in
2002, the Company designated 900,000 warrants valued at $415,427 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, 2002, net of
unamortized discount of $927,546.
On June 1, 2001 the Company issued an aggregate of $200,000 of convertible
debentures to two accredited investors. The debentures were due May 30, 2004,
bear interest payable at a rate of 10% per annum, and were 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. On December 5, 2002, each investor converted his debenture into
100,000 shares of the Company's common stock.
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.
12
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.
As of December 20, 2002, the Company had approximately $0.9 million in cash, net
trade accounts receivable of $2.6 million and current trade accounts payable of
$1.1 million. It is estimated that the Company's cash burn rate, with revenues,
is less than $0.1 million per quarter. The Company's anticipated debt service
obligations for scheduled interest and principal payments are approximately $1.3
million in fiscal 2003, $190,000 in fiscal 2004 and $2.0 million in fiscal 2005.
As of December 20, 2002, 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 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.
13
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, 2002, is as follows:
NAME POSITION AGE
O.B. Parrish Chairman of the Board, Chief Executive 69
Officer, and Director
Mary Ann Leeper, Ph.D. President, Chief Operating Officer and 62
Director
William R. Garguilo, Jr. Secretary and Director 74
Jack Weissman Vice President - Sales 55
Michael Pope Vice President and General Manager of
The Female Health Company (UK)Plc 46
Mitchell Warren Vice President - International Affairs 36
Robert R. Zic Principal Accounting Officer 39
David R. Bethune Director 62
Stephen M. Dearholt Director 56
Michael R. Walton Director 64
James R. Kerber Director 70
Richard E. Wenninger Director 55
O. B. PARRISH
Age: 69; Elected Director: 1987; Present Term Ends: 2003 Annual Meeting
O.B. Parrish has served as Chief Executive Officer of the Company since 1994, as
acting Chief Financial and Accounting Officer from February 1996 to March 1999
and as the Chairman of the Board and a Director of the Company since 1987. Mr.
Parrish is a shareholder and has served as the President and as a Director of
Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois") since 1987.
Phoenix of Illinois owns approximately 295,000 shares of the Company's common
stock. Mr. Parrish also 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.
14
MARY ANN LEEPER, Ph.D.
Age: 62; Elected Director: 1987; Present Term Ends: 2003 Annual Meeting
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996, 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: 74; Elected Director: 1987; Present Terms Ends: 2003 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: 55; 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. 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: 46; 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 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.
From 1982 to 1986, Mr. Pope was Site Manager, Engineering and Production
Manager, Development Manager and Silicon Manager for Warne Surgical Products.
15
MITCHELL WARREN
Age: 36; 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: 39; 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: 62; Elected Director: 1996; Present Term Ends: 2003 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.
STEPHEN M. DEARHOLT
Age: 56; Elected Director: 1996; Present Term Ends: 2003 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.
16
MICHAEL R. WALTON
Age: 64; Elected Director: 1999; Present Term Ends 2003 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: 70; Director: 1999; Present Term Ends 2003 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 a 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 consolidating
over 200 life and health insurance companies for ICH Corporation, HCA
Corporation and US Life Corporation.
RICHARD E. WENNINGER
Age: 55; Director: 2001: Present Term Ends 2003 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.
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 a 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 2002 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 4 on January 2, 2002 to report a
transaction occurring on November 29, 2001 and filed a Form 4 on December 27,
2002 to report the conversion of preferred stock into common stock on September
20, 2002; Dr. Leeper filed a Form 4 on December 27, 2002 to report the exchange
of stock options for restricted common stock on September 26, 2002; Mr. Parrish
filed a Form 4 on December 27, 2002 to report the exchange of stock options for
restricted common stock on September 26, 2002; Mr. Gargiulo filed a Form 4 on
December 27, 2002 to report the exchange of stock options for restricted common
stock on September 26, 2002; Mr. Bethune filed a Form 4 on December 27, 2002 to
report the exchange of stock options for restricted common stock on September
26, 2002; Mr. Walton filed a Form 4 on December 26, 2002 to report
17
the extension of the term of a warrant to purchase shares of common stock on
September 19, 2002, the conversion of preferred stock into common stock on
September 20, 2002 and the exchange of stock options for restricted common stock
on September 26, 2002; Mr. Weissman filed a Form 4 on December 27, 2002 to
report the exchange of stock options for restricted common stock on September
26, 2002; Mr. Pope filed a Form 4 on December 27, 2002 to report the exchange of
stock options for restricted common stock on September 26, 2002; Mr. Kerber
filed a Form 4 on December 27, 2002 to report the exchange of stock options for
restricted common stock on September 26, 2002; and Mr. Dearholt filed a Form 4
on December 17, 2002 to report the conversion of preferred stock into common
stock on September 20, 2002, the exchange of stock options for restricted stock
on September 26, 2002 and one transaction occurring on November 22, 2002.
Item 10. Executive Compensation
The table below gives information for each of the Company's last three fiscal
years regarding all annual, long-term and other compensation paid by the Company
to its chief executive officer and the only executive officer whose total annual
salary and bonus exceeded $100,000 for services rendered during the fiscal year
ended September 30, 2002. The individuals listed in this table are referred to
elsewhere in this report as the "named executive officers."
SUMMARY COMPENSATION TABLE
Annual
Compensation Long-Term Compensation Awards
------------ -----------------------------
Restricted Securities
Name and Stock Underlying
Principal Fiscal Salary Awards Options/SARs
Position Year ($) ($) (#)
---------------------- ------------ ------------ ---------- -------------
O.B. Parrish 2002 90,000 237,800(1) --
Chairman and 2001 90,000 -- --
Chief Executive 2000 90,000 -- --
Officer
Mary Ann Leeper, Ph.D. 2002 225,000 404,875(1) --
President and 2001 225,000 -- --
Chief Operating 2000 225,000 -- --
Officer
(1) On September 26, 2002, Mr. Parrish and Dr. Leeper were issued shares of
restricted common stock in exchange for the cancellation of their stock options.
Mr. Parrish received 116,000 shares of restricted common stock and Dr. Leeper
received 197,500 shares of restricted common stock. All of the restricted common
stock vests on September 26, 2003. The closing price of the Company's common
stock on September 26, 2002, was $2.05 per share. As of September 30, 2002, the
value of Mr. Parrish's restricted common stock was $229,680 and the value of Dr.
Leeper's restricted stock was $391,050 based on a value of $1.98 per share, the
closing price of the Company's common stock on that date. Please see "Options"
in Note 8 in financial statements for additional information regarding the
option exchange.
Option Grants During Last Fiscal Year
No stock options were granted to the named executive officers during the
fiscal year ended September 30, 2002.
Fiscal Year-End Option/SAR Values
Effective September 26, 2002, each of the named executive officers agreed
to exchange all of their outstanding stock options for (i) the number of shares
of restricted common stock equal to 25% of the old options being exchanged and
(ii) the right to receive new options to purchase the number of shares of common
stock equal to 100% of the old options being exchanged on the first business day
that is at least six months and one day after the effective date of the
exchange. As a result, the named executive officers do not hold any stock
options as of September 30, 2002. See "Options" in Note 8 in the financial
statement for additional information regarding the option exchange.
