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As filed with the Securities and Exchange Commission on December 8, 1998
Registration No. ________
------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
THE FEMALE HEALTH COMPANY
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
-------------------------
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WISCONSIN 3069 39-1144397
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
O.B. PARRISH, CHAIRMAN
875 NORTH MICHIGAN AVENUE OF THE BOARD AND CHIEF
SUITE 3660 EXECUTIVE OFFICER
CHICAGO, ILLINOIS 60611 875 NORTH MICHIGAN AVENUE
(312) 280-1119 SUITE 3660
CHICAGO, ILLINOIS 60611
(312) 280-1119
(ADDRESS AND TELEPHONE NUMBER
OF PRINCIPAL EXECUTIVE OFFICES AND (NAME, ADDRESS AND TELEPHONE
PRINCIPAL PLACE OF BUSINESS) NUMBER OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
JAMES S. BEDORE, ESQ.
REINHART, BOERNER, VAN DEUREN
NORRIS & RIESELBACH, S.C.
1000 NORTH WATER STREET, SUITE 2100
MILWAUKEE, WI 53202
(414) 298-1000
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. |X|
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(B) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. |_|
<PAGE> 2
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. |_|
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. |_|
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
TO BE TO BE PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE PRICE FEE
<S> <C> <C> <C> <C> <C>
COMMON STOCK, PAR VALUE $.01 2,213,124 $1.375 (2) $3,043,046 $1,026
PER SHARE
COMMON STOCK, PAR VALUE $.01 200,000 $2.17 (3) $ 434,000
PER SHARE, ISSUABLE UPON
EXERCISE OF A WARRANT
</TABLE>
(1) IN THE EVENT OF A STOCK SPLIT, STOCK DIVIDEND OR SIMILAR TRANSACTION
INVOLVING THE REGISTRANT'S COMMON STOCK, IN ORDER TO PREVENT DILUTION, THE
NUMBER OF SHARES REGISTERED SHALL AUTOMATICALLY BE INCREASED TO COVER THE
ADDITIONAL SHARES IN ACCORDANCE WITH RULE 416(A) UNDER THE SECURITIES ACT.
(2) ESTIMATED SOLELY FOR PURPOSES OF CALCULATING THE REGISTRATION FEE PURSUANT
TO RULE 457(C) UNDER THE SECURITIES ACT, ON THE BASIS OF THE AVERAGE OF THE HIGH
AND LOW REPORTED SALE PRICES OF THE REGISTRANT'S COMMON STOCK ON DECEMBER 3,
1998, AS REPORTED ON THE AMERICAN STOCK EXCHANGE.
(3) REPRESENTS THE WARRANT'S EXERCISE PRICE PER SHARE FOR PURPOSES OF
CALCULATING THE AMOUNT OF THE REGISTRATION FEE IN ACCORDANCE WITH RULE 457(G)
UNDER THE SECURITIES ACT.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION - DATED _____________
THE FEMALE HEALTH COMPANY
2,413,124 SHARES OF COMMON STOCK
This Prospectus may be used only by Kingsbridge Capital Limited (the
"Selling Stockholder") in connection with its resale, from time to time, of up
to 2,413,124 shares (the "Shares") of Common Stock, par value $.01 per share
(the "Common Stock") of The Female Health Company, a Wisconsin corporation
("FHC" or the "Company"). The Shares represent 2,213,124 Shares of Common Stock
(the "Equity Line Shares") which may be issued pursuant to a Private Equity Line
of Credit Agreement dated November 19, 1998 (the "Equity Line Agreement")
between the Company and the Selling Stockholder and 200,000 Shares of Common
Stock which the Selling Stockholder may receive upon exercise of a warrant (the
"Warrant") held by the Selling Stockholder. The Company will not receive any
proceeds from the sale of the Shares by the Selling Stockholder. The expenses
incurred in registering the sale of the Shares, including legal and accounting
fees, will be paid by the Company, except for commissions, transfer taxes and
certain other expenses associated with the sale of the Shares, which will be
paid by the Selling Stockholder.
The Company will sell the Equity Line Shares to the Selling Stockholder
pursuant to the terms of the Equity Line Agreement. On the date of each purchase
under the Equity Line Agreement, the Selling Stockholder will pay the Company a
per Share purchase price equal to (a) 88% of the Share's market price (as
defined in the Equity Line Agreement), if such market price is $2 or more or (b)
82% of the Share's market price if such market price is less than $2. The
Company has agreed to indemnify the Selling Stockholder against certain
liabilities, including liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act").
The Selling Stockholder may offer, pursuant to this Prospectus, the Shares
to purchasers from time to time in transactions on the American Stock Exchange,
in negotiated transactions, or otherwise, or by a combination of these methods,
at fixed prices that may be changed, at market prices prevailing at the time of
the sale, at prices related to the market prices or at negotiated prices. The
Selling Stockholder may effect these transactions by selling the Shares to or
through broker-dealers, who may receive compensation in the form of discounts or
commissions from the Selling Stockholder or from the purchasers of the Shares
for whom the broker-dealers may act as an agent or to whom they may sell as a
principal, or both. The Selling Stockholder is an "underwriter" within the
meaning of the Securities Act in connection with the sale of the Shares offered
hereby. See "Plan of Distribution."
The Common Stock is listed for quotation on the American Stock Exchange
under the symbol "FHC." On December 2, 1998, the closing sale price of the
Common Stock was $1.50.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS _______________
<PAGE> 4
TABLE OF CONTENTS
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Page
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Available Information...................................................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
The Equity Line Agreement.................................................. 13
Use of Proceeds............................................................ 15
Price Range of Common Stock................................................ 15
Dividend Policy............................................................ 15
Determination of Offering Price............................................ 15
Capitalization............................................................. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 17
Business................................................................... 23
Management................................................................. 30
Principal Shareholders..................................................... 35
Certain Transactions....................................................... 36
Description of Capital Stock............................................... 37
Selling Stockholder........................................................ 41
Plan of Distribution....................................................... 42
Legal Matters.............................................................. 43
Experts.................................................................... 43
Index to Financial Statements..............................................F-i
</TABLE>
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in this
Prospectus, in connection with the offering described herein, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Selling Stockholder or any underwriters,
brokers or agents. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, nor shall there be any sale of these securities
by any person in any jurisdiction in which it is unlawful for such person to
make such offer, solicitation or sale. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create an implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as a "small business
issuer" as defined under Regulation S-B promulgated under the Securities Act. In
accordance with the Exchange Act, the Company files reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information may be inspected and copied at, and copies of such materials
can be obtained at prescribed rates from, the Public Reference Room of the
Commission located at 450 Fifth Street, N.W., Washington, D.C. and the
Commission's Pacific Regional Office located at 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California, the Commission's Northeast Regional Office
located at 7 World Trade Center, Suite 1300, New York, New York and at the
Commission's Midwest Regional Office located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois. The public may obtain information
concerning the operation of the Public Reference Room by calling the Commission
at 1-800-SEC-0330. In addition, the Company has filed the registration statement
of which this Prospectus is a part and other filings pursuant to the Exchange
Act with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system, and such filings are publicly available through the
Commission's site on the World Wide Web on the Internet located at
http://www.sec.gov.
This Prospectus does not contain all of the information set forth in the
registration statement of which this Prospectus is a part and which the Company
has filed with the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the registration
statement, including the exhibits filed as a part thereof, copies of which can
be expected at, or obtained at prescribed rates from, the Public Reference
Branch of the Commission at the address set forth above. Additional updating
information with respect to the Company may be provided in the future by means
of appendices or supplements to this Prospectus. The Company's Common Stock is
traded on the American Stock Exchange and copies of the foregoing materials may
also be inspected and copied at such exchange.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto contained elsewhere in
this Prospectus. The risks of an investment in these securities are described
under "RISK FACTORS." Each prospective investor is urged to read this Prospectus
in its entirety.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
section 27A of the Securities Act and section 21E of the Exchange Act. In light
of the important factors that can materially affect results, including those set
forth below, the inclusion of forward-looking information herein should not be
regarded as a representation by the Company or any other person that the
objectives or plans for the Company will be achieved. Assumptions relating to
budgeting, research, sales, results and market penetration and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its capital
expenditure or other budgets, which may in turn affect the Company's business,
financial position, results of operations and cash flows. The reader is,
therefore, cautioned not to place undue reliance on forward-looking statements
contained herein, which speak as of the date of this Prospectus. Factors that
might cause actual results to differ from those anticipated in the
forward-looking statements include, but are not limited to, those described in
"Risk Factors."
THE COMPANY
The Company is essentially a global start-up company. Its business consists
solely of the manufacture and sale of the female condom, known in the United
States as REALITY(R) and under various other trade names in foreign countries.
The Company was incorporated in Wisconsin in 1971 and established in its current
form as The Female Health Company on February 1, 1996.
Initially, the Company expended significant time and resources in the
development of the female condom and securing FDA approval to market the female
condom in the United States. During this time, the Company also operated its
original business of marketing specialty chemical and branded consumer products
for the leisure time, household and institutional health care markets under the
name Wisconsin Pharmacal (the "Recreational Products Business"). After
considering various alternatives, in 1995 the Board of Directors selected the
female condom as the central focus for the Company's strategic direction. As a
result, in January 1996, the Company sold its Recreational Products Business,
changed its name to The Female Health Company and devoted itself solely to the
commercialization of the female condom.
As part of this restructuring, on February 1, 1996, the Company acquired
the stock of Chartex Resources Limited (which, together with its wholly-owned
subsidiary, Chartex International, Plc, is referred to in this Prospectus
collectively as "Chartex"), the manufacturer and owner of certain worldwide
rights to, and the Company's then sole supplier of, the female condom. As a
result of these transactions, the Company's sole business now consists of the
manufacture, marketing and sale of the female condom. The Company owns certain
global intellectual property rights for the female condom, including patents in
the United States, the European Union, Japan and various other countries,
regulatory approvals in certain countries, including a Pre-Market Approval
("PMA") granted by the United States Food and Drug Administration ("FDA")
approving and permitting marketing of the female condom in the United States
(which PMA is required to market the product in the United States since the FDA
determined that the product was a Class III medical device regulated by the
FDA), and CE mark in the European Union ("EU") (representing that the product,
as a medical device, has been approved by the EU for marketing in the member
countries of the EU) and certain proprietary manufacturing technology. In
addition, the Company leases a state of the art manufacturing facility in
London, England, capable of producing 60 million female condoms per year. The
facility has been inspected and approved by the FDA and the EU.
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Clinical trials have established the female condom as safe and effective.
Studies show the following:
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Reduction in STDs(1) 34% (Results when female condom was
Reduction in Acts of Unprotected Sex(1) 25% available as an option vs. when
only the male condom was available.)
Effectiveness in Preventing Pregnancy(2) 95%(3) (When used properly with every
sex act.)
</TABLE>
(1) Supported by UNAIDS
(2) Supported by The U.S. Agency for International Development (USAID) and
conducted by Family Health International (FHI).
(3) Recent studies completed in Japan evaluating the female condom's
effectiveness in preventing pregnancy, which were submitted to the
Japanese regulatory authorities in connection with their review of the
product, showed the female condom to be approximately 98% effective when
used consistently and correctly.
The Company believes the female condom has global potential to help
prevent sexually transmitted diseases ("STDs") and unintended pregnancy. UNAIDS
estimates that 30 million people worldwide now have HIV/AIDS, that there are
16,000 new cases per day, and at the present rate 40 million children will be
orphaned by AIDS by the year 2010. In addition, HIV/AIDS is decimating the
social and economic structures in many developing countries. There are now 13
Sub-Saharan African countries in which 10% or more of the population is
infected. In the United States, the Center for Disease Control notes that five
of the ten most frequently reported diseases are STDs and that one in five
Americans over the age of 12 has Herpes. In a recent study, the National Academy
of Science estimated that $17 billion is spent annually in the United States on
treating STDs. However, for every $1 spent on prevention of STDs, $43 is spent
on treatment of STDs.
The female condom is made of polyurethane which is approximately 40%
stronger than latex, the material of which most male condoms are made. It is
thin, comfortable and, unlike the male condom, can be put in place prior to
sexual arousal. As a result, it is less disruptive to the natural flow of the
sex act. In addition, to date, there have been no reported allergic reactions to
the female condom. However, it is estimated that 7% of all individuals are
allergic to latex, the material most often used in male condoms.
The Company's strategy is to position itself as a manufacturer and
capitalize on its proprietary position by selling the product through global
public sector and country-specific public and private sector partners which have
established female/consumer marketing organizations with sufficient resources to
penetrate the market. Existing global public sector and country-specific
partners purchase the female condom ex-factory and are responsible for all
marketing and shipping expenses.
Global Public Sector: UNAIDS and the Company have entered into a
multi-year global public sector agreement for FHC to provide the female condom
to developing countries at a special reduced price based on worldwide volume.
During the last year, product launches were made in Zimbabwe, Bolivia, Haiti,
South Africa and Zambia. It is anticipated that multiple launches will occur
during the next two years, including launches in Kenya, Nigeria, Uganda, Ghana,
Cambodia, Bangladesh, Columbia and Central America. Population Services
International (PSI), an organization that performs social marketing of various
products in developing countries, launched the product in Zimbabwe under the
UNAIDS agreement. Based on its success in Zimbabwe, PSI, in collaboration with
UNAIDS, is now marketing the female condom in seven countries. In PSI's current
annual report, PSI indicates that, in collaboration with UNAIDS, PSI plans to
launch the female condom worldwide. PSI also notes in its report that, in 1997,
it distributed 539 million male condoms.
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United States Public Sector: In the United States, currently 10 major
cities and 15 states, including the States of New York, Pennsylvania, Florida,
Connecticut, Hawaii, Louisiana, Maryland, New Jersey, South Carolina and
Illinois, and the cities of Miami, Washington, D.C., Chicago, Philadelphia, New
York and Houston, have purchased the female condom. In addition, all of the
cities and states have reordered product since their initial orders.
Commercial Markets: The Company markets the product directly in the
United States and United Kingdom. The Company has commercial partners which have
recently launched the product in Canada, Brazil, Venezuela, Taiwan, South Korea
and Holland. The Company has signed distribution agreements in Japan and
Bangladesh where launches are expected in the coming year. In Japan, the market
for male condoms exceeds 600 million units. In Japan, the Company has entered
into a relationship with Taiho Pharmaceutical Co., Inc. ("Taiho"), a $1 billion
division of a $5 billion Japanese health care company. Taiho will market the
female condom in Japan once it receives Japanese regulatory approval. In October
1997, Taiho submitted an application to Koseisho (the Japanese equivalent of the
United States FDA) seeking approval to market the female condom in Japan. The
application is currently under review, with Taiho expecting to receive approval
to commence marketing the female condom in Japan during the Company's 1999
fiscal year. The Company's partner in Japan has invested more than $2 million to
date in pre-launch development expenses.
The Company is in discussions with potential partners for key European
countries, India, Mexico, the People's Republic of China and Russia.
The Company believes sales volume will continue to grow as more public
health officials and consumers become familiar with the female condom and its
effectiveness in preventing STDs, including HIV/AIDS, and in reducing health
care costs.
As a result of the earlier investment by Chartex, the Company has a $70
million tax loss carryforward in the United Kingdom.
The Company's principal executive offices are located at 875 North
Michigan Avenue, Suite 3660, Chicago, Illinois 60611, and its telephone number
is 312-280-1119.
THE OFFERING
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Securities to be offered
by the Selling Stockholder (1)....................... Up to 2,413,124 Shares of Common Stock
Common Stock outstanding as of November 17, 1998 10,441,227 Shares(2)
American Stock Exchange symbol....................... FHC
</TABLE>
(1) The Company may sell to the Selling Stockholder up to $6 million worth of
the Company's Common Stock in tranches pursuant to the Equity Line
Agreement. The amount and timing of such sales will be determined by the
Company, subject to certain restrictions set forth in the Equity Line
Agreement. See "The Equity Line Agreement."
(2) Does not include (a) 1,408,534 Shares of Common Stock issuable upon
exercise of warrants outstanding as of September 30, 1998 (including
200,000 Shares issuable upon exercise of the Warrant); (b) 1,174,478 Shares
of Common Stock issuable upon exercise of stock options outstanding as of
September 30, 1998; (c) 680,000 Shares of Common Stock issuable upon
conversion of outstanding preferred stock; and (d) Shares of Common Stock
issuable to the Selling Stockholder pursuant to the Equity Line Agreement.
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. This information
should be read in conjunction with such financial statements, including the
notes thereto.
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Year Ended September 30 Nine Months Ended June 30
1996 1997 1997 1998
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STATEMENTS OF OPERATIONS DATA:
Net revenues.................... $2,064,258 $2,916,408 $2,016,419 $4,040,672
----------
Cost of products sold........... 4,719,979 3,475,709 2,859,138 4,082,175
Advertising and Promotion....... 1,976,289 1,642,347 1,480,639 371,421
Net loss........................ (8,798,303) (6,251,149) (5,369,941) (2,702,645)
Loss per common and dilutive
common equivalent share........ $(1.33) $(0.74) $(0.66) $(0.37)
</TABLE>
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September 30, 1997 June 30, 1998
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CONSOLIDATED BALANCE SHEET
DATA:
Working capital................. $1,312,106 $1,899,704
Total assets.................... 8,339,335 7,724,158
Long-term debt and capital lease
obligations.................... 538,969 9,591
Stockholders' Equity............ 3,554,638 3,594,778
</TABLE>
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RISK FACTORS
Prospective investors should carefully consider the risk factors set
forth below, as well as the other information contained in this Prospectus.
ADDITIONAL CAPITAL REQUIRED; POTENTIAL DILUTION
Sales of the Company's sole product, the female condom, are currently
insufficient to cover fixed manufacturing overhead, advertising and general and
administrative costs. Consequently, management recognizes that the Company must
secure additional capital to fund operating losses. At this stage in the
Company's development, the amount and timing of the Company's future capital
requirements cannot be precisely determined. Management believes that the
capital which it may raise through sales of Common Stock under the Equity Line
Agreement will be sufficient to satisfy its current and expected funding
requirements. If the conditions required to sell Common Stock to the Selling
Stockholder under the Equity Line Agreement are not satisfied or the Company
does not receive shareholder approval to increase its authorized Common Stock to
enable it to sell a sufficient number of shares under the Equity Line Agreement,
the Company may need to raise additional capital in the immediate future. The
Company may seek such additional capital through the sale of debt or equity
securities or the sale of Company assets or rights, or by discounting
receivables and/or letters of credit or by other means available to the Company.
However, factors affecting the Company's capital requirements, including new
market launches by the Company's international partners and sales orders from
existing customers, are outside the control of management. Some of these factors
may increase the amount of capital required or accelerate the date when
additional capital will be required, or both. No assurance can be given that the
Company will be successful in raising additional capital. Further, there can be
no assurance that such amount, if raised, will be sufficient to operate the
Company until sales of the female condom generate sufficient revenues to fund
operations. In addition, any such funds raised may be costly to the Company
and/or dilutive to existing shareholders.
RELIANCE ON PRODUCT LINE
The Company expects to derive its future revenues from sales of the
female condom, its sole current product. The product is in the early stages of
its commercialization. Accordingly, the ultimate level of acceptance of the
female condom by public health advocates as well as users around the world,
which includes the decision to use the female condom versus other available
products, is not yet known.
The Company's current level of expenditures has been established to
support a higher level of revenues associated with the female condom. For the
Company to begin generating cash from operations, sales of the female condom
will have to increase approximately two times the current annualized level
($454,000 per month). If sales do not increase from current levels to this
degree or if the cost to obtain this level of sales is prohibitive, the Company
will continue to incur operating losses and, ultimately, the Company's viability
will be in jeopardy.
CONTINUED LISTING ON THE AMERICAN STOCK EXCHANGE
The Company's Common Stock is listed for trading on the American Stock
Exchange (the "Exchange"). The Constitution of the Exchange provides that its
Board of Governors may, in its discretion, at any time, remove any security from
listing. Although the determination as to whether a security warrants delisting
is not based on any precise mathematical formula, the Exchange has adopted a
number of guidelines which it will consider when deciding whether to delist an
Exchange-traded security. Certain of these guidelines address the issuer's
financial condition. For example, the Exchange will consider delisting the
securities of an issuer which has stockholders' equity of less than $2 million
if the Company has sustained losses from continuing operations and/or net losses
in two of its three most recent fiscal years (which the Company has) or which
has stockholders' equity of less than $4 million if the Company has sustained
losses from continuing operations and/or net losses in three of its four most
recent fiscal years (which the Company has). As of June 30, 1998, the Company
had stockholders' equity of approximately $3.6 million. On February 5, 1998, the
Company received a letter from the Exchange noting that the Company has fallen
below certain of the Exchange's continued listing guidelines and indicating that
the Exchange will review the Company's listing eligibility. The letter
specifically noted that the Company has fallen
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<PAGE> 10
below the Exchange's continued listing guidelines triggered by both (1) five
years of losses and (2) equity below $4 million since the Company had losses in
three of its four most recent fiscal years. There can be no assurance that the
Exchange will permit the continued listing of the Company's Common Stock on the
Exchange. If the Exchange delists trading of the Company's Common Stock,
investors would likely find it more difficult to obtain accurate quotations of
the price of the Company's Common Stock and to sell the Common Stock on the open
market.
HISTORY OF LOSSES; SUFFICIENCY OF CAPITAL; INDEPENDENT AUDITOR'S GOING
CONCERN OPINION
The Company incurred a loss of $6.3 million for the year ended
September 30, 1997 and a loss of $2.7 million for the nine months ended June 30,
1998. As of June 30, 1998, the Company had an accumulated deficit of $40.6
million. At June 30, 1998, the Company had working capital of $1.9 million and
stockholders' equity of $3.6 million. Historically, the Company has incurred
cash operating losses relating to expenses incurred to develop, manufacture and
promote the female condom. Consistent with the availability of resources, the
Company expects to incur substantial expenditures in fiscal 1999 in an effort to
support its manufacturing operations and increase awareness and distribution of
the female condom around the globe. Until internally generated funds are
sufficient to meet cash requirements, the Company will remain dependent upon its
ability to generate sufficient capital from outside sources. There can be no
assurance that the Company will achieve a profitable level of operations in the
near term or at all.
The independent auditor's report on the Company's consolidated
financial statements for the years ended September 30, 1997 and 1996 was
qualified as to the Company's ability to continue as a going concern. While many
factors are considered by the auditor in reaching its opinion, the primary
reason for the going concern opinion on the Company's financial statements was
due to continued deficit cash flows from operations, driven largely by continued
operating losses. For the year ended September 30, 1997, the Company's net cash
used in operations was $5 million. For the nine months ended June 30, 1998, the
net cash used in operations totalled $2.6 million.
In the near term, the Company's management expects operating costs to
continue to exceed funds generated from operations due principally to the
Company's fixed manufacturing costs relative to current production volumes.
While management believes that revenue from sales of the female condom will
eventually exceed operating costs and that ultimately operations will generate
sufficient funds to meet capital requirements, there can be no assurance that
such level of operations will be achieved in the near term. Management believes
that the Company must first achieve, on a continuing basis, positive cash flow
from operations and net operating profits in order for the Company's independent
auditors to re-evaluate the going concern opinion.
COMPETITION
The Company believes that there is currently no other female condom
sold in the world. However, other parties may seek to develop an intravaginal
pouch which does not infringe the Company's patents. These products, if
developed, could be distributed by companies with greater financial resources
and customer contacts than the Company.
There are a number of other products currently marketed which have a
higher degree of accepted efficacy for preventing pregnancy. These products
include birth control pills, Norplant and Depo Provera. However, other than the
female condom, only the latex male condom is generally recognized as being
efficacious in preventing unintended pregnancies and STDs. Companies
manufacturing these products are generally larger than the Company and have
access to greater resources than the Company. In addition, the female condom is
generally sold at the retail level at prices comparatively greater than the
price of the latex male condom. Accordingly, the female condom will not be able
to compete with the latex male condom solely on the basis of price.
8
<PAGE> 11
FUTURE SALES OF COMMON STOCK
Sales of the Company's Common Stock in the public market or the
perception that such sales may occur, could adversely affect the market price of
the Company's Common Stock. As of November 17, 1998, the Company had outstanding
10,441,227 shares of Common Stock and 680,000 shares of convertible preferred
stock which are convertible into an equal number of shares of Common Stock. All
of these shares are eligible for resale in the public market by persons other
than "affiliates" of the Company (generally, a person who has a control
relationship with the Company) without regard to any resale limitations under
Rule 144 of the Securities Act. In addition, the Equity Line Agreement provides
that the Company will issue at least $1 million (up to a maximum of $6 million)
of Common Stock during its term, which commences on the effective date of the
registration statement of which this Prospectus is a part (the "Effective Date")
and continues until the earlier of (1) the date the Company sells $6 million of
Common Stock to the Selling Stockholder under the Equity Line Agreement, (2) the
date the Company fails to meet certain obligations under the Equity Line
Agreement or (3) 24 months after the Effective Date. (If the Company does not
issue the minimum $1 million of stock to the Selling Stockholder, the Company
must pay the Selling Stockholder an amount equal to the portion of the $1
million not sold, multiplied by 12% (17% if the failure to sell the required
minimum is due to certain specified events).) The Shares of Stock which the
Company may sell to the Selling Stockholder under the Equity Line Agreement will
be available for immediate resale to the public pursuant to this Prospectus.
Further, the Company has issued options and warrants to purchase an aggregate of
2,383,012 shares of Common Stock. The Company has filed or intends to file
registration statements under the Securities Act to register the sale of the
shares underlying these options and warrants and, accordingly, any shares
received upon exercise of these options or warrants will also be freely tradable
without restriction by persons other than affiliates. The resale of the Shares
pursuant to the Equity Line Agreement and the outstanding stock options and
warrants, or the prospect of such resales, may have an adverse effect on the
market price of the Common Stock.
DILUTIVE AND OTHER EFFECTS OF EQUITY LINE AGREEMENT
While the equity line arrangement governed by the Equity Line Agreement
will help provide the Company with additional future financing, the sale of
Shares thereunder will have a dilutive impact on other stockholders of the
Company. As a result, the Company's net income (loss) per share could be
materially decreased (increased) in future periods, and the market price of the
Common Stock could be materially and adversely affected. In addition, the Common
Stock to be issued under the Equity Line Agreement will be issued at a discount
to the then prevailing market price of the Common Stock. These discounted sales
could have an immediate adverse effect on the market price of the Common Stock.
The Company has also agreed to pay Hartinvest-Medical Ventures ("HMV"),
the entity that solicited the Selling Stockholder, a commission of 7% on all
amounts received by the Company under the Equity Line Agreement. This commission
may, at the option of HMV, be paid in shares of the Company's Common Stock
valued at the same price at which Shares of Common Stock are sold to the Selling
Stockholder under the Equity Line Agreement. As further consideration, the
Company has agreed to issue to HMV warrants to purchase Shares of Common Stock
equal to 10% of the number of Shares actually sold by the Company to the Selling
Stockholder under the Equity Line Agreement. The warrants will have a three-year
term and be exercisable at a price per share equal to $2.17 (which was 120% of
the last sale price of the Company's Common Stock on the date the Equity Line
Agreement was executed). As further consideration for entering into the Equity
Line Agreement, the Company issued to the Selling Stockholder the Warrant, which
is exercisable over a three-year period at an exercise price of $2.17 (which was
equal to 120% of the last sale price of the Company's Common Stock on the date
the Equity Line Agreement was executed). The issuance or resale of the Shares
would have a further dilutive effect on the Company's stockholders and could
have an adverse effect on the Company's stock price. The Equity Line Agreement
will not be available under certain conditions which could require the Company
to seek funds from other sources (with the intendent risk factor set forth in
the preceding paragraph).
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been and may
continue to be affected by quarter-to-quarter variations in the Company's
operating results, announcements by the Company's competitors and other factors.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations,
9
<PAGE> 12
particularly among emerging growth company stock, which have often been
unrelated to the operating performance of particular companies. Factors not
directly related to the Company's performance, such as governmental regulation
or negative industry reports, may also have a significant adverse impact on the
market price of the Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon its ability to
attract and retain highly qualified personnel. The Company is particularly
dependent upon the services of O.B. Parrish, its Chairman of the Board and Chief
Executive Officer, and Mary Ann Leeper, Ph.D., its President and Chief Operating
Officer. The Company has entered into an employment agreement with Dr. Leeper.
The loss of the services of these or certain other key individuals, or the
failure of the Company to attract and retain other skilled personnel, could have
a material adverse impact on the Company. The Company has not purchased keyman
life insurance insuring the lives of any of its executive officers or key
employees.
PENNY STOCK RULES
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The Securities and Exchange Commission's regulations generally define a
penny stock to be an equity security that has a price of less than $5.00 per
share, subject to certain exceptions (including equity securities listed on the
American Stock Exchange) or issued by an issuer that has (1) net tangible assets
in excess of $2 million, if such issuer has been in continuous operation for at
least three years; (2) net tangible assets in excess of $5 million, if such
issuer has been in continuous operation for less than three years; or (3)
average annual revenues of at least $6 million for the last three years. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, if the Company's Common Stock falls within the definition
of "penny stock," trading in the Company's securities would be covered by Rule
15g-9 promulgated under the Exchange Act. Under this rule, generally
broker-dealers who recommend such securities to persons other than established
customers and certain accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale of such securities.
Although the Company believes that its securities will, as of the date
of this Prospectus, be outside the definitional scope of a penny stock, as they
will be listed on the American Stock Exchange, in the event the Common Stock
were subsequently to become characterized as penny stock, the market liquidity
for the Company's securities could be adversely affected. In such an event, the
regulations on penny stocks could limit the ability of broker-dealers to sell
the Company's securities and thus the ability of purchasers in this offering to
sell their securities in the secondary market.
CONTINGENT LIABILITIES
The Company has entered into an exclusive North American licensing
agreement with the owner of the "reality" trademark and a royalty agreement with
a nonprofit organization that previously conducted a major study to assess the
safety and efficacy of the female condom. The Company's fiscal 1997 trademark
royalty expense was approximately $5,700. During fiscal 1998, the Company
incurred a royalty expense to the nonprofit organization of approximately
$1,600.
PRODUCT LIABILITY
The nature of the Company's product may expose the Company to
significant product liability risks. The Company maintains product liability
insurance with coverage limits of $5 million per year on the female condom.
There can be no assurance that the Company will be able to maintain such
insurance on acceptable terms or that such insurance will provide adequate
coverage against product liability claims. While no product liability claims
10
<PAGE> 13
on the female condom have been brought against the Company to date, a successful
product liability claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect on the Company.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures the female condom in a facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States dollar. To
date, the Company's management has not deemed it necessary to utilize currency
hedging strategies to manage its currency risks. On an ongoing basis, management
continues to evaluate its commercial transactions and is prepared to employ
currency hedging strategies when it believes such strategies are appropriate. In
addition, some of the Company's future international sales may be in developing
nations where dramatic political or economic changes are possible. Such factors
may adversely affect the Company's results of operations and financial
condition.
GOVERNMENT REGULATION
The female condom is subject to regulation by the FDA, pursuant to the
federal Food, Drug and Cosmetic Act (the "FDC Act"), and by other state and
foreign regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices, which include testing, quality
control and documentation procedures. The Company's compliance with applicable
regulatory requirements is monitored through periodic inspections by the FDA.
The failure to comply with applicable regulations may result in fines, delays or
suspensions of clearances, seizures or recalls of products, operating
restrictions and criminal prosecutions and could have a material adverse effect
on the Company.
MANAGEMENT OF OPERATIONS
The Company's future short-term and long-term success will be dependent
upon its ability to effectively anticipate, respond to and manage changing
business conditions. The Company believes that current management will be able
to properly manage the Company's future operations. However, there can be no
assurance that the Company will be able to adapt its manufacturing operations or
administrative and financial functions to manage the Company's growth or to
otherwise address the future needs of the business.
YEAR 2000 ISSUES
The Company's State of Readiness. The Company's main financial and
manufacturing hardware and software systems have been tested and are either now
Year 2000 compliant or are expected to be by December 31, 1998. This was
accomplished primarily through systems upgrades and maintenance done over the
last few years. The Company is in the process of surveying major customers and
suppliers regarding their Year 2000 readiness and, to date, the Company is not
aware of any significant Year 2000 issues at these entities that would
materially affect the Company's business. The Company believes that if a Year
2000 problem develops at any of the Company's vendors whereby the vendor becomes
unable to address the Company's needs, alternative vendors are readily available
that could furnish the Company with the same or similar supplier or services
without material undue delay or expense.
Costs to Address the Company's Year 2000 Issues. The majority of the
Company's Year 2000 issues were corrected either through systems upgrades or
normal maintenance contracts. The cost of these improvements to date has been
approximately $20,000.
Risks to the Company for Year 2000 Issues. With regard to systems under
the Company's control, the Company knows of no significant exposure that the
Company has to the Year 2000 issue since, if necessary, the Company's systems
are capable of accepting manually entered data. The worst case scenario is that
the Company has to revert back to certain manual systems. The Company believes
that its customers and vendors are at various
11
<PAGE> 14
stage of compliance but the Company has not been made aware of significant Year
2000 issues that would materially affect its business with them. The Company
will continue to monitor Year 2000 compliance with its customers and vendors
throughout 1999 but it will not be able to achieve the same degree of certainty
that it can with its own internal systems.
The Company's Contingency Plan. To the extent that the Company
discovers minor internal systems that are not Year 2000 compliant by mid-1999,
it will have time to implement manual systems by year-end 1999 which the Company
believes will significantly reduce the financial risk to the Company.
12
<PAGE> 15
THE EQUITY LINE AGREEMENT
Effective November 19, 1998, the Company entered into the Equity Line
Agreement with Kingsbridge Capital Limited, a private investor (the "Selling
Stockholder"), pursuant to which the Company may issue and sell, from time to
time, shares of its Common Stock for cash consideration up to an aggregate of $6
million. Pursuant to the requirements of the Equity Line Agreement, the Company
has filed a registration statement, of which this Prospectus forms a part, in
order to permit the Selling Stockholder to resell to the public any Shares that
it acquires pursuant to the Equity Line Agreement. Commencing as of the date the
registration statement of which this Prospectus forms a part is declared
effective by the Securities and Exchange Commission and continuing for a period
of 24 months thereafter, the Company may from time to time at its sole
discretion, and subject to certain restrictions set forth in the Equity Line
Agreement, sell ("put") Shares of its Common Stock to the Selling Stockholder at
a price equal to (a) 88% of the then current average market price of a Share of
the Company's Common Stock, as determined under the Equity Line Agreement, if
such average market price is at least $2 or (b) 82% of such average market price
if the average market price is less than $2. Puts can be made every 20 trading
days in amounts ranging from a minimum of $100,000 to a maximum of $1,000,000,
depending on the trading volume and the market price of the Common Stock at the
time of each put. The Company is required to put at least $1,000,000 of its
Common Stock to the Selling Stockholder over the two-year life of the Equity
Line Agreement. If the Company does not put at least $1 million of the Common
Stock to the Selling Stockholder during the term of the Equity Line Agreement,
the Company must pay the Selling Stockholder at the end of such two-year term an
amount equal to the portion of the $1 million not so put, multiplied by 12% (17%
if the failure to put the required minimum occurs as a result of certain
specified events). As of the date of this Prospectus, no Shares of Common Stock
have been sold to the Selling Stockholder under the Equity Line Agreement.
Under the Equity Line Agreement, the average market price of the
Company's Common Stock for purposes of calculating the purchase price to be paid
by the Selling Stockholder will be calculated as the average of the lowest bid
prices of the Common Stock (as reported by Bloomberg L.P.) on each of the five
days on which the Exchange is open for business (a "trading day"), during the
period which includes the two trading days preceding the day on which the
Company delivers notice to the Selling Stockholder that the Company is
exercising a put (a "Put Notice"), the trading day on which the Put Notice is
delivered, and the two trading days following the trading day on which the Put
Notice is delivered.
The Company's ability to put Shares of its Common Stock, and the
Selling Stockholder's obligation to purchase the Shares, is conditioned upon the
satisfaction of certain conditions. These conditions include: (1) the
registration statement of which this Prospectus forms a part must have been
declared effective by the Securities and Exchange Commission; (2) the
representations and warranties of the Company set forth in the Equity Line
Agreement must be accurate as of the date of each put; (3) the Company must have
performed and complied with all obligations under the Equity Line Agreement, the
Registration Rights Agreement entered into between the Company and the Selling
Stockholder in connection with the Equity Line Agreement and the Warrant
required to be performed as of the date of each put; (4) no statute, rule,
regulation, executive order, decree, ruling or injunction may be in effect which
prohibits or directly and adversely affects any of the transactions contemplated
by the Equity Line Agreement; (5) at the time of a put, there may not have been
any material adverse change in the Company's business, operations, properties,
prospects or financial condition since the date of fling of the Company's most
recent periodic report filed with the Securities and Exchange Commission
pursuant to the Exchange Act; (6) the Company's Common Stock must not have been
delisted from the Exchange nor suspended from trading; (7) the number of Shares
to be put to the Selling Stockholder, together with any Shares then held by the
Selling Stockholder, may not exceed 9.9% of all shares of Common Stock of the
Company that would be outstanding upon completion of the put; (8) the Company's
Common Stock must have a minimum bid price of $1.00 per share at the time of the
put; and (9) the average trading volume of the Company's Common Stock for 20
consecutive trading days immediately preceding a put must be at least 17,000
shares per day. In addition, at present the Company has approximately 1,300,000
shares of Common Stock authorized but unissued and unreserved. Accordingly,
until the Company increases its authorized Common Stock by amending its Articles
of Incorporation (which requires shareholder approval), the Company cannot sell
more than approximately 1,300,000 shares of Common Stock to the Selling
Stockholder. The Company intends to seek shareholder approval to amend its
Articles of Incorporation to increase its authorized Common Stock at its 1999
annual shareholder meeting.
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<PAGE> 16
The Selling Stockholder has agreed that it will not engage in short
sales of the Company's Common Stock except that the Selling Stockholder may
enter into any short sale or other hedging arrangement it deems appropriate with
respect to Shares it receives under the Equity Line Agreement after it receives
a Put Notice with respect to such Shares so long as such short sales or
arrangements do not involve more than the number of such Shares with respect to
that Put Notice.
In conjunction with the Equity Line Agreement, effective November 19,
1998, the Company issued to the Selling Stockholder the Warrant, which entitles
the holder to purchase 200,000 shares of the Company's Common Stock at a price
of $2.17 per share (which represents 120% of the closing price of a share of the
Company's Common Stock on the date the Equity Line Agreement was executed). The
Warrant is exercisable at any time beginning on May 19, 1999 and ending on May
19, 2002. The Warrant contains provisions that protect against dilution by
adjustment of the exercise price and the number of shares issuable thereunder
upon the occurrence of certain events, such as a merger, stock split or reverse
stock split, stock dividend or recapitalization. The exercise price of the
Warrant is payable either (a) in cash or (b) by a "cashless exercise," in which
that number of Shares of Common Stock underlying the Warrant having a fair
market value at the time of exercise equal to the aggregate exercise price are
cancelled as payment of the exercise price.
Prior to entering into the Equity Line Agreement, on May 1, 1998 and
renewed on November 13, 1998, the Company entered into a Fund-Raising Agreement
with Hartinvest-Medical Ventures ("HMV"). Pursuant to this agreement, HMV agreed
to solicit potential purchasers of the Company's Common Stock and the Company
agreed to pay HMV a commission if it was successful in attracting such
purchasers. Pursuant to this agreement, HMV solicited the Selling Stockholder.
Accordingly, HMV is entitled to receive a commission equal to 7% of the amount
of funds received by the Company under the Equity Line Agreement. HMV may elect
to receive this commission in cash or stock valued at the same price as the
Selling Stockholder pays under the Equity Line Agreement. As further
consideration, pursuant to this agreement, the Company is required to issue to
HMV three-year warrants to purchase shares of the Company's Common Stock equal
to 10% of the number of Shares purchased by the Selling Stockholder under the
Equity Line Agreement. The exercise price per share under these warrants is
$2.17, representing 120% of the closing price of a share of the Company's Common
Stock on the date the Equity Line Agreement was executed.
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<PAGE> 17
USE OF PROCEEDS
The proceeds from the sale of the Shares will be received directly by
the Selling Stockholder. No proceeds will be received by the Company from the
sale of the Shares offered hereby.
However, the Company will receive the put price paid pursuant to the
Equity Line Agreement if and to the extent Common Stock is sold by the Company
pursuant thereto. The put price equals 88% of the then current average market
price of the Company's Common Stock, as determined under the Equity Line
Agreement, if such average market price is at least $2 and 82% of the average
market price if such average market price is less than $2. The Company will also
receive the proceeds, if any, relating to the exercise of the Warrant and the
warrants issued to HMV. The exercise price of the Warrant is $2.17 per share.
See "The Equity Line Agreement."
The funds received by the Company will be used for general working
capital purposes.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently listed on the American Stock
Exchange under the symbol "FHC." As of November 17, 1998, there were
approximately 480 holders of record of the Common Stock.
The following table sets forth the historical high and low sale prices
of a share of Common Stock on the Exchange for the periods indicated:
<TABLE>
<CAPTION>
Common Stock Sale Price
High Low
<S> <C> <C>
Year ended September 30, 1997
Quarter ended:
December 31, 1996 6-1/4 3-3/4
March 31, 1997 4-1/8 1-13/16
June 30, 1997 3-3/8 1-11/16
September 30, 1997 4 2-7/8
Year ended September 30, 1998:
Quarter ended:
December 31, 1997 4-5/16 3
March 31, 1998 3-1/2 2-1/2
June 30, 1998 3-5/8 2-1/2
September 30, 1998 3-1/2 1-7/16
</TABLE>
The foregoing sale price quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions.
DIVIDEND POLICY
The Company has not paid a dividend on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.
DETERMINATION OF OFFERING PRICE
The Common Stock offered by this Prospectus may be offered for sale
from time to time in transactions on the Exchange, in negotiated transactions,
or otherwise, or by a combination of these methods, at fixed prices which may be
changed, at market prices at the time of sale, at prices related to market
prices or at negotiated prices. As such, the offering price is indeterminate as
of the date of this Prospectus. See "Plan of Distribution."
