As filed with the Securities and Exchange Commission on September 21, 2000
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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THE FEMALE HEALTH COMPANY
(Name of Small Business Issuer in its Charter)
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Wisconsin 3069 39-1144397
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
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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)
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Copies to:
James M. 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. [ ]
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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE REGISTRATION FEE
----------------------------- ------------ --------------------------- ----------------- -----------------
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Common Stock, $0.01 par value 650,000 $ 0.48 (1) $ 312,000 $ 83
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(1) Calculated in accordance with Rule 457(c) based on the average of the bid and asked prices of the
Common Stock as reported on the Over the Counter Bulletin Board on September 18, 2000, solely for the purposes
of calculating the amount of the registration fee.
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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 SEPTEMBER 21, 2000
THE FEMALE HEALTH COMPANY
650,000 SHARES OF COMMON STOCK
This prospectus may be used only by the stockholders listed under the
section entitled "Selling Stockholders" in the prospectus for their resale of up
to 650,000 shares of our common stock. We will not receive any proceeds from the
sale of the shares by the selling stockholders.
Our common stock is quoted on the Over the Counter Bulletin Board under
the symbol "FHCO." On September 19, 2000, the closing sale price of the common
stock was $0.59375.
YOU SHOULD CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 6 BEFORE PURCHASING OUR
COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
September ___, 2000
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TABLE OF CONTENTS
PAGE
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Prospectus Summary. . . . . . . . . . . . . . . . . . 3
Risk Factors. . . . . . . . . . . . . . . . . . . . . 6
Forward-Looking Statements May Prove to be Inaccurate 11
Use of Proceeds . . . . . . . . . . . . . . . . . . . 11
Price Range of Common Stock . . . . . . . . . . . . . 11
Dividend Policy . . . . . . . . . . . . . . . . . . . 11
Determination of Offering Price . . . . . . . . . . . 12
Capitalization. . . . . . . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 14
Business. . . . . . . . . . . . . . . . . . . . . . . 19
Management. . . . . . . . . . . . . . . . . . . . . . 24
Principal Shareholders. . . . . . . . . . . . . . . . 30
Related Party Transactions. . . . . . . . . . . . . . 32
Description of Capital Stock. . . . . . . . . . . . . 34
Selling Stockholders. . . . . . . . . . . . . . . . . 38
Plan of Distribution. . . . . . . . . . . . . . . . . 38
Legal Matters . . . . . . . . . . . . . . . . . . . . 39
Experts . . . . . . . . . . . . . . . . . . . . . . . 40
The Female Health Company Index to Consolidated
Financial Statements. . . . . . . . . . . . . . . . . 41
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PROSPECTUS SUMMARY
THIS SUMMARY PROVIDES AN OVERVIEW OF SELECTED INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU
SHOULD CONSIDER. THEREFORE, YOU SHOULD ALSO READ THE MORE DETAILED INFORMATION
IN THIS PROSPECTUS AND OUR FINANCIAL STATEMENTS.
OUR BUSINESS
The Female Health Company is essentially a global start-up company. Our
business consists solely of the manufacture and sale of the female condom, known
in the United States as Reality and under various other trade names in foreign
countries. We were incorporated in Wisconsin in 1971 and established in our
current form as The Female Health Company on February 1, 1996.
Initially, we 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, we also operated our original recreational
products business. After considering various alternatives, in 1995 our Board of
Directors selected the female condom as the central focus for our strategic
direction. As a result, in January 1996, we sold our recreational products
business, changed our name to The Female Health Company and devoted ourselves
solely to the commercialization of the female condom.
As part of this restructuring, on February 1, 1996, we acquired the stock
of Chartex Resources Limited, the manufacturer and owner of worldwide rights to,
and our then sole supplier of, the female condom. As a result of these
transactions, our sole business now consists of the manufacture, marketing and
sale of the female condom. We own global intellectual property rights for the
female condom, including:
- patents in the United States, the European Union, Japan and various other
countries;
- a Pre-Market Approval granted by the United States Food and Drug
Administration (FDA) approving and permitting marketing of the female
condom in the United States;
- a CE mark in the European Union representing that the product, as a
medical device, has been approved by the European Union for marketing in
the member countries of the European Union;
- regulatory approvals in various other countries, including Japan; and
- proprietary manufacturing technology.
We also lease 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 European Union.
Our principal executive offices are located at 875 North Michigan Avenue,
Suite 3660, Chicago, Illinois 60611, and our telephone number is 312-280-1119.
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THE OFFERING
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Common stock offered by the selling stockholders 650,000 shares
Common stock outstanding as of September 7, 2000 13,328,699 shares (1)
Over the Counter Bulletin Board symbol . . . . . FHCO
_________________
<FN>
(1) Does not include:
- 4,363,500 shares of common stock issuable upon exercise of warrants
outstanding as of September 7, 2000;
- 2,923,000 shares of common stock issuable upon exercise of stock options
outstanding as of September 7, 2000;
- 660,000 shares of common stock issuable upon conversion of outstanding
preferred stock; and
- shares issuable upon conversion of the $1.5 million convertible
debentures outstanding.
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SUMMARY FINANCIAL INFORMATION
The summary financial information below is derived from our financial
statements appearing elsewhere in this prospectus. You should read this
information in conjunction with those financial statements, including the notes
to the financial statements.
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YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED
1997 1998 1999 JUNE 30, 2000
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STATEMENTS OF OPERATIONS DATA:
Net revenues. . . . . . . . . . $ 2,916,408 $ 5,451,399 $ 4,715,477 $ 3,923,425
Cost of products sold . . . . . 3,475,709 5,273,369 4,598,747 3,612,216
Net loss. . . . . . . . . . . . (6,251,149) (3,357,316) (3,750,309) (3,126,029)
Net loss attributable to common
stockholders. . . . . . . . (6,266,114) (4,306,985) (3,884,228) (3,225,119)
Net loss per common share
outstanding . . . . . . . . $ (0.74) $ (0.43) $ (0.36) $ (0.26)
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SEPTEMBER 30, 1999 JUNE 30, 2000
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CONSOLIDATED BALANCE SHEET DATA:
Working capital . . . . . . . . . $ 522,081 $ (1,152,428)
Total assets. . . . . . . . . . . 6,507,143 4,722,069
Long-term debt and capital lease
Obligations. . . . . . . . . . . - -
Stockholders' equity (deficit). . 1,722,970 (293,940)
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RISK FACTORS
You should carefully consider the following risk factors, as well as the
other information contained in this prospectus, before purchasing our common
stock.
WE NEED ADDITIONAL CAPITAL TO SUPPORT OUR OPERATIONS. WE MAY NOT BE ABLE
TO RAISE SUFFICIENT AMOUNTS OF ADDITIONAL CAPITAL WHEN NEEDED AND, IF WE DO
RAISE ADDITIONAL CAPITAL, IT COULD DILUTE THE HOLDINGS OF OUR SHAREHOLDERS.
Sales of our sole product, the female condom, are currently insufficient to
cover our fixed manufacturing overhead, advertising and general and
administrative costs. Consequently, we must secure additional capital to fund
operating losses. We may not be successful in raising sufficient amounts of
additional capital when needed and, even if we are able to raise additional
capital, the terms of our financing activities may be costly and/or dilute the
holdings of our shareholders.
We estimate that we may need up to $1.3 million before the end of 2000 to
fund our anticipated cash needs for working capital, capital expenditures and
debt obligations, depending on the level of sales of our product. However, at
this stage in our development, the amount and timing of our future capital
requirements cannot be precisely determined. Many of the factors affecting our
capital requirements, including new market launches by our international
partners and sales orders from existing customers, are outside of our control.
We have an Equity Line Agreement to sell up to $6 million of our common
stock to Kingsbridge Capital Limited, a private investor. We have sold $582,000
to Kingsbridge under this agreement through the date of this prospectus. Our
future use of the Equity Line Agreement is subject to a number of significant
conditions which we have summarized on page 17 of this prospectus.
We expect to raise additional capital through one or more of the following
means:
- the sale of debt or equity securities, including under the Equity Line
Agreement with Kingsbridge if we meet the conditions to use the agreement;
- the sale of assets or rights; or
- by discounting receivables and/or letters of credit to facilitate
collection.
We can make no assurance that we will be successful in raising additional
capital. Further, we can make no assurance that any amount, if raised, will be
sufficient to continue our operations until sales of the female condom generate
sufficient revenues to fund operations. We may also find it difficult to raise
funds from any debt financing because our existing creditors hold a first
security interest in all of our assets.
WE EXPECT TO RELY ON OUR EQUITY LINE AGREEMENT TO RAISE NEEDED CAPITAL, BUT WE
MAY NOT BE ABLE TO SATISFY ALL OF THE CONDITIONS TO USE IT WHEN NEEDED. ALSO,
IF WE DO USE OUR EQUITY LINE AGREEMENT, IT COULD DILUTE THE HOLDINGS OF OUR
SHAREHOLDERS.
Our Equity Line Agreement with Kingsbridge gives us the right, subject to
various conditions, to sell to Kingsbridge shares of our common stock for cash
consideration up to $6 million. We have sold a total of $582,000 of common
stock to Kingsbridge through the date of this prospectus. We may sell
additional shares to Kingsbridge at any time on or before February 12, 2001 only
if we comply with the conditions in the Equity Line Agreement or Kingsbridge
waives the conditions. The conditions to our ability to sell our common stock
under the Equity Line Agreement include the following:
- the registration statement for resales of stock by Kingsbridge must remain
in effect;
- the sale must not cause Kingsbridge's ownership of our common stock to
exceed 9.9% of the outstanding shares of our common stock;
6
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- the trading price of our common stock over a five trading day period
preceding the date of the sale must equal or exceed $1.00 per share; and
- the average daily trading volume of our common stock for a 20 trading day
period preceding the date of the sale must equal or exceed 17,000 shares.
We may not be able to meet the conditions to use the Equity Line Agreement
when needed. For example, between May 16, 2000 and September 7, 2000, our
common stock trading price closed below $1 per share on all 77 trading days.
Kingsbridge may waive any of the conditions for our use of the Equity Line
Agreement, but we can make no assurance that it will choose to do so. If we are
unable to use the Equity Line Agreement when needed, we may be forced to seek
other sources of capital which may not be available to use on acceptable terms,
if at all.
Any stock which we sell to Kingsbridge under the Equity Line Agreement will
be sold at a discount to the stock's then market price as provided in the
agreement. The discount is 12% of the market price of a share of our common
stock at the time if the market price is $2.00 or more and 18% if the market
price is less than $2.00. As a result, any sales of common stock by us under
the Equity Line Agreement could significantly increase our net loss per share or
decrease our net income per share and cause the market price of our common stock
to decrease.
We have also agreed to pay Hartinvest-Medical Ventures, the entity that
solicited Kingsbridge, a commission of 7% on all amounts received from
Kingsbridge under the agreement. This commission may, at the option of
Hartinvest-Medical Ventures, be paid in shares of our common stock valued at the
same price at which we sell shares to Kingsbridge under the agreement. If
Hartinvest-Medical Ventures elects to receive payment of its commissions in
common stock, the issuance of the shares would further dilute our shareholders
and could cause our stock price to decrease.
OUR SUCCESS IS COMPLETELY DEPENDENT UPON THE SUCCESS OF THE FEMALE CONDOM.
We expect to derive our future revenues from sales of the female condom,
our sole current product. Our current level of expenditures has been
established to support a higher level of revenues. For us to begin generating
cash from operations, sales of the female condom will have to increase to
approximately 22 million per year based upon the current average selling price
per unit, which would represent approximately 37% of our manufacturing capacity
compared to approximately 11% of our manufacturing capacity that we used in
fiscal 1999. If sales do not increase from current levels to this degree or if
the cost to obtain this level of sales is prohibitive, we will continue to
experience operating losses and, ultimately, our viability will be in jeopardy.
Our ability to achieve a higher level of revenues is uncertain because 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.
SINCE OUR COMMON STOCK IS NO LONGER LISTED ON THE AMERICAN STOCK EXCHANGE, YOU
MAY HAVE GREATER DIFFICULTY BUYING AND SELLING OUR COMMON STOCK.
On February 5, 1999, our common stock was delisted from the American Stock
Exchange since it did not meet all of the criteria for continued listing.
Commencing on approximately February 10, 1999, the common stock has been quoted
on the OTC Bulletin Board under the symbol "FHCO." You may find it more
difficult to obtain accurate quotations of the price of the our common stock and
to sell the common stock on the open market than was the case when the common
stock was listed on the American Stock Exchange. In addition, companies whose
stock is listed on the American Stock Exchange must adhere to the rules of that
exchange. These rules include various corporate governance procedures which,
among other items, require a company to obtain shareholder approval prior to
completing various types of important transactions including issuances of common
stock equal to 20% or more of the company's then outstanding common stock for
less than the greater of book or market value or most issuances of stock
options. Since our stock is quoted on the OTC Bulletin Board, we are not
subject to those or any comparable rules.
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WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND, DUE TO THAT AND OTHER FACTORS, OUR
INDEPENDENT AUDITOR HAS ISSUED A QUALIFIED OPINION ON OUR FINANCIAL STATEMENTS.
We had a net loss attributable to common stockholders of $3.2 million for
the first nine months of fiscal 2000, $3.9 million for fiscal 1999, $4.3 million
for fiscal 1998 and $6.3 million for fiscal 1997. As of June 30, 2000, we had
an accumulated deficit of $48.4 million, a working capital deficit of $1.2
million and stockholders' deficit of $0.3 million. Historically, we have
experienced cash operating losses relating to expenses to develop, manufacture
and promote the female condom. Consistent with the availability of resources,
we expect to make substantial expenditures in fiscal 2000 in an effort to
support our manufacturing operations and increase awareness and distribution of
the female condom around the globe. Until our internally generated funds are
sufficient to meet cash requirements, we will remain dependent upon our ability
to generate sufficient capital from outside sources. We can make no assurance
that we will achieve a profitable level of operations in the near term or at
all.
Our independent auditor's reports on our consolidated financial statements
for the fiscal years ended September 30, 1999, 1998 and 1997 were qualified as
to our 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 was due to our continued deficit cash flows from
operations, driven largely by continued operating losses. Our net cash used in
operations was $0.8 million for the first nine months of fiscal 2000, $2.8
million for fiscal 1999, $2.8 million for fiscal 1998 and $5.0 million for
fiscal 1997.
In the near term, we expect operating costs to continue to exceed funds
generated from operations due principally to our fixed manufacturing costs
relative to our current production volumes. We can make no assurance that we
will achieve positive cash flows from our operations in the near term or at all.
We believe we must first achieve, on a continuing basis, positive cash flow from
operations and net operating profits in order for our independent auditors to
re-evaluate their going concern opinion.
BECAUSE OUR PRODUCT FACES SIGNIFICANT COMPETITION FROM OTHER PRODUCTS, SUCH AS
THE MALE CONDOM, WE MAY NOT BE ABLE TO ACHIEVE ANTICIPATED GROWTH LEVELS OR
PROFIT MARGINS.
We may be unable to compete successfully against current and future
competitors, and competitive pressures could have a negative effect on our
revenues, cash flows and profit margins. Although we believe that there is
currently no other female condom sold in the world, other parties may seek to
develop an intravaginal pouch which does not infringe our patents. These
products, if developed, could be distributed by companies with greater financial
resources and customer contacts than us. In addition, there are a number of
other products currently marketed which have a higher degree of accepted
efficacy for preventing pregnancy than does the female condom. These products
include male condoms, 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 sexually
transmitted diseases. Companies manufacturing these competing products are
generally much larger than we are and have access to significantly greater
resources than we do. In addition, the female condom is generally sold 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.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY REDUCE THE STOCK'S
TRADING PRICE.
A large number of our shares of common stock which are currently
outstanding or which we may issue in the near future may be immediately resold
in the public market. Sales of our common stock in the public market or the
perception that sales may occur, could cause the market price of our common
stock to decline even if our business is doing well. Virtually all of the
13,328,699 shares of our common stock and 660,000 shares of our convertible
preferred stock outstanding as of September 7, 2000 may be immediately resold in
the public market, although sales of our shares by our directors, executive
officers or other persons who may control us may be subject to restrictions
under Rule 144, including limitations on the number of shares that may be sold.
We may also issue up to $6 million of common stock under our Equity Line
Agreement with Kingsbridge. The shares of common stock which we may sell to
Kingsbridge under the Equity Line Agreement will be available for immediate
resale to the public because we have filed a registration statement with the
Securities and Exchange Commission to register the resale by Kingsbridge of
these shares. Further, as of
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September 7, 2000, we have issued options and warrants to purchase 7,286,500
shares of common stock. We have filed or intend 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, except for shares
received by our directors, executive officers or other persons who may control
us which are subject to the restrictions under Rule 144.
OUR STOCK PRICE HAS BEEN EXTREMELY VOLATILE AND, AS A RESULT, THE PRICE COULD BE
DOWN AT A TIME WHEN YOU DESIRE TO SELL YOUR SHARES.
The market price of our common stock has been and may continue to be
affected by quarter-to-quarter variations in our operating results,
announcements by our competitors and other factors. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations,
particularly among the stock of emerging growth companies, which have often been
unrelated to the operating performance of particular companies. Factors not
directly related to our performance, such as governmental regulation or negative
industry reports, may also have a significant adverse impact on the market price
of our common stock.
BECAUSE OUR COMMON STOCK IS A "PENNY STOCK," TRADING IN IT IS SUBJECT TO THE
PENNY STOCK RULES WHICH COULD AFFECT YOUR ABILITY TO RESELL THE STOCK IN THE
MARKET.
The Securities Enforcement and Penny Stock Reform Act of 1990 imposes
restrictions when making trades in any stock such as our common stock which is
defined as a "penny stock." The SEC's regulations generally define a penny stock
as an equity security that has a price of less than $5.00 per share, other than
securities which are traded on markets such as the New York Stock Exchange, the
American Stock Exchange or the Nasdaq Stock Market. As a result of being a
penny stock, the market liquidity for our common stock may be adversely affected
since the regulations on penny stocks could limit the ability of broker-dealers
to sell our common stock and thus your ability to sell our common stock in the
secondary market. The regulations restricting trades in penny stock include:
- a requirement that stock brokers deliver to their customers, prior to any
transaction involving a penny stock, a disclosure schedule explaining the
penny stock market and the risks associated with the penny stock market;
and
- a requirement that broker-dealers who recommend penny stocks to persons
other than their established customers and a limited class of 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 the securities.
AS A MANUFACTURER AND MARKETER OF A CONSUMER PRODUCT, WE COULD EXPERIENCE
PRODUCT LIABILITY CLAIMS.
The nature of our product may expose us to significant product liability
risks. We maintain product liability insurance with coverage limits of $5
million per year on the female condom. We can make no assurance that we will be
able to maintain this insurance on acceptable terms or that the insurance will
provide adequate coverage against product liability claims. While no product
liability claims on the female condom have been brought against us to date, a
successful product liability claim against us in excess of our insurance
coverage could be extremely damaging to us.
SINCE WE SELL PRODUCT IN FOREIGN MARKETS, WE ARE SUBJECT TO FOREIGN CURRENCY AND
OTHER INTERNATIONAL BUSINESS RISKS THAT COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We manufacture the female condom in a leased facility located in London,
England. In addition, a material portion of our future sales are likely to be
in foreign markets. Manufacturing costs and sales to foreign markets are
subject to inherent risks and challenges that could adversely affect our
revenues, cash flows and profit margins, including:
- normal currency risks associated with changes in the exchange rate of
foreign currencies relative to the United States dollar;
- unexpected changes in international regulatory requirements and tariffs;
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- difficulties in staffing and managing foreign operations;
- greater difficulty in accounts receivable collection;
- political or economic changes, especially in developing nations; and
- price controls and other restrictions on foreign currency.
To date, we have not used currency hedging strategies to manage our
currency risks. On an ongoing basis, we will continue to evaluate our
commercial transactions and will consider employing currency hedging strategies
if appropriate.
OUR PRODUCT IS SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION WHICH EXPOSES US TO
RISKS THAT WE WILL BE FINED OR EXPOSED TO CIVIL OR CRIMINAL LIABILITY, RECEIVE
NEGATIVE PUBLICITY OR BE PREVENTED FROM SELLING OUR PRODUCT.