18
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 the Company's 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, 2001, and 2002 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 received a
cash bonus.
Change of Control Agreements
In fiscal 1999, the Company entered into Change of Control Agreements with
each of O.B. Parrish, its Chairman and Chief Executive Officer, Mary Ann Leeper,
its President and Chief Operating Officer, and Michael Pope, its Vice President.
In fiscal 2000, the Company entered into a Change of Control Agreement with
Mitchell Warren, its 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information regarding beneficial ownership of the
Company's common stock as of December 20, 2002 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 the Company's common stock subject to options or
warrants that are either currently exercisable or exercisable within 60 days of
December 20, 2002, and shares of the Company's common stock subject to the
conversion of convertible debentures outstanding as of December 20, 2002, 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.
19
Shares Beneficially
Owned
--------------------------
Name and Address of Beneficial Owner (1) Number Percent
---------------- --------
O. B. Parrish (2). . . . . . . . . . . . 978,501 5.2%
William R. Gargiulo, Jr. (2) . . . . . . 390,001 2.1%
Mary Ann Leeper, Ph.D. (2) . . . . . . . 598,401 3.2%
Stephen M. Dearholt (3). . . . . . . . . 4,435,305 20.8%
David R. Bethune . . . . . . . . . . . . 32,500 *
James R. Kerber (4). . . . . . . . . . . 563,710 3.0%
Michael R. Walton (5). . . . . . . . . . 692,566 3.8%
Richard E. Wenninger(6). . . . . . . . . 3,414,373 17.1%
Gary Benson (7). . . . . . . . . . . . . 1,429,166 7.3%
All directors, nominees and
executive officers, as a group
(12 persons) (2)(3)(4)(5)(6). . . . . . 10,648,412 44.9%
*Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 515
North State Street, Suite 2225, Chicago, IL 60610; the address of Mr.
Dearholt is 759 North Milwaukee Street, Suite 316, Milwaukee, WI 53202; the
address of Mr. Kerber is 8547 East Arapahoe Road, #J217, Englewood, CO
80112; the address of Mr. Walton is 1626 North Prospect Avenue, No. 2310,
Milwaukee, WI 53202; the address of Mr. Wenninger is 855 W. Dean Road,
Milwaukee, WI 53217; and the address of Mr. Benson is Regency Athletic
Club, 1300 Nicollet Mall, Suite 600, Minneapolis, MN 55403.
(2) Includes 294,501 shares owned by and 60,000 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 243,900 shares owned by
her; for Mr. Parrish, also includes 187,500 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 35,500 shares owned by him.
(3) Includes 704,405 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, 17,200 shares held in a
self-directed IRA, 275,820 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, and 418,100 shares held by the John W.
Dearholt Trust of which Mr. Dearholt is a co-trustee with a sibling. Mr.
Dearholt shares the power to vote and dispose of 693,920 shares of 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 2,922,500
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) Consists of 492,058 shares of common stock owned directly by Mr. Walton,
30,900 shares subject to exercise of warrants held by Mr. Walton, and
169,608 shares of common stock held by a trust of which Mr. Walton is
trustee.
20
(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),
and (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. 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) Consists of 329,166 shares of common stock and warrants to purchase
1,100,000 shares of common stock owned by Goben Enterprises, LP, a limited
partnership of which Mr. Benson is a general partner.
Equity Compensation Plan Information
The following table summarizes share information, as of September 30, 2002,
for the Company's equity compensation plans and arrangements. These plans and
arrangements were not required to be approved by the Company's shareholders,
and, accordingly, none of these plans or arrangements have been approved by the
Company's shareholders.
NUMBER OF NUMBER OF
COMMON SHARES TO BE WEIGHTED-AVERAGE COMMON SHARES
ISSUED UPON EXERCISE EXERCISE PRICE OF AVAILABLE FOR FUTURE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, ISSUANCE UNDER EQUITY
PLAN CATEGORY WARRANTS, AND RIGHTS WARRANTS, AND RIGHTS COMPENSATION PLANS
------------- ----------------------- -------------------- ---------------------
Equity compensation plans
approved by shareholders . . . . . . - - -
Equity compensation plans
not approved by shareholders . . . . 5,133,400 $ 0.61 2,245,808
--------- ------ ---------
Total 5,133,400 $ 0.61 2,245,808
The Company's equity compensation plans include the 1997 Stock Option Plan, the
1997 Outside Director Stock Option Plan, special option grants to three persons
and warrant issuances to nine persons. All of the shares available for future
issuance are under the Company's stock option plans. Shares of the Company's
common stock are authorized for issuance under the 1997 Stock Option Plan to
employees, officers and key executives of the Company and its subsidiaries and
shares of the Company's common stock are authorized for issuance under the 1997
Outside Director Stock Option Plan to outside directors of the Company. The
Board of Directors administers both plans. Options granted are nonqualified
stock options under the Internal Revenue Code. Options expire at such time as
the Board of Directors determines, provided that no stock option may be
exercised later than the tenth anniversary of the date of its grant. Options
cannot be exercised until the vesting period, if any, specified by the Board of
Directors. Options are not transferable other than by will or the laws of
descent and distribution, and may be exercised during the life of the
participant only by him or her. The option price per share is determined by the
Board of Directors, but cannot be less than 100% of the fair market value of the
Common Stock on the date such option is granted.
The Company issued two options to purchase an aggregate of 150,000 shares of
common stock to a consultant with an exercise price of $0.66 per share for each
option and an expiration date of December 31, 2011 as to 50,000 shares and June
30, 2012 as to 100,000 shares. The Company issued options to purchase 90,000
shares of common stock to Phoenix of Illinois with an exercise price of $2.00
per share and an expiration date of November 20, 2004. The Company issued an
option to purchase 30,000 shares of common stock to a professional advisor with
an exercise price of $2.00 per share and an expiration date of September 20,
2004.
21
On May 17, 1999, the Company issued warrants to purchase 337,500 shares of
common stock to a placement agent with an exercise price of $1.00 per share and
an expiration date of May 17, 2004. On September 19, 1997, the Company issued
warrants to purchase 30,900 shares of common stock to a financial consultant
with an exercise price of $2.50 per share and an expiration date of September
19, 2006. On September 4, 1998, the Company issued warrants to purchase 75,000
shares of common stock to an investment banking firm with an exercise price of
$2.25 per share and an expiration date of July 30, 2003.
The Company may also issue up to 4,100,000 shares of common stock under warrants
issued to six guarantors of the Company's credit facility with Heartland Bank.
For additional information regarding these warrants, see Note 4 to the financial
statements.
Item 12. Certain Relationships and Related Transactions
On February 18, 1999, the Company borrowed $50,000 from O.B. Parrish, its
Chairman and Chief Executive Officer. The borrowing was completed through the
execution of a $50,000, one-year promissory note payable by the Company to Mr.
Parrish and a Note Purchase and Warrant Agreement and Stock Issuance Agreement.
