VERU INC. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington,
D.C.
20549
FORM
10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended September 30, 2008
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
file number 1-13602
The
Female Health
Company
(Name
of
registrant as specified in its charter)
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Wisconsin
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39-1144397
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|
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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515
N. State Street, Suite
2225, Chicago, Illinois
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60654
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code (312) 595-9123
Securities
registered under Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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|
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Common
stock, $.01 par
value
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American
Stock Exchange
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Securities
registered under Section 12(g) of the Act:
None
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated
file o(Do
not check if a smaller reporting
company)
Smaller reporting company þ
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No þ
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 2008, was approximately $48.8 million
based on the per share closing price as of March 31, 2008 quoted on the American
Stock Exchange for the registrant’s common stock, which was $2.48.
There
were 27,146,158 shares of the registrant’s common stock, $0.01 par value per share outstanding at December
10, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE:
None
THE
FEMALE HEALTH COMPANY
FORM
10-K
SEPTEMBER
30, 2008
TABLE
OF CONTENTS
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PART
I
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Page
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Item
1.
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Business
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5
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Item
2.
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Properties
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15
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Item
3.
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Legal
Proceedings
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15
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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15
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PART
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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16
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Item
6.
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Selected
Financial Data
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18
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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25
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Item
8.
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Financial
Statements and Supplementary Data
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25
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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25
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Item
9A(T).
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Controls
and Procedures
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25
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Item
9B.
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Other
Information
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| PART III |
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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26
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Item
11.
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Executive
Compensation
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32
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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37
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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40
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Item
14.
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Principal
Accountant Fees and Services
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41
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| PART IV |
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Item
15.
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Exhibits
and Financial Statement Schedules
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42
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Signatures
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48
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3
Certain
statements included in this Annual Report on Form 10-K which are not statements
of historical fact are intended to be, and are hereby identified as,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that forward-looking
statements involve known and unknown risks, uncertainties and other factors
that
may cause the actual results, performance or achievements of the Company to
be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the Company's inability to secure adequate capital
to fund operations, working capital requirements, advertising and promotional
expenditures and principal and interest payments on debt obligations; factors
related to increased competition from existing and new competitors including
new
product introduction, price reduction and increased spending on marketing;
limitations on the Company's opportunities to enter into and/or renew agreements
with international partners, the failure of the Company or its partners to
successfully market, sell, and deliver its product in international markets,
and
risks inherent in doing business on an international level, such as laws
governing medical devices that differ from those in the U.S., unexpected changes
in the regulatory requirements, political risks, export restrictions, tariffs,
and other trade barriers, and fluctuations in currency exchange rates; the
disruption of production at the Company's manufacturing facilities due to raw
material shortages, labor shortages, and/or physical damage to the Company's
facilities; the Company's inability to manage its growth and to adapt its
administrative, operational and financial control systems to the needs of the
expanded entity and the failure of management to anticipate, respond to and
manage changing business conditions; the loss of the services of executive
officers and other key employees and the Company's continued ability to attract
and retain highly-skilled and qualified personnel; the costs and other effects
of litigation, governmental investigations, legal and administrative cases
and
proceedings, settlements and investigations; and developments or assertions
by
or against the Company relating to intellectual property rights.
4
PART
I
Item
1.
Business
General
The
Female Health Company ("FHC" or the "Company") manufactures, markets and sells
the female condom (FC), the only product approved by the U.S. Food and Drug
Administration (FDA) under a woman's control which provides dual protection
against unintended pregnancy and sexually transmitted diseases ("STDs"),
including HIV/AIDS.
FC
has
undergone extensive testing for efficacy, safety and acceptability, not only
in
the United States but also in many countries around the world. Certain of these
studies show that having FC available allows women to have more options,
resulting in an increase in protected sex acts and a decrease in STDs, including
HIV/AIDS.
The
product is currently sold or available through various channels in 116
countries. It is commercially marketed directly to consumers in 15
countries by various country specific partners, including in the United States,
the United Kingdom, France, Brazil, India and Canada. Currently,
public sector female condom programs in various stages are ongoing in over
90
countries.
In
September 2005, FHC completed development of FC2, its second generation female
condom. FC2 has basically the same physical design, specifications, safety
and
efficacy profile as FC. Manufactured from a nitrile polymer, FC2 can be produced
more economically than the first generation product made from polyurethane,
a
higher cost raw material. FC2 has received the CE Mark which allows the Company
to market FC2 throughout the European Union ("EU"). In August 2006, the Company
was notified by the World Health Organization (WHO) that after a stringent
technical review process regarding design, product characteristics, quality
control and manufacturing technology, FC2 is in principle being manufactured
to
at least the same standard as the polyurethane female condom, FC. In addition,
the design and physical characteristics of FC2, supported by the clinical data,
suggest that FC and FC2 are functionally equivalent, when used correctly and
consistently. Based on this assessment, WHO has stated that FC2 is acceptable
for bulk procurement by UN agencies subject to the standard quality assurance
measures being applied prior to procurement. In January 2008,
the Company submitted a PMA application to the FDA for FC2. The FDA’s
OB/GYN Device Advisory Committee unanimously voted at its December 11, 2008
meeting that the Company’s second-generation female condom, the FC2 female
condom, is approvable with a single condition. The condition is that
the FC2 female condom’s instructions for use continue to follow use instructions
for the FC female condom and appropriately identify the study that was performed
to establish the comparable safety and effectiveness of FC2 with
FC. The FDA is not bound by the committee’s recommendation, but it
takes its advice into consideration when completing its review of obstetric
and
gynecologic devices. If the FDA determines the FC2 female condom
approvable, the final step will be to confirm the package labeling and
directions.
5
In
July
2007, The Female Health Company obtained approval for its common stock to be
listed on the American Stock Exchange (AMEX) and began trading on AMEX under
the
symbol “FHC” on July 9, 2007. On December 1, 2008, following the
merger of The American Stock Exchange with the New York Stock Exchange, the
Company’s stock began to trade on the NYSE Alternext under the symbol
“FHC”.
On
October 1, 2007, The Female Health Company (M) SDN, BHD, a wholly owned
subsidiary of The Female Health Company-UK which was incorporated in May, 2007,
began operations in Selangor D.E. Malaysia. The Malaysian entity
manufactures the Company’s second generation product, FC2.
History
The
female condom was invented by a Danish physician who obtained a U.S. patent
for
the product in 1988. The physician subsequently sold certain rights to the
condom to Chartex Resources Limited. In the years that followed, Chartex, with
resources provided by a Danish entrepreneur and a nonprofit Danish foundation,
developed the manufacturing processes and completed other activities associated
with bringing the female condom to market in certain non-U.S. countries. The
Company, known as Wisconsin Pharmacal Company, Inc. (the Company's predecessor),
owned certain rights to the female condom in the U.S., Canada and Mexico,
pursued the pre-clinical and clinical studies and overall development of the
product for worldwide use and U.S. FDA approval of the product.
The
Female Health Company is the successor to Wisconsin Pharmacal Company, Inc.,
a
company which previously manufactured and marketed a wide variety of disparate
specialty chemical and branded consumer products in addition to owning certain
rights to the female condom described above. The Company was originally
incorporated in Wisconsin in 1971.
In
fiscal
1995, the Company's Board of Directors approved a plan to complete a series
of
actions designed, in part, to maximize the potential of the female condom.
First, the Company restructured
and transferred all of the assets and liabilities of the Company other than
those related primarily to the female condom to a newly formed, wholly-owned
subsidiary of the Company, WPC Holdings, Inc. ("Holdings"). In January 1996,
the
Company sold Holdings to an unrelated third party. Then, in February 1996,
the
Company acquired Chartex (renamed The Female Health Company - UK in 1997),
the
manufacturer and owner of certain worldwide rights to, and the Company's sole
supplier of, the female condom. As a result of the sale of Holdings and the
acquisition of Chartex, The Female Health Company evolved to its current state
with its sole business consisting of the manufacture, marketing and sale of
the
female condom.
The
FDA
approved FC for distribution in 1993 and approved the Company's UK FC
manufacturing facility in 1994. Since that time, the Company has sold about
180
million female condoms (FC and FC2) around the world.
6
Strategy
The
Company’s strategy is to fully develop the market for FC and FC2 on a global
basis. In doing so, it has developed contacts and relationships with global
public health sector organizations such as WHO, the United Nations Population
Fund (UNFPA), the Joint United Nations Programme on HIV/AIDS
(UNAIDS), the U.S. Agency for International Development (USAID),
country-specific health ministries and non-governmental organizations (NGOs),
and commercial partners in various countries. To provide its customers with
prevention program and technical product support, the Company has placed
representatives in the major regions of the world: Asia, Africa, Europe, North
America and Latin America. The Company manufactures the first generation
product, FC, in London, England. To accelerate market penetration and
increase volume, the Company developed FC2, a nitrile polymer product less
costly to produce which is available at a lower price than FC. FC2 is
currently being produced at the Company’s facility in Selangor D.E., Malaysia
and in Kochi, India, in conjunction with FHC’s business partner, Hindustan Latex
Limited (“HLL”). The Company made its first substantial sales of FC2 in the
second quarter of fiscal 2007. In fiscal 2008, FC2 comprised 40% of the units
sold.
With
the
product’s primary market currently being the public sector, the Company incurs
minimal sales and marketing expense. Thus, as the demand for the
female condom continues to grow in the public sector, the Company’s operating
expenses are likely to grow at a much lower rate than that of
volume.
Products
Currently,
there are only three FDA approved products marketed that prevent the
transmission of HIV/AIDS through sexual intercourse: the male latex condom,
the
male polyurethane condom and the FC female polyurethane condom. FC is the only
FDA approved product controlled by women that prevents sexually transmitted
diseases including HIV/AIDS. Used consistently and correctly, it provides women
dual protection against STD’s (including HIV/AIDS) and unintended
pregnancy. The female condom does not compete with the male condom,
but is an alternative to either male condom use or to unprotected
sex.
Numerous
clinical and behavioral studies have been conducted regarding use of FC. Studies
show that FC is found acceptable by women and their partners in many cultures.
Importantly, studies also show that when FC is made available with male condoms
there is a significant increase in protected sex acts. The increase in
protected sex acts varies by country and averages between 10% and
35%.
FC
is
made of polyurethane, a thin but strong material which is resistant to rips
and
tears during use. FC consists of a soft, loose fitting sheath and two flexible
O
rings. One of the rings is used to insert the device and helps to hold it in
place. The other ring remains outside the vagina after insertion. FC lines
the
vagina, preventing skin-to-skin contact during intercourse.
7
In
September 2005, FHC completed development of FC2, its second generation female
condom. FC2 has basically the same physical design, specifications, safety
and
efficacy profile as FC. Manufactured from a nitrile polymer, FC2 can be produced
more economically than the first generation product made from polyurethane,
a
more costly raw material. FC2 has received the CE Mark which
allows the Company to market FC2 throughout the EU. In August 2006, the Company
was notified by WHO that after a stringent technical review process regarding
design, product characteristics, quality control and manufacturing technology,
FC2 is in principle being manufactured to at least the same standard as the
polyurethane female condom, FC. In addition, the design and physical
characteristics of FC2, supported by the clinical data, suggest that FC and
FC2
are functionally equivalent, when used correctly and consistently. Based on
this
assessment, WHO has stated that FC2 is acceptable for bulk procurement by UN
agencies subject to the standard quality assurance measures being applied prior
to procurement.
On
January 8, 2008, the Company submitted the FC2 pre-market approval application
(PMA) to the FDA. The FDA accepted it for review on January 28, 2008.
The FDA’s OB/GYN Device Advisory Committee unanimously voted at its December 11,
2008 meeting that the Company’s second-generation female condom, the FC2 female
condom, is approvable with a single condition. The condition is that
the FC2 female condom’s instructions for use continue to follow use instructions
for the FC female condom and appropriately identify the study that was performed
to establish the comparable safety and effectiveness of FC2 with
FC. The FDA is not bound by the committee’s recommendation, but it
takes its advice into consideration when completing its review of obstetric
and
gynecologic devices. If the FDA determines the FC2 female condom
approvable, the final step will be to confirm the package labeling and
directions.
The
raw
materials of which FC and FC2 are manufactured offer a number of benefits over
latex, the material that is most commonly used in male condoms. Both materials,
polyurethane and FC2’s nitrile polymer, are stronger than latex, reducing the
probability that the female condom sheath will tear during use. Unlike latex,
both polyurethane and FC2’s nitrile polymer quickly transfer heat, so the female
condom immediately warms to body temperature when it is inserted, which may
enhance pleasure and sensation during use. Unlike the male condom, the female
condom may be inserted in advance of arousal, eliminating disruption during
sexual intimacy. Both female condoms offer an alternative to latex sensitive
users (7% to 20% of the population) who are unable to use male condoms without
irritation. To the Company's knowledge, there is no reported allergy to either
polyurethane or the nitrile polymer to date.
Both
products, FC and FC2, are pre-lubricated and disposable and are recommended
for
use during a single sex act.
Cost
Effectiveness of the Female Condom
A
study
entitled "Cost-effectiveness of the female condom in preventing HIV and STDs
in
commercial sex workers in South Africa" was reported in the Journal of Social Science
and
Medicine in 2001. This study shows that making FC available is highly
cost effective in reducing public health costs in developing countries as well
as in the U.S.
8
In
October 2006, a study regarding FC2 entitled “Country-wide distribution of the
nitrile female condom (FC2) in Brazil and South Africa: a cost effectiveness
analysis” was published in AIDS. The study
concludes that expanded distribution of FC2 in Brazil and South Africa may
avert
hundreds to thousands of HIV infections annually at an incremental cost to
government or donors that is less than that of antiretroviral
therapy. The study also found that if only 16.6 million female
condoms were distributed in South Africa, almost 10,000 HIV infections would
be
prevented. If 53.7 million female condoms were distributed, 32,000
HIV infections would be prevented. Comparing the dollar value of
health care costs averted with the cost of distributing the female condoms,
the
total cost savings would be between $5.3 million and $35.7
million. Similarly, if 26.2 million condoms were distributed in
Brazil, 600 HIV infections would be averted. If 84.8 million condoms
were distributed, 2,000 new HIV infections would be prevented. In
total, the savings in Brazil alone could range from $1.1 million to $27
million.
Female
Condom Reuse
Studies
have shown that FC can be reused up to five times. WHO’s website includes the
proper procedure for the washing and preparation of FC if it is going to be
reused. WHO, UNAIDS and FHC concur that FC should only be reused when
a new female condom is not available. FC2 is not
reusable.
Global
Market Potential
The
only
means of preventing sexual transmission of HIV/AIDS, besides abstinence, is
condoms, male and female. In recent years, scientists have sought to
develop alternative means of preventing HIV/AIDS. Unfortunately, the
development attempts have not been successful to date: four
microbicides have failed in clinical trials and the most promising HIV/AIDS
vaccine under development has also failed. Thus, HIV/AIDS prevention
is focused on condoms, male and female. The Company’s female condom
is the only product, when used consistently and correctly, that gives a woman
control over her sexual health by providing dual protection against sexually
transmitted diseases (including HIV/AIDS), and unintended
pregnancy.
The
first
clinical evidence of AIDS was noted more than twenty years ago. Since
then, HIV/AIDS has become the most devastating pandemic facing humankind in
recorded history. UNAIDS in its July 2008 Aids Epidemic Update reported that
approximately 33 million people globally were living with HIV.
Approximately 2.7 million new cases of HIV will be reported this year while
about 2 million people will have died from the disease. Sub-Saharan Africa
remains most heavily affected by HIV, accounting for 67% of all people living
with HIV and for 72% of AIDS deaths in 2007. Women now account for
50% of those living with HIV/AIDS and in some Sub-Saharan African countries,
for
more than 70% of those infected. In a published paper by Dr. Colin
Mathers and Dejan Loncar of the WHO, “Projections of Global Mortality and Burden
of Disease from 2002 to 2030," they estimate that at least 117 million people
will have died of or will have AIDS by 2030.
In
the
United States, the Centers for Disease Control and Prevention reported in 2006
that the HIV/AIDS epidemic is taking an increasing toll on women and girls.
Women of color, particularly Black women, have been especially hard hit and
represent the majority of new HIV and AIDS cases among women, and the majority
of women living with the disease. Black women accounted for 67% of AIDS
cases among women aged 13 and older diagnosed in 2005, but only 12% of the
U.S.
population of women. Latinas accounted for 16% of estimated AIDS
cases in 2005, compared to 13% of the female population aged 13 and
over.
9
For
the
most recent year in which data are available (2004), the Centers for Disease
Control and Prevention reported that HIV infection was:
●
the leading cause of death for African American women aged 25-34
years;
●
the 3rd
leading
cause of death for African American women aged 35-44 years; and
●
the 4th
leading
cause of death for African American women aged 45-54 years and for Hispanic
women aged 35-44.
Most
HIV/AIDS diagnoses among women are due to high-risk heterosexual contact (80%
in
2005). The rate of AIDS diagnosis for black women was approximately
18 times the rate for white women, while the prevalence rate among Hispanic
women was more than four times that of white women.
In
March
2008, CDC announced that a recent study indicated that 26% of female adolescents
in the United States has at least one of the most common sexually transmitted
infections (STI’s). Led by CDC’s Sara Forhan, the study is the first
to examine the combined national prevalence of common STI’s among adolescent
women in the United States.
In
addition to overall STI prevalence, the study found that by race, African
American teenage girls had the highest prevalence, with an overall prevalence
of
48 percent compared to 20 percent among both whites and Mexican
Americans. Overall, approximately half of all the teens in the study
reported ever having sex. Among these girls, the STI prevalence was
40 percent.
The
Condom Market
The
global male condom market (public and private sector) is estimated to be $3
billion. The global public sector market for male condoms is
estimated to have been greater than 10 billion units annually since 2005. Given
the rapid spread of HIV/AIDS in India and China, UNAIDS estimates that the
annual public sector demand for condoms, both male and female, will reach 19
billion units within the next ten years.
Government
Regulation
FC
received PMA as a Class III Medical Device from the FDA in 1993. The extensive
clinical testing and scientific data required for FDA approval laid the
foundation for approvals throughout the rest of the world, including receipt
of
a CE Mark in 1997 which allows the Company to market FC throughout the European
Union. In addition to the United States and the EU, several other countries
have
formally reviewed and approved FC for sale, including Canada, Australia, Japan
and India.
10
The
Company believes that FC's PMA and FDA classification as a Class III Medical
Device create a significant barrier to entry in the U.S. market. The Company
estimates that it would take a minimum of four to six years to implement,
execute and receive FDA approval of a PMA to market another type of female
condom.
FC2
received the CE mark which allows it to be marketed throughout the European
Union. FC2 has also been approved by both Brazil’s and India’s
Regulatory authorities.
In
the
U.S., FC is regulated by the FDA. Pursuant to section 515(a)(3) of the Safe
Medical Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend
approval and initiate withdrawal of the PMA if the FDA finds that FC is unsafe
or ineffective, or on the basis of new information with respect to the device,
which, when evaluated together with information available at the time of
approval, indicates a lack of reasonable assurance that the device is safe
or
effective under the conditions of use prescribed, recommended or suggested
in
the labeling. Failure to comply with the conditions of FDA approval invalidates
the approval order. Commercial distribution of a device that is not in
compliance with these conditions is a violation of the SMA Act. The
Company submitted a PMA for FC2 to the FDA in January 2008. The FDA’s
OB/GYN Device Advisory Committee unanimously voted at its December 11, 2008
meeting that the Company’s second-generation female condom, the FC2 female
condom, is approvable with a single condition. The condition is that
the FC2 female condom’s instructions for use continue to follow use instructions
for the FC female condom and appropriately identify the study that was performed
to establish the comparable safety and effectiveness of FC2 with
FC. The FDA is not bound by the committee’s recommendation, but it
takes its advice into consideration when completing its review of obstetric
and
gynecologic devices. If the FDA determines the FC2 female condom
approvable, the final step will be to confirm the package labeling and
directions.