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<PAGE> 18
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Company as of June 30, 1998:
<TABLE>
<S> <C>
Short-term indebtedness:
Current portion of long-term debt and
capital lease obligations................................... $ 641,173
Notes payable to shareholders................................. 767,538
-----------
$1,408,711
Long-term debt and capital lease obligations,
less current maturities.......................................... $ 206,029
Stockholders' equity:
Class A Preferred Stock, par value $.01
per share, 5,000,000 shares of Series 1 Preferred
authorized, 680,000 shares outstanding ................... 6,800
Common Stock, par value $.01 per share,
15,000,000 shares authorized
10,415,757 shares issued and outstanding.................. 104,158
Additional paid-in capital.................................... 43,667,433
Foreign currency translation gain............................. 426,641
-------
Accumulated deficit........................................... (40,610,254)
------------
Total stockholders' equity.................................. 3,594,778
---------
Total Capitalization............................................... $5,209,518
==========
</TABLE>
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<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of the
Company's financial condition and results of operations and should be read in
conjunction with the Company's financial statements and the notes thereto
contained elsewhere in this Prospectus. The discussion also includes certain
forward-looking statements. See "PROSPECTUS SUMMARY--Forward-Looking
Statements."
OVERVIEW
Over the past few years, the Company completed significant aspects of
the development and commercialization of the female condom. These initiatives
have resulted in the attainment of proprietary manufacturing technology and
product design patents, necessary regulatory approvals, endorsements from
various organizations within the world medical community and the development of
significant manufacturing capacity. These steps, taken as part of the Company's
plan to develop and sell a product with global commercial and humanitarian
value, have required the expenditure of significant amounts of capital and
resulted in significant operating losses including the period 1996 through the
present.
The Company has begun the process of developing the market for the
female condom around the world. As part of this plan, the Company has completed
a number of distribution agreements and is pursuing other arrangements for the
marketing and sale of the female condom. Management believes that as the number
of markets in which the female condom is sold increases, sales will grow and, at
certain levels, the Company will become profitable. However, there can be no
assurance that such level of sales will be achieved in the near term or at all.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
For the nine months ended June 30, 1998, sales increased $2,024,253, or
100%, compared with the same period last year. The higher sales are due to
increased unit sales to domestic public sector agencies and the global public
sector.
The Female Health Company had net revenues of $4,040,672 and a net loss
of $2,702,645 ($0.28 per common share) for the nine months ended June 30, 1998
compared to revenues of $2,016,419 and a net loss of $5,369,941 ($0.66 per
common share) for the nine months ended June 30, 1997. As discussed more fully
below, the decrease in the Company's net loss was principally related to
increased sales volume, reduced expenditures for advertising and promotion,
adjustments to inventory reserves and reduced interest expense.
Cost of goods sold increased $1,223,037, or 43%, to $4,082,175 for the
nine months ended June 30, 1998 from $2,859,138 for the same period last year.
Increases in the costs of goods sold, which are related to higher sales volumes,
were offset, in part, by a $649,387 reduction in the Company's reserve for
inventory obsolescence. The FDA's decision to extend the useful life of the
female condom to five years from three years and the reduction of finished goods
inventories resulting from the increased level of sales were the factors leading
to the inventory reserve adjustment. The Company did not adjust inventory
reserves during the same period last year.
Advertising and promotional expenditures decreased $1,109,218, or 75%,
to $371,421 for the nine months ended June 30, 1998 from $1,480,639 for the same
period in the prior year. Advertising and promotion relates almost exclusively
to the U.S. consumer market, and includes the costs of print advertising, trade
and consumer promotions, product samples and other marketing costs. Through
expenditures to date, the Company has established that the female condom is
responsive to promotion; but due to the Company's size, it doesn't possess the
resources to conduct a significant marketing program. Accordingly, the Company
is in discussions with potential partners for the U.S. that have the resources
to conduct such a marketing program. The prior period amounts largely reflect
expenditures for the Company's previous print advertising campaign and single
market test of the Company's television commercial.
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<PAGE> 20
Selling, general and administrative expenses increased $62,504, or 3%,
to $2,165,007 for the nine months ended June 30, 1998 from $2,102,503 for the
same period last year. The Company's initiatives to reduce spending in all
administrative areas have resulted in reductions in the expenses associated with
telecommunication, legal and financial matters in the United States and United
Kingdom. These reductions were offset by charges related to the award of stock
to key employees in lieu of cash raises.
Net interest and non-operating expenses decreased $819,366 to $124,714
for the nine months ended June 30, 1998 from $944,080 for the same period the
prior year. During the prior year, the Company had a higher level of debt
resulting from the issuance of convertible debentures. The subsequent conversion
of the debentures to Common Stock has lowered the outstanding debt and decreased
interest expense.
For the nine months ended June 30, 1998, total operating expenses were
$2,536,428, a decrease of $1,046,714, or 29% compared with the $3,583,142 total
operating expenses for the same period last year. For the nine months ended June
30, 1998, total operating expenses decreased to 63% of net revenues. For the
same period last year, total operating expenses were 177% of net revenues.
In addition, during the nine months ended June 30, 1997, the Company
amortized $642,000 of discounts related to certain beneficial conversion
features included with the convertible debentures issued by the Company. See
note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 ("FY1997") COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996 ("FY1996")
The Company had revenues of $2.9 million and a net loss of ($5.6)
million (($0.67) per share) in FY1997 compared to net revenues of $2.1 million
and a net loss of ($8.7) million (($1.31) per share) in FY1996.
As discussed more fully below, the FY1997 loss principally resulted
from fixed manufacturing overhead and administrative costs, configured to
support significantly greater volume levels. Over the past two years, the
Company has acquired manufacturing capacity and created an organizational
structure which management believes will enable it to increase the sales of the
female condom and manage the accompanying growth.
Revenues increased $0.8 million (41%) in FY1997 over the prior year.
The increase in revenues principally related to initial shipments to developing
countries under the Company's agreement with UNAIDS and increased U.S. trade
sales, partially offset by a decline in U.S. public sector sales due, in part,
to a reduction in selling price.
In 1997, cost of goods sold declined $1.2 million from $4.7 million in
FY1996 to $3.5 million in FY1997, principally due to a $1.1 million favorable
adjustment to the Company's inventory reserves in the fourth quarter, as a
result of the FDA's approval of an extension in the product's useful life to
five years from three years. In FY1996, based on the then existing three-year
useful life, cost of goods sold included a $1.0 million charge for a reduction
in the expected realizable value of the Company's inventory.
Excluding the effects of the inventory reserves, cost of goods sold
increased $0.9 million (23%) in FY1997 due to both increased sales and the
inclusion of a full year of costs from the Company's manufacturing operations
compared to eight months in FY1996. During FY1997 and FY1996, gross margins were
negatively affected by excess capacity at the Company's U.K.-based manufacturing
facility. For both FY1997 and FY1996, output at its manufacturing facility was
less than 5% of the facility's annual capacity.
Advertising and promotion expenditures decreased 17% to $1.6 million in
FY1997 compared to $2.0 million in FY1996. Advertising and promotion relates
almost exclusively to the U.S. market and includes the costs of print
advertising, trade and consumer promotions, product samples and other marketing
costs incurred to increase consumer awareness and purchases of the female
condom. The Company's decision to secure a marketing and distribution partner
for the U.S. and European markets limited such spending in the second half of
FY1997.
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<PAGE> 21
Selling, general and administrative expenses totalled $3.0 million for
FY1997 compared to $3.3 million for FY1996 representing an 8% reduction.
Research and development expenditures decreased by $0.3 million (83%) from $0.4
million in FY1996 to $0.1 million in FY1997 while reductions in selling expenses
were offset by increased expenditures for investor relations, legal and
compensation.
Nonoperating expense for FY1997 decreased $0.3 million (49%) to $0.4
million from $0.7 million in FY1996. Additional nonoperating income of $0.1
million for FY1997 and a FY1996 charge of $0.2 million to reduce the estimated
value of warehouse space provided as part of the consideration for the sale of
the Recreational Products Business accounted for the overall decrease.
FACTORS THAT MAY AFFECT OPERATING RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are
dependent on the Company's ability to increase consumer demand for and to
cost-effectively manufacture sufficient quantities of the female condom.
Inherent in this process are a number of factors that the Company must
successful manage in order to achieve favorable future results and improve its
financial condition.
Reliance on a Single Product
The Company expects to derive the vast majority, if not all, of its
future revenues from the female condom, its sole current product. While
management believes the global potential for the female condom is significant,
the product is in the early stages of commercialization and, as a result, the
ultimate level of consumer demand around the world is not yet known. To date,
sales of the female condom have not been sufficient to cover the Company's fixed
operating costs.
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a
global distribution network for the female condom through forming relationships
with representatives of city, state and country public health agencies in the
global public sector and by completing partnership arrangements with private
sector companies who have the necessary marketing and financial resources for
local market distribution. To date, this strategy has resulted in numerous
in-country distributions in the public sector, particularly in Africa and Latin
America. Several partnership agreements have been completed for the
commercialization of the female condom in private sector markets around the
world. However, the Company is dependent on country governments as well as city
and state public health departments within the United States to continue their
commitment to prevention of STDs, including AIDS, by including female condoms in
their programs. The Company is also dependent on finding appropriate partners
for the private sector markets around the world. Once an agreement is completed,
the Company is reliant on the effectiveness of the partners to market and
distribute the product. Failure by the Company's partners to successfully market
and distribute the female condom or failure of country governments to implement
prevention programs which include distribution of barrier methods against the
AIDS crisis, or an inability of the Company to secure additional agreements for
new markets either in the public or private sectors could adversely affect the
Company's financial condition and results of operations.
Inventory and Supply
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market Risks
The Company manufactures the female condom in a leased facility located
in London, England. Further, a material portion of the Company's future sales
are likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States dollar. In
addition, some of the Company's future international sales may
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<PAGE> 22
be in developing nations where dramatic political or economic changes are
possible. Such factors may adversely affect the Company's results of operations
and financial condition.
Regulatory Risks
The manufacture and marketing of the female condom is regulated by the
FDA. Failure to comply with the conditions of FDA approval invalidates the
approval order. Under certain circumstances, failure to comply with the
conditions of FDA approval could result in fines or suspension or withdrawal of
FDA approval. The Company's operating results and financial condition could be
materially adversely affected in the event of a withdrawal of approval from the
FDA.
LIQUIDITY AND SOURCES OF CAPITAL
Historically, the Company has incurred significant operating losses.
Cash used in continuing operations was $5.0 million and $4.1 million in FY1997
and FY1996, respectively, and was $2.6 million and $4.5 million for the nine
months ended June 30, 1998 and 1997, respectively. Historically, the Company has
funded operating losses and capital costs, in large part, through the sale of
Common Stock or debt securities convertible into Common Stock.
During FY1997, the Company received approximately $1.0 million in
proceeds from newly-issued notes payable, $1.9 million (net of transaction
costs) from the issuance of convertible debentures and warrants, and $1.6
million (net of transaction costs) from the sale of convertible preferred stock
and $0.2 million from the issuance of Common Stock upon exercise of options. The
Company also sold its U.K. manufacturing building for $3.4 million in a sale
leaseback transaction. For the nine months ended June 30, 1998, the Company
received approximately $1.82 million (net of transaction costs) in proceeds from
the sale of a series of convertible preferred stock. FHC used these amounts to
fund current operations of the Company and to repay existing liabilities.
In the near term, FHC management expects operating and capital costs to
continue to exceed funds generated from operations due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize the female condom around the world.
On September 29, 1997, the Company entered into an agreement with
Vector Securities International, Inc. ("Vector"), an investment banking firm
specializing in providing advice to heath care and life companies. Pursuant to
this agreement, for a one-year period, Vector will act as the Company's
exclusive financial advisor for the purposes of identifying and evaluating
opportunities available to the Company for increasing shareholder value. These
opportunities may include selling all or a portion of the business, assets or
stock of the Company or entering into one or more distribution arrangements
relating to the Company's product. However, no specific such opportunity has yet
been identified and there can be no assurance that any such opportunities will
be available to the Company or, if so available, that the Company will
ultimately elect or be able to consummate any such transaction.
On November 19, 1998, the Company executed an agreement with a private
investor (the "Equity Line Agreement"). This agreement provides for the Company,
at its sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $6 million of the Company's Common Stock, subject to a minimum
put of $1 million over the duration of the agreement. The Equity Line Agreement
expires 24 months after the effective date of the registration statement of
which this Prospectus is a part and, among other things, provides for minimum
and maximum puts ranging from $100,000 to $1,000,000 depending on the Company's
stock price and trading volume. Puts cannot occur more frequently than every 20
trading days. Upon a proper put under this agreement, the investor purchases
Common Stock at a discount of (a) 12% from the then current average market price
of the Company's Common Stock, as determined under the Equity Line Agreement, if
such average market price is at least $2 or (b) 18% from the then current
average market price if such average market price is less than $2. In addition,
the Company is required to pay its placement agent sales commissions in Common
Stock or cash, at the placement agent's discretion, equal to 7% of the funds
raised under the Equity Line Agreement and issue warrants to the placement agent
to purchase shares of Common Stock, at an exercise price of $2.17 per share,
equal to 10% of the Shares sold
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<PAGE> 23
by the Company under the Equity Line Agreement. In addition, pursuant to the
Equity Line Agreement, the Company issued the investor the Warrant to purchase
200,000 shares of Common Stock at $2.17 per share.
While the Company believes that its existing capital resources
(including expected proceeds from sales of Common Stock pursuant to the Equity
Line Agreement) will be adequate to fund its currently anticipated capital
needs, if they are not or the Company does not receive shareholder approval to
amend its Articles of Incorporation to increase its authorized Common Stock,
enabling the Company to sell sufficient Shares under the Equity Line Agreement,
the Company may need to raise additional capital until its sales increase
sufficiently to cover operating expenses. In addition, there can be no assurance
that the Company will satisfy the conditions required for it to exercise puts
under the Equity Line Agreement. Accordingly, the Company may not be able to
realize all or any of the funds available to it under the Equity Line Agreement.
Until internally generated funds are sufficient to meet cash
requirements, FHC will remain dependent upon its ability to generate sufficient
capital from outside sources. While management believes that revenues from sales
of the female condom will eventually exceed operating costs, and that ultimately
operations will generate sufficient funds to meet capital requirements, there
can be no assurance that such level of operations will ultimately be achieved,
or be achieved in the near term. Likewise, there can be no assurance that the
Company will be able to source all or any portion of its required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of the female condom generate sufficient
revenues to fund operations. In addition, any funds raised may be costly to the
Company and/or dilutive to stockholders. If the Company is not able to source
the required funds or any future capital which becomes required, the Company may
be forced to sell certain of its assets or rights or cease operations.
As of November 16, 1998, the Company had approximately $877,000 in
cash, net trade accounts receivable of $837,000 and current trade accounts
payable of $762,000. It is estimated that the Company's cash burn rate, without
revenues, is approximately $0.4 million per month.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, suppliers,
salaries and benefits, and increased general and administrative expenses.
Historically, the Company has absorbed increased costs and expenses without
increasing selling prices.
NEW ACCOUNTING PRONOUNCEMENTS
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
supersedes APB Opinion No 15, was issued in February 1997 by the Financial
Accounting Standards Board. The Statement changes the computation and
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that have only common
stock outstanding are required to present basic earnings per-share amounts. All
other entities are required to present basic and diluted per-share amounts.
Diluted per share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a loss or
increase the income per common share from continuing operations. All entities
required to present per-share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 15, 1997. Earlier application
is not permitted.
The Company has numerous issues of potential common stock outstanding, including
options to employees and stock purchase warrants that become exercisable if
certain conditions are met and preferred stock that is convertible to common
stock. Each of these potential common stock instruments must be separately
evaluated to determined whether they are dilutive, and various adjustments to
income and share amounts are computed. Due to the complexities involved,
management has not completed its assessment of the effects that the application
of Statement No. 128 will have on the per-share information presented in the
accompanying financial statements.
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<PAGE> 24
Capital Structure
Statement of Financial Accounting Standard No. 129, "Disclosure of Information
about Capital Structure," was issued in February 1997 by the Financial
Accounting Standards Board. The Statement requires an entity to explain the
pertinent rights and privileges of the various securities outstanding. The
standard is effective for financial statement periods ending after December 15,
1997. The Company does not believe the adoption of the Standard will have a
material impact on the consolidated financial statements.
Comprehensive Income
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," that the Company will be required to adopt for
its year ended September 30, 1998, and disclose in its interim financial
statements beginning with the period ending December 31, 1997. This
pronouncement is not expected to have a significant impact on the Company's
financial statements. The Statement establishes standards for the reporting and
presentation of comprehensive income and its components. The statement requires
that items recognized as components of comprehensive income be reported in a
financial statement. The statement also requires that a company classify items
of other comprehensive income by their nature in a financial statement, and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. For the years ended September 30, 1997 and
1996, the Company's components of comprehensive income (loss) consisted of its
reported net (loss) and foreign currency translation adjustments.
Segments of an Enterprise
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued in July 1997 by the
Financial Accounting Standards Board. The Statement requires the Company to
disclose the factors used to identify reportable segments including the basis of
organization, differences in products and services, geographic areas, and
regulatory environments. The Statement additionally requires financial results
to be reported in the financial statements for each reportable segment. The
Statement is effective for financial statement periods beginning after December
15, 1997. The Company does not believe the adoption of the statement will have a
material impact on the consolidated financial statements.
Derivatives
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 requires companies to
record derivatives onthe balance sheet as assets or liabilities at fair value.
Depending on the use of the derivative and whether it qualifies for hedge
accounting, gains or losses resulting from changes in the value of those
derivatives would either be recorded as a component of net income or as a change
in stockholders' equity. The Company is required to adopt this new standard for
the quarter and year beginnin October 1, 1999. The Company currently has no
derivative instruments and, accordingly, the adoption of this statement has no
impact on its consolidated financial statements.
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<PAGE> 25
BUSINESS
GENERAL
The Female Health Company ("FHC" or the "Company") markets,
manufactures and sells the female condom, the only FDA-approved product under a
woman's control which can prevent unintended pregnancy and sexually transmitted
diseases ("STDs"), including HIV/AIDS.
The female condom has undergone extensive testing for efficacy, safety
and acceptability, not only in the United States but also in over 25 additional
countries. Certain of these studies show that having the female condom available
allows women to have more options, resulting in an approximately 30% increase in
protected sex acts. Furthermore, studies show that when the female condom is
available as a choice, there is an approximately 35% decrease in STDs, including
HIV/AIDS.
The product is currently sold or available in either or both commercial
(private sector) and public sector markets in 30 countries. It is commercially
marketed directly by the Company in the United States and the United Kingdom and
through marketing partners in Canada, Holland, Brazil, Venezuela, South Korea
and Taiwan. The Company has signed distribution agreements in Japan and
Bangladesh, and the Company anticipates that the product will be marketed in
these countries in the coming months. The Company's partner in Japan, Taiho
Pharmaceutical Co., Ltd. ("Taiho"), submitted a formal application for
regulatory approval with Koseisho, the Japanese regulatory agency in October
1997 and expects to receive approval to begin marketing the female condom during
the Company's 1999 fiscal year. The Company is currently in discussions with
potential distributors for key European countries, India, The People's Republic
of China and other countries.
As noted above, the female condom is sold to the public sector. In
particular, the product is marketed to city and state public health clinics as
well as not-for-profit organizations such as Planned Parenthood in the United
States. Following several years of testing the efficacy and acceptability of the
female condom, the product received a formal endorsement by The World Health
Organization ("WHO") and the Joint United Nations Programme on AIDS ("UNAIDS").
In 1996, the Company entered into a three-year agreement with UNAIDS, whereby
UNAIDS will facilitate the availability and distribution of the female condom in
the developing world and the Company will sell the product to developing
countries at a reduced price based on the total number of units purchased. The
current price is 38 pence sterling (approximately $0.64 per unit). Pursuant to
this agreement, the product is currently being marketed in Zambia, Zimbabwe,
Tanzania, Cote d' Ivoire, Bolivia, Haiti, South Africa and other countries. The
Company anticipates multiple launches will occur during the next two years under
this agreement, including launches in Kenya, Nigeria, Uganda, Ghana, Cambodia,
Bangladesh, Columbia and Central American countries.
PRODUCT
The female condom is made of polyurethane, a thin but strong material
which is resistant to rips and tears during use. The female condom consists of a
soft, loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and hold it in place. The other ring remains outside the
vagina after insertion. The female condom lines the vagina, preventing skin from
touching skin during intercourse. The female condom is prelubricated and
disposable and is intended for use during only one sex act.
GLOBAL MARKET POTENTIAL
WHO estimates there are more than 300 million new cases of STDs
worldwide each year, excluding HIV, and most of those diseases are more easily
transmitted to women than to men. UNAIDS estimates that there are currently
approximately 30 million people worldwide who are infected with HIV/AIDS and
there are approximately 16,000 people per day who are newly infected. In the
United States, the Center for Disease Control noted that in 1995, five of the
ten most frequently reported diseases were STDs. The Center also has noted that
one in five Americans over the age of 12 has Herpes. Women are currently the
fastest growing group infected with
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HIV and are expected to comprise the majority of new cases by the year 2000. The
following highlights the substantial and growing market for protection against
STDs.
<TABLE>
<S> <C>
Worldwide:
Number of people with HIV/AIDS(1) 30 million
Number of new cases of HIV/AIDS daily(1) 16,000
Number of children expected to be orphaned by AIDS by 40 million
2010 (at current rate)(1)
Examples of decreases in life expectancy due to
HIV/AIDS(1)
Zimbabwe 22 years
Cote d'Ivoire 11 years
Number of Sub-Saharan African countries where more 13
than 10% of population is HIV positive(1)
(1) Source: UNAIDS
United States:
Number of top ten most frequently reported diseases 5
in the United States in 1995 that were STDs(1)
Ratio of individuals over 12 years of age with Herpes(1) 1 in 5
Annual expenditures to treat STDs(2) $17 billion
Dollars spent on STD treatment for every $1.00 spent on prevention(2) $43
The United States has one of the highest rates of teenage pregnancy in
Western nations--Each year one in nine teenage women (ages 15-19)
becomes pregnant(3)
</TABLE>
(1) Source: Center for Disease Control
(2) Source: National Academy of Sciences
(3) Source: Alan Guttmacher Institute
At the 1988 World AIDS Conference, the following points were emphasized:
- - New drugs help some AIDS patients in Western nations. However, they are of
little value in developing countries due to cost and complexity of
administration.
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- - Simple, inexpensive treatments for HIV/AIDS--or a vaccine to prevent
infection from HIV--are unlikely in the near term.
- - Prevention is essential.
Currently, there are only two products that prevent the transmission of HIV/AIDS
through sexual intercourse--the latex male condom and the female condom.
MALE CONDOM MARKET: It is estimated the global annual market for male condoms is
4.7 billion units. However, the majority of all acts of sexual intercourse,
excluding those intended to result in pregnancy, are completed without
protection. As a result, it is estimated the potential market for protection is
much larger than the identified male condom market.
ADVANTAGES VERSUS THE MALE CONDOM
The female condom is currently the only available barrier method which
is controlled by the woman and allows her to protect herself against STDs,
including HIV/AIDS and unintended pregnancy. Although latex male condoms also
offer protection against STDs, the female condom possesses a certain number of
advantages. The most important advantage is that a woman can control whether or
not she is protected. Many men do not like to wear male condoms and may refuse
to do so.
The material that is used for the female condom, polyurethane, offers a
number of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability that
the female condom sheath will tear during use. Clinical studies and everyday use
have shown that latex male condoms can tear between 4% to 8% of the times they
are used, while studies show that the female condom tears in less than 1% of
uses. Unlike latex, polyurethane quickly transfers heat, so the female condom
immediately warms to body temperature when it is inserted, which may result in
increased pleasure and sensation during use. The product offers an additional
benefit to the 7% to 10% of the population that is allergic to latex and who, as
a result, may be irritated by latex male condoms. There is no reported allergy
to date to polyurethane. The female condom is also more convenient, providing
the option of insertion hours before sexual arousal and as a result is less
disruptive during sex than the male condom which requires sexual arousal for
application.
SAFETY AND EFFICACY
Based on use of the product in clinical trials and approximately five
years of worldwide marketing, the female condom has been proven to be safe and
effective. The following information reflects the results of various trials:
<TABLE>
<S> <C> <C>
Reduction in STDs(1) 34% (Results when female condom was
Reduction in Acts of Unprotected Sex(1) 25% available as an option vs. when
only the male condom was available.)
Effectiveness in Preventing Pregnancy(2) 95%(3) (When used properly with every sex act.)
</TABLE>
(1) Supported by UNAIDS
(2) Supported by The U.S. Agency for International Development (USAID)
and conducted by Family Health International (FHI).
(3) Recent studies completed in Japan evaluating the female condom's
effectiveness in preventing pregnancy, which were submitted to the
Japanese regulatory authorities in connection with their review of
the product, showed the female condom to be approximately 98%
effective when used consistently and correctly.
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<PAGE> 28
COST EFFECTIVENESS
At the 1998 World AIDS Conference held in Geneva, Switzerland, UNAIDS
presented the results from its cost-effectiveness study which indicated that
making the female condom available is highly cost effective in reducing public
health costs in developing countries.
ENDORSEMENTS
Currently, the female condom is endorsed for use by the World Health
Organization (WHO), the United Nations Joint Programme on AIDS (UNAIDS), the
United States Agency for International Development (USAID), many nongovernment
organizations around the world and a number of city and state public health
departments in the United States.
WORLDWIDE REGULATORY APPROVALS
The female condom received PMA approval as a Class III Medical Device
from the FDA in 1993. The extensive clinical testing and scientific data
required for FDA approval laid the foundation for approvals throughout the rest
of the world, including receipt of a CE Mark in 1997 which allows the Company to
market the female condom throughout the EU. In addition to the United States and
the EU, several other countries have approved the female condom for sale,
including Canada, Russia, Australia, South Korea and Taiwan. The Company expects
the female condom to receive approval in Japan in fiscal year 1999.
The Company believes that the female condom's PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry by competitive products. The Company estimates that it would take a
minimum of four to six years to implement, execute and receive FDA approval or a
PMA to market another type of female condom.
The Company believes there are no material issues or material costs
associated with the Company's compliance with environmental laws related to the
manufacture and distribution of the female condom.
STRATEGY
The Company's strategy is to act as a manufacturer, selling the female
condom to the global public sector, United States public sector and commercial
partners for country-specific marketing. The public sector and commercial
partners assume the cost of shipping and marketing the product. As a result, as
volume increases, the Company's operating expenses will not increase
significantly.
COMMERCIAL MARKETS
The Company markets the product directly in the United States and
United Kingdom. The Company has commercial partners which have recently launched
the product in Canada, Brazil, Venezuela, Taiwan, South Korea and Holland. The
Company has signed agreements with partners in Japan and Bangladesh where
launches are expected during the coming year.
JAPANESE MARKET
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have never been approved in Japan and, as a result, 85% of
Japanese couples seeking protection use condoms. FHC's partner in Japan is
Taiho, a $1 billion subsidiary of Otsuka Pharmaceutical Co., Ltd., a $5 billion
Japanese health care company. The agreement between the Company and Taiho
requires Taiho to perform clinical testing of the product in Japan and obtain
the necessary regulatory approvals. After approval, expected during the
Company's 1999 fiscal year, the Company will manufacture the product and supply
it to Taiho, which will have responsibility for marketing and distributing the
female condom in Japan. Studies completed in Japan show an acceptance rate of
70% among Japanese women. Taiho plans to market the female condom under the name
"Mylura Femy."
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<PAGE> 29
RELATIONSHIPS AND AGREEMENTS WITH PUBLIC SECTOR ORGANIZATIONS
Currently, it is estimated that more than 1.5 billion male condoms are
distributed worldwide by the public sector each year. The female condom is seen
as an important addition to prevention strategies by the public sector because
studies show that the availability of the female condom decreases the incidence
of unprotected sex by as much as 30% over male condoms alone.
The Company has a multi-year agreement with UNAIDS to supply the female
condom to developing countries at a reduced price which is negotiated each year
based on volume. The current price is 38 pence sterling (approximately $0.64)
per unit. During the last year, the female condom has been launched in the
countries of Zimbabwe, Tanzania, Bolivia, Haiti, South Africa and Zambia. It is
anticipated that multiple product launches will occur in several countries
during the next two years, including in the countries of Kenya, Nigeria, Uganda,
Ghana, Cambodia, Bangladesh, Columbia and Central America. Population Services
International (PSI), an organization that performs social marketing of various
products in developing countries, launched the female condom in Zimbabwe under
the UNAIDS agreement. Based on its success in Zimbabwe, PSI, in collaboration
with UNAIDS, is now marketing the female condom in seven countries. In PSI's
current annual report, PSI indicates that, in collaboration with UNAIDS, it
plans to launch the female condom worldwide. PSI also notes in its report that
in 1997 it distributed 539 million male condoms.
In the United States, the product is marketed to city and state public
health clinics, as well as not-for-profit organizations such as Planned
Parenthood. Currently, 10 major cities and 15 state governments, including New
York, Pennsylvania, Florida, Connecticut, Hawaii, Louisiana, Maryland, New
Jersey, South Carolina, Illinois, Chicago, Philadelphia, New York and Houston,
have purchased the product for distribution with a number of others expressing
interest. All major cities and states have re-ordered product after their
initial shipments.
STATE-OF-ART MANUFACTURING FACILITY
The Company manufactures the female condom in a 40,000 square foot
leased facility in London, England. The facility is currently capable of
producing 60 million units per year. With additional equipment, this capacity
can be significantly increased.
GOVERNMENT REGULATION
In the U.S., the female condom is regulated by the FDA. Pursuant to
section 515(a)(3) of the Safe Medical Amendments Act of 1990 (the "SMA Act"),
the FDA may temporarily suspend approval and initiate withdrawal of the PMA if
the FDA finds that the female condom is unsafe or ineffective, or on the basis
of new information with respect to the device, which, when evaluated together
with information available at the time of approval, indicates a lack of
reasonable assurance that the device is safe or effective under the condition of
use prescribed, recommended or suggested in the labeling. Failure to comply with
the conditions of FDA approval invalidates the approval order. Commercial
distribution of a device that is not in compliance with these conditions is a
violation of the SMA Act.
COMPETITION
The Company's female condom competes in part with male condoms. Latex
male condoms typically cost less and have brand names that are more widely
recognized than the female condom. In addition, male condoms are generally
manufactured and marketed by companies with significantly greater financial
resources than the Company. It is also possible that other parties may develop a
female condom. These competing products could be manufactured, marketed and sold
by companies with significantly greater financial resources than those of the
Company.
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<PAGE> 30
EMPLOYEES
As of November 16, 1998, the Company's operations had 74 full-time
employees within the U.S. and the U.K. and 2 part-time employees. No Company
employees are represented by a labor union. The Company believes that its
employee relations are good.
BACKLOG
At November 16, 1998, the Company had unfilled orders of $451,000. The
comparable amount as of the same date of the prior year was $1,121,000. All of
these unfilled orders are expected to be filled during fiscal 1999.
PATENTS AND TRADEMARKS
The Company currently holds product and technology patents in the
United States, Japan, the United Kingdom, France, Italy, Germany, Spain, the
European Patent Convention, Canada, The People's Republic of China, New Zealand,
Singapore, Hong Kong and Australia. Additional product and technology patents
are pending in Brazil, South Korea, Germany, Japan and several other countries.
The patents cover the key aspects of the female condom, including its overall
design and manufacturing process. The Company licenses the trademark "Realty" in
the United States and has trademarks on the names "femidom" and "femy" in
certain foreign countries. The Company has also secured, or applied for, 27
trademarks in 14 countries to protect the various names and symbols used in
marketing the product around the world. In addition, the experience that has
been gained through years of manufacturing the female condom has allowed the
Company to develop trade secrets and know-how, including certain proprietary
production technologies, that further secure its competitive position.
RESEARCH AND DEVELOPMENT
In FY1997 and FY1996, the Company incurred research and development
costs from continuing operations of $60,811 and $361,094, respectively. For the
nine months ended June 30, 1998 and 1997, respectively, the Company incurred
research and development costs of $0 and $48,777, respectively. These
expenditures were related to conducting acceptability studies.
INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
See Note 11 to Notes to Consolidated Financial Statements, included
herein.
HISTORY
The female condom was invented by a Danish physician who obtained a
U.S. patent for the product in 1988. The physician subsequently sold certain
rights to the condom to Chartex Resources Limited. In the years that followed,
Chartex, with resources provided by a nonprofit Danish foundation, developed the
manufacturing processes and completed other activities associated with bringing
the female condom to market in certain non-U.S. countries. Wisconsin Pharmacal
Company, Inc., which then owned certain rights to the female condom in the U.S.,
Canada and Mexico, pursued the pre-clinical and clinical studies and overall
development of the product for worldwide use and U.S. FDA approval of the
product.
FHC is the successor to Wisconsin Pharmacal Company, Inc., a company
which previously manufactured and marketed a wide variety of disparate specialty
chemical and branded consumer products in addition to owning certain rights to
the female condom described above. A summary of the Company's origins follows.
In fiscal 1995, the Company's Board of Directors approved a plan to
complete a series of actions designed, in part, to maximize the potential of the
female condom. First, the Company restructured and transferred all of the assets
and liabilities of the Company, other than those related primarily to the female
condom, to a newly-formed, wholly-owned company, WPC Holdings, Inc.
("Holdings"). In January 1996, the Company sold Holdings to an unrelated third
party. Then, in February 1996, the Company acquired Chartex (renamed The Female
Health Company - UK in 1997), the manufacturer and owner of certain worldwide
rights to, and the Company's then sole
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<PAGE> 31
supplier of, the female condom. As a result of the sale of Holdings and the
acquisition of Chartex, FHC evolved to its current state with its sole business
consisting of the manufacture, marketing and sale of the female condom.
The FDA approved the female condom for distribution in 1993 and the
Company's manufacturing facility in 1994. Since that time, the Company has sold
over 23 million female condoms around the world.
PROPERTIES
The Company leases approximately 4,500 square feet of office space at
875 North Michigan Avenue, Suite 3660, Chicago, Illinois 60611 under a lease
that expires in 2001. The Company also leases approximately 1,900 square feet
for corporate offices at 919 North Michigan Avenue, Suite 2208, Chicago,
Illinois 60611 under a lease that expires January 31, 2001. However, the Company
has subleased these premises to a third party. The Company utilizes warehouse
space and sales fulfillment services of an independent public warehouse located
near Minneapolis, Minnesota, for storage and distribution of the female condom.
The Company manufactures the female condom in a 40,000 square foot leased
facility located in London, England. The FDA-approved manufacturing process is
subject to periodic inspections by the FDA. Current capacity at the
manufacturing facility is approximately 60 million female condoms per year.
Management believes the properties are adequately insured.
LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
29
<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Title Age
<S> <C> <C>
O.B. Parrish Chairman of the Board, Chief
Executive Officer, acting Chief Financial
Officer and Director 65
Mary Ann Leeper, Ph.D. President, Chief Operating Officer
and Director 58
William R. Gargiulo, Jr. Secretary and Director 70
Jack Weissman Vice President-Trade Sales 50
Michael Pope Vice President of the Company,
Director of Chartex
Resources Limited, Director and
General Manager of Chartex
International, Plc 42
David R. Bethune Director 58
Stephen M. Dearholt Director 52
</TABLE>
O.B. Parrish has served as Chief Executive Officer of the Company since
1994, as acting Chief Financial Officer since February 1996 and as the Chairman
of the Board and a Director of the Company since 1987. Mr. Parrish is a
shareholder and has served as the President and as a Director of Phoenix Health
Care of Illinois, Inc. ("Phoenix of Illinois") since 1987. Phoenix of Illinois
owns approximately 270,000 shares of the Company's outstanding Common Stock. Mr.
Parrish also was the Co-Chairman and a Director of Inhalon Pharmaceuticals, Inc.
until its sale to Medeva, Plc. and is Chairman and a Director of ViatiCare,
L.L.C. and a director of Microbyx. Mr. Parrish is also a trustee of Lawrence
University. From 1977 until 1986, Mr. Parrish was the President of the Global
Pharmaceutical Group of G.D. Searle & Co. ("Searle"). From 1974 until 1977, Mr.
Parrish was the President of Searle International, the foreign sales operation
of Searle. Prior to that, Mr. Parrish was Executive Vice President of Pfizer's
International Division.
William R. Gargiulo, Jr. has served as Secretary of the Company from 1996
to present, as Vice President from 1996 to September 30, 1998, as Assistant
Secretary of the Company from 1989 to 1996, as Vice President - International of
The Female Health Company Division from 1994 until 1996, as Chief Operating
Officer of the Company from 1989 to 1994, and as General Manager of the Company
from 1988 to 1994. Mr. Gargiulo has also served as a Director of the Company
since 1987. Mr. Gargiulo is a Trustee of a trust which is a shareholder of
Phoenix of Illinois. From 1984 until 1986, Mr. Gargiulo was the Executive
Vice-President of Searle's European operations. From 1976 until 1984, Mr.
Gargiulo was the Vice President of Searle's Latin American operations.
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996 and as President and Chief Executive Officer of The Female
Health Company Division from May 1994 until January 1996, as Senior Vice
President - Development of the Company from 1989 until January 1996 and as a
Director of the Company since 1987. Dr. Leeper is a shareholder and has served
as a Vice President and Director of Phoenix of Illinois since 1987. Previously,
Dr. Leeper served as Vice President - Market Development for Searle's
30
<PAGE> 33
Pharmaceutical Group and in various Searle research and development management
positions. As Vice President - Market Development, Dr. Leeper was responsible
for worldwide licensing and acquisition, marketing and market research. In
earlier positions, she was responsible for preparation of new drug applications
and was a liaison with the FDA.
Mr. Weissman has served as Vice President - Trade Sales of The Female
Health Company since June 1995. From 1992 until 1994, Mr. Weissman was Vice
President - Sales for Capital Spouts, Inc., a small manufacturing company.
During the period from 1989 to 1992, Mr. Weissman acted as General Manager - HTV
Group, an investment group involved in the development of retail stores. Mr.
Weissman joined Searle's consumer products group in 1979 and held positions of
increasing responsibility, including National Account Manager and Military Sales
Manager from 1985 to 1989. Mr. Weissman was Account Manager - Retail Business
Development, for the NutraSweet Company, a Searle subsidiary. Prior to Searle,
Mr. Weissman worked in the consumer field as Account Manager and Territory
Manager for Norfolk Thayer & Whitehall Laboratories.
Mr. Pope has served as Vice President of the Company since 1996 and as
General Manager of Chartex International, Plc since the Company's 1996
acquisition of Chartex. Mr. Pope has also served as a Director of Chartex
Resources Limited and Chartex International, Plc since 1995. Previously, Mr.
Pope was Director of Technical Operations for Chartex which included
responsibility for manufacturing, engineering, process development and quality
assurance. Mr. Pope was responsible for the development of the high speed
proprietary manufacturing technology for the female condom and securing the
necessary approvals of the manufacturing process by regulatory organizations,
including the FDA. Mr. Pope was also instrumental in developing and securing
Chartex's relationship with its Japanese marketing partner. Prior to joining
Chartex, Mr. Pope was Production Manager and Technical Manager for Franklin
Medical, a manufacturer of disposable medical devices. Prior to that, Mr. Pope
was Site Manager, Engineering and Production Manager, Development Manager and
Silicon Manager for Warne Surgical Products.
Mr. Bethune has served as a Director of the Company since January 1996.
Mr. Bethune is a business consultant to the pharmaceutical industry and
previously held the position of President and Chief Operating Officer of the
IVAX Corporation. Prior to IVAX, Mr. Bethune was Group Vice President of
American Cyanamid Company and a member of its Executive Committee until the sale
of the company to American Home Products. He had global executive authority for
human biologicals, consumer health products, pharmaceuticals and opthalmics, as
well as medical research. Previously, he was President of the Lederle
Laboratories Division of American Cyanamid Company. Mr. Bethune rejoined Lederle
from Searle, where he was President of Operations in the United States, Canada
and the Caribbean since December 1986. From 1984 until his appointment as
President of Operations, Mr. Bethune served as Vice President and General
Manager, United States Pharmaceuticals. Mr. Bethune is on the Board of Directors
of the Southern Research Institute, Atrix Pharmaceuticals and the American
Foundation for Pharmaceutical Education, Partnership for Prevention. He is a
founding trustee of the American Cancer Society Foundation and an associate
member of the National Wholesale Druggists' Association and the National
Association of Chain Drug Stores. He is the founding chairman of the Corporate
Council of the Children's Health Fund in New York City and served on the
Arthritis Foundation Corporate Advisory Council.
Mr. Dearholt has served as a Director of the Company since April 1996.
Mr. Dearholt is a co-founder and partner in Response Marketing, one of the
largest privately owned life insurance marketing organizations in the United
States. He has over 23 years of experience in direct response advertising and
data based marketing of niche products. Since 1985, he has been a 50% owner of
R.T. of Milwaukee, a private investment holding company which operates a stock
brokerage business in Milwaukee, Wisconsin. In late 1995, Mr. Dearholt arranged,
on very short notice, a $1 million bridge loan which assisted the Company in its
purchase of Chartex.
The Company's Board of Directors has an Audit Committee and a
Compensation Committee. The Board's Audit Committee is comprised of Messrs.
Bethune and Dearholt. The responsibilities of the Audit Committee, in addition
to such other duties as may be specified by the Board of Directors, include the
following: (1) recommendation to the Board of Directors of independent auditors
for the Company; (2) review of the timing, scope and results of the independent
auditors' audit examination; (3) review of periodic comments and recommendations
by the auditors and of the Company's response thereto; and (4) review of the
scope and adequacy
31
<PAGE> 34
of internal accounting controls. The Audit Committee did not meet during the
fiscal year ended September 30, 1998.
The Board's Compensation Committee is comprised of Messrs. Gargiulo and
Bethune. The responsibility of the Compensation Committee, in addition to such
other duties as may be specified by the Board of Directors, is to make
recommendations to the Board of Directors with respect to compensation for the
executive officers and to administer the Company's 1989, 1990, 1994 and Outside
Director Stock Option Plans. The Compensation Committee met two times during the
fiscal year ended September 30, 1998.
There is no standing nominating or similar committee of the Board of
Directors.
Directors who are not also employees of the Company receive a one-time
grant of options to purchase 30,000 shares of the Company's Common Stock upon
their initial election to the Company's Board of Directors. The options are
granted at an exercise price equal to the last sale price of the Company's
Common Stock on the date of grant. The Company also pays each such outside
director $1,000 for each meeting of the Board of Directors attended by such
director and reimburses the outside director for his expenses incurred in
attending the meeting.
All directors serve until the next annual meeting of the Company's
shareholders and until his or her successor has been duly elected or until his
or her prior death, resignation or removal. Each executive officer holds office
until his or her successor has been duly appointed or until his or her prior
death, resignation or removal.
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<PAGE> 35
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth all annual, long-term and other compensation
paid by the Company to each of its executive officers whose total annual salary
and bonus exceeded $100,000 for services rendered during any of the years
indicated below. The foregoing individuals are referred to herein as the "named
executive officers."