Mr. Parrish was granted warrants to purchase 10,000 shares of the Company's
common stock at an exercise price of $1.35 per share. The exercise price of the
warrants equaled 80% of the average market price of the Company's common stock
for the five trading days prior to the date of issuance. The warrants expire
upon the earlier of their exercise or nine years after the date of their
issuance. Effective February 18, 2000, the Company extended the due date of the
note to February 18, 2001, and in connection with this extension, the Company
issued to Mr. Parrish warrants to purchase 12,500 shares of the Company's common
stock at an exercise price of $0.72 per share, which equaled 80% of the average
market price of the Company's common stock for the five trading days prior to
the date of issuance. Effective February 18, 2001, the Company extended the due
date of the note to February 18, 2002, and in connection with this extension,
the Company issued to Mr. Parrish warrants to purchase 14,000 shares of the
Company's common stock at an exercise price of $0.40 per share, which equaled
75% of the average market price of the Company's common stock for the fair
trading days prior to the date of issuance. The warrants expire upon the
earlier of their exercise or ten years after the date of their issuance. The
Company also granted Mr. Parrish securities registration rights for any common
stock he receives from the Company under these warrants or the Stock Issuance
Agreement. The Company subsequently repaid this note in full.
On February 12, 1999, the Company borrowed $250,000 from Mr. Dearholt. The
borrowing was completed through the execution of a $250,000, one-year promissory
note payable by the Company to Mr. Dearholt. As part of this transaction, the
Company entered into a Note Purchase and Warrant Agreement and a Stock Issuance
Agreement. Mr. Dearholt received a warrant to purchase 50,000 shares of the
Company's common stock at an exercise price of $1.248 per share. The exercise
price of the warrants equaled 80% of the average market price of the Company's
common stock for the five trading days prior to the date of issuance. The
warrants expire upon the earlier of their exercise or nine years after the date
of their issuance. Effective February 12, 2000, the Company extended the due
date of the note to February 12, 2001, and in connection with this extension,
the Company issued to Mr. Dearholt warrants to purchase 62,500 shares of the
Company's common stock at an
22
exercise price of $0.77 per share, which equaled 80% of the average market price
of the Company's common stock for the five trading days prior to the date of
issuance. Effective February 12, 2001, the Company extended the due date of the
note to February 12, 2002, and, in connection with this extension, the Company
issued to Mr. Dearholt warrants to purchase 70,000 shares of the Company's
common stock at an exercise price of $0.40 per share, which equaled 75% of the
average market price of the Company's common stock for the five trading days
prior to the date of issuance. The warrants expire upon the earlier of their
exercise or ten years after the date of their issuance. The Company also
granted Mr. Dearholt securities registration rights for any common stock he
receives from the Company under these warrants or the Stock Issuance Agreement.
The Company subsequently repaid this note in full.
On March 25, 1997, 1998, 1999, 2000, 2001 and 2002, the Company extended a $1
million, one-year promissory note payable by it to Mr. Dearholt for a previous
loan Mr. Dearholt made to the Company. The promissory note is now payable in
full on March 25, 2003 and bears interest at 12% annually, 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 a
Stock Issuance Agreement. 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 in 1997 at an exercise price of
$1.848 per share, 200,000 shares of common stock in 1998 at an exercise price of
$2.25 per share and 200,000 shares of the Company's common stock in 1999 at an
exercise price of $1.16 per share. In connection with the extension of the note
to March 25, 2001, the Company issued warrants to purchase 280,000 shares of the
Company's common stock in 2000 at an exercise price of $0.71 per share. In
connection with the extension of the note to March 25, 2002, the Company issued
warrants to purchase 280,000 shares of the Company's common stock in 2001 at an
exercise price of $0.40 per share. In connection with the extension of the note
to March 25, 2003, the Company issued warrants to purchase 300,000 shares of the
Company's common stock in 2002 at an exercise price of $1.18 per share. In each
case, the exercise price of the warrants equaled 80% of the market price of the
Company's common stock on the date of issuance. 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, 2009 for the warrants
issued in 1999, March 25, 2010 for the warrants issued in 2000, March 25, 2011
for the warrants issued in 2001 and March 25, 2014 for the warrants issued in
2002. Under the Stock Issuance Agreement, if the Company fail to pay the $1
million under the note when due, the Company must issue 200,000 shares of the
Company's common stock to Mr. Dearholt. This issuance will not, however,
alleviate the Company's liability under the note. The Company also granted Mr.
Dearholt securities registration rights for any common stock he receives from
the Company under these warrants or the Stock Issuance Agreement.
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, a member of the Company's board of directors, Stephen M.
Dearholt, a member of the Company's board of directors, Richard E. Wenninger, a
member of the Company's board of directors, and a trust for the benefit of O.B.
Parrish, the Company's Chairman of the Board and Chief Executive Officer. 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% 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 per share or more than $1.00 per share. The Company also
issued additional warrants to purchase 100,000 shares of the Company's 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.
23
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 year 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 Company's board of directors elected to extend the terms
of warrants held by Mr. Dearholt, consisting of warrants issued in 1995 and 1996
to purchase a total of 240,000 shares of the Company's common stock at exercise
prices between $3.00 and $3.10, for an additional five years.
During fiscal 2002, the Company's board of directors elected to extend the terms
of warrants held by Mr. Walton, consisting of warrants issued in 1997 to
purchase 30,900 shares of the Company's common stock at an exercise price of
$2.50, for an additional four years.
During September 2002, the Company offered the holders of the its outstanding
preferred stock the right to convert their shares of preferred stock into shares
of common stock based on a price of $1.80 per share, the closing price of the
common stock on September 4, 2002. This resulted in a conversion rate of
approximately 1.39 shares of common stock per share of preferred stock rather
than the 1 to 1 conversion rate set forth in the Company's Articles of
Incorporation. Effective September 20, 2002, a total of 594,000 shares of
Series 1 Preferred Stock were converted into a total of 824,911 shares of common
stock. 309,000 shares of preferred stock beneficially owned by Mr. Walton were
converted into 429,166 shares of common stock and 60,000 shares of preferred
stock beneficially owned by Mr. Wenninger were converted into 83,333 shares of
common stock.
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, 2002
Consolidated Statements of Operations - Years ended September 30, 2002 and 2001
Consolidated Statements of Stockholders' Equity - Years ended September 30, 2002
and 2001
Consolidated Statements of Cash Flows - Years ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
None.
24
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 increasing the number of authorized
shares of common stock to 27,000,000 shares. (26)
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Company increasing the number of authorized
shares of common stock to 35,500,000 shares. (33)
3.4 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)
10.13 Supply Agreement between Chartex International Plc and Deerfield
Urethane, Inc. dated August 17, 1994.(14)
25
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)
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)
26
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)
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)
27
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)
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)
10.74 Exclusive Distribution Agreement, dated October 18, 2001,
between the Company and Total Access Group. (29)
10.75 Memorandum of Understanding, dated as of November 12, 2001,
between the Company and Hindustan Latex Limited. (30)
10.76 Warrant dated December 18, 2001 from the Company to Dr. Jerry
Kinder (31)
10.77 Warrant dated December 20, 2001 from the Company to Tom Bodine
(31)
28
10.78 Warrant dated February 20, 2002 from the Company to Gerald Stein
(31)
10.79 Amended and Restated Promissory Note to Stephen M. Dearholt for
1,000,000 dated March 25, 2002 and related warrants. (32)
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.