Significant
Customers
While
the
female condom (FC and FC2) provides dual protection against sexually transmitted
diseases, including HIV/AIDS, and unintended pregnancy, it is most commonly
used
to prevent sexually- transmitted diseases and is an integral part of many
HIV/AIDS prevention programs throughout the world. These prevention
programs are typically supplied by global public sector buyers who purchase
products for distribution, at low cost or no cost, to those who need but cannot
afford to buy such products themselves. Within the global public
sector are large international agencies such as UNFPA (UN Population Fund),
USAID (United States Agency for International Development) various Ministries
of
Health, state and local health agencies and NGO’s (non-governmental agencies)
such as Population Services International. The Company’s most
significant customers are either global public sector agencies or those who
facilitate their purchases and/or distribution. In fiscal year 2008,
significant customers were UNFPA (19% of sales), John Snow, Inc., facilitator
of
USAID I DELIVER project (25% of sales) and Sekunjalo, distributor to the
Republic of South Africa (17% of sales).
11
Commercial
Markets – Direct to Consumers
The
Company markets FC directly in the United Kingdom. The Company has distribution
agreements with commercial partners which market directly to consumers in 15
countries, including the United States, Brazil, Canada, Mexico, Spain, France,
Japan and India. These agreements are generally exclusive for a single country.
Under these agreements, the Company manufactures and sells the female condom
to
the distributor partners, who, in turn market and distribute the product to
consumers in the established territory. FC2 is being sold
commercially in India, France and Brazil.
Relationships
and Agreements with Public Sector Organizations
The
Company has an agreement with UNAIDS to supply FC to developing countries at
a
reduced price which can be negotiated each year based on the Company's cost
of
production. The current price per unit ranges between £0.42 and £0.445 (British
pounds sterling), or approximately $0.76 to $0.81, depending on contractual
volumes. Under the agreement, UNAIDS and the Company cooperate in educational
efforts and marketing FC in developing countries. Sales of FC are made directly
to international public agencies and to public health authorities in each
country at the price established by the agreement with UNAIDS. The agreement
expires on December 31, 2008, but is automatically renewed for one year
unless either party gives at least 90 days prior written notice of termination.
FC is available in over 90 countries through public sector
distribution.
In
May
2006, the Company received an initial order for 500,100 FC female condoms from
the National AIDS Control Organization (NACO) of the Ministry of Health &
Family Welfare, Government of India. The order, placed through UNFPA,
supplied female condoms for NACO’s year-long program effectiveness
study. The female condoms were distributed to 60,000 women at 13
sites in eight states. Because the pilot project was highly successful showing
consistent use of FC, NACO decided to scale up the program under which women
are
trained on how to use the female condom. In June 2008, the Company and HLL
were
successful in winning an order from NACO. The order, for 1.5 million
female condoms, was manufactured in Kochi, India, in HLL’s newly commissioned
factory and will be used in the scaled up prevention program.
The
Company sells the female condom in the United States to city and state public
health clinics as well as not-for-profit organizations such as Planned
Parenthood. The female condom is currently available in 95 locations
in New York City, including both community based organizations and the N.Y.C.
Department of Health and Mental Hygiene units, it is being distributed as part
of New York City’s Female Condom Education and Distribution Project being
conducted by the Bureau of HIV/AIDS Prevention and Control.
Employees
As
of
December 10, 2008, the Company had 168 full-time employees, including 9 located
in the U.S., 144 in the UK and 15 in Malaysia, and no part-time
employees. No Company employees are represented by a labor union. The Company
believes that its employee relations are good. In Malaysia,
direct labor is supplied primarily by a contracted work force.
12
Research
and Development
In
September 2005, the Company announced that development of its second generation
product, FC2 was complete. Throughout fiscal 2006, the Company
developed and scaled-up the FC2 manufacturing process, which was completed
by
approximately March 31, 2007. Throughout the remainder of fiscal 2007
and throughout fiscal 2008, the Company conducted various activities in
preparation and support of a PMA for FC2. The Company incurred
research and development costs of approximately $284,000 in fiscal 2008 and
approximately $209,000 in fiscal 2007.
Environmental
Regulation
The
Company believes there are no material issues or material costs associated
with
the Company's compliance with environmental laws related to the manufacture
and
distribution of FC and FC2. The Company has incurred no expenses in
either fiscal 2008 or 2007, nor does it anticipate the need for any
environmental expenditures in the foreseeable future.
Raw
Materials
Polyurethane
is the principal raw material the Company uses to produce FC. The Company has
entered into a supply agreement with Deerfield Urethane, Inc. for the purchase
of the Company's requirement of polyurethane. Under this agreement, the parties
negotiate pricing on an annual basis. The term of the agreement currently
expires on December 31, 2009 and automatically renews for additional one year
periods unless either party gives at least 12 months prior written notice of
termination. There are no quantity commitments in this
agreement.
The
principal raw material used to produce FC2 is a nitrile polymer. While general
nitrile formulations are available from a number of suppliers, the Company
has
chosen to work closely with the technical market leader in synthetic polymers
to
develop a grade ideally suited to the bio-compatibility and functional needs
of
a female condom. The supplier has agreed that the Company is the sole
and exclusive owner of the unique polymer formulation that was developed for
FC2.
Manufacturing
Facilities
FC
The
Company manufactures FC in a 40,000 square-foot leased facility in London,
England. Manufacturing capacity at this facility is expandable to
60 million units per year with additional investment in
equipment.
FC2
The
Company began end-stage production of FC2 within a 1,900 square foot leased
facility located in Selangor D.E., Malaysia. That lease terminated on
December 31, 2007, after production was moving to a larger
facility. On September 1, 2007, the Company leased
16,000
13
sq.
ft.
of production space in Selangor D.E., Malaysia to house the expanding
operations. Manufacturing began in that location in December
2007. Current production capacity in Malaysia is 30 million units
annually.
The
Company’s India-based FC2 end-stage production capacity is located at a facility
owned by its business partner, Hindustan Latex Limited (HLL) in the Cochin
Special Export Zone. Production began at that facility in December 2007
with an initial capacity of 7.5 million units per year. In June,
2008, NACO placed an order of 1.5 million units for distribution in
India.
FHC’s
total FC2 production capacity is 37.5 million units annually. The
Company intends to expand its capacity at existing locations and/or manufacture
at additional locations as the demand for FC2 develops.
Competition
The
Company's female condom participates in the same market as male condoms but
is
not seen as directly competing with male condoms. Rather, the Company believes
that providing FC is additive in terms of prevention and choice. Latex male
condoms cost less and have brand names that are more widely recognized than
FC.
In addition, male condoms are generally manufactured and marketed by companies
with significantly greater financial resources than the Company.
Medtech
Products Ltd. ("MP"), a male latex condom company with a manufacturing facility
in Chennai, India, has developed a natural latex female condom. MP's
female condom has been marketed under various names including V-Amour, VA
Feminine Condom and L’Amour. USAID and Family Health International (FHI) are
currently evaluating the MP female condom for consideration to move into Phase
3
clinical study. The manufacturing process has a CE mark for
distribution in Europe and may be available in other countries. MP
received the Indian Drug Controller approval in January 2003. The product has
not received FDA approval nor has it been listed as an essential product by
WHO.
It
is
also possible that other parties may develop a female condom. These competing
products could be manufactured, marketed and sold by companies with
significantly greater financial resources than those of the
Company.
Patents
and Trademarks
The
Company currently holds product and technology patents for FC in the United
States. The Company’s current United States patents expire between 2009 and
2014. The Company understands these U.S. patents to cover FC as sold. The
patents are generally directed to the structural aspects of the product.
The Company also has patents covering technology and products relating to FC
in
Japan, the United Kingdom, France, Italy, Germany, Spain, the European Patent
Convention, Canada, the People’s Republic of China, South Korea and
Australia. These patents expire from 2008 to 2013. Patent
applications for FC2 are pending in the U.S. and in other countries around
the
world through the Patent Cooperation Treaty. The applications cover the key
aspects of the second generation female condom, including its overall design
and
manufacturing process. While there can be no assurance, these patents could
provide the Company with protection against copycat products entering the U.S.
market during the pendency of the patents. In South Africa, a patent for FC2
was
granted in fiscal year 2008.
14
The
Company has the registered trademark “FC Female Condom” in the United
States. The Company has also secured, or applied for, 12 trademarks in 22
countries to protect the various names and symbols used in marketing the product
around the world. These include "femidom" and "femy," “Reality” and others. In
addition, the experience that has been gained through years of manufacturing
the
FC female condom has allowed the Company to develop trade secrets and know-how,
including certain proprietary production technologies that further protect
its
competitive position. The Company has registered the trademark “FC2 Female
Condom” in the United States.
Backlog
At
December 10, 2008, product orders totaled $10,087,176 for FC and $730,843 for
FC2, or a total of $10,818,019. At December 15, 2007, product orders
totaled $4,692,000 for FC and $1,928,000 for FC2, or a total of
$6,620,000. Unfilled orders materially fluctuate from quarter to
quarter, and include orders with requested delivery dates later in fiscal 2009.
The Company expects current unfilled orders to be filled during fiscal
2009.
Item
2.
Description of Property
The
Company leases approximately 5,100 square feet of office space at 515 North
State Street, Suite 2225, Chicago, IL 60654. The lease expires
October 31, 2011. The Company utilizes warehouse space and sales fulfillment
services of an independent public warehouse located in Wood Dale, IL for storage
and distribution of the female condom. The Company manufactures the FC female
condom in a 40,000 square foot leased facility located in London, England under
a lease which expires in 2016, with the right to renew through 2027. The
FDA-approved manufacturing process is subject to periodic inspections by the
FDA
as well as the EU quality group. Current capacity at the U.K. facility could
be
expanded to 60 million units annually with additional investment in
equipment. The Company manufactures and
warehouses FC2 within a leased facility with 16,000 sq. ft. of production space,
in Selangor D.E., Malaysia. The lease, which began on September 1,
2007, has a three year term and is renewable for two additional three year
terms. The Company’s Malaysian production capacity is approximately 30 million
units annually.
Item
3.
Legal Proceedings.
The
Company is not currently involved in any pending legal proceedings.
Item
4.
Submission of Matters To A Vote Of Security Holders.
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended September 30, 2008.
15
PART
II
|
Item
5. Market For Registrant’s Common Equity, Related Stockholder Matters and
Small Issuer Purchases of Equity Securities
|
Shares
of
the Company's common stock have traded on the American Stock Exchange (AMEX)
under the symbol "FHC" since July 9, 2007. On December 1, 2008, following
the merger of The American Stock Exchange with the New York Stock Exchange,
the
Company’s stock began to trade on the NYSE Alternext under the symbol “FHC”.
Prior to July 9, 2007, shares of the Company's common stock traded on the
OTC Bulletin Board under the symbol "FHCO." The approximate number of record
holders of the Company's common stock at December 11, 2008 was 395. The Company
has paid no cash dividends on its common stock and does not expect to pay cash
dividends on its common stock in the foreseeable future. The Company anticipates
that for the foreseeable future it will retain any earnings for use in the
operation of its business. The Company's credit facility contains a provision
restricting the Company's ability to pay common stock dividends and
distributions. Information regarding the Company's high and low reported closing
prices for its common stock for the quarters indicated is set forth in the
table
below. Sale prices on the OTC Bulletin Board reflect inter-dealer prices,
without retail mark-ups, mark downs, or commissions.
|
Quarters
|
||||||||||||||||
|
FIRST
|
SECOND
|
THIRD
|
FOURTH
|
|||||||||||||
|
2008
Fiscal Year
|
||||||||||||||||
|
Price
per common share – High
|
$ | 3.60 | $ | 2.84 | $ | 2.87 | $ | 3.15 | ||||||||
|
Price
per common share – Low
|
$ | 2.20 | $ | 2.17 | $ | 2.30 | $ | 2.15 | ||||||||
|
2007
Fiscal Year
|
||||||||||||||||
|
Price
per common share – High
|
$ | 1.65 | $ | 2.30 | $ | 2.95 | $ | 2.55 | ||||||||
|
Price
per common share – Low
|
$ | 1.20 | $ | 1.46 | $ | 2.15 | $ | 2.00 | ||||||||
Stock
Repurchase Program
On
January 17, 2007, the Company announced a Stock Repurchase Program under the
terms of which up to a million shares of its common stock could be purchased
during the subsequent twelve months. In March, 2008, the Board
approved the expansion of the repurchase program up to two million shares and
continuation of this program through December 31, 2009. Through
September 30, 2008, the Company has purchased 841,000 shares.
16
|
Issuer
Purchases of Equity Securities:
|
Details
of Treasury Stock Purchases through September 30, 2008
|
|||||||||||||||
|
Period:
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
Total
Number
of
Shares Purchased
As
Part of Publicly
Announced
Program
|
Maximum
Number
of
Shares that May
Yet
be Purchased
Under
the Program
|
||||||||||||
|
January
17, 2007 – September 30, 2007
|
173,400 | $ | 2.12 | 173,400 | 826,600 | |||||||||||
|
October
1, 2007 – June 30, 2008
|
439,600 | $ | 2.57 | 613,000 | 1,387,000 | |||||||||||
|
July
1, 2008 – July 31, 2008
|
53,000 | $ | 2.51 | 666,000 | 1,334,000 | |||||||||||
|
August
1, 2008 – August 31, 2008
|
68,700 | $ | 2.62 | 734,700 | 1,265,300 | |||||||||||
|
September
1, 2008 – September 30, 2008
|
106,300 | $ | 3.09 | 841,000 | 1,159,000 | |||||||||||
|
Quarterly
Subtotal
|
228,000 | $ | 2.81 | 228,000 | ||||||||||||
|
Total
|
841,000 | $ | 2.54 | 841,000 | 1,159,000 | |||||||||||
In
October, 2008, the Board of Directors amended this Stock Repurchase Program
to
expressly authorize the repurchase outside of the open market of common stock
issued under the Company’s equity compensation plans from directors, employees,
consultants and other service providers of the Company or any of its
subsidiaries. The repurchases would be authorized by Company officers
at fair market value on the date of purchase. Total repurchases under
this amendment are limited to an aggregate of 250,000 shares per calendar year
and to a maximum of 25,000 shares annually per individual. The
maximum repurchase for the remainder of calendar 2008 would be a total of 62,500
shares or 6,250 shares per individual. This provision will expire at
the termination date of the Stock Repurchase Program. To date, no
repurchases have been made under this amendment.
Warrant
Settlement Program
During
the third quarter of fiscal 2007, the Company offered certain holders of
warrants a program under which they could settle the warrants for fully vested
common stock. The subject warrants had exercise prices ranging from
$0.40 per share to $1.50 per share. Warrant holders who elected to
participate in the program tendered 2,762,500 warrants to acquire 1,782,645
shares of common stock, which were issued during the third quarter of FY 2007.
Since the fair value of the warrants tendered was greater than the value of
the
common stock received, no expense was recorded related to this
program.
Redemption
of Class A Series 1 Convertible Preferred Stock
In
May
2008, the Company elected to exercise its right to redeem all of the 56,000
outstanding shares of its Class A Series 1 Convertible Preferred
Stock (the "Series 1 Preferred Stock"), subject to the right of the holders
to
elect to convert their shares of Series 1 Preferred Stock into Common Stock
in lieu of redemption. On the redemption dates in
June 2008, 42,000 of the outstanding shares of Series 1 Preferred
Stock were acquired by the Company pursuant to the redemption and
cancelled and the remaining 14,000 outstanding shares of Series 1 Preferred
Stock were converted into 14,000 shares of Common Stock and cancelled. The
Series 1 Preferred Stock was subject to an 8% dividend, paid
annually. The Company paid a redemption price per share equal to the
liquidation value per share (which was $2.50 per share plus accrued and unpaid
dividends) for the 42,000 shares that were redeemed. Shareholders who
elected to convert received one common share for each share of Series 1
Preferred Stock plus accumulated dividends. The final unpaid
dividends of $2,100 for the converted 14,000 shares of Series 1 Preferred Stock
were paid in July 2008.
17
The
Company issued 473,377 shares of
Series 3 Preferred Stock to 11 investors during February 2004 and received
$1,500,602 in proceeds. Each share of Series 3 Preferred Stock is convertible
at
any time into one share of the Company’s common stock. Holders of shares of the
Series 3 Preferred Stock are entitled to cumulative dividends in preference
to
any dividend on the Company’s common stock at the rate of 10 percent of the
original issuance price ($3.17 per share) per annum, payable quarterly at the
Company’s option in cash or shares of the Company’s common stock. If dividends
are paid in shares of common stock, the dividend rate will be equal to 95
percent of the average of the closing sales prices of the common stock on the
five trading days preceding the dividend reference date. The dividend reference
date means January 1, April 1, July 1, October 1 of each year. In the event
of a
liquidation or dissolution of the Company, the Series 3 Preferred Stock would
have priority over the Company’s common stock and holders of any other series of
preferred stock of the Company. The Company may redeem any share of Series
3
Preferred Stock at any time that is after the second anniversary of the date
of
issuance of the share, provided that the redemption may not occur until the
first day on or after the second anniversary of the date of issuance of such
share in which the market value of the Company’s common stock is at least 150
percent of the original
issue price of $3.17 per
share. The liquidation preference on the Series 3 Preferred Stock is
$3.17 per share plus accrued and unpaid dividends. As of September
30, 2008, there are 307,602
shares
of Series 3
Preferred Stock outstanding.
Repurchase
of Class A Series 3 Convertible Preferred Stock
In
April
2008, the Company repurchased 150,000 shares of Class A Series 3 Convertible
Preferred Stock, which is subject to a 10% dividend, paid quarterly. The shares
were repurchased at $3.17 per share for a total of approximately
$475,000. In July, 2008, the Company repurchased an additional 15,773
shares of Class A Series 3 Convertible Preferred Stock for a total of
approximately $50,000; the dividend of approximately $500 of this purchase
was
paid in October, 2008. All of the shares were purchased at the same
per share price at which they were sold to the shareholder, $3.17 per
share. The repurchased preferred shares have been
retired.
Item
6.
Selected Financial Data
Not
applicable to a smaller reporting company.
18
Item
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The
Company manufactures, markets and sells the FC female condom, the only
FDA-approved product under a woman's control which provides dual protection
against unintended pregnancy and sexually transmitted diseases, including
HIV/AIDS. During 2003, the Company began development of its second
generation female condom, FC2, which was completed in 2005. In
August, 2006, after a stringent technical review, the World Health Organization
cleared it for purchase by UN agencies. The first substantial sales
of FC2 occurred in the second quarter of fiscal 2007. The Company
submitted a PMA with the FDA for FC2 in January 2008. The FDA’s
OB/GYN Device Advisory Committee unanimously voted at its December 11, 2008
meeting that the Company’s second-generation female condom, the FC2 female
condom, is approvable with a single condition. The condition is that
the FC2 female condom’s instructions for use continue to follow use instructions
for the FC female condom and appropriately identify the study that was performed
to establish the comparable safety and effectiveness of FC2 with
FC. The FDA is not bound by the committee’s recommendation, but it
takes its advice into consideration when completing its review of obstetric
and
gynecologic devices. If the FDA determines the FC2 female condom
approvable, the final step will be to confirm the package labeling and
directions. The Company believes that FC2 will result in a
significant reduction in production costs and accelerate growth through the
lower price product.
Revenues. Most
of
the Company's revenues are derived from sales of the female condom, its only
product, and are recognized upon shipment of the product to its customers.
Beginning in fiscal 2008, revenue is also being derived from licensing its
intellectual property to its business partner in India, Hindustan Latex
Limited. Such revenue appears as royalties on the Audited
Consolidated Statement of Income for the year ended September 30,
2008.
