|
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
|
Principles
of consolidation and nature of operations
: The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, The Female Health Company - UK and The Female Health Company
- UK,
plc. All significant intercompany transactions and accounts have been eliminated
in consolidation. The Female Health Company ("FHC" or the "Company")
is currently engaged in the marketing, manufacture and distribution of a
consumer health care product known as the “FC Female Condom” in the U.S., and
"femidom" or "femy" outside the U.S. The Female Health Company - UK, is the
holding company of The Female Health Company - UK, plc, which operates a 40,000
sq. ft. leased manufacturing facility located in London, England, leases 1,900
sq. ft. of a manufacturing facility located in Selangor D.E., Malaysia pursuant
to a lease which expires on December 31, 2007 and leases 16,000 sq. ft. of
a manufacturing facility also 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 credit terms are primarily on a net 30-day
basis.
Use
of
estimates
: The preparation of financial statements requires
management to make estimates and use assumptions that affect certain reported
amounts and disclosures. Actual results may differ from those
estimates.
Significant
accounting estimates include the following:
The
market value of inventory is based on management's best estimate of future
sales
and the time remaining before the existing inventories reach their expiration
dates.
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 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. 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.
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.
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
|
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
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
$6,500,000 at September 30, 2007.
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 and leasehold improvements 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 of 12
years. Patents and trademarks have no carrying value in the
accompanying balance sheet at September 30, 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, 2007 and 2006, was approximately $209,000 and $211,000,
respectively.
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.
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
1.
|
Nature
of Business and Significant Accounting Policies
(Continued)
|
Deferred
Grant Income
: The Company receives 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 Company allocates the grant
monies received on a proportionate basis to expenses incurred and capital
expenditures related to the underlying project. The deferred income will be
recognized over the useful lives of the fixed assets when they are placed in
service.
Adoption
of Accounting Standard and Share-Based Compensation
: Effective October 1,
2006, the Company adopted Financial Accounting Standards Board (“FASB”)
Statement No. 123 (revised), “Share-Based Payment” (“SFAS 123R”), 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.
Prior
to
the adoption of SFAS 123R, the Company utilized the intrinsic-value based method
of accounting under Accounting Principles Board Opinion No. 25 (APB 25),
“Accounting for Stock Issued to Employees” and related interpretations, and
adopted the disclosure requirements of SFAS 123, “Accounting for Stock Based
Compensation” (“SFAS 123”). Under the intrinsic-value based method of
accounting, compensation expense for stock options granted to our employees
was
measured as the excess of the quoted market price of the Company’s common stock
at the grant date over the amount the employee must pay for the
stock.
Advertising
: The
Company's policy is to expense production costs in the period in which the
advertisement is initially presented to consumers.
Income
taxes
: The Company files separate income tax returns for its
foreign subsidiaries. Statement of Financial Accounting Standards No.
109,
Accounting for Income Taxes
(FAS 109), requires recognition of
deferred tax assets and liabilities for the expected future tax consequences
of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets are also
provided for carryforwards for income tax purposes. In addition, the amount
of
any future tax benefits is reduced by a valuation allowance to the extent such
benefits are not expected to be realized.
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.
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 Parent Company has financed the operations of its subsidiaries
through an intercompany loan with The Female Health Company, plc. which was
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
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
The
components of inventory consist of the following at September 30,
2007:
|
Raw
material
|
|
$
|
808,379
|
|
|
Work
in process
|
|
|
273,704
|
|
|
Finished
goods
|
|
|
358,499
|
|
|
Inventory,
gross
|
|
|
1,440,582
|
|
|
Less
allowance for obsolescence
|
|
|
(68,000
|
)
|
|
Inventory,
net
|
|
$
|
1,372,582
|
|
|
Note
3.
|
Acquired
Intangible Asset
|
The
Company follows SFAS 142,
Goodwill and Other Intangible
Assets
. The following is a summary of acquired intangible assets
at September 30, 2007:
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Subject
to amortization:
|
|
|
|
|
|
|
|
Patents
|
|
$
|
1,123,214
|
|
|
$
|
1,123,214
|
|
Amortization
expense recognized on all amortizable intangible assets totaled $43,809 for
the
year ended September 30, 2006. As the patents were fully amortized as
of March 31, 2006, no additional amortization expense was incurred subsequent
to
that date.
|
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, 2008. The two notes
total $1,500,000 and bear interest payable at a rate of prime plus 1% (prime
rate was 7.75% at September 30, 2007). These notes are collateralized by
substantially all of the assets of the Company. No amounts are
outstanding under the revolving notes at September 30, 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 $6,486 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 $3,365,000
(£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.