(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.
29
(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 on November 13, 2001.
(29) Incorporated herein by reference to Amendment No. 1 to the Company's Form
SB-2 Registration Statement filed on February 6, 2002.
(30) Incorporated herein by reference to Amendment No. 2 to the Company's Form
SB-2 Registration Statement filed on February 27, 2002.
(31) Incorporated herein by reference to Amendment No. 3 to the Company's Form
SB-2 Registration Statement filed on March 18, 2002.
(32) Incorporated herein by reference to the Company's March 31, 2002 Form
10-QSB.
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.
Item 14. Controls and Procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Principal Accounting Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on this evaluation,
the Company's Chief Executive Officer and Principal Accounting Officer concluded
that the Company's disclosure controls and procedures were effective. It should
be noted that in designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
30
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, 2002
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, 2002
----------------------- Chief Executive Officer,
O.B. Parrish and Director
/s/ Mary Ann Leeper President, Chief Operating December 26, 2002
--------------------------- Officer and Director
Mary Ann Leeper, Ph.D.
/s/ Robert Zic Principal Accounting Officer December 26, 2002
------------------------
Robert Zic
/s/ William R. Gargiulo Secretary and Director December 26, 2002
-------------------------
William R. Gargiulo
/s/ David R. Bethune Director December 26, 2002
-------------------------
David R. Bethune
/s/ Stephen M. Dearholt Director December 26, 2002
-------------------------
Stephen M. Dearholt
/s/ Michael R. Walton Director December 26, 2002
-------------------------
Michael R. Walton
Director December 26, 2002
------------------------
James R. Kerber
Director December 26, 2002
------------------------
Richard E. Wenninger
31
CERTIFICATION
I, O.B. Parrish, Chief Executive Officer of The Female Health Company, certify
that:
1. I have reviewed this annual report on Form 10-K of The Female Health
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 27, 2002
/s/ O.B. Parrish
-------------------------
O.B. Parrish
Chief Executive Officer
32
CERTIFICATION
I, Robert R. Zic, Principal Accounting Officer of The Female Health Company,
certify that:
1. I have reviewed this annual report on Form 10-K of The Female Health
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 27, 2002
/s/ Robert R. Zic
-----------------------------
Robert R. Zic
Principal Accounting Officer
33
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-2
Consolidated Balance Sheet as of September 30, 2002. . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . F-5 and F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 and F-8
Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . F-9 through F-26
F-1
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, 2002, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended September 30, 2002 and 2001. 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, 2002, and the results of their
operations and their cash flows for the years ended September 30, 2002 and 2001,
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 16, 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 16. 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 12, 2002, except for the waiver of loan
covenant violations discussed in Note 4, as
to which the date is December 13, 2002.
F-2
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 558,643
Accounts receivable, net of allowance for doubtful accounts
of $18,000 and allowance for product returns of $5,000 . . . . . . 2,421,425
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913,184
Prepaid expenses and other current assets. . . . . . . . . . . . . . 244,224
-------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . 4,137,476
-------------
Other Assets
Certificate of deposit . . . . . . . . . . . . . . . . . . . . . . . 121,042
Intellectual property, net of accumulated amortization of $776,213 . 388,162
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,555
-------------
666,759
-------------
Equipment and Furniture and Fixtures
Equipment, furniture and fixtures. . . . . . . . . . . . . . . . . . 4,049,041
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . 3,290,406
-------------
758,635
-------------
$ 5,562,870
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable, related party, net of unamortized discount of $147,651 $ 852,349
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 524,947
Current maturities of obligations under capital leases . . . . . . . 24,542
Accrued expenses and other current liabilities . . . . . . . . . . . 691,954
Preferred dividends payable. . . . . . . . . . . . . . . . . . . . . 133,996
-------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . 2,227,788
-------------
Long-Term Liabilities
Note payable, bank, net of unamortized discount of $972,454. . . . . 927,546
Obligations under capital leases . . . . . . . . . . . . . . . . . . 52,912
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . 450,000
Deferred gain on sale of facility. . . . . . . . . . . . . . . . . . 1,274,339
-------------
2,704,797
-------------
Stockholders' Equity
Convertible preferred stock, Series 1, par value $.01 per share.
Authorized 5,000,000 shares; issued and outstanding 66,000 shares. 660
Common stock, par value $.01 per share. Authorized 35,500,000
shares; issued and outstanding 18,042,384 shares.. . . . . . . . . 180,424
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 54,990,237
Unearned consulting fees . . . . . . . . . . . . . . . . . . . . . . (173,013)
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . (641,017)
Accumulated other comprehensive income . . . . . . . . . . . . . . . 224,953
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (53,919,883)
-------------
662,361
Treasury stock, at cost, 20,000 shares of common stock . . . . . . . (32,076)
-------------
630,285
-------------
$ 5,562,870
=============
See Notes to Consolidated Financial Statements.
F-3
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
2002 2001
------------ ------------
Net revenues. . . . . . . . . . . . . . . . . . . . . . . $ 8,416,512 $ 6,716,174
Cost of products sold . . . . . . . . . . . . . . . . . . 4,855,321 4,406,110
------------ ------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . 3,561,191 2,310,064
------------ ------------
Operating expenses:
Advertising and promotion . . . . . . . . . . . . . . . 43,832 129,155
Selling, general and administrative . . . . . . . . . . 3,064,683 2,539,037
Out of court settlement costs . . . . . . . . . . . . . 1,258,210 -
Stock compensation. . . . . . . . . . . . . . . . . . . 1,863,956 123,758
------------ ------------
Total operating expenses. . . . . . . . . . . . 6,230,681 2,791,950
------------ ------------
OPERATING (LOSS). . . . . . . . . . . . . . . . (2,669,490) (481,886)
------------ ------------
Nonoperating income (expense):
Interest expense. . . . . . . . . . . . . . . . . . . . (817,714) (702,039)
Interest income . . . . . . . . . . . . . . . . . . . . 6,042 12,669
------------ ------------
(811,672) (689,370)
------------ ------------
NET (LOSS). . . . . . . . . . . . . . . . . . . (3,481,162) (1,171,256)
Preferred dividends, Series 1 . . . . . . . . . . . . . . 132,005 133,000
------------ ------------
Net (loss) attributable to common stockholders. $(3,613,167) $(1,304,256)
============ ============
Net (loss) per common share outstanding . . . . $ (0.22) $ (0.09)
Weighted average common shares outstanding. . . . . . . . 16,244,920 14,630,970
See Notes to Consolidated Financial Statements.