The
Company's strategy is to develop a global market and distribution network for
its product by maintaining relationships with public sector groups and
completing partnership arrangements with companies with the necessary marketing
and financial resources and local market expertise. The Company's
customers include the following:
| ● |
The
Company sells the female condom to the global public sector under
the
umbrella of its agreement with UNAIDS. This agreement
facilitates the availability and distribution of the female condom
at a
reduced price based on the Company's cost of production. The
current price per unit ranges between £0.42 and £0.445 (British pounds
sterling), or approximately $0.76 to $0.81, depending on contractual
volumes. Currently, the female condom
is available in over 90 countries through public sector
distribution.
|
| ● |
The
Company sells FC to the U.S. Agency for International Development
(USAID)
for use in USAID prevention programs in developing countries.
|
| ● | The Company sells the female condom in the United States to city and state public health clinics as well as not-for-profit organizations such as Planned Parenthood. |
19
| ● | The Company markets FC directly in the United Kingdom. The Company has distribution agreements with commercial partners which market directly to consumers in 15 countries, including the United States, Brazil, Canada, Mexico, Spain, France, Japan and India. These agreements are generally exclusive for a single country. Under these agreements, the Company manufactures and sells the female condom to the distributor partners, who, in turn market and distribute the product to consumers in the established territory. |
Occasionally,
significant quarter to quarter variations may occur due to the timing and
shipment of large orders, not from any fundamental change in the Company's
business. Because the Company manufactures FC in a leased facility
located in London, England and FC2 in a leased facility located in Malaysia,
a
portion of the Company's operating costs are denominated in foreign currencies.
While a material portion of the Company's future sales are likely to be in
foreign markets, all sales are denominated in either British pounds sterling
or
United States dollars. Manufacturing costs and sales to foreign markets are
subject to normal currency risks associated with changes in the exchange rate
of
British pounds sterling relative to the United States dollar. Since the
Malaysian ringgit (MYR) is historically quite stable against the dollar, the
foreign exchange impact of MYR versus British pounds (GBP) is negligible as
the
UK subsidiary’s financial statements are converted to U.S. dollars. On an
ongoing basis, management continues to evaluate the Company's commercial
transactions and is prepared to employ currency hedging strategies when it
believes such strategies are appropriate.
Expenses. The
Company manufactures FC at its facility located in the United Kingdom and FC2
at
its facility located in Selangor D.E., Malaysia. The Company's cost
of goods sold consists primarily of direct material costs, direct labor costs
and indirect production and distribution costs. Direct material costs
include raw materials used to make the female condom, principally polyurethane
for FC and a nitrile polymer for FC2. Indirect product costs include
logistics, quality control, and maintenance expenses, as well as costs for
helium, nitrogen, electricity and other utilities. All of the key
components for the manufacture of the female condom are essentially available
from either multiple sources or multiple locations within a source.
The
Company has experienced increased costs of products, supplies, salaries and
benefits, and increased general and administrative expenses. In both
2007 and 2008, the Company has increased selling prices wherever possible to
offset such cost increases.
As
noted
above, the Company's manufacturing costs are subject to currency risks
associated with changes in the exchange rate of British pounds sterling relative
to the United States dollar. To date, the Company's management has
not deemed it appropriate to utilize currency hedging strategies to manage
its
currency risks. A decrease of the value of the U.S. dollar compared
to British pounds sterling has the effect of increasing the Company's cost
of
sales and decreasing its gross profit margin. When the dollar
strengthens against the pound, the opposite impact occurs.
20
Operating
Highlights. The Company's net revenues have increased steadily
in recent periods. The Company had net revenues of $25,634,126 in the
fiscal year ended September 30, 2008 as compared to net revenues of $19,319,889
in the fiscal year ended September 30, 2007.
The
Company generated cash flow from operations of $4.2 million in 2008 versus
using
$0.08 million in its operation for the fiscal year ended September 30,
2007.
The
Company had net income attributable to common stockholders of $4,829,262 or
$0.18 per diluted share in fiscal 2008. In fiscal 2007, the Company
had net income attributable to common stockholders of $1,532,665 or $0.06 per
diluted share.
Results
of Operations
Fiscal
Year Ended September 30, 2008 ("2008") Compared to Fiscal Year Ended September
30, 2007 ("2007")
The
Company had net revenues of $25,634,126 and net income attributable to common
stockholders of $4,829,262 or $0.18 per diluted share versus net revenues of
$19,319,889 and net income attributable to common stockholders of $1,532,665
or
$0.06 per diluted share in 2007.
Net
revenues increased $6,314,237, or 33%, in 2008 over the prior year,
demonstrating growth in demand for female condoms. In 2008, net revenue included
royalties of $105,876 earned from licensing intellectual property to the
Company’s business partner in India, Hindustan Latex Limited.
Gross
profit increased $3,573,486, or 50%, to $10,729,801 for 2008 from $7,156,315
for
2007. The increase was attributable to improved FC margins as overhead was
spread over a higher number of units and the product mix, with a higher
percentage of the more profitable second generation product, FC2.
Cost
of
sales increased $2,740,751, or 23%, to $14,904,325 for 2008 from $12,163,574
for
2007. The increase in cost of sales is a result of increased volume and a slight
increase in manufacturing costs.
Advertising
and promotional expenses increased $43,926 to $223,800 for 2008 from $179,874
for 2007. The increase relates to the public relations program to promote FC2
and communicate the Company’s global contribution to woman’s health, and
promotional expenses related to the 2008 International AIDS Conference held
in
Mexico City, in August 2008.
Selling,
general and administrative
expenses increased $1,173,624,
or 20%, to $7,038,060 in
2008 from
$5,864,436 in
2007. The increase resulted
from full
year versus partial year salaries
and related costs from various positions added mid-year 2007, increased consulting
fees
for Sarbanes-Oxley-related review of internal control over financial
reporting and incentive bonuses related to the achievement of various
levels of profitability and units shipped.
21
Research
and development costs
increased $75,608 to $284,216 in 2008 from $208,608 in 2007. The costs in 2007
were incurred to develop commercial scale manufacturing of FC2, while fiscal
2008 costs are related to the preparation and support of the PMA for
FC2.
Total
operating expenses increased $1,293,158 to $7,546,076 in 2008 from $6,252,918
in
2007 as a result of increases in selling, general and administrative expense,
advertising and promotion and research and development costs.
The
Company's operating income increased $2,280,328 to $3,183,725 in 2008 from
$903,397 in 2007 due to the improved gross profit partially offset by an
increase in operating expenses.
The
Company recorded non-operating income of $1,020,181 in 2008 versus non-operating
expense of $34,484 in 2007. This was primarily attributable to a
significant gain on foreign currency ($966,736). 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 on intercompany trade accounts
are recorded in earnings as the local currency is the functional
currency. Assets located outside the United States totaled
approximately $7,500,000 and $6,500,000 at September 30, 2008 and 2007,
respectively.
Under
the
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, an entity is able to recognize a tax benefit for current or past losses
when it can demonstrate that the tax loss carry forward will be utilized before
expiration. Management believes that the Company’s recent and
projected future growth and profitability has made it more likely than not
that
the Company will utilize a portion of its net operating carryforwards in the
future. The Company has recorded a tax benefit in the amount of
$775,000 during the year ended September 30, 2008 compared to $825,000 for
the
year ended September 30, 2007 as a result of the decrease in the valuation
allowance on these assets.
Factors
That May Affect Operating Results and Financial Condition
The
Company's future operating results and financial condition are dependent on
the
Company's ability to increase demand for the female condom and to
cost-effectively manufacture sufficient quantities of the female condom.
Inherent in this process are a number of factors that the Company must
successfully manage in order to achieve favorable future results and improve
its
financial condition.
Reliance
on a Single Product
The
Company expects to derive the vast majority, if not all, of its future revenues
from the female condom, its sole current product. While management believes
the
global potential for the female condom is significant, the ultimate level of
consumer demand around the world is not yet known.
22
Distribution
Network
The
Company's strategy is to develop a global distribution network for the female
condom by entering into partnership arrangements with financially secure
companies with appropriate marketing expertise. This strategy has resulted
in
numerous in-country distributions in the public sector, particularly in Africa,
Latin America and recently India. The Company has also entered into several
partnership agreements for the commercialization of the female condom in
consumer sector markets around the world. However, the Company is dependent
on
country governments, global donors, as well as U.S. municipal and state public
health departments to continue AIDS/HIV/STD prevention programs that include
female condoms as a component of such programs. The Company’s commercial market
penetration is dependent on its ability to identify appropriate business
partners who will effectively market and distribute the female condom within
its
contractual territory. Failure by the Company's partners to successfully market
and distribute the female condom or failure of donors and/or country governments
to establish and sustain HIV/AIDS prevention programs which include distribution
of female condoms, the Company’s inability to secure additional agreements with
global AIDS prevention organizations, or the Company’s inability to secure
agreements in new markets, either in the public or private sectors, could
adversely affect the Company’s financial condition and results of
operations.
Inventory
and Supply
All
of
the key components for the manufacture of the female condom are essentially
available from either multiple sources or multiple locations within a
source.
Global
Market and Foreign Currency Risks
The
Company manufactures FC in a leased facility located in London, England and
FC2
in a leased facility located in Malaysia. A material portion of the Company's
future sales are likely to be in foreign markets. Manufacturing costs and sales
to foreign markets are subject to normal currency risks associated with changes
in the exchange rate of foreign currencies relative to the United States
dollar.
On
an
ongoing basis, management continues to evaluate its commercial transactions
and
is prepared to employ currency hedging strategies when it believes such
strategies are appropriate. In addition, some of the Company's future
international sales may be in developing nations where dramatic political or
economic changes are possible. Such factors may adversely affect the Company's
results of operations and financial condition.
Government
Regulation
The
female condom is subject to regulation by the FDA pursuant to the Federal Food,
Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign regulatory
agencies. Under the FDC Act, medical devices must receive FDA clearance before
they can be sold. FDA regulations also require the Company to adhere to certain
"Good Manufacturing Practices," which include testing, quality control and
documentation procedures. The Company's compliance with applicable regulatory
requirements is monitored through periodic inspections by the FDA. The failure
to comply with applicable regulations may result in fines, delays or suspensions
of clearances, seizures or recalls of products, operating restrictions,
withdrawal of FDA approval and criminal prosecutions. The Company's operating
results and financial condition could be materially adversely affected in the
event of a withdrawal of approval from the FDA or a failure by FDA to approve,
or a significant delay of approval by the FDA of FC2.
23
Liquidity
and Sources of Capital
In
2007, the Company’s
operations consumed cash of $0.1 million primarily due to the timing of
collection of accounts receivable. In fiscal year 2008, the Company
generated $4.2 million in positive cash flow from
operations. Investing activities consumed $0.5 million, primarily in
purchasing fixed assets. Financing activities consumed a net of $1.9
million; $2.4 million was used to repurchase stock, $0.7 million generated
by
stock option and warrant exercises, and $0.2 consumed by preferred dividend
and
capital lease payments. Cash flows from operations, investing activites
and financing activites together with an $0.8 million negative currency
exchange rate impact resulted in a positive cash flow of $1.1 million in fiscal
2008. In earlier years, the Company funded operating losses and
capital requirements, in large part, through the sale of preferred stock, common
stock or debt securities convertible into common stock.
At
September 30, 2008, the Company had working capital of $9.2 million and
stockholders' equity of $9.7 million compared to working capital of $7.2 million
and stockholders' equity of $7.4 million as of September 30, 2007.
The
Company believes its current cash position is adequate to fund operations of
the
Company in the near future, although no assurances can be made that such cash
will be adequate. However, if needed, the Company may sell equity securities
to
raise additional capital and may borrow funds under its Heartland Bank credit
facility.
Presently,
the Company has two revolving notes with Heartland Bank that allow the Company
to borrow up to $1,500,000. These notes expire on July 1, 2009.
These notes were extended under the same terms as the initial notes dated May
19, 2004, with the exception of the interest rate which has been reduced to
prime plus .5% (prime rate was 5% at September 30, 2008). No new warrants were
issued as part of the extension of these notes. These notes are collateralized
by substantially all of the assets of the Company. No amounts were outstanding
under the revolving notes at September 30, 2008.
As
of
December 10, 2008, the Company had approximately $3.7 million in cash, net
trade
accounts receivable of $ 3.2 million and current trade accounts payable of
$ 1.1
million. Presently, the Company has no required debt service
obligations.
Impact
of
Inflation and Changing Prices
Although
the Company cannot accurately determine the precise effect of inflation, the
Company has experienced increased costs of product, supplies, salaries and
benefits, and increased general and administrative expenses. In 2007 and 2008
the Company has, where possible, increased selling prices to offset such
increases in costs.
24
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable to a smaller reporting company.
Item
8.
Financial Statements and Supplementary Data
The
consolidated financial statements of the Company and notes thereto are filed
under this item beginning on page F-1 of this report.
Supplementary
data is not applicable to a smaller reporting company.
Item
9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not
applicable.
Item
9A(T). Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and
15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on
this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
It should be noted that in designing and evaluating the disclosure controls
and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship
of
possible controls and procedures. The Company has designed its disclosure
controls and procedures to reach a level of reasonable assurance of achieving
desired control objectives and, based on the evaluation described above,
the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the
Company's disclosure controls and procedures were effective at reaching that
level of reasonable assurance.
Changes
in Internal Control Over Financial Reporting
There
was
no change in the Company's internal control over financial reporting (as
defined
in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of
1934,
as amended) during the Company's most recently completed fiscal quarter that
has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management
of the Company is responsible for establishing and maintaining effective
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended). The
Company’s internal control over financial reporting is designed to provide
reasonable assurance to the Company’s management and board of directors
regarding the preparation and fair presentation of published financial
statements. The Company’s internal control over financial reporting
includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the
Company;
(ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management
and
directors of the Company; and
(iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect
to
financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
25
Management
assessed the effectiveness of the Company's internal control over financial
reporting as of September 30, 2008. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on its assessment, management believes that,
as of September 30, 2008, the Company's internal control over financial
reporting was effective based on those criteria.
This
Annual Report on Form 10-K does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this Annual Report on Form
10-K.
PART
III
Item
10.
Directors, Executive Officers and Corporate Governance
Certain
information about the Company's executive officers, directors and certain key
employees as of September 30, 2008, is as follows:
|
NAME
|
POSITION
|
AGE
|
|
O.B.
Parrish
|
Chairman
of the Board, Chief Executive Officer, acting President and
Director
|
75
|
|
Mary
Ann Leeper, Ph.D.
|
Senior
Strategic Adviser and Director
|
68
|
|
William
R. Gargiulo, Jr.
|
Secretary
and Director
|
80
|
|
Michael
Pope
|
Vice
President and General Manager of The Female Health Company (UK)
Plc
|
51
|
|
Donna
Felch
|
Vice
President and Chief Financial Officer
|
61
|
|
Jack
Weissman
|
Vice
President – Sales
|
61
|
|
Janet
Lee
|
Controller
|
44
|
|
David
R. Bethune
|
Director
|
68
|
|
Stephen
M. Dearholt
|
Director
|
62
|
|
Michael
R. Walton
|
Director
|
71
|
|
Richard
E. Wenninger
|
Director
|
61
|
|
Mary
Margaret Frank
|
Director
|
39
|
26
O.B.
PARRISH
Age:
75;
Elected Director: 1987; Present Term Ends: 2009 Annual Meeting
O.B.
Parrish has served as Chief Executive Officer of the Company since 1994, as
acting President since May 2006, as acting Chief Financial and Accounting
Officer from February 1996 to March 1999 and as the Chairman of the Board and
a
Director of the Company since 1987. Mr. Parrish is a shareholder and has served
as the President and as a Director of Phoenix Health Care of Illinois, Inc.
("Phoenix of Illinois") since 1987. Phoenix of Illinois owns approximately
233,501 shares of the Company's common stock. Mr. Parrish also is Chairman
and a
Director of Abiant, Inc., a neuroimaging company, and a director of Zila, Inc.,
an oral cancer screening company. Mr. Parrish is also a trustee of
Lawrence University. From 1977 until 1986, Mr. Parrish was the President of
the
Global Pharmaceutical Group of G.D. Searle & Co. ("Searle"), a
pharmaceutical/consumer products company. From 1974 until 1977, Mr. Parrish
was
the President of Searle International, the foreign sales operation of Searle.
Prior to that, Mr. Parrish was Executive Vice President of Pfizer's
International Division.
MARY
ANN
LEEPER, Ph.D.
Age:
68;
Elected Director: 1987; Present Term Ends: 2009 Annual Meeting
Dr.
Leeper has served as Senior Strategic Adviser since May 2006. Dr. Leeper served
as the President and Chief Operating Officer of the Company from February 1996
to April 2006, as President and Chief Executive Officer of The Female Health
Company Division from May 1994 until January 1996, as Senior Vice President
-
Development of the Company from 1989 until January 1996 and as a Director of
the
Company since 1987. Dr. Leeper is a shareholder and has served as a Vice
President and Director of Phoenix of Illinois since 1987. From 1981 until 1986,
Dr. Leeper served as Vice President - Market Development for Searle's
Pharmaceutical Group and in various Searle research and development management
positions. As Vice President - Market Development, Dr. Leeper was responsible
for worldwide licensing and acquisition, marketing and market research. In
earlier positions, she was responsible for preparation of new drug applications
and was a liaison with the FDA. Dr. Leeper serves on the Board of Neenah Paper,
Inc. and is chair of its nominating and governance committee. She is also an
adjunct professor at the University of Virginia Darden School of
Business.
WILLIAM
R. GARGIULO, JR.
Age:
80;
Elected Director: 1987; Present Terms Ends: 2009 Annual Meeting
William
R. Gargiulo, Jr. has served as Secretary of the Company from 1996 to present,
as
Vice President from 1996 to September 30, 1998, as Assistant Secretary of the
Company from 1989 to 1996, as Vice President - International of The Female
Health Company Division from 1994 until 1996, as Chief Operating Officer of
the
Company from 1989 to 1994, and as General Manager of the Company from 1988
to
1994. Mr. Gargiulo has also served as a Director of the Company since 1987.
Mr.
Gargiulo is a trustee of a trust which is a shareholder of Phoenix of Illinois.
From 1984 until 1986, Mr. Gargiulo was the Executive Vice-President of the
Pharmaceutical Group of Searle, in charge of Searle's European operations.
From
1976 until 1984, Mr. Gargiulo was the Vice President of Searle's Latin American
operations.
27
MICHAEL
POPE
Age:
51;
Vice President, General Manager - The Female Health Company (UK)
Plc.
Mr.
Pope
has served as Vice President of the Company since 1996 and as General Manager
of
The Female Health Company (UK) Plc. (formerly Chartex International, Plc.)
since
the Company's 1996 acquisition of Chartex. Mr. Pope has also served as a
Director of The Female Health Company, Ltd. (formerly Chartex Resources Limited)
and The Female Health Company (UK) Plc. since 1995. From 1990 until 1996, Mr.
Pope was Director of Technical Operations for Chartex with responsibility for
manufacturing, engineering, process development and quality assurance. Mr.
Pope
was responsible for the development of the high speed proprietary manufacturing
technology for the female condom and securing the necessary approvals of the
manufacturing process by regulatory organizations, including the FDA. Mr. Pope
was also instrumental in developing and securing Chartex's relationship with
its
Japanese marketing partner. Prior to joining Chartex, from 1986 to 1990, Mr.
Pope was Production Manager and Technical Manager for Franklin Medical, a
manufacturer of disposable medical devices. From 1982 to 1986, Mr. Pope was
Site
Manager, Engineering and Production Manager, Development Manager and Silicon
Manager for Warne Surgical Products.
DONNA
FELCH
Age
61;
Vice President and Chief Financial Officer
Ms.
Felch
has served as Vice President and Chief Financial Officer of the Company since
February
2006. Prior to joining the Company, Ms. Felch was Vice President and Treasurer
of American Pharmaceutical Partners, Inc., a pharmaceutical company that
develops, manufactures and markets injectible pharmaceutical products, from
November 2002 until June 2005. In these positions, she directed the
treasury, tax, financial planning and analysis, credit and collections and
risk
management functions. Ms. Felch joined American Pharmaceutical Partners in
1998
and during such time held the positions of Senior Director of Corporate
Accounting and Director of General Accounting and Tax. In these roles her
responsibilities included internal and external financial reporting, tax,
treasury, financial planning, credit and risk management. Previously, Ms Felch
served as Director of Corporate Tax with Fujisawa USA, a subsidiary of a major
Japanese pharmaceutical company. Ms. Felch had formerly worked as a Tax Manager
for LyphoMed, Inc., a generic pharmaceutical manufacturer.