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
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 $580,513 (£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 $198,793 (£97,500) and is included in other
assets in the consolidated balance sheet at 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 will be recognized ratably over the initial term of the
lease. Unamortized deferred gain as of September 30, 2007, was
$1,074,339 (£526,921).
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 will expire 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 $6,840 and may be renewed for two additional three year
terms.
Details
of operating lease expense, including real estate taxes and insurance, are
as
follows:
|
|
|
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Operating
Lease Expense:
|
|
|
|
|
|
|
|
Factory
& Office Leases
|
|
$
|
1,026,335
|
|
|
$
|
832,547
|
|
|
Other
|
|
|
37,688
|
|
|
|
18,718
|
|
|
|
|
$
|
1,064,023
|
|
|
$
|
851,265
|
|
The
Company also leases equipment under a number of lease agreements which expire
at
various dates between March 2009 and May 2011. The aggregate monthly
rental was $3,141 at September 30, 2007.
|
Future
Minimum payments under operating leases consisted of the following
at
September 30, 2007:
|
|
|
Operating
Leases
|
|
|
2008
|
$ 773,572
|
|
|
2009
|
770,600
|
|
|
2010
|
771,228
|
|
|
2011
|
690,440
|
|
|
2012
|
612,259
|
|
|
Thereafter
|
2,544,914
|
|
|
|
$ 6,163,013
|
|
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
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, 2007 and 2006 is as follows:
|
|
|
September
30
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense at statutory rates
|
|
$
|
295,000
|
|
|
$
|
96,000
|
|
|
Non-deductible
expenses
|
|
|
97,000
|
|
|
|
142,000
|
|
|
State
income tax, net of federal benefits
|
|
|
(46,000
|
)
|
|
|
(13,000
|
)
|
|
Recognition
of net operating loss, decrease in valuation allowance
|
|
|
(825,000
|
)
|
|
|
-
|
|
|
Utilization
of NOL carryforwards
|
|
|
(674,000
|
)
|
|
|
(225,000
|
)
|
|
Benefit
of net operating loss not recognized, increase in valuation
allowance
|
|
|
328,000
|
|
|
|
-
|
|
|
Income
tax benefit
|
|
$
|
(825,000
|
)
|
|
$
|
-
|
|
As
of
September 30, 2007, the Company had federal and state net operating loss
carryforwards of approximately $43,565,000 and $23,461,000, respectively, for
income tax purposes expiring in years 2008 to 2027. The benefit relating to
$1,537,800 of these net operating losses relates to exercise of common stock
options and will be credited directly to stockholders’ equity when realized. The
Company's UK subsidiary, The Female Health Company - UK, plc has UK net
operating loss carryforwards of approximately $88,222,000 as of September 30,
2007. 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, 2007:
|
Deferred
Tax Assets:
|
|
|
Federal
net operating loss carryforwards
|
|
$
|
14,812,000
|
|
|
State
net operating loss carryforwards
|
|
|
1,877,000
|
|
|
Foreign
net operating loss carryforwards
|
|
|
29,996,000
|
|
|
Foreign
capital allowance
|
|
|
1,806,000
|
|
|
Other
|
|
|
71,000
|
|
|
Gross
deferred tax assets
|
|
|
48,562,000
|
|
|
Valuation
allowance for deferred tax asset
|
|
|
47,737,000
|
|
|
Deferred
income taxes
|
|
$
|
825,000
|
|
The
valuation allowance increased by $149,000 and $1,089,000 for the years ended
September 30, 2007 and 2006, respectively. Included in the valuation
allowance increase in 2007 is a recognition of $825,000 of net operating loss
carryforward.
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
7.
|
Share-based
Compensation
|
Stock
Option Plans
Under
the
Company’s share based long-term incentive compensation plans, the Company had
granted non-qualified stock options to employees and consultants. The
Company's 1997 Stock Option Plan expired December 31, 2006, and the Company
no
longer has shares available for issuance under any of its plans.