The female condom is subject to regulation by the FDA under the Food, Drug
and Cosmetic Act, and by other state and foreign regulatory agencies. Under the
Food, Drug and Cosmetic Act, medical devices must receive FDA clearance before
they can be sold. FDA regulations also require us to adhere to "Good
Manufacturing Practices," which include testing, quality control and
documentation procedures. Our compliance with applicable regulatory
requirements is monitored through periodic inspections by the FDA and other
foreign regulatory agencies. If we fail to comply with applicable regulations,
we could:
- be fined or exposed to civil or criminal liability;
- face suspensions of clearances, seizures or recalls of products or
operating restrictions;
- receive negative publicity; or
- be prevented from selling our product in the United States or in foreign
markets.
OUR SHAREHOLDERS MAY BE PERSONALLY LIABLE FOR UP TO $.01 FOR EACH SHARE HELD IF
WE FAIL TO REPAY OUR DEBTS TO OUR EMPLOYEES FOR UNPAID COMPENSATION.
Since we are a Wisconsin corporation, our shareholders may be personally
liable for our debts to our employees for services performed. Wisconsin law
limits the potential amount of our shareholders' liability to the par value of
our shares, which is $.01 per share, for each share held. Potential liability
is also limited to debts for a maximum of six months' services.
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FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE
We have made forward-looking statements in this prospectus that are subject
to risks and uncertainties. When we use the words "believes," "expects,"
"anticipates" or similar expressions, we are making forward-looking statements.
Because many factors can materially affect results, including those listed under
"Risk Factors," you should not regard our inclusion of forward-looking
information as a representation by us or any other person that our objectives or
plans will be achieved. Our assumptions relating to budgeting, research, sales,
results and market penetration and other management decisions are subjective in
many respects and thus are susceptible to interpretations and periodic revisions
based on actual experience and business developments. The impact of any of
these factors may cause us to alter our capital expenditures or other budgets,
which may in turn affect our business, financial position, results of operations
and cash flows. Therefore, you should not place undue reliance on
forward-looking statements contained in this prospectus, which speak only 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."
USE OF PROCEEDS
The proceeds from the sale of the shares offered by this prospectus will be
received directly by the selling stockholders. We will not receive any proceeds
from the sale of the shares.
PRICE RANGE OF COMMON STOCK
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "FHCO." As of September 7, 2000, there were approximately 452 holders of
record of our common stock.
Prior to February 5, 1999, our common stock was listed on the American
Stock Exchange. The following table lists the historical high and low sale
prices of a share of our common stock on the American Stock Exchange for periods
prior to February 5, 1999 and on the OTC Bulletin Board for periods on or after
February 9, 1999:
<TABLE>
<CAPTION>
COMMON STOCK SALE PRICE
--------------------------
HIGH LOW
------------ ------------
<S> <C> <C>
1998 Fiscal Year:
Quarter ended:
December 31, 1997 4-3/8 3
March 31, 1998 3-9/16 2
June 30, 1998 3-5/8 2-3/8
September 30, 1998 3-9/16 1-3/8
1999 Fiscal Year:
Quarter ended:
December 31, 1998 2 1-1/8
March 31, 1999 2-1/16 1-1/16
June 30, 1999 2 7/8
September 30, 1999 1-11/16 11/16
2000 Fiscal Year
Quarter ended:
December 31, 1999 1-19/32 25/32
March 31, 2000 1-1/4 3/4
June 30, 2000 1-3/32 1/2
</TABLE>
The sale price quotations above reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions.
DIVIDEND POLICY
We have not paid a dividend on our common stock and do not anticipate
paying any dividends in the foreseeable future.
11
<PAGE>
DETERMINATION OF OFFERING PRICE
The common stock offered by this prospectus may be offered for sale by the
selling stockholders from time to time in transactions on the OTC Bulletin
Board, 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."
12
<PAGE>
CAPITALIZATION
The following table includes information regarding our unaudited short-term
indebtedness and stockholders' equity as of June 30, 2000.
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------
(UNAUDITED)
<S> <C>
Short-term indebtedness:
Notes payable, related party, net
of unamortized discount. . . . . . . . . . . . . . . . . . . . $ 1,163,522
Convertible debentures, net of
unamortized discount . . . . . . . . . . . . . . . . . . . . . 1,358,911
---------------
Total short-term indebtedness. . . . . . . . . . . . . . . 2,522,433
===============
Stockholders' equity:
Class A Convertible Preferred Stock-Series 1, par value $.01 per
Share, 5,000,000 shares authorized, 660,000 shares issued and
outstanding as of June 30, 2000. . . . . . . . . . . . . . . . 6,600
Common stock, par value $.01 per share, 22,000,000 shares
authorized, 13,325,341 shares issued and outstanding as of
June 30, 2000. . . . . . . . . . . . . . . . . . . . . . . . . 133,254
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 47,987,899
Unearned consulting fees . . . . . . . . . . . . . . . . . . . . (76,360)
Accumulated other comprehensive income . . . . . . . . . . . . . 91,964
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (48,405,221)
Treasury stock, at cost. . . . . . . . . . . . . . . . . . . . . (32,076)
---------------
Total stockholders' equity . . . . . . . . . . . . . . . . $ (293,940)
===============
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide an analysis of our
financial condition and results of operations and should be read in conjunction
with our financial statements and the notes to our financial statements
contained elsewhere in this prospectus. The discussion also includes
forward-looking statements. As indicated in "Forward-Looking Statements May
Prove To Be Inaccurate," you should not place undue reliance on forward-looking
statements.
OVERVIEW
Over the past few years, we have completed significant aspects of the
development and commercialization of the female condom. These initiatives have
resulted in our 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 our 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.
We have begun the process of developing the market for the female condom
around the world. As part of this plan, we have entered into a number of
distribution agreements and are pursuing other arrangements for the marketing
and sale of the female condom. We believe that as the number of markets in
which the female condom is sold increases, sales will grow and, if our sales
increase significantly, we will become profitable. However, we can make no
assurance that we will achieve profitability in the near term or at all.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
We had net revenues of $3,923,425 and a net loss of $3,225,119 for the nine
months ended June 30, 2000 compared to net revenues of $3,409,695 and a net loss
of $3,143,280 for the nine months ended June 30, 1999.
Our operating loss for the nine months ended June 30, 2000 was $1,942,792
compared to $2,726,534 for the same period last year for a decrease of 29%. As
discussed in more detail in the following paragraphs, the decrease in our net
operating loss was a result of gross profit improvements and reductions in
operating expenses principally from a decline in advertising and promotion
expenses. Gross profit was $311,209 for the nine month period in 2000 versus a
gross loss of $378,090 for the same 1999 period. The increase in the net loss
resulted from an increase in non-operating interest expenses and amortization of
debt issuance costs more than offsetting the reduced operating loss.
For the nine months ended June 30, 2000, sales increased $513,730, or 15%,
compared with the same period last year. The higher net revenues occurred
because of increased unit sales shipped to international customers.
Units shipped and orders in-house totaled 7.4 million units at June 30,
2000 compared to 4.9 million at June 30, 1999 for an increase of 51%. We expect
significant quarter to quarter variation due to the timing of receipt of large
orders, subsequent production scheduling, and shipping of products as various
countries launch the product. We believe this variation between quarters will
continue for several quarters to come until reorders form an increasing portion
of total sales.
Cost of goods sold decreased $175,569, or 5%, to $3,612,216 for the nine
months ended June 30, 2000 from $3,787,785 for the same period last year. The
decrease occurred as a result of a larger portion of our total sales being
comprised of international and global public sector business (68%) than during
the same period in the prior year (46%). The costs of goods sold per unit for
such customers' business is less expensive because of the efficiencies related
to the production of the bulk sized product sold.
Advertising and promotional expenditures decreased $50,333, or 23%, to
$169,000 for the nine months ended June 30, 2000 from $219,333 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, we have established that the female condom is responsive
to promotion; but due to our size, we do not possess the resources to conduct a
significant marketing program. Accordingly, we are in discussions with
potential partners for the U.S. that have the resources to conduct such a
marketing program.
14
<PAGE>
Selling, general and administrative expenses decreased $44,110, or 2%, to
$2,085,001 in the current period from $2,129,111 for the same period last year.
The decrease reflects a decrease in consulting and legal fees than incurred
during the same period during the prior year.
Amortization of debt issuance costs increased $176,026 to $245,676 for the
nine months ended June 30, 2000 from $69,650 for the same period in the prior
year. The comparative increase is due to the amortization period of debt
issuance costs which began at the time of the issuance of convertible debentures
in May and June 1999.
Net interest and non-operating expenses increased $692,519 to $937,561 for
the current period from $245,042 for the same period the prior year. The
increase exists because we had a higher level of debt outstanding during the
current fiscal year than the same period last year as a result of the issuance
of convertible debentures. The result is a larger amount of non-cash expenses
incurred from the amortization of discounts on notes payable and convertible
debentures than the first half of the prior year.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1998
We had net revenues of $4.7 million and a net loss attributable to common
stockholders of $(3.9) million, or ($0.36) per share, in 1999 compared to net
revenues of $5.5 million and a net loss attributable to common stockholders of
$(4.3) million, or ($0.43) per share, in 1998.
Without a one-time $817,000 charge for dividend accretion in 1998, we would
have experienced an increase in net loss principally related to an increase in
non-operating expenses rather than the $0.4 million, or 10%, reduction in the
net loss attributable to stockholders from $(4.3) million in 1998 to $(3.9)
million in 1999. Net losses for both 1999 and 1998 are attributable to fixed
manufacturing overhead and administrative costs associated with operating the
manufacturing facility configured to support significantly greater volume
levels.
Net revenues decreased $0.7 million, or 13%, in 1999 over the prior year.
Declining sales in both the global public sector and city and state agencies
within the United States accounted for all of the decrease. We believe the
decrease reflects variation in the timing of receipt of significant public
sector orders. This variation should decrease as more countries order and
reorder the female condom. Net sales to commercial accounts increased as a
result of the reinstatement of a major drug store chain and other promotional
chain activity.
Our strategy is to act as a manufacturer supplying the public sector and
commercial partners throughout the world. Our partners pay for all marketing
and shipping costs. Consequently, as our sales volume increases, our operating
expenses will not increase significantly.
In 1999, the cost of products sold of $4.6 million was 98% of net sales
compared with 1998 cost of products sold of $5.3 million which was 97% of net
sales. The reduction of cost of products sold was a result of lower sales
volume, offset, in part, by the effect of the sale in 1998 of product which had
been written down as of September 30, 1997, reflecting management's estimate of
product not expected to be sold prior to its expiration date. In 1998, we were
able to sell the product because of the FDA's decision to extend the approved
useful life of the female condom to five years from three years. As a result,
1998 cost of products sold was $0.9 million lower than it would have been had we
not sold product previously written down. Our manufacturing facility in the
United Kingdom utilized approximately 11% of its capacity in 1999 compared with
approximately 12% of its capacity in 1998.
Advertising and promotion expenditures decreased 42% to $0.3 million in
1999 compared to $0.4 million in 1998. Advertising and promotion relates
exclusively to the US 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. Through
expenditures since the product launch, we have established that demand for the
female condom is responsive to promotion; but due to our size, we do not possess
the resources to conduct a significant consumer marketing program. Accordingly
we are seeking potential partners for the United States that have the resources
to conduct a marketing program for the female condom.
15
<PAGE>
Selling, general and administrative expenses were $2.9 million in each of
1999 and 1998. As a percentage of net revenues, selling, general and
administrative expenses were 61% in 1999 compared with 53% in 1998. The
increase as a percentage of net revenues was due to the decline in net revenues
in 1999 as compared to 1998. Selling, general and administrative expenses did
not proportionately decline with the decline in net revenues because the
reduction in compensation expenses was offset by higher costs from consulting,
investor relations, sales and legal.
Net interest and non-operating expenses for 1999 increased $0.5 million, or
251%, to $0.7 million from $0.2 million in 1998. As a result of our higher
levels of debt in 1999, principally due to the issuance of convertible
debentures and two notes payable, we experienced an increase in interest
expenses.
We were able to cover fixed manufacturing overhead costs and reached above
the break-even at the gross profit level. However, based on the current average
selling price per unit, we must achieve cumulative annual unit sales of
approximately 22 million female condoms, or 37% of manufacturing capacity, to
cover operating and non-operating expenses. Non-operating expense includes
interest and non-cash charges reflecting discounts on warrants and convertible
debentures related to financing. We anticipate that non-operating expense will
decrease as unit sales volume increases, fixed overhead costs are covered and
our need for funding decreases. Excluding non-operating expense relating to our
funding requirements, we believe our cash flows would achieve a break-even level
at approximately 15.9 million units.
LIQUIDITY AND SOURCES OF CAPITAL
Historically, we have had significant operating losses. Cash used in
operations was $0.8 million for the first nine months of fiscal 2000 and $2.8
million for fiscal 1999. Historically, we have funded operating losses and
capital requirements, in large part, through the sale of common stock or debt
securities convertible into common stock.
During fiscal 1999, we received the following from financing activities:
- approximately $1.3 million in proceeds from newly-issued notes payable;
- $1.5 million, net of transaction costs, from the sale of convertible
debentures and warrants;
- $1.0 million from the issuance of common stock; and
- $0.1 million from the issuance of common stock upon exercise of options.
We used these amounts to fund our current operations and to repay existing
liabilities.
In the near term, we expect operating losses and capital requirements to
continue to exceed funds generated from operations due principally to our fixed
manufacturing costs relative to current production volumes and the ongoing need
to commercialize the female condom around the world. We estimate that our cash
burn rate is approximately $0.1 million per month.
On September 29, 1997, we entered into an agreement with Vector Securities
International, Inc., an investment banking firm specializing in providing advice
to healthcare and life-science companies. Under this agreement, Vector has
acted as our exclusive financial advisor for the purposes of identifying and
evaluating opportunities available to us for increasing shareholder value. We
are discussing with Vector the extension of these arrangements. These
opportunities may include selling all or a portion of our business, assets or
stock or entering into one or more distribution arrangements relating to our
product. We can make no assurance that any opportunities will be available to
us or, if any opportunities are available, that we will ultimately elect or be
able to complete a transaction.
On May 19, 1999 and June 3, 1999, we issued a total of $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of our common
stock to five accredited investors. The convertible debentures were originally
due one year after issuance. However, we have elected under the terms of the
convertible debentures to extend the due date to two years after issuance. In
connection with this extension, we issued to the investors additional warrants
to purchase a total of 375,000 shares of common stock upon the same terms as the
other warrants.
16
<PAGE>
On November 19, 1998, we executed an equity line agreement with Kingsbridge
Capital Limited, a private investor. This agreement gives us the right, subject
to the conditions described below, to sell to Kingsbridge up to $6.0 million of
our common stock. The agreement expires on February 12, 2001. The agreement
provides for minimum and maximum stock sales ranging from $100,000 to $1,000,000
depending on our stock price and trading volume. Stock sales cannot occur more
frequently than every 20 trading days. Any stock sold by us to Kingsbridge
under the agreement will be sold at a discount to the stock's then trading price
as provided in the agreement. The discount is 12% from the then current average
market price of our common stock if the average market price is at least $2 and
18% from the then current average market price if the average market price is
less than $2. In addition, we are required to pay our placement agent sales
commissions in common stock or cash, at the placement agent's option, equal to
7% of the funds we raise under the 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 of common stock we sell under the agreement.
We also issued to Kingsbridge a warrant to purchase 200,000 shares of our common
stock at $2.17 per share.
We are required to sell at least $1 million of common stock to Kingsbridge
during the term of the agreement. If we do not sell the minimum amount of
common stock, we will be required to pay Kingsbridge a 12% fee on that portion
of the $1 million minimum not sold during the term of the agreement. As of the
date of this prospectus, we have completed four sales to Kingsbridge of a total
of 680,057 shares of our common stock for the combined cash proceeds of
$582,000. Each sale was made while our common stock price was below $2.00 per
share and, therefore, the common stock was sold at the 18% discount. The timing
and amount of the stock sales under the agreement are totally at our discretion,
subject to our compliance with each of the following conditions at the time we
request a stock sale under the agreement:
- the registration statement we filed with the SEC for resales of stock by
Kingsbridge must remain in effect;
- all of our representations and warranties in the agreement must be
accurate and we must have complied with all of our obligations in
agreement;
- there may not be any injunction, legal proceeding or law prohibiting our
sale of the stock to Kingsbridge;
- the sale must not cause Kingsbridge's ownership our common stock to exceed
9.9% of the outstanding shares of our common stock;
- the trading price of our common stock over a five trading day preceding
the date of the sale must equal or exceed $1.00 per share; and
- the average daily trading volume of our common stock for a 20 trading day
period preceding the date of the sale must equal or exceed 17,000 shares.
The trading price of our common stock was below $1.00 per share as of June
30, 2000. Although Kingsbridge waived the condition relating to the trading
price of our common stock for the fourth sale completed during the quarter ended
June 30, 2000, we can make no assurance that Kingsbridge will waive this
condition or any other condition under the equity line agreement if we cannot
satisfy such conditions to use the equity line agreement if needed in the
future.
We have a $1 million note due March 25, 2001 and a $250,000 note payable
due February 12, 2001 to Mr. Stephen Dearholt, one of our directors. We also
have a $50,000 note payable due February 18, 2001 to Mr. O.B. Parrish, our
Chairman of the Board and Chief Executive Officer.
On June 14, 2000, we sold 500,000 shares of common stock to two investors,
including 400,000 shares to a trust for the benefit of one of Mr. Dearholt's
children, at a price of $0.50 per share, representing a discount of 6% of the
market price of our common stock on that date.
17
<PAGE>
We estimate that we may need up to $1.3 million before the end of calendar
year 2000 to fund our anticipated cash needs for working capital, capital
expenditures and debt obligations, depending on the level of sales of the female
condom. However, at this stage in our development, the amount and timing of our
future capital requirements cannot be precisely determined. Many of the factors
affecting our capital requirements, including new market launches by our
international partners and sales orders from existing customers, are outside of
our control. While the we believe that our existing capital resources,
including expected proceeds from sales of common stock under our agreement with
Kingsbridge if we are able to satisfy the conditions for its use, will be
adequate to fund our currently anticipated capital needs, if they are not, we
may need to raise additional capital until our sales increase sufficiently to
cover operating expenses. In addition, we may not be able to satisfy the
conditions required to sell stock under our agreement with Kingsbridge when
needed. For example, between May 16, 2000 and September 7, 2000, our common
stock trading price closed below $1 per share on all 77 trading days.
Until internally generated funds are sufficient to meet cash requirements,
we will remain dependent upon our ability to generate sufficient capital from
outside sources. While we believe 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, we can make no assurance
that we will achieve positive cash flows from our operations in the near term,
or ever. We also can make no assurance that we will be able to source all or
any portion of our required capital through the sale of debt or equity or, if
raised, the amount will be sufficient to fund our operations until sales of the
female condom generate sufficient revenues to fund operations. Any funds raised
may be costly to us and/or dilutive to stockholders. We may also find it
difficult to raise funds from any debt financing because our existing creditors
hold a first security interest in all of our assets. If the we are not able to
source the required funds or any future capital which becomes required, we may
be forced to sell assets or rights or cease operations.
18
<PAGE>
BUSINESS
GENERAL
We manufacture, market and sell the female condom around the world. The
female condom is the only 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 40 additional
countries. Several of the studies show that having the female condom available
increases protected sex acts and decreases the incidence of STDs.
The product is currently sold or available in various venues including the
commercial sector and public sector clinics in over 75 countries. It is
commercially marketed directly by us in the United States and the United Kingdom
and through marketing partners in 15 countries, including Canada, Japan and
France. We are currently in discussions with potential distributors for certain
European countries, India, The People's Republic of China and other countries.
As noted above, the female condom is sold to the global public sector. In
the U.S., the product is marketed to city and state public health clinics as
well as not-for-profit organizations such as Planned Parenthood. Following
several years of testing the efficacy and acceptability of the female condom, in
1996, we entered into a three-year agreement with the Joint United Nations
Programme on AIDS ("UNAIDS"), which has subsequently been extended. Under this
agreement, UNAIDS facilitates the availability and distribution of the female
condom in the developing world and we sell the product to developing countries
at a reduced price. The current price is 38 pence sterling, or approximately
$0.58 per unit. Under this agreement, the product is currently available in 51
countries, including Zambia, Zimbabwe, Tanzania, Brazil, Uganda, South Africa
and Haiti. We anticipate multiple launches will occur during the next two years
under this agreement, including launches in Kenya, Nigeria, 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 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.