<TABLE>
<CAPTION>
Annual Long-Term Compensation
Compensation Awards
Restricted Securities
Name and Stock Underlying
Principal Fiscal Salary Awards(1) Options/SARs
Position Year ($) ($) (#)
<S> <C> <C> <C> <C>
O.B. Parrish 1998 90,000 117,955(2) --
Chairman and 1997 90,000 -- 100,000
Chief Executive 1996 90,000 -- 120,000
Officer
Mary Ann Leeper, 1998 225,000 84,210(2) --
Ph.D. President and 1997 225,000 -- 90,000
Chief Operating 1996 225,000 -- --
Officer
</TABLE>
(1) Represents fair market value of restricted Common Stock on the date of grant
based on the $2.88 closing price of the Company's Common Stock on such date.
(2) At September 30, 1998, the named executive officer owned 25,000 shares of
restricted Common Stock, having a fair market value of $71,875 on such date,
based on the closing price of the Company's Common Stock on such date. For Mr.
Parrish, also includes his pro rata portion of 25,000 shares of restricted stock
granted to Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois"), based
on his 64% ownership of such entity. For Dr. Leeper, also includes her pro rata
portion of such restricted stock based on her approximately 16.7% ownership of
such entity. All of these shares were granted on May 5, 1998 and vest in full on
the first anniversary of the grant date. The owner is entitled to receive any
dividends declared on these shares of restricted stock.
FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth the number and value of unexercised options
held by the named executive officers at September 30, 1998:
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options at Value of Unexercised In-the-Money
Fiscal Year End September 30, 1998 Options at Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C>
O.B. Parrish 88,000/176,000 $0
Mary Ann Leeper, Ph.D. 96,667/193,333 $0
</TABLE>
33
<PAGE> 36
EMPLOYMENT AGREEMENTS
Dr. Leeper entered into an employment agreement with the Company effective
May 1, 1994. The original term of Dr. Leeper's employment extended to April 30,
1997 and thereafter her employment term renews automatically for additional
three-year terms unless notice of termination is given. The employment agreement
is terminable by the Company at any time if such termination is for cause (as
defined in the employment agreement). If Dr. Leeper is terminated without cause,
the Company is obligated to continue to pay Dr. Leeper her base salary and any
bonus to which she would otherwise have been entitled for a period equal to the
longer of two years from date of termination or the remainder of the then
applicable term of the employment agreement. In addition, the Company is
obligated to continue Dr. Leeper's participation in any health, life insurance
or disability plan sponsored by the Company and in which Dr. Leeper participated
prior to her termination of employment. Dr. Leeper's employment agreement
provides for a base salary of $175,000, $195,000 and $225,000, respectively, for
each of the first three years of her employment term, subject to the achievement
of certain performance goals established by Dr. Leeper and the Company. If the
employment agreement is renewed beyond the initial three-year term, the base
salary will be increased annually by the Board of Directors based upon Dr.
Leeper's performance and such other factors as the Board of Directors deems
appropriate. For fiscal 1998, Dr. Leeper's base salary was set at $225,000 and
for fiscal 1999 it was set at $225,000. The employment agreement also provides
Dr. Leeper with certain fringe benefits including an annual cash bonus of up to
100% of her base salary if certain performance goals established by the Board of
Directors are achieved.
34
<PAGE> 37
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of November 17, 1998 by (1) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the Common Stock; (2) each director; (3) each named executive officer; and (4)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Beneficially Owned
Name Number Percent
<S> <C> <C>
O.B. Parrish (1) 494,001 4.68%
William R. Gargiulo, Jr. (1) 366,668 3.50%
Mary Ann Leeper, Ph.D. (1) 455,668 4.31%
David R. Bethune (2) 50,000 *
Phoenix Health Care of
Illinois, Inc.(3) 324,501 3.10%
Stephen M. Dearholt (4) 1,125,466 11.07%
State of Wisconsin
Investment Board 635,000 6.08%
All directors and
executive officers as a
group (eight persons)(1)(2)(4) 1,987,801 17.37%
</TABLE>
* Less than 1%.
(1) Includes 269,501 shares owned by and 30,000 shares under option to
Phoenix Health Care of Illinois, Inc. ("Phoenix of Illinois"). Messrs.
Parrish and Gargiulo and Dr. Leeper may be deemed to share voting and
dispositive power as to such shares since Mr. Gargiulo is a trustee of
a trust which is a shareholder, and Mr. Parrish and Dr. Leeper are
officers, directors and shareholders, of Phoenix of Illinois. For Dr.
Leeper, also includes 9,500 shares owned by and 96,667 shares under
option to her (which options are exercisable within 60 days); for Mr.
Parrish, also includes 56,500 shares owned by and 88,000 shares under
option to him (which options are exercisable within 60 days); and for
Mr. Gargiulo, also includes 500 shares owned by and 16,667 shares under
option to him, which options are exercisable within 60 days.
(2) Represents options which are currently exercisable.
(3) Includes 269,501 shares owned by and 30,000 shares under options to
Phoenix of Illinois.
(4) Includes 238,057 shares owned directly by Mr. Dearholt. Also includes
69,500 shares held by the Dearholt, Inc. Profit Sharing Plan, 9,680
shares held by Response Marketing Money Purchase Plan, 5,000 and
148,129 shares held by trusts (of which Mr. Dearholt is a trustee) and
45,100 shares held by Mr. Dearholt's minor children. Also includes
warrants to purchase 610,000 shares of Common Stock and options to
purchase 30,000 shares.
35
<PAGE> 38
CERTAIN TRANSACTIONS
On March 25, 1997 and again on March 25, 1998, the Company extended a
$1 million one-year promissory note payable by the Company to Mr. Dearholt in
connection with a previous loan Mr. Dearholt made to the Company. The promissory
note is now payable in full on March 25, 1999 and bears interest at 12% per
annum payable monthly. The note proceeds were initially used by the Company to
provide working capital needed to fund the initial stages of the Company's U.S.
marketing campaign ($0.2 million) and to fund operating losses ($0.8 million).
The borrowing transactions were effected in the form of a promissory note from
the Company to Mr. Dearholt and related Note Purchase and Warrant Agreements and
Stock Issuance Agreements. Under the 1997 and 1998 Note Purchase and Warrant
Agreements, the Company issued to Mr. Dearholt warrants to purchase 200,000 and
200,000 shares of the Company's Common Stock in 1997 and 1998, respectively, at
exercise prices of $1.848 and $2.25 per share, respectively. The warrants expire
upon the earlier of their exercise or five years after the date of their
issuances. Under the Stock Issuance Agreements, if the Company fails to pay the
$1 million under the note when due, the Company must issue 200,000 shares of its
Common Stock to Mr. Dearholt. This issuance will not, however, alleviate the
Company from its liability under the note. The Company also granted Mr. Dearholt
certain securities registration rights with respect to any Common Stock he
receives from the Company under these warrants or the Stock Issuance Agreement.
Mr. Dearholt has agreed that, if the Company requests, he will extend the
promissory note for an additional one-year term to be due and payable on March
25, 2000 upon the same terms as the prior note extensions. In consideration of
this agreement, the Company extended the term of certain warrants held by Mr.
Dearholt to purchase 200,000 shares of the Company's Common Stock which expire
March 25, 2001 to March 25, 2002.
On July 27, 1997, a trust of which Stephen M. Dearholt, a director of
the Company, is a trustee, purchased 60,000 shares of the Company's Class A
Convertible Preferred Stock--Series 1 at a price of $2.50 per share, which
represented the per share price offered to all subscribers in the private
placement of these shares.
It has been and currently is the policy of the Company that
transactions between the Company and its officers, directors, principal
shareholders or affiliates are to be on terms no less favorable to the Company
than could be obtained from unaffiliated parties. The Company intends that any
future transactions between the Company and its officers, directors, principal
shareholders or affiliates will be approved by a majority of the directors who
are not financially interested in the transaction.
36
<PAGE> 39
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000
shares of Common Stock, $.01 par value per share and 5,000,000 shares of Class A
Preferred Stock, $.01 par value per share (the "Class A Preferred Stock"). The
Class A Preferred Stock may be issued in series, at such times and with such
terms, as the Board of Directors deems appropriate. To date, the Board of
Directors has authorized for issuance 1,040,000 shares of Class A Preferred
Stock--Series 1, of which 680,000 shares are currently outstanding and 1,500,000
shares of Class A Preferred Stock--Series 2, of which no shares are currently
issued and outstanding since the 729,927 shares of Class A Preferred
Stock--Series 2 which were previously issued have all converted into a like
number of shares of Common Stock. The Company's Amended and Restated Articles of
Incorporation provide that any shares of Class A Preferred Stock which are
issued and subsequently converted into Common Stock may not be reissued by the
Company. Accordingly, the Company currently has 2,460,000 shares of Class A
Preferred Stock authorized and available for issuance in series designated by
the Board.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the shareholders. Subject to the prior
rights of the holders of Class A Preferred Stock, as described below, holders of
Common Stock are entitled to receive dividends when and as declared by the Board
of Directors out of funds legally available therefor. Upon liquidation or
dissolution of the Company, holders of Common Stock are entitled to share
ratably in the remaining assets of the Company which may be available for
distribution after payment of the Company's creditors and satisfaction of any
accrued but unpaid dividends on, and the liquidation preferences, if any, of,
the Class A Preferred Stock. Holders of Common Stock have no preemptive,
subscription or redemption rights. The Common Stock has no cumulative voting
rights. As a result, holders of more than 50% of the outstanding shares of
Common Stock can elect all of the directors of the Company.
All outstanding shares of Common Stock, including the Shares to be sold
in this offering, are, or upon payment therefor, will be, fully paid and
nonassessable. Wisconsin law, however, may make shareholders of the Company
personally liable for unpaid wages due employees for up to six months' services,
but not in an amount greater than the consideration paid for such shares.
CLASS A PREFERRED STOCK
The Company's Board of Directors is authorized, subject to the
limitations described below, to issue from time to time, without shareholder
authorization, in one or more designated series, shares of Class A Preferred
Stock and to determine the dividend, redemption, liquidation, sinking fund and
conversion rights of each particular series. No dividends or other distributions
will be payable on the Common Stock unless dividends are paid in full on the
Class A Preferred Stock and all sinking fund obligations for the Class A
Preferred Stock, if any, are fully funded. Dividends on the Class A Preferred
Stock will be cumulative from the date of issuance. In the event of a
liquidation or dissolution of the Company, the Class A Preferred Stock would
have priority over the Common Stock to receive the amount of the liquidation
preference as specified in each particular series, together with any accrued but
unpaid dividends thereon out of the remaining assets of the Company. Holders of
shares of Class A Preferred Stock will have the right, at any time on or before
the redemption of such shares, to surrender the certificate evidencing the
shares of Class A Preferred Stock and receive upon conversion thereof, a
certificate evidencing one share of Common Stock for each share of Class A
Preferred Stock so surrendered. The holders of Class A Preferred Stock shall be
entitled to cast one vote per share held of record by them at all meetings of
the shareholders of the Company.
Class A Preferred Stock--Series 1
Pursuant to the Company's Articles of Incorporation, on August 15,
1997, the Board of Directors by resolution designated the relative rights and
preferences of the first series of Class A Preferred Stock which was designated
"Class A Preferred Stock--Series 1." The Board authorized for issuance 1,040,000
shares of this Series 1 Preferred Stock and 680,000 shares were issued and are
currently outstanding. The Company has no
37
<PAGE> 40
present intention of issuing any additional shares of Series 1 Preferred Stock.
The Series 1 Preferred Stock accrues dividends on a daily basis at the rate of
8% per year on the "liquidation value" of the Series 1 Preferred Stock ($2.50
per share subject to adjustment and increase for accrued dividends). The
dividends will accrue through the earliest of the date of repurchase of the
Series 1 Preferred Stock, its conversion into Common Stock or the liquidation of
the Company. Dividends on the Series 1 Preferred Stock must be paid in full
before dividends may be paid on any other class of stock of the Company or
before any sums may be set aside for the redemption or purchase of any of the
Preferred Stock. Dividends will accrue whether or not they have been declared
and whether or not there are funds legally available therefore. Dividends are
payable on October 1 of each year. Dividends which are not paid on such dividend
reference date will accrue and be added to the liquidation value of each share
of Series 1 Preferred Stock. No dividends can be declared and set aside for any
shares of Common Stock unless the Board declares a dividend payable on the
outstanding shares of Series 1 Preferred Stock, in addition to the dividends
which the Series 1 Preferred Stock is otherwise entitled as described above.
Such additional dividends on the Series 1 Preferred Stock must be declared in
the same amount per share of Series 1 Preferred Stock as would be declared
payable on the shares of Common Stock into which each share of Series 1
Preferred Stock could be converted.
On or after August 1, 1998, each share of Series 1 Preferred Stock is
convertible into one share of Common Stock. Upon conversion, certificates for
shares of Common Stock will be issued together with, to the extent legally
available, an amount of cash equal to the remaining accrued but unpaid dividends
on the shares of Series 1 Preferred Stock so converted. The Series 1 Preferred
Stock is redeemable by the Company on or after August 1, 2000 (subject to prior
conversion by the holder) at a price of $2.50 per share plus all accrued but
unpaid dividends. Upon a liquidation of the Company, the Series 1 Preferred
Stock is entitled to a liquidation preference equal to $2.50 per share plus any
accrued but unpaid dividends. This amount must be paid prior to any distribution
on shares of Common Stock. Except as provided above, the Series 1 Preferred
Stock will have the same rights, preferences and limitations as any other series
of Preferred Stock to be issued in the future, whenever designated and issued
Class A Preferred Stock--Series 2
On December 30, 1997, the Company's Board of Directors by resolution
designated the relative rights and preferences of the second series of Class A
Preferred Stock which is designated "Class A Preferred Stock--Series 2." The
Board authorized for issuance 1,500,000 shares of this Series 2 Preferred Stock
and, shortly thereafter, 729,927 shares were issued. However, as of the date of
this Prospectus, no shares of Series 2 Preferred Stock are issued and
outstanding since they all converted into shares of Common Stock on a
one-for-one basis on April 3, 1998. The Series 2 Preferred Stock does not carry
any dividend preference. Upon a liquidation of the Company, each share of the
Series 2 Preferred Stock outstanding at the time of such liquidation is entitled
to a liquidation preference equal to the purchase price paid for such share.
This amount must be paid prior to any distribution on shares of Common Stock,
however, the liquidation preference on the Series 1 Preferred Stock must be paid
before the liquidation preference on the Series 2 Preferred Stock is paid.
The issuance of one or more series of Class A Preferred Stock could
have an adverse effect on certain rights, including voting rights, of the
holders of Common Stock. Such shares are also available for issuance to defend
against the threat of a takeover, if the Board of Directors deems such takeover
not to be in the best interests of the Company or its shareholders. This could
occur even if such a takeover of the Company was favored by a majority of
shareholders and was at a premium to the market price of the Common Stock. The
Company has no current plans or intention to issue additional shares of Class A
Preferred Stock.
WARRANTS
The Warrant issued to the Selling Stockholder entitles the holder to
purchase 200,000 Shares of Common Stock at a price of $2.17 per share. The
Warrant is exercisable at any time beginning on May 19, 1999 and ending three
years thereafter. The Shares of Common Stock underlying the Warrant, when issued
upon exercise of the Warrant in whole or in part, will be fully
38
<PAGE> 41
paid and nonassessable (subject to the last sentence under "Common Stock"
above), and the Company will pay any transfer tax incurred as a result of the
issuance of Common Stock to the holder upon its exercise.
The Warrant contains provisions that protect the holder against
dilution by adjustment of the exercise price and number of shares to be received
upon exercise. Such adjustments will occur in the event, among others, of a
merger, stock split or reverse stock split, stock dividend or recapitalization.
The Company is not required to issue fractional shares upon the exercise of the
Warrant. The holder of the Warrant will not possess any rights as a stockholder
of the Company until such holder exercises the Warrant.
The Warrant may be exercised upon surrender on or before the expiration
date of the Warrant at the offices of the Company, with an exercise form
completed and executed as indicated, accompanied by payment of the exercise
price for the number of shares with respect to which the Warrant is being
exercised. The exercise price is payable either (i) by check or bank draft
payable to the order of the Company or by wire transfer to an account designated
by the Company or (ii) by a "cashless exercise," in which that number of shares
of Common Stock underlying the Warrant having a fair market value equal to the
aggregate exercise price are cancelled as payment of the exercise price.
For the life of the Warrant, the holder thereof has the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares of Common stock issuable upon the exercise of
the Warrant. The Warrant holder may be expected to exercise the Warrant at a
time when the Company would, in all likelihood, be able to obtain any needed
capital by an offering of Common Stock on terms more favorable than those
provided for by the Warrant. Furthermore, the terms on which the Company could
obtain additional capital during the life of the Warrant may be adversely
affected.
In addition to the Warrant issued to the Selling Stockholder, the
Company is required to issue warrants to its placement agent in connection with
the Equity Line Agreement. Such warrants will be issued at such time or times as
the Company receives funds from the Selling Stockholder under the Equity Line
Agreement. The placement agent is entitled to receive warrants exercisable for
Shares of Common Stock representing 10% of the Shares of Common Stock sold by
the Company to the Selling Stockholder under the Equity Line Agreement. Each
warrant will have a three-year term and will be exercisable at the same price
per share and will have terms and conditions similar to the Warrant issued to
the Selling Stockholder described above.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Firstar Trust
Company, Milwaukee, Wisconsin.
CERTAIN STATUTORY PROVISIONS
Section 180.1150 of the Wisconsin Business Corporation Law provides
that the voting power of shares of public corporations, such as the Company,
which are held by any person holding in excess of 20% of the voting power of
such Company shall be limited to 10% of the full voting power of such shares.
This statutory voting restriction is not applicable to shares acquired directly
from the Company, acquired in a transaction incident to which the shareholders
of the Company vote to restore the full voting power of such shares and under
certain other circumstances more fully described in section 180.1150. In
addition, this statutory voting restriction is not applicable to shares of
Common Stock acquired before April 22, 1986.
Section 180.1141 of the Wisconsin Business Corporation Law provides
that a "resident domestic corporation," such as the Company, may not engage in a
"business combination" with an "interested shareholder" (a person beneficially
owning 10% or more of the aggregate voting power of the stock of the Company)
for three years after the date (the "stock acquisition date") the interested
shareholder acquired his 10% or greater interest, unless the business
combination (or the acquisition of the 10% or greater interest) was approved
before the stock acquisition date by the Company's Board of Directors. After the
three-year period, a business combination that was not so approved can be
consummated only if it is approved by a majority of the outstanding voting
shares not held by the interested shareholder or is made at a specified price
intended to provide a fair price for the shares held by
39
<PAGE> 42
noninterested shareholders. Section 180.1141 is not applicable to shares of
Common Stock acquired by a shareholder prior to the registration of the Common
Stock under the Exchange Act and shares acquired before September 10, 1987.
INDEMNIFICATION
The Company's directors and officers are entitled to certain statutory
rights to be indemnified by the Company against certain litigation-related
liabilities and expenses, provided the director or officer is either successful
in the defense of such litigation or is otherwise determined not to have engaged
in willful misconduct, knowingly violated the law, failed to deal fairly with
the Company or its shareholders or derived an improper personal benefit in the
performance of his duties to the Company. These rights are incorporated in the
Company's By-Laws. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
40
<PAGE> 43
SELLING STOCKHOLDER
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock by the Selling Stockholder as of , 1998.
Upon the completion of the offering and assuming the sale by the Selling
Stockholder of all of the Shares of Common Stock available for resale under this
Prospectus, the Selling Stockholder will not own more than 1% of the outstanding
Common Stock of the Company.
<TABLE>
<CAPTION>
Shares Owned Shares Being Shares Owned After
Before Offering Offered Offering
Number Percent
<S> <C> <C> <C> <C>
Kingsbridge Capital Limited 2,413,124(1) 20%(2) 2,413,124(1) 0(3)
P.O. Box 3340
Dawson Building
Main Street
Tortola,
British Virgin Islands
Total
</TABLE>
(1) Includes 2,213,124 Shares of Common Stock which may be issued pursuant
to the Equity Line Agreement and 200,000 Shares of Common Stock which
are issuable upon exercise of the Warrant.
(2) As of the date of this Prospectus, the Selling Stockholder does not own
any shares of the Company's Common Stock. If all of the Shares offered
hereby were purchased and held by the Selling Stockholder, it would
hold approximately 20% of the outstanding Common Stock of the Company.
(3) Assumes that all Shares acquired pursuant to the Equity Line Agreement
and the Warrant are sold pursuant to this Prospectus.
The Selling Stockholder has not had any material relationship with the
Company or any of its affiliates within the past three years other than as a
result of the ownership of Common Stock or as a result of the negotiation and
the execution of the Equity Line Agreement.
The Shares offered hereby by the Selling Stockholder are to be acquired
pursuant to the Equity Line Agreement between the Company and the Selling
Stockholder or upon exercise of the Warrant. Under the Equity Line Agreement,
the Company agreed to register the Shares for resale by the Selling Stockholder
to permit the resale of such Shares from time to time by the Selling Stockholder
in the market or in privately-negotiated transactions. The Company will prepare
and file such amendments and supplements to the registration statement as may be
necessary in accordance with the rules and regulations of the Securities Act to
keep it effective for a period of approximately 30 months.
The Company has agreed to bear certain expenses (other than broker
discounts and commissions, if any) in connection with the registration
statement.
41
<PAGE> 44
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Stockholder that the
Selling Stockholder may sell the Shares from time to time in transactions on the
American Stock Exchange, in negotiated transactions, or otherwise, or by a
combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices or at negotiated
prices. The Selling Stockholder may effect these transactions by selling the
Shares to or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholder or the
purchasers of the Shares for whom the broker-dealer may act as an agent or to
whom they may sell the Shares as a principal, or both. The compensation to a
particular broker-dealer may be in excess of customary commissions.
The Selling Stockholder is an "underwriter" within the meaning of the
Securities Act in connection with the sale of the Shares offered hereby.
Broker-dealers who act in connection with the sale of the Shares may also be
deemed to be underwriters. Profits on any resale of the Shares as a principal by
such broker-dealers and any commissions received by such broker-dealers may be
deemed to be underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in such transactions as agent may
receive commissions from the Selling Stockholder (and, if they act as agent for
the purchaser of such Shares, from such purchaser). Broker-dealers may agree
with the Selling Stockholder to sell a specified number of Shares at a
stipulated price per share and, to the extent such a broker-dealer is unable to
do so acting as agent for the Selling Stockholder, to purchase as principal any
unsold Shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholder. Broker-dealers who acquire Shares as principal may
thereafter resell such Shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or otherwise
at market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive from the purchasers of such
Shares commissions computed as described above. To the extent required under the
Securities Act, a supplemental prospectus will be filed, disclosing (a) the name
of any such broker-dealers; (b) the number of Shares involved; (c) the price at
which such Shares are to be sold; (d) the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable; (e) that such
broker-dealers did not conduct any investigation to verify the information set
out or incorporated by reference in this Prospectus, as supplemented; and (f)
other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Shares may not simultaneously engage in
market making activities with respect to such securities for a period beginning
when such person becomes a distribution participant and ending upon such
person's completion of participation in a distribution, including stabilization
activities in the Common Stock to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition and without
limiting the foregoing, in connection with transactions in the Shares, the
Company and the Selling Stockholder will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
imitation, Rule 10b-5 and, insofar as the Company and the Selling Stockholder
are distribution participants, Regulation M and Rules 100, 101, 102, 103, 104
and 105 thereof. All of the foregoing may affect the marketability of the
Shares.
The Selling Stockholder has agreed that it will not engage in short
sales of the Company's Common Stock except that the Selling Stockholder may
enter into any short sale or other hedging arrangement it deems appropriate with
respect to Shares it receives under the Equity Line Agreement after it receives
a Put Notice with respect to such Shares so long as such short sales or
arrangements do not involve more than the number of such Shares with respect to
that Put Notice.
The Selling Stockholder will pay all commissions and certain other
expenses associated with the sale of the Shares. The Shares offered hereby are
being registered pursuant to contractual obligations of the Company, and the
Company has paid the expenses of the preparation of this Prospectus. The Company
has also agreed to indemnify the Selling Stockholder with respect to the Shares
offered hereby against certain liabilities, including,
42
<PAGE> 45
without limitation, certain liabilities under the Securities Act, or, if such
indemnity is unavailable, to contribute toward amounts required to be paid in
respect of such liabilities.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.,
Milwaukee, Wisconsin.
EXPERTS
The consolidated financial statements of the Company at September 30,
1997 and for the two years in the period ended September 30, 1997 included in
this Prospectus have been audited by McGladrey & Pullen LLP, independent
auditors, as set forth in their report (which contains an explanatory paragraph
with respect to conditions which raise substantial doubt about the Company's
ability to continue as a going concern), in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
amounts and classification of liabilities that might result from the outcome of
that uncertainty.
43
<PAGE> 46
THE FEMALE HEALTH COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Document Page No.
<S> <C>
Audited Consolidated Financial Statements.
Report of McGladrey & Pullen, LLP, Independent Auditors. F-1
Consolidated Balance Sheet as of September 30, 1997. F-2
Consolidated Statements of Operations for the years ended September 30,
1997 and 1996. F-3
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997 and 1996. F-4
Consolidated Statements of Cash Flows for the years ended September 30,
1997 and 1996. F-7
Notes to Consolidated Financial Statements. F-10
Unaudited Condensed Interim Financial Statements.
Condensed Consolidated Balance Sheet as of June 30, 1998. F-25
Condensed Consolidated Statements of Operations for Quarters ended June
30, 1998 and 1997. F-26
Condensed Consolidated Statements of Operations for Nine Months ended
June 30, 1998 and 1997. F-27
Condensed Consolidated Statements of Cash Flows for Nine Months ended
June 30, 1998 and 1997. F-28
Notes to Condensed Consolidated Financial Statements. F-29
</TABLE>
F-i
<PAGE> 47
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Female Health Company and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of The
Female Health Company and subsidiaries, as of September 30, 1997, and
the related statements of operations, stockholders' equity, and cash
flows for the years ended September 30, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Female Health Company and subsidiaries as of September 30, 1997, and
the results of their operations and their cash flows for the years
ended September 30, 1997 and 1996, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been presented
assuming that The Female Health Company will continue as a going
concern. As more fully described in Note 15, the Company has
experienced slower than expected growth in revenues from its sole
product, which has adversely affected the Company's current results of
operations and liquidity. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 15. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
As described in Note 16 to the financial statements, the Company
changed its method of accounting for discounts on convertible
debentures. This change has been applied retroactively to 1996 and,
accordingly, all prior financial statements have been restated.
McGLADREY & PULLEN, LLP
/s/ MCGLADREY & PULLEN, LLP
Schaumburg, Illinois
November 20, 1997
F-1
<PAGE> 48
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, 1997
------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,633,467
Accounts receivable, net of allowances of $292,000 610,951
Inventories, net of allowances of $894,000 947,081
Prepaid expenses and other current assets 293,590
-----------
TOTAL CURRENT ASSETS 3,485,089
OTHER ASSETS
Note receivable 750,000
Intellectual property, net of accumulated amortization of $199,248 996,360
Other assets 243,782
PROPERTY, PLANT AND EQUIPMENT
Equipment, furniture and fixtures 3,863,859
Less: accumulated depreciation (999,735)
-----------
2,864,124
-----------
$8,339,355
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, related party, net of unamortized discount of $133,209 $866,791
Current maturities of long-term debt and capital lease obligations 43,996
Accounts payable 874,908
Accrued expenses and other current liabilities 372,323
Preferred dividends payable 14,965
----------
TOTAL CURRENT LIABILITIES 2,172,983
LONG-TERM LIABILITIES
Long term debt and capital lease obligations, less current maturities 538,969
Deferred gain on sale of facility 1,767,612
Other long term liabilities 305,153
----------
4,784,717
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, par value $.01
per share. Authorized 5,000,000 shares; issued and outstanding 680,000 shares
6,800
Common Stock, par value $.01 per share.
Authorized 15,000,000 shares; issued and outstanding 9,514,430 shares 95,145
Additional paid-in capital 40,238,387
Foreign currency translation gain 203,195
Accumulated deficit (36,988,889)
------------
3,554,638
------------
$8,339,355
============
</TABLE>
See notes to consolidated financial statement
F-2
<PAGE> 49
<PAGE> 50
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended September 30
1997 1996
----------- ----------
<S> <C> <C>
NET REVENUES $2,916,408 $2,064,258
COST OF PRODUCTS SOLD:
Cost of goods sold 4,530,185 3,769,979
Change in obsolescence reserve (1,054,476) 950,000
----------- ----------
3,475,709 4,719,979
----------- ----------
GROSS PROFIT (LOSS) (559,301) (2,655,721)
OPERATING EXPENSES
Advertising and promotion 1,642,347 1,976,289
Selling, general and administrative 3,036,765 3,303,717
----------- ----------
Total Operating Expenses 4,679,112 5,280,006
----------- ----------
Operating (loss) (5,238,413) (7,935,727)
NONOPERATING INCOME (EXPENSE)
Interest expense (1,268,980) (662,916)
Interest income 176,717 106,708
Nonoperating income/(expense) 79,527 (301,907)
----------- -----------
(1,012,736) (858,115)
----------- -----------
(LOSS) FROM CONTINUING OPERATIONS (6,251,149) (8,793,842)
Income (loss) from discontinued
operations and gain on sale, net of
applicable income tax expense --- (4,461)
----------- -----------
Net (loss) (6,251,149) (8,798,303)
Preferred dividends 14,965 ---
----------- -----------
Net (loss) attributable to common
stockholders (6,266,114) (8,798,303)
Net (loss) per common share outstanding
Continuing Operations ($0.74) ($1.33)
Discontinued Operations .00 .00
----------- ----------
($0.74) ($1.33)
Weighted average common shares outstanding 8,453,266 6,611,796
</TABLE>
See notes to consolidated financial statement
F-3
<PAGE> 51
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in
Stock Stock Capital
<S> <C> <C> <C>
Balance at September 30, 1995 $ --- $63,928 29,411,702
Net loss --- --- ---
Issuance of 700,000 shares of Common Stock
(net of offering costs of $293,313) --- 7,000 2,779,417
Issuance of 13,350 shares of Common Stock
upon exercise of stock options --- 133 46,741
Issuance of 105,580 shares of Common Stock
for consulting and other services --- 1,056 626,712
Issuance of warrants with convertible debentures --- --- 90,000
Issuance of beneficial conversion feature
with convertible debentures --- --- 382,000
Issuance of warrants with short-term notes payable --- --- 340,000
Issuance of warrants for consulting and other services --- --- 78,500
Translation adjustment --- --- ---
-------- --------- -----------
Balance at September 30, 1996 --- $72,117 $33,755,072
Net loss --- --- ---
Issuance of 2,128,371 shares of Common Stock
upon conversion of debt --- 21,284 3,670,281
Issuance of 39,833 shares of Common Stock
upon exercise of stock options --- 398 178,268
Issuance of 124,564 shares of Common Stock
for consulting services --- 1,246 206,617
Issuance of 10,000 shares of Common Stock
under Stock Bonus Plan --- 100 53,025
Issuance of warrants with convertible debentures --- --- 30,176
Issuance of beneficial conversion feature
with convertible debentures --- --- 398,000
Issuance of warrants with short-term notes payable --- --- 250,000
Issuance of 680,000 shares of Preferred Stock
(net of offering costs of $96,252) 6,800 --- 1,596,948
Issuance of warrants for consulting services --- --- 89,500
Revaluation of options for legal services --- --- 10,500
Preferred stock dividends --- --- ---
Translation adjustment --- --- ---
------ -------- -----------
Balance at September 30, 1997 $6,800 $95,145 $40,238,387
====== ======== ===========
</TABLE>
F-4
<PAGE> 52
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Foreign
Currency
Accumulated Translation
Deficit Gain (Loss) Total
<S> <C> <C> <C>
Balance at September 30, 1995 $(21,924,472) --- $7,551,158
Net loss (8,798,303) --- (8,798,303)
Issuance of 700,000 shares of Common Stock
(net of offering costs of $293,313) --- --- 2,786,417
Issuance of 13,350 shares of Common Stock
upon exercise of stock options --- --- 46,874
Issuance of 105,580 shares of Common Stock
for consulting and other services --- --- 627,768
Issuance of warrants with convertible debentures --- --- 90,000
Issuance of beneficial conversion feature
with convertible debentures --- --- 382,000
Issuance of warrants with short-term notes payable --- --- 340,000
Issuance of warrants for consulting and other services --- --- 78,500
Translation adjustment --- 83,858 83,858
---------- ------ ------
Balance at September 30, 1996 (30,722,775) 83,858 3,188,272
Net loss (6,251,149) --- (6,251,149)
Issuance of 2,128,371 shares of Common Stock
upon conversion --- --- 3,691,565
Issuance of 39,833 shares of Common Stock
upon exercise of stock options --- --- 178,666
Issuance of 124,564 shares of Common Stock
for consulting services --- --- 207,863
Issuance of 10,000 shares of Common Stock
under Stock Bonus Plan --- --- 53,125
Issuance of warrants with convertible debentures --- --- 30,176
Issuance of beneficial conversion feature
with convertible debentures --- --- 398,000
Issuance of warrants with short-term notes payable --- --- 250,000
Issuance of 680,000 shares of Preferred Stock
(net of offering costs of $96,252) --- --- 1,603,748
Revaluation of warrants for consulting services --- --- 89,500
Revaluation of options for legal services --- --- 10,500
Preferred stock dividends (14,965) --- (14,965)
Preferred stock dividends --- --- ---
</TABLE>
F-5
<PAGE> 53
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Translation adjustment --- 119,337 119,337
------------ ------- -------
Balance at September 30, 1997 $(36,988,889) $203,195 $3,554,638
============ ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 54
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30
1997 1996
OPERATING ACTIVITIES ---------- ----------
<S> <C> <C>
Net (loss) ($6,251,149) ($8,798,303)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation 553,298 349,061
Amortization of intellectual property rights 121,741 76,023
Provision for (recovery of) inventory obsolescence (1,054,476) 950,000
Provision for doubtful accounts, returns and discounts 119,274 120,126
Gain on sale of Holdings --- (224,538)
(Gain) loss on disposal of equipment (84,646) 37,576
Issuance and revaluation of warrants and options 360,988 706,268
Amortization of debenture issuance costs 27,507 4,278
Amortization of discount on note receivable and interest earned on lease deposit (29,140) (29,703)
Amortization of discounts on notes payable and convertible debentures 954,820 304,570
Amortization of other assets --- 250,000
Write down of note receivable to realizable value 92,471 ---
Amortization of deferred gain on sale and leaseback of building (70,119) ---
Changes in operating assets and liabilities of continuing operations, excluding effect
of purchase of Chartex in 1996:
Accounts receivable (271,173) 47,269
Inventories 1,086,999 1,935,923
Prepaid expenses and other current assets 28,260 177
Accounts payable 138,532 (914,876)
Accrued expenses and other current liabilities (730,929) 1,133,407
Due to stockholder --- (19,795)
---------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (5,007,742) (4,072,537)
INVESTING ACTIVITIES
Capital expenditures (24,597) (596,402)
Purchase of Chartex, less $71,417 cash received --- (5,103,088)
Sale of Holdings, net of expenses and cash sold --- 5,213,263
Proceeds from sale of property and equipment 3,376,056 ---
Proceeds from return of lease deposits 91,171 ---
Payments for lease deposits (245,953) ---
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,196,677 (486,227)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 1,603,748 ---
Proceeds from issuance of common stock --- 3,080,000
Proceeds from issuance of common stock upon exercise of options 178,666 46,874
Costs of common stock issuance --- (293,583)
Proceeds from related party notes issued 1,000,000 2,160,000
Proceeds from convertible debentures issued 2,020,000 2,000,000
Payments on notes payable, related party (2,160,000) ---
Costs to issue convertible debentures (155,400) (154,000)
Increase (decrease) in notes payable --- (109,503)
Payments on long-term debt and capital lease obligations (1,912,430) (768,613)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 574,584 5,961,175
Effect of exchange rate changes on cash and equivalents (44,132) (9,675)
---------- ----------
Increase (decrease) in cash and cash equivalents (1,280,613) 1,392,736
</TABLE>
F-7
<PAGE> 55
<TABLE>
<CAPTION>
<S> <C> <C>
Cash and cash equivalents at beginning of year 2,914,080 1,521,344
---------- ----------
Cash and cash equivalents at end of year $1,633,467 $2,914,080
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 56
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended September 30
1997 1996
---------- ----------
<S> <C> <C>
Supplemental cash flow disclosures:
Interest paid $273,714 $457,280
Supplemental schedule of noncash investing and financing activities:
Convertible debentures converted to common stock, net of unamortized
discounts and issuance costs 3,691,565
Issuance of warrants on convertible debentures and notes payable 280,176 430,000
Capital lease obligations incurred for equipment 56,588
Preferred dividends declared 14,965
Sale of manufacturing facility:
Proceeds from sale 3,365,000
Depreciated cost of property (1,398,819)
-----------
Deferred gain on sale 1,966,181
Sale of WPC Holdings, Inc.:
Selling price 8,285,000
Liabilities assumed by buyer (916,060)
Note receivable taken (785,000)
Other assets received (250,000)
----------
Cash received 6,333,940
Expenses on sale and cash sold (1,120,677)
-----------
$5,213,263
Purchase of Chartex:
Assets acquired:
Trade receivables 203,613
Inventories 644,268
Other current assets 82,053
Property and equipment 3,870,167
Intellectual property rights 1,127,469
----------
5,927,570
Liabilities assumed:
Accounts payable and accrued expenses (835,725)
Bank debt (1,615,229)
Other long-term debt (1,109,235)
----------
3,560,189
Net assets acquired, net of cash received of $71,417 2,367,381 Settlement of
intercompany assets and liabilities:
Prepaid royalties (1,875,491)
Accrued royalties 4,761,198
Option fee paid (150,000)
----------
Cash paid in 1996 $5,103,088
==========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 57
Note 1. Nature Of Business and Significant Accounting Policies
Principles of consolidation and nature of operations: The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, The Female Health Company - UK and The Female Health Company - UK,
plc, previously Chartex Resources Limited and Chartex International, plc
("Chartex"), respectively. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Female Health Company ("FHC"
or the "Company") is currently engaged in the marketing, manufacture and
distribution of a consumer health care product known as the Reality female
condom, "Reality," in the U.S. and "femidom" or "femy" outside the U.S. The
Female Health Company - UK, is the holding company of The Female Health Company
- - UK, plc, which operates a 40,000 sq. ft. leased manufacturing facility located
in London, England.
The Company changed its name from Wisconsin Pharmacal, Inc. to The Female
Health Company concurrently with the sale of WPC Holdings, Inc. on January 29,
1996.
The Company sells primarily to public sector institutions, wholesalers,
distributors, and drug, general merchandise, and grocery retailers in the U.S.
and United Kingdom.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and use assumptions that affect certain reported amounts and
disclosures. Actual results may differ from those estimates. Significant
accounting estimates include the following:
Allowances for price discounts and product returns: Receivables include a
provision for sales returns and trade allowances, which is based on management's
estimate of future product returns from customers in connection with unsold
product which has expired or is expected to expire before it is sold. The
estimated cost for product returns, price discounts and trade allowances are
accrued when the initial sale is recorded.
Allowances against inventories: 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.
Intellectual property: The Company evaluates intellectual property rights
for impairment by comparing the net present value of the asset's estimated
future income stream to the asset's carrying value.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on the
Company's future results of operations and financial condition.
Cash equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Substantially all of the Company's cash was on deposit with one financial
institution.
Inventories: Inventories are valued at the lower of cost or market. The
cost is determined using the first-in, first-out (FIFO) method.
Foreign currency translation: In accordance with Financial Accounting
Standards No. 52, "Foreign Currency Translation", the financial statements of
the Company's international subsidiaries are translated into U.S. dollars using
the exchange rate at each balance sheet date for assets and liabilities, the
historical exchange rate for stockholders' equity and a weighted average
exchange rate for each period for revenues, expenses, and gains and losses.
Translation adjustments are recorded as a separate component of stockholders'
equity as the local currency is the functional currency.
Building, equipment, furniture and fixtures and assets under capital
leases: Depreciation and amortization is computed by the estimated useful lives
of the respective assets which range as follows:
<TABLE>
<S> <C>
Equipment 5 - 10 years
Furniture and fixtures 3 years
</TABLE>
F-10
<PAGE> 58
Amortization of assets under capital lease is included with depreciation and
amortization for owned assets.
Intellectual property rights: The Company holds patents on the Female
Condom in the United States, the European Union, Japan, Canada, Australia and
The People's Republic of China and holds patents on the manufacturing technology
in various countries. The Company also licenses the trademark "Reality" in the
United States and has trademarks on the names "femidom" and "femy" in certain
foreign countries. Intellectual property rights are amortized on a straight-line
basis over their estimated useful life of twelve years.
Financial instruments: The Company has no financial instruments for which
the carrying value materially differs from fair value.
Revenue Recognition: Revenues from product sales are recognized as the
products are shipped to the customers.
Research and Development Costs: Research and development costs are expensed
as incurred. The amount of costs expensed for the years ended September 1997 and
1996 was $60,811 and $361,094, respectively.
Stock-Based Compensation: The value of stock options awarded to employees
is measured using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The
Company has provided pro forma disclosures of net income as if the fair
value-based method prescribed by Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", ("FAS 123"). was used in measuring
compensation expense in Note 7.
Income Taxes: The Company files separate income tax returns for its foreign
subsidiaries. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109) requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are also provided for carryforwards for income tax purposes.
In addition, the amount of any future tax benefits is reduced by a valuation
allowance to the extent such benefits are not expected to be realized.
Advertising: The Company's policy is to expense production costs in the
period in which the advertisement is initially presented to consumers.
Net (Loss) Per Common Share: Net (loss) per common share is computed using
the weighted average number of shares of common stock outstanding. Fully diluted
income per share is not presented for each of the periods since the effect of
including common equivalent shares would be anti-dilutive.
Reclassifications: Certain prior year amounts have been reclassified on the
Consolidated Statements of Operations and the Consolidated Statements of Cash
Flows to conform to the 1997 presentation.