F-4
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
Accumulated
Additional Unearned Other
Preferred Common Paid-in Consulting Deferred Comprehensive
Stock Stock Capital Fees Compensation Income
--------- ------ ---------- ---------- ------------ -------------
Balance at September 30, 2000. . . . . . . . . . . . . . $ 6,600 $138,037 $48,231,986 $(90,815) $ - $ 55,661
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 notes payable, related parties - - 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. . . . . . . . . . . . . . . . - - - - - -
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) . . . . . . . . . . . . . . . . . . . . . . - - - - - -
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
============ ======== =========== ========= ========== =========
Cost of
Accumulated Treasury
Deficit Stock Total
----------- -------- -----
Balance at September 30, 2000. . . . . . . . . . . . . . $(49,002,460) $(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 notes payable, related parties - - 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) - (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) - (1,171,256)
Foreign currency translation adjustment. . . . . . . . - - (31,860)
------------
Comprehensive income (loss). . . . . . . . . . . . . . . (1,203,116)
------------- --------- ------------
Balance at September 30, 2001. . . . . . . . . . . . . . $(50,306,716) $(32,076) $ 52,323
============= ========= ============
F-5
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
Additional Unearned
Preferred Common Paid-in Consulting Deferred
Stock Stock Capital Fees Compensation
--------- ------ ------- ---------- ------------
Balance at September 30, 2001 (balance forwarded). . . . . . . . $ 6,600 $156,929 $50,264,602 $ (60,817) $ -
Issuance of 100,000 shares of Common Stock for
consulting services. . . . . . . . . . . . . . . . . . . . . . . - 1,000 66,000 (67,000) -
Issuance of 150,000 stock options for consulting services. . . . - - 188,830 (188,830) -
Conversion of 594,000 shares of Preferred Stock
into 824,991 shares of Common Stock. . . . . . . . . . . . . . . (5,940) 8,250 (2,310) - -
Issuance of 92,549 shares of Common Stock upon
exercise of stock options . . . . . . . . . . . . . . . . . . . - 925 42,083 - -
Issuance of 450,000 shares of Common Stock and extension
of warrants for out of court settlement. . . . . . . . . . . . . - 4,500 1,253,710 - -
Stock compensation relating to the Company's stock option plans. - - 1,720,322 - -
Issuance of 469,000 restricted shares of Common Stock. . . . . . - 4,690 503,559 - (641,017)
Issuance of 183,150 shares of Common Stock upon
exercise of stock warrants. . . . . . . . . . . . . . . . . . . - 1,832 98,168 - -
Issuance of warrants with note payable, bank . . . . . . . . . . - - 415,427 - -
Issuance of warrants with note payable, related party. . . . . . - - 265,710 - -
Renewal of expired warrants. . . . . . . . . . . . . . . . . . . - - 30,436 - -
Issuance of 39,180 shares of Common Stock as payment of
interest on debentures. . . . . . . . . . . . . . . . . . . . . - 392 49,608 - -
Issuance of 70,585 shares of Common Stock as payment of
preferred stock dividends . . . . . . . . . . . . . . . . . . . - 706 35,292 - -
Preferred Stock dividends. . . . . . . . . . . . . . . . . . . . - - - - -
Issuance of 120,000 shares of Common Stock . . . . . . . . . . . - 1,200 58,800 - -
Amortization of unearned consulting fees . . . . . . . . . . . . - - - 143,634 -
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - -
Foreign currency translation adjustment. . . . . . . . . . . . - - - - -
Comprehensive income (loss). . . . . . . . . . . . . . . . . . .
------------ -------- ------------ ---------- --------------
Balance at September 30, 2002. . . . . . . . . . . . . . . . . . $ 660 $180,424 $54,990,237 $(173,013) $ (641,017)
============ ======== ============ ========== ==============
See Notes to Consolidated Financial Statements.
Accumulated
Cost of Other
Accumulated Treasury Comprehensive
Deficit Stock Total Income
----------- -------- ----- -------------
Balance at September 30, 2001 (balance forwarded). . . . . . . . $ 23,801 $(50,306,716) $(32,076) $ 52,323
Issuance of 100,000 shares of Common Stock for
consulting services . . . . . . . . . . . . . . . . . . . . . . - - - -
Issuance of 150,000 stock options for consulting services. . . . - - - -
Conversion of 594,000 shares of Preferred Stock
into 824,991 shares of Common Stock . . . . . . . . . . . . . . - - - -
Issuance of 92,549 shares of Common Stock upon
exercise of stock options . . . . . . . . . . . . . . . . . . . - - - 43,008
Issuance of 450,000 shares of Common Stock and extension
of warrants for out of court settlement . . . . . . . . . . . . - - - 1,258,210
Stock compensation relating to the Company's stock option plans. - - - 1,720,322
Issuance of 469,000 restricted shares of Common Stock. . . . . . - - - (132,768)
Issuance of 183,150 shares of Common Stock upon
exercise of stock warrants. . . . . . . . . . . . . . . . . . . - - - 100,000
Issuance of warrants with note payable, bank . . . . . . . . . . - - - 415,427
Issuance of warrants with note payable, related party. . . . . . - - - 265,710
Renewal of expired warrants. . . . . . . . . . . . . . . . . . . - - - 30,436
Issuance of 39,180 shares of Common Stock as payment of
interest on debentures. . . . . . . . . . . . . . . . . . . . . - - - 50,000
Issuance of 70,585 shares of Common Stock as payment of
preferred stock dividends . . . . . . . . . . . . . . . . . . . - - - 35,998
Preferred Stock dividends. . . . . . . . . . . . . . . . . . . . - (132,005) - (132,005)
Issuance of 120,000 shares of Common Stock . . . . . . . . . . . - - - 60,000
Amortization of unearned consulting fees . . . . . . . . . . . . - - - 143,634
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . - (3,481,162) - (3,481,162)
Foreign currency translation adjustment. . . . . . . . . . . . 201,152 - - 201,152
------------
Comprehensive income (loss). . . . . . . . . . . . . . . . . . . (3,280,010)
-------- ------------- --------- ------------
Balance at September 30, 2002. . . . . . . . . . . . . . . . . . $224,953 $(53,919,883) $(32,076) $ 630,285
======== ============= ========= ============
See Notes to Consolidated Financial Statements.