MALE CONDOM MARKET
It is estimated the global annual market for male condoms is 5.4 billion
units. The major segments are in the global public sector, the U.S., Japan,
India and China.
GLOBAL MARKET POTENTIAL
The World Health Organization ("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 34 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
and one in every three sexually active people will get an STD by age 24. Women
are currently the fastest growing group infected with HIV and are expected to
comprise the majority of new cases by the coming year.
Currently, there are only two products that prevent the transmission of
HIV/AIDS through sexual intercourse-the latex male condom and the female condom.
19
<PAGE>
We are currently in discussion with WHO and UNAIDS regarding the role the
female condom will play as part of the International Partnership Against Aids in
Africa. The partnership is a coalition of African governments, the United
Nations, donors and the private and community sectors. Its mission is over the
next decade to help reduce the number of new HIV infections in Africa, promote
care of HIV positive persons and to mobilize society to halt the advance of
AIDS.
ADVANTAGES VERSUS THE MALE CONDOM
The female condom is currently the only available barrier contraceptive
method controlled by women which allows them to protect themselves against
unintended pregnancy and STDs, including HIV/AIDS. The most important advantage
is that a woman can control whether or not she is protected as many men do not
like to wear male condoms and may refuse to do so.
The polyurethane material that is used for the female condom offers a
number of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability that
the female condom sheath will tear during use. Clinical studies and everyday
use have shown that latex male condoms can tear as much as 4% to 8% of the times
they are used. Unlike latex, polyurethane quickly transfers heat, so the female
condom immediately warms to body temperature when it is inserted, which may
result in increased pleasure and sensation during use. The product offers an
additional benefit to the 7% to 20% of the population that is allergic to latex
and who, as a result, may be irritated by latex male condoms. To our knowledge,
there is no reported allergy to date to polyurethane. The female condom is also
more convenient, providing the option of insertion hours before sexual arousal
and as a result is less disruptive during sexual intimacy than the male condom
which requires sexual arousal for application.
COST EFFECTIVENESS
Over the past two years several studies have been completed which show that
providing the female condom in public clinics in both the United States and
countries in the developing world, is at a minimum cost effective and usually
cost saving. This is important information for governments to have in
determining where their public health dollars are allocated. These studies have
been or are about to be published and also presented at various scientific
meetings around the world.
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 us to market the
female condom throughout the European Union. In addition to the United States
and the European Union, several other countries have approved the female condom
for sale, including Canada, Japan, Russia, Australia, South Korea and Taiwan.
We believe that, in addition to its patent coverage, the female condom's
PMA approval and FDA classification as a Class III Medical Device create a
significant barrier to entry in the U.S. We estimate 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.
We believe there are no material issues or material costs associated with
our compliance with environmental laws related to the manufacture and
distribution of the female condom.
STRATEGY
Our 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, our operating expenses will not increase significantly.
20
<PAGE>
COMMERCIAL MARKETS
We market the product directly in the United States and United Kingdom. We
have commercial partners which have launched the product in 15 countries,
including Canada, Japan and France. The most recent launch was in Japan on
April 25, 2000 by our partner, Taiho Pharmaceuticals. To date, the launch and
results are proceeding as planned. We also recently entered into an exclusive
distribution agreement appointing Mayer Laboratories, Inc. as our exclusive
distributor to the commercial market in the United States.
RELATIONSHIPS AND AGREEMENTS WITH PUBLIC SECTOR ORGANIZATIONS
Currently, it is estimated that more than 1.7 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 making the female condom available decreases the amount of
unprotected sex by as much as one-third over offering only a male condom.
We have an agreement with UNAIDS to supply the female condom to developing
countries at a reduced price which is negotiated each year based on our cost of
production. The current price per unit is approximately 0.38 pounds, or $0.58.
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 the
states of New York, Pennsylvania, Florida, Mississippi, California, Louisiana,
Maryland, New Jersey, South Carolina and Illinois, and the cities of 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 since their initial shipments.
STATE-OF-ART MANUFACTURING FACILITY
We manufacture 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. Section 515(a)(3)
of the Safe Medical Amendments Act of 1990 authorizes the FDA to 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 Safe
Medical Amendments Act of 1990.
COMPETITION
The female condom competes in part with male condoms. Latex male condoms
cost less and have brand names that are more widely recognized than the female
condom. In addition, male condoms are generally manufactured and marketed by
companies with significantly greater financial resources than we. It is also
possible that other parties may develop a female condom. Competing products
could be manufactured, marketed and sold by companies with significantly greater
financial resources than we have.
EMPLOYEES
As of September 7, 2000, we had 71 full-time employees within the U.S. and
the U.K. and one part-time employee. None of our employees are represented by a
labor union. We believe that our employee relations are good.
21
<PAGE>
BACKLOG
At September 7, 2000, we had unfilled orders of $1.0 million. The
comparable amount as of the same date of the prior year was $1.1 million. All
of these unfilled orders are expected to be filled during fiscal 2000. The
unfilled orders are a result of requested shipping dates from our customers
rather than delays in manufacturing.
PATENTS AND TRADEMARKS
We currently hold 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. These patents expire between 2005 and 2113. Additional
product and technology patents are pending in Brazil, South Korea, Germany and
several other countries. The patents cover the key aspects of the female
condom, including its overall design and manufacturing process. We license the
trademark "Reality" in the United States and have trademarks on the names
"femidom" and "femy" in a number of foreign countries. We have 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 us to develop trade secrets and know-how, including proprietary
production technologies, that further secure our competitive position.
RESEARCH AND DEVELOPMENT
We had research and development costs from continuing operations of $67,429
for nine months ended June 30, 2000, $122,196 in fiscal 1999 and $2,500 in
fiscal 1998. These expenditures were primarily related to conducting
acceptability studies and analyzing second generation products.
INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
See Note 10 to Notes to Consolidated Financial Statements, included
elsewhere in this prospectus.
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 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 a number of non-U.S. countries. Wisconsin Pharmacal
Company, Inc., which then had a license from Chartex 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.
We are 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 licensing rights to the
female condom described above.
In fiscal 1995, our Board of Directors approved a plan to complete a series
of actions designed, in part, to maximize the potential of the female condom.
First, we restructured and transferred all of our assets and liabilities, other
than those related primarily to the female condom, to a newly-formed,
wholly-owned subsidiary, WPC Holdings, Inc. In January 1996, we sold WPC
Holdings to an unrelated third party. Then, in February 1996, we acquired
Chartex, renamed The Female Health Company - UK in 1997, the manufacturer and
owner of worldwide rights to, and our then sole supplier of, the female condom.
As a result of the sale of WPC Holdings and the acquisition of Chartex, we
evolved to our current state with our sole business consisting of the
manufacture, marketing and sale of the female condom.
The FDA approved the female condom for distribution in 1993 and our
manufacturing facility in 1994. Since that time, we have sold over 34 million
female condoms around the world.
22
<PAGE>
PROPERTIES
We lease 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. We also lease 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, we have subleased these premises to a
third party. We utilize warehouse space and sales fulfillment services of an
independent public warehouse located near Minneapolis, Minnesota, for storage
and distribution of the female condom. We manufacture the female condom in a
40,000 square foot leased facility located in London, England under a lease that
expires in 2015. The FDA-approved manufacturing process is subject to periodic
inspections by the FDA as well as the European Union quality group. Current
capacity at the manufacturing facility is approximately 60 million female
condoms per year. We believe the properties are adequately insured.
LEGAL PROCEEDINGS
We are not currently involved in any material pending legal proceedings.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. You may read and copy any reports, proxy statements or
other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. or at the SEC's public reference rooms in Los
Angeles, California, New York, New York and Chicago, Illinois. You can obtain
information concerning the operation of the public reference rooms by calling
the SEC at 1-800-SEC-0330. In addition, we have filed the registration
statement of which this prospectus is a part and other filings with the SEC
through its Electronic Data Gathering, Analysis and Retrieval system, and our
filings are publicly available through the SEC's site on the World Wide Web on
the Internet located at www.sec.gov.
This prospectus does not contain all of the information in the registration
statement of which this prospectus is a part and which we have filed with the
SEC. For further information about us and the securities offered by this
prospectus, you should review the registration statement, including the exhibits
filed as a part of the registration statement, at the public reference rooms.
We may update information about us by filing appendices or supplements to this
prospectus.
23
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our 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 67
and Director
Mary Ann Leeper, Ph.D President, Chief Operating Officer and Director 60
Vice President-Sales
Jack Weissman Vice President, Director and General Manager of 52
The Female Health Company (UK) Plc.
Michael Pope Vice President-International Affairs 43
Mitchell Warren Director of Finance and Administration 34
Robert R. Zic Secretary and Director 37
William R. Gargiulo, Jr. Director 72
David R. Bethune Director 59
Stephen M. Dearholt Director 53
Michael R. Walton Director 62
James R. Kerber Director 68
</TABLE>
Mr. Parrish has served as our Chief Executive Officer since 1994, and as
our Chairman of the Board and a Director since 1987. Mr. Parish also served as
our acting Chief Financial Officer and Accounting Officer from February 1996 to
March 1999. Mr. Parrish is a shareholder and has served as the President and as
a Director of Phoenix Health Care of Illinois, Inc. since 1987. Phoenix Health
Care of Illinois owns 295,501 shares of our 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 Financial Services,
LLC, a financial services company, Chairman and a Director of MIICRO Inc., a
neuroimmaging company, and a Director of Amerimmune Pharmaceuticals, Inc. Mr.
Parrish is also a trustee of Lawrence University. From 1977 until 1986, Mr.
Parrish was the President of the Global Pharmaceutical Group of G.D. Searle &
Co., a pharmaceutical/consumer products company. From 1974 until 1977, Mr.
Parrish was the President of Searle International, the foreign sales operation
of Searle. Prior to that, Mr. Parrish was Executive Vice President of Pfizer's
International Division.
Dr. Leeper has served as our President and Chief Operating Officer since
1996, as a Director since 1987, as President and Chief Executive Officer of The
Female Health Company division from May 1994 until January 1996 (when the
division was consolidated with The Female Health Company), and as our Senior
Vice President - Development from 1989 until January 1996. Dr. Leeper is a
shareholder and has served as a Vice President and Director of Phoenix Health
Care of Illinois since 1987. From 1981 until 1986, Dr. Leeper served as Vice
President - Market Development for Searle's Pharmaceutical Group and in various
Searle research and development management positions. As Vice President -
Market Development, Dr. Leeper was responsible for worldwide licensing and
acquisition, marketing and market research. In earlier positions, she was
responsible for preparation of new drug applications and was a liaison with the
24
<PAGE>
FDA. Dr. Leeper currently serves on the Board of Directors of the Temple
University School of Pharmacy and on the Board of Directors of the Northwestern
University School of Music. She is on the Board of CEDPA, an international
not-for-profit organization working on women's issues in the developing world.
Dr. Leeper is also a director of Influx, Inc., a pharmaceutical research
company.
Mr. Weissman has served as our Vice President - Sales since June 1995.
From 1992 until 1994, Mr. Weissman was Vice President - Sales for Capital
Spouts, Inc., a manufacturer of pouring spouts for gable paper cartons. 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 and Whitehall Laboratories.
Mr. Pope has served as our Vice President since 1996 and as Director and
General Manager of The Female Health Company (UK) Plc, formerly Chartex
International, Plc, since our 1996 acquisition of Chartex. Mr. Pope has also
served as a Director of The Female Health Company, Ltd., formerly Chartex
Resources Limited, since 1995. From 1990 until 1996, 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, from 1986 to 1990, Mr.
Pope was Production Manager and Technical Manager for Franklin Medical, a
manufacturer of disposable medical devices. During the period from 1982 to
1986, Mr. Pope was Site Manager, Engineering and Production Manager, Development
Manager and Silicon Manager for Warne Surgical Products.
Mr. Warren has served as our Vice President - International Affairs since
February 2000 and as our Director of International Affairs from January 1999 to
February 2000. From 1993 to 1998, Mr. Warren was employed by Population
Services International (PSI), an international social marketing and
communications organization, first as Executive Director of PSI/South Africa and
then of PSI/Europe. From 1989 to 1993, Mr. Warren was Program Director of
Medical Education for South African Blacks.
Mr. Zic has served as our Director of Finance and Administration since
March 1999. From 1998 to 1999, Mr. Zic held the dual positions of Acting
Controller and Acting Chief Financial Officer at Ladbroke's Pacific Racing
Association. From 1995 to 1998, Mr. Zic served as the Chief Accounting Manager
and Assistant Controller at Argonaut Insurance Company. In this capacity, he
was responsible for the financial and accounting operations at Argonaut's ten
divisions and the external and internal financial reporting of Argonaut and its
four subsidiaries. From 1990 to 1994, Mr. Zic was the Assistant Controller of
CalFarm Insurance Company, where he was responsible for the company's external
financial reporting duties. Mr. Zic's career began in 1986 as an auditor with
Arthur Andersen & Co.
Mr. Gargiulo has served as a Director since 1987, as our Secretary since
1996, as our Vice President from 1996 to September 30, 1998, as our Assistant
Secretary from 1989 to 1996, as Vice President International of The Female
Health Company Division from 1994 until 1996, as our Chief Operating Officer
from 1989 to 1994, and as our General Manager from 1988 to 1994. Mr. Gargiulo
is a Trustee of a trust which is a shareholder of Phoenix Health Care of
Illinois. From 1984 until 1986, Mr. Gargiulo was the Executive Vice President
of the Pharmaceutical Group of G.D. Searle & Co., in charge of Searle's European
operations. From 1976 until 1984, Mr. Gargiulo was the Vice President of
Searle's Latin American operations.
Mr. Bethune has served as a Director since January 1996. Mr. Bethune has
been Chairman and Chief Executive Officer of Atrix Laboratories since 1999.
From 1997 to 1998, Mr. Bethune held the position of President and Chief
Operating Officer of the IVAX Corporation. From 1996 to 1997, Mr. Bethune was a
consultant to the pharmaceutical industry. From 1995 to 1996, Mr. Bethune was
President and Chief Executive Officer of Aesgen, Inc., a generic pharmaceutical
company. From 1992 to 1995, Mr. Bethune was Group Vice President of American
Cyanamid Company and a member of its Executive Committee until the sale of the
company to American Home Products. He had global executive authority for human
biologicals, consumer health products, pharmaceuticals and opthalmics, as well
as medical
25
<PAGE>
research. 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 since April 1996. Mr. Dearholt is a
co-founder of and has been a partner in Response Marketing, one of the largest
privately owned life insurance marketing organizations in the United States,
since 1972. He has over 23 years of experience in direct response advertising
and database 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 us in
our purchase of Chartex. Mr. Dearholt is also very active in the nonprofit
sector. He is currently on the Board of Directors of Children's Hospital
Foundation of Wisconsin, an honorary board member of the Zoological Society of
Milwaukee, and the national Advisory Council of the Hazelden Foundation. He is
a past board member of Planned Parenthood Association of Wisconsin, and past
Chairman of the Board of the New Day Club, Inc.
Mr. Walton has served as a Director since April 1999. Mr. Walton is
President and owner of Sheboygan County Broadcasting Co., Inc., a company he
founded in 1972. In addition to its financial assets, Sheboygan County
Broadcasting Co. currently owns four radio stations. The company has focused on
start-up situations, and growing value in underperforming, and undervalued
business situations. It has purchased and sold properties in Wisconsin,
Illinois and Michigan. Prior to 1972, Mr. Walton was owner and President of
Walton Co., an advertising representative firm which he founded in New York
City. He has held sales and management positions with Forbes Magazine, The
Chicago Sun Times and Gorman Publishing Co., a trade magazine publisher
specializing in new magazines which was subsequently sold to a large
international publishing concern. Mr. Walton has served on the Boards of the
American Red Cross, the Salvation Army and the Chamber of Commerce.
Mr. Kerber has served as a Director since April 1999. Mr. Kerber has been
a business consultant to the insurance industry since January 1996. He has over
40 years of experience in operating insurance companies, predominantly those
associated with life and health. From October 1994 until January 1996, he was
Chairman, President, Chief Executive Officer and director of the 22 life and
health insurance companies which comprise the ICH Group. In 1990, Mr. Kerber
was founding partner in the Life Partners Group where he was Senior Executive
Vice President and a director. Prior to that, he was involved with operating
and consolidating over 200 life and health companies for ICH Corporation, HCA
Corporation and US Life Corporation.
Our Board of Directors has an Audit Committee. The Board's Audit Committee
is comprised of Messrs. Bethune, Dearholt and Kerber. The responsibilities of
the Audit Committee, in addition to other duties which may be specified by the
Board of Directors, include the following:
- recommendation to the Board of Directors of independent auditors;
- review of the timing, scope and results of the independent auditors' audit
examination;
- review of periodic comments and recommendations by the auditors and of our
response to the auditors' periodic comments and recommendations; and
- review of the scope and adequacy of internal accounting controls.
The Audit Committee met two times during the fiscal year ended September
30, 1999.
Our Board of Directors met 20 times during the fiscal year ended September
30, 1999.
The Board of Directors approves grants of options under the 1989, 1990 and
1994 Stock Option Plans. Any employee who is a member of the Board abstains
from voting on grants of options to him or her. Outside directors receive
one-time automatic grants of options under the Outside Director Stock Option
Plan.
26
<PAGE>
There is no standing nominating or similar committee of the Board of
Directors.
Directors who are not also our employees receive a one-time grant of
options to purchase 30,000 shares of our common stock upon their initial
election to the Board of Directors. The options are granted at an exercise
price equal to the last sale price of our common stock on the date of grant. We
also pay each outside director $1,000 for each meeting of the Board of Directors
attended by the director (excluding telephonic meetings) and reimburse the
outside director for his expenses in attending the meeting.
All directors serve until the next annual meeting of our shareholders and
until his or her successor has been elected or until his or her prior death,
resignation or removal. Each executive officer holds office until his or her
successor has been appointed or until his or her prior death, resignation or
removal.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below gives information regarding all annual, long-term and other
compensation paid by us to each of our executive officers whose total annual
salary and bonus exceeded $100,000 for services rendered during any of the years
indicated below. The individuals listed in this table are referred to elsewhere
in this prospectus as the "named executive officers."
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION
COMPENSATION AWARDS
------------- -------------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING
PRINCIPAL FISCAL SALARY AWARDS(1) OPTIONS/SARS
POSITION YEAR ($) ($) (#)
---------------------- ------ -------- ------------- ------------
<S> <C> <C> <C> <C>
O.B. Parrish . . . . . 1999 90,000 -- 200,000
Chairman and . . . . 1998 90,000 117,955(2) 204,000
Chief Executive. . . 1997 90,000 -- 164,000(3)
Officer
Mary Ann Leeper, Ph.D. 1999 225,000 -- 500,000
President and. . . . 1998 225,000 84,210(2) 290,000
Chief Operating. . . 1997 225,000 -- 200,000(3)
Officer
<FN>
(1) Represents fair market value of restricted common stock on the date of
grant based on the $2.88 closing price of our common stock on the date of grant.
(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 that date,
based on the closing price of our common stock on that date, and a fair market
value of $40,625 on September 30, 1999, based on the closing price of our common
stock on that date. For Mr. Parrish, also includes his pro rata portion of
25,000 shares of restricted stock granted to Phoenix Health Care of Illinois,
based on his 64% ownership of Phoenix Health Care of Illinois. For Dr. Leeper,
also includes her pro rata portion of the restricted stock based on her
approximately 16.7% ownership of Phoenix Health Care of Illinois. All of these
shares were granted on May 5, 1998 and vested in full on the first anniversary
of the grant date. The owner is entitled to receive any dividends declared on
these shares of restricted stock.
(3) Includes 164,000 and 200,000 options for Mr. Parrish and Dr. Leeper,
respectively, which were granted in 1995 and 1996 fiscal years but repriced in
1997.
</TABLE>
27
<PAGE>
OPTION GRANTS DURING LAST FISCAL YEAR
The following table provides certain information regarding stock options
granted to the named executive officers during the fiscal year ended September
30, 1999.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---------------------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
O.B. Parrish . . . . . 200,000(1) 12.4 0.85 6/02/09
Mary Ann Leeper, Ph.D. 500,000(1) 31.1 0.85 6/02/09
<FN>
_______________________
(1) One-third of the options vest on our achieving sales of 13,000,000 units
of the female condom in a 12 month period and having positive operating
earnings. One-third of the options vest on our achieving sales of 23,000,000
units of the female condom in a 12 month period and having positive operating
earnings. One-third of the options vest if the average closing price of our
common stock for any period of five consecutive trading days is at least $5.00
per share.