Note 2. Inventories
The components of inventory consist of the following at September 30, 1997:
<TABLE>
<S> <C>
Raw material $ 237,315
Work in process 60,879
Finished goods 1,542,887
Less allowance for obsolescence (894,000)
---------
Net Inventory $ 947,081
=========
</TABLE>
F-11
<PAGE> 59
Note 3. Leases
Property, plant and equipment include the following amounts for leases
which have been capitalized at September 30, 1997:
<TABLE>
<S> <C>
Leasehold interest in equipment, furniture and fixtures $189,124
Less accumulated amortization 148,478
--------
$ 40,646
========
</TABLE>
The Company entered into a seven year operating lease with a third party
for office space effective September 12, 1994. The lease is cancelable at the
end of the 60th month of the term of the lease upon payment of a termination fee
of $63,867. The Company also has an informal agreement to reimburse an affiliate
for office space used by the officers of the Company. The affiliate's lease is
with an unrelated third party which expires January 31, 2001.
On December 10, 1996, the Company entered into what is in essence a sale
and leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received $3,365,000 (Pounds)
1,950,000 for leasing the facility to a third party for a nominal annual rental
charge and for providing the third party with an option to purchase the facility
for one pound during the period December 2006 to December 2027.
As part of the same transaction, the Company entered into an agreement to
lease the facility back from the third party for base rents of $336,000 (Pounds)
195,000 per year payable quarterly until 2016. The lease is renewable through
December 2027. The Company was also required to make a security deposit of
$336,000 (Pounds) 195,000 to be reduced in subsequent years. The facility had a
net book value of $1,398,819 (Pounds) 810,845 on the date of the transaction.
The $1,966,181 (Pounds) 1,139,155 gain which resulted from this transaction will
be recognized ratably over the initial term of the lease. Unamortized deferred
gain as of September 30, 1997 was $1,767,612 (Pounds) 1,096,441. Concurrent with
this transaction, the Company repaid the mortgage loan on this property of
$1,834,000 (Pounds) 1,062,500.
In 1987, a subsidiary entered into a lease for office space expiring March
3, 1999. In 1993, these offices were vacated and subsequently this space was
subleased to a third party for a period expiring February 28, 1999. At the time
the sublease was entered into a liability was established for all future costs
to the end of the lease, net of expected sublease receipts. Details of lease
rent expense in total and separately for transactions with related parties is as
follows:
<TABLE>
<CAPTION>
September 30
1997 1996
-------- --------
<S> <C> <C>
Operating lease expense:
Factory and office leases $579,197 $ --
Office space used by officers 51,255 57,640
Other 88,772 114,684
-------- --------
Total lease expense 719,224 172,324
Discontinued operations --- 32,035
-------- --------
Continuing operations $719,224 $140,289
======== ========
</TABLE>
F-12
<PAGE> 60
Future minimum payments under capital and operating leases, including planned
reimbursement of affiliate for office space used by officers, consisted of the
following at September 30, 1997:
<TABLE>
<CAPTION>
Rentals
Receivable
Under
Capital Operating Subleases
-------- ---------- ----------
<S> <C> <C> <C>
1998 $44,897 $ 592,741 $65,664
1999 23,156 485,201 12,038
2000 --- 459,607 ---
2001 --- 431,983 ---
2002 --- 320,110 ---
Thereafter --- 4,401,513 ---
-------- --------- --------
Total minimum payments $68,053 $6,691,155 $77,702
========== ========
Amount representing interest (901)
--------
$67,152
========
</TABLE>
Note 4. Notes Payable and Long-Term Debt
During 1997, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt, a current director of the Company. The outstanding note payable
bears interest at 12% and is payable in full in 1998. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000 shares
of the Company's common stock at $1.848 per share, which represented the average
trading price for the five trading days prior to the closing date for the
transaction and resulted in an initial discount on the note of $250,000. Any
stock issued under the warrants carry certain registration rights. The warrants
expire in 2004. In addition, if the Company defaults on its obligation under the
note, the Company is required to issue an additional 200,000 shares of its
common stock to Mr. Dearholt in addition to all other remedies to which Mr.
Dearholt may be entitled. The note is recorded at September 30, 1997, net of
unamortized discount of $133,209. The discount in combination with the note's
12% coupon resulted in an effective interest rate of 53 percent on the note.
During 1997, the Company repaid $1,000,000 borrowed from an affiliate of Mr.
Dearholt, and $160,000 borrowed from Mr. Parrish, a current officer and director
of the Company.
Long-term debt and capital lease obligations at September 30, 1997, consisted of
the following:
<TABLE>
<S> <C>
Foundation note, noninterest bearing, due 1999,
net of unamortized discount of $80,676, interest imputed at 11% $ 515,813
Capital lease obligations 67,152
---------
Total long-term debt and capital leases 582,965
Less current maturities 43,996
---------
Long-term portion $ 538,969
=========
</TABLE>
The Foundation note for $515,813 (Pounds) 319,957 is a noninterest bearing
Economic Development Grant provided by the United Kingdom Regional Selective
Assistance Program. The grant is repayable by the Company if certain conditions
of the grant are not satisfied.
On February 20, 1997, the Company issued convertible debentures for $1,989,824
which is net of $30,176 in unamortized discount; (the Debentures) at 8% maturing
in 1999. These Debentures are convertible in the Company's common stock at the
lesser of $2.875 (representing the average market price for the five
F-13
<PAGE> 61
days preceding the date the Debentures were sold) or 80% of the market price at
the time the debentures are converted into FHC common stock. The discount
relates to the valuation of the detachable warrants for 67,333 shares of common
stock. During fiscal 1997, the debentures were all converted into 1,364,625
shares of common stock.
At September 30, 1996, there were convertible debentures of $1,910,000 (net of
$90,000 in unamortized discount) with detachable warrants for 40,201 shares of
common stock (the Debentures) at 8% maturing in 1999. These Debentures were
convertible into the Company's common stock at the lesser of $5.275
(representing the average market price for the five days preceding the date the
Debentures were sold) or 80% of the market price at the time the debentures are
converted into FHC common stock. All of these debentures were converted in
763,746 shares of common stock in fiscal 1997.
Upon conversion of the debentures, $277,610 of issuance costs and $110,007 of
unamortized discount were charged to equity and $59,182 of accrued interest was
credited to equity.
Note 5. Income Taxes
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss from continuing operations before
income taxes as of September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
September 30
1997 1996
---------- ----------
<S> <C> <C>
Tax credit statutory rates $(2,130,479) $(2,942,986)
Nondeductible expenses 223,368 ---
State income tax, net of federal benefits (241,660) (231,219)
Benefit of net operating loss not
recognized, increase in valuation allowance 2,073,129 3,153,062
Other 75,642 (21,143)
---------- ----------
$ --- $ ---
========== ==========
</TABLE>
As of September 30, 1997, the Company had federal net operating loss
carryforwards of approximately $25,700,000 and state net operating loss
carryforwards of $28,400,000, respectively, for income tax purposes expiring in
years 2005 to 2013. The benefit relating to $1,489,218 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 $181,000 at September 30, 1997, expiring in years 1998
to 2008. The Company's Chartex subsidiary has U.K. net operating loss
carryforwards of approximately $68,900,000 as of September 30, 1997. These U.K.
net operating loss carryforwards can be carried forward indefinitely to be used
to offset future U.K. taxable income. Significant components of the Company's
deferred tax assets and liabilities are as follows at September 30, 1997:
F-14
<PAGE> 62
<TABLE>
<S> <C>
Deferred tax assets:
Federal net operating loss carryforwards $8,727,724
State net operating loss carryforwards 1,843,911
Foreign net operating loss carryforwards 22,752,873
Tax credit carryforwards 181,210
Inventory obsolescence 328,043
Accounts receivable allowances 90,373
Other 22,330
----------
Total gross deferred tax assets 33,946,464
Valuation allowance for deferred tax assets
(33,930,605)
----------
Deferred tax assets net of valuation allowance 15,859
Deferred tax liabilities: Equipment, furniture
and
fixtures
(15,859)
---------
Net deferred tax assets $ ---
=========
</TABLE>
Reconciliations of the valuation allowance for deferred tax assets for the year
ended September 30, 1997, is as follows:
<TABLE>
<S> <C>
Balance, beginning $(31,857,476)
Increase in valuation allowance charged
to current operations (2,073,129)
------------
Balance, ending $(33,930,605)
============
</TABLE>
The valuation allowance reported in the financial statements for the year ended
September 30, 1996, was decreased by approximately $559,000 due primarily to
changes in the deferred tax asset related to net operating loss carryforwards
acquired in the purchase of Chartex.
Note 6. Royalty and Licensing Agreements
The Company has an exclusive license (except for licenser's rights) with Meijers
Inc. to use the trademark "Reality" in the U.S. and Canada. For this exclusive
license to the Reality trademark, the Company agreed to pay the licenser the
greater of (a) $0.015 per Female Condom sold in the U.S. thereafter or (b) a
minimum annual royalty equal to 50% of the average annual royalties paid during
the period beginning five years immediately preceding the year for which the
royalties are due or $4,500 whichever is greater. The amount of trademark
royalty expense was approximately $5,700 and $8,900 for 1997 and 1996,
respectively.
Effective September 24, 1992, the Company entered into an agreement with Family
Health International ("FHI"), a nonprofit organization. FHI, in conjunction with
the Contraceptive Research and Development Program ("CONRAD"), conducted a major
study to assess the safety and efficacy of the Female Condom. The agreement with
FHI provides that FHI may not use, or permit the use of, the data supporting the
study in connection with any company competitive with the Company or product
competitive with the Female Condom. The agreement also provides that FHI will be
paid a royalty on U.S. private sector sales of the Female Condom. The royalty is
calculated on a sliding scale based on the number of units sold beginning with
quantities sold over 10 million units and subject to a cumulative maximum
royalty of $10 million. Since less than 10 million units have been sold to date
no royalties have been incurred.
Prior to the 1996 acquisition of Chartex, the Company paid royalties under a
series of licensing agreements to market the Female Condom in the United States,
Canada and Mexico. These royalty agreements have ceased upon the acquisition and
unpaid royalties were settled at the acquisition date.
F-15
<PAGE> 63
Note 7. Common Stock
Stock Option Plans
In October 1989, in conjunction with an amendment of the officer/stockholder's
employment agreement, the Company adopted the 1989 Stock Option Plan which
granted the officer/stockholder (now "former officer") options to purchase up to
50,000 shares of Common Stock at the price per share in the Company's initial
public offering ($6.00). During a previous year, 30,000 of these options were
canceled. The remaining options for 20,000 shares are currently exercisable.
On April 6, 1991 the Company entered into a stock option agreement with this
same former officer. Under the agreement, the Company granted the former officer
the option to purchase up to 130,000 shares of Common Stock at the market price
at the date of the grant ($4.75 per share). Exercise of the option was
contingent upon the market price of the Common Stock equaling at least $9.50 per
share within a three-day period immediately preceding the date of exercise. On
July 31, 1996, the Board of Directors amended the plan entitling the exercise of
these options for 130,000 shares of Common Stock at any time prior to the
expiration of the option period. In October, 1996 36,000 of these shares were
exercised. At September 30, 1997 options to purchase 94,000 shares of Common
Stock were outstanding under this agreement.
In 1990, the Company provided for the award of options to purchase up to 200,000
shares of the Company's common stock to key Company employees. The options
generally expire in eight years from date of grant and become exercisable evenly
over a four-year period. At September 30, 1997, 108,279 options are outstanding
under the 1990 plan, 97,779 of which are exercisable.
The Company has various stock option plans established in 1994 and 1997 under
which it may grant to employees responsible for the growth and financial success
of the Company options to purchase shares of Common Stock. These options
generally expire ten years from the date of grant and become exercisable based
on continued employment in one-third increments as follows: (i) on the first
anniversary of the grant date (ii) on the date when the average sale price of
the Company's common stock is at least $7.50 per share and (iii) on the date
when the Company and its subsidiaries, on a consolidated basis, achieve a
positive cash flow for a six-month period, as determined by the Company's
independent auditors.
In 1997, the exercise price for The Female Health Company employee stock options
granted under the 1997 Plan and the 1994 Stock Option Plan (the "1994 Plan")
were amended to $2.00 per share (the last sale price of the Company's common
stock as of April 22, 1997).
Under the 1994 plan, the Company provided for the award of options to purchase
up to 449,000 shares of the Company's common stock. At September 30, 1997,
433,867 options were granted and are outstanding under the 1994 plan, 143,734 of
which were exercisable.
Under the 1997 plan, the Company provided for the award of options to purchase
up to 600,000 shares of the Company's common stock. At September 30, 1997,
444,600 options were granted and are outstanding under the 1997 Plan, none of
which were exercisable.
Directors who are employees of the Company do not receive compensation for
serving in such capacity. Directors who are not employees of the Company each
receive $1,000 for attendance at each Board meeting or a meeting of a committee
of which he or she is a member. In addition, during 1996 the Company established
a stock option plan for outside directors (the "Outside Director Plan"). The
Outside Director Plan provides each director who is not an employee of the
Company receives a grant of options to purchase 30,000 shares, 150,000 total
shares, of the Company's common stock at an exercise price equal to the last
sale price on the date of grant. The options generally expire ten years after
the grant date and vest in one-third increments on the grant date and each of
the two successive anniversaries thereafter provided the director continues to
serve on the Board. In 1997, options to purchase 60,000 shares of common stock
at $2.00 per share were granted and the exercise price on 60,000 options granted
in 1996
F-16
<PAGE> 64
was lowered to $2.00. At September 30, 1997, 120,000 options were outstanding
under the Outside Director Plan, of which 60,000 were exercisable.
During 1995, Phoenix Health Care of Illinois, Inc. ("Phoenix"), a related party
was awarded options to purchase 90,000 shares of Common Stock at $6.00 per
share. The options vest in accordance with the same vesting criteria as the 1990
and 1994 stock option plan above. During 1997, the exercise price was amended to
$2.00 per share (the last sale price of the Company's common stock as of April
22, 1997). No compensation expense was recognized. At September 30, 1997, 30,000
shares were exercisable.
During 1996, the Compensation Committee of the Board granted special stock
options to outside legal counsel to purchase 30,000 shares and an officer of the
Company to purchase 120,000 shares at an exercise price of $3.875. The Company
recognized a charge to income of $91,000 in connection with the issuance of
options to a nonemployee under FAS 123. During 1997, the Company amended the
exercise price on the 30,000 options to outside legal counsel to $2.00 per share
resulting in additional expense of $10,500. The options vest in accordance with
the same vesting criteria under the 1994 Plan as described above. At September
30, 1997, 150,000 options were outstanding, 50,000 of which were exercisable.
Summarized information regarding all of the Company's stock options is as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Shares Price
--------- --------
<S> <C> <C>
Outstanding at September 30, 1995 837,638 $6.04
Granted 350,900 4.17
Exercised (13,350) 3.51
Expired or canceled (160,384) 4.75
---------
Outstanding at September 30, 1996 1,014,804 4.89
Granted 504,600 2.00
Exercised (39,833) 4.49
Expired or canceled (18,825) 6.53
---------
Outstanding at September 30, 1997 1,460,746 2.92
---------
Exercisable at September 30, 1997 495,513 $4.30
</TABLE>
<TABLE>
<CAPTION>
September 30
1997 1996
------- -------
<S> <C> <C>
Exercisable shares 495,513 396,904
Available for future grants 200,533 92,100
</TABLE>
Stock options have been granted to employees at, or in excess of, fair market
value at the date of grant. Accordingly, in accordance with APB 25 and related
interpretations, no compensation cost has been recognized related to such stock
option grants.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for all awards during Fiscal 1996 and 1997
consistent with the method set forth under FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123") the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below:
F-17
<PAGE> 65
<TABLE>
<CAPTION>
Year ending September 30
------------------------------------------------------
Earnings Earnings
1997 per share 1996 per share
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders $(6,266,114) (.74) $(8,798,303) (1.33)
Compensation expense related to stock options granted (688,975) (.08) $(566,487) (.09)
----------- ---- ----------- -----
$(6,955,089) (.82) $(9,364,790) (1.42)
=========== ==== =========== =====
</TABLE>
As the provisions of FAS 123 have been applied only to options granted since
September 30, 1995, the resulting pro forma compensation cost is not
representative of that to be incurred in future years, when the pro forma cost
would be fully reflected.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model assuming expected volatility of 69.1% and
74.1%, risk-free interest rates of 5.86% and 5.51% for 1997 and 1996,
respectively, and expected lives of one to three years and 0.0% dividend yield
in both periods. The weighted average fair value of options granted or options
with reduced exercise price was $.84 and $1.57 for the years ended September 30,
1997 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
different from those of traded options, and because changes in the input
assumptions can materially affect the fair value estimate, the model may not
provide a reliable single measure of the fair value of its employee stock
options.
Stock Bonus Plan
During 1997, the Company adopted the 1997 Stock Bonus Plan ("1997 Bonus Plan")
to provide stock bonuses in lieu of cash bonuses to key employees who are
responsible for the Company's future growth and financial success. The 1997
Bonus Plan provides for the award of up to 200,000 shares which are
nontransferable and subject to a risk of forfeiture for one year subsequent to
grant date. At September 30, 1997, 10,000 shares of restricted stock had been
issued to one employee under the 1997 Bonus Plan.
Common Stock Purchase Warrants
During 1996, the Company entered into a consulting agreement (the "Consulting
Agreement") with a third party to provide investor relations services. In
connection with the Consulting Agreement, the Company granted the consultant
common stock purchase warrants to purchase 150,000 shares of the Company's
common stock. In 1997, the Company amended the consulting agreement, reducing
the exercise price to $2.00 per share. The Company recognized compensation of
$89,500 and $78,500 in 1997 and 1996, respectively, under FAS 123 in connection
with the exercisable shares. At September 30, 1997, 50,000 warrants were
exercisable.
F-18
<PAGE> 66
No warrants were exercised during 1997. At September 30, 1997, the following
warrants were outstanding:
<TABLE>
<CAPTION>
Number
Outstanding
-----------
<S> <C>
Warrant in connection with the consulting agreement 150,000
Warrant to the lender and the guarantor in connection with a $1,000,000 note 20,000
Warrant to the lender and the guarantor in connection with a $1,000,000 note 220,000
Warrants issued in connection with Convertible Debentures 40,201
---------
Warrants outstanding as of September 30, 1996 430,201
Issued during 1997 in connection with:
Note payable (Note 4) 200,000
Convertible Debentures (See Note 4) 67,333
Convertible Preferred Stock (See Note 8) 52,000
--------
Outstanding at September 30, 1997 749,534
</TABLE>
At September 30, 1997, the Company had reserved a total of 2,610,813 shares of
its common stock for the exercise of options and warrants outstanding. This
amount includes shares reserved to satisfy obligations due if the Company
defaults on the payment of interest or principal on an $1 million note due March
25, 1998.
Issuance of Stock
During 1997, the Company issued 124,564 shares of common stock with a market
value of approximately $330,000. The stock was issued to various consultants for
providing investor relation services. Consulting expense of $206,617 and
$127,188 was recognized during the years ended September 30, 1997 and 1996,
respectively.
In 1996, the Company sold in a public offering 700,000 shares of common stock.
The proceeds were used to repay a (Pounds) 312,000 promissory note and make a
partial prepayment on another promissory note and to fund the Company's
operating and working capital requirements. Net proceeds to the Company from the
offering, after deduction of associated expenses were $2.8 million. In addition,
27,000 shares of common stock were issued to the placement agent in November,
1996 for accrued offering expenses.
Note 8. Preferred Stock
In 1997, FHC raised approximately $1.6 million proceeds, net of issuance costs
of $96,252, in a private placement of 680,000 shares of 8% cumulative
convertible preferred stock. In addition, 52,000 common stock purchase warrants
were issued to the placement agents. Each share of preferred stock is
convertible into one share of the Company's common stock on or after August 1,
1998. Annual preferred stock dividends will be paid if and as declared by the
Company's Board of Directors. No dividends or other distributions will be
payable on the Company's common stock unless dividends are paid in full on the
preferred stock. The preferred stock may be redeemed at the option of FHC, in
whole or in part, on or after August 1, 2000, subject to certain conditions, at
$2.50 per share plus accrued and unpaid dividends. In the event of a liquidation
or dissolution of the Company, the preferred stock would have priority over the
Company's common stock.
Note 9. Acquisition and Disposition
In 1996, the Company sold WPC Holdings, Inc. ("Holdings"), which owned all of
the assets and liabilities of the Company other than those related primarily to
the Female Condom, and purchased Chartex Resources Limited ("Chartex"), the
owner of certain worldwide rights to, and sole manufacturer of, the Female
Condom.
F-19
<PAGE> 67
In 1996, the Company completed the sale of the net assets of Holdings for total
consideration of $8.75 million, valued for accounting purposes at $8.285
million. Total consideration included a $1 million note receivable with interest
at 8 percent, principal due in four equal annual installments beginning January
1999. This note receivable was discounted using an effective rate of interest of
15 percent and, as a result, was valued at inception at $785,000. The carrying
value of the note was reduced to $750,000 at September 30, 1997 in expectation
of early repayment of the note for an amount less than face value.
During the period beginning with the Company's Board of Directors approval of
the plan to sell Holdings until the sale was completed, Holdings was accounted
for as a discontinued operation. Results of Holdings for the period October 1,
1995 through January 29, 1996 were as follows:
<TABLE>
<S> <C>
Net revenues $3,258,346
Gross profit 1,524,302
Operating expenses 1,623,100
---------
Operating income (loss) (98,798)
Nonoperating expense (130,201)
---------
Income (loss) from operations (228,999)
Gain on sale of discontinued operations 224,538
---------
Income (loss) from discontinued operations $ (4,461)
=========
</TABLE>
Interest expense included in discontinued operations totaled $81,731 for the
year ended September 30, 1996. The purchaser of Holdings has assumed
responsibility for all of Holdings obligations. However, the Company remains
contingently liable for certain obligations incurred prior to the sale of
Holdings (See Note 12 - Contingent Liabilities).
In, 1996, the Company completed its purchase of all of the issued and
outstanding share capital of Chartex Resources Limited the parent company and
sole owner of stock in Chartex International, PLC (collectively referred to as
"Chartex"). Chartex is based in London, England and owns certain worldwide
intellectual property and proprietary manufacturing technology for the female
condom.
The acquisition of Chartex was accounted for as a purchase. The purchase price
of $5.2 million was less than the fair value of net assets purchased by $7.5
million. The excess of the fair value of the net assets acquired over the
purchase price was allocated to reduce long-term assets on a pro rata basis in
order to arrive at the purchase accounting values for the assets and liabilities
acquired.
The results of Chartex are combined with the Company after the February 1, 1996
acquisition date. The following unaudited summary, prepared on a pro forma
basis, combines the operating results of the Company and Chartex as if the
acquisition of Chartex had occurred on October 1, 1995:
<TABLE>
<CAPTION>
(millions, except per share data)
<S> <C>
Net revenues $2.1
Net loss (9.3)
Net loss per share ($1.41)
</TABLE>
The above amounts reflect adjustments for amortization of intangibles and
depreciation based upon purchase accounting values, imputed interest on borrowed
funds, and elimination of intercompany transactions. The pro forma information
is not necessarily indicative of the results that would have occurred had the
purchase been made at the beginning of the period or of the future results of
the combined operations.
F-20
<PAGE> 68
Note 10. Employee Retirement Plan
Effective October 1, 1997, the Company adopted a Simple Individual Retirement
Account (IRA) plan for its employees. Employees are eligible to participate in
the plan if their compensation reaches certain minimum levels and are allowed to
contribute up to a maximum of $6,000 annual compensation to the plan. The
Company has elected to match 100% of employee contributions to the plan up to a
maximum of 1% of employee compensation for the year.
Note 11. Industry Segments And Financial Information About Foreign and
Domestic Operations
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
Since the Company's 1996 acquisition of Chartex, the Company has operated in
foreign and domestic regions. Information about the Company's operations in
different geographic areas (determined by the location of the operating unit) is
as follows.
<TABLE>
<CAPTION>
September 30
----------------------------
(Amounts in thousands) 1997 1996
------- -------
<S> <C> <C>
Net revenues:
United States $2,050 $1,514
International 866 550
Operating profit (loss):
United States (3,120) (6,071)
International (2,118) (1,865)
Identifiable assets:
United States 3,349 4,946
International 4,990 6,320
</TABLE>
On occasion, the Company's U.S. unit sells product directly to customers located
outside the U.S. Were such transaction reported by geographic destination of the
sale rather than the geographic location of the unit, U.S. revenues would be
decreased and International revenues increased by $293,000 in 1997.
Note 12. Contingent Liabilities
Prior to the sale of Holdings, the Company entered into an employment agreement
with Mr. Wundrock and an agreement for the lease of the Holdings' facilities.
Each of these agreements was assigned to Holdings and assumed by the buyer of
Holdings. However, because the third party creditor did not release the Company
from any future liability under these employment and lease agreements at the
time of their assignment, the Company remains contingently liable if Holdings
defaults in making any payments under the agreements. At September 30, 1997, the
total future payments for these contingent liabilities was $3.1 million for the
lease of Holdings' facilities and $.6 million for the employment agreement.
The testing, manufacturing and marketing of consumer products by the Company
entail an inherent risk that product liability claims will be asserted against
the Company. The Company maintains product liability insurance coverage for
claims arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the century
date change occurs, date-sensitive systems may either fail or not operate
properly unless the underlying programs are modified or replaced. The Company is
assessing the extent of programming changes required to address this issue.
Although final cost estimates have not been determined, it is not expected that
these expenses will have a material impact on the Company's financial condition,
liquidity, or results of operations.
F-21
<PAGE> 69
Note 13. Related Party Transactions
For 1997, the Company paid the rent for office space leased by Phoenix but used
by two officers of the Company. No agreement currently exists between the
Company and Phoenix regarding the lease, however, it is the Company's intention
to continue paying the rent in order to provide office space for its employees.
It has been and currently is the policy of the Company that transactions between
the Company and its officers, directors, principal shareholders or affiliates
are to be on terms no less favorable to the Company than could be obtained from
unaffiliated parties. The Company intends that any future transactions between
the Company and its officers, directors, principal shareholders or affiliates
will be approved by a majority of the directors who are not financially
interested in the transaction.
Note 14. Current Accounting Pronouncements
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
supersedes APB Opinion No 15, was issued in February 1997 by the Financial
Accounting Standards Board. The Statement changes the computation and
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants and convertible securities,
outstanding that trade in a public market. Those entities that have only common
stock outstanding are required to present basic earnings per-share amounts. All
other entities are required to present basic and diluted per-share amounts.
Diluted per share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce a loss or
increase the income per common share from continuing operations. All entities
required to present per-share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 15, 1997. Earlier application
is not permitted.
The Company has numerous issues of potential common stock outstanding, including
options to employees and stock purchase warrants that become exercisable if
certain conditions are met and preferred stock that is convertible to common
stock. Each of these potential common stock instruments must be separately
evaluated to determined whether they are dilutive, and various adjustments to
income and share amounts are computed. Due to the complexities involved,
management has not completed its assessment of the effects that the application
of Statement No. 128 will have on the per-share information presented in the
accompanying financial statements.
Capital Structure
Statement of Financial Accounting Standard No. 129, "Disclosure of Information
about Capital Structure," was issued in February 1997 by the Financial
Accounting Standards Board. The Statement requires an entity to explain the
pertinent rights and privileges of the various securities outstanding. The
standard is effective for financial statement periods ending after December 15,
1997. The Company does not believe the adoption of the Standard will have a
material impact on the consolidated financial statements.
Comprehensive Income
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," that the Company will be required to adopt for
its year ended September 30, 1998, and disclose in its interim financial
statements beginning with the period ending December 31, 1997. This
pronouncement is not expected to have a significant impact on the Company's
financial statements. The Statement establishes standards for the reporting and
presentation of comprehensive income and its components. The statement requires
that items recognized as components of comprehensive income be reported in a
financial statement. The statement also requires that a company classify items
of other comprehensive income by their nature in a financial statement, and
display the accumulated balance of
F-22
<PAGE> 70
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. For
the years ended September 30, 1997 and 1996, the Company's components of
comprehensive income (loss) consisted of its reported net (loss) and foreign
currency translation adjustments.
Segments of an Enterprise
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information," was issued in July 1997 by the
Financial Accounting Standards Board. The Statement requires the Corporation to
disclose the factors used to identify reportable segments including the basis of
organization, differences in products and services, geographic areas, and
regulatory environments. The Statement additionally requires financial results
to be reported in the financial statements for each reportable segment. The
Statement is effective for financial statement periods beginning after December
15, 1997. The Company does not believe the adoption of the statement will have a
material impact on the consolidated financial statements.
Note 15. Continuing Operations
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a loss of $6.3 million for the year ended September 30, 1997, and as of
September 30, 1997, had an accumulated deficit of $37.0 million. At September
30, 1997, the Company had working capital of $1.3 million and stockholders'
equity of $3.6 million. The Company expects to incur substantial expenditures in
an effort to increase consumer awareness and acceptance of the Female Condom. As
a result, operations in the near future are expected to continue to use working
capital. Management recognizes that the Company's continued operations depend on
its ability to raise additional capital through a combination of equity or debt
financing, strategic alliances and increased sales volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the Female Condom. Management believes that
recent developments, including the Company's agreement with the UNAIDS, a joint
United Nations program on HIV/AIDS, provide an indication of the Company's early
success in broadening awareness and distribution of the Female Condom and may
benefit efforts to raise additional capital and to secure additional agreement
to promote and distribute the Female Condom throughout other parts of the world.
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated requirements.
Specifically, the Company entered into an agreement with Vector Securities
International, Inc. (Vector), an investment banking company specializing in
providing advice to pharmaceutical medical devices and managed care companies.
Pursuant to this agreement, for a one-year period, Vector will act as the
Company's exclusive financial advisor for the purpose of identifying and
evaluating opportunities available to the Company for increasing shareholder
value. These opportunities may include selling all or a portion of the business,
assets or stock of the Company or entering into one or more distribution
arrangements relating to the Company's product. However, no specific opportunity
has yet been identified and there can be no assurance that any such
opportunities will be available to the Company or, if so available, that the
Company will ultimately elect to consummate any such transaction. 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.
Note 16. Restatement of 1996 and 1997 Financial Statements.
F-23
<PAGE> 71
In March 1998, the Company discovered that it did not properly report a charge
to interest expense for the amortization of discounts associated with a
"beneficial conversion feature" on two sets of convertible debentures issued in
August 1996 and February 1997.
As disclosed in Note 4, the first set of debentures was issued in August 31,
1996 for $2,000,000 at 8% and the second set of debentures was issued February
20, 1997 for $2,020,000 at 8%, both maturing after 3 years. Both sets of
convertible debentures included a conversion feature that was "in the money" as
of the date of issuance ( a "beneficial conversion feature"). The beneficial
conversion feature allowed the debentures to be converted into company stock at
the lesser of $5.275 per share for debentures No. 1 and $2.875 per share for
debentures No. 2 (representing the average market price for the five preceding
days of the date the debentures were sold) or 80% of the market price at the
time the conversion occurs. Fifty percent of the debentures could be converted
into company stock after 45 days and the remainder after 65 days for both
debentures.
In March 1997, the SEC staff concluded that a beneficial conversion feature
should be recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in capital. That
amount should be calculated at the date of issue as the difference between the
conversion price and the fair value of the common stock into which the security
is convertible, multiplied by the number of shares into which the security is
convertible. Any discount resulting from the beneficial conversion feature
increases the effective interest rate of the security and should be reflected as
charge to interest expense.
The intrinsic value of the beneficial conversion feature as of date of issuance
was $382,000 on debentures No. 1 and $398,000 on debentures No. 2 and, as a
result, the Company has restated the previously reported financial statements
for 1997 and 1996 as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Restated statement of operations:
Increase in interest expense and increase
in net (loss) attributable to common stockholders $642,000 $138,000
Increase in net (loss) per common share ($0.07) ($0.02)
Restated balance sheet:
Increase in accumulated deficit and
increase in additional paid-in capital 780,000
</TABLE>
F-24
<PAGE> 72
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30,
1998
------------
<S> <C>
ASSETS
Current Assets:
Cash and equivalents $2,203,481
Accounts receivable, net 862,357
Inventories, net 784,636
Prepaid expenses and other current assets 213,384
------------
TOTAL CURRENT ASSETS 4,063,858
Intellectual property rights, net 938,956
Other assets 162,776
PROPERTY, PLANT AND EQUIPMENT 4,006,640
Less accumulated depreciation and amortization (1,448,072)
------------
Net Property, plant, and equipment 2,558,568
------------
TOTAL ASSETS $7,724,158
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, net of unamortized discount $ 767,538
Trade accounts payable 337,080
Accrued expenses and other current liabilities 301,677
Debt due within one year 641,173
Preferred dividends payable 116,686
------------
TOTAL CURRENT LIABILITIES 2,164,154
Capital lease obligations 9,591
Deferred gain on lease of facility (see Note 3) 1,759,197
Other long-term liabilities 196,438
------------
TOTAL LIABILITIES 4,129,380
STOCKHOLDERS' EQUITY:
Convertible preferred stock 6,800
Common stock 104,158
Additional Paid-in-capital 43,667,433
Accumulated deficit (40,610,254)
Translation gain 426,641
-----------
Total Stockholders' Equity 3,594,778
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,724,158
===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-25
<PAGE> 73
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------------------
1998 1997(a)
----------------------- -----------------------
<S> <C> <C>
Net revenues $1,114,919 $814,403
Cost of products sold 990,383 799,239
----------------------- -----------------------
Gross margin (loss) 124,536 15,164
Advertising & Promotion 92,193 173,158
Selling, general and administrative 908,339 759,403
-----------------------
-----------------------
Total Operating Expenses 1,000,532 932,561
-----------------------
-----------------------
Operating loss (875,996) (917,397)
Interest, net and other expense 39,109 153,348
----------------------- -----------------------
Pretax loss (915,105) (1,070,745)
Provision for income taxes ---- ----
----------------------- -----------------------
Net loss (915,105) (1,070,745)
Preferred dividends accreted, Series 2 (see Note 8) ---- ----
Preferred dividends, Series 1 33,907 ----
----------------------- -----------------------
Net loss attributable to Common stockholders
(949,012) (1,070,745)
======================= =======================
Basic and diluted net loss per common share outstanding
$(0.09) $(0.12)
Weighted average number of common shares outstanding
10,371,469 9,161,125
</TABLE>
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
F-26
<PAGE> 74
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------------------------------
1998 1997(a)
----------------------- -----------------------
<S> <C> <C>
Net revenues $4,040,672 $2,016,419
Cost of products sold 4,082,175 2,859,138
----------------------- -----------------------
Gross margin (loss) (41,503) (842,719)
Advertising & Promotion 371,421 1,480,639
Selling, general and administrative 2,165,007 2,102,503
-----------------------
-----------------------
Total Operating Expenses 2,536,428 3,583,142
-----------------------
-----------------------
Operating loss (2,577,931) (4,425,861)
Interest, net and other expense 124,714 944,080
----------------------- -----------------------
Pretax loss (2,702,645) (5,369,941)
Provision for income taxes ---- ----
----------------------- -----------------------
Net loss $(2,702,645) $(5,369,941)
Preferred dividends accreted, Series 2 (see Note 8) 817,000 ----
Preferred dividends, Series 1 101,720 ----
----------------------- -----------------------
Net loss attributable to Common stockholders
$(3,621,365) $(5,369,941)
======================= =======================
Basic and diluted net loss per common share outstanding
$ (0.37) $ (0.66)
Weighted average number of common shares outstanding
9,821,778 8,095,955
</TABLE>
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
F-27
<PAGE> 75
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months ended June 30,
---------------------------------------------
1998 1997(a)
---------------------- ---------------------
<S> <C> <C>
OPERATIONS:
Net (loss) $(2,702,645) $(5,369,941)
Adjusted for noncash and nonoperating items:
Depreciation and amortization 442,140 495,135
Noncash interest expense 243,419 577,574
Amortization of discounts on convertible debentures
---- 642,000
Reduction in inventory reserves (652,192) ----
Reduction in accounts receivable reserves (101,386) ----
Amortization of other assets 8,008 ----
Changes in operating assets and liabilities 148,006 (809,443)
---------------------- ---------------------
Net cash provided (used) in operating activities
(2,614,650) (4,464,675)
INVESTING ACTIVITIES:
Capital expenditures (16,918) (82,178)
Proceeds from repayment of note receivable 750,000 ----
Lease of facility (see Note 3) ---- 3,291,410
---------------------- ---------------------
Net cash provided in investing activities 733,082 3,209,232
FINANCING ACTIVITIES:
Borrowings 1,000,000 2,507,602
Debt repayments (1,040,347) (4,040,848)
Proceeds from the issuance of preferred stock 1,843,384 ----
Proceeds from the issuance of common stock upon exercise of
options and warrants 480,175 776,352
---------------------- ---------------------
Net cash provided (used) by financing activities
2,283,212 (756,894)
Effect of exchange rate change on cash and equivalents
168,370 (39,840)
---------------------- ---------------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 570,014 (2,052,177)
Cash and equivalents at beginning of period 1,633,467 2,914,080
====================== =====================
CASH AND EQUIVALENTS AT END OF PERIOD $2,203,481 $861,903
====================== =====================
Schedule of noncash financing and investing activities:
Preferred dividends declared, Series 1 $101,720 ----
Preferred dividends accreted, Series 2 817,000
Issuance of warrants on notes payable 297,500 ----
Conversion of Preferred Stock into Common Stock 7,299
Conversion of Convertible Debentures into Common Stock
---- $4,020,000
</TABLE>
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
F-28
<PAGE> 76
NOTE 1 - Basis of Presentation
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flow for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
Operating results for the three months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the fiscal year ended September 30, 1997.
NOTE 2 - Earnings Per Share
Basic and diluted net (loss) per Common share outstanding is based on the
weighted average of shares of Common Stock outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully dilutive
earnings per share. All earnings per share in the accompanying financial
statements have been presented to conform to Statement No. 128 requirements. The
Company has "in the money" options and warrants outstanding of 1,357,866 and
670,400 as of June 30, 1998 and 1997, respectively. The Company also has
preferred stock outstanding as of June 30, 1998, which is convertible into
680,000 shares of common stock (see Note 5). The inclusion of the options,
warrants and convertible preferred stock in the computation of diluted earnings
per share would have resulted in a reduction of the loss per share
(antidilutive) and therefore both basic and diluted earnings per share amounts
were the same for each of the periods presented in the accompanying financial
statements.
NOTE 3 - Lease of Manufacturing Facility
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 1,950,000 (Pounds)
representing approximately $3,365,000 for leasing the facility to a third party
for a nominal annual rental charge and for providing the third party 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 per year payable quarterly
until 2016 of 195,000 (Pounds) representing approximately $336,000. The lease is
renewable through 2027. The Company was also required to make a security deposit
of 195,000 (Pounds) representing approximately $336,000 to be reduced in
subsequent years. The facility had a net book value of 810,845 (Pounds)
representing approximately $1,398,819 on the date of the transaction. The
1,139,155 (Pounds) representing approximately $1,966,181 gain which resulted
from this transaction will be recognized ratably over the initial term of the
lease.
Concurrent with this transaction, the Company repaid the mortgage loan on this
property of 1,062,500 (Pounds) representing approximately $1,834,000.
F-29
<PAGE> 77
NOTE 4 - Inventories
The components of inventory consist of the following:
<TABLE>
<CAPTION>
June 30, 1998
-------------------------
<S> <C>
Raw Material and work in process $ 569,585
Finished Goods 459,664
-------------------------
Inventory, Gross 1,029,249
Less: Inventory reserves (244,613)
=========================
Inventory, net $ 784,636
=========================
</TABLE>
NOTE 5 - Sale of Convertible Preferred Stock
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.82 million, after commissions and expenses.
The Series 2 Preferred Stock automatically converted into Common Stock on a
one-for-one basis, on April 3, 1998, the date in which the registration
statement registering the resale of the Common Stock was declared effective by
the SEC. The investors received four-year Warrants to purchase 240,000 shares of
Common Stock exercisable at a price per share equal to the lesser of $3.425 or
the average of the three closing bid prices per share of Common Stock for any
three consecutive trading days chosen by the investor during the 30 trading day
period ending on the trading day immediately prior to the exercise of the
Warrants. Individuals providing services to the Company's placement agent for
the above convertible Preferred Stock received Warrants to purchase 4,000 shares
of Common Stock exercisable at any time prior to December 31, 2001, at $4.11 per
share.
In September 1997, the Company raised approximately $1.6 million net proceeds,
after issuance costs of $96,252, in a private placement of 680,000 shares of 8%
cumulative convertible Preferred Stock - Series 1. In addition, warrants to
purchase 52,000 shares of Common Stock were issued to the placement agents. Each
share of Preferred Stock is convertible into one share of the Company's Common
Stock on or after August 1, 1998. Annual Preferred Stock dividends will be paid
if and as declared by the Company's Board of Directors. No dividends or other
distributions will be payable on the Company's Common Stock unless dividends are
paid in full on the Preferred Stock. The shares may be redeemed at the option of
the Company, 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 - Series 1
would have priority over the Company's Common Stock.
NOTE 6 - Financial Condition
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 $6.3 million for the year ended September 30, 1997, a loss of
$2.7 million for the nine months ended June 30, 1998 and as of June 30, 1998 had
an accumulated deficit of $40.6 million. At June 30, 1998, the Company had
working capital of $1.9 million and stockholders' equity of $3.6 million. In the
future, the Company expects to continue to broaden distribution of the Female
Condom(TM) through expanding partnerships in the major markets including the
United States, the European market and the developing World and to support its
manufacturing operations to meet the increased demand. As a result, operations
in the near future are expected to continue to use working capital. Management
recognizes that the Company's continued operations depend on its ability to
raise additional capital through a combination of equity or debt financing,
strategic alliances and increased sales volumes. At various points during the
developmental stage of the product, the Company was able to secure resources, in
large part through the sale of equity and debt securities, to satisfy its
F-30
<PAGE> 78
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(TM).
Management believes that recent developments, including the broadening of
distribution of the product under the Company's agreement with the UNAIDS, a
joint United Nations program on HIV/AIDS, provide an indication of the Company's
continued success in broadening awareness and distribution of the Female Condom.
The expanding distribution 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.
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated short-term
requirements. Previously, the Company entered into an agreement with Vector
Securities, International, Inc. (Vector), an investment banking firm
specializing in providing financial advisory services to health care and
life-science companies. Pursuant to this agreement, Vector is acting as the
Company's exclusive financial advisor for the purpose of identifying and
evaluating opportunities available to the Company for increasing shareholder
value. These opportunities may include selling all or a portion of the business,
assets or stock of the Company or entering into one or more distribution
arrangements relating to the Company's product. However, no specific opportunity
has yet been identified and there can be no assurance that any such
opportunities will be available to the Company or, if so available, that the
Company will ultimately elect to consummate any such transaction. Further, there
can be no assurance, assuming the Company raises additional funds or enters into
business agreements with third parties, that the Company will achieve
profitability or positive cashflow. If the Company is unable to obtain adequate
financing, management will be required to curtail certain of the Company's
operations or ultimately cease operations.