JACK
WEISSMAN
Age:
61;
Vice President - Sales
Mr.
Weissman has served as Vice President – Sales of the Company since June 1995.
From 1992 to 1994, Mr. Weissman was Vice President-Sales for Capitol Spouts,
Inc., a manufacturer of pouring spouts for gable paper cartons. From 1989 to
1992, he acted as General Manager-HTV Group, an investment group involved in
the
development of retail stores. Mr. Weissman joined Searle's Consumer Products
Group in 1979 and held positions of increasing responsibility, including
National Account and Military Sales Manager. From 1985 to 1989, he was Director
- Retail Business Development for The NutraSweet Company, a Searle subsidiary.
Prior to Searle, Mr. Weissman worked in the consumer products field as account
manager and territory manager for Norcliff Thayer and Whitehall
Laboratories.
28
JANET
LEE
Age:
44;
Controller
Ms.
Lee
has served as Controller of the Company since May 2007. From November
2002 until May 2007, Ms. Lee served the Society of Thoracic Surgeons as
Accounting Manager/Analyst. Previously, she held various financial
positions at RR Donnelley and Sons Company and ServiceMaster.
DAVID
R.
BETHUNE
Age:
68;
Elected Director: 1996; Present Term Ends: 2009 Annual Meeting
Mr.
Bethune has served as a Director of the Company since January 1996. He is
currently Executive Chairman and Chief Financial Officer of Zila, Inc, an oral
cancer screening company. Additionally, he is a member of the Board of Directors
of the CAMBREX Corporation, a life sciences company dedicated to providing
products and services that accelerate and improve the discovery and
commercialization of human therapeutics. Mr. Bethune served as Chairman and
Chief Executive Officer of Atrix Laboratories, Inc. from 1999 until his
retirement in 2004. From 1997 to 1998, Mr. Bethune held the positions of
President and Chief Operating Officer of the IVAX Corporation. From 1996 to
1997, Mr. Bethune was a consultant to the pharmaceutical industry. From 1995
to
1996, Mr. Bethune was President and Chief Executive Officer of Aesgen, Inc.,
a
generic pharmaceutical company. From 1992 to 1995, Mr. Bethune was Group Vice
President of American Cyanamid Company and a member of its Executive Committee
until the sale of the company to American Home Products. He had global executive
authority for human biologicals, consumer health products, pharmaceuticals
and
opthalmics, as well as medical research. Mr. Bethune is a founding trustee
of
the American Cancer Society Foundation. He is the founding chairman of the
Corporate Council of the Children's Health Fund in New York City and served
on
the Arthritis Foundation Corporate Advisory Council.
STEPHEN
M. DEARHOLT
Age:
62;
Elected Director: 1996; Present Term Ends: 2009 Annual Meeting
Mr.
Dearholt has served as a Director of the Company since April 1996. Mr. Dearholt
is a co-founder of, and partner in, Insurance Processing Center, Inc., one
of
the largest privately owned life insurance marketing organizations in the United
States, since 1972. He has over 36 years of experience in direct response
advertising and data based marketing of niche products. In late 1995, Mr.
Dearholt arranged, on very short notice, a $1 million bridge loan which assisted
the Company in its purchase of Chartex. He is a past board member of the
Children’s Hospital Foundation of Wisconsin, the Zoological Society of
Milwaukee, Planned Parenthood Association of Wisconsin, and past Chairman of
the
Board of the New Day Club, Inc.
29
MICHAEL
R. WALTON
Age:
71;
Elected Director: 1999; Present Term Ends: 2009 Annual Meeting
Mr.
Walton has served as a Director of the Company since April 1999. Mr. Walton
is
President and owner of Sheboygan County Broadcasting Co., Inc., a company he
founded in 1972. The company has focused on start-up situations, and growing
value in under-performing, and undervalued radio stations and newspapers.
Sheboygan County Broadcasting Co. has owned and operated businesses in
Wisconsin, Illinois, Michigan and New York. It has specialized in
creating, building and managing news media properties and has acquired existing
companies as well. Prior to 1972, Mr. Walton was owner and President of Walton
Co., an advertising representative firm he founded in New York City. He has
held
sales and management positions with Forbes Magazine, The Chicago Sun Times
and
Gorman Publishing Co. Mr. Walton has served on the Boards of the American Red
Cross, the Salvation Army, the Sheboygan County Chamber of Commerce and the
Rogers Memorial Hospital Foundation.
RICHARD
E. WENNINGER
Age:
61;
Director: 2001; Present Term Ends: 2009 Annual Meeting
Mr.
Wenninger has served as a Director of the Company since July 2001. Mr. Wenninger
is former Chairman of Wenninger Company, Inc., a mechanical contracting and
engineering company. From 1976 to 2001, Mr. Wenninger served as President and
Chief Executive Officer of Wenninger Company, Inc. He is also Secretary of
Wenn
Soft, Inc., a software development, sales and service company he founded in
1997. From 1992 to 1999, Mr. Wenninger served as Secretary of Liftco, Inc.
Mr.
Wenninger is a former board member of the Boys & Girls Club of Milwaukee, a
former President and board member of the Milwaukee Athletic Club, a former
board
member of the Wisconsin Psychoanalytic Foundation, a former board member of
University Lake School, the former President and a former board member of the
Plumbing and Mechanical Contractors Association of Milwaukee, the former
President and a former board member of the Sheet Metal Contractors Association
of Milwaukee and a former board member of the Mechanical Contractors Association
of America.
MARY
MARGARET FRANK
Age:
39;
Director: 2004; Present Term Ends: 2009 Annual Meeting
Dr.
Frank
has served as a Director of the Company since October 2004. Dr. Frank has served
as an Assistant Professor of Accounting at the Darden Graduate School of
Business at the University of Virginia where she teaches financial and tax
accounting since 2002. From 1999 to 2002, Dr. Frank was an Assistant Professor
at the Graduate School of Business at the University of Chicago. During 1997,
Dr. Frank was an accounting instructor at the Kenan-Flagler Business School
at
the University of North Carolina at Chapel Hill. From 1992 to 1994, Dr. Frank
served as a Senior Tax Consultant at Arthur Andersen. She has her
master’s degree and Ph.D. in accounting from the University of North Carolina at
Chapel Hill and was issued her CPA in 1994.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the Company's officers
and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and
30
Exchange
Commission ("SEC") on Forms 3, 4 and 5. Officers, directors and greater than
10%
stockholders are required by SEC regulation to furnish the Company with copies
of all Forms 3, 4 and 5 they file.
Based
solely on a review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes
that
during the year ended September 30, 2008, all reports required by Section
16(a) to be filed by the Company's officers, directors and more than 10%
shareholders were filed on a timely basis, except Mr. Pope filed a Form 4 report
on August 11, 2008 reporting a transaction occurring on August 1, 2008 and
a
Form 4 report on August 22, 2008 reporting a transaction occurring on
August 15, 2008.
Code
of
Ethics
The
Company has adopted a Code of Business Ethics that applies to all of the
Company's employees, including the Company's Chief Executive Officer and Chief
Financial Officer. A copy of the Code of Business Ethics is available
on the Company's corporate website which is located at www.femalehealth.com.
The
Company also intends to disclose any amendments to, or waivers from, the Code
of
Business Ethics on its corporate website.
Audit
Committee
The
members of the Audit Committee of the Company's Board of Directors are Mary
Margaret Frank, Ph.D. (Chairperson), David R. Bethune and Michael Walton. The
Company's Board of Directors has determined that Dr. Frank qualifies as an
"audit committee financial expert" as defined by the rules of the SEC based
on
her work experience and education. Dr. Frank and the other members of the Audit
Committee are independent directors in accordance with the listing standards
of
the American Stock Exchange. The Audit Committee is an "audit committee" for
purposes of Section 3(a)(58)(A) of the Securities Exchange Act of
1934.
31
Item
11.
Executive Compensation
Summary
Compensation Table
The
table
shown below provides information for the Company's last two fiscal years
regarding compensation paid by the Company to its Chief Executive Officer and
the other two most highly compensated executive officers of the Company based
on
total compensation for services rendered during the fiscal year ended September
30, 2008. The individuals listed in this table are referred to
elsewhere in this report as the "named executive officers."
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
(1)
|
Stock
Awards
(2)
|
Nonequity
Incentive
Plan
Compensation
(3)
|
All
Other Compensation
(4)
|
Total
|
|
|
O.B.
Parrish, Chief Executive Officer and Acting President
|
2008
2007
|
$145,100
$140,000
|
$93,750
-
|
$66,063
$245,375
|
$366,000
-
|
$22,073
$22,074
|
$692,986
$407,449
|
|
|
Donna
Felch, Vice President and Chief Financial Officer
|
2008
2007
|
$185,000
$175,000
|
-
$34,000
|
$15,188
$56,888
|
$122,000
-
|
$9,504
$5,457
|
$331,692
$271,345
|
|
| Mike Pope, Vice President and General Manager of Female Health Company (UK) Plc. |
2008
2007
|
$211,725
(5)
$227,009
(5) |
-
$34,000 |
$15,188
$50,625 |
$122,000
- |
$34,468 (5)
$33,625
(5)
|
$383,381
$345,259 |
|
|
(1)
|
Bonus
amount for 2008 represents a retention bonus payable monthly to Mr.
Parrish based on continued service from January 1, 2008 through
September 30, 2008. Bonus amounts for 2007 represent
discretionary bonuses awarded based on the Company's revenue and
profit
performance.
|
|
(2)
|
These
amounts reflect the dollar value of the compensation cost of all
outstanding restricted stock awards recognized over the requisite
service
period, computed in accordance with FAS 123R. The stock awards are
valued
at the closing market price of the Company's common stock on the
date of
grant.
|
|
(3)
|
Amounts
for 2008 represent payouts under the Company's Key Executive Incentive
Program based on achieving net income objectives for 2008. Under
this
program, each named executive officer is entitled to a payout based
on the
Company exceeding a target amount of net income for 2008 and an additional
payout for exceeding 110% of such target amount, with the amount
of the
payout based on the value of the Company's common stock on September 30,
2008. A similar program was in effect for 2007, but no payout
was made under the program as the net income targets were not met.
|
32
|
(4)
|
The
amount of "All Other Compensation" for Mr. Parrish consists of premiums
paid by the Company for term life insurance and disability insurance
under
which Mr. Parrish or his designee is the beneficiary; for Ms. Felch
consists of matching contributions by the Company under the Company's
Simple Individual Retirement Account plan for its employees and for
Mr.
Pope consists of an automobile allowance.
|
|
(5)
|
Mr.
Pope's salary and automobile allowance are paid in U.K. pounds. Amounts
shown for Mr. Pope's salary are based on the 12-month average exchange
rate for the year, which was 1.978304 U.S. dollars per U.K. pound
in
fiscal 2007 and 1.975563 U.S. dollars per U.K. pound in fiscal 2008.
|
Stock
Awards
No
stock
options were granted to any of the named executive officers during the fiscal
year ended September 30, 2008.
On
February 6, 2007, Ms. Felch received a grant of 15,000 shares of common
stock pursuant to her employment letter agreement described below under
"Employment and Change of Control Agreements."
On
July 1, 2007, Mr. Pope received a grant of 30,000 shares of common stock
pursuant to a commitment made by the Company on June 30,
2006. Mr. Pope received a grant of an additional 30,000 shares of
common stock on August 1, 2008.
The
following table provides information regarding unexercised options held by
the
named executive officers at September 30, 2008. All of these option
awards are fully vested. No named executive officer exercised any
option during the fiscal year ended September 30, 2008.
|
Outstanding
Equity Awards at Fiscal Year-End
|
||||
|
Option
Awards
|
||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Option
Exercise
Price
|
Option
Expiration
Date
|
|
|
O.
B. Parrish
|
464,000
|
1.40
|
04/22/13
|
|
|
Donna
Felch
|
–
|
–
|
–
|
|
|
Michael
Pope
|
370,000
|
1.40
|
04/22/13
|
|
|
|
||||
33
Employment
and Change of Control Agreements
Effective
February 2, 2006, the Company entered into a letter agreement with Donna Felch,
the Company's Chief Financial Officer and Vice President regarding the terms
of
her employment with the Company. Pursuant to the terms of the letter agreement,
Ms. Felch will serve as the Company's Vice President and Chief Financial Officer
and will be responsible for the Company's financial reporting, financial
analysis and related filings with the Securities and Exchange
Commission. Ms. Felch will receive an annual base salary of at least
$165,000. Additionally, Ms. Felch is entitled to participate in the Company's
bonus plans, stock incentive plan and other employee benefit plans. As a hiring
bonus, Ms. Felch received a grant of 15,000 shares of common stock.
Additionally, the Company agreed to grant Ms. Felch an additional 15,000 shares
of common stock on the one year anniversary date of her hire date if she
remained employed by the Company on such date. Ms. Felch is eligible to
participate in any medical, health, dental, disability and life insurance policy
that is in effect for the Company's other employees who are located in the
United States.
Effective
October 1, 2005, the Company entered into Amended and Restated Change of Control
Agreements with each of O.B. Parrish, its Chairman, Chief Executive Officer
and
Acting President and Michael Pope, its Vice President, and effective
February 8, 2006, the Company entered into a Change of Control Agreement
with Donna Felch, its Chief Financial Officer and Vice President. These
agreements essentially act as springing employment agreements which provide
that, upon a change of control, as defined in the agreement, the Company will
continue to employ the executive for a period of three years in the same
capacities and with the same compensation and benefits as the executive was
receiving prior to the change of control, in each case as specified in the
agreements. If the executive is terminated without cause or if he or she quits
for good reason, in each case as defined in the agreements, after the change
of
control, the executive is generally entitled to receive the following
benefits:
|
●
|
a
lump
sum payment equal to the sum of the executive's base salary through
the
termination date, a prorated payment of bonus which the executive
is
eligible to receive and any compensation previously deferred by
the executive;
|
|
●
|
a
lump
sum payment equal to three times the sum of the executive's base
salary
and the amount of the executive's prorated bonus;
|
|
●
|
continuation
of
health and other similar benefits for a period of three years after
the
termination date; and
|
|
●
|
a "gross-up" payment which will, in general, effectively reimburse the executive for any amounts paid under federal excise taxes relating to change of control benefits. |
34
Director Summary Compensation Table
Directors
who are executive officers or employees of the Company do not receive
compensation for serving as directors. In fiscal 2008, the Company
paid fees to its directors who are not executive officers or employees of
the
Company for their committee participation. As described
below, one of our directors, Mary Ann Leeper, receives
compensation as the Company's Senior Strategic Adviser pursuant to an employment
agreement, and another director, William Gargiulo, Jr. receives consulting
fees.
The
following table provides information concerning the compensation paid by
the
Company in
2008
to
each of its
directors
who
are not executive officers of the Company.
|
Name
|
Fees
Earned
or
Paid in Cash (1)
|
Option
Awards (2)
|
Nonequity
Incentive Plan
Compensation
(3)
|
All
Other
Compensation
(4)
|
Total
|
|||||||||||
|
Mary
Ann Leeper
|
– | – | $ | 122,000 | $ | 178,042 | $ | 300,042 | ||||||||
|
William
Gargiulo, Jr.
|
– | – | $ | 67,100 | $ | 60,000 | $ | 127,100 | ||||||||
|
David
Bethune
|
$ | 9,000 | $ | 10,182 | – | – | $ | 19,182 | ||||||||
|
Stephen
Dearholt
|
– | $ | 10,182 | – | – | $ | 10,182 | |||||||||
|
Mary
Margaret Frank
|
$ | 11,000 | $ | 10,182 | – | – | $ | 21,182 | ||||||||
|
Michael
Walton
|
– | $ | 10,182 | – | – | $ | 10,182 | |||||||||
|
Richard
Weninger
|
– | $ | 10,182 | – | – | $ | 10,182 | |||||||||
|
James
Kerber (5)
|
– | $ | 5,561 | – | – | $ | 5,561 | |||||||||
|
(1)
|
The
amounts in this column reflect fees paid to board members for their
committee participation.
|
|
(2) |
The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended September 30,2008, in accordance with FAS 123R of stock option awards to the listed directors and, thus, include amounts from awards granted prior to fiscal 2008 that vested in fiscal 2008. The assumptions made in valuing the stock option awards are included under "Note 7, Share-based Compensation" in the Notes to Consolidated Financial Statements, included herein. |
| On October 12, 2006, each of the directors of the Company other than O.B. Parrish, Mary Ann Leeper and William Gargiulo, Jr. received a grant of options to purchase 30,000 shares of common stock with an exercise price of $1.27 per share. All such stock options vest on the 12th of each month commencing on November 12, 2006 and ending on October 12, 2009 and have a ten year term. | |
| (3) | Amounts for 2008 represent payouts under the Company's Key Executive Incentive Program based on achieving net income objectives |
| for 2008. Under this program, each participant is entitled to a payout based on the Company exceeding a target amount of net income for 2008 and an additional payout for exceeding 110% of such target amount, with the amount of the payout based on the value of the Company's common stock on September 30, 2008. A similar program was in effect for 2007, but no payout was made under the program as the net income targets were not met. | |
| (4) | The amount of "All Other Compensation" for Dr. Leeper consists of salary of $157,520 as well as $5,746 in matching contributions by the Company under the Company's Simple Individual Retirement Account plan for its employees and $14,776 of premiums paid by the Company for term life insurance and disability insurance under which Dr. Leeper or her designee is the beneficiary. Dr. Leeper is employed as a Senior Strategic Advisor. She has specific responsibility for the preparation, submission and presentation of the FC2 PMA to the FDA. In addition, she participates as a member of the Executive Operation Committee. Dr. Leeper's compensation is for the execution of these responsibilities. She does not receive compensation for her role as a director of the Company. Mr. Gargiulo is a consultant to the Company and serves as the Corporate Secretary. In this role, he is responsible for scheduling all board and board committee meetings and distribution of material and preparation and approval of minutes for each meeting. In addition, he is responsible for the Company's relationship with its transfer agent and the issuance of shares. Mr. Gargiulo also assists Ms. Felch with investor relations. Mr. Gargiulo's compensation for the execution of these responsibilities was $60,000. He does not receive compensation for being a director of the Company. |
35
|
(5)
|
Mr.
Kerber did not stand for re-election at the 2008 Annual Meeting of
Shareholders, and accordingly his term as a director ended as of
March 27, 2008.
|
Dr.
Leeper has served as the Company's Senior Strategic Adviser since May 2006
when she retired from the positions of President and Chief Operating Officer
of
the Company. Dr. Leeper's services as Senior Strategic Adviser
are governed by the terms of an employment agreement dated January 20, 2006,
between the Company and Dr. Leeper. The employment agreement took
effect as of May 1, 2006, and originally was to expire on September 30, 2006,
but has been extended a number of times with the most recent extension lasting
until December 31, 2007. Pursuant to the employment agreement,
Dr. Leeper receives an annual base salary of at least $150,000 and is
entitled to participate in the Company’s bonus plans, stock incentive plan and
other employee benefit plans. Additionally, Dr. Leeper is eligible to
participate in any medical, health, dental, disability and life insurance policy
that is in effect for the Company’s other senior management. Pursuant
to the employment agreement, Dr. Leeper has agreed not to compete with the
Company during employment and for a period of two years following termination
of
employment (six months if employment is terminated by the Company after a
“change of control”) and has agreed to maintain the confidentiality of the
Company’s proprietary information and trade secrets during the term of
employment and for three years thereafter. The employment agreement provides
that if Dr. Leeper’s employment is terminated by the Company without “cause” or
by Dr. Leeper for “good reason,” Dr. Leeper will be entitled to a severance
payment of $125,000 and a payment of $50,000 in consideration of the
noncompetition and confidentiality covenants, except that if such termination
occurs at any time after or in anticipation of a “change of control” with
respect to the Company, Dr. Leeper will be entitled solely to those amounts
to
which she is entitled under the Amended and Restated Change of Control Agreement
dated October 1, 2005 by and between the Company and Dr. Leeper. The
terms of such Amended and Restated Change of Control Agreement are substantially
the same as those summarized under the heading "Employment and Change of Control
Agreements." If the termination of Dr. Leeper’s employment occurs as
a result of the death or disability of Dr. Leeper, then she shall be entitled
to
receive the greater of (a) her base salary or (b) the remaining amounts due
her
under the terms of the employment agreement. Since the contract
expiration, the
Company has continued to employ Ms. Leeper based on the same
terms.