</TABLE>
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, 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN
UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT
FISCAL YEAR END FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------------------- ------------------------------- --------------------------
<S> <C> <C>
O.B. Parrish 88,000/376,000 $ 0/0
Mary Ann Leeper, Ph.D. 96,667/693,333 $ 0/0
</TABLE>
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Dr. Leeper effective May 1,
1994. The original term of Dr. Leeper's employment extended to April 30, 1997
and after April 30, 1997 her employment term renews automatically for additional
three-year terms unless notice of termination is given. The employment
agreement has automatically renewed for a term ending on April 30, 2003. We may
terminate the employment agreement at any time for cause. If Dr. Leeper is
terminated without cause, we are 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,
we are obligated to continue Dr. Leeper's participation in any of our health,
life insurance or disability plans in which Dr. Leeper participated prior to her
termination of employment. Dr. Leeper's employment agreement provided for a
base salary of $175,000 for the first year of her employment term, $195,000 for
the second year of her employment term and $225,000 for the third year of her
employment term, subject to the achievement of performance goals established by
Dr. Leeper and the Board of Directors.
28
<PAGE>
If the employment agreement is renewed beyond the initial three-year term, it
requires her base salary to be increased annually by the Board of Directors
based upon her performance and any other factors that the Board of Directors
considers appropriate. For fiscal 1998 and 1999, Dr. Leeper's base salary was
$225,000 per year. The employment agreement also provides Dr. Leeper with
various fringe benefits including an annual cash bonus of up to 100% of her base
salary. The Board of Directors may award the cash bonus to Dr. Leeper in its
discretion. To date, Dr. Leeper has not been awarded a cash bonus.
CHANGE OF CONTROL AGREEMENTS
In fiscal 1999, we entered into Change of Control Agreements with each of
O.B. Parrish, our Chairman and Chief Executive Officer, Mary Ann Leeper, our
President and Chief Operating Officer, and Michael Pope, our Vice President.
These agreements essentially act as springing employment agreements which
provide that, upon a change of control, as defined in the agreement, we will
continue to employ the executive for a period of three years in the same
capacities and with the same compensation and benefits as the executive was
receiving prior to the change of control, in each case as specified in the
agreements. If the executive is terminated without cause or if he or she quits
for good reason, in each case as defined in the agreements, after the change of
control, the executive is generally entitled to receive a severance payment from
us equal to the amount of compensation remaining to be paid to the executive
under the agreement for the balance of the three-year term.
29
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information regarding the beneficial ownership
of our common stock as of September 7, 2000 by:
- each stockholder known by us to be the beneficial owner of more than 5% of
our common stock;
- each director;
- each named executive officer; and
- all directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons and
entities included in the table have sole voting and investment power with
respect to all shares beneficially owned, subject to applicable community
property laws. Shares of common stock subject to options that are either
currently exercisable or exercisable within 60 days of June 30, 2000 are treated
as outstanding and beneficially owned by the option holder for the purpose of
computing the percentage ownership of the option holder. However, these shares
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
-------------------
NAME NUMBER PERCENT
---------------------------------------------- --------- --------
<S> <C> <C>
O.B. Parrish (1) . . . . . . . . . . . . . . . 506,501 3.8%
William R. Gargiulo, Jr. (1) . . . . . . . . . 352,168 2.6
Mary Ann Leeper, Ph.D. (1) . . . . . . . . . . 462,168 3.4
David R. Bethune (2) . . . . . . . . . . . . . 50,000 *
Michael R. Walton. . . . . . . . . . . . . . . 527,810 4.0
James R. Kerber. . . . . . . . . . . . . . . . 343,710 2.6
Stephen M. Dearholt (3). . . . . . . . . . . . 2,521,720 17.3
Gary Benson (4). . . . . . . . . . . . . . . . 5,883,047 30.9
All directors and executive
officers as a group (eleven persons) (1)(3)(5) 4,144,955 27.8
__________
<FN>
* Less than 1%.
(1) Includes 294,501 shares owned by Phoenix Health Care of Illinois and
30,000 shares under option to Phoenix Health Care of Illinois. Under the rules
of the Securities and Exchange Commission, Messrs. Parrish and Gargiulo and Dr.
Leeper may share voting and dispositive power as to these 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 Health Care of
Illinois. For Dr. Leeper, also includes 40,900 shares owned by her and 96,667
shares under option to her; for Mr. Parrish, also includes 71,500 shares owned
by him, 22,500 shares under warrants to him and 88,000 shares under option to
him; and for Mr. Gargiulo, also includes 10,500 shares owned by him, 16,667
shares under option to him and 500 shares held by the William R. Gargiulo 1991
Convertible Trust of which Mr. Gargiulo and his spouse are the trustees and
share voting and investment power over such shares.
(2) Represents options which are currently exercisable.
30
<PAGE>
(3) Includes 524,742 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, 36,200 shares held in a self-directed
IRA; 162,898 shares held by the Mary C. Dearholt Trust of which Mr. Dearholt, a
sibling and his mother are trustees; 18,100 shares held by Mr. Dearholt's minor
child; 418,100 shares held by the John W. Dearholt Trust of which Mr. Dearholt
is a co-trustee with a sibling, and 60,000 shares of preferred stock held by the
Mary C. Dearholt Trust, of which Mr. Dearholt, a sibling and his mother are
trustees, that are convertible share-for-share into our common stock. Mr.
Dearholt shares the power to vote and dispose of 640,998 shares of common stock
(including 60,000 shares of preferred stock convertible into common stock) held
by the Mary C. Dearholt Trust, the John W. Dearholt Trust and the James W.
Dearholt Trust. Mr. Dearholt has sole power to vote and dispose of the
remaining shares of common stock, except that North Central Trust has the sole
power to vote and dispose of the 9,680 shares of common stock held by the
Response Marketing Money Purchase Plan. Also includes warrants to purchase
1,172,500 shares of common stock and options to purchase 50,000 shares.
(4) Includes warrants to purchase 1,500,000 shares of common stock and
assumes the conversion as of September 7, 2000 of all principal and accrued but
unpaid interest under convertible debentures in the principal amount $1,500,000.
The original principal balance plus any accrued but unpaid interest of the
convertible debentures may be converted into common stock at Mr. Benson's
election at any time based on a per share price equal to the lesser of (a) 70%
of the market price of our common stock at the time of conversion; or (b) $1.00.
Mr. Benson's address is 2925 Dean Parkway, Minneapolis, Minnesota 55416.
(5) Includes 50,000 shares under option held by Mr. Bethune.
</TABLE>
31
<PAGE>
RELATED PARTY TRANSACTIONS
On February 18, 1999, we borrowed $50,000 from O.B. Parrish, our Chairman
and Chief Executive Officer. The borrowing was completed through the execution
of a $50,000, one-year promissory note payable by us to Mr. Parrish and a Note
Purchase and Warrant Agreement and Stock Issuance Agreement. Mr. Parrish was
granted warrants to purchase 10,000 shares of our common stock at an exercise
price of $1.35 per share. The exercise price of the warrants equaled 80% of the
average market price of our common stock for the five trading days prior to the
date of issuance. The warrants expire upon the earlier of their exercise or
nine years after the date of their issuance. Effective February 18, 2000, we
extended the due date of the note to February 18, 2001, and in connection with
this extension, we issued to Mr. Parrish warrants to purchase 12,500 shares of
our common stock at an exercise price of $0.72 per share, which equaled 80% of
the average market price of our common stock for the five trading days prior to
the date of issuance. The warrants expire upon the earlier of their exercise or
ten years after the date of their issuance. Under the Stock Issuance Agreement,
if we fail to pay the $50,000 promissory note when due, we must issue 10,000
shares of our common stock to Mr. Parrish. The issuance will not, however,
alleviate our liability under the note. We also granted Mr. Parrish securities
registration rights for any common stock he receives from us under these
warrants or the Stock Issuance Agreement.
On February 12, 1999, we borrowed $250,000 from Mr. Dearholt. The
borrowing was effectuated in the form of a $250,000, one-year promissory note
payable by us to Mr. Dearholt. As part of this transaction, we entered into a
Note Purchase and Warrant Agreement and a Stock Issuance Agreement. Mr.
Dearholt received a warrant to purchase 50,000 shares of our common stock at an
exercise price of $1.248 per share. The exercise price of the warrants equaled
80% of the average market price of our common stock for the five trading days
prior to the date of issuance. The warrants expire upon the earlier of their
exercise or nine years after the date of their issuance. Effective February 12,
2000, we extended the due date of the note to February 12, 2001, and in
connection with this extension, we issued to Mr. Dearholt warrants to purchase
62,500 shares of our common stock at an exercise price of $0.77 per share, which
equaled 80% of the average market price of our common stock for the five trading
days prior to the date of issuance. The warrants expire upon the earlier of
their exercise or ten years after the date of their issuance. Under the Stock
Issuance Agreement, if we fail to pay the $250,000 under the note when due, we
must issue 50,000 shares of our common stock to Mr. Dearholt. This issuance
will not, however, alleviate our liability under the note. We also granted Mr.
Dearholt securities registration rights for any common stock he receives from us
under these warrants or the Stock Issuance Agreement.
During 1998, as compensation for consulting services, we awarded Phoenix
Health Care of Illinois, Inc., a corporation which is owned in part and
controlled by O.B. Parrish, Mary Ann Leeper and William R. Gargiulo, Jr., 25,000
shares of restricted stock with a market value of approximately $93,750.
On March 25, 1997, 1998, 1999 and 2000, we extended a $1 million, one-year
promissory note payable by us to Mr. Dearholt for a previous loan Mr. Dearholt
made to us. The promissory note is now payable in full on March 25, 2001 and
bears interest at 12% annually, payable monthly. We used $0.2 million of the
note proceeds to provide working capital needed to fund the initial stages of
our U.S. marketing campaign and $0.8 million of the note proceeds to fund
operating losses. The borrowing transactions were effected in the form of a
promissory note from us to Mr. Dearholt and related Note Purchase and Warrant
Agreements and a Stock Issuance Agreement. Under the 1997, 1998 and 1999 Note
Purchase and Warrant Agreements, we issued to Mr. Dearholt warrants to purchase
200,000 shares of common stock in 1997 at an exercise price of $1.848 per share,
200,000 shares of common stock in 1998 at an exercise price of $2.25 per share
and 200,000 shares of common stock in 1999 at an exercise price of $1.16 per
share. In connection with the extension of the note to March 25, 2001, we
issued warrants to purchase 250,000 shares of our common stock in 2000 at an
exercise price of $0.71 per share. In each case, the exercise price of the
warrants equaled 80% of the market price of our common stock on the date of
issuance. The warrants expire upon the earlier of their exercise or on March
25, 2005 for the warrants issued in 1997, March 25, 2007 for the warrants issued
in 1998, March 25, 2009 for the warrants issued in 1999, and March 25, 2010 for
the warrants issued in 2000. Under the Stock Issuance Agreement, if we fail to
pay the $1 million under the note when due, we must issue 200,000 shares of our
common stock to Mr. Dearholt. This issuance will not, however, alleviate our
liability under the note. We also granted Mr. Dearholt securities registration
rights for any common stock he receives from us under these warrants or the
Stock Issuance Agreement. In consideration of Mr. Dearholt's agreement to
extend the note's due date to March 25, 2000, we extended the expiration date of
warrants held by Mr. Dearholt to purchase 200,000 shares of our common stock
from March 25, 2001 to March 25, 2002.
32
<PAGE>
On September 24, 1999, we completed a private placement of 666,671 shares
of our common stock to various investors at a purchase price of $0.75 per share,
representing a discount of 12% from the closing price of a share of our common
stock on the Over the Counter Bulletin Board on that date. Stephen M. Dearholt,
one of our directors, purchased 266,667 shares for $200,000 in this private
placement. The terms of Mr. Dearholt's purchase were identical to the terms
offered to the other, unrelated investors. As part of this private placement,
we granted all of the investors, including Mr. Dearholt, registration rights
which require that we register the investors' resale of these shares.
On June 14, 2000, we completed a private placement of 400,000 shares of our
common stock to The John W. Dearholt Trust at a price of $0.50 per share,
representing a discount of 6% from the closing price of our common stock on the
Over the Counter Bulletin Board on that date. Stephen M. Dearholt is a
co-trustee of this trust. As part of this private placement, we granted the
investor registration rights which require that we register the investor's
resale of those shares. The registration statement, of which this prospectus is
a part, registers this investor's resale from time to time of those shares.
It has been and currently is our policy that transactions between us and
our officers, directors, principal shareholders or affiliates are to be on terms
no less favorable to us than could be obtained from unaffiliated parties. We
intend that any future transactions between us and our officers, directors,
principal shareholders or affiliates will be approved by a majority of the
directors who are not financially interested in the transaction.
33
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 27 million shares of common stock,
$.01 par value per share and 5 million shares of Class A Preferred Stock, $.01
par value per share. The Class A Preferred Stock may be issued in series, at
any times and with any terms, that the Board of Directors considers appropriate.
To date, the Board of Directors has authorized for issuance 1,040,000 shares of
Class A Preferred Stock--Series 1, of which 660,000 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. Our 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.
Accordingly, we currently have 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 for the payment of dividends. Upon
liquidation or dissolution, holders of common stock are entitled to share, based
on the number of shares owned, in our remaining assets which may be available
for distribution after payment of our creditors and satisfaction of any accrued
but unpaid dividends on the Class A Preferred Stock 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 our directors.
All outstanding shares of common stock are fully paid and nonassessable.
Wisconsin law, however, may make our shareholders personally liable for unpaid
wages due employees for up to six months' services, but not in an amount greater
than the par value of the shares.
CLASS A PREFERRED STOCK
The 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, 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 out of our remaining assets. Holders of
shares of Class A Preferred Stock will have the right, at any time on or before
the redemption of the shares, to surrender the certificate evidencing the shares
of Class A Preferred Stock and receive upon conversion of the shares of Class A
Preferred Stock, 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 are entitled to cast one vote per share held of record by them
at all meetings of our shareholders.
Class A Preferred Stock--Series 1
As authorized by our 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, 660,000 of
which are currently outstanding. We have no 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, which currently is $2.50
per share and is 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 liquidation.
Dividends on the Series 1 Preferred
34
<PAGE>
Stock must be paid in full before dividends may be paid on any other class of
our stock 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 for the payment of
dividends. Dividends are payable on October 1 of each year. Dividends which
are not paid on the 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. 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. We may redeem the
Series 1 Preferred Stock on or after August 1, 2000, unless the holder converts
the shares before our redemption is effective, at a price of $2.50 per share
plus all accrued but unpaid dividends. Upon a liquidation, 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 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 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, each share of
the Series 2 Preferred Stock outstanding at the time of liquidation is entitled
to a liquidation preference equal to the purchase price paid for each 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 the rights of the holders of common stock, including dividend
rights, rights upon liquidation and voting rights. The Preferred Stock could
also be issued by us to defend against the threat of a takeover, if the Board of
Directors determines that the takeover is not in our best interests or the best
interests of our shareholders. This could occur even if a takeover was favored
by a majority of shareholders and was at a premium to the market price of the
common stock. We have no current plans or intention to issue additional shares
of Class A Preferred Stock.
CONVERTIBLE DEBENTURES
On May 19, 1999 and June 3, 1999, we issued convertible debentures to five
investors in the principal amount of $1,500,000. The convertible debentures
bear interest at 8% annually and originally had a one-year term. However, we
have elected under the terms of the convertible debenture to extend the
repayment term for an additional year. Upon this extension, we issued to the
investors warrants to purchase 375,000 shares of our common stock having the
same terms and conditions as the warrants issued to the investors described
below. One million dollars of the convertible debentures is payable on May 19,
2001, with the remaining $500,000 payable on June 3, 2001. Interest on the
convertible debentures is payable quarterly either in cash or, at the investor's
option, common stock based on the stock's then fair market value.
The investors may elect to convert the original principal balance of
convertible debentures plus any accrued but unpaid interest into common stock at
any time after one year from the date they were issued based on a per share
price equal to the lesser of:
- 70% of the market price of the common stock at the time of conversion; or
- $1.00.
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<PAGE>
Payment of the convertible debentures is secured by a first priority
security interest in all of our assets. In addition, if we default in payment
of principal or interest on the convertible debentures, we must immediately
issue 1,500,000 shares of our common stock to the investors at no cost and that
issuance will not in any way impair the other rights the investors possess,
including the right to demand payment of the convertible debentures.
WARRANTS
We also issued to the purchasers of the convertible debentures warrants to
purchase 1,875,000 shares of our common stock. These warrants are exercisable
by the investors at any time within five years after the date of their issuance
at an exercise price per share equal to the lesser of:
- 70% of the market price of our common stock on the date of exercise; or
- $1.00.
In addition, as part of the consideration that we paid R.J. Steichen &
Company, our placement agent in the offering of the convertible debentures and
warrants, we also issued warrants to purchase a total of 337,500 shares of our
common stock to R.J. Steichen. The warrants issued to R.J. Steichen are
exercisable at any time during a period of four years commencing one year after
the date of the private placement at an exercise price of $1.00 per share.
The warrants issued to the investors and R.J. Steichen contain provisions
that protect the holder against dilution by adjustment of the exercise price and
number of shares to be received upon exercise. Adjustments will occur in the
event, among others, of a merger, stock split or reverse stock split, stock
dividend or recapitalization. We are not required to issue fractional shares
upon the exercise of the warrants. The holder of the warrants will not possess
any rights as a stockholder until the holder exercises the warrants.
The warrants may be exercised upon surrender on or before the expiration
date of the warrants at our offices, with an exercise form completed and
executed as indicated, accompanied by payment of the exercise price for the
number of shares for which the warrant is being exercised. The exercise price
is payable by check or bank draft payable to our order or by wire transfer or,
in the case of the R.J. Steichen, by a "cashless exercise," in which the number
of shares of common stock underlying the warrant having a fair market value
equal to the total exercise price are cancelled as payment of the exercise
price.
For the life of the warrants and the convertible debentures, the holder 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 or conversion of the convertible debentures.
The warrant or convertible debenture holder should be expected to exercise the
warrant or convertible debenture at a time when we would likely be able to
obtain any needed capital by an offering of common stock on terms more favorable
than those provided for by the warrant or convertible debenture. Furthermore,
the terms on which we could obtain additional capital during the life of the
warrant or convertible debenture may be adversely affected.
TRANSFER AGENT
The transfer agent and registrar for the common stock is Firstar Bank,
N.A., Milwaukee, Wisconsin.
WISCONSIN ANTI-TAKEOVER PROVISIONS
Section 180.1150 of the Wisconsin Business Corporation Law provides that
the voting power of shares of public corporations, such as us, which are held by
any person holding in excess of 20% of the voting power of our stock shall be
limited to 10% of the full voting power of the shares. This statutory voting
restriction does not apply to shares acquired directly from us, acquired in a
transaction incident to which our shareholders vote to restore the full voting
power of the shares and under 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.
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<PAGE>
Section 180.1141 of the Wisconsin Business Corporation Law provides that a
"resident domestic corporation," such as us, may not engage in a "business
combination" with a person beneficially owning 10% or more of the voting power
of our outstanding stock for three years after the 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 our Board of Directors. After the
three-year period, a business combination that was not so approved can be
completed 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 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 Securities
Exchange Act of 1934 and shares acquired before September 10, 1987.
INDEMNIFICATION
Our directors and officers are entitled to statutory rights to be
indemnified by us against litigation-related liabilities and expenses if the
director or officer is either successful in the defense of litigation or is
otherwise determined not to have engaged in willful misconduct, knowingly
violated the law, failed to deal fairly with us or our shareholders or derived
an improper personal benefit in the performance of his duties to us. These
rights are incorporated in our By-Laws. To the extent that indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons, we have been advised that in the opinion of
the Securities and Exchange Commission, the indemnification provisions are
against public policy as expressed in the Securities Act and are, therefore,
unenforceable.
37
<PAGE>
SELLING STOCKHOLDERS
Information regarding beneficial ownership of our common stock by the
selling stockholders as of September 7, 2000 follows. The table assumes that
the selling stockholders sell all shares offered under this prospectus. We can
make no assurance as to how many of the shares offered that the selling
stockholders will in fact sell.