Note 7 - Restatement of 1997 Financial Statements
In March 1998, the Company discovered that its reporting of a charge to interest
expense for the amortization of discounts associated with a "beneficial
conversion feature" on two sets of convertible debentures issued in August 1996
and February 1997 was not in accord with a March, 1997 SEC decision regarding
the reporting of such transactions. The first set of debentures was issued
August 12, 1996 for $2,000,000 at 8% and the second set of debentures was issued
February 20, 1997 for $2,020,000 at 8%, both maturing after 3 years. Both sets
of convertible debentures included a conversion feature that was "in the money"
as of the date of issuance (a "beneficial conversion feature"). The beneficial
conversion feature allowed the debentures to be converted into Company Common
stock at the lesser of $5.275 per share for debentures No. 1 and $2.875 per
share for debentures No. 2 (representing the average market price for the five
days preceding the date the debentures were sold) or 80% of the market price at
the time the conversion occurs. Fifty percent of the debentures could be
converted into Company Common stock after 45 days from the date of issuance and
the remaining after 65 days for both debentures.
In March 1997, the SEC staff concluded that a beneficial conversion feature
should be recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in capital. That
amount should be calculated at the date of issue as the difference between the
conversion price and the fair value of the common stock into which the security
is convertible. Any discount resulting from the beneficial conversion feature
increases the effective interest rate of the security and should be reflected as
a charge to interest expense. The intrinsic value of the beneficial conversion
feature as of the date of issuance was $382,000 on debentures No. 1 and $398,000
on debentures No. 2 and, as a result, the Company has restated the previously
reported unaudited condensed consolidated statements of operations for 1997 as
follows:
F-31
<PAGE> 79
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------
Three Months Ended Six Months Ended
--------------------- ------------------------
<S> <C> <C>
Increase in interest expense and increase in net loss
attributable to common stockholders $ 98,000 $ 642,000
Increase in net loss per common share outstanding
$(0.01) $(0.08)
</TABLE>
Note 8 - Preferred Dividends, Series 2
The Company's $2.0 million private placement of convertible Preferred Stock -
Series 2 on December 31, 1997 included a beneficial conversion feature valued at
$500,000 and four-year warrants to purchase additional shares of common stock
valued at $317,000. In accordance with new SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants, a total of $817,000 as additional paid-in capital. The
corresponding discount of $817,000, associated with the issuance of the
convertible preferred stock is a one-time, non-recurring charge that has been
fully amortized and reflected as preferred dividends accreted in the
consolidated statements of operations for the quarter and nine months ended June
30, 1998. The dividend accretion had no impact on the Company's cashflow from
operations.
F-32
<PAGE> 80
No dealer, salesperson or any other person has been authorized by the Company to
give any information or to make any representations other than those contained
in this Prospectus in connection with the offering made hereby, and, if given or
made, such information or representations may not be relied upon. This
Prospectus does not constitute an offer to sell or the solicitation of an offer
to buy any securities other than those specifically offered hereby or an offer
to sell, or a solicitation of an offer to buy, to any person in any jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since any of the dates as of which information is furnished or since the
date of this Prospectus.
THE FEMALE HEALTH COMPANY
2,413,124 SHARES OF COMMON STOCK
--------------------------------
PROSPECTUS
-------------------------------
__________, 1998
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Pursuant to sections 180.0850 to 180.0859 of the Wisconsin
Business Corporation Law, directors and officers of the Company are entitled to
mandatory indemnification from the Company against certain liabilities and
expenses (i) to the extent such officers or directors are successful in the
defense of a proceeding and (ii) in proceedings in which the director or officer
is not successful in the defense thereof, unless (in the latter case only) it is
determined that the director or officer breached or failed to perform his duties
to the Company and such breach or failure constitute: (a) willful failure to
deal fairly with the Company or its shareholders in connection with a matter in
which the director or officer had a material conflict of interest; (b) a
violation of the criminal law unless the director or officer had reasonable
cause to believe his or her conduct was lawful or had no reasonable cause to
believe his or her conduct was unlawful; (c) a transaction from which the
director or officer derived an improper personal profit; or (d) willful
misconduct. It should be noted that section 180.0859 of the Wisconsin Business
Corporation Law specifically states that it is the public policy of Wisconsin to
require or permit indemnification in connection with a proceeding involving
securities regulation, as described therein, to the extent required or permitted
under sections 180.0850 to 180.0858 as described above. Additionally, under the
Wisconsin Business Corporation law, directors of the Company are not subject to
personal liability to the Company, its shareholders or any person asserting
rights on behalf thereof for certain breaches or failures to perform any duty
resulting solely from their status as such directors, except in circumstances
paralleling those in subparagraphs (a) through (d) outlined above.
Consistent with sections 180.0850 to 180.0859 of the Wisconsin
Business Corporation Law, Article VIII of the Company's By-Laws provides that
the Company shall indemnify any person in connection with legal proceedings
threatened or brought against him by reason of his present or past status as an
officer or director of the Company in the circumstances described above. Article
VIII of the By-Laws also provides that the directors of the Company are not
subject to personal liability to the Company, its shareholders or persons
asserting rights on behalf thereof, as provided in the Wisconsin Business
Corporation Law. The By-Laws also contain a nonexclusivity clause which provides
in substance that the indemnification rights under the By-Laws shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any agreement with the Company, any By-Law or otherwise.
The indemnification provided as set forth above is not
exclusive of any other rights to which a director or an officer of the Company
may be entitled.
The general effect of the foregoing provisions is to reduce
the circumstances in which an officer or director may be required to bear the
economic burdens of the foregoing liabilities and expenses.
II-1
<PAGE> 82
Item 25. Other Expenses of Issuance and Distribution.
The expenses in connection with the offering are as follows:
<TABLE>
<CAPTION>
Item Amount*
<S> <C>
Registration
fee................................................................................. $ 1,026
American Stock Exchange Listing expenses............................................ 17,500
Printing expenses................................................................... 5,000
Legal fees and expenses............................................................. 25,000
Accounting fees and expenses........................................................ 10,000
Miscellaneous expenses.............................................................. 5,000
-------
Total................................................................. $63,526
=======
</TABLE>
- ----------
* All amounts estimated except the registration fee and the American Stock
Exchange Listing expenses.
Item 26. Recent Sales of Unregistered Securities.
On November 21, 1995, the Company borrowed $1 million from an affiliate
of Mr. Dearholt, a current director of the Company, under a one-year note
payable in full on November 20, 1996. As part of this transaction, Mr. Dearholt
guaranteed the Company's obligations under the $1 million promissory note. In
consideration of the transaction, the Company issued warrants to each of Mr.
Dearholt and the lender, which entitle each of them to purchase 10,000 shares of
the Company's Common Stock at $3.00 per share, which represented the average
trading price of the Company's Common Stock for the five trading days prior to
the issuance of such warrants. The warrants expire on November 20, 2000.
On March 12, 1996, the Company entered into an agreement with John A.
Wundrock and Thomas J. Bonesho, two of its former directors. Pursuant to this
agreement, the Company acknowledged the Mr. Wundrock and Mr. Bonesho incurred
$67,186.87 of expenses in connection with the Company's special meeting proxy
related to the approval of the sale of WPC Holdings, Inc., a former subsidiary
of the Company, and the change in the Company's name. In accordance with this
agreement, the Company agreed to reimburse Messrs. Wundrock and Bonesho for such
expenses by issuing them 15,580 shares of the Company's Common Stock,
representing the number of shares required to reimburse them for such expenses
based on the last sale price of the Company's Common Stock on March 11, 1996.
On March 25, 1996, the Company borrowed $1 million form Mr. Dearholt
under a one-year note payable in full on April 25, 1997. As part of the
transaction, the Company issued to Mr. Dearholt and his affiliate, warrants to
purchase 200,000 and 20,000 shares of the Company's Common Stock, respectively,
at $3.10 per share. The $3.10 per share price represented the average trading
price of the Company's Common Stock for the five trading days immediately prior
to the transaction. The warrants expire on March 25, 2001.
On March 25, 1997, the Company refinanced its $1 million borrowing from
Mr. Dearholt by extending the one-year note payable for an additional year to be
payable in full on March 25, 1998. Then again on March 25, 1998, the Company and
Mr. Dearholt agreed to extend the promissory note for an additional one year to
be payable in full on March 25, 1999. As part of these transactions, on the date
of each extension, the Company issued to Mr. Dearholt warrants to purchase
200,000 shares of the Company's Common Stock at exercise prices of $1.848 and
$2.25 per share, respectively. These exercise prices represented the average
trading price of the Company's Common Stock for the five trading days
immediately prior to each of the refinancings. The warrants expire on the
earlier of their exercise or five years after the date of their issuance.
II-2
<PAGE> 83
The Company believes that the sales described above were exempt from
registration under section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act because such sales were made to a limited
group of persons, each of whom was believed to have been a sophisticated
investor and each of whom had a pre-existing business or personal relationship
with the Company or its management and since each person was purchasing for
investment without a view to further distribution. Restrictive legends were
placed on all instruments evidencing the securities described above.
On September 12, 1996, the Company completed a Regulation S offering to
five offshore institutional investors selling to such investors 8% cumulative
convertible debentures for an aggregate principal amount of $2 million. The
debentures are convertible into the Company's Common Stock. In addition, the
debenture holders received warrants to purchase 40,201 shares of the Company's
Common Stock at an exercise price of $5.72 per share.
On February 20, 1997, the Company sold $2,020,000 of 8% convertible
debentures and related warrants to eight foreign investors pursuant to the
exemption from the securities registration requirement provided by Regulation S
promulgated under the Securities Act of 1933, as amended. The convertible
debentures mature on January 31, 2000 and bear interest at 8% per annum, payable
semiannually. The convertible debentures are convertible at the election of the
holders into shares of Common Stock in accordance with their terms. As required
by Regulation S, the Company offered and sold the convertible debentures and
warrants in an offshore transaction only to non-U.S. persons. The Company did
not use the services of an underwriter in this offering but, rather, European
American Services, Inc. acted as a distributor for the offering. For its
services as the distributor, European American Services, Inc. received a
placement fee of 7% of the principal amount of the debentures sold. In
connection with this Regulation S offering, the investors also received warrants
to purchase a total of 67,333 shares of the Company's Common Stock at an
exercise price of $5.00 per share.
The warrants expire on October 30, 1999.
The Company believes the above transactions were exempt from the
securities registration requirement pursuant to Regulation S promulgated under
the Securities Act because such sales were made to nonresidents of the United
States in an offshore transaction without any directed selling efforts made in
the United States by the Company, any distributor or any of their respective
affiliates or any persons acting on behalf of any of such parties. In addition,
the Company believes it implemented all offering restrictions and complied with
all of the terms and conditions of Regulation S which were imposed on the issuer
of the securities as of the date of each offering.
On July 29, 1997, the Company completed a private placement of 680,000
shares of Class A Convertible Preferred Stock--Series 1 (the "Series 1 Preferred
Stock") to a group of accredited investors. Each share of the Series 1 Preferred
Stock was sold for $2.50. In connection with this private placement, the Company
issued to the placement agents in the offering warrants exercisable for a total
of 52,000 shares of Common Stock at an exercise price of $2.50 per share. The
Company also paid the placement agents a cash commission equal to 7% of the
proceeds received by the Company from sales made by the placement agents. The
Company raised approximately $1.6 million of proceeds, net of issuance costs of
$96,252. The Company believes that it has satisfied the exemption from the
securities registration requirement provided by section 4(2) of the Securities
Act and Regulation D promulgated thereunder in this offering in that the
securities were sold in a private placement to only accredited investors, most
of whom had a pre-existing personal or business relationship with the Company or
its officers or directors and each of whom provided representations which the
Company deemed necessary to satisfy itself that they were accredited investors
and were purchasing for investment and not with a view to resale in connection
with a public offering.
On December 31, 1997, the Company sold 729,927 shares of Class A
Convertible Preferred Stock--Series 2 ("Series 2 Preferred Stock") and warrants
to purchase 240,000 shares of the Company's Common Stock to three institutional
accredited investors pursuant to section 4(2) of the Securities Act and
Regulation D promulgated thereunder. Each share of Series 2 Preferred Stock
was sold for $2.74. This
II-3
<PAGE> 84
private placement netted the Company $1.82 million, after deduction for expenses
and commissions. in connection with this private placement, the Company issued
to its placement agent in the offering warrants to purchase 4,000 shares of the
Company's Common Stock at an exercise price of $4.11 per share. The Company also
paid the placement agent a commission equal to 7% of the gross proceeds raised
by the Company in this offering. The warrants issued to the investors are
exercisable at an exercise price per share equal to the lesser of (a) $3.25 or
(b) the average of the three closing bid prices per share of the Company's
Common Stock for any three consecutive trading days selected by the holder in
the 30 consecutive trading day period ending on the trading day immediately
prior to the date of exercise. Both the warrants issued to the investors and the
warrants issued to the Company's placement agent in this offering expire on
December 31, 2001. The Company believes that it has satisfied the exemption from
the securities registration requirement provided by section 4(2) of the
Securities Act and Regulation D promulgated thereunder in this offering in that
the securities were sold in a private placement to only sophisticated,
institutional, accredited investors, each of whom provided representations which
the Company deemed necessary to satisfy itself that they were accredited
investors and were purchasing for investment and not with a view to resale in
connection with a public offering.
Item 27. Exhibits. The following exhibits are filed as part of this
Registration Statement.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company.1
3.2 Amended and Restated By-Laws of the Company.2
4.1 Amended and Restated Articles of Incorporation (same as Exhibit 3.1).1
4.2 Articles II, VII and XI of the Amended and Restated By-Laws of the
Company (included in Exhibit 3.2).2
4.3 Private Equity Line of Credit Agreement between the
Company and Kingsbridge Capital Limited dated
November 19, 1998.
4.4 Registration Rights Agreement between the Company and
Kingsbridge Capital Limited dated as of November 19,
1998.
4.5 Warrant to Purchase up to 200,000 shares of Common
Stock of the Company issued to Kingsbridge Capital
Limited as of November 19, 1998.
10.1 Employment Agreement between John Wundrock and the Company dated
October 1, 1989.1
10.2 Wisconsin Pharmacal Company, Inc. (k/n/a The Female Health Company)
1990 Stock Option Plan.3
10.3 Commercial Building Lease dated May 1, 1992 covering
the Jackson, Wisconsin, office and manufacturing
facility.4
10.4 Reality Female Condom Clinical Trial Data Agreement between the
Company and Family Health International dated September 24, 1992.5
10.5 Trademark License Agreement for Reality Trademark.6
</TABLE>
II-4
<PAGE> 85
<TABLE>
<S> <C>
10.6 Office space lease between the Company and John Hancock Mutual Life
Insurance Company dated June 1, 1994.7
10.7 Employment Agreement dated September 10, 1994 between the Company and
Dr. Mary Ann Leeper.8
10.8 1994 Stock Option Plan.9
10.9 Investor relations and development services Consulting Agreement
between the Company and C.C.R.I. Corporation dated March 13, 1995.10
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company
and C.C.R.I. Corporation, as amended on April 22, 1996.11
10.11 Offshore Securities Subscription Agreement for the
sale of 370,000 shares of Company Common Stock dated
February 7, 1995.10
10.12 Offshore Securities Subscription Agreement for the
sale of 100,000 shares of Company Common Stock dated
February 7, 1995.10
10.13 Offshore Securities Subscription Agreement for the
sale of 500,000 shares of Company Common Stock dated
February 7, 1995.10
10.14 Settlement Agreement and Mutual Release of All Claims between WPC
Holdings, Inc., Reflect, Inc. and the Company dated June 15, 1995.11
10.15 Stock Purchase Agreement by and between WPC Acquisition Corporation
and the Company dated June 20, 1995.12
10.16 Agreement relating to the acquisition of the entire
issued share capital of Chartex Resources Limited and
exhibits thereto.13
10.17 Company Promissory Note payable to Stephen M. Dearholt for $1 million
dated March 25, 1996 and related Note Purchase and Warrant Agreement,
Warrants and Stock Issuance Agreement.12
10.18 Outside Director Stock Option Plan.11
10.19 Exclusive Distribution Agreement between Chartex International Plc
and Taiho Pharmaceutical Co., Ltd. dated October 18, 1994.14
10.20 Supply Agreement between Chartex International Plc and Deerfield
Urethane, Inc. dated August 17, 1994.14
10.21 Employment Letter dated February 28, 1990 from Chartex Resources Ltd.
to Michael Pope and Board amendments thereto.14
</TABLE>
II-5
<PAGE> 86
<TABLE>
<S> <C>
10.22 Grant Letter dated March 7, 1996 from the Government Office for
London of the Secretary of State of Trade and Industry regarding
economic development grant to the Company.14
10.23 Letter Amendment to Asset Sale Agreement dated April 29, 1996 between
the Company and Dowty Seals Limited and Chartex International Plc.14
10.24 Form of Offshore Securities Subscription Agreement entered into
between the Company and certain foreign investors on September 12,
1996.15
10.25 Form of 8% Convertible Debenture due August 31, 1999
issued by the Company to certain foreign investors on
September 12, 1996.15
10.26 Form of Warrant issued by the Company to certain foreign investors as
of September 12, 1996.15
10.27 Fund Raising Agreement dated May 1, 1998 by and
between Hartinvest-Medical Ventures and the Company.
21 Subsidiaries of Registrant.
23 Consent of McGladrey & Pullen, LLP
</TABLE>
- -----------------------
[FN]
1 Incorporated herein by reference to the Company's Registration
Statement on Form S-18, Registration No. 33-35096, as filed with the
Securities and Exchange Commission on May 25, 1990.
2 Incorporated herein by reference to the Company's 1995 Form 10-KSB.
3 Incorporated herein by reference to the Company's December 31, 1990
Form 10-Q.
4 Incorporated herein by reference to the Company's June 30, 1992 Form
10-Q.
5 Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration No.
33-51586, as filed with the Securities and Exchange Commission on
September 28, 1992.
6 Incorporated herein by reference to the Company's 1992 Form 10-KSB.
7 Incorporated herein by reference to the Company's June 30, 1994 Form
10-Q.
8 Incorporated herein by reference to the Company's Registration
Statement on Form S-2, Registration No. 33-84524, as filed with the
Securities and Exchange Commission on September 28, 1994.
9 Incorporated herein by reference to the Company's 1994 Form 10-KSB.
10 Incorporated herein by reference to the Company's March 31, 1995 Form
10-Q.
</FN>
II-6
<PAGE> 87
[FN]
11 Incorporated herein by reference to the Company's Form S-1 Registration
Statement filed with the Securities and Exchange Commission on April
23, 1996.
12 Incorporated herein by reference to the Company's June 30, 1995 Form
10-Q.
13 Incorporated herein by reference to the Company's Current Report on
Form 8-K dated November 20, 1995.
14 Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Form S-1 Registration Statement filed with the Securities
and Exchange Commission on June 5, 1996.
15 Incorporated herein by reference to the Company's 1996 Form 10-K.
[FN]
Item 28. Undertakings.
The small business issuer hereby undertakes as follows:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) File, during any period in which offers and sales of securities may be
made pursuant to this registration, a post-effective amendment to this
registration statement to:
(i) include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and
(iii) include any additional or changed material information on the plan of
distribution.
(c) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(d) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
II-7
<PAGE> 88
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Chicago, State of Illinois, on the 1st day of December, 1998.
THE FEMALE HEALTH COMPANY
BY /s/ O.B. Parrish
Its Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ O.B. Parrish Chairman of the Board, Chief December 1, 1998
_________________________________ Executive Officer, acting
O.B. Parrish Principal Financial Officer,
acting Principal Accounting
Officer and Director
/s/ William R. Gargiulo, Jr. Secretary and Director December 1, 1998
_________________________________
William R. Gargiulo, Jr.
/s/ Mary Ann Leeper, Ph.D. President and Chief Operating December 1, 1998
_________________________________ Officer and Director
Mary Ann Leeper, Ph.D.
_________________________________ Director __________, 1998
David R. Bethune
/s/ Stephen M. Dearholt
_________________________________ Director December 1, 1998
Stephen M. Dearholt
</TABLE>
II-8
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit Number Description Number
<S> <C>
4.3 Private Equity Line of Credit Agreement between the Company and
Kingsbridge Capital Limited dated November 19, 1998
4.4 Registration Rights Agreement between the Company and Kingsbridge
Capital Limited dated November 19, 1998
4.5 Warrant to purchase up to 200,000 shares of Common Stock of the
Company issued to Kingsbridge Capital Limited as of November 19,
1998
10.27 Fund-Raising Agreement dated May 1, 1998 by and between
Hartinvest-Medical Ventures and the Company
21 Subsidiaries of Registrant
23 Consent of McGladrey & Pullen, LLP
</TABLE>
<PAGE> 1
EXHIBIT 4.3
PRIVATE EQUITY LINE AGREEMENT
BY AND BETWEEN
KINGSBRIDGE CAPITAL LIMITED
AND
THE FEMALE HEALTH COMPANY
DATED AS OF NOVEMBER 19, 1998
NYB 55194.4
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I Certain Definitions
Section 1.1 Average Daily Trading Volume......................... 2
Section 1.2 Bid Price............................................ 2
Section 1.3 Blackout Shares...................................... 2
Section 1.4 Capital Shares....................................... 2
Section 1.5 Ceiling Price........................................ 2
Section 1.6 Closing.............................................. 2
Section 1.7 Closing Date......................................... 2
Section 1.8 Commitment Period.................................... 2
Section 1.9 Common Stock......................................... 2
Section 1.10 Common Stock Equivalents............................. 2
Section 1.11 Condition Satisfaction Date.......................... 2
Section 1.12 Damages.............................................. 2
Section 1.13 Discount............................................. 2
Section 1.14 Effective Date....................................... 3
Section 1.15 Escrow Agreement..................................... 3
Section 1.16 Exchange Act......................................... 3
Section 1.17 Floor Price.......................................... 3
Section 1.18 Investment Amount.................................... 3
Section 1.19 Legend............................................... 3
Section 1.20 Market Price......................................... 3
Section 1.21 Maximum Commitment Amount............................ 3
Section 1.22 Maximum Commitment Amount............................ 3
</TABLE>
NYB 55194.4
<PAGE> 3
Section 1.23 Material Adverse Effect.............................. 3
Section 1.24 Maximum Put Amount................................... 3
Section 1.25 Minimum Put Amount................................... 3
Section 1.26 NASD................................................. 3
Section 1.27 Outlanding........................................... 3
Section 1.28 Person............................................... 4
Section 1.29 Preferred Stock...................................... 4
Section 1.30 Principal Market..................................... 4
Section 1.31 Purchase Price....................................... 4
Section 1.32 Put.................................................. 4
Section 1.33 Put Date............................................. 4
Section 1.34 Put Notice........................................... 4
Section 1.35 Put Shares........................................... 4
Section 1.36 Registrable Securities............................... 4
Section 1.37 Registration Rights Agreement........................ 5
Section 1.38 Registration Statement............................... 5
Section 1.39 Regulation D......................................... 5
Section 1.40 SEC.................................................. 5
Section 1.41 Section 4(2)......................................... 5
Section 1.42 Securities Act....................................... 5
Section 1.43 SEC Documents........................................ 5
Section 1.44 Subscription Date.................................... 5
Section 1.45 Trading Cushion...................................... 5
Section 1.46 Trading Day.......................................... 5
Section 1.47 Underwriter.......................................... 5
NYB 55194.4
<PAGE> 4
Section 1.48 Valuation Event....................................... 6
Section 1.49 Valuation Period...................................... 6
Section 1.50 Warrant............................................... 6
Section 1.51 Warrant Shares........................................ 7
ARTICLE II
Section 2.1 Investments............................................ 7
Section 2.2 Mechanics.............................................. 7
Section 2.3 Closings............................................... 8
Section 2.4 Termination of Investment Obligation................... 8
Section 2.5 The Warrant............................................ 8
Section 2.6 Blackout Shares........................................ 8
Section 2.7 Liquidated Damages..................................... 9
ARTICLE III
Section 3.1 Intent................................................ 9
Section 3.2 Sophisticated Investor................................ 9
Section 3.3 Authority............................................. 9
Section 3.4 Not an Affiliate...................................... 10
Section 3.5 Organization and Standing............................. 10
Section 3.6 Absence of Conflicts.................................. 10
Section 3.7 Disclosure; Access to Information..................... 10
Section 3.8 Manner of Sale........................................ 10
ARTICLE IV
Section 4.1 Organization of the Company........................... 10
Section 4.2 Authority............................................. 10
NYB 55194.4
<PAGE> 5
Section 4.3 Capitalization.......................................... 11
Section 4.4 Common Stock............................................ 11
Section 4.5 SEC Documents........................................... 11
Section 4.6 Exemption from Registration; Valid Issuances............. 12
Section 4.7 No General Solicitation or Advertising in Regard to
this Transaction................................................ 12
Section 4.8 Corporate Documents..................................... 12
Section 4.9 No Conflicts............................................. 12
Section 4.10 No Material Adverse Change.............................. 13
Section 4.11 No Undisclosed Liabilities.............................. 13
Section 4.12 No Undisclosed Events or Circumstances.................. 13
Section 4.13 No Integrated Offering.................................. 14
Section 4.14 Litigation and Other Proceedings........................ 14
Section 4.15 No Misleading or Untrue Communication................... 14
Section 4.16 Material Non-Public Information......................... 14
ARTICLE V
Section 5.1 Compliance with Law...................................... 14
Section 5.2 Limitation on Short Sales................................ 14
Section 6.1 Registration Rights...................................... 15
Section 6.2 Reservation of Common Stock.............................. 15
Section 6.3 Listing of Common Stock.................................. 15
Section 6.4 Exchange Act Registration................................ 15
Section 6.5 Legends.................................................. 15
Section 6.6 Corporate Existence...................................... 15
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Section 6.7 Notice of Certain Events Affecting Registration;
Suspension of Right to Make a Put............................... 15
Section 6.8 Expectations Regarding Put Notices....................... 16
Section 6.9 Consolidation; Merger................................... 16
Section 6.10 Issuance of Put Shares, Warrant Shares and Blackout
Shares.......................................................... 16
Section 6.11 Legal Opinion on Subscription Date...................... 17
Section 6.12 No Other Equity Lines................................... 17
ARTICLE VII
Section 7.1 Conditions Precedent to the Obligation of the Company
to Issue and Sell Common Stock.................................. 17
Section 7.2 Conditions Precedent to the Right of the Company to
Deliver a Put Notice and the Obligation of the Investor to
Purchase Put Shares............................................. 17
Section 7.3 Due Diligence Review; Non-Disclosure of Non-Public
Information..................................................... 20
ARTICLE VIII
Section 8.1 Legends................................................. 21
Section 8.2 No Other Legend or Stock Transfer Restrictions........... 22
Section 8.3 Investor's Compliance................................... 22
ARTICLE IX
Section 9.1 Indemnification.......................................... 22
Section 9.2 Method of Asserting Indemnification Claims............... 23
ARTICLE X
Section 10.1 Fees and Expenses....................................... 26
Section 10.2 Reporting Entity for the Common Stock................... 26
Section 10.3 Brokerage............................................... 26
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Section 10.4 Notices............................................... 27
Section 10.5 Assignment............................................ 28
Section 10.6 Amendment; No Waiver.................................. 28
Section 10.7 Annexes and Exhibits; Entire Agreement................ 28
Section 10.8 Termination; Survival................................. 28
Section 10.9 Severability.......................................... 29
Section 10.10 Title and Subtitles.................................. 29
Section 10.11 Counterparts......................................... 29
Section 10.12 Choice of Law........................................ 29
55194.4
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EXHIBIT 4.3
PRIVATE EQUITY LINE AGREEMENT
BY AND BETWEEN
KINGSBRIDGE CAPITAL LIMITED
AND
THE FEMALE HEALTH COMPANY
DATED AS OF NOVEMBER 19, 1998
This PRIVATE EQUITY LINE AGREEMENT is entered into as of the 19th day of
November, 1998 (this "Agreement"), by and between KINGSBRIDGE CAPITAL LIMITED
(the "Investor"), an entity organized and existing under the laws of the British
Virgin Islands, and The Female Health Company, a corporation organized and
existing under the laws of the State of Wisconsin (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue and sell to the Investor, from time to
time as provided herein, and the Investor shall purchase, up to $6,000,000 of
the Common Stock (as defined below); and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in Common Stock to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
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ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 "Average Daily Trading Volume" Section 1.1 Average Daily Trading
Volume Section 1.1 Average Daily Trading Volume shall mean, with respect to any
date, the average of the daily trading volumes for the Common Stock on the
Principal Market for the twenty (20) Trading Days immediately preceding such
date.
Section 1.2 "Bid Price" Section 1.2 Bid Price Section 1.2 Bid Price shall mean
the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the
Principal Market.
Section 1.3 "Blackout Shares" Section 1.3 Blackout Shares Section 1.3 Blackout
Shares shall have the meaning assigned to them in Section 2.6.
Section 1.4 "Capital Shares" Section 1.4 Capital Shares Section 1.4 Capital
Shares shall mean the Common Stock and any shares of any other class of common
stock whether now or hereafter authorized, having the right to participate in
the distribution of dividends (as and when declared) and assets (upon
liquidation of the Company).
Section 1.5 "Ceiling Price" shall mean one hundred fifty percent (150%) of the
Bid Price of the Common Stock on the Subscription Date.Section 1.5 "Ceiling
Price" shall mean one hundred fifty percent (150%) of the Bid Price of the
Common Stock on the Subscription Date.Section 1.5 "Ceiling Price" shall mean one
hundred fifty percent (150%) of the Bid Price of the Common Stock on the
Subscription Date.
Section 1.6 "Closing" shall mean one of the closings of a purchase and sale of
the Common Stock pursuant to Section 2.1.
Section 1.7 "Closing Date" Section 1.7 Closing Date Section 1.7 Closing Date
shall mean, with respect to a Closing, the third Trading Day following the Put
Date related to such Closing, provided all conditions to such Closing have been
satisfied on or before such Trading Day.
Section 1.8 "Commitment Period" Section 1.8 Commitment Period Section 1.8
Commitment Period shall mean the period commencing on the earlier to occur of
(i) the Effective Date or (ii) such earlier date as the Company and the Investor
may mutually agree in writing, and expiring on the earlier to occur of (x) the
date on which the Investor shall have purchased Put Shares pursuant to this
Agreement for an aggregate Purchase Price of the Maximum Commitment Amount, (y)
the date this Agreement is terminated pursuant to Section 2.4, or (z) the date
occurring twenty four (24) months from the date of commencement of the
Commitment Period.
Section 1.9 "Common Stock" Section 1.9 Common Stock Section 1.9 Common Stock
shall mean the Company's common stock, $.01 par value per share.
Section 1.10 "Common Stock Equivalents" Section 1.10 Common Stock Equivalents
Section 1.10 Common Stock Equivalents shall mean any securities that are
convertible into or exchangeable for Common Stock or any warrants, options or
other rights to subscribe for or purchase Common Stock or any such convertible
or exchangeable securities.
Section 1.11 "Condition Satisfaction Date" Section 1.11 Condition Satisfaction
Date Section 1.11 Condition Satisfaction Date shall have the meaning set forth
in Section 7.2 of this Agreement.
Section 1.12 "Damages" Section 1.12 Damages Section 1.12 Damages shall mean any
loss, claim, damage, liability, costs and expenses (including, without
limitation, reasonable attorneys' fees and disbursements and costs and expenses
of expert witnesses and investigation).
Section 1.13 "Discount" Section 1.13 Discount Section 1.13 Discount shall mean
twelve percent (12%); provided, however, that if the Market Price of the Common
Stock for a Valuation Period is less than two dollars ($2.00) then the Discount
shall be eighteen percent (18%) in respect of the applicable Put.
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Section 1.14 "Effective Date" Section 1.14 Effective Date Section 1.14 Effective
Date shall mean the date on which the SEC first declares effective a
Registration Statement registering resale of the Registrable Securities as set
forth in Section 7.2(a).
Section 1.15 "Escrow Agreement" Section 1.15 Escrow Agreement Section 1.15
Escrow Agreement shall mean the escrow agreement in the form of Exhibit A
entered into pursuant to Section 7.2(o) hereof.
Section 1.16 "Exchange Act" Section 1.16 Exchange Act Section 1.16 Exchange Act
shall mean the Securities Exchange Act of 1934, as amended and the rules and
regulations promulgated thereunder.
Section 1.17 "Floor Price" Section 1.17 Floor Price Section 1.17 Floor Price
shall mean one dollar ($1.00) per share.
Section 1.18 "Investment Amount" Section 1.18 Investment Amount Section 1.18
Investment Amount shall mean the dollar amount (within the range specified in
Section 2.2) to be invested by the Investor to purchase Put Shares with respect
to any Put Date as notified by the Company to the Investor in accordance with
Section 2.2 hereof.
Section 1.19 "Legend" Section 1.19 Legend Section 1.19 Legend shall have the
meaning specified in Section 8.1.
Section 1.20 "Market Price" Section 1.20 Market Price Section 1.20 Market Price
on any given date shall mean the average of the lowest intra-day bid prices of
the Common Stock over the Valuation Period. "Lowest intra-day bid price" shall
mean the lowest price bid for the Common Stock (as reported by Bloomberg L.P.)
during any Trading Day.
Section 1.21 "Maximum Commitment Amount" Section 1.21 Maximum Commitment Amount
Section 1.21 Maximum Commitment Amount shall mean $6,000,000.
Section 1.22 "Minimum Commitment Amount" Section 1.22 Minimum Commitment Amount
Section 1.22 Minimum Commitment Amount shall mean $1,000,000.
Section 1.23 "Material Adverse Effect" Section 1.23 Material Adverse Effect
Section 1.23 Material Adverse Effect shall mean any effect on the business,
operations, properties or financial condition of the Company that is material
and adverse to the Company or to the Company and such other entities controlling
or controlled by the Company, taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise interfere with the
ability of the Company to enter into and perform its obligations under any of
(i) this Agreement, (ii) the Registration Rights Agreement, (iii) the Escrow
Agreement and (iv) the Warrant.
Section 1.24 "Maximum Put Amount" Section 1.24 Maximum Put Amount Section 1.24
Maximum Put Amount shall mean with respect to any Put the amount determined in
accordance with the table set forth on Annex A hereto.
Section 1.25 "Minimum Put Amount" Section 1.25 Minimum Put Amount Section 1.25
Minimum Put Amount shall mean $100,000.
Section 1.26 "NASD" Section 1.26 NASD Section 1.26 NASD shall mean the National
Association of Securities Dealers, Inc.
Section 1.27 "Outstanding" Section 1.27 Outstanding Section 1.27 Outstanding
when used with reference to Common Shares or Capital Shares (collectively the
"Shares"), shall mean, at any date as of which the
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number of such Shares is to be determined, all issued and outstanding Shares,
and shall include all such Shares issuable in respect of outstanding scrip or
any certificates representing fractional interests in such Shares; provided,
however, that "Outstanding" shall not refer to any such Shares then directly or
indirectly owned or held by or for the account of the Company.
Section 1.28 "Person" Section 1.28 Person Section 1.28 Person shall mean an
individual, a corporation, a partnership, an association, a trust or other
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.29 "Preferred Stock" Section 1.29 Preferred Stock Section 1.29
Preferred Stock shall mean the Company's Class A preferred stock, par value $.01
per share, in whatever series issued.
Section 1.30 "Principal Market" Section 1.30 Principal Market Section 1.30
Principal Market shall mean the American Stock Exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market or the New York Stock Exchange, whichever is
at the time the principal trading exchange or market for the Common Stock.
Section 1.31 "Purchase Price" Section 1.31 Purchase Price Section 1.31 Purchase
Price shall mean, with respect to a Put, the Market Price on the applicable Put
Date (or such other date on which the Purchase Price is calculated in accordance
with the terms and conditions of this Agreement) less the product of the
Discount and the Market Price; provided, however, that in no event shall the
Purchase Price be greater than the Ceiling Price.
Section 1.32 "Put" Section 1.32 Put Section 1.32 Put shall mean each occasion
the Company elects to exercise its right to tender a Put Notice requiring the
Investor to purchase a specified amount of the Company's Common Stock, subject
to the terms and conditions of this Agreement.
Section 1.33 "Put Date" Section 1.33 Put Date Section 1.33 Put Date shall mean
the Trading Day during the Commitment Period that a Put Notice to sell Common
Stock to the Investor is deemed delivered pursuant to Section 2.2(b) hereof.
Section 1.34 "Put Notice" Section 1.34 Put Notice Section 1.34 Put Notice shall
mean a written notice to the Investor setting forth the Investment Amount that
the Company intends to require the Investor to purchase pursuant to the terms of
this Agreement.
Section 1.35 "Put Shares" Section 1.35 Put Shares Section 1.35 Put Shares shall
mean all shares of Common Stock issued or issuable pursuant to a Put that has
been exercised or may be exercised in accordance with the terms and conditions
of this Agreement.
Section 1.36 "Registrable Securities" Section 1.36 Registrable Securities
Section 1.36 Registrable Securities shall mean the (i) Put Shares, (ii) the
Warrant Shares, (iii) the Blackout Shares and (iv) any securities issued or
issuable with respect to any of the foregoing by way of exchange, stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise. As to any
particular Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (w) the Registration Statement has been declared
effective by the SEC and all Registrable Securities have been disposed of
pursuant to the Registration Statement, (x) all Registrable Securities have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (y) such time as all Registrable Securities have been otherwise
transferred to holders who may trade such shares without restriction under the
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Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend or
(z) in the opinion of counsel to the Company, which counsel shall be reasonably
acceptable to the Investor, all Registrable Securities may be sold without
registration or the need for an exemption from any registration requirements and
without any time, volume or manner limitations pursuant to Rule 144(k) (or any
similar provision then in effect) under the Securities Act.
Section 1.37 "Registration Rights Agreement" Section 1.37 Registration Rights
Agreement Section 1.37 Registration Rights Agreement shall mean the registration
rights agreement in the form of Exhibit B hereto.
Section 1.38 "Registration Statement" Section 1.38 Registration Statement
Section 1.38 Registration Statement shall mean a registration statement on Form
SB-2 (if use of such form is then available to the Company pursuant to the rules
of the SEC and, if not, on such other form promulgated by the SEC for which the
Company then qualifies and which counsel for the Company shall deem appropriate
and which form shall be available for the resale of the Registrable Securities
to be registered thereunder in accordance with the provisions of this Agreement,
the Registration Rights Agreement, and the Warrant and in accordance with the
intended method of distribution of such securities), for the registration of the
resale by the Investor of the Registrable Securities under the Securities Act.
Section 1.39 "Regulation D" Section 1.39 Regulation D Section 1.39 Regulation D
shall have the meaning set forth in the recitals of this Agreement.
Section 1.40 "SEC" Section 1.40 SEC Section 1.40 SEC shall mean the Securities
and Exchange Commission.
Section 1.41 "Section 4(2)" Section 1.41 Section 4(2) Section 1.41 Section 4(2)
shall have the meaning set forth in the recitals of this Agreement.
Section 1.42 "Securities Act" Section 1.42 Securities Act Section 1.42
Securities Act shall have the meaning set forth in the recitals of this
Agreement.
Section 1.43 "SEC Documents" Section 1.43 SEC Documents Section 1.43 SEC
Documents shall mean the Company's latest Form 10-K as of the time in question,
all Forms 10-Q and 8-K filed thereafter, and the Proxy Statement for its latest
fiscal year as of the time in question until such time the Company no longer has
an obligation to maintain the effectiveness of a Registration Statement as set
forth in the Registration Rights Agreement.
Section 1.44 "Subscription Date Section 1.44 Subscription Date Section 1.44
Subscription Date" shall mean the date on which this Agreement is executed and
delivered by the parties hereto.
Section 1.45 "Trading Cushion" Section 1.45 Trading Cushion Section 1.45 Trading
Cushion shall mean the mandatory twenty (20) Trading Days between Put Dates.
Section 1.46 "Trading Day" Section 1.46 Trading Day Section 1.46 Trading Day
shall mean any day during which the Principal Market shall be open for business.
Section 1.47 "Underwriter" Section 1.47 Underwriter Section 1.47 Underwriter
shall mean any underwriter participating in any disposition of the Registrable
Securities on behalf of the Investor pursuant to the Registration Statement.
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Section 1.48 "Valuation Event" Section 1.48 Valuation Event Section 1.48
Valuation Event shall mean an event in which the Company at any time during a
Valuation Period takes any of the following actions:
(a) subdivides or combines its Common Stock;
(b) pays a dividend in its Capital Stock or makes any other
distribution of its Capital Shares, except for dividends paid with
respect to the Preferred Stock;
(c) issues any additional Capital Shares ("Additional Capital
Shares"), otherwise than as provided in the foregoing Subsections
(a) and (b) above, at a price per share less, or for other
consideration lower, than the Bid Price in effect immediately prior
to such issuance, or without consideration;
(d) issues any warrants, options or other rights to subscribe for
or purchase any Additional Capital Shares and the price per share
for which Additional Capital Shares may at any time thereafter be
issuable pursuant to such warrants, options or other rights shall
be less than the Bid Price in effect immediately prior to such
issuance;
(e) issues any securities convertible into or exchangeable for
Capital Shares and the consideration per share for which Additional
Capital Shares may at any time thereafter be issuable pursuant to
the terms of such convertible or exchangeable securities shall be
less than the Bid Price in effect immediately prior to such
issuance;
(f) makes a distribution of its assets or evidences of indebtedness
to the holders of its Capital Shares as a dividend in liquidation
or by way of return of capital or other than as a dividend payable
out of earnings or surplus legally available for dividends under
applicable law or any distribution to such holders made in respect
of the sale of all or substantially all of the Company's assets
(other than under the circumstances provided for in the foregoing
subsections (a) through (e); or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing
Subsections (a) through (f) hereof, inclusive, which in the opinion
of the Company's Board of Directors, determined in good faith,
would have a materially adverse effect upon the rights of the
Investor at the time of a Put or exercise of the Warrant.
Section 1.49 "Valuation Period" Section 1.49 Valuation Period Section 1.49
Valuation Period shall mean the period of five (5) Trading Days during which the
Purchase Price of the Common Stock is valued, which period shall be with respect
to the Purchase Price on any Put Date, the two (2) Trading Day preceding and the
two (2) Trading Days following the Trading Day on which the applicable Put
Notice is deemed to be delivered, as well as the Trading Day on which such
notice is deemed to be delivered; provided, however, that if a Valuation Event
occurs during any Valuation Period, a new Valuation Period shall begin on the
Trading Day immediately after the occurrence of such Valuation Event and end on
the fifth Trading Day thereafter.