F-6
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . $(3,481,162) $(1,171,256)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . 410,173 425,795
Amortization of intellectual property rights. . . . . . 109,245 106,779
(Recovery of) inventory obsolescence. . . . . . . . . . (1,768) (28,623)
(Recovery of) doubtful accounts, returns and discounts. (4,554) (135,593)
Interest added to certificate of deposit. . . . . . . . (6,042) -
Amortization of unearned consulting fees. . . . . . . . 143,634 123,758
Amortization of discounts on notes payable
and convertible debentures. . . . . . . . . . . . . . 458,501 375,541
Amortization of deferred income realized on UK grant. . (26,557) (25,956)
Amortization of deferred gain on sale and leaseback
of building . . . . . . . . . . . . . . . . . . . . . (83,896) (82,000)
Out of court settlement . . . . . . . . . . . . . . . . 1,258,210 -
Stock compensation. . . . . . . . . . . . . . . . . . . 1,720,322 -
Gain on sale of equipment and furniture and fixtures. . (1,105) -
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . (801,872) (466,630)
Inventories. . . . . . . . . . . . . . . . . . . . . . (237,449) (97,696)
Prepaid expenses and other assets. . . . . . . . . . . (114,357) (41,565)
Accounts payable . . . . . . . . . . . . . . . . . . . 31,747 135,609
Accrued expenses and other current liabilities . . . . 248,279 256,818
------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES . . . . . . (378,651) (625,019)
------------ ------------
INVESTING ACTIVITIES
Purchase of certificate of deposit. . . . . . . . . . . . . - (115,000)
Capital expenditures. . . . . . . . . . . . . . . . . . . . (35,009) (57,791)
Proceeds on sale of equipment and furniture and fixtures. . 1,105 -
------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES . . . . . . (33,904) (172,791)
------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock. . . . . . . . . . . 60,000 800,000
Proceeds from exercised stock options . . . . . . . . . . . 43,008 -
Proceeds from exercise of common stock warrants . . . . . . 100,000 -
Proceeds from note payable, bank. . . . . . . . . . . . . . 500,000 1,500,000
Payments on note payable, bank. . . . . . . . . . . . . . . (100,000) -
Proceeds from convertible debentures issued . . . . . . . . - 450,000
Payments on convertible debentures. . . . . . . . . . . . . - (1,500,000)
Dividend paid on preferred stock. . . . . . . . . . . . . . (95,825) (107,186)
Payments on related party notes . . . . . . . . . . . . . . - (300,000)
Payments on capital lease obligations . . . . . . . . . . . (8,403) -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . 498,780 842,814
------------ ------------
(continued)
F-7
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002 AND 2001
2002 2001
---------- -----------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . $ 3,012 $ (32,720)
---------- -----------
Net increase in cash. . . . . . . . . . . . . . . . . . . 89,237 12,284
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . 469,406 457,122
---------- -----------
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . $ 558,643 $ 469,406
========== ===========
Supplemental Cash Flow Disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . $ 381,578 $ 303,837
Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of warrants on notes payable . . . . . . . . . . . . . . $ 681,137 $1,105,852
Common stock issued for payment of preferred stock dividends
and convertible debenture interest. . . . . . . . . . . . . . . 85,998 51,896
Preferred dividends declared, Series 1. . . . . . . . . . . . . . 132,005 133,000
Renewal of notes payable with related parties . . . . . . . . . . 1,000,000 1,300,000
Capital lease obligations incurred for capital expenditures . . . 81,076 -
See Notes to Consolidated Financial Statements.
F-8
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 "FC Female Condom" 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 over 100 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.
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-9
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 has the registered trademark "FC Female Condom" 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.
Reclassification: Certain expenses on the statement of operations for the year
----------------
ended September 30, 2001 have been reclassified to be consistent with the
presentation shown for the year ended September 30, 2002.
Revenue recognition: Revenues from product sales are recognized as the products
-------------------
are shipped to the customers.
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 8 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-10
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: 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. Management does not anticipate that the
adoption of these Statements will have a significant effect on the Company's
financial statements.
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.
F-11
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of
Debt, and an amendment of that Statement, SFAS 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends SFAS
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS 145 is effective for
financial statements issued for fiscal years beginning after May 15, 2002.
Management does not anticipate that the adoption of this Statement will have a
significant effect on the Company's financial statements.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 is effective
for exit or disposal activities initiated after December 31, 2002. Management
does not anticipate that the adoption of this Statement will have a significant
effect on the Company's financial statements.
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness to Others. FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of certain guarantee contracts, a liability for the fair value of
the obligation undertaken in issuing the guarantee. FIN 45 also incorporates,
without change, the guidance in FIN 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which is being superseded. FIN 45 is effective for
financial statements issued for fiscal years ending after December 15, 2002.
Management does not anticipate that the adoption of this Statement will have a
significant effect on the Company's financial statements.
F-12
NOTE 2. INVENTORIES
The components of inventory consist of the following at September 30, 2002:
Raw materials . . . . . . . . . . . . $ 574,952
Work in process. . . . . . . . . . . 84,880
Finished goods. . . . . . . . . . . . 298,568
Less allowance for obsolescence . . (45,216)
---------------
$ 913,184
===============
NOTE 3. OPERATING LEASES AND RENTAL EXPENSE
The Company has a lease agreement for office space with an unrelated third party
which expires September 2006. The lease requires monthly payments of $5,763
plus real estate taxes, utilities, and maintenance expenses. The Company was
required to make an initial security deposit of $115,000 which has been reduced
to $92,000 as of September 30, 2002. The security deposit is in the form of an
irrevocable letter of credit from a bank. The Bank presently requires the
Company to hold a $92,000 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 in 2001 which is net of sublease rentals of $9,891.
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 $396,021 (268,125
pounds) per year payable quarterly until 2016. The lease is renewable through
December 2027. The Company was also required to make an initial security deposit
of $396,021 (268,125 pounds) which has been reduced to $153,075 (97,500 pounds)
and is included in other assets in the balance sheet at September 30, 2002. 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, 2002, was $1,274,339 (811,681
pounds).
The Company also leases equipment under lease agreements which expire at various
dates between October 2004 and December 2005. The aggregate monthly rental was
$3,405 at September 30, 2002.
F-13
NOTE 3. OPERATING LEASES AND RENTAL EXPENSE (CONTINUED)
Details of operating lease expense in total and separately for transactions with
related parties are as follows:
September 30,
2002 2001
-------- --------
Operating lease expense:
Factory and office leases . . . . . . . . $622,037 $551,039
Affiliate lease (net of sublease rentals) - 3,495
Other . . . . . . . . . . . . . . . . . . 10,217 20,000
-------- --------
$632,254 $574,534
======== ========
Future minimum payments under operating leases consisted of the following at
September 30, 2002:
Operating
----------
2003 . . . . . . . . . $ 473,733
2004 . . . . . . . . . 475,450
2005 . . . . . . . . . 472,434
2006 . . . . . . . . . 470,487
2007 . . . . . . . . . 396,020
Thereafter . . . . . . 3,645,853
----------
Total minimum payments $5,933,977
==========
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
During 2001, 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 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. 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 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 70,000 and
14,000 shares of the Company's common stock, respectively, 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.
F-14
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
During 2002, 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
March 2003. As part of the transaction, the Company issued Mr. Dearholt warrants
to purchase 300,000 shares of the Company's common stock at $1.18 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 $265,710. Any stock issued under the warrants carries
certain registration rights. The warrants expire in 2012. In addition, if the
Company defaults on its obligation under the note, the Company is required to
issue an additional 300,000 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, 2002, net of unamortized discount of $147,651. The
discount, in combination with the note's 12 percent coupon, resulted in an
effective interest rate of 46 percent on the note.
On May 19 and June 3, 1999, the Company issued an aggregate of $1,500,000 of
convertible debentures. 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. Concurrent
with obtaining the credit facility discussed in the next paragraph, 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. The Company paid
dividends on the Company's Class A Preferred Stock - Series 1 and issued
warrants on its short-term note, both of which are covenant violations of the
credit facility. The violations were waived by the bank on December 13, 2002.