<TABLE>
<CAPTION>
SHARES OWNED SHARES BEING SHARES OWNED
SELLING STOCKHOLDERS BEFORE OFFERING OFFERED AFTER OFFERING
-------------------------- -------------------------- ------------ ------------------------
NUMBER PERCENT NUMBER PERCENT
---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
The John W. Dearholt Trust 418,100 (1) 3.1% 400,000 18,100 *
c/o Stephen M. Dearholt
741 N. Milwaukee Street
Suite 500
Milwaukee, WI 53202
Jerry Popiel 150,000 * 100,000 50,000 *
Geotek
8036 40th Avenue
Denver, CO 80207
James Chase
7815 North River Road
Milwaukee, WI 53217 360,000 2.7% 150,000 210,000 1.6%
__________________
<FN>
* Less than 1%.
(1) Stephen M. Dearholt, one of our directors, is a co-trustee of The John W. Dearholt
Trust. The number of shares listed on the table does not include 2,103,620 shares of our
common stock beneficially owned by Mr. Dearholt. See "Principal Shareholders."
</TABLE>
On June 14, 2000, we completed a private placement of 500,000 shares of our
common stock to Mr. Popiel and The John W. Dearholt Trust at a price of $0.50
per share, representing a discount of 6% from the closing price of our common
stock on the OTC Bulletin Board on that date. Stephen M. Dearholt, a co-trustee
of The John W. Dearholt Trust, is one of our directors. For information
regarding Mr. Dearholt and his material transactions with us, see "Management",
"Principal Shareholders" and "Related Party Transactions."
On June 15, 2000, we issued 150,000 shares of our common stock to Mr. Chase
as compensation for investor relations and consulting services.
We have agreed to bear certain expenses (other than broker discounts and
commissions, if any) in connection with the registration statement.
PLAN OF DISTRIBUTION
We have been advised by the selling stockholders that the selling
stockholders may sell the shares from time to time in transactions on the OTC
Bulletin Board, 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 stockholders 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 stockholders or the purchasers of
the shares for whom the broker-dealer may act as an agent or to whom it may sell
the shares as a principal, or both. The compensation to a particular
broker-dealer may be in excess of customary commissions.
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<PAGE>
Broker-dealers who act in connection with the sale of the shares may 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
underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in transactions as agent may receive
commissions from the selling stockholders and, if they act as agent for the
purchaser of the shares, from the purchaser. Broker-dealers may agree with the
selling stockholders to sell a specified number of shares at a stipulated price
per share and, to the extent a broker-dealer is unable to do so acting as agent
for the selling stockholders, to purchase as principal any unsold shares at the
price required to fulfill the broker-dealer commitment to the selling
stockholders. Broker-dealers who acquire shares as principal may resell the
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 may pay to or receive from the
purchasers of the shares commissions computed as described above. To the extent
required under the Securities Act, a supplemental prospectus will be filed,
disclosing:
- the name of the broker-dealers;
- the number of shares involved;
- the price at which the shares are to be sold;
- the commissions paid or discounts or concessions allowed to the
broker-dealers, where applicable;
- that broker-dealers did not conduct any investigation to verify the
information in this prospectus, as supplemented; and
- 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 the common stock for a period beginning when the person
becomes a distribution participant and ending upon the 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, we and the selling stockholders
will be subject to applicable provisions of the Exchange Act, including Rule
10b-5 and to the extent we and the selling stockholders are distribution
participants, Regulation M. These rules and regulations may affect the
marketability of the shares.
The selling stockholders will pay all commissions associated with the sale
of the shares. The shares offered by this prospectus are being registered to
comply with contractual obligations, and the we have paid the expenses of the
preparation of this prospectus. We have also agreed to indemnify the selling
stockholders against various liabilities, including liabilities under the
Securities Act, or, if the indemnity is unavailable, to contribute toward
amounts required to be paid.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.,
Milwaukee, Wisconsin.
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<PAGE>
EXPERTS
The consolidated financial statements of The Female Health Company at
September 30, 1999 and for the two years in the period ended September 30, 1999
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 our 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.
40
<PAGE>
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, 1999 . . . . . . . . F-2
Consolidated Statements of Operations for the years ended
September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 1999 and 1998 . . . . . . . . . . . . . . . . . . . F-5 and F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . F-7 through F-20
Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheet
as of June 30, 2000 . . . . . . . . . . . . . . . . . . . . . . . F-21
Unaudited Condensed Consolidated Statements of Operations
for the Nine Months Ended June 30, 2000 and 1999. . . . . . . . . F-22
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 2000 and 1999. . . . . . . . . F-23
Notes to Unaudited Condensed Consolidated Financial Statements. . . . F-24 through F-28
</TABLE>
41
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Female Health Company
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of The Female Health
Company and subsidiaries, as of September 30, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended September 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 1999, and the results of their
operations and their cash flows for the years ended September 30, 1999 and 1998,
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 13, 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 13. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts of classification of liabilities that may result from the outcome of
this uncertainty.
/s/ McGladrey & Pullen, LLP
Schaumburg, Illinois
November 11, 1999
F-1
<PAGE>
THE FEMALE HEALTH COMPANY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 570,709
Accounts receivable, net of allowance for doubtful accounts
of $108,000 and allowance for product returns of $227,000. . . 1,572,455
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,015,202
Prepaid expenses and other current assets. . . . . . . . . . . . 477,482
-------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . 3,635,848
-------------
Other Assets
Intellectual property, net of accumulated amortization of
$455,600 . . . . . . . . . . . . . . . . . . . . . . . . . . . 756,902
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 157,111
-------------
914,013
-------------
Property, Plant and Equipment
Equipment, furniture and fixtures. . . . . . . . . . . . . . . . 3,943,710
Less accumulated depreciation. . . . . . . . . . . . . . . . . . 1,986,428
-------------
1,957,282
-------------
$ 6,507,143
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable, related party, net of unamortized discount of
$115,377 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,184,623
Convertible debentures, net of unamortized discount of $680,645. 819,355
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 612,043
Accrued expenses and other current liabilities . . . . . . . . . 424,193
Preferred dividends payable. . . . . . . . . . . . . . . . . . . 73,553
-------------
Total current liabilities. . . . . . . . . . . . . . . . 3,113,767
-------------
Long-Term Liabilities
Deferred gain on sale of facility. . . . . . . . . . . . . . . . 1,583,260
Other long term liabilities. . . . . . . . . . . . . . . . . . . 87,146
-------------
1,670,406
-------------
Stockholders' Equity
Convertible Preferred Stock, Series 1, par value $.01 per share.
Authorized 5,000,000 shares; issued and outstanding 660,000
shares.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,600
Common Stock, par value $.01 per share. Authorized 22,000,000
shares; issued and outstanding 11,929,580 shares.. . . . . . . 119,297
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 46,820,778
Unearned consulting fees . . . . . . . . . . . . . . . . . . . . (201,374)
Accumulated other comprehensive income . . . . . . . . . . . . . 189,847
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (45,180,102)
-------------
1,755,046
Treasury Stock, at cost, 20,000 shares of common stock . . . . . (32,076)
-------------
1,722,970
-------------
$ 6,507,143
=============
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . . . . . . $ 4,715,477 $ 5,451,399
Cost of products sold . . . . . . . . . . . . . . . . . . 4,598,747 5,273,369
------------ ------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . 116,730 178,030
------------ ------------
Operating expenses:
Advertising and promotion . . . . . . . . . . . . . . . 251,867 433,821
Selling, general and administrative . . . . . . . . . . 2,890,860 2,895,108
------------ ------------
Total operating expenses. . . . . . . . . . . . 3,142,727 3,328,929
------------ ------------
OPERATING (LOSS). . . . . . . . . . . . . . . . (3,025,997) (3,150,899)
------------ ------------
Nonoperating income (expense):
Interest expense. . . . . . . . . . . . . . . . . . . . (860,523) (456,662)
Interest income . . . . . . . . . . . . . . . . . . . . 36,030 133,104
Nonoperating income . . . . . . . . . . . . . . . . . . 100,181 117,141
------------ ------------
(724,312) (206,417)
------------ ------------
NET (LOSS). . . . . . . . . . . . . . . . . . . (3,750,309) (3,357,316)
Preferred dividends accreted, Series 2. . . . . . . . . . -- 817,000
Preferred dividends, Series 1 . . . . . . . . . . . . . . 133,919 132,669
------------ ------------
Net (loss) attributable to common stockholders. $(3,884,228) $(4,306,985)
============ ============
Net (loss) per common share outstanding . . . . (0.36) (0.43)
Weighted average common shares outstanding. . . . . . . . 10,890,173 9,971,493
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Other
Preferred Common Paid-in Consulting Comprehensive Accumulated
Stock Stock Capital Fees Income Deficit
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997. . . . . . . $ 6,800 $ 95,145 $40,238,387 - $ 203,195 $(36,988,889)
Issuance of 729,927 shares of
Preferred Stock (net of offering
costs of $156,616) . . . . . . . . . . . 7,299 - 1,836,085 - - -
Issuance of 729,927 shares of
Common Stock upon conversion
of Preferred Stock . . . . . . . . . . . (7,299) 7,299 - - - -
Issuance of 29,400 shares of
Common Stock upon exercise
of stock options . . . . . . . . . . . . - 294 58,506 - - -
Issuance of 25,000 shares of
Common Stock for consulting
services . . . . . . . . . . . . . . . . - 250 93,500 - - -
Issuance of 107,000 shares of
Common Stock under stock
bonus plan . . . . . . . . . . . . . . . - 1,070 306,555 - - -
Issuance of 10,000 shares of
Common Stock upon exercise
of warrants. . . . . . . . . . . . . . . - 100 19,900 - - -
Issuance of 18,000 options to employees. . - - 51,660 - - -
Issuance of warrants with short-
term notes payable . . . . . . . . . . . - - 297,500 - - -
Issuance of warrants for
professional services. . . . . . . . . . - - 114,750 - - -
Preferred Stock dividends. . . . . . . . . - - - - - (132,669)
Preferred Stock dividends accreted . . . . - - 817,000 - - (817,000)
Purchase of 10,000 shares of
Common Stock held in Treasury. . . . . . - - - - - -
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . - - - - - (3,357,316)
Foreign currency translation adjustment. - - - - 101,785 -
Comprehensive income (loss)
------------------------------------------
Balance at September 30, 1998
(balance forward). . . . . . . . . . . . $ 6,800 $104,158 $43,833,843 - $ 304,980 $(41,295,874)
Issuance of 482,964 shares of
Common Stock under the equity
line of credit . . . . . . . . . . . . . - 4,685 480,315 - - -
Issuance of 20,718 shares of
Common Stock upon conversion
of Preferred Stock . . . . . . . . . . . (200) 200 - - - -
Issuance of 120,000 shares of
Common Stock upon exercise
of warrants. . . . . . . . . . . . . . . - 1,200 128,760 - - -
Issuance of 175,000 shares of
Common Stock for consulting
services . . . . . . . . . . . . . . . . - 1,750 184,188 (185,938) - -
Issuance of warrants with
convertible debentures . . . . . . . . . - - 1,276,300 - - -
Issuance of 15,000 shares of
Common Stock under stock
bonus plan . . . . . . . . . . . . . . . - 150 23,288 - - -
Issuance of 18,000 shares of
Common Stock upon exercise
of stock options . . . . . . . . . . . . - 180 16,695 - - -
Issuance of warrants with
short-term notes payable . . . . . . . . - - 253,515 - - -
Issuance of 30,691 shares of
Common Stock as payment of
preferred stock dividends. . . . . . . . - 307 31,058 - - -
Issuance of warrants for
consulting services. . . . . . . . . . . - - 99,483 (99,483) - -
Preferred Stock dividends. . . . . . . . . - - - - - (133,919)
Purchase of 10,000 Shares of
Common Stock held in Treasury. . . . . . - - - - - -
Issuance of 666,671 shares of
Common Stock . . . . . . . . . . . . . . - 6,667 493,333 - - -
Amortization of unearned
consulting fees. . . . . . . . . . . . . - - - 84,047 - -
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . - - - - - (3,750,309)
Foreign currency translation
adjustment . . . . . . . . . . . . . . - - - - (115,133) -
Comprehensive income (loss)
Balance at September 30, 1999. . . . . . . $ 6,600 $119,297 $46,820,778 $ (201,374) $ 189,847 $(45,180,102)
------------------------------------------ ----------- -------- ----------- ------------ --------------- -------------
Cost of
Treasury
Stock Total
<S> <C> <C>
Balance at September 30, 1997. . . . . . . - $ 3,554,638
Issuance of 729,927 shares of
Preferred Stock (net of offering
costs of $156,616) . . . . . . . . . . . - 1,843,384
Issuance of 729,927 shares of
Common Stock upon conversion
of Preferred Stock . . . . . . . . . . . - -
Issuance of 29,400 shares of
Common Stock upon exercise
of stock options . . . . . . . . . . . . - 58,800
Issuance of 25,000 shares of
Common Stock for consulting
services . . . . . . . . . . . . . . . . - 93,750
Issuance of 107,000 shares of
Common Stock under stock
bonus plan . . . . . . . . . . . . . . . - 307,625
Issuance of 10,000 shares of
Common Stock upon exercise
of warrants. . . . . . . . . . . . . . . - 20,000
Issuance of 18,000 options to employees. . - 51,660
Issuance of warrants with short-
term notes payable . . . . . . . . . . . - 297,500
Issuance of warrants for
professional services. . . . . . . . . . - 114,750
Preferred Stock dividends. . . . . . . . . - (132,669)
Preferred Stock dividends accreted . . . . - -
Purchase of 10,000 shares of
Common Stock held in Treasury. . . . . . (19,330) (19,330)
Comprehensive income (loss): -
Net (loss) . . . . . . . . . . . . . . . - (3,357,316)
Foreign currency translation adjustment. - 101,785
------------
Comprehensive income (loss) (3,255,531)
------------------------------------------ ------------
Balance at September 30, 1998
(balance forward). . . . . . . . . . . . $ (19,330) $ 2,934,577
Issuance of 482,964 shares of
Common Stock under the equity
line of credit . . . . . . . . . . . . . - 485,000
Issuance of 20,718 shares of
Common Stock upon conversion
of Preferred Stock . . . . . . . . . . . - -
Issuance of 120,000 shares of
Common Stock upon exercise
of warrants. . . . . . . . . . . . . . . - 129,960
Issuance of 175,000 shares of
Common Stock for consulting
services . . . . . . . . . . . . . . . . - -
Issuance of warrants with
convertible debentures . . . . . . . . . - 1,276,300
Issuance of 15,000 shares of
Common Stock under stock
bonus plan . . . . . . . . . . . . . . . - 23,438
Issuance of 18,000 shares of
Common Stock upon exercise
of stock options . . . . . . . . . . . . - 16,875
Issuance of warrants with
short-term notes payable . . . . . . . . - 253,515
Issuance of 30,691 shares of
Common Stock as payment of
preferred stock dividends. . . . . . . . - 31,365
Issuance of warrants for
consulting services. . . . . . . . . . . - -
Preferred Stock dividends. . . . . . . . . - (133,919)
Purchase of 10,000 Shares of
Common Stock held in Treasury. . . . . . (12,746) (12,746)
Issuance of 666,671 shares of
Common Stock . . . . . . . . . . . . . . - 500,000
Amortization of unearned
consulting fees. . . . . . . . . . . . . - 84,047
Comprehensive income (loss):
Net (loss) . . . . . . . . . . . . . . . - (3,750,309)
Foreign currency translation
adjustment . . . . . . . . . . . . . . - (115,133)
------------
Comprehensive income (loss) (3,865,442)
Balance at September 30, 1999. . . . . . . $ (32,076) $ 1,722,970
------------------------------------------ ---------- ------------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $(3,750,309) $(3,357,316)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 468,758 533,994
Amortization of intellectual property rights . . . . . . 119,501 123,437
Provision for (recovery of) inventory obsolescence . . . (6,394) (857,450)
Provision for doubtful accounts, returns and discounts . 22,460 24,717
Issuance of common stock for bonuses and
consulting services . . . . . . . . . . . . . . . . . . 23,438 401,375
Issuance and revaluation of warrants and options 166,410
Amortization of unearned consulting fees . . . . . . . . 84,047 -
Amortization of discounts on notes payable
and convertible debentures. . . . . . . . . . . . . . . 671,854 329,327
Amortization of deferred income realized
on U.K. grant . . . . . . . . . . . . . . . . . . . . . (142,723) (61,274)
Amortization of deferred gain on sale and leaseback
of building . . . . . . . . . . . . . . . . . . . . . . (91,772) (94,795)
Amortization of debt issuance costs. . . . . . . . . . . 174,124 -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (507,929) (538,219)
Inventories . . . . . . . . . . . . . . . . . . . . . . (105,433) 891,421
Prepaid expenses and other current assets . . . . . . . 149,617 (92,058)
Accounts payable. . . . . . . . . . . . . . . . . . . . 128,165 (411,286)
Accrued expenses and other current liabilities. . . . . (78,733) 188,798
------------ ------------
Net cash (used in) operating activities. . . . . . . (2,841,329) (2,752,919)
------------ ------------
INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . (22,637) (58,827)
Proceeds from repayment of note receivable . . . . . . . . . - 750,000
Proceeds from return of lease deposits . . . . . . . . . . . - 90,859
------------ ------------
Net cash (used in) provided by investing activities. (22,637) 782,032
------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock. . . . . . . . . . - 1,843,384
Proceeds from issuance of common stock . . . . . . . . . . . 500,000 -
Proceeds from issuance of common stock under the
equity line of credit. . . . . . . . . . . . . . . . . . . 485,000 -
Proceeds from issuance of common stock
of options and warrants . . . . . . . . . . . . . . . . . . 146,835 78,800
Proceeds from related party notes issued . . . . . . . . . . 1,300,000 1,000,000
Proceeds from convertible debentures issued. . . . . . . . . 1,305,000 -
Purchase of common stock held in treasury. . . . . . . . . . (12,746) (19,330)
Dividend paid on preferred stock . . . . . . . . . . . . . . (161,670) -
Payments on notes payable, related party . . . . . . . . . . (1,000,000) (1,000,000)
Payments on long-term debt and capital lease obligations . . (638,620) (113,131)
------------ ------------
Net cash provided by financing activities. . . . . . 1,923,799 1,789,723
------------ ------------
</TABLE>
F-5
<PAGE>
THE FEMALE HEALTH COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Effect of exchange rate changes on cash. . . . . . . . . . . . $ 30,589 $ 27,984
----------- -----------
Net (decrease) in cash . . . . . . . . . . . . . . . (909,578) (153,180)
Cash at beginning of year. . . . . . . . . . . . . . . . . . . 1,480,287 1,633,467
----------- -----------
Cash at end of year. . . . . . . . . . . . . . . . . . . . . . $ 570,709 $1,480,287
=========== ===========
Supplemental Cash Flow Disclosures:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . $ 190,444 $ 125,246
Supplemental Schedule of Noncash Investing and
Financing Activities:
Issuance of warrants on convertible debentures and
notes payable. . . . . . . . . . . . . . . . . . . . . . . $1,529,815 $ 297,500
Common stock issued for payment of preferred stock dividends 31,365 -
Preferred dividends declared, Series 1 . . . . . . . . . . . 133,919 132,669
Preferred dividends accreted, Series 2 . . . . . . . . . . . - 817,000
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
THE FEMALE HEALTH COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and nature of operations: The consolidated
----------------------------------------------------------
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, The Female Health Company - UK and The Female Health Company - UK,
plc. All significant intercompany transactions and accounts have been
eliminated in consolidation. The Female Health Company ("FHC" or the "Company")
is currently engaged in the marketing, manufacture and distribution of a
consumer health care product known as the Reality female condom, "Reality," in
the U.S. and "femidom" or "femy" outside the U.S. The Female Health Company -
UK, is the holding company of The Female Health Company - UK, plc, which
operates a 40,000 sq. ft. leased manufacturing facility located in London,
England.
The product is currently sold or available in either or both commercial (private
sector) and public sector markets in 30 countries. It is commercially marketed
directly by the Company in the United States and the United Kingdom and through
marketing partners globally.
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:
Trade receivables include a provision for sales returns and trade allowances,
which is based on management's estimate of future product returns from customers
in connection with unsold product which has expired or is expected to expire
before it is sold. The estimated cost for product returns, price discounts and
trade allowances are accrued when the initial sale is recorded.