Section 1.50 "Warrant" Section 1.50 Warrant Section 1.50 Warrant shall mean the
Warrant in the form of Exhibit C hereto issued pursuant to Section 2.5 of this
Agreement.
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Section 1.51 "Warrant Shares" Section 1.51 Warrant Shares Section 1.51 Warrant
Shares shall mean all shares of Common Stock issued or issuable pursuant to
exercise of the Warrant.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK; TERMINATION OF
OBLIGATIONS; WARRANT; BLACKOUT SHARES
Section 2.1 Investments Section 2.1 Investments Section 2.1 Investments.
(a) Puts. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII
hereof), on any Put Date the Company may exercise a Put by the
delivery of a Put Notice. The number of Put Shares that the
Investor shall receive pursuant to such Put shall be determined by
dividing the Investment Amount specified in the Put Notice by the
Purchase Price with respect to such Put Date.
(b) Minimum Amount of Puts. The Company shall, in accordance with
Section 2.2(a), issue and sell Put Shares to the Investor and the
Investor shall purchase Put Shares from the Company totaling (in
aggregate Purchase Prices) at least the Minimum Commitment Amount.
If the Company for any reason (other than the failure of the
Investor to satisfy the conditions set forth in Section 7.1 hereof)
fails to issue and deliver such Put Shares during the Commitment
Period, on the first Trading Day after the expiration of the
Commitment Period, the Company shall wire to Investor a sum in
immediately available funds equal to the product of (X) the Minimum
Commitment Amount minus the aggregate Investment Amounts of the Put
Shares delivered to the Investor hereunder and (Y) the 12% Discount;
provided, however, that if this Agreement is terminated pursuant to
Section 2.4 hereof, the Discount shall be increased by five (5)
percentage points for purposes of this Section.
(c) Maximum Amount of Puts. Unless the Company obtains the
requisite approval of its shareholders in accordance with the
corporate laws of Wisconsin and the applicable rules of the
Principal Market, no more than 19.9% of the Outstanding shares of
Common Stock as of the Subscription Date may be issued and sold
pursuant to Puts.
Section 2.2 Mechanics Section 2.2 Mechanics Section 2.2 Mechanics.
(a) Put Notice. At any time during the Commitment Period, the
Company may deliver a Put Notice to the Investor, subject to the
conditions set forth in Section 7.2; provided, however, the
Investment Amount for each Put as designated by the Company in the
applicable Put Notice shall be neither less than the Minimum Put
Amount nor more than the Maximum Put Amount.
(b) Date of Delivery of Put Notice. A Put Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile or
otherwise by the Investor if such notice is received prior to 12:00
noon
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New York time, or (ii) the immediately succeeding Trading Day if it
is received by facsimile or otherwise after 12:00 noon New York
time on a Trading Day or at any time on a day which is not a
Trading Day. No Put Notice may be deemed delivered, on a day that
is not a Trading Day.
Section 2.3 Closings Section 2.3 Closings Section 2.3 Closings. On each Closing
Date for a Put, (i) the Company shall deliver into escrow one or more
certificates, at the Investor's option, representing the Put Shares to be
purchased by the Investor pursuant to Section 2.1 herein, registered in the name
of the Investor and (ii) the Investor shall deliver into escrow the Investment
Amount specified in the Put Notice by wire transfer of immediately available
funds to the account provided for in the Escrow Agreement. In addition, on or
prior to such Closing Date, each of the Company and the Investor shall deliver
to the other all documents, instruments and writings required to be delivered or
reasonably requested by either of them pursuant to this Agreement in order to
implement and effect the transactions contemplated herein. Payment of the
Investment Amount to the Company and delivery of such certificate(s) to the
Investor shall occur out of escrow in accordance with the Escrow Agreement;
provided, however, that to the extent the Company has not paid the fees,
expenses and disbursements of the Investor's counsel in accordance with Section
12.1, the amount of such fees, expenses and disbursements shall be paid in
immediately available funds, at the direction of the Investor, to Investor's
counsel with no reduction in the number of Put Shares issuable to the Investor
on such Closing Date; provided, further, that so long as the Investor shall
maintain professional liability, errors and omissions and/or directors' and
officers' insurance for its activities related to the Put Shares, the Warrant
Shares or the Blackout Shares, three percent (3%) of such Investment Amount
shall be either (i) retained by the Investor in respect of such insurance or
(ii) paid in immediately available funds, at the direction of the Investor in
respect of such insurance, in either case, with no reduction in the number of
Put Shares issuable to the Investor on such Closing Date.
Section 2.4 Termination of Investment Obligation Section 2.4 Termination of
Investment Obligation Section 2.4 Termination of Investment Obligation. The
Investor's obligation to purchase shares of Common Stock hereunder shall
automatically terminate (including with respect to any Put, notice of which has
been given but the applicable Closing Date has not yet occurred) and the
Investor may, at its sole discretion, terminate this Agreement in the event that
(i) the Registration Statement is not effective within ninety (90) days
following the date required therefor in the Registration Rights Agreement or
(ii) there shall occur any stop order or suspension of the effectiveness of the
Registration Statement for an aggregate of sixty (60) Trading Days during the
Commitment Period, for any reason other than deferrals or suspension during a
Blackout Period in accordance with the Registration Rights Agreement, as a
result of corporate developments subsequent to the Subscription Date that would
require such Registration Statement to be amended to reflect such event in order
to maintain its compliance with the disclosure requirements of the Securities
Act or (iii) the Company shall at any time fail to comply with the requirements
of Section 6.3, 6.4, 6.5 or 6.6.
Section 2.5 The Warrant Section 2.5 The Warrant Section 2.5 The Warrant. On the
Subscription Date, the Company shall issue the Warrant to the Investor. The
Warrant shall be delivered by the Company to the Investor upon execution of this
Agreement by the parties hereto. The Warrant Shares shall be registered for
resale pursuant to the Registration Rights Agreement.
Section 2.6 Blackout Shares Section 2.6 Blackout Shares Section 2.6 Blackout
Shares. In the event that, (a) within five (5) Trading Days following any
Closing Date, the Company gives a Blackout Notice to the Investor of a Blackout
Period in accordance with the Registration Rights Agreement, and (b) the Bid
Price
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on the Trading Day immediately preceding such Blackout Period ("Old Bid Price")
is greater than the Bid Price on the first Trading Day following such Blackout
Period that the Investor may sell its Registrable Securities pursuant to an
effective Registration Statement ("New Bid Price"), then the Company shall issue
to the Investor the number of additional shares of Registrable Securities (the
"Blackout Shares") equal to the difference between (X) the product of the number
of Registrable Securities issued to the Investor in respect of such Closing Date
and held by Investor immediately prior to the Blackout Period multiplied by the
Old Bid Price, divided by the New Bid Price, and (Y) the number of Registrable
Securities issued to the Investor in respect of such Closing Date and held by
Investor immediately prior to the Blackout Period.
Section 2.7 Liquidated Damages Section 2.7 Liquidated Damages Section 2.7
Liquidated Damages. The parties hereto acknowledge and agree that the sum
payable under Section 2.1(b) and the requirement to issue Blackout Shares under
Section 2.6 above shall give rise to liquidated damages and not penalties. The
parties further acknowledge that (a) the amount of loss or damages likely to be
incurred is incapable or is difficult to precisely estimate, (b) the amounts
specified in such Sections bear a reasonable proportion and are not plainly or
grossly disproportionate to the probable loss likely to be incurred by the
Investor in connection with the failure by the Company to make Puts with
aggregate Purchase Prices totalling at least the Minimum Commitment Amount or in
connection with a Blackout Period under the Registration Rights Agreement, and
(c) the parties are sophisticated business parties and have been represented by
sophisticated and able legal and financial counsel and negotiated this Agreement
at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1 Intent Section 3.1 Intent Section 3.1 Intent. The Investor is
entering into this Agreement for its own account and the Investor has no present
arrangement (whether or not legally binding) at any time to sell the Common
Stock to or through any person or entity; provided, however, that by making the
representations herein, the Investor does not agree to hold the Common Stock for
any minimum or other specific term and reserves the right to dispose of the
Common Stock at any time in accordance with federal and state securities laws
applicable to such disposition.
Section 3.2 Sophisticated Investor Section 3.2 Sophisticated Investor Section
3.2 Sophisticated Investor. The Investor is a sophisticated investor (as
described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as
defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it is capable of evaluating the merits and
risks of an investment in Common Stock. The Investor acknowledges that an
investment in the Common Stock is speculative and involves a high degree of
risk.
Section 3.3 Authority Section 3.3 Authority Section 3.3 Authority. Each of
this Agreement, the Registration Rights Agreement, and the Escrow Agreement has
been duly authorized by all necessary corporate action and no further consent or
authorization of the Investor, or its Board of Directors or stockholders is
required. Each of this Agreement, the Registration Rights Agreement, and the
Escrow Agreement was validly executed and delivered by the Investor and each is
a valid and binding agreement of the Investor enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the
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enforcement of, creditors' rights and remedies or by other equitable principles
of general application.
Section 3.4 Not an Affiliate Section 3.4 Not an Affiliate Section 3.4 Not an
Affiliate. The Investor is not an officer, director or "affiliate" (as that
term is defined in Rule 405 of the Securities Act) of the Company.
Section 3.5 Organization and Standing Section 3.5 Organization and Standing
Section 3.5 Organization and Standing. Investor is duly organized, validly
existing, and in good standing under the laws of the British Virgin Islands.
Section 3.6 Absence of Conflicts Section 3.6 Absence of Conflicts Section 3.6
Absence of Conflicts. The execution and delivery of this Agreement and any
other document or instrument contemplated hereby, and the consummation of the
transactions contemplated thereby, and compliance with the requirements thereof,
will not (a) violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on Investor, (b) violate any provision of
any indenture, instrument or agreement to which Investor is a party or is
subject, or by which Investor or any of its assets is bound, (c) conflict with
or constitute a material default thereunder, (d) result in the creation or
imposition of any lien pursuant to the terms of any such indenture, instrument
or agreement, or constitute a breach of any fiduciary duty owed by Investor to
any third party, or (e) require the approval of any third-party (that has not
been obtained) pursuant to any material contract to which Investor is subject or
to which any of its assets, operations or management may be subject.
Section 3.7 Disclosure; Access to Information Section 3.7 Disclosure; Access to
Information Section 3.7 Disclosure; Access to Information. The Investor has
received all documents, records, books and other information pertaining to
Investor's investment in the Company that have been requested by Investor. The
Investor has reviewed or received copies of the SEC Documents. The Investor has
been afforded opportunities to ask questions and receive answers from management
of the Company.
Section 3.8 Manner of Sale Section 3.8 Manner of Sale Section 3.8 Manner of
Sale. At no time was Investor presented with or solicited by or through any
leaflet, public promotional meeting, television advertisement or any other form
of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1 Organization of the Company Section 4.1 Organization of the Company
Section 4.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Wisconsin and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
Except as set forth in the SEC Documents, the Company does not own more than
fifty percent (50%) of the outstanding capital stock of or control any other
business entity. The Company is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect.
Section 4.2 Authority Section 4.2 Authority Section 4.2 Authority. (i) The
Company has the requisite corporate power and authority to enter into and
perform its obligations under this Agreement, the Registration Rights Agreement,
the Warrant and the Escrow Agreement and to issue the Put Shares, the Warrant,
the Warrant Shares and the Blackout Shares; (ii) the execution and delivery
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of this Agreement and the Registration Rights Agreement, and the execution,
issuance and delivery of the Warrant, by the Company and the consummation by it
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action and no further consent or authorization of the
Company or its Board of Directors or stockholders is required; and (iii) each of
this Agreement and the Registration Rights Agreement has been duly executed and
delivered, and the Warrant has been duly executed, issued and delivered, by the
Company and constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws relating to, or affecting generally the enforcement of, creditors' rights
and remedies or by other equitable principles of general application.
Section 4.3 Capitalization Section 4.3 Capitalization Section 4.3
Capitalization. As of June 30, 1998, the authorized capital stock of the
Company consisted of 15,000,000 shares of Common Stock, of which 10,415,757
shares were issued and outstanding, and 5,000,000 shares of blank-check
preferred stock designated as "Class A Preferred Stock," of which two series
have been designated, the first being Series 1, of which 1,040,000 shares have
been authorized and 680,000 shares were issued and outstanding and the second
being Series 2, of which 1,500,000 shares have been authorized and no shares
were issued and outstanding. Except for (i) options to purchase not more than
1,192,454 shares of Common Stock with purchase prices between $.01 and $15.25
per share (as more specifically described on Schedule 4.3 hereof); (ii) warrants
to purchase not more than 1,133,534 shares of Common Stock with purchase prices
between $1.848 and $5.72 per share (as more particularly described on Schedule
4.3 hereof) and (iii) Common Stock issuable in exchange for shares of Class A
Series 1 Preferred Stock on a one for one basis, there are no options, warrants,
or rights to subscribe to, securities, rights or obligations convertible into or
exchangeable for or giving any right to subscribe for any shares of capital
stock of the Company. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
nonassessable (except as set forth in Wisconsin Statutes Section 180.0822(2)(b),
as interpreted).
Section 4.4 Common Stock Section 4.4 Common Stock Section 4.4 Common Stock.
The Company has registered its Common Stock pursuant to Section 12(b) or 12(g)
of the Exchange Act and is in full compliance with all reporting requirements of
the Exchange Act, and the Common Stock is currently listed or quoted on the
Principal Market. As of the date hereof, the Principal Market is the American
Stock Exchange.
Section 4.5 SEC Documents Section 4.5 SEC Documents Section 4.5 SEC Documents.
The Company has delivered or made available to the Investor true and complete
copies of the SEC Documents (including, without limitation, proxy information
and solicitation materials). The Company has not provided to the Investor any
information that, according to applicable law, rule or regulation, should have
been disclosed publicly prior to the date hereof by the Company, but which has
not been so disclosed. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and other federal, state and local laws, rules
and regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the
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Company included in the SEC Documents comply as to form and substance in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
Section 4.6 Exemption from Registration; Valid Issuances Section 4.6 Exemption
from Registration; Valid Issuances Section 4.6 Exemption from Registration;
Valid Issuances. The sale and issuance of the Warrant, the Warrant Shares, the
Put Shares and any Blackout Shares in accordance with the terms and on the bases
of the representations and warranties set forth in this Agreement, may and shall
be properly issued pursuant to Rule 4(2), Regulation D and/or any applicable
state law. When issued and paid for as herein provided, the Put Shares, the
Warrant Shares and any Blackout Shares shall be duly and validly issued, fully
paid, and nonassessable (except as set forth in Wisconsin Statutes Section
180.0822(2)(b), as interpreted). Neither the sales of the Put Shares, the
Warrant, the Warrant Shares or any Blackout Shares pursuant to, nor the
Company's performance of its obligations under, this Agreement, the Registration
Rights Agreement, or the Warrant shall (i) result in the creation or imposition
of any liens, charges, claims or other encumbrances upon the Put Shares, the
Warrant Shares, any Blackout Shares or any of the assets of the Company, or (ii)
entitle the holders of Outstanding Capital Shares to preemptive or other rights
to subscribe to or acquire the Capital Shares or other securities of the
Company. The Put Shares, the Warrant Shares and any Blackout Shares shall not
subject the Investor to personal liability by reason of the ownership thereof
(except as set forth in Wisconsin Statutes Section 180.0822(2)(b), as
interpreted).
Section 4.7 No General Solicitation or Advertising in Regard to this Transaction
Section 4.7 No General Solicitation or Advertising in Regard to this
Transaction Section 4.7 No General Solicitation or Advertising in Regard to
this Transaction. Neither the Company nor any of its affiliates nor any
distributor or any person acting on its or their behalf (i) has conducted or
will conduct any general solicitation (as that term is used in Rule 502(c) of
Regulation D) or general advertising with respect to any of the Put Shares, the
Warrant, the Warrant Shares or any Blackout Shares, or (ii) made any offers or
sales of any security or solicited any offers to buy any security under any
circumstances that would require registration of the Common Stock issued to the
Investor hereunder under the Securities Act.
Section 4.8 Corporate Documents Section 4.8 Corporate Documents Section 4.8
Corporate Documents. The Company has furnished or made available to the
Investor true and correct copies of the Company's Certificate of Incorporation,
as amended and in effect on the date hereof (the "Certificate"), and the
Company's Amended and Restated By-Laws, as so amended and restated and in effect
on the date hereof (the "By-Laws").
Section 4.9 No Conflicts Section 4.9 No Conflicts Section 4.9 No Conflicts. The
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby, including
without limitation the issuance of the Put Shares, the Warrant, the Warrant
Shares and the Blackout Shares do not and will not (i) result in a violation of
the Certificate or By-Laws or (ii) conflict with, or constitute a material
default (or an event that with
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notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
material agreement, indenture, instrument or any "lock-up" or similar provision
of any underwriting or similar agreement to which the Company is a party, or
(iii) result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or by which any property or
asset of the Company is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect) nor is
the Company otherwise in violation of, conflict with or in default under any of
the foregoing; provided, however, that for purposes of the Company's
representations and warranties as to violations of foreign law, rule or
regulation referenced in clause (iii), such representations and warranties are
made only to the best of the Company's knowledge insofar as the execution,
delivery and performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby are or may be affected by
the status of the Investor under or pursuant to any such foreign law, rule or
regulation. The business of the Company is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Common Stock or the Warrant in accordance with
the terms hereof (other than any SEC, NASD or state securities filings that may
be required to be made by the Company subsequent to any Closing, any
registration statement that may be filed pursuant hereto, and any shareholder
approval or filing required by the rules applicable to companies whose common
stock trades on the American Stock Exchange); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
Section 4.10 No Material Adverse Change Section 4.10 No Material Adverse Change
Section 4.10 No Material Adverse Change. Since December 31, 1997, to the
Company's knowledge, no event has occurred that would have a Material Adverse
Effect on the Company, except as disclosed in the SEC Documents.
Section 4.11 No Undisclosed Liabilities Section 4.11 No Undisclosed Liabilities
Section 4.11 No Undisclosed Liabilities. To the Company's knowledge, the
Company has no liabilities or obligations that are material, individually or in
the aggregate, and that are not disclosed in the SEC Documents or otherwise
publicly announced, other than those incurred in the ordinary course of the
Company's businesses since December 31, 1997 and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect on the Company.
Section 4.12 No Undisclosed Events or Circumstances Section 4.12 No Undisclosed
Events or Circumstances Section 4.12 No Undisclosed Events or Circumstances.
Since December 31, 1997, no event or circumstance has occurred or exists with
respect to the Company or its businesses, properties, prospects, operations or
financial condition, that, under applicable law, rule or regulation, requires
public disclosure or announcement prior to the date hereof by the Company but
which has not been so publicly announced or disclosed in the SEC Documents.
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Section 4.13 No Integrated Offering Section 4.13 No Integrated Offering Section
4.13 No Integrated Offering. Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security,
other than pursuant to this Agreement, under circumstances that would require
registration of the Common Stock issued to the Investor hereunder under the
Securities Act.
Section 4.14 Litigation and Other Proceedings Section 4.14 Litigation and Other
Proceedings Section 4.14 Litigation and Other Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which would be reasonably likely to have a Material Adverse
Effect. Except as set forth in the SEC Documents, no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which would
be reasonably likely to result in a Material Adverse Effect.
Section 4.15 No Misleading or Untrue Communication Section 4.15 No Misleading or
Untrue Communication Section 4.15 No Misleading or Untrue Communication. The
Company, any Person representing the Company, and, to the knowledge of the
Company, any other Person selling or offering to sell the Put Shares, the
Warrant, the Warrant Shares or the Blackout Shares in connection with the
transactions contemplated by this Agreement, have not made, at any time, any
oral communication in connection with the offer or sale of the same which
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.16 Material Non-Public Information Section 4.16 Material Non-Public
Information Section 4.16 Material Non-Public Information. The Company is not in
possession of, nor has the Company or its agents disclosed to the Investor, any
material non-public information that (i) if disclosed, would, or could
reasonably be expected to have, an effect on the price of the Common Stock or
(ii) according to applicable law, rule or regulation, should have been disclosed
publicly by the Company prior to the date hereof but which has not been so
disclosed.
ARTICLE V
COVENANTS OF THE INVESTOR
Section 5.1 Compliance with Law. The Investor's trading activities with respect
to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and the
rules and regulations of the Principal Market on which the Company's Common
Stock is listed. Section 5.1 Compliance with Law. The Investor's trading
activities with respect to shares of the Company's Common Stock will be in
compliance with all applicable state and federal securities laws, rules and
regulations and the rules and regulations of the Principal Market on which the
Company's Common Stock is listed. Section 5.1 Compliance with Law. The
Investor's trading activities with respect to shares of the Company's Common
Stock will be in compliance with all applicable state and federal securities
laws, rules and regulations and the rules and regulations of the Principal
Market on which the Company's Common Stock is listed.
Section 5.2 Limitation on Short Sales. The Investor and its Affiliates shall
not engage in short sales of the Company's Common Stock; provided, however, that
the Investor may enter into any short sale or other hedging or similar
arrangement it deems appropriate with respect to Put Shares after it receives a
Put Notice with respect to such Put Shares so long as such sales or arrangements
do not involve more than the number of such Put Shares (determined as of the
date of such Put Notice).
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ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1 Registration Rights Section 6.1 Registration Rights Section 6.1
Registration Rights. The Company shall cause the Registration Rights Agreement
to remain in full force and effect and the Company shall comply in all respects
with the terms thereof.
Section 6.2 Reservation of Common Stock Section 6.2 Reservation of Common Stock
Section 6.2 Reservation of Common Stock. As of the date hereof, the Company has
available and the Company shall reserve and keep available at all times, free of
preemptive rights, 1,500,000 shares of Common Stock for the purpose of enabling
the Company to satisfy any obligation to issue the Put Shares, the Warrant
Shares and the Blackout Shares. The Company covenants and agrees to use its
reasonable best efforts to obtain shareholder approval for the authorization of
such additional shares of Common Stock as shall be necessary to fulfill the
Company's obligations to issue the Put Shares, the Warrant Shares and the
Blackout Shares.
Section 6.3 Listing of Common Stock Section 6.3 Listing of Common Stock Section
6.3 Listing of Common Stock. The Company shall use its reasonable best efforts
to maintain the listing of the Common Stock on a Principal Market, and as soon
as practicable (but in any event prior to the commencement of the Commitment
Period) will cause the Put Shares, the Warrant Shares and any Blackout Shares to
be listed on the Principal Market. The Company further shall, if the Company
applies to have the Common Stock traded on any other Principal Market, include
in such application the Put Shares, the Warrant Shares and any Blackout Shares,
and shall take such other action as is necessary or desirable in the opinion of
the Investor to cause the Common Stock to be listed on such other Principal
Market as promptly as possible. The Company shall use its reasonable best
efforts to continue the listing and trading of its Common Stock on the Principal
Market and will comply in all respects with the Company's reporting, filing and
other obligations under the bylaws or rules of the NASD and the Principal
Market.
Section 6.4 Exchange Act Registration Section 6.4 Exchange Act Registration
Section 6.4 Exchange Act Registration. The Company shall (i) cause its Common
Stock to continue to be registered under Section 12(g) or 12(b) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
said Act, and will not take any action or file any document (whether or not
permitted by said Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Act.
Section 6.5 Legends Section 6.5 Legends Section 6.5 Legends. The certificates
evidencing the Put Shares, the Warrant Shares and the Blackout Shares shall be
free of legends, except as provided for in Article VIII.
Section 6.6 Corporate Existence Section 6.6 Corporate Existence Section 6.6
Corporate Existence. The Company shall take all steps necessary to preserve and
continue the corporate existence of the Company.
Section 6.7 Notice of Certain Events Affecting Registration; Suspension of Right
to Make a Put Section 6.7 Notice of Certain Events Affecting Registration;
Suspension of Right to Make a Put Section 6.7 Notice of Certain Events Affecting
Registration; Suspension of Right to Make a Put. The Company shall immediately
notify the Investor upon the occurrence of any of the following events in
respect of a registration statement or related prospectus in respect of an
offering of Registrable Securities: (i) receipt of any request for additional
information by the SEC or any other federal or state governmental authority
during the period of effectiveness of the
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registration statement for amendments or supplements to the registration
statement or related prospectus; (ii) the issuance by the SEC or any other
federal or state governmental authority of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose; (iii) receipt of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the registration statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the registration
statement would be appropriate, and the Company shall promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Put Notice during the continuation
of any of the foregoing events.
Section 6.8 Expectations Regarding Put Notices Section 6.8 Expectations
Regarding Put Notices Section 6.8 Expectations Regarding Put Notices. Within
ten (10) days after the commencement of each calendar quarter occurring
subsequent to the commencement of the Commitment Period, the Company undertakes
to notify the Investor as to its reasonable expectations as to the dollar amount
it intends to raise during such calendar quarter, if any, through the issuance
of Put Notices. Such notification shall constitute only the Company's good
faith estimate with respect to such calendar quarter and shall in no way
obligate the Company to raise such amount during such calendar quarter or
otherwise limit its ability to deliver Put Notices during such calendar quarter
in amounts greater or less than the amount specified by the Company as its
reasonable expectations regarding such calendar quarter. The failure by the
Company to comply with this provision can be cured by the Company's notifying
the Investor at any time as to its reasonable expectations with respect to the
current calendar quarter.
Section 6.9 Consolidation; Merger Section 6.9 Consolidation; Merger Section 6.9
Consolidation; Merger. The Company shall not, at any time after the date
hereof, effect any merger or consolidation of the Company with or into, or a
transfer of all or substantially all of the assets of the Company to, another
entity unless the resulting successor or acquiring entity (if not the Company)
assumes by written instrument the obligation to deliver to the Investor such
shares of stock and/or securities as the Investor is entitled to receive
pursuant to this Agreement and the Warrant.
Section 6.10 Issuance of Put Shares, Warrant Shares and Blackout Shares Section
6.10 Issuance of Put Shares, Warrant Shares and Blackout Shares Section 6.10
Issuance of Put Shares, Warrant Shares and Blackout Shares. The sale of the Put
Shares, the issuance of the Warrant Shares pursuant to exercise of the Warrant
and the issuance of any Blackout Shares shall be made in accordance with the
provisions and requirements of Regulation D and any applicable state law.
Issuance of the Warrant Shares pursuant to exercise of the Warrant through a
cashless exercise shall be made in accordance with the provisions and
requirements of Section 3(a)(9) under the Securities Act and any applicable
state law.
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Section 6.11 Legal Opinion on Subscription Date Section 6.11 Legal Opinion on
Subscription Date Section 6.11 Legal Opinion on Subscription Date. The
Company's independent counsel shall deliver to the Investor on the Subscription
Date an opinion in the form of Exhibit E.
Section 6.12 No Other Equity Lines Section 6.12 No Other Equity Lines Section
6.12 No Other Equity Lines. The Company shall refrain from entering into any
other agreements, arrangements or understandings granting to the Company the
right to put shares of its securities to one or more investors in private
placements.
ARTICLE VII
CONDITIONS TO DELIVERY OF
PUT NOTICES AND CONDITIONS TO CLOSING
Section 7.1 Conditions Precedent to the Obligation of the Company to Issue and
Sell Common Stock Section 7.1 Conditions Precedent to the Obligation of the
Company to Issue and Sell Common Stock Section 7.1 Conditions Precedent to the
Obligation of the Company to Issue and Sell Common Stock. The obligation
hereunder of the Company to issue and sell the Put Shares to the Investor
incident to each Closing is subject to the satisfaction, at or before each such
Closing, of each of the conditions set forth below.
(a) Accuracy of the Investor's Representation and Warranties. The
representations and warranties of the Investor shall be true and
correct in all material respects as of the date of this Agreement
and as of the date of each such Closing as though made at each such
time.
(b) Performance by the Investor. The Investor shall have
performed, satisfied and complied in all respects with all
covenants, agreements and conditions required by this Agreement to
be performed, satisfied or complied with by the Investor at or
prior to such Closing.
Section 7.2 Conditions Precedent to the Right of the Company to Deliver a Put
Notice and the Obligation of the Investor to Purchase Put Shares Section 7.2
Conditions Precedent to the Right of the Company to Deliver a Put Notice and the
Obligation of the Investor to Purchase Put Shares Section 7.2 Conditions
Precedent to the Right of the Company to Deliver a Put Notice and the Obligation
of the Investor to Purchase Put Shares. The right of the Company to deliver a
Put Notice and the obligation of the Investor hereunder to acquire and pay for
the Put Shares incident to a Closing is subject to the satisfaction, on (i) the
applicable Put Date and (ii) the applicable Closing Date (each a "Condition
Satisfaction Date"), of each of the following conditions:
(a) Registration of the Registrable Securities with the SEC. As
set forth in the Registration Rights Agreement, the Company shall
have filed with the SEC a Registration Statement with respect to
the resale of the Registrable Securities by the Investor that shall
have been declared effective by the SEC prior to the first Put
Date, but in no event later than one hundred twenty (120) days
after Subscription Date.
(b) Effective Registration Statement. As set forth in the
Registration Rights Agreement, the Registration Statement shall
have previously become effective and shall remain effective on each
Condition Satisfaction Date and (i) neither the Company nor the
Investor shall have received notice that the SEC has issued or
intends to issue a stop order with respect to the Registration
Statement or that the
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SEC otherwise has suspended or withdrawn the effectiveness of the
Registration Statement, either temporarily or permanently, or
intends or has threatened to do so (unless the SEC's concerns have
been addressed and the Investor is reasonably satisfied that the
SEC no longer is considering or intends to take such action), and
(ii) no other suspension of the use or withdrawal of the
effectiveness of the Registration Statement or related prospectus
shall exist.
(c) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and
correct in all material respects as of each Condition Satisfaction
Date as though made at each such time (except for representations
and warranties specifically made as of a particular date).
(d) Performance by the Company. The Company shall have performed,
satisfied and complied in all respects with all covenants,
agreements and conditions required by this Agreement, the
Registration Rights Agreement and the Warrant to be performed,
satisfied or complied with by the Company at or prior to each
Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered,
promulgated or adopted by any court or governmental authority of
competent jurisdiction that prohibits the transactions contemplated
by this Agreement or otherwise has a Material Adverse Effect, and
no actions, suits or proceedings shall be in progress, pending or
threatened by any Person, that seek to enjoin or prohibit the
transactions contemplated by this Agreement or otherwise could
reasonably be expected to have a Material Adverse Effect. For
purposes of this paragraph (e), no proceeding shall be deemed
pending or threatened unless one of the parties has received
written or oral notification thereof prior to the applicable
Closing Date.
(f) No Suspension of Trading In or Delisting of Common Stock. The
trading of the Common Stock shall not have been suspended by the
SEC, the Principal Market or the NASD and the Common Stock shall
have been approved for listing or quotation on and shall not have
been delisted from the Principal Market. The issuance of shares of
Common Stock with respect to the applicable Closing, if any, shall
not violate the shareholder approval requirements of the Principal
Market.
(g) Legal Opinion. The Company shall have caused to be delivered
to the Investor, within five (5) Trading Days of the effective date
of the Registration Statement, an opinion of the Company's
independent counsel in the form of Exhibit E hereto, addressed to
the Investor.
(h) Due Diligence. No dispute between the Company and the Investor
shall exist pursuant to Section 7.3 as to the adequacy of the
disclosure contained in the Registration Statement.
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(i) Ten Percent Limitation. On each Closing Date, the number of
Put Shares then to be purchased by the Investor shall not exceed
the number of such shares that, when aggregated with all other
shares of Registerable Securities then owned by the Investor
beneficially or deemed beneficially owned by the Investor, would
result in the Investor owning more than 9.9% of all of such Common
Stock as would be outstanding on such Closing Date, as determined
in accordance with Section 16 of the Exchange Act and the
regulations promulgated thereunder. For purposes of this Section,
in the event that the amount of Common Stock outstanding as
determined in accordance with Section 16 of the Exchange Act and
the regulations promulgated thereunder is greater on a Closing Date
than on the date upon which the Put Notice associated with such
Closing Date is given, the amount of Common Stock outstanding on
such Closing Date shall govern for purposes of determining whether
the Investor, when aggregating all purchases of Common Stock made
pursuant to this Agreement and, if any, Warrant Shares and Blackout
Shares, would own more than 9.9% of the Common Stock following such
Closing Date.
(j) Minimum Bid Price. The Bid Price equals or exceeds the Floor
Price throughout the applicable Valuation Period (or, with respect
to any Put Date, the portion of the Valuation Period preceding such
Put Date).
(k) Minimum Average Daily Trading Volume. The Average Daily
Trading Volume for the Common Stock with respect to the applicable
Put Date and Closing Date equals or exceeds 17,000 shares per
Trading Day.
(l) No Knowledge. The Company shall have no knowledge of any event
more likely than not to have the effect of causing such
Registration Statement to be suspended or otherwise ineffective
(which event is more likely than not to occur within the fifteen
Trading Days following the Trading Day on which such Notice is
deemed delivered).
(m) Trading Cushion. The Trading Cushion shall have elapsed since
the immediately preceding Put Date.
(n) Shareholder Vote. The issuance of shares of Common Stock with
respect to the applicable Closing, if any, shall not violate the
shareholder approval requirements of the Principal Market.
(o) Escrow Agreement. The parties hereto shall have entered into
the Escrow Agreement.
(p) Other. On each Condition Satisfaction Date, the Investor shall
have received and been reasonably satisfied with such other
certificates and documents as shall have been reasonably requested
by the Investor in order for the Investor to confirm the Company's
satisfaction of the conditions set forth in this Section 7.2.,
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including, without limitation, a certificate in substantially the
form and substance of Exhibit F hereto, executed in either case by
an executive officer of the Company and to the effect that all the
conditions to such Closing shall have been satisfied as at the date
of each such certificate.
Section 7.3 Due Diligence Review; Non-Disclosure of Non-Public Information.
(a) The Company shall make available for inspection and review by
the Investor, advisors to and representatives of the Investor (who
may or may not be affiliated with the Investor and who are
reasonably acceptable to the Company), any Underwriter, any
Registration Statement or amendment or supplement thereto or any
blue sky, NASD or other filing, all financial and other records, all
SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the
Company's officers, directors and employees to supply all such
information reasonably requested by the Investor or any such
representative, advisor or Underwriter in connection with such
Registration Statement (including, without limitation, in response
to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of
enabling the Investor and such representatives, advisors and
Underwriters and their respective accountants and attorneys to
conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
(b) Each of the Company, its officers, directors, employees and
agents shall in no event disclose non-public information to the
Investor, advisors to or representatives of the Investor unless
prior to disclosure of such information the Company identifies such
information as being non-public information and provides the
Investor, such advisors and representatives with the opportunity to
accept or refuse to accept such non-public information for review.
The Company may, as a condition to disclosing any non-public
information hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in form
reasonably satisfactory to the Company and the Investor.
(c) Nothing herein shall require the Company to disclose non-public
information to the Investor or its advisors or representatives, and
the Company represents that it does not disseminate non-public
information to any investors who purchase stock in the Company in a
public offering, to money managers or to securities analysts;
provided, however, that notwithstanding anything herein to the
contrary, the Company shall, as hereinabove provided, immediately
notify the advisors and representatives of the Investor and any
Underwriters of any event or the existence of any circumstance
(without any obligation to disclose the specific event or
circumstance) of which it becomes aware, constituting non-public
information (whether or not requested of the Company specifically
or generally during the course of due diligence by such persons or
entities), which, if not disclosed in the prospectus included in
the Registration Statement would cause
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such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the
statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section 7.3
shall be construed to mean that such persons or entities other than
the Investor (without the written consent of the Investor prior to
disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance
with the terms and conditions of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the
Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an
untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to
make the statements contained therein, in light of the
circumstances in which they were made, not misleading.
ARTICLE VIII
LEGENDS
Section 8.1 Legends Section 8.1 Legends Section 8.1 Legends. Each of the
Warrant and, unless otherwise provided below, each certificate representing
Registrable Securities will bear the following legend (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND
HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION
THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN
OBLIGATIONS OF THE COMPANY SET FORTH IN A PRIVATE EQUITY LINE
AGREEMENT BETWEEN THE FEMALE HEALTH COMPANY AND KINGSBRIDGE
CAPITAL LIMITED DATED AS OF NOVEMBER 19, 1998. A COPY OF THE
PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY
BE OBTAINED FROM THE COMPANY'S EXECUTIVE OFFICES.
As soon as practicable after the execution and delivery hereof, but in any
event within 5 Trading Days hereafter, the Company shall issue to the transfer
agent for its Common Stock (and to any substitute or replacement transfer agent
for its Common Stock upon the Company's appointment of any such substitute or
replacement transfer agent) instructions in substantially the form of Exhibit G
hereto, with a copy to the Investor. Such instructions shall be irrevocable by
the
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Company from and after the date hereof or from and after the issuance thereof
to any such substitute or replacement transfer agent, as the case may be,
except as otherwise expressly provided in the Registration Rights Agreement. It
is the intent and purpose of such instructions, as provided therein, to require
the transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investor to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and
under the following circumstances and without consultation by the transfer
agent with the Company or its counsel and without the need for any further
advice or instruction or documentation to the transfer agent by or from the
Company or its counsel or the Investor:
(a) At any time after the Effective Date, upon surrender of one or
more certificates evidencing Common Stock that bear the Legend, to
the extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered;
provided that (i) the Registration Statement shall then be
effective and (ii) if reasonably requested by the transfer agent
the Investor confirms to the transfer agent that the Investor has
complied with the prospectus delivery requirement.
(b) At any time upon any surrender of one or more certificates
evidencing Registrable Securities that bear the Legend, to the
extent accompanied by a notice requesting the issuance of new
certificates free of the Legend to replace those surrendered and
containing representations that (i) the Investor is permitted to
dispose of such Registrable Securities without limitation as to
amount or manner of sale pursuant to Rule 144(k) under the
Securities Act or (ii) the Investor has sold, pledged or otherwise
transferred or agreed to sell, pledge or otherwise transfer such
Registrable Securities in a manner other than pursuant to an
effective registration statement, to a transferee who shall upon
such transfer be entitled to freely tradeable securities.
Section 8.2 No Other Legend or Stock Transfer Restrictions Section 8.2 No Other
Legend or Stock Transfer Restrictions Section 8.2 No Other Legend or Stock
Transfer Restrictions. No legend other than the one specified in Section 8.1 has
been or shall be placed on the share certificates representing the Common Stock
and no instructions or "stop transfers orders," so called, "stock transfer
restrictions," or other restrictions have been or shall be given to the
Company's transfer agent with respect thereto other than as expressly set forth
in this Article VIII.
Section 8.3 Investor's Compliance Section 8.3 Investor's Compliance Section 8.3
Investor's Compliance. Nothing in this Article VIII shall affect in any way the
Investor's obligations under any agreement to comply with all applicable
securities laws upon resale of the Common Stock.
ARTICLE IX
INDEMNIFICATION
Section 9.1 Indemnification Section 9.1 Indemnification Section 9.1
Indemnification. The Company agrees to indemnify and hold harmless the
Investor, its partners, affiliates, officers, directors, employees, and duly
authorized agents, and each Person or entity, if any, who controls the Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, together with the Controlling Persons (as defined in the
Registration Rights Agreement) from and against any
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Damages, joint or several, and any action in respect thereof to which the
Investor, its partners, affiliates, officers, directors, employees, and duly
authorized agents, and any such Controlling Person becomes subject to, resulting
from, arising out of or relating to any misrepresentation, breach of warranty or
nonfulfillment of or failure to perform any covenant or agreement on the part of
Company contained in this Agreement, as such Damages are incurred, unless such
Damages result primarily from the Investor's gross negligence, recklessness or
bad faith in performing its obligations under this Agreement.
Section 9.2 Method of Asserting Indemnification Claims Section 9.2 Method of
Asserting Indemnification Claims Section 9.2 Method of Asserting Indemnification
Claims. All claims for indemnification by any Indemnified Party (as defined
below) under Section 9.1 shall be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which any person
claiming indemnification under any provision of Section 9.1 (an
"Indemnified Party") might seek indemnity under Section 9.1 is
asserted against or sought to be collected from such Indemnified
Party by a person other than the Company, the Investor or any
affiliate of the Company or (a "Third Party Claim"), the Indemnified
Party shall deliver a written notification, enclosing a copy of all
papers served, if any, and specifying the nature of and basis for
such Third Party Claim and for the Indemnified Party's claim for
indemnification that is being asserted under any provision of
Section 12.2 against any person (the "Indemnifying Party"), together
with the amount or, if not then reasonably ascertainable, the
estimated amount, determined in good faith, of such Third Party
Claim (a "Claim Notice") with reasonable promptness to the
Indemnifying Party. If the Indemnified Party fails to provide the
Claim Notice with reasonable promptness after the Indemnified Party
receives notice of such Third Party Claim, the Indemnifying Party
shall not be obligated to indemnify the Indemnified Party with
respect to such Third Party Claim to the extent that the
Indemnifying Party's ability to defend has been prejudiced by such
failure of the Indemnified Party. The Indemnifying Party shall
notify the Indemnified Party as soon as practicable within the
period ending thirty (30) calendar days following receipt by the
Indemnifying Party of either a Claim Notice or an Indemnity Notice
(as defined below) (the "Dispute Period") whether the Indemnifying
Party disputes its liability or the amount of its liability to the
Indemnified Party under Section 9.1 and whether the Indemnifying
Party desires, at its sole cost and expense, to defend the
Indemnified Party against such Third Party Claim.
(i) If the Indemnifying Party notifies the Indemnified Party
within the Dispute Period that the Indemnifying Party desires
to defend the Indemnified Party with respect to the Third
Party Claim pursuant to this Section 9.2(a), then the
Indemnifying Party shall have the right to defend, with
counsel reasonably satisfactory to the Indemnified Party, at
the sole cost and expense of the Indemnifying Party, such
Third Party Claim by all appropriate proceedings, which
proceedings shall be vigorously and diligently prosecuted by
the Indemnifying Party to a final conclusion or will be
settled at the discretion of the Indemnifying Party (but only
with the consent of the Indemnified Party (which consent shall
not be unreasonably
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<PAGE> 31
withheld) in the case of any settlement that provides for any
relief other than the payment of monetary damages or that
provides for the payment of monetary damages as to which the
Indemnified Party shall not be indemnified in full pursuant
to Section 9.1). The Indemnifying Party shall have full
control of such defense and proceedings, including any
compromise or settlement thereof; provided, however, that the
Indemnified Party may, at the sole cost and expense of the
Indemnified Party, at any time prior to the Indemnifying
Party's delivery of the notice referred to in the first
sentence of this clause (i), file any motion, answer or other
pleadings or take any other action that the Indemnified Party
reasonably believes to be necessary or appropriate to protect
its interests; and provided further, that if requested by the
Indemnifying Party, the Indemnified Party will, at the sole
cost and expense of the Indemnifying Party, provide
reasonable cooperation to the Indemnifying Party in
contesting any Third Party Claim that the Indemnifying Party
elects to contest. The Indemnified Party may participate in,
but not control, any defense or settlement of any Third Party
Claim controlled by the Indemnifying Party pursuant to this
clause (i), and except as provided in the preceding sentence,
the Indemnified Party shall bear its own costs and expenses
with respect to such participation. Notwithstanding the
foregoing, the Indemnified Party may take over the control of
the defense or settlement of a Third Party Claim at any time
if it irrevocably waives its right to indemnity under Section
9.1 with respect to such Third Party Claim.