The
Company adopted SFAS 123R in the first quarter of fiscal 2007 using the modified
prospective approach. Under this transition method, the measurement of the
Company’s method of amortization of costs for share-based payments granted prior
to, but not vested as of October 1, 2006, would be based on the same estimate
of
the grant-date fair value and the same amortization method that was previously
used in our SFAS 123 pro forma disclosure. Financial statement amounts for
prior
periods presented in this Form 10-KSB have not been restated to reflect the
fair
value method granted of expensing share-based compensation. For equity awards
granted after the date of adoption, the Company will amortize share-based
compensation on a straight-line basis over the vesting term.
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. Prior to the adoption of SFAS 123R, the
effect of forfeitures on the pro forma expense amounts was recognized based
on
estimated forfeitures.
The
effect of adopting SFAS 123R was to decrease operating income, income before
income taxes and net income by $121,564 for the twelve months ended September
30, 2007. Share-based compensation is included in selling, general
and administrative expenses in the statements of income. The adoption of SFAS
123R by the Company had no effect on basic and diluted earnings per share for
the twelve months ended September 30, 2007. The adoption of SFAS 123R did not
affect the Company’s cash flows or financing activities. Upon adoption of SFAS
123R the Company reclassified amounts in unearned consulting fees and deferred
compensation to additional paid in capital.
The
following table shows the effect on net income attributable to common
stockholders for the twelve months ended September 30, 2006 had compensation
expense been recognized based upon the estimated fair value on the grant date
of
stock option awards, in accordance with SFAS 123, as amended by SFAS No. 148
“Accounting for Stock-Based Compensation - Transition and
Disclosure”:
|
|
|
Year
Ended
September
30, 2006
|
|
|
|
|
|
|
|
Net
income as reported
|
|
$
|
120,778
|
|
|
Deduct:
Total stock based employee compensation expense
determined
under the fair value basis for all awards, net of related tax
effects
|
|
|
(492,086
|
)
|
|
Pro
forma net loss
|
|
$
|
(371,308
|
)
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
0.01
|
|
|
Pro
forma
|
|
$
|
(0.02
|
)
|
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
The
Company granted 180,000 stock options during the fiscal year ended September
30,
2007. The Company did not grant any options during the fiscal year ended
September 30, 2006. 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
and
pro forma 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.
The
Company’s stock options expire in 10 years and generally vest ratably over the
thirty-six month vesting period.
Option
Activity
:
The
following table summarizes the stock options outstanding and exerciserable
at
September 30, 2007:
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
Shares
|
|
|
Exercise
Price
Per
Share
|
|
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at September 30, 2005
|
|
|
2,660,980
|
|
|
$
|
1.39
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(1,000
|
)
|
|
$
|
1.40
|
|
|
|
|
|
Forfeited
|
|
|
(15,000
|
)
|
|
$
|
2.40
|
|
|
|
|
|
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
|
|
5.82
|
|
$ 2,421,683
|
|
Exercisable
on September 30, 2007
|
|
|
2,619,370
|
|
|
$
|
1.37
|
|
5.67
|
|
$ 2,299,208
|
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 $2.35 on the last day of business for the
period ended September 30, 2007. The total intrinsic value of options exercised
during the year ended September 30, 2007 was $46,230.
Total
unrecognized compensation cost for stock options as of September 30, 2007 was
$120,000. This compensation cost will be recognized over a weighted average
period of 2.1 years. The realized tax benefit from stock options and
other share-based payments for the twelve months ended September 30, 2007 and
the twelve months ended September 30, 2006 was $0, 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 2007 is summarized in
the
table below:
|
Non-vested
awards summary:
|
|
Shares
|
|
|
Weighted
Average
Grant
-Date
Fair
Value
|
|
|
Outstanding
at October 1, 2006
|
|
|
347,917
|
|
|
$
|
1.48
|
|
|
Stock
Granted
|
|
|
231,250
|
|
|
$
|
1.61
|
|
|
Vested
|
|
|
468,333
|
|
|
$
|
1.54
|
|
|
Forfeited
|
|
|
2,500
|
|
|
$
|
1.26
|
|
|
Total
Outstanding September 30, 2007
|
|
|
113,333
|
|
|
$
|
1.53
|
|
The
Company recognized share-based compensation expense for restricted stock of
approximately $727,067 for the year ended September 30, 2007 and $952,809 for
the year ended September 30, 2006. This expense is included in selling, general
and administrative expenses for the respective periods.