The market value of inventory is based on management's best estimate of future
sales and the time remaining before the existing inventories reach their
expiration dates.
The Company evaluates intellectual property rights for impairment by comparing
the net present value of the asset's estimated future income stream to the
asset's carrying value.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on the
Company's future results of operations and financial condition.
Cash: Substantially all of the Company's cash was on deposit with one financial
----
institution.
Inventories: Inventories are valued at the lower of cost or market. The cost
-----------
is determined using the first-in, first-out (FIFO) method. Inventories are also
written down for management's estimates of product which will not sell prior to
its expiration date. Write downs of inventories establish a new cost basis,
which is not increased for future increases in the market value of inventories,
or changes in estimated obsolescence.
F-7
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation: In accordance with Financial Accounting Standards
----------------------------
No. 52, "Foreign Currency Translation", the financial statements of the
Company's international subsidiaries are translated into U.S. dollars using the
exchange rate at each balance sheet date for assets and liabilities, the
historical exchange rate for stockholders' equity and a weighted average
exchange rate for each period for revenues, expenses, and gains and losses.
Translation adjustments are recorded as a separate component of stockholders'
equity as the local currency is the functional currency.
Equipment and furniture and fixtures: Depreciation and amortization is computed
------------------------------------
by the estimated useful lives of the respective assets which range as follows:
Equipment 5 - 10 years
Furniture and fixtures 3 years
Intellectual property rights: The Company holds patents on the female condom in
----------------------------
the United States, the European Union, Japan, Canada, Australia and The People's
Republic of China and holds patents on the manufacturing technology in various
countries. The Company also licenses the trademark "Reality" in the United
States and has trademarks on the names "femidom" and "femy" in certain foreign
countries. Intellectual property rights are amortized on a straight-line basis
over their estimated useful life of twelve years.
Financial instruments: The Company has no financial instruments for which the
----------------------
carrying value materially differs from fair value.
Revenue Recognition: Revenues from product sales are recognized as the products
-------------------
are shipped to the customers.
Research and Development Costs: Research and development costs are expensed as
-------------------------------
incurred. The amount of costs expensed for the years ended September 1999 and
1998 was $122,196 and $2,500, 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.
Advertising: The Company's policy is to expense production costs in the period
-----------
in which the advertisement is initially presented to consumers.
Income taxes: The Company files separate income tax returns for its foreign
-------------
subsidiaries. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109) requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are also provided for carryforwards for income
tax purposes. In addition, the amount of any future tax benefits is reduced by
a valuation allowance to the extent such benefits are not expected to be
realized.
F-8
<PAGE>
------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share (EPS): The Company has adopted the provisions of Statement
--------------------------
of Financial Accounting Standards (FAS) No. 128, Earnings Per Share. FAS No.
128 requires the presentation of "basic" and "diluted" EPS. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon conversion of convertible preferred or
convertible debt and the exercise of stock options and warrants for all periods.
Fully diluted (loss) per share is not presented since the effect would be
anti-dilutive.
New Accounting Pronouncements: The Financial Accounting Standards Board has
-------------------------------
issued Statement No. 130, Reporting Comprehensive Income, that the Company
adopted during its year ended September 30, 1999. The Statement establishes
standards for 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, 1999 and 1998, the Company's components of
comprehensive income (loss) consisted of its reported net (loss) and foreign
currency translation adjustments.
Effective December 31, 1998, the Company adopted FAS No. 131, Disclosures of an
Enterprise and Related Information (FAS 131). FAS 131 superseded FAS No. 14,
Financial Reporting for Segments of a Business Enterprise. FAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. FAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
operates primarily in one industry segment while operating in both foreign and
domestic regions. See Note 10.
In June 1998, the Financial Accounting Standards Board issues FAS 133,
Accounting for Derivative Instruments and Hedging Activities (FAS 133), which is
required to be adopted in years beginning after June 15, 1999. FAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. Management believes that
the adoption of FAS No. 133 will have no material impact on the Company.
NOTE 2. INVENTORIES
The components of inventory consist of the following at September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Raw materials . . . . . . . . . $ 230,765
Work in process . . . . . . . . 270,184
Finished goods. . . . . . . . . 546,473
Less allowance for obsolescence (32,220)
-----------
$1,015,202
===========
</TABLE>
F-9
<PAGE>
NOTE 3. LEASES
The Company entered into a seven-year operating lease with a third party for
office space effective September 12, 1994. The Company also had an informal
agreement to reimburse an affiliate for office space used by the officers of the
Company through October 31, 1998. The affiliate's lease is with an unrelated
third party which expires January 31, 2001. On November 1, 1998 the office
space was sublet for the remaining term of the lease. Reimbursement for the
affiliate rent expense was $14,999 and $48,146 in 1999 and 1998, respectively,
which in 1999 is net of sublease rentals of $35,018.
On December 10, 1996, the Company entered into what is in essence a sale and
leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received $3,365,000 (1,950,000
pounds) for leasing the facility to a third party for a nominal annual rental
charge and for providing the third party with an option to purchase the facility
for one pound during the period December 2006 to December 2027.
As part of the same transaction, the Company entered into an agreement to lease
the facility back from the third party for base rents of $336,000 (195,000
pounds) per year payable quarterly until 2016. The lease is renewable through
December 2027. The Company was also required to make a security deposit of
$336,000 (195,000 pounds) to be reduced in subsequent years. The facility had a
net book value of $1,398,819 (810,845 pounds) on the date of the transaction.
The $1,966,181 (1,139,155 pounds) gain which resulted from this transaction will
be recognized ratably over the initial term of the lease. Unamortized deferred
gain as of September 30, 1999 was $1,583,260 (982,537 pounds).
In 1987, a subsidiary entered into a lease for office and factory space expiring
January 31, 2001. These offices and factory space were vacated and subsequently
this space was subleased to a third party for a period expiring January 31,
2001. 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 operating lease expense in total and separately for transactions with
related parties is as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
<S> <C> <C>
Operating lease expense:
Factory and office leases. . . . . . . . . . . . . . . . . . . . . $691,399 $820,695
Office space previously used by officers (net of sublease rentals) 14,999 48,146
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,231 17,811
-------- --------
$728,629 $886,652
======== ========
</TABLE>
F-10
<PAGE>
NOTE 3. LEASES (CONTINUED)
Future minimum payments under operating leases, including planned reimbursement
of an affiliate for office space previously used by officers, consisted of the
following at September 30, 1999:
<TABLE>
<CAPTION>
Rentals
Receivable
Under
Operating Subleases
---------- ----------
<S> <C> <C>
2000 . . . . . . . . . $ 481,063 $ 39,204
2001 . . . . . . . . . 443,513 13,068
2002 . . . . . . . . . 321,778 -
2003 . . . . . . . . . 321,778 -
2004 . . . . . . . . . 320,893 -
Thereafter . . . . . . 3,884,472 -
---------- ----------
Total minimum payments $5,773,497 $ 52,272
========== ==========
</TABLE>
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
During 1998, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt, a current director of the Company. The outstanding note payable
had an interest rate of 12% and was paid in full in 1999. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000 shares
of the Company's common stock at $2.25 per share, which represented 80% of the
average trading price for the five trading days prior to the closing date for
the transaction and resulted in an initial discount on the note of $297,500.
Any stock issued under the warrants carry certain registration rights. The
warrants expire in 2006. The discount in combination with the note's 12% coupon
resulted in an effective interest rate of 63 percent on the note.
During 1999, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt. The outstanding note payable bears interest at 12% and is payable
in full in 2000. As part of the transaction, the Company issued Mr. Dearholt
warrants to purchase 200,000 shares of the Company's common stock at $1.16 per
share, which represented 80% of the average trading price for the five trading
days prior to the closing date for the transaction and resulted in an initial
discount on the note of $194,574. Any stock issued under the warrants carry
certain registration rights. The warrants expire in 2008. 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, 1999, net of unamortized discount of $93,626. The
discount in combination with the note's 12% coupon resulted in an effective
interest rate of 35 percent on the note.
Additionally, during 1999 the Company borrowed $250,000 from Mr. Dearholt and
$50,000 from O.B. Parrish, also a current director of the Company. Each note
payable bears interest at 12% and is payable in full in 2000. As part of the
transactions, the Company issued Mr. Dearholt and Mr. Parrish warrants to
purchase 50,000 and 10,000 shares of the Company's common stock at $1.35 and
$1.25 per share, respectively, which represented 80% of the average trading
price for the five trading days prior to the closing date for the transaction
and resulted in an initial discount on the notes of $49,219 and $9,722,
respectively. Any stock issued under the warrants carry certain registration
rights. The warrants expire in 2008 and 2007, respectively. Also if the
Company defaults on its obligation under the note, the Company is required to
issue an additional 50,000 and 10,000 shares of its common stock to Mr. Dearholt
and Mr. Parrish, respectively, in addition to all other remedies to which each
is entitled. The notes are recorded at September 30, 1999, net
F-11
<PAGE>
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
of unamortized discounts of $18,018 and $3,733, respectively. The discount in
combination with the notes' 12% coupon resulted in an effective interest rate of
35 percent for each note.
On June 1, 1999 the Company completed a private placement of convertible
debentures in the principal amount of $1,500,000 and warrants to purchase
1,875,000 shares of common stock. The convertible debentures are convertible
into shares of the Company's common stock as follows: the first 50% of the
original principal balance and any accrued but unpaid interest thereon is
convertible into common stock at the investor's election, at any time after one
year, based on a per share price equal to the lesser of 70% of the market price
of the Company's common stock at the time of conversion or $1.25, the second 50%
of the original principal balance and, any accrued but unpaid interest thereon,
is convertible into common stock at the investor's election at any time after
one year based on a per share price equal to the lesser of 70% of the market
price of the Company's common stock at the time of conversion or $2.50. The
convertible debentures are payable one year after issuance or, if the Company
elects, two years after issuance. If the term extended for the extra one year,
the Company must issue to the investor at the time of execution, 375,000
additional warrants to purchase shares of the Company's common stock on the same
terms as the other warrants. Interest on the convertible debentures is due at a
rate of 8% per annum, payable quarterly in either cash or, at the debenture
holder's option, common stock of the Company.
The convertible debentures are collateralized by a first security interest in
all of the Company's assets. In addition, if the Company defaults in payment of
the principal or interest due on the convertible debentures in accordance with
their terms, the Company must immediately issue 1,500,000 shares of its common
stock to the investor at no cost. The issuance of these shares will not affect
any of the outstanding warrants then held by the investor, which warrants will
continue in effect in accordance with their terms.
Additionally, warrants to purchase 337,500 shares of the Company's common stock
were issued to the Company's placement agent in this offering. The warrants
have a term of five years and are exercisable at an exercise price equal to the
lesser of 70% of the market price of the common stock at the time of the
exercise or $1.00. The warrants were valued at $224,500 which was recorded as
additional paid-in capital.
The convertible debentures beneficial conversion feature is valued at $336,400
and the warrants to purchase 1,875,000 shares of the Company's common stock are
valued at $715,100. In accordance with SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants (a total of $1,051,500) as additional paid in capital. The
corresponding amount of $1,051,500 was recorded as a discount on convertible
debentures and is amortized over 1 year using the interest rate method. The
note is recorded net of a discount of $680,645 at September 30, 1999. The
discount in combination with the debenture's 8% coupon resulted in an effective
interest rate of 159 percent for the debentures. Upon completion of the
convertible debenture private placement $195,000 of issuance costs were charged
to equity.
On April 6, 1999 the Company restructured its $602,360 (370,000 pounds) Aage V.
Jensen Charity Foundation note payable. The terms included immediate payment of
$177,000 (110,000 pounds) as of the date of the restructuring agreement and
required nine installment payments beginning April 15, 1999 and concluding on
December 10, 1999. To avoid incurring additional interest related to the loan,
the Company paid off the entire loan on June 10, 1999.
F-12
<PAGE>
NOTE 5. INCOME TAXES
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss before income taxes as of September
30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
------------ ------------
<S> <C> <C>
Tax credit statutory rates. . . . . . . . . . . . . . . . . . . . . . . . . . $(1,275,100) $(1,141,490)
Nondeductible expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,300 47,900
State income tax, net of federal benefits . . . . . . . . . . . . . . . . . . (177,700) (159,100)
Benefit of net operating loss not recognized, increase in valuation allowance 1,374,500 1,252,690
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000 -
$ - $ -
============ ============
</TABLE>
As of September 30, 1999, the Company had federal and state net operating loss
carryforwards of approximately $32,853,000 for income tax purposes expiring in
years 2005 to 2015. The benefit relating to $1,537,800 of these net operating
losses relates to exercise of common stock options and will be credited directly
to stockholders' equity when realized. The Company also has investment tax and
research and development credit carryforwards for income tax purposes
aggregating approximately $150,000 at September 30, 1999, expiring in years 2000
to 2010. The Company's U.K. subsidiary, The Female Health Company - UK, plc
subsidiary has U.K. net operating loss carryforwards of approximately
$68,010,000 as of September 30, 1999. 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, 1999:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Federal net operating loss carryforwards . . $11,170,000
State net operating loss carryforwards . . . 2,166,000
Foreign net operating loss carryforwards . . 20,403,000
Foreign capital allowances . . . . . . . . . 4,008,000
Tax credit carryforwards . . . . . . . . . . 150,000
Accounts receivable allowances . . . . . . . 138,000
Other. . . . . . . . . . . . . . . . . . . . 17,000
------------
Total gross deferred tax assets. . . . . . . . 38,052,000
Valuation allowance for deferred tax assets. . 38,036,000
------------
Deferred tax assets net of valuation allowance 16,000
Deferred tax liabilities:
Equipment, furniture and fixtures. . . . . . (16,000)
------------
Net deferred tax assets. . . . . . . . . . . . $ -
============
</TABLE>
The valuation allowance increased by $1,711,000 and $1,252,690 for the years
ended September 30, 1999 and 1998, respectively.
F-13
<PAGE>
NOTE 6. ROYALTY AGREEMENTS
The Company has royalty agreements for sales of its products which provide for
royalty payments based on sales quantities and achievement of specific sales
levels. The amount of royalty expense was $38,451 for the year ended September
30, 1998. There was no royalty expense for the year ended September 30, 1999.
NOTE 7. COMMON STOCK
Stock Option Plans
The Company has various stock option plans that authorize the granting of
options to officers, key employees and directors to purchase the Company's
common stock at prices generally equal to the market value of the stock at the
date of grant. Under these plans, the Company has 58,128 shares available for
future grants as of September 30, 1999. The Company has also granted options to
one of its legal counsel and an affiliate. Certain options are vested and
exercisable upon issuance, others over periods up to four years and still others
based on the achievement of certain performance criteria by the Company and
market prices of its common stock.
Summarized information regarding all of the Company's stock options is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- --------
<S> <C> <C>
Outstanding at September 30, 1997 1,460,746 $ 2.92
Granted . . . . . . . . . . . . . 18,000 0.01
Exercised . . . . . . . . . . . . (29,400) 2.00
Expired or canceled . . . . . . . (274,868) 5.50
----------
Outstanding at September 30, 1998 1,174,478 2.29
Granted . . . . . . . . . . . . . 1,876,000 .86
Exercised . . . . . . . . . . . . (18,000) .01
Expired or canceled . . . . . . . (79,178) 6.75
----------
Outstanding at September 30, 1999 2,953,300 $ 1.27
==========
</TABLE>
Options shares exercisable at September 30, 1999 and 1998 are 425,766 and
463,410, respectively.
F-14
<PAGE>
NOTE 7. COMMON STOCK (CONTINUED)
Options Outstanding and Exercisable
<TABLE>
<CAPTION>
Range of Number Wghted. Avg. Wghted. Avg. Number Wghted. Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices At 9/30/99 Life Price at 9/30/99 Price
------------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
.85. . . . . 1,860,000 8.9 $ .85 - $ -
1.5625. . . . 16,000 6.3 1.5625 - -
2.00. . . . . 1,077,300 4.8 2.00 425,766 2.00
------------- ----------- ------------ ------------- ----------- -------------
.85 to $2.00 2,953,300 7.4 $ 1.27 425,766 $ 2.00
============= =========== ============ ============= =========== =============
</TABLE>
During 1998, the Company granted options to employees to purchase 18,000 shares
of the Company's common stock at $.01. Compensation expense of $51,660 was
recognized regarding this issuance.
All other 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 1997 and 1998
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:
<TABLE>
<CAPTION>
Year Ending September 30,
Loss Loss
1999 Per Share 1998 Per Share
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss attributable to common
stockholders. . . . . . . . . . . . $(3,884,228) $ (.36) $(4,306,985) $ (0.43)
Compensation expense related to stock
options granted . . . . . . . . . . (371,902) (.03) (615,776) (0.06)
------------ ----------- ------------ -----------
$(4,256,130) $ (0.39) $(4,922,731) $ (0.49)
============ =========== ============ ===========
</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 presented 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 63.4% and
69.1% and risk-free interest rates of 5.0% and 4.43% for 1999 and 1998,
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 was $.61
and $2.87 for the years ended September 30, 1999 and 1998, respectively.
F-15
<PAGE>
NOTE 7. COMMON STOCK (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
different from those of traded options, and because changes in the input
assumptions can materially affect the fair value estimate, the model may not
provide a reliable single measure of the fair value of its employee stock
options.
Stock Bonus Plan
During 1997, the Company adopted a 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. During the year ended September 30, 1998, 107,000 shares of
restricted stock had been issued to key employees and consultants. During the
year ended September 30, 1999, 15,000 shares of restricted stock were issued to
key employees. Expense under the plan was $23,438 and $307,625 for the years
ended September 30, 1999 and 1998, respectively.
Common Stock Purchase Warrants
The Company enters into consulting agreements with separate third party
professionals to provide investor relations services and financial advisory
services. In connection with the consulting agreements, the Company granted
warrants to purchase common stock. At September 30, 1999, 165,000 warrants were
exercisable.
In 1998, the Company issued 165,000 warrants and recognized consulting expense
and additional paid-in capital of $114,750. In 1999, the Company issued 100,000
warrants. The value of the warrants of $99,483 was recognized as unearned
consulting fees and additional paid-in capital and the expense is being
recognized over the term of the agreement.
There were 120,000 warrants exercised during 1999. At September 30, 1999, the
following warrants were outstanding:
<TABLE>
<CAPTION>
Number
Outstanding
-----------
<S> <C>
Warrants issued in connection with:
Investor relations services contract 90,000
Financial advisory services contract 175,000
Convertible Debentures . . . . . . . 2,320,034
Convertible Preferred Stock. . . . . 176,000
Equity Line of Credit. . . . . . . . 200,000
Notes Payable. . . . . . . . . . . . 900,000
-----------
Outstanding at September 30, 1999. . 3,861,034
===========
</TABLE>
At September 30, 1999, the Company had reserved a total of 7,132,462 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 $1.3 million of notes due
between February and March 2000.
F-16
<PAGE>
NOTE 7. COMMON STOCK (CONTINUED)
Issuance of Stock
The Company has issued common stock to consultants for providing investor
relation services. In 1998, the Company issued 25,000 shares of common stock
with a market value of $93,750 which was recognized as consulting expense. In
1999, the Company issued 175,000 shares of common stock with a market value of
$185,938 which was recorded as unearned consulting fees which is being
recognized over the term of the agreement.
NOTE 8. PREFERRED STOCK
The Company has outstanding 660,000 shares of 8% cumulative convertible
preferred stock (Series 1). Each share of preferred stock is convertible into
one share of the Company's common stock on or after August 1, 1998. Annual
preferred stock dividends will be paid if and as declared by the Company's Board
of Directors. No dividends or other distributions will be payable on the
Company's common stock unless dividends are paid in full on the preferred stock.
The preferred stock may be redeemed at the option of FHC, in whole or in part,
on or after August 1, 2000, subject to certain conditions, at $2.50 per share
plus accrued and unpaid dividends. In the event of a liquidation or dissolution
of the Company, the preferred stock would have priority over the Company's
common stock. During 1999, 20,000 shares were converted into common 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 $1.84 million, net of issuance costs of $156,616.
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.
The Company's 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 year ended June 30, 1998. The
dividend accretion had no impact on the Company's cash flow from operations.
NOTE 9. 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. Company contributions were
$6,541 and $11,947 for 1999 and 1998, respectively.
F-17
<PAGE>
NOTE 10. INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations in different geographic areas (determined by the location
of the operating unit) is as follows.