36
Item
12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following table sets forth information regarding the beneficial ownership of
the
Company's common stock as of November 18, 2008 with respect to (a) each
person known to the Company to own beneficially more than 5% of the Company's
common stock, (b) each named executive officer and each director of the Company
and (c) all directors and executive officers as a group.
The Company has determined beneficial ownership in accordance with the rules of the SEC. Unless otherwise indicated, the persons and entities included in the table have sole voting and investment power with respect to all shares beneficially owned, except to the extent authority is shared by spouses under applicable law. Shares of the Company's common stock subject to options or warrants that are either currently exercisable or exercisable within 60 days of November 18, 2008 are treated as outstanding and beneficially owned by the holder for the purpose of computing the percentage ownership of the holder. However, these shares are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The table lists applicable percentage ownership based on 26,723,758 shares outstanding as of November 18, 2008.
|
Shares
Beneficially
Owned
|
||||||
|
Name
and Address of
Beneficial Owner (1)
|
Number
|
Percent
|
||||
|
O.B.
Parrish (2)
|
1,328,901
|
4.9
|
%
|
|||
|
William
R. Gargiulo, Jr. (3)
|
137,500
|
*
|
||||
|
Mary
Ann Leeper, Ph.D. (4)
|
949,500
|
3.5
|
%
|
|||
|
Stephen
M. Dearholt (5)
|
3,878,820
|
13.7
|
%
|
|||
|
David
R. Bethune (6)
|
195,000
|
*
|
||||
|
Michael
R. Walton (7)
|
850,556
|
3.2
|
%
|
|||
|
Richard
E. Wenninger (8)
|
2,813,671
|
10.5
|
%
|
|||
|
Mary
Margaret Frank (9)
|
52,500
|
*
|
||||
|
Michael
Pope (10)
|
400,845
|
1.5
|
%
|
|||
|
Donna
Felch (11)
|
90,000
|
*
|
||||
|
Red
Oak Partners (12)
|
1,530,410
|
5.7
|
%
|
|||
|
Gary
Benson (13)
|
1,261,364
|
4.7
|
%
|
|||
|
All
directors and executive officers
as
a group (11 persons) (2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
|
10,697,293
|
35.2
|
%
|
|||
_______________
*Less
than 1 percent.
|
(1)
|
Unless
otherwise indicated, the address of each beneficial owner is 515
North
State Street, Suite 2225, Chicago, IL 60654; the address of Mr. Dearholt
is 36365 Trail Ridge Road,
Steamboat Springs, CO 80488; the address of Mr. Walton is 1626 North
Prospect Avenue, No. 2310, Milwaukee, WI 53202; the address of Mr.
Wenninger is 14000 Gypsum Creek Road, Gypsum, CO 81637; the address
of Dr.
Frank is P.O. Box 6550, Charlottesville, VA 22906; the address of
Mr.
Benson is Regency Athletic Club, 1300 Nicollet Mall, Suite 600,
Minneapolis, MN 55403; and the address of Red Oak Partners is 145
Fourth
Avenue, Suite 15A, New York, NY 10003.
|
37
|
(2)
|
Includes
233,501 shares owned by Phoenix of Illinois. Under the rules of the
SEC,
Mr. Parrish may be deemed to have voting and dispositive power as
to such
shares since Mr. Parrish is an officer, director and the majority
shareholder of Phoenix of Illinois. Also includes 379,900 shares
of common
stock owned directly by Mr. Parrish, 225,000 shares of common stock
owned
by the Geneva O. Parrish 1996 Living Trust of which Mr. Parrish is
beneficiary and for which Mr. Parrish may be deemed to share voting
and
investment power, 464,000 shares of common stock subject to stock
options
held by Mr. Parrish and 26,500 shares under common stock purchase
warrants
issued to Mr. Parrish.
|
|
(3)
|
Consists
of 37,500 shares of common stock owned directly by Mr. Gargiulo and
100,000 shares of common stock subject to stock options held by Mr.
Gargiulo.
|
|
(4)
|
Consists
of 159,500 shares of common stock owned directly by Dr. Leeper and
790,000
shares of common stock subject to stock options held by Dr. Leeper.
|
|
(5)
|
Includes
1,574,400 shares owned directly by Mr. Dearholt. Also includes 69,500
shares held by the Dearholt, Inc. Profit Sharing Plan, 28,500 shares
held
in a self-directed IRA, 275,820 shares held by the Mary C. Dearholt
Trust
of which Mr. Dearholt, a sibling and his mother are trustees, and
418,100
shares held by the John W. Dearholt Trust of which Mr. Dearholt is
a
co-trustee with a sibling. Mr. Dearholt shares the power to vote
and
dispose of 693,920 shares of common stock held by the Mary C. Dearholt
Trust and the John W. Dearholt Trust. Mr. Dearholt has sole power
to vote
and dispose of the remaining shares of common stock. Also includes
162,500
shares of common stock subject to stock options and common stock
purchase
warrants for 1,350,000 shares of common stock.
|
|
(6)
|
Consists
of 32,500 shares of common stock owned directly by Mr. Bethune and
162,500
shares of common stock subject to stock options held by Mr. Bethune.
|
|
(7)
|
Consists
of (a) 485,341 shares of common stock owned directly by Mr. Walton,
(b)
102,500 shares of common stock subject to stock options held by Mr.
Walton, (c) 27,757 shares of Common Stock held by a trust of which
Mr.
Walton is trustee and (d) 234,958 shares of common stock held by
Sheboygan
County Broadcasting Co., Inc. ("Sheboygan"). Under the rules of the
SEC,
Mr. Walton may be deemed to have voting and dispositive power as
to the
shares held by Sheboygan since Mr. Walton is an officer, director
and
shareholder of Sheboygan.
|
|
(8)
|
Consists
of (a) 2,506,171 shares of common stock owned directly by Mr. Wenninger,
(b) 5,000 shares of common stock held by Mr. Wenninger's spouse (Mr.
Wenninger disclaims
beneficial ownership of the shares held by his spouse), (c) 250,000
shares
of Common Stock held by a trust of which Mr. Walton is trustee, and
(d)
52,500 shares of common stock subject to stock options.
|
38
|
(9)
|
Consists
of 52,500 shares of common stock subject to stock options held by
Dr.
Frank.
|
|
(10)
|
Consists
of 30,845 shares of common stock owned directly by Mr. Pope and 370,000
shares of common stock subject to stock options.
|
(11)
Consists of 90,000 shares of common stock owned directly by Ms.
Felch.
|
(12)
|
Red
Oak Partners and certain affiliates filed a Schedule 13D dated
May 7, 2007 reporting that Red Oak Partners, as general partner of
Red Oak Fund LP, beneficially owned 1,530,410 shares of common stock
with
shared voting and investment power over such shares.
|
|
(13)
|
Gary
Benson filed a Schedule 13G/A dated May 25, 2007 reporting that as
of May
15, 2007 Mr. Benson and certain of his affiliates beneficially owned
1,261,364 shares of common stock, which includes 32,710 shares of
preferred stock and 1,170,379 shares of common stock owned by Goben
Enterprises LP, a limited partnership, of which Mr. Benson is the
general
partner.
|
The
above
beneficial ownership information is based on information furnished by the
specified person and is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, as required for purposes of this
annual report. This information should not be construed as an admission of
beneficial ownership for other purposes.
Equity
Compensation Plan Information
The
following table summarizes share information, as of September 30, 2008, for
the
Company's equity compensation plans and arrangements. The plans and arrangements
dated prior to July, 2007, were not required to be approved by the Company's
shareholders, and, accordingly, none of these plans or arrangements have been
approved by the Company's shareholders. In March, 2008, the
Company’s shareholders approved the 2008 Stock Incentive Plan and authorized
2,000,000 shares (subject to adjustment in the event of stock splits and other
similar events) for issuance under the plan.
|
EQUITY
PLAN CATEGORY
|
NUMBER
OF COMMON SHARES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS,
WARRANTS, AND RIGHTS
|
NUMBER
OF WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS,
AND
RIGHTS
|
COMMON
SHARES AVAILABLE FOR FUTURE ISSUANCE UNDER COMPENSATION
PLANS
|
|||
|
Equity
compensation plans approved by shareholders
|
-
|
-
|
1,950,000
|
|||
|
Equity
compensation plans not approved by shareholders
|
2,439,980
|
$1.41
|
-
|
|||
|
Total
|
2,439,980
|
$1.41
|
1,950,000
|
39
The
Company's equity compensation plans not approved by shareholders include the
1997 Stock Option Plan, the 1997 Outside Director Stock Option Plan, special
option grants to three persons and warrant issuances to nine persons. Options
granted under these plans are nonqualified stock options under the Internal
Revenue Code. Options expire at such time as the Board of Directors determines,
provided that no stock option may be exercised later than the tenth anniversary
of the date of its grant. Options cannot be exercised until the vesting period,
if any, specified by the Board of Directors. Options are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the life of the participant only by him or her. The option price per
share is determined by the Board of Directors, but cannot be less than 100%
of
the fair market value of the Common Stock on the date such option is granted.
The 1997 Stock Option Plan expired as of December 31, 2006, thus no further
shares can be issued under this plan.
In
July
2006, the Company issued 200,000 warrants to purchase shares of common stock
to
a consultant in part for payment to assist in evaluating strategic growth
opportunities. These warrants have an exercise price of $1.30 per
share and expire on July 10, 2016.
Item
13.
Certain Relationships and Related Transactions, and Director
Independence.
Transactions
with Related Persons
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.
Director
Independence
The
Company's Board of Directors currently consists of eight
members: O.B. Parrish, Mary Ann Leeper, Ph.D., William R. Gargiulo,
Jr., Stephen M. Dearholt, David R. Bethune, Michael R. Walton, Richard E.
Wenninger and Mary Margaret Frank, Ph.D. The Board of Directors has
reviewed the independence of the directors under the applicable standards of
the
American Stock Exchange, and based on this review, the Board of Directors
determined that all of the directors are independent under the American Stock
Exchange listing standards other than O.B. Parrish, Mary Ann Leeper and William
R. Gargiulo, Jr.
40
Item
14.
Principal Accountant Fees and Services.
The
following table summarizes the fees the Company paid for audit and non-audit
services rendered by the Company's independent auditors, McGladrey & Pullen,
LLP, during fiscal years 2008 and 2007:
|
Service
Type
|
Fiscal
2008
|
Fiscal
2007
|
|
Audit
Fees (1)
|
$287,017
|
$201,496
|
|
Audit-Related
Fees (2)
|
12,211
|
15,261
|
|
Tax
Fees (3)
|
12,481
|
23,901
|
|
All
Other Fees
|
--
|
--
|
|
Total
Fees
|
$311,709
|
$240,658
|
|
(1)
|
Consists
of fees for professional services rendered in connection with the
audit of
the Company's financial statements for the fiscal years ended September
30, 2008 and September 30, 2007; the reviews of the financial statements
included in each of the Company's quarterly reports on Form 10-QSB
during
those fiscal years; and consents and assistance with documents filed
by
the Company with the SEC.
|
|
(2)
|
Consists
of costs incurred for consultation on various accounting matters
in
support of the Company's financial statements and comment letters
from the
SEC.
|
|
(3)
|
For
the fiscal years ended September 30, 2007 and September 30, 2008
consists
of fees for professional services rendered in connection with preparation
of federal and state income tax returns, including foreign tax filings,
and assistance with foreign tax structuring.
|
The
Audit
Committee of the Board of Directors of the Company considered that the provision
of the services and the payment of the fees described above are compatible
with
maintaining the independence of McGladrey & Pullen, LLP.
The
Audit
Committee is responsible for reviewing and pre-approving any non-audit services
to be performed by the Company's independent auditors. The Audit Committee
has
delegated its pre-approval authority to the Chairman of the Audit Committee
to
act between meetings of the Audit Committee. Any pre-approval given by the
Chairman of the Audit Committee pursuant to this delegation is presented to
the
full Audit Committee at its next regularly scheduled meeting. The Audit
Committee or Chairman of the Audit Committee reviews and, if appropriate,
approves non-audit service engagements, taking into account the proposed scope
of the non-audit services, the proposed fees for the non-audit services, whether
the non-audit services are permissible under applicable law or regulation and
the likely impact of the non-audit services on the independence of the
independent auditors.
41
Each
new
engagement of the Company's independent auditors to perform non-audit services
set forth in the table above has been approved in advance by the Audit Committee
or the Chairman of the Audit Committee pursuant to the foregoing
procedures.
PART
IV
Item
15.
Exhibits and Financial Statement Schedules.
(a) The
following documents are filed as part of this report:
1. Financial
Statements
|
|
The
following consolidated financial statements of the Company are included
in
Item 8 of this report:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
Consolidated
Balance Sheets as of September 30, 2008 and 2007
|
|
|
Consolidated
Statements of Income for the Years Ended September 30, 2008 and 2007
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended September 30,
2008 and 2007
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2008 and
2007
|
|
|
Notes
to Consolidated Financial Statements
|
2. Financial
Statement Schedules
All
schedules for which provision is made in the applicable accounting regulations
of the Commission are not required under the related instructions, are
inapplicable or the required information is shown in the financial statements
or
notes thereto, and therefore, have been omitted.
42
3. Exhibits
|
EXHIBIT
NO.
|
DESCRIPTION
|
|
3.1
|
Amended
and Restated Articles of Incorporation of the Company. (10)
|
|
3.2
|
Articles
of Amendment to the Amended and Restated Articles of Incorporation
of the
Company increasing the number of authorized shares of common stock
to
27,000,000 shares. (15)
|
|
3.3
|
Articles
of Amendment to the Amended and Restated Articles of Incorporation
of the
Company increasing the number of authorized shares of common stock
to
35,500,000 shares. (18)
|
|
3.4
|
Articles
of Amendment to the Amended and Restated Articles of Incorporation
of the
Company increasing the number of authorized shares of common stock
to
38,500,000 shares. (19)
|
|
3.5
|
Articles
of Amendment to the Amended and Restated Articles of Incorporation
of the
Company designating the terms and preferences for the Class A Preferred
Stock – Series 3. (21)
|
|
3.6
|
Amended
and Restated By-Laws of the Company. (1)
|
|
4.1
|
Amended
and Restated Articles of Incorporation, as amended (same as
Exhibits 3.1, 3.2, 3.3 and 3.4).
|
|
4.2
|
Articles
II, VII and XI of the Amended and Restated By-Laws of the Company
(included in Exhibit 3.5).
|
|
10.1
|
Reality
Female Condom Clinical Trial Data Agreement between the Company and
Family
Health International dated September 24, 1992. (3)
|
|
10.2
|
Trademark
License Agreement for Reality Trademark. (4)
|
|
10.3
|
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. (5)
|
|
10.4
|
Outside
Director Stock Option Plan. (6)
|
|
10.5
|
Supply
Agreement between Chartex International Plc and Deerfield Urethane,
Inc.
dated August 17, 1994. (6)
|
|
10.6
|
Letter
Amendment to Asset Sale Agreement dated April 29, 1996 between the
Company and Dowty Seals Limited and Chartex International Plc. (6)
|
43
|
10.7
|
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. (7)
|
|
10.8
|
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. (7)
|
|
10.9
|
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. (7)
|
|
10.10
|
Lease
Agreement among Chartex Resources Limited, P.A.T. (Pensions) Limited
and
The Female Health Company. (8)
|
|
10.11
|
Agreement
dated March 14, 1997, between the United Nations Joint Programme on
HIV/AIDS and Chartex International PLC. (9)
|
|
10.12
|
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. (11)
|
|
10.13
|
1997
Stock Option Plan. (9)
|
|
10.14
|
Agreement
dated September 29, 1997, between Vector Securities International and
The Female Health Company. (9)
|
|
10.15
|
Company
Promissory Note to Stephen M. Dearholt for $250,000 dated
February 12, 2000 and related Warrants. (13)
|
|
10.16
|
Company
Promissory Note to O.B. Parrish for $50,000 dated February 18,
2000 and related Warrants. (13)
|
|
10.17
|
Company
Promissory Note to Stephen M. Dearholt for $1 million dated
March 25, 2000 and related Warrants. (13)
|
|
10.18
|
Stock
Purchase Agreement, dated as of June 14, 2000, between The Female
Health Company and The John W. Dearholt Trust. (14)
|
|
10.19
|
Stock
Purchase Agreement, dated as of June 14, 2000, between the Company
and The John W. Dearholt Trust. (14)
|
|
10.20
|
Amended
and Restated Promissory Note to Stephen M. Dearholt for $250,000
dated
February 12, 2001 and related warrants. (2)
|
44
|
10.21
|
Amended
and Restated Promissory Note to O.B. Parrish for $50,000 dated
February 18, 2001 and related warrants. (2)
|
|
10.22
|
Amended
and Restated Promissory Note to Stephen M. Dearholt for $1,000,000
dated March 25, 2001 and related warrants. (16)
|
|
10.23
|
Loan
Agreement, dated as of May 18, 2001, between the Company and
Heartland Bank. (16)
|
|
10.24
|
Registration
Rights Agreement, dated as of May 18, 2001, between the Company and
Heartland Bank. (16)
|
|
10.25
|
Warrant
dated May 18, 2001 from the Company to Heartland Bank. (17)
|
|
10.26
|
Warrants
dated May 18, 2001 from the Company to Stephen M. Dearholt.
(17)
|
|
10.27
|
Warrant
dated May 18, 2001 from the Company to The Geneva O. Parrish
1996 Living Trust. (17)
|
|
10.28
|
Warrants
dated May 23, 2001 from the Company to Richard E. Wenninger.
(17)
|
|
10.29
|
Registration
Rights Agreement, dated as of May 18, 2001, among the Company and
certain guarantors. (17)
|
|
10.30
|
Amended
and Restated Promissory Note to Stephen M. Dearholt for $1,000,000
dated
March 25, 2003 and related warrants.
(20)
|
|
10.31
|
Amended
and Restated Change of Control Agreement between the Company and
O.B.
Parrish dated October 1, 2005.
(22)
|
|
10.32
|
Amended
and Restated Change of Control Agreement between the Company and
Mary Ann
Leeper dated October 1, 2005.
(22)
|
|
10.33
|
Amended
and Restated Change of Control Agreement between the Company and
Michael
Pope dated October 1, 2005.
(22)
|
|
10.34
|
Change
of Control Agreement between the Company and Donna Felch dated February
8,
2006.
(23)
|
|
10.35
|
Letter
Agreement between the Company and Donna Felch dated February 2, 2006.
(23)
|
|
10.36
|
Employment
Agreement between the Company and Mary Ann Leeper dated effective
as of
May 1, 2006. (24)
|
|
21
|
Subsidiaries
of Registrant. (12)
|
45
|
23.1
|
Consent
of McGladrey & Pullen, LLP
|
|
24.1
|
Power
of Attorney (included as part of the signature page hereof).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer and Principal Financial Officer pursuant
to 18
U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002.