(ii) If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the
Indemnifying Party desires to defend the Third Party Claim
pursuant to Section 9.2(a), or if the Indemnifying Party
gives such notice but fails to prosecute vigorously and
diligently or settle the Third Party Claim, or if the
Indemnifying Party fails to give any notice whatsoever within
the Dispute Period, then the Indemnified Party shall have the
right to defend, at the sole cost and expense of the
Indemnifying Party, the Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted by the
Indemnified Party in a reasonable manner and in good faith or
will be settled at the discretion of the Indemnified Party
(with the consent of the Indemnifying Party, which consent
will not be unreasonably withheld). The Indemnified Party
will have full control of such defense and proceedings,
including any compromise or settlement thereof; provided,
however, that if requested by the Indemnified Party, the
Indemnifying Party will, at the sole cost and expense of the
Indemnifying Party, provide reasonable cooperation to the
Indemnified Party and its counsel in contesting any Third
Party Claim which the Indemnified Party is contesting.
Notwithstanding the foregoing provisions of this clause (ii),
if the Indemnifying Party has notified the Indemnified Party
within the Dispute Period that the Indemnifying Party
disputes its liability or the amount of its liability
hereunder to the
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<PAGE> 32
Indemnified Party with respect to such Third Party Claim and
if such dispute is resolved in favor of the Indemnifying
Party in the manner provided in clause (iii) below, the
Indemnifying Party will not be required to bear the costs and
expenses of the Indemnified Party's defense pursuant to this
clause (ii) or of the Indemnifying Party's participation
therein at the Indemnified Party's request, and the
Indemnified Party shall reimburse the Indemnifying Party in
full for all reasonable costs and expenses incurred by the
Indemnifying Party in connection with such litigation. The
Indemnifying Party may participate in, but not control, any
defense or settlement controlled by the Indemnified Party
pursuant to this clause (ii), and the Indemnifying Party
shall bear its own costs and expenses with respect to such
participation.
(iii) If the Indemnifying Party notifies the Indemnified
Party that it does not dispute its liability or the amount of
its liability to the Indemnified Party with respect to the
Third Party Claim under Section 9.1 or fails to notify the
Indemnified Party within the Dispute Period whether the
Indemnifying Party disputes its liability or the amount of
its liability to the Indemnified Party with respect to such
Third Party Claim, the Loss in the amount specified in the
Claim Notice shall be conclusively deemed a liability of the
Indemnifying Party under Section 9.1 and the Indemnifying
Party shall pay the amount of such Loss to the Indemnified
Party on demand. If the Indemnifying Party has timely
disputed its liability or the amount of its liability with
respect to such claim, the Indemnifying Party and the
Indemnified Party shall proceed in good faith to negotiate a
resolution of such dispute, and if not resolved through
negotiations within the Resolution Period, such dispute shall
be resolved by arbitration in accordance with paragraph (c)
of this Section 9.2.
(b) In the event any Indemnified Party should have a claim under
Section 9.1 against the Indemnifying Party that does not involve a
Third Party Claim, the Indemnified Party shall deliver a written
notification of a claim for indemnity under Section 9.1 specifying
the nature of and basis for such claim, together with the amount
or, if not then reasonably ascertainable, the estimated amount,
determined in good faith, of such claim (an "Indemnity Notice")
with reasonable promptness to the Indemnifying Party. The failure
by any Indemnified Party to give the Indemnity Notice shall not
impair such party's rights hereunder except to the extent that the
Indemnifying Party demonstrates that it has been irreparably
prejudiced thereby.
(c) Any dispute under this Agreement or the Warrant shall be
submitted to arbitration (including, without limitation, pursuant
to this Section 12.3) and shall be finally and conclusively
determined by the decision of a board of arbitration consisting of
three (3) members (the "Board of Arbitration") selected as
hereinafter provided. Each of the Indemnified Party and the
Indemnifying Party shall select one (1) member and the third member
shall be selected by mutual agreement of the other members, or if
the other members fail to reach agreement
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<PAGE> 33
on a third member within twenty (20) days after their selection,
such third member shall thereafter be selected by the American
Arbitration Association upon application made to it for such purpose
by the Indemnified Party. The Board of Arbitration shall meet on
consecutive business days in New York County, New York or such other
place as a majority of the members of the Board of Arbitration
determines more appropriate, and shall reach and render a decision
in writing (concurred in by a majority of the members of the Board
of Arbitration) with respect to the amount, if any, which the
Indemnifying Party is required to pay to the Indemnified Party in
respect of a claim filed by the Indemnified Party. In connection
with rendering its decisions, the Board of Arbitration shall adopt
and follow such rules and procedures as a majority of the members of
the Board of Arbitration deems necessary or appropriate. To the
extent practical, decisions of the Board of Arbitration shall be
rendered no more than thirty (30) calendar days following
commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to the
Indemnified Party and the Indemnifying Party. Any decision made by
the Board of Arbitration (either prior to or after the expiration of
such thirty (30) calendar day period) shall be final, binding and
conclusive on the Indemnified Party and the Indemnifying Party and
entitled to be enforced to the fullest extent permitted by law and
entered in any court of competent jurisdiction. Each party to any
arbitration shall bear its own expense in relation thereto,
including but not limited to such party's attorneys' fees, if any,
and the expenses and fees of the Board of Arbitration shall be
divided between the Indemnifying Party and the Indemnified Party in
the same proportion as the portion of the related claim determined
by the Board of Arbitration to be payable to the Indemnified Party
bears to the portion of such claim determined not to be so payable.
ARTICLE X
MISCELLANEOUS
Section 10.1 Fees and Expenses Section 10.1 Fees and Expenses Section 10.1 Fees
and Expenses. Each of the Company and the Investor agrees to pay its own
expenses incident to the performance of its obligations hereunder, except that
the Company shall pay the fees, expenses and disbursements of the Investor's
counsel incurred during the preparation, negotiation and execution of this
Agreement, the Registration Rights Agreement, the Escrow Agreement and the
Warrant in an amount not to exceed $20,000.
Section 10.2 Reporting Entity for the Common Stock Section 10.2 Reporting Entity
for the Common Stock Section 10.2 Reporting Entity for the Common Stock. The
reporting entity relied upon for the determination of the trading price or
trading volume of the Common Stock on any given Trading Day for the purposes of
this Agreement shall be Bloomberg, L.P. or any successor thereto. The written
mutual consent of the Investor and the Company shall be required to employ any
other reporting entity.
Section 10.3 Brokerage Section 10.3 Brokerage Section 10.3 Brokerage. Each of
the parties hereto represents that it has had no dealings in connection with
this transaction with any finder or broker who will demand payment of any fee or
commission from the other party. The Company on the one hand, and the Investor,
on the other hand, agree to indemnify the other against and hold the other
harmless from
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any and all liabilities to any persons claiming brokerage commissions or
finder's fees on account of services purported to have been rendered on behalf
of the indemnifying party in connection with this Agreement or the transactions
contemplated hereby.
Section 10.4 Notices. Section 10.4 Notices. Section 10.4 Notices. All notices,
demands, requests, consents, approvals, and other communications required or
permitted hereunder shall be in writing and, unless otherwise specified herein,
shall be (i) personally served, (ii) deposited in the mail, registered or
certified, return receipt requested, postage prepaid, (iii) delivered by
reputable air courier service with charges prepaid, or (iv) transmitted by hand
delivery, telegram, or facsimile, addressed as set forth below or to such other
address as such party shall have specified most recently by written notice given
in accordance herewith. Any notice or other communication required or permitted
to be given hereunder shall be deemed effective (a) upon hand delivery or
delivery by facsimile, with accurate confirmation generated by the transmitting
facsimile machine, at the address or number designated below (if delivered on a
business day during normal business hours where such notice is to be received),
or the first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
If to the Company:
The Female Health Company
919 North Michigan Avenue
Suite 2208
Attention: O.B. Parrish
Chairman and Chief Executive Officer
Chicago, Illinois 60611
Telephone: (312) 280-2281
Facsimile: (312) 280
with a copy (which shall not constitute notice) to:
Reinhart, Boerner, Van Deuren, Norris & Rieselbach
1000 North Water Street
Suite 2100
Milwaukee, Wisconsin 53202
Attention: David Krosner, Esq.
Telephone: (414) 298-1000
Facsimile: (414) 298-8097
if to the Investor:
Kingsbridge Capital Limited
c/o Kingsbridge Corporate Services Limited
Main Street
Kilcullen, County Kildare
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<PAGE> 35
Republic of Ireland
Attention: Adam Gurney
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Keith M. Andruschak, Esq.
Telephone: (212) 878-8570
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the
other party hereto.
Section 10.5 Assignment Section 10.5 Assignment Section 10.5 Assignment. Neither
this Agreement nor any rights of the Investor or the Company hereunder may be
assigned by either party to any other person. Notwithstanding the foregoing, (a)
the provisions of this Agreement shall inure to the benefit of, and be
enforceable by, any transferee of any of the Common Stock purchased or acquired
by the Investor hereunder with respect to the Common Stock held by such person,
and (b) the Investor's interest in this Agreement may be assigned at any time,
in whole or in part, to any other person or entity (including any affiliate of
the Investor) upon the prior written consent of the Company, which consent shall
not to be unreasonably withheld.
Section 10.6 Amendment; No Waiver Section 10.6 Amendment; No Waiver Section 10.6
Amendment; No Waiver. No party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth in this Agreement or therein. Except as expressly
provided in this Agreement, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by both parties hereto. The failure of the either party to insist on
strict compliance with this Agreement, or to exercise any right or remedy under
this Agreement, shall not constitute a waiver of any rights provided under this
Agreement, nor estop the parties from thereafter demanding full and complete
compliance nor prevent the parties from exercising such a right or remedy in the
future.
Section 10.7 Annexes and Exhibits; Entire Agreement Section 10.7 Annexes and
Exhibits; Entire Agreement Section 10.7 Annexes and Exhibits; Entire Agreement.
All annexes and exhibits to this Agreement are incorporated herein by reference
and shall constitute part of this Agreement. This Agreement, the Warrant, the
Registration Rights Agreement and the Escrow Agreement set forth the entire
agreement and understanding of the parties relating to the subject matter hereof
and thereof and supersede all prior and contemporaneous agreements, negotiations
and understandings between the parties, both oral and written, relating to the
subject matter hereof.
Section 10.8 Termination; Survival Section 10.8 Termination; Survival Section
10.8 Termination; Survival. This Agreement shall terminate on the earlier of
(i) twenty four (24) months after the commencement of the Commitment Period and
(ii) the date on which the Company has made Puts with an aggregate Investment
Amount equal to the Maximum Commitment Amount; provided, however, that the
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provisions of Articles VI, VIII, IX and X, and of Section 2.1(b) and Section
7.3, shall survive the termination of this Agreement.
Section 10.9 Severability Section 10.9 Severability Section 10.9 Severability.
In the event that any provision of this Agreement becomes or is declared by a
court of competent jurisdiction to be illegal, unenforceable or void, this
Agreement shall continue in full force and effect without said provision;
provided that such severability shall be ineffective if it materially changes
the economic benefit of this Agreement to any party.
Section 10.10 Title and Subtitles Section 10.10 Title and Subtitles Section
10.10 Title and Subtitles. The titles and subtitles used in this Agreement are
used for the convenience of reference and are not to be considered in construing
or interpreting this Agreement.
Section 10.11 Counterparts Section 10.11 Counterparts Section 10.11
Counterparts. This Agreement may be executed in multiple counterparts, each of
which may be executed by less than all of the parties and shall be deemed to be
an original instrument which shall be enforceable against the parties actually
executing such counterparts and all of which together shall constitute one and
the same instrument.
Section 10.12 Choice of Law Section 10.12 Choice of Law Section 10.12 Choice of
Law. This Agreement shall be construed under the laws of the State of New York.
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IN WITNESS WHEREOF, the parties hereto have caused this Private Equity Line
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
KINGSBRIDGE CAPITAL LIMITED
By: /s/ Adam Gurney
_____________________________
Adam Gurney
Director
THE FEMALE HEALTH COMPANY
By: /s/ O.B. Parrish
_____________________________
O.B. Parrish
Chairman
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<PAGE> 38
ANNEX A
MAXIMUM PUT AMOUNT
The Maximum Put Amount with respect to a Put shall be determined based upon the
Average Daily Trading Volume of shares of Common Stock with respect to the
relevant Put Date and the Market Price as of such Put Date of shares of Common
Stock on such Put Date as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY TRADING VOLUME
Market Price
($ per share) 17,000-22,000 22,001-30,000 30,001-45,000 45,001-Above
====================== ============= ============= ============= ============
<S> <C> <C> <C> <C>
1.00-1.50 $100,000 $125,000 $175,000 $ 200,000
1.51-2.00 $125,000 $150,000 $200,000 $ 225,000
2.01-2.50 $200,000 $300,000 $400,000 $ 500,000
2.51-3.00 $250,000 $350,000 $450,000 $ 600,000
3.01-3.50 $300,000 $400,000 $450,000 $ 600,000
3.51-4.00 $350,000 $450,000 $500,000 $ 600,000
4.01-4.50 $350,000 $450,000 $550,000 $ 650,000
4.51-5.00 $400,000 $500,000 $600,000 $ 750,000
5.01-Above $450,000 $600,000 $750,000 $1,000,000
====================== ============= ============= ============= ============
</TABLE>
31
NYB 55194.4
<PAGE> 1
EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of November 19,
1998, is made and entered into by and between The Female Health Company, a
Wisconsin corporation (the "Company"), and KINGSBRIDGE CAPITAL LIMITED (the
"Investor").
WHEREAS, the Company and the Investor have entered into that certain Private
Equity Line Agreement, dated as of the date hereof (the "Equity Line
Agreement"), pursuant to which the Company will issue, from time to time, to
the Investor up to $6,000,000 worth of shares of Common Stock, par value $.01
per share, of the Company (the "Common Stock");
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investor entering into the Investment Agreement, the Company has issued to the
Investor a warrant dated as of the date hereof, exercisable from time to time
within three (3) years following the six-month anniversary of the date of
issuance (the "Warrant") for the purchase of an aggregate of up to 200,000
shares of Common Stock at a price specified in such Warrant;
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investor's agreement to enter into the Investment Agreement, the Company has
agreed to provide the Investor with certain registration rights with respect to
the Registrable Securities;
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, in the Warrant, and in
the Investment Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, intending to be
legally bound hereby, the parties hereto agree as follows (capitalized terms
used herein and not defined herein shall have the respective meanings ascribed
to them in the Investment Agreement):
ARTICLE I
REGISTRATION RIGHTS
Section 1.1. REGISTRATION STATEMENTS 1.1. REGISTRATION STATEMENTS 1.1.
REGISTRATION STATEMENTS.
(a) Filing of Registration Statement. Subject to the terms and conditions
of this Agreement, the Company shall file with the SEC within sixty (60) days
following the Subscription Date a registration statement on Form SB-2 or other
appropriate form under the Securities Act (the "Registration Statement") for
the registration of the resale by the Investor of the Registrable Securities.
(b) Effectiveness of the Registration Statement. The Company shall use its
reasonable best efforts to have the Registration Statement declared effective
by the SEC by no later than one hundred twenty (120) days after Subscription
Date and to insure that the Registration Statement remains in effect throughout
the term of this Agreement as set forth in Section 4.2, subject to the terms
and conditions of this Agreement.
(c) Failure to Obtain Effectiveness of Registration Statement. In the
event the Company fails for any reason (other than the Investor's failure to
satisfy the conditions set forth in Section 7.1 of the Equity Line Agreement)
to obtain the effectiveness of a Registration Statement within the time period
set forth in Section 1.1(b), the Company shall pay to the Investor, within
1
NYB 55181.3
<PAGE> 2
three (3) Trading Days of the date by which such Registration Statement was
required to have been declared effective, $15,000 in immediately available
funds into an account designated by the Investor; provided, however, that such
amount shall not be payable with respect to the postponement of the
effectiveness of a Registration Statement (or use of the underlying prospectus)
pursuant to Section 1.1(e). Such payment shall be made by wire transfer of
immediately available funds to an account designated by the Investor.
(d) Failure to Maintain Effectiveness of Registration Statement. In the
event the Company fails to maintain the effectiveness of a Registration
Statement (or the underlying prospectus) throughout the period set forth in
Section 4.2, other than temporary suspensions as set forth in Section 1.1(e),
and the Investor holds any Registrable Securities at any time during the period
of such ineffectiveness (an "Ineffective Period"), the Company shall pay to the
Investor in immediately available funds into an account designated by the
Investor an amount equal to one percent (1%) of the aggregate Purchase Price of
all of the Registrable Securities then held by the Investor for each full
calendar month (or pro rata portion thereof for any partial month) of an
Ineffective Period. Such amounts shall not be payable with respect to
suspensions of the effectiveness of a Registration Statement (or use of the
underlying prospectus), in accordance with Section 1.1(e). Such payments shall
be made on the first Trading Day after the earliest to occur of (i) the
expiration of the Commitment Period, (ii) the expiration of an Ineffective
Period, (iii) the expiration of the first month of an Ineffective Period and
(iv) the expiration of each additional month during an Ineffective Period.
(e) Deferral or Suspension During a Blackout Period. Sections 1.1 (c) and
(d) notwithstanding, if the Company shall furnish to the Investor notice signed
by the Chairman and Chief Executive Officer of the Company stating that the
Board of Directors of the Company has, by duly authorized resolution,
determined in good faith that it would be seriously detrimental to the Company
and its shareholders for the Registration Statement to be filed (or remain in
effect) and it is therefore essential to defer the filing of such Registration
Statement (or temporarily suspend the effectiveness of such Registration
Statement or use of the related prospectus) (a "Blackout Notice"), the Company
shall have the right (i) immediately to defer such filing for a period of not
more than thirty (30) days beyond the date by which such Registration Statement
was otherwise required hereunder to be filed or (ii) suspend such effectiveness
for a period of not more than thirty (30) (any such deferral or suspension
period of up to thirty days, a "Blackout Period"). The Investor acknowledges
that it would be seriously detrimental to the Company and its shareholders for
such Registration Statement to be filed (or remain in effect) during a Blackout
Period and therefore essential to defer such filing (or suspend such
effectiveness) during such Blackout Period and agrees to cease any disposition
of the Registrable Securities during such Blackout Period. The Company may not
utilize any of its rights under this Section 1.1(e) to defer the filing of a
Registration Statement (or suspend its effectiveness) more than twice in any
twelve (12) month period. Following such deferral or suspension, the Investor
shall be entitled to such additional number of shares of Common Stock as set
forth in Section 2.6 of the Investment Agreement.
(f) Liquidated Damages. The Company and the Investor hereto acknowledge
and agree that the sums payable under subsections 1(c) or 1(d) above shall
constitute liquidated damages and not penalties. The parties further
acknowledge that (i) the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, (ii) the amounts
2
NYB 55181.3
<PAGE> 3
specified in such subsections bear a reasonable proportion and are not plainly
or grossly disproportionate to the probable loss likely to be incurred in
connection with any failure by the Company to obtain or maintain the
effectiveness of a Registration Statement, (iii) one of the reasons for the
Company and the Investor reaching an agreement as to such amounts was the
uncertainty and cost of litigation regarding the question of actual damages,
and (iv) the Company and the Investor are sophisticated business parties and
have been represented by sophisticated and able legal and financial counsel and
negotiated this Agreement at arm's length.
ARTICLE II
REGISTRATION PROCEDURES
Section 2.1. FILINGS; INFORMATION 2.1. FILINGS; INFORMATION 2.1. FILINGS;
INFORMATION. The Company will effect the registration and sale of such
Registrable Securities in accordance with the intended methods of
disposition thereof. Without limiting the foregoing, the Company in each
such case will do the following as expeditiously as possible, but in no
event later than the deadline, if any, prescribed therefor in this
Agreement:
(a) The Company shall (i) prepare and file with the SEC a Registration
Statement on Form SB-2 (if use of such form is then available to the Company
pursuant to the rules of the SEC and, if not, on such other form promulgated by
the SEC for which the Company then qualifies, that counsel for the Company
shall deem appropriate and which form shall be available for the sale of the
Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement and in accordance with the intended method of
distribution of such Registrable Securities); (ii) use reasonable best efforts
to cause such filed Registration Statement to become and remain effective
(pursuant to Rule 415 under the Securities Act or otherwise); (iii) prepare and
file with the SEC such amendments and supplements to such Registration
Statement and the prospectus used in connection therewith as may be necessary
to keep such Registration Statement effective for the time period prescribed by
Section 1.1(b); and (iv) comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the Investor set forth in such Registration Statement.
(b) The Company shall file all necessary amendments to the Registration
Statement in order to effectuate the purpose of this Agreement, the Investment
Agreement, and the Warrant.
(c) If so requested by the managing underwriters, if any, or the holders
of a majority in aggregate principal amount of the Registrable Securities being
sold in connection with the filing of a Registration Statement under the
Securities Act for the offering on a continuous or delayed basis in the future
of all of the Registrable Securities (a "Shelf Registration"), the Company
shall (i) promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriters, if any, and such
holders agree should be included therein, and (ii) make all required filings of
such prospectus supplement or post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated
in such prospectus supplement or post-effective amendment; provided, however,
that the Company shall not be required to take any action pursuant to this
Section 2.1(c)(ii) that would, in the opinion of counsel for the Company,
violate applicable law.
3
NYB 55181.3
<PAGE> 4
(d) In connection with the filing of a Shelf Registration, the Company
shall enter into such agreements and take all such other reasonable actions in
connection therewith (including those reasonably requested by the managing
underwriters, if any, or the holders of a majority in aggregate principal
amount of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and in such
connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an underwritten registration, the Company
shall (i) make such representations and warranties to the holders of such
Registrable Securities and the underwriters, if any, with respect to the
business of the Company (including with respect to businesses or assets
acquired or to be acquired by the Company), and the Registration Statement,
prospectus and documents, if any, incorporated or deemed to be incorporated by
reference therein, in each case, in form, substance and scope as are
customarily made by issuers to underwriters in underwritten offerings, and
confirm such representations and warranties if and when requested; (ii) if an
underwriting agreement is entered into, it shall contain indemnification
provision and procedures no less favorable to the selling holders of such
Registrable Securities and the underwriters, if any, than those set forth
herein (or such other provisions and procedures acceptable to the holders of a
majority in aggregate principal amount of Registrable Securities covered by
such Registration Statement and the managing underwriters, if any); and (iii)
deliver such documents and certificates as may be reasonably requested by the
holders of a majority in aggregate principal amount of the Registrable
Securities being sold, their counsel and the managing underwriters, if any, to
evidence the continued validity of their representations and warranties made
pursuant to clause (i) above and to evidence compliance with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.
(e) Five (5) Trading Days prior to filing the Registration Statement or
prospectus, or any amendment or supplement thereto (excluding amendments deemed
to result from the filing of documents incorporated by reference therein), the
Company shall deliver to the Investor and one firm of counsel representing the
Investor, in accordance with the notice provisions of Section 4.8, copies of
the Registration Statement as proposed to be filed, together with exhibits
thereto, which documents will be subject to review by the Investor and such
counsel, and thereafter deliver to the Investor and such counsel, in accordance
with the notice provisions of Section 4.8, such number of copies of the
Registration Statement, each amendment and supplement thereto (in each case
including all exhibits thereto), the prospectus included in the Registration
Statement (including each preliminary prospectus) and such other documents or
information as the Investor or counsel may reasonably request in order to
facilitate the disposition of the Registrable Securities.
(f) The Company shall deliver, in accordance with the notice provisions of
Section 4.8, to each seller of Registrable Securities covered by the
Registration Statement such number of conformed copies of the Registration
Statement and of each amendment and supplement thereto (in each case including
all exhibits and documents incorporated by reference), such number of copies of
the prospectus contained in the Registration Statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus
filed under Rule 424 promulgated under the Securities Act relating to such
seller's Registrable Securities, and such other documents, as such seller may
reasonably request to facilitate the disposition of its Registrable Securities.
4
NYB 55181.3
<PAGE> 5
(g) After the filing of the Registration Statement, the Company shall
promptly notify the Investor of any stop order issued or threatened by the SEC
in connection therewith and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered.
(h) The Company shall use its reasonable best efforts to (i) register or
qualify the Registrable Securities under such other securities or blue sky laws
of such jurisdictions in the United States as the Investor may reasonably (in
light of its intended plan of distribution) request, and (ii) cause the
Registrable Securities to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary
by virtue of the business and operations of the Company and do any and all
other acts and things that may be reasonably necessary or advisable to enable
the Investor to consummate the disposition of the Registrable Securities;
provided, however, that the Company will not be required to qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this paragraph (h), subject itself to taxation in any such
jurisdiction, or consent or subject itself to general service of process in any
such jurisdiction.
(i) The Company shall immediately notify the Investor upon the occurrence
of any of the following events in respect of the Registration Statement or
related prospectus in respect of an offering of Registrable Securities: (i)
receipt of any request by the SEC or any other federal or state governmental
authority for additional information, amendments or supplements to the
Registration Statement or related prospectus; (ii) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose; (iii) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate, and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus.
(j) The Company shall enter into customary agreements and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities (whereupon the Investor may, at its
option, require that any or all of the representations, warranties and
covenants of the Company also be made to and for the benefit of the Investor).
(k) The Company shall make available to the Investor (and will deliver to
Investor's counsel), subject to restrictions imposed by the United States
federal government or
5
NYB 55181.3
<PAGE> 6
any agency or instrumentality thereof, copies of all correspondence between the
SEC and the Company, its counsel or its auditors concerning the Registration
Statement and will also make available for inspection by the Investor and any
attorney, accountant or other professional retained by the Investor
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company (collectively, the "Records")
as shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers and employees to supply all
information reasonably requested by any Inspectors in connection with the
Registration Statement. Records that the Company determines, in good faith, to
be confidential and that it notifies the Inspectors are confidential shall not
be disclosed by the Inspectors unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in the Registration
Statement or (ii) the disclosure or release of such Records is requested or
required pursuant to oral questions, interrogatories, requests for information
or documents or a subpoena or other order from a court of competent
jurisdiction or other process; provided, however, that prior to any disclosure
or release pursuant to clause (ii), the Inspectors shall provide the Company
with prompt notice of any such request or requirement so that the Company may
seek an appropriate protective order or waive such Inspectors' obligation not
to disclose such Records; and, provided, further, that if failing the entry of
a protective order or the waiver by the Company permitting the disclosure or
release of such Records, the Inspectors, upon advice of counsel, are compelled
to disclose such Records, the Inspectors may disclose that portion of the
Records that counsel has advised the Inspectors that the Inspectors are
compelled to disclose. The Investor agrees that information obtained by it
solely as a result of such inspections (not including any information obtained
from a third party who, insofar as is known to the Investor after reasonable
inquiry, is not prohibited from providing such information by a contractual,
legal or fiduciary obligation to the Company) shall be deemed confidential and
shall not be used by it as the basis for any market transactions in the
securities of the Company or its affiliates unless and until such information
is made generally available to the public. The Investor further agrees that it
will, upon learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the Company, at
its expense, to undertake appropriate action to prevent disclosure of the
Records deemed confidential.
(l) To the extent required by law or reasonably necessary to effect a sale
of Registrable Securities in accordance with prevailing business practices at
the time of any sale of Registrable Securities pursuant to a Registration
Statement, the Company shall deliver to the Investor a signed counterpart,
addressed to the Investor, of (1) an opinion or opinions of counsel to the
Company, and (2) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering such
matters of the type customarily covered by opinions or comfort letters, as the
case may be, as the Investor therefor reasonably requests.
(m) The Company shall otherwise comply with all applicable rules and
regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act.
(n) The Company shall appoint a transfer agent and registrar for all of
the Registrable Securities covered by such Registration Statement not later
than the effective date of such Registration Statement.
6
NYB 55181.3
<PAGE> 7
(o) The Company may require the Investor to promptly furnish in writing to
the Company such information as may be legally required in connection with such
registration including, without limitation, all such information as may be
requested by the SEC or the National Association of Securities Dealers. The
Investor agrees to provide such information requested in connection with such
registration promptly and in any event within ten (10) business days after
receiving such written request and the Company shall not be responsible for any
delays in obtaining or maintaining the effectiveness of the Registration
Statement caused by the Investor's failure to timely provide such information.
Section 2.2. REGISTRATION EXPENSES 2.2. REGISTRATION EXPENSES 2.2.
REGISTRATION EXPENSES. In connection with each Registration Statement, the
Company shall pay all registration expenses incurred in connection with the
registration thereunder (the "Registration Expenses"), including, without
limitation: (i) all registration, filing, securities exchange listing and
fees required by the National Association of Securities Dealers, (ii) all
registration, filing, qualification and other fees and expenses of
compliance with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) all word processing, duplicating, printing,
messenger and delivery expenses, (iv) the Company's internal expenses
(including, without limitation, all salaries and expenses of its officers
and employees performing legal or accounting duties), (v) the fees and
expenses incurred by the Company in connection with the listing of the
Registrable Securities, (vi) reasonable fees and disbursements of counsel
for the Company and customary fees and expenses for independent certified
public accountants retained by the Company (including the expenses of any
special audits or comfort letters or costs associated with the delivery by
independent certified public accountants of such special audit(s) or comfort
letter(s) requested pursuant to Section 2.1(l) hereof), (vii) the fees and
expenses of any special experts retained by the Company in connection with
such registration, (viii) all reasonable fees and expenses of one firm of
counsel for the Investor retained as the Investor's counsel with respect to
such Registration Statement up to an amount of $5,000, unless a greater
amount is required due the nature of the review performed by Investor's
counsel (an estimate of such greater fees and expenses of such firm of
counsel to be provided to the Company prior to the undertaking of such
counsel's review), (ix) premiums and other costs of policies of insurance
against liabilities arising out of any public offering of the Registrable
Securities being registered, and (x) any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but
excluding underwriting fees, discounts, transfer taxes or commissions, if
any, attributable to the sale of Registrable Securities, which shall be
payable by each holder of Registrable Securities pro rata on the basis of
the number of Registrable Securities of each such holder that are included
in a registration under this Agreement.
ARTICLE III
INDEMNIFICATION AND CONTRIBUTION
Section 3.1. INDEMNIFICATION BY THE COMPANY 3.1. INDEMNIFICATION BY THE
COMPANY 3.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless the Investor, its partners, Affiliates,
officers, directors, employees and duly authorized agents, and each Person
or entity, if any, who controls the Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, together with
the partners, Affiliates, officers,
7
NYB 55181.3
<PAGE> 8
directors, employees and duly authorized agents of such controlling Person
or entity (collectively, the "Controlling Persons"), from and against any
loss, claim, damage, liability, costs and expenses (including, without
limitation, reasonable attorneys' fees and disbursements and costs and
expenses of investigating and defending any such claim) (collectively,
"Damages"), joint or several, and any action or proceeding in respect
thereof to which the Investor, its partners, affiliates, officers,
directors, employees and duly authorized agents, and any Controlling Person,
may become subject under the Securities Act or otherwise, as incurred,
insofar as such Damages (or actions or proceedings in respect thereof) arise
out of, or are based upon, any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement, or in any
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement relating to the Registrable Securities or arises out of, or are
based upon, any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse the Investor, its partners,
affiliates, officers, directors, employees and duly authorized agents, and
each such Controlling Person, for any legal and other expenses reasonably
incurred by the Investor, its partners, affiliates, officers, directors,
employees and duly authorized agents, or any such Controlling Person, as
incurred, in investigating or defending or preparing to defend against any
such Damages or actions or proceedings; provided, however, that the Company
shall not be liable to the extent that any such Damages arise out of the
Investor's failure to send or give a copy of the final prospectus or
supplement to the persons asserting an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such person if such
statement or omission was corrected in such final prospectus or supplement;
provided, further, that the Company shall not be liable to the extent that
any such Damages arise out of or are based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement, or any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and
in conformity with written information furnished to the Company by the
Investor or any other person who participates as an underwriter in the
offering or sale of such securities, in either case, specifically stating
that it is for use in the preparation thereof; provided, further, that the
Company shall not be liable to the extent that any such Damages arise out of
or are based upon the gross negligence or willful misconduct of the
Investor.
Section 3.2. INDEMNIFICATION BY THE INVESTOR. The Investor agrees to
indemnify and hold harmless the Company and each of its Controlling Persons
from and against any Damages suffered by the Company and/or each of its
Controlling Persons insofar as such Damages arise directly from the gross
negligence or willful misconduct of the Investor.as such Damages arise
directly from the gross negligence or willful misconduct of the
Investor.such Damages arise directly from the gross negligence or willful
misconduct of the Investor.
Section 3.3. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by any person or entity in respect of which indemnity may be sought pursuant
to Section 3.1 (an "Indemnified Party") of notice of any claim or the
commencement of any action, the Indemnified Party shall, if a claim in
respect thereof is to be made against the person or entity against whom such
indemnity may be sought (the "Indemnifying Party"), notify the Indemnifying
Party in writing of the claim or the commencement of such action. In
8
NYB 55181.3
<PAGE> 9
the event an Indemnified Party shall fail to give such notice as provided in
this Section 3.2 and the Indemnifying Party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, the
indemnification provided for in Section 3.1 shall be reduced to the extent
of any actual prejudice resulting from such failure to so notify the
Indemnifying Party; provided, however, that the failure to notify the
Indemnifying Party shall not relieve the Indemnifying Party from any
liability that it may have to an Indemnified Party otherwise than under
Section 3.1. If any such claim or action shall be brought against an
Indemnified Party, and it shall notify the Indemnifying Party thereof, the
Indemnifying Party shall be entitled to participate therein, and, to the
extent that it wishes, jointly with any other similarly notified
Indemnifying Party, to assume the defense thereof with counsel reasonably
satisfactory to the Indemnified Party. After notice from the Indemnifying
Party to the Indemnified Party of its election to assume the defense of such
claim or action, the Indemnifying Party shall not be liable to the
Indemnified Party for any legal or other expenses subsequently incurred by
the Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that the Indemnified
Party shall have the right to employ separate counsel to represent the
Indemnified Party and its Controlling Persons who may be subject to
liability arising out of any claim in respect of which indemnity may be
sought by the Indemnified Party against the Indemnifying Party, but the fees
and expenses of such counsel shall be for the account of such Indemnified
Party, unless (i) the Indemnifying Party and the Indemnified Party shall
have mutually agreed to the retention of such counsel or (ii) in the
reasonable judgment of the Company and such Indemnified Party,
representation of both parties by the same counsel would be inappropriate
due to actual or potential conflicts of interest between them, it being
understood, however, that the Indemnifying Party shall not, in connection
with any one such claim or action or separate but substantially similar or
related claims or actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all Indemnified Parties, or for fees and expenses
that are not reasonable. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any claim
or pending or threatened proceeding in respect of which the Indemnified
Party is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability arising
out of such claim or proceeding. Whether or not the defense of any claim or
action is assumed by the Indemnifying Party, such Indemnifying Party will
not be subject to any liability for any settlement made without its consent,
which consent will not be unreasonably withheld.
Section 3.4. OTHER INDEMNIFICATION 3.4. OTHER INDEMNIFICATION 3.4. OTHER
INDEMNIFICATION. Indemnification similar to that specified in the preceding
paragraphs of this Article 3 (with appropriate modifications) shall be given
by the Company with respect to any required registration or other
qualification of securities under any federal or state law or regulation of
any governmental authority other than the Securities Act. The provisions of
this Article III shall be in addition to any other rights to
indemnification, contribution or other remedies which an Indemnified Party
may have pursuant to law, equity, contract or otherwise.
Section 3.5. CONTRIBUTION 3.5. CONTRIBUTION 3.5. CONTRIBUTION. If the
indemnification and
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reimbursement obligations provided for in any section of this Article III is
unavailable or insufficient to hold harmless the Indemnified Parties in
respect of any Damages referred to herein, then the Indemnifying Party, in
lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Damages as
between the Company on the one hand and the Investor on the other, in such
proportion as is appropriate to reflect the relative fault of the Company
and of the Investor in connection with such statements or omissions, as well
as other equitable considerations. The relative fault of the Company on the
one hand and of the Investor on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by such party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Investor agree that it would not be just and equitable
if contribution pursuant to this Section 3.4 were determined by pro rata
allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result
of the Damages referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such Indemnified Party in connection
with investigating or defending any such action or claim. Notwithstanding
the provisions of this Section 3.4, the Investor shall in no event be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities of the Investor were sold to the
public (less underwriting discounts and commissions) exceeds the amount of
any damages which the Investor has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission.
No Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
ARTICLE IV
MISCELLANEOUS
Section 4.1. NO OUTSTANDING REGISTRATION RIGHTS 4.1. NO OUTSTANDING
REGISTRATION RIGHTS 4.1. NO OUTSTANDING REGISTRATION RIGHTS. The Company
represents and warrants to the Investor that, except as disclosed in the SEC
Documents, there is not in effect on the date hereof any agreement by the
Company pursuant to which any holders of securities of the Company have a
right to cause the Company to register or qualify such securities under the
Securities Act or any securities or blue sky laws of any jurisdiction.
Section 4.2. TERM 4.2. TERM 4.2. TERM. The registration rights provided to
the holders of Registrable Securities hereunder shall terminate at such time
as all Registrable Securities have been issued and have ceased to be
Registrable Securities. Notwithstanding the foregoing, paragraphs (c) and
(d) of Section 1.1, Article III, Section 4.8, and Section 4.9 shall survive
the termination of this Agreement.
Section 4.3. RULE 144 4.3. RULE 144 4.3. RULE 144. The Company will file in
a timely manner, information, documents and reports in compliance with the
Securities Act and the Exchange
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Act and will, at its expense, promptly take such further action as holders
of Registrable Securities may reasonably request to enable such holders of
Registrable Securities to sell Registrable Securities without registration
under the Securities Act within the limitation of the exemptions provided by
(a) Rule 144 under the Securities Act ("Rule 144"), as such Rule may be
amended from time to time, or (b) any similar rule or regulation hereafter
adopted by the SEC. If at any time the Company is not required to file such
reports, it will, at its expense, forthwith upon the written request of any
holder of Registrable Securities , make available adequate current public
information with respect to the Company within the meaning of paragraph
(c)(2) of Rule 144 or such other information as necessary to permit sales
pursuant to Rule 144. Upon the request of the Investor, the Company will
deliver to the Investor a written statement, signed by the Company's
principal financial officer, as to whether it has complied with such
requirements.
Section 4.4. CERTIFICATE 4.4. CERTIFICATE 4.4. CERTIFICATE. The Company
will, at its expense, forthwith upon the request of any holder of
Registrable Securities, deliver to such holder a certificate, signed by the
Company's principal financial officer, stating (a) the Company's name,
address and telephone number (including area code), (b) the Company's
Internal Revenue Service identification number, (c) the Company's Commission
file number, (d) the number of shares of each class of Stock outstanding as
shown by the most recent report or statement published by the Company, and
(e) whether the Company has filed the reports required to be filed under the
Exchange Act for a period of at least ninety (90) days prior to the date of
such certificate and in addition has filed the most recent annual report
required to be filed thereunder.
Section 4.5. AMENDMENT AND MODIFICATION 4.5. AMENDMENT AND MODIFICATION 4.5.
AMENDMENT AND MODIFICATION. Any provision of this Agreement may be waived,
provided that such waiver is set forth in a writing executed by both parties
to this Agreement. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the Company has obtained the written consent of the holders of
a majority of the then outstanding Registrable Securities. Notwithstanding
the foregoing, the waiver of any provision hereof with respect to a matter
that relates exclusively to the rights of holders of Registrable Securities
whose securities are being sold pursuant to a Registration Statement and
does not directly or indirectly affect the rights of other holders of
Registrable Securities may be given by holders of at least a majority of the
Registrable Securities being sold by such holders; provided that the
provisions of this sentence may not be amended, modified or supplemented
except in accordance with the provisions of the immediately preceding
sentence. No course of dealing between or among any Person having any
interest in this Agreement will be deemed effective to modify, amend or
discharge any part of this Agreement or any rights or obligations of any
person under or by reason of this Agreement.
Section 4.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT 4.6. SUCCESSORS AND
ASSIGNS; ENTIRE AGREEMENT 4.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT.
This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors
and assigns. The Investor may assign its rights under this Agreement to any
subsequent holder the Registrable Securities, provided that the Company
shall have the right to require any holder of Registrable Securities to
execute a counterpart of this
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Agreement as a condition to such holder's claim to any rights hereunder,
provided further that such holder is an "accredited investor" as defined in
Rule 501 of Regulation D. This Agreement, together with the Investment
Agreement and the Warrant(s) sets forth the entire agreement and
understanding between the parties as to the subject matter hereof and merges
and supersedes all prior discussions, agreements and understandings of any
and every nature among them.
Section 4.7. SEPARABILITY 4.7. SEPARABILITY 4.7. SEPARABILITY. In the event
that any provision of this Agreement or the application of any provision
hereof is declared to be illegal, invalid or otherwise unenforceable by a
court of competent jurisdiction, the remainder of this Agreement shall not
be affected except to the extent necessary to delete such illegal, invalid
or unenforceable provision unless that provision held invalid shall
substantially impair the benefits of the remaining portions of this
Agreement.
Section 4.8. NOTICES 4.8. NOTICES 4.8. NOTICES. All notices, demands,
requests, consents, approvals, and other communications required or
permitted hereunder shall be in writing and shall be (i) deposited in the
mail, registered or certified, return receipt requested, postage prepaid,
(ii) delivered by reputable air courier service with charges prepaid, or
(iii) transmitted by hand delivery, telegram or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand
delivery or delivery by facsimile, with accurate confirmation generated by
the transmitting facsimile machine, at the address or number designated
below (if delivered on a business day during normal business hours where
such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
If to the Company:
The Female Health Company
919 North Michigan Avenue
Suite 2208
Attention: O.B. Parrish
Chairman and Chief Executive Officer
Chicago, Illinois 60611
Telephone: (312) 280-2281
Facsimile:
with a copy (which shall not constitute notice) to:
Reinhart, Boerner, Van Deuren, Norris &
Rieselbach
1000 North Water Street
Suite 2100
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Milwaukee, Wisconsin 53202
Attention: David Krosner, Esq.