<TABLE>
<CAPTION>
September 30,
(Amounts in Thousands) 1999 1998
-------- --------
<S> <C> <C>
Net revenues:
United States . . . . . . $ 2,350 $ 2,481
International . . . . . . 2,365 2,970
Operating profit (loss):
United States . . . . . . (2,665) (2,731)
International . . . . . . (361) (420)
Identifiable assets
United States . . . . . . 1,760 2,088
International . . . . . . 4,747 5,471
</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 $177,000 and $396,000 in 1999
and 1998, respectively.
NOTE 11. CONTINGENT LIABILITIES
The Company's future obligations under the terms of a facilities lease were
assigned by the Company and assumed by the buyer as part of the 1996 sale of the
Company's subsidiary WPC Holdings, Inc. However, because the third party
creditor did not release the Company from any future liability under the lease
agreement at the time of their assignment, the Company remains contingently
liable if Holdings defaults in making any payments under the agreement. At
September 30, 1999, the total future payments under the lease agreement were
$2.5 million.
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.
NOTE 12. RELATED PARTY TRANSACTIONS
For 1998, the Company paid the rent for office space leased by Phoenix Health
Care of Illinois, Inc. ("Phoenix"), a company that owns approximately 270,000
shares of the Company's outstanding common stock and has three officers and
directors that are also officers and directors of the Company. This leased
space was subleased as of November 1, 1998.
F-18
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1998 the Company awarded Phoenix 25,000 shares of restricted common stock
with a market value of approximately $93,750 for consulting services provided to
the Company. No such amount was awarded in 1999.
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 13. CONTINUING OPERATIONS AND SUBSEQUENT EVENT
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a loss of $3.8 million for the year ended September 30, 1999, and as of
September 30, 1999, had an accumulated deficit of $45.2 million. At September
30, 1999, the Company had working capital of $.4 million and stockholders'
equity of $1.7 million. In the near term, the Company expects operating and
capital costs to continue to exceed funds generated from operations, due
principally to the Company's fixed manufacturing costs relative to current
production volumes and the ongoing need to commercialize the female condom
around the world. As a result, operations in the near future are expected to
continue to use working capital. Management recognizes that the Company's
continued operations depend on its ability to raise additional capital through a
combination of equity or debt financing, strategic alliances and increased sales
volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the female condom. Management believes
that recent developments, including the Company's agreement with the UNAIDS, a
joint United Nations program on HIV/AIDS, provide an indication of the Company's
early success in broadening awareness and distribution of the female condom and
may benefit efforts to raise additional capital and to secure additional
agreements to promote and distribute the female condom throughout other parts of
the world.
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 healthcare and life-science companies. Pursuant to this
agreement, as extended, 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. 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. Management is currently
determining whether the Company should seek to extend this arrangement.
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 $6.0 million of the Company's common stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires 24 months after the effective date of the pending registration
statement 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. The Company is required to draw down a minimum of $1 million during the
two-year period. If the Company does not draw down the minimum, the Company is
required to pay the investor a
F-19
<PAGE>
NOTE 13. CONTINUING OPERATIONS AND SUBSEQUENT EVENT (CONTINUED)
12% fee on that portion of the $1 million minimum not drawn down at the end of
the two-year period. As of September 30, 1999, the Company had placed three
puts for the combined cash proceeds of $485,000 providing the investor with a
total of 482,964 shares of the Company's common stock.
The timing and amounts of the stock sales under the agreement are totally at the
Company's discretion, subject to the Company's compliance with each of the
following conditions at the time the Company requests a stock sale under the
agreement:
- the registration statement the Company filed with the SEC for sales of
stock under the agreement must remain in effect;
- all of the Company's representation and warranties in the agreement must
be accurate and the Company must have complied with all of the obligations
in the agreement;
- there may not be any injunction, legal proceeding or law prohibiting the
Company's sale of the stock to Kingsbridge;
- the Company's counsel must issue a legal opinion to Kingsbridge;
- the sale must not cause Kingbridge's ownership of the Company's common
stock to exceed 9.9% of the outstanding shares of our common stock;
- the trading price of the Company's common stock over a five trading day
period preceding the date of the date of the sale must equal or exceed
$1.00 per share; and
- the average daily trading volume of the Company's common stock for a 20
trading day period preceding the date of the sale must equal or exceed
17,000 shares.
Between September and November 1999 the Company completed a private placement
where 983,333 shares of the Company's common stock were sold for $737,500, of
which $500,000 was received through September 30, 1999. The stock sales were
directly with accredited investors and included one current director of the
Company. The Company provided the shares to these investors at a $.75 share
price.
While the Company believes that its existing capital resources will be adequate
to fund its currently anticipated capital needs, if they are not the Company may
need to raise additional capital until its sales increase sufficiently to cover
operating expenses. 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.
Further, there can be no assurance, assuming the Company successfully raises
additional funds or enters into business agreements with third parties, that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate financing, management will be required to sharply
curtail the Company's efforts to promote the female condom and to curtail
certain other of its operations or, ultimately, cease operations.
F-20
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
2000
-------------
<S> <C>
ASSETS
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 395,806
Accounts receivable, net. . . . . . . . . . . . . . . . . . 553,720
Inventories, net. . . . . . . . . . . . . . . . . . . . . . 1,173,794
Prepaid expenses and other current assets . . . . . . . . . 255,949
-------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . 2,379,269
Intellectual property rights, net. . . . . . . . . . . . . . . 643,281
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 149,681
PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . . . . 3,787,592
Less accumulated depreciation and amortization . . . . . . . . (2,237,754)
-------------
Net Property, plant, and equipment . . . . . . . . . . . . . 1,549,838
-------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,722,069
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable, related parties, net of unamortized discount $ 1,163,522
Convertible debenture, net of unamortized discount. . . . . 1,358,911
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 502,535
Accrued expenses and other current liabilities. . . . . . . 406,686
Preferred dividends payable . . . . . . . . . . . . . . . . 100,043
-------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . 3,531,697
Deferred gain on lease of facility . . . . . . . . . . . . . . 1,442,800
Other long-term liabilities. . . . . . . . . . . . . . . . . . 41,512
-------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . 5,016,009
STOCKHOLDERS'DEFICIT:
Convertible preferred stock. . . . . . . . . . . . . . . . . . 6,600
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 133,254
Additional paid-in-capital . . . . . . . . . . . . . . . . . . 47,987,899
Unearned consulting compensation . . . . . . . . . . . . . . . (76,360)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . (48,405,221)
Accumulated other comprehensive income . . . . . . . . . . . . 91,964
Treasury stock, at cost. . . . . . . . . . . . . . . . . . . . (32,076)
-------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . (293,940)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT. . . . . . . . . . $ 4,722,069
=============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-21
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------
2000 1999
------------ ------------
<S> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . $ 3,923,425 $ 3,409,695
Cost of products sold . . . . . . . . . . . . . 3,612,216 3,787,785
------------ ------------
Gross profit (loss) . . . . . . . . . . . . . . 311,209 (378,090)
------------ ------------
Advertising and promotion . . . . . . . . . . . 169,000 219,333
Selling, general and administrative . . . . . . 2,085,001 2,129,111
------------ ------------
Total operating expenses. . . . . . . . . . . . 2,254,001 2,348,444
------------ ------------
Operating (loss). . . . . . . . . . . . . . . . (1,942,792) (2,726,534)
Amortization of debt issuance costs . . . . . . 245,676 69,650
Interest, net and other expense . . . . . . . . 937,561 245,042
------------ ------------
Income (loss) before income taxes . . . . . . . (3,126,029) (3,041,226)
Provision for income taxes. . . . . . . . . . . - -
------------ ------------
Net (loss). . . . . . . . . . . . . . . . . . . $(3,126,029) $(3,041,226)
Preferred dividends, Series 1 . . . . . . . . . 99,090 102,054
------------ ------------
Net (loss) attributable to common stockholders. $(3,225,119) $(3,143,280)
============ ============
Net (loss) per common share outstanding . . . . $ (0.26) $ (0.29)
Weighted average common shares outstanding. . . 12,522,230 10,719,690
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months ended
June 30,
------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATIONS:
Net (loss). . . . . . . . . . . . . . . . . . . . . . . $(3,126,029) $(3,041,226)
Adjusted for noncash items:
Depreciation and amortization. . . . . . . . . . . . . 474,443 425,016
Amortization of discounts on notes payable and
convertible debentures . . . . . . . . . . . . . . . 844,997 332,994
Changes in operating assets and liabilities. . . . . . 961,986 (526,101)
------------ ------------
Net cash (used in) operating activities . . . . . . . . (844,603) (2,809,317)
INVESTING ACTIVITIES:
Capital expenditures, Net cash (used in)
investing activities . . . . . . . . . . . . . . . . . (11,579) (22,129)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from related party notes issued. . . . . . . . 1,300,000 1,300,000
Payments on notes payable, related party. . . . . . . . (1,300,000) (1,558,043)
Proceeds from the issuance of convertible debentures. . - 1,500,000
Dividends paid on preferred stock . . . . . . . . . . . (39,002) (116,255)
Purchase of common stock held in Treasury . . . . . . . - (12,746)
Proceeds from the issuance of common stock upon
exercise of options and warrants . . . . . . . . . . - 226,878
Proceeds from issuance of common stock. . . . . . . . . 719,500 485,000
------------ ------------
Net cash provided by financing activities . . . . . . . 680,498 1,953,835
------------ ------------
Effect of exchange rate changes on cash . . . . . . . . 781 256,640
------------ ------------
INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . (174,903) (749,972)
Cash at beginning of period . . . . . . . . . . . . . . 570,709 1,480,287
------------ ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . $ 395,806 $ 730,315
============ ============
Schedule of noncash financing and investing
activities:
Common stock issued for payment of preferred
stock dividends and convertible debenture
interest . . . . . . . . . . . . . . . . . . . . . . $ 48,160 $ 29,972
Issuance of warrants on notes payable . . . . . . . . . 350,989 1,304,515
Common stock issued for payment of consulting services. 79,680 84,375
Preferred dividends declared, Series 1. . . . . . . . . 99,090 100,289
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 10Q-SB 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 nine months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2000. 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, 1999.
Principles of consolidation and nature of operations:
----------------------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, The Female Health Company - UK and The Female
Health Company - UK, plc. All significant intercompany transactions and accounts
have been eliminated in consolidation. The Female Health Company ("FHC" or the
"Company") is currently engaged in the marketing, manufacture and distribution
of a consumer health care product known as the Reality female condom, "Reality,"
in the U.S. and "femidom" or "femy" outside the U.S. The Female Health Company -
UK, is the holding company of The Female Health Company - UK, plc, which
operates a 40,000 sq. ft. leased manufacturing facility located in London,
England.
Reclassification:
----------------
Certain expenses on the statements of income for the nine months ended June 30,
1999 have been reclassified to be consistent with the presentation shown for the
nine months ended June 30, 2000.
NOTE 2 - Earnings Per Share
--------------------
Earnings per share (EPS): Basic EPS is computed by dividing income available to
-------------------------
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential common
shares consist of the incremental common shares issuable upon conversion of
convertible preferred or convertible debt and the exercise of stock options and
warrants for all periods. Fully diluted (loss) per share is not presented since
the effect would be anti-dilutive.
NOTE 3 - Comprehensive Income (Loss)
-----------------------------
Total Comprehensive Loss was $(3,323,002) for the nine months ended June 30,
2000 and $(2,479,199) for the nine months ended June 30, 1999.
F-24
<PAGE>
NOTE 4 - Inventories
-----------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------
<S> <C>
Raw material and work in process $ 321,614
Finished goods . . . . . . . . . 866,000
---------------
Inventory, gross . . . . . . . . 1,187,614
Less: inventory reserves . . . . (13,820)
---------------
Inventory, net . . . . . . . . . $ 1,173,794
===============
</TABLE>
NOTE 5 - Sale of Convertible Preferred Stock
---------------------------------------
The Company has outstanding 660,000 shares of 8% cumulative Convertible
Preferred Stock - Series 1. Each share of preferred stock is convertible into
one share of the Company's Common Stock on or after August 1, 1998. Annual
preferred stock dividends will be paid if and as declared by the Company's Board
of Directors. No dividends or other distributions will be payable on the
Company's Common Stock unless dividends are paid in full on the Preferred Stock.
The 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 net loss of $3.2 million for the nine months ended June 30, 2000 and
as of June 30, 2000 had an accumulated deficit of $48.4 million. At June 30,
2000, the Company had working capital of $(1.2) million and stockholders'
deficit of $0.3 million. In the near term, the Company expects operating and
capital costs to continue to exceed funds generated from operations due
principally to the Company's manufacturing costs relative to current production
volumes and the ongoing need to commercialize the Female Condom around the
world. As a result, operations in the near future are expected to continue to
use working capital. Management recognizes that the Company's continued
operations 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 future efforts to raise
additional capital and to secure additional agreements to promote and distribute
the Female Condom throughout other parts of the world.
F-25
<PAGE>
NOTE 6 - Financial Condition - (Continued)
------------------------------------
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm specializing
in providing financial advisory services to healthcare and life-science
companies. Pursuant to this agreement, as extended, Vector has acted as the
Company's exclusive financial advisor through June 30, 2000 for the purposes of
identifying and evaluating opportunities available to the Company for increasing
stockholder value. The Company and Vector are discussing extending these
arrangements. 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. 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. Management is currently determining whether the Company
should seek to extend this arrangement.
On May 19, 1999 and June 3, 1999 the Company issued an aggregate $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. See Note 7 of the Notes to
Unaudited Condensed Consolidated Financial Statements for additional detail.
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 $6.0 million of the Company's Common Stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires on February 12, 2001 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 by the Company under the Equity
Line Agreement. Pursuant to the Equity Line Agreement, the Company issued the
investor a Warrant to purchase 200,000 shares of Common Stock at $2.17 per
share.
The Company is required to draw down a minimum of $1 million during the term of
the Equity Line Agreement. If the Company does not draw down the minimum, the
Company is required to pay the investor a 12% fee on that portion of the $1
million minimum not drawn down at the end of the term of the Equity Line
Agreement. As of March 31, 2000, the Company has placed four puts for the
combined cash proceeds of $582,000 providing the investor with a total of
680,057 shares of the Company's Common Stock. Each put was executed while the
Company's stock price was below $2.00 per share and therefore, the common stock
was sold at the 18% discount. The timing and amount of the stock sales under
the Equity Line Agreement are totally at the Company's discretion, subject to
the Company's compliance with each of the following conditions at the time the
Company requests a stock sale under the Equity Line Agreement:
- the registration statement the Company filed with the SEC for sales of
stock under the Equity Line Agreement must remain in effect;
- all of the Company's representations and warranties in the Equity Line
Agreement must be accurate and the Company must have complied with all of
the Company's obligations in the Equity Line Agreement;
- there may not be any injunction, legal proceeding or law prohibiting the
Company's sale of the stock to the investor;
F-26
<PAGE>
NOTE 6 - Financial Condition - (Continued)
------------------------------------
- the sale must not cause the investor's ownership of the Company's common
stock to exceed 9.9% of the outstanding shares of the Company's common
stock;
- the trading price of the Company's common stock over a five trading day
period preceding the date of the sale must equal or exceed $1.00 per
share; and
- the average daily trading volume of the Company's common stock for a 20
trading day period preceding the date of the sale must equal or exceed 17,000
shares.
The trading price of the Company's common stock was below $1.00 per share as of
June 30, 2000. Although Kingsbridge waived the condition relating to the
trading price of the Company's common stock for the fourth put completed during
the quarter ended June 30, 2000, the Company can make no assurance that
Kingsbridge will waive this condition or any other condition under the Equity
Line Agreement if the Company cannot satisfy such conditions to use the Equity
Line Agreement if needed in the future.
While the Company believes that its existing capital resources will be adequate
to fund its currently anticipated capital needs, if they are not, the Company
may need to raise additional capital until its sales increase sufficiently to
cover operating expenses. 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
of the funds available to it under the Equity Line Agreement.
Further, there can be no assurances, 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 commercialize the Female Condom and to curtail
certain other of its operations or, ultimately, cease operations.
NOTE 7 - Sale of Convertible Debentures
---------------------------------
On May 19 and June 3, 1999, the Company issued an aggregate of $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. Interest on the convertible
debentures is payable quarterly at a rate of 8% annually in cash or, at the
investors' option, common stock at its then current fair market value. From
December 2, 1999 until February 11, 2000, interest on the convertible debentures
was at the rate of 10% annually, and then returned to 8% annually. Repayment of
the convertible debentures is secured by a first security interest in all of the
Company's assets. The original principal balance plus any accrued but unpaid
interest of the convertible debentures may be convertible into the Company's
common stock at the investor's election at any time after one year based on a
per share price equal to the lesser of (a) 70% of the market price of the
Company's Common Stock at the time of conversion or (b) $1.00. The convertible
debentures were originally payable one year after issuance. However, the
Company elected under the terms of the convertible debentures to extend the due
date to two years after issuance. As a result of the Company electing to extend
the term of the debentures an additional year, the Company issued to the
investors at the time of extension, additional warrants to purchase 375,000
shares of Common Stock on the same terms as the other warrants.
The convertible debentures beneficial conversion feature is valued at $336,400
and the warrants to purchase 1,875,000 shares of common stock are valued at
$715,100. In accordance with SEC reporting requirements for such transactions,
the Company recorded the value of the beneficial conversion feature and warrants
(a total of $1,051,500) as additional paid in capital.
The corresponding amount of $1,051,500 was recorded as a discount on convertible
debentures and is amortized over 1 year using the interest rate method.
F-27
<PAGE>
NOTE 8 - Industry Segments And Financial Information About Foreign and Domestic
-----------------------------------------------------------------------
Operations
----------
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations in different geographic areas (determined by the location
of the operating unit) is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------
(Amounts in thousands) 2000 1999
-------- --------
<S> <C> <C>
Net revenues:
United States . . . . . . $ 1,542 $ 1,856
International . . . . . . 2,381 1,553
Operating profit (loss):
United States . . . . . . (3,344) (2,665)
International . . . . . . 119 (479)
Identifiable assets:
United States . . . . . . 1,082 1,647
International . . . . . . 3,640 4,678
</TABLE>
On occasion, the Company's U.S. unit sells product directly to customers located
outside the U.S. Were such transactions 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 $36,540 and $96,514 as of June
30, 2000 and 1999, respectively. Additionally, U.S. operating loss reflects
$2,227,625 and $1,075,330 of worldwide corporate overhead for the nine months
ended June 30, 2000 and 1999, respectively.
F-28
<PAGE>
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS LISTED IN THIS
PROSPECTUS IS OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON
STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
THE FEMALE HEALTH COMPANY
650,000 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
September, 2000
<PAGE>
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 Amended and Restated 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 Amended and Restated 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 Amended and Restated By-Laws also
contain a nonexclusivity clause which provides in substance that the
indemnification rights under the Amended and Restated 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 Amended and Restated
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>
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 . . . . . . $ 83
Printing expenses. . . . . . 5,000
Legal fees and expenses. . . 10,000
Accounting fees and expenses 5,000
Miscellaneous expenses . . . 5,000
--------
Total. . . . . $ 25,083
========
____________
<FN>
* All amounts estimated except the registration fee.
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
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 each of March 25, 1997, March 25, 1998 and March 25, 1999 the Company
refinanced its $1 million borrowing from Mr. Dearholt by extending the one-year
note payable to him for an additional year. Accordingly, the note is now payable
in full on March 25, 2000. 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, $2.25 and
$1.16 per share, respectively. These exercise prices represented 80% of 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>
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 one person
who is an accredited investor and a director of the Company. Mr. Dearholt also
represented to the Company that he was purchasing for investment without a view
to further distribution. Restrictive legends were placed on all instruments
evidencing the securities described above.
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 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.