(25)
|
|
(1)
|
Incorporated
herein by reference to the Company's Registration Statement on Form
S-18,
Registration No. 33-35096, as filed with the Securities and Exchange
Commission on May 25, 1990.
|
|
(2)
|
Incorporated
herein by reference to the Company's March 31, 2001 Form
10-QSB.
|
|
(3)
|
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.
|
|
(4)
|
Incorporated
herein by reference to the Company's 1992 Form 10-KSB.
|
|
(5)
|
Incorporated
herein by reference to the Company's June 30, 1995 Form
10-Q.
|
|
(6)
|
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.
|
|
(7)
|
Incorporated
herein by reference to the Company's March 31, 1999 Form
10-QSB.
|
|
(8)
|
Incorporated
herein by reference to the Company's December 31, 1996 Form
10-QSB.
|
|
(9)
|
Incorporated
herein by reference to the Company's Form 10-KSB/A-2 for the year
ended
September 30, 1997.
|
|
(10)
|
Incorporated
herein by reference to the Company's Form SB-2 Registration Statement
filed with the Securities and Exchange Commission on October 19,
1999.
|
|
(11)
|
Incorporated
herein by reference to the Company's March 31, 1997 Form
10-QSB.
|
|
(12)
|
Incorporated
herein by reference to the Company's Form 10-KSB for the year ended
September 30, 1999.
|
46
|
(13)
|
Incorporated
herein by reference to the Company's March 31, 2000 Form
10-QSB.
|
|
(14)
|
Incorporated
herein by reference to the Company's June 30, 2000 Form
10-QSB.
|
|
(15)
|
Incorporated
herein by reference to the Company's Form SB-2 Registration Statement
filed with the Securities and Exchange Commission on September 21,
2000.
|
|
(16)
|
Incorporated
herein by reference to the Company's June 30, 2001 Form
10-QSB.
|
|
(17)
|
Incorporated
herein by reference to the Company's Form SB-2 Registration Statement
filed on November 13, 2001.
|
|
(18)
|
Incorporated
by reference herein to the Company's Form SB-2 Registration Statement
filed on September 6, 2002.
|
|
(19)
|
Incorporated
herein by reference to the Company's March 31, 2003 Form
10-QSB.
|
|
(20)
|
Incorporated
herein by reference to the Company's September 30, 2003 Form
10-KSB.
|
|
(21)
|
Incorporated
herein by reference to the Company's March 31, 2004 Form
10-QSB.
|
|
(22)
|
Incorporated
herein by reference to the Company's September 30, 2007 Form
10-KSB.
|
|
(23)
|
Incorporated
herein by reference to the Company's Form 8-K dated February 8, 2006
and
filed on February 8, 2006.
|
|
(24)
|
Incorporated
hereby by reference to the Company's Form 8-K/A dated February 20,
2006
and filed on February 21, 2006.
|
|
(25)
|
This
certification is not "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or incorporated by reference into
any
filing under the Securities Exchange Act of 1933, as amended, or
the
Securities Exchange Act of 1934, as
amended.
|
(b) Exhibits
The
response to this portion of Item 15 is submitted as a separate section of this
report.
(c) Financial
Statement Schedules
The
response to this portion of Item 15 is submitted as a separate section of this
report.
47
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
Date: December 18,
2008
THE
FEMALE HEALTH COMPANY
BY: /s/
O.B.
Parrish
O.B. Parrish, Chairman,
Chief
Executive Officer
BY: /s/
Donna
Felch
Donna Felch, Vice President,
Chief Financial Officer
POWER
OF
ATTORNEY
Each
person whose signature appears below hereby appoints O.B. Parrish and Donna
Felch, 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 to
the
Form 10-K 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 Exchange Act of 1934, this Report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
|
Signature
|
Title
|
Date
|
|
/s/
O.B.
Parrish
O.B.
Parrish
|
Chairman
of the Board, Chief Executive Officer and Director
(Principal
Executive Officer)
|
December 18,
2008
|
|
/s/
Mary Ann
Leeper
Mary
Ann Leeper, Ph.D.
|
Director
|
December 18,
2008
|
48
| /s/ Donna Felch |
Vice
President and Chief Financial Officer (Principal Accounting
and
|
December 18,
2008
|
| Donna Felch | Financial Officer) | |
|
/s/
William
R.
Gargiulo
|
Secretary
and Director
|
December 18,
2008
|
|
William
R. Gargiulo
|
||
|
/s/
David R.
Bethune
|
Director
|
December 18,
2008
|
|
David
R. Bethune
|
||
| ______________________ |
Director
|
December 18,
2008
|
|
Stephen
M. Dearholt
|
||
| /s/ Michael R. Walton |
Director
|
December 18,
2008
|
|
Michael
R. Walton
|
||
| ______________________ | Director |
December 18,
2008
|
|
Richard
E. Wenninger
|
||
|
/s/
Mary Margaret
Frank
|
Director
|
December 18,
2008
|
|
Mary
Margaret Frank
|
49
The
Female Health Company and Subsidiaries
Index
to Consolidated Financial Statements
|
Document
|
Page
No.
|
|
Audited
Consolidated Financial Statements.
|
|
|
Report
of McGladrey & Pullen, LLP, Independent Registered Public Accounting
Firm.
|
F-1
|
|
Consolidated
Balance Sheets as of September 30, 2008 and 2007
|
F-2
|
|
Consolidated
Statements of Income for the years ended September
30, 2008 and 2007.
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity for
the years ended September 30, 2008 and 2007.
|
F-4
and F-5
|
|
Consolidated
Statements of Cash Flows for the years ended September
30, 2008 and 2007.
|
F-6
|
|
Notes
to Consolidated Financial Statements.
|
F-7
through F-21
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
The
Female Health Company and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of The Female Health
Company and Subsidiaries, as of September 30, 2008 and 2007, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each
of the two years in the period ended September 30, 2008. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 2008, in conformity with U.S. generally accepted accounting
principles.
We
were
not engaged to examine management’s assessment of the effectiveness of The
Female Health Company and Subsidiaries’ internal control over financial
reporting as of September 30,2008, included in the accompanying Controls and
Procedures and, accordingly, we do not express an opinion thereon.
/s/
McGladrey & Pullen, LLP
Chicago,
Illinois
December
18,
2008
F-1
|
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER
30, 2008 AND 2007
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
|
$ | 1,922,148 | $ | 799,421 | ||||
|
Restricted
cash
|
211,873 | 86,435 | ||||||
|
Accounts
receivable, net of allowance for doubtful accounts
|
||||||||
|
2008
$53,000 and 2007 $51,000
|
6,810,050 | 6,080,153 | ||||||
|
Inventories
|
1,322,652 | 1,372,582 | ||||||
|
Prepaid
expenses and other current assets
|
414,040 | 399,536 | ||||||
|
Deferred
income taxes
|
1,600,000 | 825,000 | ||||||
|
TOTAL
CURRENT ASSETS
|
12,280,763 | 9,563,127 | ||||||
|
Other
Assets
|
55,330 | 251,536 | ||||||
|
EQUIPMENT,
FURNITURE AND FIXTURES
|
||||||||
|
Equipment
not yet in service
|
- | 444,275 | ||||||
|
Equipment,
furniture and fixtures
|
6,046,283 | 5,967,082 | ||||||
| 6,046,283 | 6,411,357 | |||||||
|
Less
accumulated depreciation and amortization
|
4,551,638 | 5,032,472 | ||||||
| 1,494,645 | 1,378,885 | |||||||
|
TOTAL
ASSETS
|
$ | 13,830,738 | $ | 11,193,548 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 621,115 | $ | 806,134 | ||||
|
Accrued
expenses and other current liabilities
|
2,385,540 | 1,532,170 | ||||||
|
Preferred
dividends payable
|
25,068 | 53,025 | ||||||
|
TOTAL
CURRENT LIABILITIES
|
3,031,723 | 2,391,329 | ||||||
|
Obligations
under capital leases
|
49,597 | 23,176 | ||||||
|
Deferred
gain on sale of facilities
|
836,733 | 1,074,339 | ||||||
|
Deferred
grant income
|
203,483 | 257,245 | ||||||
|
TOTAL
LIABILITIES
|
4,121,536 | 3,746,089 | ||||||
|
STOCKHOLDERS’
EQUITY:
|
||||||||
|
Convertible
preferred stock, Class A Series 1, par value $.01 per
share;
|
||||||||
|
authorized
5,000,000 shares; no shares issued and outstanding in
2008;
|
||||||||
| 56,000 shares issued and outstanding in 2007. | - | 560 | ||||||
|
Convertible
preferred stock, Class A Series 3, par value $.01 per
share;
|
||||||||
|
authorized
700,000 shares; 307,602 shares and 473,377
|
||||||||
|
shares
issued outstanding in 2008 and 2007, respectively;
|
3,076 | 4,734 | ||||||
|
Convertible
preferred stock, Class B, par value $.50 per share;
|
||||||||
|
authorized
15,000 shares; no shares issued and outstanding
|
- | - | ||||||
|
Common
Stock, par value $.01 per share; authorized 38,500,000
|
||||||||
|
shares;
issued 27,112,908 and 26,437,908 shares, and
|
||||||||
|
26,271,908
and 26,264,508 shares outstanding in 2008 and 2007,
respectively
|
271,129 | 264,379 | ||||||
|
Additional
paid-in capital
|
65,366,130 | 64,954,610 | ||||||
|
Accumulated
other comprehensive (loss) income
|
(162,705 | ) | 1,051,156 | |||||
|
Accumulated
deficit
|
(53,598,971 | ) | (58,428,233 | ) | ||||
|
Treasury
stock, at cost, 841,000 and 173,400 shares of common
stock
|
||||||||
|
in 2008 and 2007, respectively
|
(2,169,457 | ) | (399,747 | ) | ||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
9,709,202 | 7,447,459 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 13,830,738 | $ | 11,193,548 | ||||
|
See
notes to consolidated financial statements.
|
||||||||
F-2
|
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
|
||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
YEARS
ENDED SEPTEMBER 30, 2008 AND 2007
|
||||||||
|
2008
|
2007
|
|||||||
|
Product
sales
|
$ | 25,528,250 | $ | 19,319,889 | ||||
|
Royalty
income
|
105,876 | - | ||||||
|
Net
revenues
|
25,634,126 | 19,319,889 | ||||||
|
Cost
of sales
|
14,904,325 | 12,163,574 | ||||||
|
Gross
profit
|
10,729,801 | 7,156,315 | ||||||
|
Operating
expenses:
|
||||||||
|
Advertising
and promotion
|
223,800 | 179,874 | ||||||
|
Selling,
general and administrative
|
7,038,060 | 5,864,436 | ||||||
|
Research
and development
|
284,216 | 208,608 | ||||||
|
Total
operating expenses
|
7,546,076 | 6,252,918 | ||||||
|
Operating
income
|
3,183,725 | 903,397 | ||||||
|
Non-operating
income (expense):
|
||||||||
|
Interest,
net and other income
|
53,445 | 36,004 | ||||||
|
Foreign
currency transaction gain (loss)
|
966,736 | (70,488 | ) | |||||
| 1,020,181 | (34,484 | ) | ||||||
|
Income
before income taxes
|
4,203,906 | 868,913 | ||||||
|
Income
tax benefit
|
(762,862 | ) | (825,000 | ) | ||||
|
Net income
|
4,966,768 | 1,693,913 | ||||||
|
Preferred
dividends, Class A, Series 1
|
8,397 | 11,201 | ||||||
|
Preferred
dividends, Class A, Series 3
|
129,109 | 150,047 | ||||||
|
Net
income attributable to common stockholders
|
$ | 4,829,262 | $ | 1,532,665 | ||||
|
Net
income per basic common share outstanding
|
$ | 0.18 | $ | 0.06 | ||||
|
Basic
weighted average common shares outstanding
|
26,116,499 | 24,952,440 | ||||||
|
Net
income per diluted common share outstanding
|
$ | 0.18 | $ | 0.06 | ||||
|
Diluted
weighted average common shares outstanding
|
27,983,263 | 26,398,565 | ||||||
|
See
notes to consolidated financial statements.
|
||||||||
F-3
|
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS
ENDED SEPTEMBER 2008 AND 2007
|
|||||||||||||||||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||||||||||||||||
|
Class
A
|
Class
A
|
Other
|
|||||||||||||||||||||||||||||||
|
Series
1
|
Series
3
|
Preferred
|
Additional
|
Unearned
|
Comprehensive
|
Cost
of
|
|||||||||||||||||||||||||||
|
Preferred
|
Preferred
|
Stock
|
Common
|
Paid-in
|
Consulting
|
Deferred
|
(Loss)
|
Accumulated
|
Treasury
|
||||||||||||||||||||||||
|
Stock
|
Stock
|
Class
B
|
Stock
|
Capital
|
Fees
|
Compensation
|
Income
|
Deficit
|
Stock
|
Total
|
|||||||||||||||||||||||
|
Balance
at September 30, 2006
|
$ | 560 | $ | 4,734 | $ | - | $ | 243,164 | $ | 64,291,244 | $ | (61,000 | ) | $ | (449,325 | ) | $ | 598,474 | $ | (59,823,450 | ) | $ | (32,076 | ) | $ | 4,772,325 | |||||||
|
Cumulative
effect of accounting change for SAB 108
|
- | - | - | - | 137,448 | - | - | - | (137,448 | ) | - | - | |||||||||||||||||||||
|
Adoption
of FAS 123R
|
- | - | - | - | (510,325 | ) | 61,000 | 449,325 | - | - | - | - | |||||||||||||||||||||
|
Share-based
compensation
|
- | - | - | 585 | 616,046 | - | - | - | - | - | 616,631 | ||||||||||||||||||||||
| Issuance of 1,782,645 shares of Common | |||||||||||||||||||||||||||||||||
|
Stock for Warrant Settlement Program
|
- | - | - | 17,826 | (17,826 | ) | - | - | - | - | - | - | |||||||||||||||||||||
| Issuance of 150,000 shares of Common | |||||||||||||||||||||||||||||||||
|
Stock for consulting services
|
- | - | - | 1,500 | 230,500 | - | - | - | - | - | 232,000 | ||||||||||||||||||||||
| Issuance of 61,397 shares of Common Stock | |||||||||||||||||||||||||||||||||
|
as payment of preferred stock dividends
|
- | - | - | 614 | 111,613 | - | - | - | - | - | 112,227 | ||||||||||||||||||||||
| Issuance of 69,000 shares of Common Stock | |||||||||||||||||||||||||||||||||
|
for options exercised
|
- | - | - | 690 | 95,910 | - | - | - | - | - | 96,600 | ||||||||||||||||||||||
|
Stock
repurchase – 173,400 Treasury Shares
|
- | - | - | - | - | - | - | - | - | (367,671 | ) | (367,671 | ) | ||||||||||||||||||||
|
Preferred
Stock dividends
|
- | - | - | - | - | - | - | - | (161,248 | ) | - | (161,248 | ) | ||||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | - | - | - | 1,693,913 | - | 1,693,913 | ||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | - | - | - | 452,682 | - | - | 452,682 | ||||||||||||||||||||||
|
Comprehensive
income
|
2,146,595 | ||||||||||||||||||||||||||||||||
|
Balance
at September 30, 2007
|
$ | 560 | $ | 4,734 | $ | - | $ | 264,379 | $ | 64,954,610 | $ | - | $ | - | $ | 1,051,156 | $ | (58,428,233 | ) | $ | (399,747 | ) | $ | 7,447,459 | |||||||||
|
See
Notes to Consolidated Financial Statements.
|
|||||||||||||||||||||||||||||||||
F-4
|
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS
ENDED SEPTEMBER 2008 AND 2007
|
||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Class
A
|
Class
A
|
Other
|
||||||||||||||||||||||||||
|
Series
1
|
Series
3
|
Preferred
|
Additional
|
Comprehensive
|
Cost
of
|
|||||||||||||||||||||||
|
Preferred
|
Preferred
|
Stock
|
Common
|
Paid-in
|
(Loss)
|
Accumulated
|
Treasury
|
|||||||||||||||||||||
|
Stock
|
Stock
|
Class
B
|
Stock
|
Capital
|
Income
|
Deficit
|
Stock
|
Total
|
||||||||||||||||||||
|
Balance
at September 30, 2007
|
$ | 560 | $ | 4,734 | $ | - | $ | 264,379 | $ | 64,954,610 | $ | 1,051,156 | $ | (58,428,233 | ) | $ | (399,747 | ) | $ | 7,447,459 | ||||||||
|
Share-based
compensation
|
- | - | - | 800 | 264,002 | - | - | - | 264,802 | |||||||||||||||||||
|
Amoritization
of unearned consulting fees
|
- | - | - | - | 57,000 | - | - | - | 57,000 | |||||||||||||||||||
|
Issuance
of 290,000 shares of Common Stock for
|
||||||||||||||||||||||||||||
|
Warrants exercised
|
- | - | - | 2,900 | 419,600 | - | - | - | 422,500 | |||||||||||||||||||
|
Issuance
of 291,000 shares of Common Stock for
|
||||||||||||||||||||||||||||
|
options
exercised
|
- | - | - | 2,910 | 299,340 | - | - | - | 302,250 | |||||||||||||||||||
|
Issuance
of 14,000 shares of Common Stock and
|
||||||||||||||||||||||||||||
|
cash
payment for 42,000 shares for redemption
|
||||||||||||||||||||||||||||
|
56,000 shares preferred stock Class A ,Series 1
|
(560 | ) | - | - | 140 | (104,580 | ) | - | - | - | (105,000 | ) | ||||||||||||||||
|
Repurchase
165,773 shares preferred stock Class A,
|
||||||||||||||||||||||||||||
|
Series
3
|
- | (1,658 | ) | - | - | (523,842 | ) | - | - | - | (525,500 | ) | ||||||||||||||||
|
Stock
repurchase – 667,600 Treasury Shares
|
- | - | - | - | - | - | - | (1,769,710 | ) | (1,769,710 | ) | |||||||||||||||||
|
Preferred
Stock dividends
|
- | - | - | - | - | - | (137,506 | ) | - | (137,506 | ) | |||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | - | 4,966,768 | - | 4,966,768 | |||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | - | (1,213,861 | ) | - | - | (1,213,861 | ) | |||||||||||||||||
|
Comprehensive
income
|
3,752,907 | |||||||||||||||||||||||||||
|
Balance
at September 30, 2008
|
$ | - | $ | 3,076 | $ | - | $ | 271,129 | $ | 65,366,130 | $ | (162,705 | ) | $ | (53,598,971 | ) | $ | (2,169,457 | ) | $ | 9,709,202 | |||||||
|
See
Notes to Consolidated Financial Statements.
|
||||||||||||||||||||||||||||
F-5
|
THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
YEARS
ENDED SEPTEMBER 30, 2008 AND 2007
|
|||||||
|
2008
|
2007
|
||||||
|
OPERATIONS
|
|||||||
|
Net
income
|
$ | 4,966,768 | $ | 1,693,913 | |||
|
Adjustments
to reconcile net income to net cash
|
|||||||
|
provided
by (used in) operating activities:
|
|||||||
|
Depreciation
and amortization
|
217,085 | 133,657 | |||||
|
Amortization
of deferred gain on sale and leaseback of building
|
(112,512 | ) | (112,721 | ) | |||
|
Amortization
of deferred income from grant - BLCF
|
(23,466 | ) | - | ||||
|
(Decrease)
increase in inventory obsolescence reserve
|
(15,100 | ) | 10,035 | ||||
|
Provision
for bad debts
|
9,878 | 1,649 | |||||
|
Interest
added to certificate of deposit
|
(2,586 | ) | (2,464 | ) | |||
|
Amortization
of unearned consulting fees
|
57,000 | 232,000 | |||||
|
Share-based
compensation
|
264,802 | 616,631 | |||||
|
Deferred
income taxes
|
(775,000 | ) | (825,000 | ) | |||
|
Loss
on disposal of fixed assets
|
6,288 | - | |||||
|
Changes
in operation assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(1,158,701 | ) | (2,648,079 | ) | |||
|
Inventories
|
(110,081 | ) | (280,528 | ) | |||
|
Prepaid
expenses and other assets
|
134,823 | 167,524 | |||||
|
Accounts
payable
|
(94,241 | ) | 159,079 | ||||
|
Accrued
expenses and other current liabilities
|
879,441 | 773,316 | |||||
|
Net
cash provided by (used in) operating activities
|
4,244,398 | (80,988 | ) | ||||
|
INVESTING
ACTIVITIES
|
|||||||
|
(Increase)
decrease in restricted cash
|
(125,438 | ) | 167,508 | ||||
|
Proceeds
from disposal of fixed assets
|
13,859 | - | |||||
|
Capital
expenditures
|
(347,602 | ) | (970,040 | ) | |||
|
Net
cash used in investing activities
|
(459,181 | ) | (802,532 | ) | |||
|
FINANCING
ACTIVITIES
|
|||||||
|
Payment
on capital lease obligations
|
(36,499 | ) | (11,189 | ) | |||
|
Proceeds
from exercise of stock options
|
302,250 | 96,600 | |||||
|
Proceeds
from exercise of common stock warrants
|
422,500 | - | |||||
|
Redemption
and repurchase of preferred stock
|
(630,500 | ) | - | ||||
|
Purchases
of common stock for treasury shares
|
(1,769,710 | ) | (367,671 | ) | |||
|
Dividends
paid on preferred stock
|
(165,463 | ) | (7,200 | ) | |||
|
Net
cash used in financing activities
|
(1,877,422 | ) | (289,460 | ) | |||
|
Effect
of exchange rate changes on cash
|
(785,068 | ) | 145,008 | ||||
|
Net
increase (decrease) in cash
|
1,122,727 | (1,027,972 | ) | ||||
|
Cash
at beginning of period
|
799,421 | 1,827,393 | |||||
|
CASH
AT END OF PERIOD
|
$ | 1,922,148 | $ | 799,421 | |||
|
Schedule
of noncash financing and investing activities:
|
|||||||
|
Common
stock issued for payment of preferred stock dividends
|
$ | - | $ | 112,227 | |||
|
Preferred
dividends declared
|
25,068 | 11,201 | |||||
|
Reduction
of accrued expense upon issuance of shares
|
76,516 | - | |||||
|
Conversion
of 14,000 shares of preferred stock Class A, Series 1 to common
stock
|
35,000 | - | |||||
|
Capital
lease obligations incurred for the purchase of equipment
|
103,559 | 50,130 | |||||
|
Foreign
currency translation adjustment
|
(1,213,861 | ) | 452,682 | ||||
|
See
notes to consolidated financial statements.
|
|||||||
F-6
The
Female Health Company and Subsidiaries
Notes
to
Consolidated Financial
Statements
Note
1. Nature
of Business and Significant Accounting Policies
Principles
of consolidation
and nature of operations: The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
The Female Health Company – UK, and its wholly owned subsidiaries, The Female
Health Company - UK, plc and The Female Health Company (M) SDN. BHD. 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, the female condom. The original female condom is known as
the “FC Female Condom” in the U.S., and "femidom" or "femy" outside the U.S; the
second generation product is known as FC2 throughout the world. 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 Female Health Company (M) SDN.BHD leases a 16,000 sq.
ft. manufacturing facility located in Selangor D.E., Malaysia.