Telephone: (414) 298-1000
Facsimile:
if to the Investor:
Kingsbridge Capital Limited
c/o Kingsbridge Corporate Services
Limited
Main Street
Kilcullen, County Kildare
Republic of Ireland
Attention: Adam Gurney
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Keith M. Andruschak, Esq.
Telephone: (212) 878-8570
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 4.8 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the
other party hereto.
Section 4.9. GOVERNING LAW 4.9. GOVERNING LAW 4.9. GOVERNING LAW. This
Agreement shall be construed under the laws of the State of Wisconsin.
Section 4.10. HEADINGS 4.10. HEADINGS 4.10. HEADINGS. The headings in this
Agreement are for convenience of reference only and shall not constitute a
part of this Agreement, nor shall they affect their meaning, construction or
effect.
Section 4.11. COUNTERPARTS 4.11. COUNTERPARTS 4.11. COUNTERPARTS. This
Agreement may be executed in multiple counterparts, each of which shall be
deemed to be an original instrument and all of which together shall
constitute one and the same instrument.
Section 4.12. FURTHER ASSURANCES 4.12. FURTHER ASSURANCES 4.12. FURTHER
ASSURANCES. Each party shall cooperate and take such action as may be
reasonably requested by another party in order to carry out the provisions
and purposes of this Agreement and the transactions contemplated hereby.
Section 4.13. ABSENCE OF PRESUMPTION. This Agreement shall be construed
without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing any instrument to be
drafted.
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Section 4.14. REMEDIES 4.14. REMEDIES 4.14. REMEDIES. In the event of a
breach or a threatened breach by any party to this Agreement of its
obligations under this Agreement, any party injured or to be injured by such
breach will be entitled to specific performance of its rights under this
Agreement or to injunctive relief, in addition to being entitled to exercise
all rights provided in this Agreement and granted by law. The parties agree
that the provisions of this Agreement shall be specifically enforceable, it
being agreed by the parties that the remedy at law, including monetary
damages, for breach of any such provision will be inadequate compensation
for any loss and that any defense or objection in any action for specific
performance or injunctive relief that a remedy at law would be adequate is
waived.
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
THE FEMALE HEALTH COMPANY
By: /s/ O.B. Parrish
________________________________
O.B. Parrish
Chairman and Chief Executive
Officer
KINGSBRIDGE CAPITAL LIMITED
By: /s/ Valentine O'Donoghue
_________________________________
Valentine O'Donoghue
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<PAGE> 1
EXHIBIT 4.5
WARRANT
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A
TRANSACTION WHICH IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE
COMPANY SET FORTH IN A PRIVATE EQUITY LINE AGREEMENT, DATED AS OF NOVEMBER
19, 1998, BETWEEN THE FEMALE HEALTH COMPANY AND KINGSBRIDGE CAPITAL LIMITED.
A COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM THE FEMALE HEALTH COMPANY'S EXECUTIVE
OFFICES.
NOVEMBER 19, 1998
Warrant to Purchase up to 200,000 Shares of Common Stock of The Female Health
Company.
The Female Health Company, a Wisconsin corporation (the "Company"), hereby
agrees that Kingsbridge Capital Limited (the "Investor") or any other Warrant
Holder is entitled, on the terms and conditions set forth below, to purchase
from the Company at any time during the Exercise Period up to 200,000 fully
paid and nonassessable (other than pursuant to Wisconsin Statutes Section
180.0822(2)(b), as interpreted) shares of Common Stock, par value $.01 per
share, of the Company (the "Common Stock"), as the same may be adjusted from
time to time pursuant to Section 6 hereof, at the Exercise Price (hereinafter
defined), as the same may be adjusted pursuant to Section 6 hereof. The resale
of the shares of Common Stock or other securities issuable upon exercise or
exchange of this Warrant is subject to the provisions of the Registration
Rights Agreement (as defined below).
Section 1. Definitions.
"Agreement" shall mean the Private Equity Line Agreement, dated the date
hereof, between the Company and the Investor.
"Capital Shares" shall mean the Common Stock and any shares of any other
class of common stock whether now or hereafter authorized, having the right to
participate in the distribution of earnings and assets of the Company.
"Date of Exercise" shall mean the date that the advance copy of the
Exercise Form is sent by facsimile to the Company, provided that the original
Warrant and Exercise Form are received by the Company within reasonable time
thereafter. If the Warrant Holder has not sent
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advance notice by facsimile, the Date of Exercise shall be the date the
original Exercise Form is received by the Company.
"Exercise Period" shall mean that period beginning on the 181st day after
the Subscription Date and continuing until the expiration of the three-year
period thereafter; provided that such period shall be extended one day for each
day after such 181st day after the Subscription Date, that a Registration
Statement is not effective during the period such Registration Statement is
required to be effective pursuant to the Registration Rights Agreement.
"Exercise Price" as of the date hereof shall mean one hundred twenty
percent (120%) of the closing price per share of Common Stock on the
Subscription Date and shall hereafter be subject to the adjustments provided
for in Section 6 of this Warrant.
"Per Share Warrant Value" shall mean the difference resulting from
subtracting the Exercise Price from the Bid Price of one share of Common Stock
on the Trading Day next preceding the Date of Exercise.
"Registration Rights Agreement" shall mean the registration rights
agreement, dated the date hereof between the Company and the Investor.
"Subscription DateSubscriptionDateSubscriptionDate" shall mean the date on
which the Agreement is executed and delivered by the parties hereto.
"Warrant Holder" shall mean the Investor or any assignee or transferee
of all or any portion of this Warrant; and WarrantHolder shall mean the
Investor or any assignee or transferee of all or any portion of this
Warrant; and WarrantHolder shall mean the Investor or any assignee or
transferee of all or any portion of this Warrant; and
other capitalized terms used but not defined herein shall have their
respective meanings set forth in the Agreement.
Section 2. Exercise; Cashless Exercise.
(a) Method of Exercise. This Warrant may be exercised in whole or in
part (but not as to a fractional share of Common Stock), at any time and from
time to time during the Exercise Period, by the Warrant Holder by (i) surrender
of this Warrant, with the form of exercise attached hereto as Exhibit A duly
executed by the Warrant Holder (the "Exercise Notice"), to the Company at the
address set forth in Section 13 hereof, accompanied by payment of the Exercise
Price multiplied by the number of shares of Common Stock for which this Warrant
is being exercised (the "Aggregate Exercise Price") or (ii) telecopying an
executed and completed Exercise Notice to the Company and delivering to the
Company within three business days thereafter the original Exercise Notice,
this Warrant and the Aggregate Exercise Price. Each date on which an Exercise
Notice is received by the Company in accordance with clause (i) and each date
on which the Exercise Notice is telecopied to the Company in accordance with
clause (ii) above shall be deemed an "Exercise Date".
(b) Payment of Aggregate Exercise Price. Subject to paragraph (c) below,
payment of the Aggregate Exercise Price shall be made by check or bank draft
payable to the order of the Company or by wire transfer to an account
designated by the Company. If the amount of the payment received by the
Company is less than the Aggregate Exercise Price, the Warrant Holder will be
notified of the deficiency and shall make payment in that amount within
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<PAGE> 3
five (5) business days. In the event the payment exceeds the Aggregate
Exercise Price, the Company will refund the excess to the Warrant Holder within
three (3) business days of receipt.
(c) Cashless Exercise. As an alternative to payment of the Aggregate
Exercise Price in accordance with paragraph (b) above, the Warrant Holder may
elect to effect a cashless exercise by so indicating on the Exercise Notice and
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
In the event of a Cashless Exercise, the Warrant Holder shall surrender this
Warrant for that number of shares of Common Stock determined by (i) multiplying
the number of Warrant Shares for which this Warrant is being exercised by the
Per Share Warrant Value and (ii) dividing the product by the Bid Price of one
share of the Common Stock on the Trading Day next preceding the Date of
Exercise.
(d) Replacement Warrant. In the event that the Warrant is not exercised
in full, the number of Warrant Shares shall be reduced by the number of such
Warrant Shares for which this Warrant is exercised, and the Company, at its
expense, shall forthwith issue and deliver to or upon the order of the Warrant
Holder a new Warrant of like tenor in the name of the Warrant Holder or as the
Warrant Holder may request, reflecting such adjusted number of Warrant Shares.
Section 3. Ten Percent Limitation. The Warrant Holder may not exercise
this Warrant such that the number of Warrant Shares to be received pursuant to
such exercise aggregated with all other shares of Common Stock then owned by
the Warrant Holder beneficially or deemed beneficially owned by the Warrant
Holder would result in the Warrant Holder owning more than 9.9% of all of such
Common Stock as would be outstanding on such Closing Date, as determined in
accordance with Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder. As of any date prior to the Date of Exercise, the
aggregate number of shares of Common Stock into which this Warrant is
exercisable, together with all other shares of Common Stock then beneficially
owned (as such term is defined in Rule 16a-1 under the Exchange Act) by such
Warrant Holder and its affiliates, shall not exceed 9.9% of the total
outstanding shares of Common Stock as of such date.
Section 4. Delivery of Stock Certificates.
(a) Subject to the terms and conditions of this Warrant, as soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within three (3) Trading Days thereafter, the Company at its expense
(including, without limitation, the payment by it of any applicable issue
taxes) will cause to be issued in the name of and delivered to the Warrant
Holder, or as the Warrant Holder may lawfully direct, a certificate or
certificates for the number of validly issued, fully paid and non-assessable
(other than pursuant to Wisconsin Statutes Section 180.0822(2)(b), as
interpreted) Warrant Shares to which the Warrant Holder shall be entitled on
such exercise, together with any other stock or other securities or property
(including cash, where applicable) to which the Warrant Holder is entitled upon
such exercise in accordance with the provisions hereof; provided, however, that
any such delivery to a location outside of the United States shall be made
within five (5) Trading Days after the exercise of this Warrant in full or in
part.
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(b) This Warrant may not be exercised as to fractional shares of Common
Stock. In the event that the exercise of this Warrant, in full or in part,
would result in the issuance of any fractional share of Common Stock, then in
such event the Warrant Holder shall receive in cash an amount equal to the Bid
Price of such fractional share within three (3) Trading Days.
Section 5. Representations, Warranties and Covenants of the Company.
(a) The Company shall take all necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation for the legal and
valid issuance of this Warrant and the Warrant Shares to the Warrant Holder.
(b) From the date hereof through the last date on which this Warrant is
exercisable, the Company shall take all reasonable steps it deems reasonably
necessary and within its reasonable control to insure that the Common Stock
remains listed or quoted on the Principal Market.
(c) The Warrant Shares, when issued in accordance with the terms hereof,
will be duly authorized and, when paid for or issued in accordance with the
terms hereof, shall be validly issued, fully paid and non-assessable (other
than pursuant to Wisconsin Statutes Section 180.0822(2)(b), as interpreted).
(d) The Company has authorized and reserved for issuance to the Warrant
Holder the requisite number of shares of Common Stock to be issued pursuant to
this Warrant. The Company shall at all times reserve and keep available, solely
for issuance and delivery as Warrant Shares hereunder, such shares of Common
Stock as shall from time to time be issuable as Warrant Shares.
Section 6. Adjustment of the Exercise Price. The Exercise Price and,
accordingly, the number of Warrant Shares issuable upon exercise of the
Warrant, shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Reclassification, Consolidation, Merger or Mandatory Share Exchange.
If the Company, at any time while this Warrant is unexpired and not exercised
in full, (i) reclassifies or changes its Outstanding Capital Shares (other than
a change in par value, or from par value to no par value per share, or from no
par value per share to par value or as a result of a subdivision or combination
of outstanding securities issuable upon exercise of the Warrant) or (ii)
consolidates, merges or effects a mandatory share exchange with or into another
corporation (other than a merger or mandatory share exchange with another
corporation in which the Company is a continuing corporation and that does not
result in any reclassification or change, other than a change in par value, or
from par value to no par value per share, or from no par value per share to par
value, or as a result of a subdivision or combination of Outstanding Capital
Shares issuable upon exercise of the Warrant) at any time while this Warrant is
unexpired and not exercised in full, then in any such event the Company, or
such successor or purchasing corporation, as the case may be, shall, without
payment of any additional consideration therefore, amend this Warrant or issue
a new Warrant providing that the Warrant Holder shall have rights not less
favorable to the holder than those then applicable to this Warrant and to
receive upon exercise under such amendment of this Warrant or new Warrant, in
lieu of each share of Common Stock theretofore issuable upon exercise of the
Warrant hereunder, the kind and amount of shares
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<PAGE> 5
of stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one share of Common Stock issuable upon exercise
of the Warrant had the Warrant been exercised immediately prior to such
reclassification, change, consolidation, merger, mandatory share exchange or
sale or transfer. Such amended Warrant shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 6.1. The provisions of this subsection (a) shall similarly
apply to successive reclassifications, changes, consolidations, mergers,
mandatory share exchanges and sales and transfers.
(b) Subdivision or Combination of Shares. If the Company, at any time
while this Warrant is unexpired and not exercised in full, shall subdivide its
Common Stock, the Exercise Price shall be proportionately reduced as of the
effective date of such subdivision, or, if the Company shall take a record of
holders of its Common Stock for the purpose of so subdividing, as of such
record date, whichever is earlier. If the Company, at any time while this
Warrant is unexpired and not exercised in full, shall combine its Common Stock,
the Exercise Price shall be proportionately increased as of the effective date
of such combination, or, if the Company shall take a record of holders of its
Common Stock for the purpose of so combining, as of such record date, whichever
is earlier.
(c) Stock Dividends. If the Company, at any time while this Warrant is
unexpired and not exercised in full, shall pay a dividend in its Capital
Shares, or make any other distribution of its Capital Shares, then the Exercise
Price shall be adjusted, as of the date the Company shall take a record of the
holders of its Capital Shares for the purpose of receiving such dividend or
other distribution (or if no such record is taken, as at the date of such
payment or other distribution), to that price determined by multiplying the
Exercise Price in effect immediately prior to such payment or other
distribution by a fraction:
1. the numerator of which shall be the total number of Outstanding Capital
Shares immediately prior to such dividend or distribution, and
2. the denominator of which shall be the total number of Outstanding
Capital Shares immediately after such dividend or distribution. The provisions
of this subsection (c) shall not apply under any of the circumstances for which
an adjustment is provided in subsections (a) or (b).
(d) Issuance of Additional Capital Shares. If the Company, at any time while
this Warrant is unexpired and not exercised in full, shall issue any additional
Capital Shares ("Additional Capital Shares"), otherwise than as provided in the
foregoing subsections (a) through (c) above or pursuant to the Equity Line
Agreement, at a price per share less, or for other consideration lower, than
the Bid Price in effect immediately prior to such issuance, or without
consideration, then upon such issuance the Exercise Price shall be reduced to
that price determined by multiplying the Exercise Price in effect immediately
prior to such event by a fraction:
1. the numerator of which shall be the number of Outstanding Capital
Shares immediately prior to the issuance of the Additional Capital Shares plus
the number of Capital Shares that the aggregate consideration for the total
number of such Additional Capital Shares so issued would purchase at the then
effective Bid Price, and
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2. the denominator of which shall be the number of Outstanding Capital
Shares immediately after the issuance of the Additional Capital Shares. The
provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or
(c).
The provisions of this subsection (d) shall not apply to the issuance of any
Additional Capital Shares that are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights or pursuant to
the exercise of any conversion or exchange rights in any convertible or
exchangeable securities.
(e) Issuance of Warrants, Options or Other Rights. If the Company, at any
time while this Warrant is unexpired and not exercised in full, shall issue any
warrants, options or other rights to subscribe for or purchase any Additional
Capital Shares
and the price per share for which Additional Capital Shares may at any
time thereafter be issuable pursuant to such warrants, options or other
rights shall be less than the Bid Price in effect immediately prior to such
issuance, then, upon the issuance of such warrants, options or other rights,
the Exercise Price shall be adjusted as provided in subsection (d) hereof on
the basis that:
1. the maximum number of Additional Capital Shares issuable on the date of
determination (subject to adjustment on the date(s) of exercise) pursuant to
all such warrants, options or other rights shall be deemed to have been issued
as of the date of actual issuance of such warrants, options or other rights,
and
2. the aggregate consideration for such maximum number of Additional
Capital Shares issuable pursuant to such warrants, options or other rights,
shall be deemed to be the consideration received by the Company for the
issuance of such warrants, options, or other rights plus the minimum
consideration to be received by the Company for the issuance of Additional
Capital Shares pursuant to such warrants, options, or other rights.
(f) Issuance of Convertible or Exchangeable Securities. If the Company,
at any time while this Warrant is unexpired and not exercised in full, shall
issue any securities convertible into or exchangeable for Capital Shares and
the consideration per share for which Additional Capital Shares may at any time
thereafter be issuable pursuant to the terms of such convertible or
exchangeable securities shall be less than the Bid Price in effect immediately
prior to such issuance, then, upon the issuance of such convertible or
exchangeable securities, the Exercise Price shall be adjusted as provided in
subsection (d) hereof on the basis that:
1. the maximum number of Additional Capital Shares necessary on the date
of determination (subject to adjustment on the date(s) of conversion or
exchange) to effect the conversion or exchange of all such convertible or
exchangeable securities shall be deemed to have been issued as of the date of
issuance of such convertible or exchangeable securities, and
2. the aggregate consideration for such maximum number of Additional
Capital Shares shall be deemed to be the consideration received by the Company
for the issuance of such convertible or exchangeable securities plus the
minimum consideration received by the Company for the issuance of such
Additional Capital Shares pursuant to the terms of such convertible or
exchangeable securities.
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<PAGE> 7
No adjustment of the Exercise Price shall be made under this subsection (f)
upon the issuance of any convertible or exchangeable securities that are
issued pursuant to the exercise of any warrants, options or other
subscription or purchase rights therefor, if the issuance of such warrants,
options or other rights was subject to subsection (e) hereof.
(g) Adjustment of Number of Shares. Upon each adjustment of the Exercise
Price pursuant to any provisions of this Section 6.1, the number of Warrant
Shares issuable hereunder at the option of the Warrant Holder shall be
calculated, to the nearest one hundredth of a whole share, multiplying the
number of Warrant Shares issuable prior to an adjustment by a fraction:
1. the numerator of which shall be the Exercise Price before any
adjustment pursuant to this Section 6.1; and
2. the denominator of which shall be the Exercise Price after such
adjustment.
(h) Liquidating Dividends, Etc. If the Company, at any while this Warrant
is unexpired and not exercised in full, makes a distribution of its assets or
evidences of indebtedness to the holders of its Capital Shares as a dividend in
liquidation or by way of return of capital or other than as a dividend payable
out of earnings or surplus legally available for dividends under applicable law
or any distribution to such holders made in respect of the sale of all or
substantially all of the Company's assets (other than under the circumstances
provided for in the foregoing subsections (a) through (g)) while an exercise is
pending, then the Warrant Holder shall be entitled to receive upon such
exercise of the Warrant in addition to the Warrant Shares receivable in
connection therewith, and without payment of any consideration other than the
Exercise Price, an amount in cash equal to the value of such distribution per
Capital Share multiplied by the number of Warrant Shares that, on the record
date for such distribution, are issuable upon such exercise of the Warrant
(with no further adjustment being made following any event which causes a
subsequent adjustment in the number of Warrant Shares issuable), and an
appropriate provision therefor shall be made a part of any such distribution.
The value of a distribution that is paid in other than cash shall be determined
in good faith by the Board of Directors of the Company.
(i) Other Provisions Applicable to Adjustments Under this Section. The
following provisions will be applicable to the making of adjustments in any
Exercise Price hereinabove provided in this Section 6.1:
1. Computation of Consideration. To the extent that any Additional
Capital Shares or any convertible or exchangeable securities or any warrants,
options or other rights to subscribe for or purchase any Additional Capital
Shares or any convertible or exchangeable securities shall be issued for a cash
consideration, the consideration received by the Company therefor shall be
deemed to be the amount of the cash received by the Company therefor, or, if
such Additional Capital Shares or convertible or exchangeable securities are
offered by the Company for subscription, the subscription price, or, if such
Additional Capital Shares or convertible or exchangeable securities are sold to
or through underwriters or dealers for public offering without a subscription
offering, the initial public offering price, in any such case excluding any
amounts paid or incurred by the Company for and in the underwriting of, or
otherwise in connection with the issue thereof. To the extent that such
issuance shall be for a consideration other than cash, then, the amount of such
consideration shall be deemed to be the fair value of
7
NYB 55181.3
<PAGE> 8
such consideration at the time of such issuance as determined in good faith by
the Company's Board of Directors. The consideration for any Additional Capital
Shares issuable pursuant to any warrants, options or other rights to subscribe
for or purchase the same shall be the consideration received by the Company for
issuing such warrants, options or other rights, plus the additional
consideration payable to the Company upon the exercise of such warrants,
options or other rights. The consideration for any Additional Capital Shares
issuable pursuant to the terms of any convertible or exchangeable securities
shall be the consideration paid or payable to the Company in respect of the
subscription for or purchase of such convertible or exchangeable securities,
plus the additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such convertible or
exchangeable securities. In case of the issuance at any time of any Additional
Capital Shares or convertible or exchangeable securities in payment or
satisfaction of any dividend upon any class of stock preferred as to dividends
in a fixed amount, the Company shall be deemed to have received for such
Additional Capital Shares or convertible or exchangeable securities a
consideration equal to the amount of such dividend so paid or satisfied.
2. Readjustment of Exercise Price. Upon the expiration of the right to
convert or exchange any convertible or exchangeable securities, or upon the
expiration of any rights, options or warrants, the issuance of which
convertible or exchangeable securities, rights, options or warrants effected an
adjustment in Exercise Price, if any such convertible or exchangeable
securities shall not have been converted or exchanged, or if any such rights,
options or warrants shall not have been exercised, the number of Capital Shares
deemed to be issued and Outstanding by reason of the fact that they were
issuable upon conversion or exchange of any such convertible or exchangeable
securities or upon exercise of any such rights, options, or warrants shall no
longer be computed as set forth above, and such Exercise Price shall forthwith
be readjusted and thereafter be the price that it would have been (but
reflecting any other adjustments in the Exercise Price made pursuant to the
provisions of this Section 6.1 after the issuance of such convertible or
exchangeable securities, rights, options or warrants) had the adjustment of the
Exercise Price made upon the issuance or sale of such convertible or
exchangeable securities or issuance of rights, options or warrants been made on
the basis of the issuance only of the number of Additional Capital Shares
actually issued upon conversion or exchange of such convertible or exchangeable
securities, or upon the exercise of such rights, options or warrants, and
thereupon only the number of Additional Capital Shares actually so issued, if
any, shall be deemed to have been issued and only the consideration actually
received by the Company (computed as set forth in sub-subsection (1. hereof)
shall be deemed to have been received by the Company. If the purchase price
provided for in any rights, options or warrants, or the additional
consideration (if any) payable upon the conversion or exchange of any
convertible or exchangeable securities, or the rate at which any convertible or
exchangeable securities are convertible into or exchangeable for Capital Shares
changes at any time (other than under or by reason of provisions designed to
protect against dilution), the Exercise Price in effect at the time of the
change shall be adjusted to the Exercise Price that would have been in effect
at such time had such rights, options, warrants or convertible or exchangeable
securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold.
8
NYB 55181.3
<PAGE> 9
3. Other Action Affecting Capital Shares. In case after the date hereof
the Company shall take any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing subsections (a)
through (h) hereof, inclusive, which in the opinion of the Company's Board of
Directors would have a materially adverse effect upon the rights of the Warrant
Holder at the time of exercise of the Warrant, the Exercise Price shall be
adjusted in such manner and at such time as the Board or Directors on the
advice of the Company's independent public accountants may in good faith
determine to be equitable in the circumstances.
(j) In the event the Company shall, at a time while the Warrant is
unexpired and outstanding, take any action which pursuant to subsections (a)
through (h) of this Section 6.1 may result in an adjustment of the Exercise
Price, the Company shall give to the Warrant Holder at its last address known
to the Company written notice of such action ten (10) days in advance of its
effective date in order to afford to the Warrant Holder an opportunity to
exercise the Warrant prior to such action becoming effective.
Section 6.1 Notice of Adjustments. Whenever the Exercise Price or number
of Warrant Shares shall be adjusted pursuant to Section 6.1 hereof, the Company
shall promptly make a certificate signed by its President or a Vice President
and by its Treasurer or Assistant Treasurer or its Secretary or Assistant
Secretary, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Company's
Board of Directors made any determination hereunder), and the Exercise Price
and number of Warrant Shares purchasable at that Exercise Price after giving
effect to such adjustment, and shall promptly cause copies of such certificate
to be mailed (by first class and postage prepaid) to the Holder of the Warrant.
In the event the Company shall, at a time while the Warrant is unexpired and
not exercised in full, take any action that pursuant to subsections (a) through
(g) of Section 6.1 may result in an adjustment of the Exercise Price, the
Company shall give to the Holder of the Warrant at its last address known to
the Company written notice of such action ten (10) days in advance of its
effective date in order to afford to the Holder of the Warrant an opportunity
to exercise the Warrant prior to such action becoming effective.
Section 7. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or By-Laws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Warrant
Holder against impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any Warrant Shares above the
amount payable therefor on such exercise, and (b) will take all such action as
may be reasonably necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable (other than pursuant to
Wisconsin Statutes Section 180.0822(2)(b), as interpreted) Warrant Shares on
the exercise of this Warrant.
Section 8. Rights As Stockholder. Prior to exercise of this Warrant, the
Warrant Holder shall not be entitled to any rights as a stockholder of the
Company with respect to the Warrant Shares, including (without limitation) the
right to vote such shares, receive dividends
9
NYB 55181.3
<PAGE> 10
or other distributions thereon or be notified of stockholder meetings.
However, in the event of any taking by the Company of a record of the holders
of any class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, the Company shall mail to each Warrant Holder, at least ten
(10) days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
Section 9. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
the Warrant and, in the case of any such loss, theft or destruction of the
Warrant, upon delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
Section 10. Choice of Law. This Agreement shall be construed under the
laws of the State of Wisconsin.
Section 11. Entire Agreement; Amendments. This Warrant, the Registration
Rights Agreement, and the Agreement contain the entire understanding of the
parties with respect to the matters covered hereby and thereby. No provision of
this Warrant may be waived or amended other than by a written instrument signed
by the party against whom enforcement of any such amendment or waiver is
sought.
Section 12. Restricted Securities.
(a) Registration or Exemption Required. This Warrant has been issued in a
transaction exempt from the registration requirements of the Securities Act in
reliance upon the provisions of Section 4(2) promulgated by the SEC under the
Securities Act. This Warrant and the Warrant Shares issuable upon exercise of
this Warrant may not be resold except pursuant to an effective registration
statement or an exemption to the registration requirements of the Securities
Act and applicable state laws.
(b) Legend. Any replacement Warrants issued pursuant to Section 2 hereof
and any Warrant Shares issued upon exercise hereof, shall bear the following
legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES
LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR
OTHERWISE DISPOSED OF, EXCEPT
10
NYB 55181.3
<PAGE> 11
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT
FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF
THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS
OF THE COMPANY SET FORTH IN A PRIVATE EQUITY LINE AGREEMENT,
DATED AS OF NOVEMBER 19, 1998, BETWEEN THE FEMALE HEALTH
COMPANY AND KINGSBRIDGE CAPITAL LIMITED. A COPY OF THE
PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH
OBLIGATIONS MAY BE OBTAINED FROM THE COMPANY'S EXECUTIVE
OFFICES."
Removal of such legend shall be in accordance with the legend removal
provisions in the Agreement.
(c) No Other Legend or Stock Transfer Restrictions. No legend other than
the one specified in Section 12(b) has been or shall be placed on the share
certificates representing the Warrant Shares and no instructions or "stop
transfer orders," so called, "stock transfer restrictions" or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Section 12.
(d) Assignment. Assuming the conditions of Section 12(a) above regarding
registration or exemption have been satisfied, the Warrant Holder may sell,
transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in
part to any Person that is an "accredited investor" as defined in Rule 501 of
Regulation D. The Warrant Holder shall deliver a written notice to Company,
substantially in the form of the Assignment attached hereto as Exhibit B,
indicating the person or persons to whom the Warrant shall be assigned and the
respective number of warrants to be assigned to each assignee. The Company
shall effect the assignment within ten (10) days, and shall deliver to the
assignee(s) designated by the Warrant Holder a Warrant or Warrants of like
tenor and terms for the appropriate number of shares.
(e) Investor's Compliance. Nothing in this Section 12 shall affect in any
way the Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
Section 13. Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and shall be (i) personally served, (ii) deposited in the mail, registered or
certified, return receipt requested, postage prepaid, (iii) delivered by
reputable air courier service with charges prepaid, or (iv) transmitted by hand
delivery, telegram or facsimile, addressed as set forth below or to such other
address as such party shall have specified most recently by written notice.
Any notice or other communication required or permitted to be given hereunder
shall be deemed effective (a) upon hand delivery or delivery by facsimile (with
accurate confirmation generated by the transmitting facsimile machine) at the
address or number designated below (if delivered on a business day during
normal business hours where such notice is to be received), or the first
business day following such delivery (if delivered other than on a business day
during normal business hours where such notice is to be received) or (b) on the
second business day following the date of
11
NYB 55181.3
<PAGE> 12
mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
If to the Company:
The Female Health Company
919 North Michigan Avenue
Suite 2208
Attention: O.B. Parrish
Chairman and Chief Executive Officer
Chicago, Illinois 60611
Telephone: (312) 280-2281
Facsimile:
with a copy (which shall not constitute notice) to:
Reinhart, Boerner, Van Deuren, Norris & Rieselbach
1000 North Water Street
Suite 2100
Milwaukee, Wisconsin 53202
Attention: David Krosner, Esq.
Telephone: (414) 298-1000
Facsimile:
if to the Investor:
Kingsbridge Capital Limited
c/o Kingsbridge Corporate Services Limited
Main Street
Kilcullen, County Kildare
Republic of Ireland
Attention: Adam Gurney
Telephone: 011-353-45-481-811
Facsimile: 011-353-45-482-003
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Keith M. Andruschak, Esq.
Telephone: (212) 878-8570
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 13 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the
other party hereto.
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<PAGE> 13
Section 14. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms
hereof. The invalidity or unenforceability of any provision hereof shall in no
way affect the validity or enforceability of any other provision.
13
NYB 55181.3
<PAGE> 14
IN WITNESS WHEREOF, this Warrant was duly executed by the undersigned,
thereunto duly authorized, as of the date first set forth above.
THE FEMALE HEALTH COMPANY
By: /s/ O.B. Parrish
-------------------------------------
O.B. Parrish
Chairman and Chief Executive Officer
Attested:
By: /s/ William R. Gargiulo, Jr.
-------------------------------------
Name: William R. Gargiulo, Jr.
Title: Secretary
14
NYB 55181.3
<PAGE> 15
EXHIBIT A TO THE WARRANT
EXERCISE FORM
THE FEMALE HEALTH COMPANY
The undersigned hereby irrevocably exercises the right to purchase
__________________ shares of Common Stock of The Female Health Company, a
Wisconsin corporation, evidenced by the attached Warrant, and herewith makes
payment of the Exercise Price with respect to such shares in full in the form
of [cash or certified check in the amount of $________], [______] Warrant
Shares, which represent the amount of Warrant Shares as provided in the
attached Warrant to be canceled in connection with such exercise], all in
accordance with the conditions and provisions of said Warrant.
The undersigned requests that stock certificates for such Warrant Shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to this Warrant in the name of the registered Holder and delivered to
the undersigned at the address set forth below.
Dated:_______________________________________
_____________________________________________
Signature of Registered Holder
Name of Registered Holder (Print)
_____________________________________________
Address
15
NYB 55181.3
<PAGE> 16
NOTICE
The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
16
NYB 55181.3
<PAGE> 17
EXHIBIT B TO THE WARRANT
ASSIGNMENT
(To be executed by the registered Warrant Holder desiring to transfer the
Warrant)
FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached Warrant
hereby sells, assigns and transfers unto the persons below named the right to
purchase ______________ shares of the Common Stock of The Female Health Company
evidenced by the attached Warrant and does hereby irrevocably constitute and
appoint ______________________ attorney to transfer the said Warrant on the
books of the Company, with full power of substitution in the premises.
Dated:
_____________________________
Signature
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NYB 55181.3
<PAGE> 18
Fill in for new Registration of Warrant:
_________________________________________
Name
_________________________________________
Address
_________________________________________
Please print name and address of assignee
(including zip code number)
18
NYB 55181.3
<PAGE> 19
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever***DocX97 Reports FooterB-1
text was:***
19
NYB 55181.3
<PAGE> 1
EXHIBIT 10.27
FUND-RAISING AGREEMENT
THIS AGREEMENT made this 1st day of May, 1998 by and between HARTINVEST-MEDICAL
VENTURES ("HMV") with address at Thomas Edge House, Tunnell Street, St. Heller,
Jersey JE2 4LU, Channel Islands hereafter "Corporate Financial Advisor"
and
THE FEMALE HEALTH COMPANY ("FHC") with address at 919 North Michigan Avenue,
Chicago, Illinois 60611, hereafter "Company".
NOW, THEREFORE, in consideration of the covenants herein contained and on the
part of each party to be fully kept and performed, the parties have agreed and
do thereby agree with each other as follows:
1. SCOPE OF WORK.
1.1 For the consideration hereafter set forth, Company does hereby engage
Corporate Financial Advisor and Corporate Financial Advisor agrees to provide
Company up to $6.0 million under the Regulation D exemption to Section 4(2) of
the 1933 Securities Act, as outlined in the term sheet attached (see Attachment
1). FHC agrees to provide the documentation and complete all regulatory
submissions for the Regulation "D" financing.
1.2 If requested by FHC, the Corporate Financial Advisor agrees to complete
said financing provided that there are no delays caused by the Company in
providing additional requirested information or explanations of information
provided by the Company to Corporate Financial Advisor. Company will provide a
legal opinion from a securities attorney as presented in Attachment 2.
1.3 Corporate Financial Advisor represents that it is registered and qualified
to do corporate advisory business.
1.4 Corporate Financial Advisor and Conpany hereby agree the terms of the
Company hereby agree the terms of the Company's common stock to be offered
through a term sheet (see Attachment 1). Company's common stock to be offered
through a term sheet (see Attachment 1).
1.5 This agreement shall be exclusive for international funding sources and
non-exclusive for the United States. The Company at its discretion may accept
or reject proposed investors based on the terms in Attachment 1. If prior to
acceptance by the Company of any subscription agreement, the Company receives
what in its sole judgment is a creditable offer to provide significant funding
on substantially better terms than those presented in Attachment 1. It
reserves the right to accept such offer and terms in place of those presented
in Attachment 1. In order to have this right of rejection, Company agrees
1
<PAGE> 2
to pay to Corporate Financial Advisor a "break up fee" of US$ 100,000 or 25,000
shares, whichever is the greater.
2. PAYMENT TERMS.
2.1 For the private placement funds raised by Corporate Financial Advisor, the
Company agrees to pay Corporate Financial Advisor a SEVEN PERCENT (7%)
COMMISSION. Notwithstanding anything in this Agreement to the contrary, if the
Company enters into a Subscription Agreement with an investor proposed by
Corporate Financial Advisor during the term of this Agreement, the Company
shall be obligated to pay Corporate Financial Advisor the 7% commission on all
amounts thereafter received by the Company from the investor pursuant to the
Subscription Agreement whether or not such amounts are received before or after
the term of this Agreement. The commission will be paid based on the actual
drawdown amount per the Term Sheet (See Attachment 1). Corporate Financial
Advisor will be entitled to receive its 7% cash commission within five business
days after the closing of each Call under the Subscription Agreement.
2.2 Corporate Financial Advisor, at its sole option, take Company common stock
equal to and at a similar per share price as the investor. Any stock taken in
lieu of cash commission will be entitled to the same registration rights given
investors in the private placement.
2.3 Corporate Financial Advisor will receive distribution warrants to purchase
common shares equal to 10% of the actual stock purchased by the investor to the
Subscription Agreement contemplated on Attachment 1. The warrants will have a
term of three years. A pro rata portion of the warrants will be automatically
forfeited if investor breaches the Subscription Agreement as specified in
Attachment 1. The warrants will have an exercise price equal to the exercise
price for the warrants issued to investors pursuant to the term sheet.
3. CONTRACTED SERVICES.
3.1 Corporate Financial Advisor may utilize the fundraising services of any
third party registered SFA or NASD broker/dealer.
3.2 All commissions will be payable to Corporate Financial Advisor who will
then pay out any commission due third party SFA or NASD broker/dealers
participating in said above private placement. Corporate Financial Advisor
agrees to furnish Company copies of any third party fundraising agreements and
further agrees to hold the Company harmless with respect to commissions owed to
any third party SFA or NASD broker/dealers participating in the private
placement and for any actions taken by such third party SFA or NASD
broker/dealers in violation of law.
2
<PAGE> 3
4. TERM.
Unless extended by mutual written agreement of the parties hereto, this
Agreement will terminate and be of no further force or effect 90 day after the
date first above written.
5. MODIFICATIONS, ETC.
5.1 This written Agreement embodies the entire understanding of the parties and
all prior negotiations, writings and consultations are merged herein.
5.2 This Agreement shall be construed and interpreted in accord with the laws
of the United Kingdom.
5.3 At the option of Corporate Financial Advisor any disagreement may be
settled by an ARBITRATION PANEL rather than the appropriate court and the
findings of the arbitration panel shall be binding on both parties. Any such
arbitration shall occur in London, England.
5.4 This Agreement shall be binding upon the parties hereto, their successors
and assigns.
5.5 This Agreement may be executed in two counterparts each of which shall be
deemed to be an original but both of which together shall constitute one and
the same agreement.
IN WITNESS WHEREOF, the parties hereto, intending to bind themselves, their
successors and assigns, have hereunto set their hands the day and year first
above written.
Corporate Financial Advisor
HARTINVEST-MEDICAL VENTURES
/s/ Sanford G. Henry
- ------------------------------
SANFORD G. HENRY
Company
THE FEMALE HEALTH COMPANY
/s/ O.B. Parrish
- ------------------------------
O.B. PARRISH
Chairman and C.E.O.
3
<PAGE> 4
ATTACHMENT 1
HMV TERM SHEET
THE FEMALE HEALTH COMPANY
DEFINITIONS
Market Price: The lowest Trade Bid Price of The Female Health
Company's (the "Company") shares for the two
trading days preceding the Call the day of the
call, and for the two trading days following the
Call.
Subscription Date: The date which Kingsbridge (the "Investor")
executes the Subscription Agreement.
Effective Date: The date the SEC declares the registration
statement, registering the Common Shares and
Common Shares underlying the Warrants, effective.
Call: Draw down by the Company of a portion of the
Subscription Agreement following registration of
the Common Shares, which Calls, together with all
prior Calls and any stock issued as commissions
in connection with such Calls, shall not exceed
19.9% of the Company's outstanding stock as of
the date of the first sale.
Symbol: FHC
Amount: $6,000,000
Securities Offered: Common Shares and Warrants.
Commitment: The Investor, subject only to the conditions set
forth in this term sheet, will irrevocably commit
to purchase up to $6,000,000 of restricted Common
Shares over the course of 24 months
4
<PAGE> 5
following the Effective Date. The Company
will irrevocably commit to draw down a minimum
of $1,000,000.
The Company will have sole discretion as to
the amount and timing of each Call subject to
the restrictions below.
Purchase Price of
Common Shares: 88% of the Market Price at each Call. The maximum
purchase price will be set at 150% of the last
sale price of the Company's common stock on the
Subscription Date.
Restrictions on Calls: (a) Each Call cannot be for less than $200,000 nor
more than $1,000,000. According to Annex A.
(b) There will be a
minimum of 20 trading days between Calls.
(c) The above
restrictions may be waived on any individual
Call upon agreement of both parties.
Restrictions on Short Sales: The Investor agrees not to sell any common stock
of the Company short during the term of the
Subscription Agreement unless the Company agrees
to such sale.
Warrants: 200,000 with a three-year life beginning six
months after the Subscription Date. The exercise
price of the warrants shall be 120% of the last
sale price of the Company's common stock on the
Subscription Date.
Registration: The Company will file a registration statement
under the Securities Act of 1933, as amended,
with respect to the Common Shares within 45 days
of the Subscription Date. Such registration
statement must be declared effective within 120
days of the Subscription Date. The registration
statement will remain effective for the duration
of the Warrants.
5
<PAGE> 6
Legal Fees: The Company will pay the reasonable legal costs
associated with an investment, not to exceed
$20,000.
Commission: 7% plus warrants to purchase such number of
shares of the Company's common stock as is equal
to 10% of the number of shares of such common
stock actually purchased by the Investor pursuant
to the Subscription Agreement.. The exercise
price of the warrants shall be 120% of the last
sale price of the Company's common stock as of
the Subscription Date. Commissions will be
payable within five business days after each
closing of a Call under the Subscription
Agreement.
Closing: April 1998 or agreed date.
6
<PAGE> 7
ANNEX A
MAXIMUM CALL AMOUNT
The Maximum Call Amount with respect to a Call shall be determined based upon
the Average Daily Trading Volume of Shares of Common Stock for the 20-trading
day period ending on the date prior to the relevant Call and the Market Price
as of such Call Date of shares of Common Stock as follows:
<TABLE>
<CAPTION>
Average Daily Trading Volume
for 20 Days Prior to Call
Market Price
($ per share) 17,000-22,000 22,001-30,000 30,001-45,000 45,001-60,000
- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
$2.00 - 2.50 $200,000 $300,000 $400,000 $ 500,000
2.50 - 3.00 250,000 350,000 450,000 600,000
3.00 - 3.50 300,000 400,000 450,000 600,000
3.50 - 4.00 350,000 450,000 500,000 600,000
4.00 - 4.50 350,000 450,000 550,000 650,000
4.50 - 5.00 400,000 500,000 600,000 750,000
5.00 - above 450,000 600,000 750,000 1,000,000
</TABLE>
7
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Female Health Company - UK
The Female Health Company - UK, plc
<PAGE> 1
EXHIBIT 23
<FF>
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report, dated November 20, 1997, which includes an emphasis paragraph relating
to an uncertainty as to the Company's ability to continue as a going concern,
on the consolidated financial statements of The Female Health Company and
subsidiaries. We also consent to the reference to our Firm under the caption
"Experts" in the Prospectus.
/s/ McGLADREY & PULLEN, LLP
Schaumburg, Illinois
November 30, 1998