On May 19, 1999 and June 3, 1999, the Company issued an aggregate of
$1,500,000 of convertible debentures and warrants to purchase 1,875,000 shares
of the Company's common stock to five accredited investors. The convertible
debentures bear interest at 8% per annum and have a one-year term; provided,
however, that the Company may extend the repayment term for an additional one
year if, upon such extension, it issues to the investors warrants to purchase
375,000 shares of the Company's common stock having the same terms and
conditions as the warrants issued to the investors in the private placement. The
investors may convert the convertible debentures into common stock at any time
after one year from the date they were issued as follows: (a) the first 50% of
the original principal balance of the convertible debentures, plus any accrued
but unpaid interest thereon, is convertible into common stock based on a per
share price equal to the lesser of (i) 70% of the market price of the common
stock at the time of conversion or (ii) $1.25; and (b) the second 50% of the
original principal balance plus any accrued but unpaid interest thereon is
convertible into common stock based on
II-3
<PAGE>
the per share price equal to the lesser of (i) 70% of the market price of the
common stock at the time of conversion or (ii) $2.50. As part of this offering,
the Company also issued to the investors warrants to purchase 1,875,000 shares
of the Company's common stock. The warrants are exercisable by the investors at
any time within five years after their date of issuance at an exercise price per
share equal to the lesser of (a) 70% of the market price of the Company's common
stock from the date of exercise or (b) $1.00. As part of the consideration that
the Company paid R.J. Steichen & Company, the Company's placement agent in the
private placement of the convertible debentures and warrants, the Company issued
to R.J. Steichen warrants to purchase a total of 337,500 shares of the Company's
common stock. The warrants issued to R.J. Steichen are exercisable at any time
commencing one year after the date of the private placement and for a period of
four years thereafter at an exercise price of $1.00 per share.
The Company believes it has satisfied the exemption from the securities
registration requirement provided by section 4(2) of the Securities Act and
Regulation D promulgated thereunder in this offering since the securities were
sold in a private placement to only sophisticated, 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.
On September 24, 1999, the Company completed a private placement of 666,671
shares of its common stock to nine investors. Each share of common stock was
sold for a purchase price of $0.75, representing a discount of 12% from the
market price on the date that the shares were sold. In connection with this
private placement, the Company agreed to register the investors' resale of these
shares pursuant to this registration statement. The Company raised approximately
$500,000 of proceeds, net of issuance cost of $0 in connection with this private
placement. 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 since the
securities were sold in a private placement to only accredited investors, most
of whom had a preexisting 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. In addition, the common stock issued to these investors
contained restrictive legends indicating that the shares had not been registered
and, therefore, cannot be resold unless the resale was registered under the
Securities Act or an exemption from such registration requirement was available.
On February 18, 1999, the Company borrowed $50,000 from O.B. Parrish, the
Company's Chairman and Chief Executive Officer. The extension was completed
through the execution of a $50,000, one year promissory note payable by the
Company to Mr. Parrish and a Note Purchase and Warrant Agreement and Stock
Issuance Agreement. Pursuant to this transaction, Mr. Parrish was granted
warrants to purchase 10,000 shares of common stock at an exercise price of $1.35
per share. The warrants expire upon the earlier of their exercise or five years
after the date of their issuance. Under the Stock Issuance Agreement, if we fail
to pay the $50,000 promissory note when due, we must issue 10,000 shares of our
common stock to Mr. Parrish. The issuance will not, however, alleviate our
liability under the note. We also granted Mr. Parrish securities registration
rights with respect to any common stock he receives from us under these warrants
or the Stock Issuance Agreement.
On February 12, 1999, we borrowed $250,000 from Mr. Dearholt. The borrowing
was effectuated in the form of a $250,000, one-year promissory note payable by
us to Mr. Dearholt. As part of this transaction, the Company entered into a Note
Purchase and Warrant Agreement and a Stock Issuance Agreement. Pursuant to the
Note Purchase and Warrant Agreement, Mr. Dearholt received a warrant to purchase
50,000 shares of our common stock at an exercise price of $1.25 per share. The
warrants expire upon the earlier of their exercise or five years after the date
of their issuance. Under the Stock Issuance Agreement, if we fail to pay the
$250,000 under the note when due, we must issue 50,000 shares of our common
stock to Mr. Dearholt. This issuance will not, however, alleviate our liability
under the note. We also granted Mr. Dearholt securities registration rights with
respect to any common stock he receives from us under these warrants or the
Stock Issuance Agreement.
II-4
<PAGE>
The Company has sold 129,506 shares of common stock on February 26, 1999,
157,356 shares of common stock on March 10, 1999, 196,102 shares of common stock
on April 10, 1999 and 197,093 shares of common stock on May 31, 2000 to a
private investor under an equity line agreement. The Company received net cash
proceeds of $145,500, $145,500, $194,000, and $97,000 respectively, from these
sales. As part of this offering, the Company also issued to the investor
warrants to purchase 200,000 shares of the Company's common stock at an exercise
price of $2.17 per share. The Company also issued warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $1.625 to this
investor on February 12, 1999 in connection with a consulting agreement. The
Company believes it has satisfied the exemption from the securities registration
requirement provided by section 4(2) of the Securities Act and Regulation D
promulgated thereunder in this offering since the securities were sold in a
private placement to a sophisticated, accredited investor, who provided
representations which the Company deemed necessary to satisfy itself that it was
an accredited investor and was purchasing for investment and not with a view to
resale in connection with a public offering.
The Company sold 316,668 shares of common stock to three investors in
November 1999. The Company received cash proceeds of $237,500 from these sales.
The Company believes it has satisfied the exemption from the securities
registration requirement provided by section 4(2) of the Securities Act and
Regulation D promulgated thereunder in this offering since the securities were
sold in a private placement to sophisticated, accredited investors, who 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.
The Company sold 100,000 shares of common stock to one investor in January
2000. The Company received cash proceeds of $75,000 from this sale. The
Company believes it has satisfied the exemption from the securities registration
requirement provided by section 4(2) of the Securities Act and Regulation D
promulgated thereunder in this offering since the securities were sold in a
private placement to a sophisticated, accredited investor, who provided
representations which the Company deemed necessary to satisfy itself that he was
an accredited investor and was purchasing for investment and not with a view to
resale in connection with a public offering.
The Company sold 80,001 shares of common stock to three investors in
February 2000. The Company received cash proceeds of $60,000 from these sales.
The Company believes it has satisfied the exemption from the securities
registration requirement provided by section 4(2) of the Securities Act and
Regulation D promulgated thereunder in this offering since the securities were
sold in a private placement to sophisticated, accredited investors, who 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 February 18, 2000, the Company issued warrants to purchase 12,500 shares
of common stock to O.B. Parrish, the Company's Chairman and Chief Executive
Officer, in connection with the extension of the due date of a $50,000 loan from
Mr. Parrish to February 18, 2001. The warrants have an exercise price of $0.72
per share. The warrants expire upon the earlier of their exercise or ten years
after the date of their issuance. The Company believes that it has satisfied
the exemption from the securities registration requirement provided by section
4(2) of the Securities Act in connection with this issuance.
On February 12, 2000, the Company issued warrants to purchase 62,500 shares
of common stock to Stephen M. Dearholt in connection with the extension of the
due date of a $250,000 loan from Mr. Dearholt to February 12, 2001. On March
25, 2000, the Company issued warrants to purchase 250,000 shares of common stock
to Stephen M. Dearholt in connection with the extension of the due date of a
$1,000,000 loan from Mr. Dearholt to March 25, 2001. The Company believes that
it has satisfied the exemption from the securities registration requirement
provided by section 4(2) of the Securities Act in connection with these
issuances.
In June, 2000, the Company sold 500,000 shares of its common stock to two
investors, including 400,000 shares to a trust for the benefit of a child of
Stephen M. Dearholt, a director of the Company. The Company received cash
proceeds of $250,000 from this sale. The Company believes it has satisfied the
exemption from the securities registration requirement provided by section 4(2)
of the Securities Act and Regulation D promulgated thereunder in this offering
since the securities were sold in a private placement to sophisticated,
accredited investors, who provided representations which the Company deemed
necessary to satisfy itself that were accredited investors and were purchasing
for investment and not with a view to resale in connection with a public
offering.
II-5
<PAGE>
On May 19, 2000 and June 3, 2000, the Company issued warrants to purchase
375,000 shares of common stock to five investors, in connection with the
one-year extension of the due date of a $1,500,000 convertible debenture with
the exercise price of the warrants is the lesser of 70% of market value or $1.00
per share. The warrants expire upon the earlier of their exercise or four years
after the date of their issuance. The Company believes that it has satisfied
the exemption from the securities registration requirement provided by section
4(2) of the Securities Act in connection with this issuance.
On June 15, 2000, the Company issued 150,000 shares of common stock to one
person as compensation for consulting services. The Company believes that it
has satisfied the exemption from the securities registration requirement
provided by section 4(2) of the Securities Act in connection with this issuance.
II-6
<PAGE>
Item 27. Exhibits. The following exhibits are filed as part of this
Registration Statement.
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT NO.. DESCRIPTION
------------ --------------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company.(20)
3.2 Articles of Amendment to the Amended and Restated Articles of Incorporation of the
Company.
3.3 Amended and Restated By-Laws of the Company.(3)
4.1 Amended and Restated Articles of Incorporation (same as Exhibit 3.1).
4.2 Articles II, VII and XI of the Amended and Restated By-Laws of the Company
(included in Exhibit 3.2).(3)
4.3 Private Equity Line of Credit Agreement between the Company and Kingsbridge
Capital Limited dated November 19, 1998.(2)
4.4 Registration Rights Agreement between the Company and Kingsbridge Capital Limited
dated as of November 19, 1998.(2)
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.(2)
4.6 Agreement between Kingsbridge Capital Limited and the Company dated February 12,
1999. (23)
4.7 Consulting Agreement between the Company and Kingsbridge Capital Limited dated
February 12, 1999.(23)
4.8 Registration Rights Agreement between Kingsbridge Capital Limited and the Company
dated February 12, 1999.(23)
4.9 Warrant for 100,000 shares of the Company's common stock issued to Kingsbridge
Capital Limited as of February 12, 1999.(23)
5 Legal Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. regarding
legality of Securities being issued.
10.1 Employment Agreement between John Wundrock and the Company dated October 1,
1989.(3)
10.2 Wisconsin Pharmacal Company, Inc. (k/n/a The Female Health Company) 1990 Stock
Option Plan.(4)
10.3 Commercial Building Lease dated May 1, 1992 covering the Jackson, Wisconsin,
office and manufacturing facility.(5)
10.4 Reality Female Condom Clinical Trial Data Agreement between the Company and
Family Health International dated September 24, 1992.(6)
10.5 Trademark License Agreement for Reality Trademark.(7)
10.6 Office space lease between the Company and John Hancock Mutual Life Insurance
Company dated June 1, 1994.(8)
II-7
<PAGE>
10.7 Employment Agreement dated September 10, 1994 between the Company and
Dr. Mary Ann Leeper.(9)
10.8 1994 Stock Option Plan.(10)
10.9 Investor relations and development services Consulting Agreement between the
Company and C.C.R.I. Corporation dated March 13, 1995.(11)
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company and
C.C.R.I. Corporation, as amended on April 22, 1996.(12)
10.11 Company Promissory Note payable to Stephen M. Dearholt for $1 million dated
March 25, 1996 and related Note Purchase and Warrant Agreement, warrants and Stock
Issuance Agreement.(13)
10.12 Outside Director Stock Option Plan.(12)
10.13 Exclusive Distribution Agreement between Chartex International Plc and Taiho
Pharmaceutical Co., Ltd. dated October 18, 1994.(14)
10.14 Supply Agreement between Chartex International Plc and Deerfield Urethane, Inc.
dated August 17, 1994.(14)
10.15 Employment Letter dated February 28, 1990 from Chartex Resources Ltd. to Michael
Pope and Board Amendments thereto.(14)
10.16 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)
10.17 Letter Amendment to Asset Sale Agreement dated April 29, 1996 between the
Company and Dowty Seals Limited and Chartex International Plc.(14)
10.18 Form of 8% Convertible Debenture due August 31, 1999 issued by the Company to
certain foreign investors on September 12, 1996.(15)
10.19 Form of Warrant issued by the Company to certain foreign investors as of
September 12, 1996.(15)
10.20 Fund Raising Agreement dated May 1, 1998 by and between Hartinvest-Medical
Ventures and the Company. (2)
10.21 Change of Control Agreement dated January 27, 1999, between The Female Health
Company and Michael Pope.(16)
10.22 Company Promissory Note to Stephen M. Dearholt for $250,000 dated February 1,
1999 and related Note Purchase And Warrant Agreement, warrants and Stock issuance
Agreement.(16)
10.23 Company Promissory Note to O.B. Parrish for $50,000 dated February 1, 1999 and
related Note Purchase And Warrant Agreement, warrants and Stock issuance
Agreement.(16)
II-8
<PAGE>
10.24 Company Promissory Note to Stephen M. Dearholt for $1 million dated March 25,
1999 and related Note Purchase and Warrant Agreement, Warrant and Stock Issuance
Agreement.(16)
10.25 Form of Registration Rights Agreement between the Company and certain private
placement investors dated as of June 1, 1999.(17)
10.26 Amendment to Registration Rights Agreement between the Company and Private
Placement Investors dated as of June 1, 1999.(17)
10.27 1 million Convertible Debenture issued by the Company to Gary Benson dated
May 19, 1999.(17)
10.28 100,000 Convertible Debenture issued by the Company to Daniel Bishop dated
June 2, 1999.(17)
10.29 100,000 Convertible Debenture issued by the Company to Robert Johander dated
June 3, 1999.(17)
10.30 100,000 Convertible Debenture issued by the Company to Michael Snow dated
June 3, 1999.(17)
10.31 100,000 Convertible Debenture issued by the Company to W.G. Securities Limited
Partnership dated June 3, 1999.(17)
10.32 Warrant to purchase 1,250,000 shares of the Company's common stock issued to Gary
Benson on May 19, 1999.(17)
10.33 Warrant to purchase 125,000 shares of the Company's common stock issued to Daniel
Bishop on June 3, 1999.(17)
10.34 Warrant to purchase 125,000 shares of the Company's common stock issued to Robert
Johander on June 3, 1999.(17)
10.35 Warrant to purchase 250,000 shares of the Company's common stock issued to Michael
Snow on June 3, 1999.(17)
10.36 Warrant to purchase 125,000 shares of the Company's common stock issued to
W.G. Securities Limited Partnership on June 3, 1999.(17)
10.37 Form of Common Stock Purchase Warrant to acquire 337,500 shares issued to
R.J. Steichen as placement agent.(17)
10.38 Form of Change of Control Agreement between the Company and each of O.B. Parrish
and Mary Ann Leeper.(20)
10.39 Lease Agreement among Chartex Resources Limited, P.A.T. (Pensions) Limited and
The Female Health Company.(18)
10.40 Agreement dated March 14, 1997, between the Joint United Nations Programme on
HIV/AIDS and Chartex International PLC.(19)
II-9
<PAGE>
10.41 Company promissory note payable to Stephen M. Dearholt for $1 million dated
March 25, 1997, and related stock purchase and warrant agreement, warrants and stock
issuance agreement.(21)
10.42 1997 Stock Option Plan.(19)
10.43 Employee Stock Purchase Plan.(19)
10.44 Agreement dated September 29, 1997, between Vector Securities International and The
Female Health Company.(19)
10.45 Company Promissory Note to Stephen M. Dearholt for $250,000 dated February 12,
2000 and related Warrants.(24)
10.46 Company Promissory Note to O.B. Parrish for $50,000 dated February 18, 2000 and
related Warrants.(24)
10.47 Company Promissory Note to Stephen M. Dearholt for $1 million dated March 25,
2000 and related Warrants.(24)
10.48 Stock Purchase Agreement, dated as of June 14, 2000, between The Female Health
Company and The John W. Dearholt Trust.
10.49 Warrant to purchase 250,000 shares of the Company's common stock issued to Gary
Benson on May 19, 2000. (25)
10.50 Warrant to purchase 25,000 shares of the Company's common stock issued to Daniel
Bishop on June 3, 2000. (25)
10.51 Warrant to purchase 25,000 shares of the Company's common stock issued to Robert
Johander on June 3, 2000. (25)
10.52 Warrant to purchase 50,000 shares of the Company's common stock issued to Michael
Snow on June 3, 2000. (25)
10.53 Warrant to purchase 25,000 shares of the Company's common stock issued to W.G.
Securities Limited Partnership on June 3, 2000. (25)
10.54 Stock Purchase Agreement, dated as of June 14, 2000, between the Company and The
John W. Dearholt Trust. (25)
10.55 Exclusive Distribution Agreement, dated as of ______, 2000, between the Company
and Mayer Laboratories, Inc.
21 Subsidiaries of Registrant.(22)
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c. (included in
Exhibit 5).
24 Power of Attorney (incorporated by reference to the signature page hereof).
____________
<FN>
(1) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
(2) Incorporated herein by reference to the Company's Form SB-2 Registration Statement filed
December 8, 1998.
II-10
<PAGE>
(3) Incorporated herein by reference to the Company's Registration Statement on Form S-18,
Registration No. 33-35096, as filed with the Securities and Exchange Commission on May 25, 1990.
(4) Incorporated herein by reference to the Company's December 31, 1990 Form 10-Q.
(5) Incorporated herein by reference to the Company's June 30, 1992 Form 10-Q.
(6) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1, Registration No. 33-51586, as filed with the Securities and
Exchange Commission on September 28, 1992.
(7) Incorporated herein by reference to the Company's 1992 Form 10-KSB.
(8) Incorporated herein by reference to the Company's June 30, 1994 Form 10-Q.
(9) Incorporated herein by reference to the Company's Registration Statement on Form S-2,
Registration No. 33-84524, as filed with the Securities and Exchange Commission on September 28,
1994.
(10) Incorporated herein by reference to the Company's 1994 Form 10-KSB.
(11) Incorporated herein by reference to the Company's March 31, 1995 Form 10-Q.
(12) Incorporated herein by reference to the Company's Form S-1 Registration Statement filed
with the Securities and Exchange Commission on April 23, 1996.
(13) Incorporated herein by reference to the Company's June 30, 1995 Form 10-Q.
(14) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Company's Form S-1
Registration Statement filed with the Securities and Exchange Commission on June 5, 1996.
(15) Incorporated herein by reference to the Company's 1996 Form 10-K.
(16) Incorporated herein by reference to the Company's March 31, 1999 Form 10-QSB.
(17) Incorporated herein by reference to the Company's June 30, 1999 Form 10-QSB.
(18) Incorporated herein by reference to the Company's December 31, 1996 Form 10-QSB.
(19) Incorporated herein by reference to the Company's Form 10-KSB/A-1 for the year ended
September 30, 1997.
(20) Incorporated herein by reference to the Company's Form SB-2 Registration Statement filed
with the Securities and Exchange Commission on October 19, 1999.
(21) Incorporated herein by reference to the Company's March 31, 1997 Form 10-QSB.
II-11
<PAGE>
(22) Incorporated herein by reference to the Company's Form 10-KSB for the year ended September
30, 1999.
(23) Incorporated herein by reference to the Company's December 31, 1998 Form 10-QSB.
(24) Incorporated herein by reference to the Company's March 31, 2000 Form 10-QSB.
(25) Incorporated herein by reference to the Company's June 30, 2000 Form 10-QSB.
</TABLE>
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-12
<PAGE>
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 21st day of September, 2000.
THE FEMALE HEALTH COMPANY
BY /s/ O.B. Parrish
------------------------------------
Its Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints O.B. Parrish and
Mary Ann Leeper, and each of them individually, his true and lawful
attorney-in-fact, with power to act with or without the other and with full
power of substitution and resubstitution, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to the Registration
Statement and file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully cause to be done by virtue hereof.
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 September 21, 2000
------------------------ Executive Officer and Director
O.B. Parrish (Principal Executive Officer)
/s/ Mary Ann Leeper President and Chief Operating September 21, 2000
------------------------ Officer and Director
Mary Ann Leeper, Ph.D.
/s/ Robert R. Zic Director of Finance and September 21, 2000
------------------------ Administration (Principal
Robert R. Zic Accounting Officer)
/s/ William R. Gargiulo Secretary and Director September 21, 2000
------------------------
William R. Gargiulo, Jr.
Director September __, 2000
-----------------------
David R. Bethune
/s/ Stephen M. Dearholt Director September 21, 2000
-----------------------
Stephen M. Dearholt
Director September __, 2000
-----------------------
James R. Kerber
Director September __, 2000
-----------------------
Michael R. Walton
</TABLE>
II-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ------------------------------------------------- ------
<C> <S> <C>
3.2 Articles of Amendment to the Amended and Restated
Articles of Incorporation of the Company
5 Legal Opinion of Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, s.c.
10.55 Exclusive Distribution Agreement, dated as of
______, 2000, between the Company and Mayer
Laboratories, Inc.
23 Consent of McGladrey & Pullen, LLP
</TABLE>