The
product is currently sold or available in either or both commercial (private
sector) and public sector markets in 116 countries. The product is marketed
in
15 countries by various country-specific commercial partners. The Company's
standard credit terms vary from 30 to 90 days, depending on the class of trade
and customary terms within a territory, so accounts receivable is affected
by
the mix of purchasers within the quarter. As is typical in the
Company's business, extended credit terms may occasionally be offered as a
sales
promotion. For the past twelve months, the Company's average days
sales outstanding has averaged approximately 87 days. Over the past
five years, the Company’s bad debt expense has been less than .01% of
sales.
Use
of
estimates: The preparation of financial statements requires
management to make estimates and use assumptions that affect certain reported
amounts and disclosures. Actual results may differ from those
estimates.
Significant
accounting estimates include the following:
In
evaluating the Company’s ability to realize it’s deferred tax assets management
considers all available positive and negative evidence including our past
operating results and our forecasts of future taxable income. In determining
future taxable income, management makes assumptions to forecast U.S. federal,
U.S. state, and international operating income, the reversal of temporary
differences, and the implementation of any feasible and prudent tax planning
strategies. These assumptions require significant judgment regarding the
forecasts of future taxable income, and are consistent with the forecasts used
to manage the Company’s business.
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
concentration:
The Company’s cash is maintained primarily in two financial institutions, one
located in London, England and the other in Clayton, Missouri.
Accounts
receivable and
concentration of credit risk: Accounts receivable are carried
at original invoice amount less an estimate made for doubtful receivables based
on a review of all outstanding amounts on a periodic basis. As of September
30,
2008, the $6,810,050 accounts receivable balance was comprised of $6,351,493
trade receivables and $458,557 other receivables, compared to an accounts
receivable balance of $6,080,153 as of September 30, 2007 which was comprised
of
$5,349,128 trade receivables and $731,025 other receivables. Management
determines the allowance for doubtful accounts by identifying troubled accounts
and by using historical experience applied to an aging of
accounts. Management also periodically evaluates individual customer
receivables and considers a customer’s financial condition, credit history, and
the current economic conditions. Accounts receivable are written off
when deemed uncollectible. Recoveries of accounts receivable
previously written off are recorded when received. The Company’s customers
are primarily governments, ministries of health and large global agencies which
purchase and distribute the female condom for use in HIV/AIDS prevention
programs. In fiscal year 2008, significant customers were UNFPA (19% of sales),
John Snow, Inc., facilitator of USAID I DELIVER project (25% of sales) and
Sekunjalo, distributor to the Republic of South Africa (17% of
sales).
F-7
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
Note
1. Nature
of Business and Significant Accounting Policies (Continued)
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.
Foreign
currency translation
and operations: 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. Assets located outside of the United
States totaled approximately $7,500,000 and $6,500,000 at September 30, 2008
and
2007, respectively.
Equipment
and furniture and
fixtures: Depreciation and amortization are computed using
primarily the straight-line method. Depreciation and amortization are
computed over the estimated useful lives of the respective assets which range
as
follows:
Equipment
5 - 10 years
Office
equipment
3 years
Furniture
&
fixtures 7
- 10 years
Depreciation
on leased assets is computed over the lesser of the remaining lease term or
the
estimated useful lives of the assets. Depreciation on leased assets
is included with depreciation on owned assets.
Patents
and
trademarks: The Company currently holds product and technology
patents on the female condom in the United States, Japan, the United Kingdom,
France, Italy, Germany, Spain, the European Patent Convention, Canada, the
People’s Republic of China, Brazil, South Korea and Australia. The
Company has the registered trademark "FC Female Condom" in the United States
and
has trademarks on the names "femidom," "femy," “Reality,” and others in certain
foreign countries. Patents are amortized on a straight-line basis
over their estimated useful life. Patents and trademarks have no
carrying value in the accompanying balance sheet at September 30, 2008 and
2007.
Financial
instruments: The Company has no financial instruments for which the
carrying value materially differs from fair value.
Research
and development
costs: Research and development costs are expensed as
incurred. The amount of costs expensed for the years ended September 30, 2008
and 2007, was approximately $284,000 and $209,000,
respectively.
F-8
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
Note
1. Nature
of Business and Significant Accounting Policies (Continued)
Restricted
cash: Restricted cash relates to security provided to one of
the Company’s UK banks for performance bonds issued in favor of customers. Such
security has been extended infrequently and only on occasions where it has
been
a contract term expressly stipulated as an absolute requirement by the funds’
provider. The expiration of the
bond
is defined by the completion of the event such as, but not limited to, delivery
of goods or at a period of time after product has been distributed.
Revenue
recognition: The Company recognizes revenue from product sales
when each of the following conditions has been met: an arrangement exists,
delivery has occurred, there is a fixed price, and collectibility is reasonably
assured. Beginning
in fiscal 2008, the Company also derives revenue from licensing its intellectual
property under an agreement with its business partner, Hindustan Latex
Limited. Such revenue appears as royalty income on the Consolidated
Statements of Income for the year ended September 30, 2008, and is recognized
in
the period in which the sale is made by Hindustan Latex Limited.
Deferred
grant
income: The Company received grant monies from the British
Linkage Challenge Fund to help the Company defray certain expenses and the
cost
of capital expenditures related to a project. The underlying project
related to the development of a linkage between the UK subsidiary and Hindustan
Latex Limited, in India, to do end-stage manufacturing of the female condom
and
develop the market for the product in that country. The grant
received was split between the Company and Hindustan Latex Limited pro-rata
to
their respective expenditure on the project. The Company utilized the general
precepts of U.S. GAAP and the principles of matching and conservatism to
determine how to account for the grant monies received. The Company
also utilized the guidance of International Accounting Standard No.
20 – Accounting for Government Grants and Disclosure of Government Assistance to
further support the Company's accounting treatment of the grant
received. The Company allocated its share of the grant monies to
capital and expense pro-rata to the respective cost allocated to the
project. Grant proceeds for expenses were credited to income in the
quarter incurred. Grant proceeds for capital expenditure were deferred and
released to income in line with the depreciation of the relevant
assets.
Share-based
compensation: The Company accounts for stock-based compensation in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123
(R), “Share-Based Payments” which establishes standards for the accounting for
equity instruments exchanged for employee services. Among its provisions, SFAS
123R requires the Company to recognize compensation expense for equity awards
over the vesting period based on their grant-date fair value.
Advertising: The
Company's policy is to expense advertising and promotion costs as
incurred.
Income
taxes: The Company files separate income tax returns for its
foreign subsidiaries. Statement of Financial Accounting Standards No.
109, Accounting for Income
Taxes (FAS 109), requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are also provided
for
carryforwards for income tax purposes. In addition, the amount of any future
tax
benefits is reduced by a valuation allowance to the extent such benefits are
not
expected to be realized.
Earnings
per share (EPS): Basic EPS is computed
by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon conversion of convertible preferred
shares and the exercise of stock options and warrants and upon restrictions
lapsing on contingent shares, for all periods.
F-9
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
Note
1. Nature
of Business and Significant Accounting Policies (Continued)
Other
comprehensive
income: Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
foreign currency translation adjustments, are reported as a separate component
of the equity section of the balance sheet, such items, along with net income,
are components of comprehensive income.
Over
the
years, the US parent company has financed the operations of its subsidiaries
through an intercompany loan with The Female Health Company-UK, plc., which
is
eliminated upon consolidation. The Company has designated the
intercompany loan to be long-term in nature as prescribed by FAS
52. Further, the Company followed the guidance of FAS 52 paragraph
20. b. when translating the subsidiary’s balance sheet for consolidation
purposes. This paragraph states that “gains and losses on
intercompany foreign currency transactions that are of a long-term investment
nature (that is, settlement is not planned or anticipated in the foreseeable
future) would not be included in the computation of net income when the entities
to the transaction are consolidated.”
The
US
parent company routinely purchases inventory produced by its UK subsidiary
for
sale to its customers. This intercompany trade account is eliminated
in consolidation. The Company’s policy and intent is to settle the intercompany
trade account on a current basis, and in accordance with FAS
52, translation gains and losses are recognized in the consolidated income
statement. Included in foreign currency transaction gains and losses is
approximately $551,000 and $70,000 of translation gains (losses) on the
intercompany trade account for the years ended 2008 and 2007, respectively,
which fluctuate based on the timing of inventory purchases by the US from the
UK
as well as variability in exchange rates.
Reclassification:
Certain
items in the financial statements for the year ended September 30, 2007 have
been reclassified to be consistent with the presentation shown for the year
ended September 30, 2008.
Note
2. Earnings
per Share
Basic
EPS
is computed by dividing income attributable to common stockholders by the
weighted average number of common shares outstanding for the period. In the
diluted earnings per share calculation, the numerator is the sum of net income
attributable to common stockholders and preferred dividends. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon conversion of convertible
preferred shares and the exercise of stock options and warrants and unvested
shares granted to employees.
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Denominator:
|
||||||||
|
Weighted
average common shares outstanding
– basic
|
26,116,499 | 24,952,440 | ||||||
|
Net
effect of dilutive securities:
|
||||||||
|
Options
|
755,600 | 492,556 | ||||||
| Warrants | 757,060 | 694,819 | ||||||
| Convertible preferred stock | 307,604 | - | ||||||
| Unvested restricted shares | 46,500 | 258,750 | ||||||
| Total net effect of dilutive securities | 1,866,764 | 1,446,125 | ||||||
| Weighted average common shares outstanding - diluted | 27,983,263 | 26,398,565 | ||||||
| Income per common share – basic | $ | 0.18 | $ | 0.06 | ||||
| Income per common share – diluted | $ | 0.18 | $ | 0.06 | ||||
F-10
|
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial
Statements
|
Warrants
to purchase approximately
450,000 shares of common stock at exercise prices ranging from $2.25 to $3.10
per share that were outstanding during the year ended September 30, 2007, were
not included in the computation of diluted net income per share because their
effect was anti-dilutive. In March 2008, 400,000 of these warrants
expired. The remaining 50,000 warrants will expire in July
2009. There are no anti-dilutive shares in the current
year.
Note
3. Inventories
The
components of inventory consist of the following at September 30, 2008 and
2007:
|
2008
|
2007
|
|||||||
|
Raw
material
|
$ | 910,130 | $ | 808,379 | ||||
|
Work
in process
|
135,020 | 273,704 | ||||||
|
Finished
goods
|
323,502 | 358,499 | ||||||
|
Inventory,
gross
|
1,368,652 | 1,440,582 | ||||||
|
Less:
inventory reserves
|
(46,000 | ) | (68,000 | ) | ||||
|
Inventory,
net
|
$ | 1,322,652 | $ | 1,372,582 | ||||
Note
4. Notes
Payable and Long-Term Debt
Presently,
the Company has two revolving notes with Heartland Bank that allow the Company
to borrow up to $1,500,000 and expire July 1, 2009. The two notes
total $1,500,000 and bear interest payable at a rate of prime plus 0.5% (prime
rate was 5% at September 30, 2008). These notes are collateralized by
substantially all of the assets of the Company. No amounts are
outstanding under the revolving notes at September 30, 2008 and
2007.
Note
5. Operating
Leases and Rental Expense
During
the year ended September 30, 2006, the Company renewed and expanded its U.S.
lease agreement to 5,100 square feet of office space which expires October
31,
2011. The lease requires monthly payments of $6,682 plus real estate
taxes, utilities, and maintenance expenses.
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 $3,365,00
(£1,950,000) for leasing the facility to a third party for a nominal annual
rental charge and for providing the third party with an option to purchase
the
facility for one pound during the period December 2006 to December 2027.
As part of the same transaction, the Company entered into an agreement to lease
the facility back from the third party for base rents of $586,198 (£296,725) per
year payable quarterly until 2016. The lease is renewable through December
2027.
The Company was also required to make an initial security deposit of $483,168
(£268,125) which has been reduced to $173,589 (£97,500) and is included in
accounts receivable in the consolidated balance sheet at September 30, 2008
because the deposit is expected to be returned to the Company during fiscal
2009. This deposit was classified as long term and included in other
assets on the balance sheet as of September 30, 2007. The
facility had a net book value of $1,398,819 (£810,845) on the date of the
transaction. The $1,966,181 (£1,139,155) gain which resulted from
this transaction is being recognized ratably over the initial lease
term. Unamortized deferred gain as of September 30, 2008 and 2007,
was $836,733 (£469,969) and $1,074,339 (£526,921),
respectively.
F-11
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
On
September 1, 2005, the Company entered into a lease agreement to utilize 1,900
square feet of a facility located in Selangor D.E., Malaysia, for warehousing
and manufacturing FC2. The lease expired on December 31, 2007. On
September 1, 2007, the Company leased 16,000 sq. ft. of manufacturing space
in
Selangor D.E., Malaysia. The lease term is for three years at a
monthly rate of $7,737 and may be renewed for two additional three year
terms.
The
Company also leases equipment under a number of lease agreements which expire
at
various dates between March 2009 and June 2013. The aggregate monthly
rental was $1,920 at September 30, 2008.
Details
of operating lease expense, including real estate taxes and insurance, are
as
follows:
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Operating
Lease Expense:
|
||||||||
|
Factory
& Office Leases
|
$ | 1,052,918 | $ | 1,026,335 | ||||
|
Other
|
23,038 | 37,688 | ||||||
| $ | 1,075,956 | $ | 1,064,023 | |||||
|
In
fiscal year 2007 and 2008, the Company entered into several capital
leases. Each of the leases have a thirty-six month term and require
monthly rentals of $4,492.
Future
minimum payments under leases consisted of the following at September
30,
2008:
|
||||||||
|
Operating
Leases
|
Capital
Leases
|
|||||||
|
2009
|
$ | 707,243 | $ | 53,907 | ||||
|
2010
|
709,649 | 41,072 | ||||||
|
2011
|
618,238 | 12,247 | ||||||
|
2012
|
540,106 | - | ||||||
|
2013
|
531,702 | - | ||||||
|
Thereafter
|
1,693,970 | - | ||||||
| $ | 4,800,908 |
107,226
|
||||||
|
Less:
amount representing interest
|
11,925
|
|||||||
|
95,301
|
||||||||
|
Current
portion
|
45,704
|
|||||||
| $ |
49,597
|
|||||||
F-12
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
Note
6. Income
Taxes
The
Company accounts for income taxes using the liability method, which requires
the
recognition of deferred tax assets or liabilities for the tax-effected temporary
differences between the financial reporting and tax bases of our assets and
liabilities, and for net operating loss and tax credit
carryforwards.
In
evaluating the Company’s ability to realize it’s deferred tax assets management
considers all available positive and negative evidence including our past
operating results and our forecast of future taxable income. In
determining future taxable income, management makes assumptions to forecast
U.S.
federal, U.S. state, and international operating income, the reversal of
temporary differences, and the implementation of any feasible and prudent tax
planning strategies. These assumptions require significant judgment regarding
the forecasts of future taxable income, and are consistent with the forecasts
used to manage the Company’s business.
A
reconciliation of income tax expense (benefit) and the amount computed by
applying the statutory Federal income tax rate to loss before income taxes
as of
September 30, 2008 and 2007 is as follows:
|
September
30
|
||||||||
|
2008
|
2007
|
|||||||
|
Income
tax expense at statutory rates
|
$ | 1,429,000 | $ | 295,000 | ||||
|
State
income tax, net of federal benefits
|
222,000 | (46,000 | ) | |||||
|
Non-deductible
expenses
|
(76,000 | ) | 97,000 | |||||
|
Effect
of foreign income tax
|
12,138 | - | ||||||
|
Utilization
of NOL carryforwards
|
(1,087,000 | ) | (674,000 | ) | ||||
|
Increase
(decrease) in valuation allowance
|
(1,263,000 | ) | (497,000 | ) | ||||
|
Income
tax benefit
|
$ | (762,862 | ) | $ | (825,000 | ) | ||
As
of
September 30, 2008, the Company had federal and state net operating loss
carryforwards of approximately $41,601,000 and $22,134,000, respectively, for
income tax purposes expiring in years 2009 to 2027. The Company's UK
subsidiary, The Female Health Company - UK, plc has UK net operating loss
carryforwards of approximately $85,383,000 as of September 30,
2008. These UK net operating loss carryforwards can be carried
forward indefinitely to be used to offset future UK taxable income.
Significant
components of the Company's deferred tax assets and liabilities are as follows
at September 30, 2008 and 2007:
|
September
30
|
||||||||
|
Deferred
Tax
Assets:
|
2008
|
2007
|
||||||
|
Federal
net operating loss carryforwards
|
$ | 14,144,000 | $ | 14,812,000 | ||||
|
State
net operating loss carryforwards
|
1,771,000 | 1,877,000 | ||||||
|
Foreign
net operating loss carryforwards – UK
|
23,907,000 | 24,702,000 | ||||||
|
Foreign
capital allowance – UK
|
1,010,000 | 1,487,000 | ||||||
|
Foreign
net operating loss carryforwards – Malaysia
|
104,000 | - | ||||||
|
Other,
net
|
31,000 | 71,000 | ||||||
|
Gross
deferred tax assets
|
40,967,000 | 42,949,000 | ||||||
|
Valuation
allowance for deferred tax asset
|
39,367,000 | 42,124,000 | ||||||
|
Deferred
income taxes
|
$ | 1,600,000 | $ | 825,000 | ||||
F-13
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
The
valuation allowance decreased by $1,263,000 (representing a reduction of
$2,757,000 net of the effects of foreign currency translations of $1,494,000)
and increased by $497,000 (representing an increase of $37,000 net of the
effects of foreign currency translations of $460,000), for the years ended
September 30, 2008 and 2007, respectively. Included in the valuation
allowance change is recognition of $775,000 and 825,000 of net operating loss
carryforwards in 2008 and 2007 respectively. Under the Internal Revenue
Code, certain ownership changes, including the prior issuance of preferred
stock, the Company’s public offering of common stock and the exercise of common
stock warrants and options may subject the Company to annual limitations on
the
utilization of its net operating loss carryforward. As of September 30, 2008,
the amounts subject to limitations has not yet been determined.