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. During 2001, the Company borrowed $1,500,000
under the credit facility and obtained personal guarantees of a total of 125
percent 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. During 2002, the Company
borrowed the remaining $500,000 under the credit facility and obtained personal
guarantees of a total of 125 percent of the amount outstanding on the loan from
three additional persons. The Company paid down $100,000 on the credit facility
in September 2002.
For giving their personal guarantees, the Company issued to the eight 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.
F-15
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
In 2001, 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 related to the $1,500,000
borrowed in 2001, the Company 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 value of the warrants in combination with
the credit facility's 10 percent coupon resulted in an effective interest rate
of 50 percent on that portion of the note.
In 2002, the Company also issued additional warrants to purchase 100,000 shares
of common stock to one guarantor with a warrant purchase price of $0.50 per
share. In accounting for the guarantors' warrants related to the $500,000
borrowed in 2002, the Company designated 900,000 warrants valued at $415,427 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, 2002,
net of unamortized discount of $927,546. The value of the 2002 warrants in
combination with the credit facility's 10 percent coupon resulted in an
effective interest rate of 101 percent on that portion of the note.
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. These
convertible debentures were converted to common stock in December 2002.
Interest expense to related parties was $322,659 and $528,769 for the years
ended September 30, 2002 and 2001, respectively.
F-16
NOTE 5. CAPITAL LEASES
The Company leases vehicles under capital leases. The assets and liabilities
under the leases were recorded at the present value of future minimum rental
payments.
Minimum future lease payments under capital leases as of September 30, 2002,
are as follows:
Years ending September 30:
2003 . . . . . . . . . . . . . . . . . . . . $ 29,536
2004 . . . . . . . . . . . . . . . . . . . . 32,019
2005 . . . . . . . . . . . . . . . . . . . . 20,906
---------
Total minimum lease payments . . . . . . . . . 82,461
Less the amount representing interest . . 5,007
---------
Present value of net minimum lease payments . 77,454
Less current portion . . . . . . . . . . . 24,542
---------
Long-term obligations under capital leases . $ 52,912
=========
The cost and accumulated amortization of the leased assets at September 30, 2002
is approximately $104,000 and $12,000, respectively. There was no amortization
of leased assets for the year ended September 30, 2001.
NOTE 6. 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, 2002 and 2001, is as follows:
September 30,
2002 2001
------------ ----------
Income tax credit at statutory rates. . . . . . . . . . . $(1,184,000) $(398,000)
Nondeductible expenses. . . . . . . . . . . . . . . . . . 486,000 58,700
State income tax, net of federal benefits . . . . . . . . (244,000) (55,700)
Benefit of net operating loss not recognized, increase in
valuation allowance. . . . . . . . . . . . . . . . . . . 942,000 395,000
------------ ----------
$ - $ -
============ ==========
F-17
NOTE 6. INCOME TAXES (CONTINUED)
As of September 30, 2002, the Company had federal and state net operating loss
carryforwards of approximately $40,800,000 and $23,180,000, respectively, for
income tax purposes expiring in years 2005 to 2022. 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, 2002, expiring in years 2006 to 2010. The Company's UK subsidiary,
The Female Health Company - UK, plc, has UK net operating loss carryforwards of
approximately $67,960,000 as of September 30, 2002. 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, 2002:
Deferred tax assets:
Federal net operating loss carryforwards. . $ 13,871,000
State net operating loss carryforwards. . . 1,178,000
Foreign net operating loss carryforwards. . 20,388,000
Foreign capital allowances. . . . . . . . . 227,000
Tax credit carryforwards. . . . . . . . . . 105,000
Other . . . . . . . . . . . . . . . . . . . 16,000
-------------
Total gross deferred tax assets . . . . . . 35,785,000
Valuation allowance for deferred tax assets (35,785,000)
-------------
Net deferred tax assets . . . . . . . . . . $ -
=============
The valuation allowance increased (decreased) by $696,000 and $(105,000) for the
years ended September 30, 2002 and 2001, respectively.
NOTE 7. ROYALTY AGREEMENTS
The Company had a royalty agreement 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 for the year ended September 30, 2001.
There was no royalty expense for the year ended September 30, 2002.
NOTE 8. 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 2,245,808 shares available
for future grants as of September 30, 2002. The Company has also granted options
to one of its legal counsel, an affiliate and consultants. 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.
F-18
NOTE 8. COMMON STOCK (CONTINUED)
In September 2001, the holders of exercisable stock options waived their rights
to exercise their options until the Company amended its articles of
incorporation to increase the number of shares of common stock authorized for
issuance. To obtain this waiver, the Company agreed to re-price these options at
$0.56 per share once the amendment was approved. The Company's common stock was
trading at less than $0.56 per share when the waivers were obtained. The total
number of options that were waived at September 30, 2001, was 2,659,800.
On May 8, 2002, the shareholders approved an amendment to the Amended and
Restated Articles of Incorporation to increase the total number of authorized
shares of common stock from 27,000,000 to 35,500,000 shares. Since the
amendment was approved, the stock options have been re-priced to $0.56 per
share. The Company has accounted for all of these stock options in accordance
with variable plan accounting guidance provided in APB No. 25 and related
interpretations. The reduction in the exercise price of the re-priced options
and the increase in the stock price of the Company's common stock as of
September 30, 2002 resulted in $1,720,322 of stock compensation expense due to
the repricing for the year ended September 30, 2002.
Effective September 2002, the holders of outstanding options to purchase a total
of 2,365,980 shares of common stock agreed to exchange their options for:
- a total of 469,000 shares of restricted common stock in the case of U.S.
option holders or the right to receive a total of 122,495 shares of
deferred common stock in September 2003 in the case of U.K. option holders;
and
- the right to receive a grant of new options to purchase a total of
2,365,980 shares of common stock on the first business day that is at least
six months and one day after the effective date of the exchange.
The shares of restricted common stock and the right to receive the shares of
deferred common stock are subject to forfeiture if the participant voluntarily
resigns or is terminated for cause on or before September 26, 2003 and may not
be transferred on or before September 26, 2003. As of September 30, 2002, the
Company had issued the restricted common stock to U.S. option holders and
accrued for the issuance to U.K. option holders. The restricted and deferred
shares have been recorded as deferred compensation within stockholders' equity
as of September 30, 2002, and will be amortized over the employees' one-year
service periods.
The new options will have an exercise price equal to 100% of the fair market
value of the common stock on the grant date and a vesting schedule of 1/36 per
month for each of the first 36 months after the date of grant. The new options,
when granted, will be accounted for in accordance with fixed plan accounting
guidance provided in APB No. 25. Options to purchase a total of 320,000 shares
of common stock did not participate in the exchange and will continue to be
accounted for in accordance with variable plan accounting guidance.