In
September, 2006, FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 developed
a
two-step process to evaluate a tax position and also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Company adopted this
interpretation on October 1, 2007. The Company has not recorded a reserve for
any tax positions for which the ultimate deductibility is highly certain but
for
which there is uncertainty about the timing of such
deductibility. The Company files tax returns in all appropriate
jurisdictions. The open tax years are those years ending September
30, 2004 to September 30, 2008, which statutes expire in
2008-2011. As of September 30, 2008, the Company has no recorded
liability for unrecognized tax benefits. The adoption and
implementation of FIN 48 had no effect on the Company’s income from operations,
net income or basic and diluted earnings per share for the period ended
September 30, 2008.
The
Company recognizes interest and penalties related to uncertain tax positions
as
income tax expense as incurred. No expense for interest and penalties
was recognized for the year ended September 30, 2008.
Note
7. Stock
Incentive Plan
In
March
2008, the Company’s shareholders approved the 2008 Stock Incentive Plan which
will be utilized to provide equity opportunities and performance –based
incentives to attract, retain and motivate those persons who make (or are
expected to make) important contributions to the Company. A total of
2,000,000 shares are available for issuance under the plan. As of
September 30, 2008, 50,000 of those shares had been issued. The
compensation expense related to these awards and related terms of these award
are included in the restricted stock disclosures that follow in Note
8.
Note
8. Share-based
Compensation
Stock
Option
Plans
Under
the
Company’s previous share based long-term incentive compensation plan, the 1997
Stock Option Plan, the Company granted non-qualified stock options to
employees. There are no shares available for grant under the plan
which expired on December 31, 2006. Options issued under that plan
expire in 10 years and generally vested 1/36 per month, with full vesting after
three years.
Compensation
expense is recognized only for share-based payments expected to vest. The
Company estimates forfeitures at the date of grant based on our historical
experience and future expectations. Stock compensation expense related to
options for the years ended September 30, 2008 and 2007 was $56,470 and
$121,564, respectively.
F-14
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
The
Company did not grant any stock options for the year ended September 30,
2008. The Company’s outstanding stock options were issued
under its 1997 Stock Option plan. These stock options expire 10 years
from the grant date and generally vest ratably over the thirty-six month vesting
period.
The
Company granted 180,000 stock options during the fiscal year ended September
30,
2007. The table below outlines the weighted average assumptions for options
granted during the fiscal year ended September 30, 2007.
|
Fiscal
Year Ended
September
30, 2007
|
|
|
Weighted
average assumptions:
|
|
|
Expected
volatility
|
61.2
%
|
|
Expected
dividend yield
|
0
%
|
|
Risk-free
interest rate
|
5.10
%
|
|
Expected
term (in years)
|
10.0
|
|
Fair
value of options granted
|
$ 0.95
|
During
the fiscal year ended September 30, 2007, the Company used historical volatility
of our common stock over a period equal to the expected life of the options
to
estimate their fair value. The dividend yield assumption is based on the
Company’s history and expectation of future dividend payouts on the common
stock. The risk-free interest rate is based on the implied yield available
on
U.S. treasury zero-coupon issues with an equivalent remaining term.
The
expected term of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations
of
future employee behavior. To value option grants and other awards for actual
stock-based compensation, the Company used the Black-Scholes option valuation
model. When the measurement date is certain, the fair value of each option
grant
is estimated on the date of grant and is based on the assumptions used for
the
expected stock price volatility, expected term, risk-free interest rates and
future dividend payments.
Option
Activity:
The
following table summarizes the stock options outstanding and exerciserable
at
September 30, 2008:
|
Weighted
Average
|
||||||||||
|
Shares
|
Exercise
Price
Per
Share
|
Remaining
Contractual
Term
(years)
|
Aggregate
Intrinsic
Value
|
|||||||
|
Outstanding
at September 30, 2006
|
2,644,980 | $ | 1.38 | |||||||
|
Granted
|
180,000 | 1.27 | ||||||||
|
Exercised
|
(69,000 | ) | 1.40 | |||||||
|
Forfeited
|
(10,000 | ) | 2.70 | |||||||
|
Outstanding
at September 30, 2007
|
2,745,980 | 1.37 | ||||||||
|
Granted
|
- | - | ||||||||
|
Exercised
|
(291,000 | ) | 1.04 | |||||||
|
Forfeited
|
(15,000 | ) | 1.27 | |||||||
|
Outstanding
at September 30, 2008
|
2,439,980 | $ | 1.41 |
4.88
|
$ 4,006,467
|
|||||
|
Exercisable
on September 30, 2008
|
2,389,980 | $ | 1.41 |
4.81
|
$ 3,917,467
|
|||||
F-15
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
The
aggregate intrinsic value in the table above is before income taxes, based
on
the Company’s closing stock price of $3.05 on the last day of business for the
period ended September 30, 2008. The total intrinsic value of options exercised
during the years ended September 30, 2008 and 2007 were $506,350 and
$46,230 respectively.
Total
unrecognized compensation cost for stock options as of September 30, 2008 was
$50,000. This compensation cost will be recognized over a weighted average
period of 1.0 year. The realized tax benefit from stock options and
other share-based payments for the years ended September 30, 2008 and 2007
was
not recognized, based on the Company’s election of the “with and without”
approach.
Restricted
Stock:
The
Company issues restricted stock to employees and consultants. Such issuances
may
have vesting periods that range from one to two years or the issuances may
be
contingent on continued employment for periods that range from one to two years.
In addition, the Company has issued stock awards to certain employees that
contain vesting provisions or provide for future issuance contingent upon the
achievement of pre-established performance targets.
A
summary
of the non-vested stock activity for the fiscal year 2008 is summarized in
the
table below:
|
Non-vested
awards summary:
|
Shares
|
Weighted
Average
Grant
-Date
Fair
Value
|
||||||
|
Outstanding
at September 30, 2006
|
347,917 | $ | 1.48 | |||||
|
Stock
Granted
|
231,250 | 1.61 | ||||||
|
Vested
|
(463,334 | ) | 1.54 | |||||
|
Forfeited
|
(2,500 | ) | 1.26 | |||||
|
Outstanding
at September 30, 2007
|
113,333 | 1.53 | ||||||
|
Stock
Granted
|
46,500 | 2.32 | ||||||
|
Vested
|
(157,278 | ) | 1.75 | |||||
|
Forfeited
|
- | - | ||||||
|
Total
Outstanding September 30, 2008
|
2,555 | $ | 2.65 | |||||
The
Company recognized share-based compensation expense for restricted stock of
approximately $265,000 for the year ended September 30, 2008 and $727,067 for
the year ended September 30, 2007. This expense is included in selling, general
and administrative expenses for the respective periods.
As
of
September 30, 2008, there was approximately $7,000 of total unrecognized
compensation cost related to non-vested restricted stock compensation
arrangements granted under the incentive plans. This unrecognized cost will
be
recognized over the weighted average period of the next 1.1 years. The fair
value of the shares that vested during the years ended September 30, 2008 and
2007 was $656,205 and $731,375, respectively.
Common
Stock Purchase
Warrants
The
Company did not issue any common stock purchase warrants in either fiscal year
2008 or fiscal year 2007. In 2008, warrant holders exercised 290,000
warrants. The Company received $422,500 of proceeds from the exercise of
these warrants. No warrants were exercised in 2007 other than those
settled through the Warrant Settlement Program. The intrinsic value of
warrants outstanding and exercisable at September 30, 2008 is $2,482,725.
There is no unrecognized compensation cost related to warrants as of September
30, 2008.
F-16
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
At
September 30, 2008, the following warrants were outstanding and
exercisable:
|
Number
|
|||
|
Outstanding
|
|||
|
Warrants
issued in connection with:
|
|||
|
Investor
relations
|
200,000 | ||
|
Note
payable, bank
|
340,000 | ||
|
Notes
payable, related party
|
686,500 | ||
|
Total
Outstanding September 30, 2008
|
1,226,500 | ||
|
Warrants
outstanding and exercisable:
|
|||
|
Number
|
|||
|
Range
of
|
Outstanding
|
Wghtd.Avg.
|
Wghtd.Avg.
|
|
Exercise
|
and
Exercisable
|
Remaining
|
Exercise
|
|
Prices
|
at
9/30/08
|
Life
|
Price
|
|
$0.40
- $0.50
|
364,000
|
2.47
|
$ 0.40
|
|
$0.51
- $1.00
|
12,500
|
1.38
|
0.72
|
|
$1.01
- $3.00
|
850,000
|
6.47
|
1.30
|
|
1,226,500
|
5.23
|
$
1.03
|
|
Warrant
Settlement
Program
During
the third quarter of fiscal 2007, the Company offered certain holders of
warrants a program under which they could settle the warrants for fully vested
common stock. The subject warrants had exercise prices ranging from
$0.40 per share to $1.50 per share. Warrant holders who elected to
participate in the program tendered 2,762,500 warrants to acquire 1,782,645
shares of common stock, which were issued during the third quarter of FY 2007.
Since the fair value of the warrants tendered was greater than the value of
the
common stock received, no expense was recorded related to this
program.
Note
9. Preferred
Stock
Redemption
of Class A Series 1 Convertible Preferred Stock
In
May
2008, the Company elected to exercise its right to redeem all of the 56,000
outstanding shares of its Class A Series 1 Convertible Preferred
Stock (the "Series 1 Preferred Stock"), subject to the right of the holders
to
elect to convert their shares of Series 1 Preferred Stock into Common Stock
in lieu of redemption. On the redemption dates in
June 2008, 42,000 of the outstanding shares of Series 1 Preferred
Stock were acquired by the Company pursuant to the redemption and
cancelled and the remaining 14,000 outstanding shares of Series 1 Preferred
Stock were converted into 14,000 shares of Common Stock and cancelled. The
Series 1 Preferred Stock was subject to an 8% dividend, paid
annually. The Company paid a redemption price per share equal to the
liquidation value per share (which was $2.50 per share plus accrued and unpaid
dividends) for the 42,000 shares that were redeemed. Shareholders who
elected to convert received one common share for each share of Series 1
Preferred Stock plus accumulated dividends. The final unpaid
dividends of $2,100 for the converted 14,000 shares of Series 1 Preferred Stock
were paid in July 2008.
F-17
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
The
Company issued 473,377 shares of
Series 3 Preferred Stock to 11 investors during February 2004 and received
$1,500,602 in proceeds. Each share of Series 3 Preferred Stock is convertible
at
any time into one share of the Company’s common stock. Holders of shares of the
Series 3 Preferred Stock are entitled to cumulative dividends in preference
to
any dividend on the Company’s common stock at the rate of 10 percent of the
original issuance price ($3.17 per share) per annum, payable quarterly at the
Company’s option in cash or shares of the Company’s common stock. If dividends
are paid in shares of common stock, the dividend rate will be equal to 95
percent of the average of the closing sales prices of the common stock on the
five trading days preceding the dividend reference date. The dividend reference
date means January 1, April 1, July 1, October 1 of each year. In the event
of a
liquidation or dissolution of the Company, the Series 3 Preferred Stock would
have priority over the Company’s common stock and holders of any other series of
preferred stock of the Company. The Company may redeem any share of Series
3
Preferred Stock at any time that is after the second anniversary of the date
of
issuance of the share, provided that the redemption may not occur until the
first day on or after the second anniversary of the date of issuance of such
share in which the market value of the Company’s common stock is at least 150
percent of the original
issue price of $3.17 per
share. The liquidation preference on the Series 3 Preferred Stock is
$3.17 per share plus accrued and unpaid dividends. As of September
30, 2008, there are 307,602 shares of Series 3 Preferred Stock
outstanding.
Repurchase
of Class A Series 3 Convertible Preferred Stock
In
April
2008, the Company repurchased 150,000 shares of Class A Series 3 Convertible
Preferred Stock, which is subject to a 10% dividend, paid quarterly. The shares
were repurchased at $3.17 per share for a total of approximately
$475,000. In July, 2008, the Company repurchased an additional 15,773
shares of Class A Series 3 Convertible Preferred Stock for a total of
approximately $50,000; the dividend of approximately $500 of this purchase
was
paid in October, 2008. All of the shares were purchased at the same
per share price at which they were sold to the shareholder, $3.17 per
share. The repurchased preferred shares have been
retired.
Note
10. Stock Repurchase
Program
On
January 17, 2007, the Company announced a Stock Repurchase Program under the
terms of which up to a million shares of its common stock could be purchased
during the subsequent twelve months. In March 2008, the Board
approved the continuation of this program through December 31, 2009 for up
to 2
million shares. Through September 30, 2008, the Company has
purchased 841,000 shares.
|
Issuer
Purchases of Equity Securities:
|
Details
of Treasury Stock Purchases through September 30, 2008
|
|||||||||||||||
|
Period:
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
Total
Number
of
Shares Purchased
As
Part of Publicly
Announced
Program
|
Maximum
Number
of
Shares that May
Yet
be Purchased
Under
the Program
|
||||||||||||
|
January
17, 2007 – September 30, 2007
|
173,400 | $ | 2.12 | 173,400 | 826,600 | |||||||||||
|
October
1, 2007 – June 30, 2008
|
439,600 | 2.57 | 613,000 | 1,387,000 | ||||||||||||
|
July
1, 2008 – July 31, 2008
|
53,000 | 2.51 | 666,000 | 1,334,000 | ||||||||||||
|
August
1, 2008 - August 31, 2008
|
68,700 | 2.62 | 734,700 | 1,265,300 | ||||||||||||
|
September
1, 2008 – September 30, 2008
|
106,300 | 3.09 | 841,000 | 1,159,000 | ||||||||||||
|
Quarterly
Subtotal
|
228,000 | 2.81 | 228,000 | |||||||||||||
|
Total
|
841,000 | $ | 2.54 | 841,000 | 1,159,000 | |||||||||||
F-18
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
In
October, 2008, the Board of Directors amended its Stock Repurchase Program
to
allow the repurchase of common stock issued under the Company’s equity
compensation plans from directors, employees, consultants and other service
providers of the Company or any of its subsidiaries. The repurchases
would be authorized by Company officers at fair market value. Total
repurchases under this amendment are limited to an aggregate of 250,000 per
calendar year and to a maximum of 25,000 shares annually per
individual. The maximum repurchase for the remainder of calendar 2008
would be a total of 62,500 shares or 6,250 per individual. This
provision will expire at the termination date of the Stock Repurchase
Program. To date, no repurchases have been made under this
provision.
Note
11. Employee Benefit
Plans
Employee
retirement
plan:
The
Company has a Simple Individual Retirement Account (IRA) plan for its
employees. Employees are eligible to participate in the plan if their
compensation reaches certain minimum levels and are allowed to contribute up
to
a maximum of $13,000 annual compensation to the plan. The Company has
elected to match 100 percent of employee contributions to the plan up to a
maximum of 3 percent of employee compensation for the years ended September
30,
2008 and 2007. Annual company contributions were approximately
$30,000 and $19,000 for 2008 and 2007, respectively.
Note
12. Industry Segments and
Financial Information about Foreign and Domestic Operations
The
Company currently operates primarily in one industry segment which includes
the
development, manufacture and marketing of consumer health care
products.
The
Company operates in foreign and domestic regions. Information about
the Company's operations by geographic area is as follows (in
thousands).
|
Net
Sales to External Customers for the Year Ended
|
Long-Lived
Asset As Of
|
|||||
|
September
30,
|
September
30,
|
|||||
|
|
2008
|
2007
|
2008
|
2007
|
||
| South Africa | $ | 4,302 |
(1)
|
(2)
|
$ | 3,733 | (1) | $ | -- | $ | -- | |||||
| Zimbabwe | 4,084 |
(1)
|
(3)
|
4,096 |
(1)
|
-- | -- | |||||||||
| United States | 2,356 | 2,516 | 194 | 226 | ||||||||||||
| rance | * | 1,217 | -- | -- | ||||||||||||
| Brazil | 2,239 | * | -- | -- | ||||||||||||
| Tanzania | 1,460 | * | -- | -- | ||||||||||||
| Papua New Guinea | 1,292 | * | -- | -- | ||||||||||||
| Zambia | * | 940 | -- | -- | ||||||||||||
| India | * | * | 174 | 225 | ||||||||||||
| United Kingdom | * | * | 171 | 315 | ||||||||||||
| Malaysia | * | * | 1,011 | 864 | ||||||||||||
| Other | 9,795 | 6,818 | -- | -- | ||||||||||||
| $ | 25,528 | $ | 19,320 | $ | 1,550 | $ | 1,630 |
| * Less than 5% percent of total net sales. | |||||
| (1) Comprised of a single customer considered to be a major customer (exceeds 10 percent of net sales). | |||||
| (2)This customer had approximately $897,000 of outstanding accounts receivable at September 30, 2008. All of the receivable was paid by the date of this filing. | |||||
| (3) This customer had approximately $1,385,600 of outstanding accounts receivable at September 30, 2008. All of the receivable was paid by the date of this filing. |
F-19
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
Note
13. Contingent
Liabilities
The
testing, manufacturing and marketing of consumer products by the Company entail
an inherent risk that product liability claims will be asserted against the
Company. The Company maintains product liability insurance coverage
for claims arising from the use of its products. The coverage amount
is currently $5,000,000 for FHC's consumer health care product.
Note
14. Recent Accounting
Pronouncements
In
September 2006, the FASB issued SFAS
157, Fair
Value
Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The requirements of SFAS 157
are effective for fiscal years beginning after November 15, 2007 except for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis
for
which delayed application is permitted until fiscal years beginning after
November 15, 2008. The Company does not believe SFAS 157
will have a material effect on its consolidated financial
statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS
159"), which provides companies with an option to report selected financial
assets and liabilities at fair value. The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility
in
earnings caused by measuring related assets and liabilities differently. SFAS
159 establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities and to more easily understand the effect
of the company's choice to use fair value on its earnings. SFAS 159 also
requires entities to display the fair value of the selected assets and
liabilities on the face of the balance sheet. SFAS 159 does not eliminate
disclosure requirements of other accounting standards, including fair value
measurement disclosures in SFAS 157. This statement is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity makes that choice in the first 120 days of that fiscal
year and also elects to apply the provisions of Statement 157. The Company
has
not elected adoption of SFAS 159.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations, which replaces FASB Statement No. 141. SFAS No. 141R establishes
principles and requirements for how an acquirer recognizes and measures in
its
financial statements the identifiable assets acquired, the liabilities assumed,
any non controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users
to
evaluate the nature and financial effects of the business combination. SFAS
No.
141R is effective as of the beginning of an entity’s fiscal year that begins
after December 15, 2008 (our Fiscal 2010). SFAS No. 141R will have an
effect on the Company’s consolidated financial statements for any business
combinations the Company may enter into.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research
Bulletin No. 51, which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between
the
interests of the parent and the interests of the noncontrolling owners. SFAS
No.160 is effective as of the beginning of an entity’s fiscal year that begins
after December 15, 2008 (our Fiscal 2010). The Company does not believe SFAS
No.
160 will have an effect on the Company’s consolidated financial
statements.
In
March 2008, the FASB issued SFAS
No. 161, “Disclosures about Derivative Instruments and Hedging Activities”
(SFAS 161) as an amendment to SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”. SFAS 161 requires that objectives for
using derivative instruments be disclosed in terms of underlying risk and
accounting designation. SFAS 161 is effective for financial statements issued
for fiscal years beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company's future
reported financial position or results of operations.
F-20
The
Female Health Company and Subsidiaries
Notes
to Consolidated
Financial
Statements
In
May
2008, the FASB issued FAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles" ("FAS 162"). FAS 162 identifies the sources of accounting
generally accepted accounting principles in the United States. FAS 162 is
effective sixty days following the SEC's approval of PCAOB amendments to AU
Section 411, "The Meaning of 'Present fairly in conformity with generally
accepted accounting principles'". The adoption of this statement is not expected
to have a material effect on the Company's future reported financial position
or
results of operations.
F-21