F-19
NOTE 8. COMMON STOCK (CONTINUED)
Summarized information regarding all of the Company's stock options is as
follows:
Weighted
Average
Number of Exercise
Shares Price
---------- --------
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
Granted . . . . . . . . . . . . . 190,000 1.11
Exercised . . . . . . . . . . . . 92,549 0.56
Expired or canceled . . . . . . . (2,572,349) 0.56
-----------
Outstanding at September 30, 2002 590,000 $ 0.88
===========
Option shares exercisable at September 30, 2002 and 2001, are 196,700 and
40,000, respectively.
Options Outstanding and Exercisable
Number Wghted. Avg. Wghted. Avg. Number Wghted. Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Price At 9/30/02 Life Price at 9/30/02 Price
------------- ----------- ---------- ----------- ----------- ---------
$0.56 . . . . 320,000 5.95 0.56 6,700 $ 0.56
0.66. . . . . 150,000 9.25 0.66 150,000 0.66
2.00. . . . . 120,000 2.20 2.00 40,000 2.00
------------- ----------- --------- -------- ---------- --------
$.56 to $2.00 590,000 6.03 0.88 196,700 $ 0.93
============= =========== ========= ======== ========== ========
In 2002, the Company granted 40,000 options to employees with exercise prices
equal to fair market value of the Company's stock at the date of grant.
Therefore, no compensation expense was recognized related to these options under
APB 25 at the date of grant.
F-20
NOTE 8. COMMON STOCK (CONTINUED)
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 (increased)
decreased to the pro forma amounts indicated below:
Year Ending September 30,
Loss Loss
2002 Per Share 2001 Per Share
------------ ----------- ------------ -----------
Net loss attributable to common
stockholders . . . . . . . . . . . . . . $(3,613,167) $ (0.22) $(1,304,256) $ (0.09)
Stock option re-pricing, net of previously
recognized expense of $1,720,322
under APB 25 . . . . . . . . . . . . . . 786,740 0.05 - -
Compensation expense related to
stock options. . . . . . . . . . . . . . (47,533) - (355,753) (0.02)
------------ ----------- ------------ -----------
$(2,873,960) $ (0.17) $(1,660,009) $ (0.11)
============ =========== ============ ===========
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,
2002. The weighted average fair value of employee options granted for the year
ended September 30, 2002, was $0.56. 40,000 options were granted to employees
for the year ended September 30, 2002. There were no options granted to
employees for the year ended September 30, 2001.
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.
F-21
NOTE 8. COMMON STOCK (CONTINUED)
During 2002, 183,150 warrants were exercised. No warrants were exercised
during 2001. At September 30, 2002, the following warrants were outstanding and
exercisable:
Number
Outstanding
-----------
Warrants issued in connection with:
Financial advisory services contract 75,000
Convertible debentures . . . . . . . 2,587,500
Convertible preferred stock. . . . . 30,900
Note payable, bank . . . . . . . . . 5,100,000
Notes payable. . . . . . . . . . . . 1,889,000
-----------
Outstanding at September 30, 2002. . 9,682,400
===========
Warrants Outstanding and Exercisable
At September 30, 2002, the Company had reserved a total of 9,982,400 shares of
its common stock for the exercise of options and warrants outstanding. This
amount includes shares reserved to satisfy obligations due if the Company
defaults on the payment of interest or principal on a $1.0 million note due in
March 2003.
Range of Number Wghted. Avg. Wghted. Avg.
Exercise Outstanding Remaining Exercise
Prices At 9/30/02 Life Price
-------------- ----------- ------------ -------------
$0.40 to $0.50 5,464,000 5.7 $ 0.49
$0.51 to $1.00 2,912,500 4.7 0.97
$1.01 to $3.10 1,305,900 4.8 1.87
-------------- --------- ----------- ------------
$0.40 to $3.10 9,682,400 5.3 $ 0.82
============== ========= =========== ============
Issuance of Stock
The Company has issued common stock to consultants for providing investor
relation services. 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. In 2002, the Company
issued 100,000 shares of common stock with a market value of $67,000 which was
recorded as unearned consulting fees and is being recognized over the term of
the agreement. The Company also issued 150,000 options to purchase shares of its
common stock with a market value of $188,830 which was recorded as unearned
consulting fees and is being recognized over the term of the agreement.
F-22
NOTE 9. PREFERRED STOCK
During September 2002, the Company offered the holders of the outstanding
preferred stock the right to convert their shares of preferred stock into shares
of common stock based on a price of $1.80 per share. This resulted in a
conversion rate of approximately 1.39 shares of common stock per share of
preferred stock rather than the 1 to 1 conversion rate set forth in the
Company's Articles of Incorporation. As of September 30, 2002, a total of
594,000 shares of Series 1 Preferred Stock were converted into a total of
824,911 shares of common stock.
The Company has 66,000 outstanding 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 10. 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. 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 11. 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 $7,500 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 $17,102 and $15,303 for 2002 and 2001, respectively.
F-23
NOTE 12. 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,
2002 2001 2002 2001
------ ------ ------ ------
United States. $2,547 $2,715 $ 158 $ 136
Brazil . . . . 2,248 766 - -
South Africa . 691 733 - -
Ghana. . . . . * 547 - -
Japan. . . . . * 382 - -
United Kingdom * * 1,267 1,571
Zimbabwe . . . 898 * - -
Other. . . . . 2,033 1,573 - -
------ ------ ------ ------
$8,417 $6,716 $1,425 $1,707
====== ====== ====== ======
* Less than 5 percent of total net sales
NOTE 13. OUT OF COURT SETTLEMENT
The former holders of the $1,500,000 convertible debentures issued on May 19,
1999 and June 3, 1999, had alleged that the Company was in default with respect
to the perfection of the former holders' security interest in the Company's
assets. On July 23, 2002, the Company settled this dispute out of court. The
Company agreed to issue 450,000 shares of common stock to the former convertible
debenture holders and to extend the expiration dates of 2,250,000 warrants held
by the former holders to 2007. The former convertible debenture holders agreed
to release their security interest in the Company's assets and they agreed not
to sell, offer or make any short sale of the 450,000 shares prior to June 24,
2003 without the Company's prior written consent. In accounting for the
litigation settlement, the common stock and extension of warrants was valued at
$1,258,210.
NOTE 14. 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.
F-24
NOTE 15. 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 16. CONTINUING OPERATIONS
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a loss of $3.6 million for the year ended September 30, 2002, and as of
September 30, 2002, had an accumulated deficit of $53.9 million. At September
30, 2002, the Company had working capital of $1.9 million and stockholders'
equity of $0.6 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.
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 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 per share equal to $0.50 per
share which was the market price at the commitment date of this transaction.
These convertible debentures were converted to common stock in December 2002.
F-25
NOTE 16. CONTINUING OPERATIONS (CONTINUED)
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 an outstanding balance of $1,900,000 under
this facility as of September 30, 2002. The unpaid balances on the credit
facility are due May 18, 2004, and bear interest payable at a rate of 10
percent.
During the year ended September 30, 2002, the Company completed a private
placement where 120,000 shares of the Company's common stock were sold for
$60,000. The stock sale was directly with an accredited investor. The Company
sold the shares to the investor at price of $0.50 per share.
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-26