As
of
September 30, 2007, there was approximately $173,629 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 six months. The fair
value of the shares that vested during the years ended September 30, 2007 and
2006 was $731,375 and $269,412, respectively.
Common
Stock Purchase Warrants
The
Company enters into consulting agreements with separate third-party
professionals to provide investor relations services and financial advisory
services. In connection with the consulting agreements, the Company
granted 200,000 warrants to purchase common stock in 2006. The fair
value of warrants was estimated at the date of grant using the Black-Scholes
option pricing model assuming expected volatility of 61.2 percent, risk-free
interest rate of 5.10 percent, expected life of ten years, and no dividend
yield. The warrants were valued at $194,035 and recorded by the
Company in selling, general and administrative expense. No warrants
were issued in 2007.
At
September 30, 2007, 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
|
|
|
1,376,500
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,916,500
|
|
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
|
Warrants
outstanding and exercisable:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
Range
of
|
|
Outstanding
|
|
|
Wghtd.Avg.
|
|
|
Wghtd.Avg.
|
|
|
Exercise
|
|
and
Exercisable
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Prices
|
|
at
9/30/07
|
|
|
Life
|
|
|
Price
|
|
|
$0.40
- $0.99
|
|
|
364,000
|
|
|
|
3.54
|
|
|
$
|
0.40
|
|
|
$1.00
- $1.99
|
|
|
12,500
|
|
|
|
2.38
|
|
|
|
0.72
|
|
|
$2.00
- $3.10
|
|
|
1,540,000
|
|
|
|
4.29
|
|
|
|
1.69
|
|
|
|
|
|
1,916,500
|
|
|
|
4.13
|
|
|
$
|
1.44
|
|
Warrant
Settlement Program
During
the third quarter of fiscal 2007, the Company offered certain holders of
warrants a program under which they could exercise the warrants on a cashless
basis for shares of 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. 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.
The
Company has 56,000 outstanding shares of 8 percent cumulative convertible Series
1 Preferred Stock. Each share of preferred stock is convertible into
one share of the Company's common stock. Annual preferred stock
dividends will be paid if and as declared by the Company's Board of Directors.
No dividends or other distributions will be payable on the Company's common
stock unless dividends are paid in full on the Series 1 Preferred
Stock. The Series 1 Preferred Stock may be redeemed at the option of
FHC, in whole or in part, subject to certain conditions, at $2.50 per share
plus
accrued and unpaid dividends. In the event of a liquidation or
dissolution of the Company, the Series 1 Preferred Stock would have priority
over the Company's common stock.
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
o
riginal
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.
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
Note
9. 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,
2007 and 2006. Annual company contributions were approximately
$19,000 and 23,000 for 2007 and 2006
Note
10. Industry Segments and
Financial Information about Foreign and Domestic
Operations
The
Company currently operates primarily in one industry segment which includes
the
development, manufacture and marketing of consumer health care
products.
The
Company operates in foreign and domestic regions. Information about
the Company's operations by geographic area is as follows (in
thousands).
|
|
|
Net
Sales to External Customers for
the
Twelve Months Ended
|
|
|
Long-Lived
Asset As Of
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
South
Africa
|
|
$
|
3,733
|
(1)(2)
|
|
$
|
1,161
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Zimbabwe
|
|
|
4,096
|
(1)
|
|
|
1,065
|
|
|
|
-
|
|
|
|
-
|
|
|
United
States
|
|
|
2,516
|
(3)
|
|
|
2,074
|
|
|
|
226
|
|
|
|
107
|
|
|
France
|
|
|
1,217
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
Brazil
|
|
|
*
|
|
|
|
2,718
|
(1)
|
|
|
-
|
|
|
|
-
|
|
|
Tanzania
|
|
|
*
|
|
|
|
754
|
|
|
|
-
|
|
|
|
-
|
|
|
Zambia
|
|
|
940
|
|
|
|
*
|
|
|
|
-
|
|
|
|
-
|
|
|
India
|
|
|
*
|
|
|
|
*
|
|
|
|
225
|
|
|
|
112
|
|
|
United
Kingdom
|
|
|
*
|
|
|
|
*
|
|
|
|
315
|
|
|
|
269
|
|
|
Malaysia
|
|
|
*
|
|
|
|
*
|
|
|
|
865
|
|
|
|
307
|
|
|
Other
|
|
|
6,818
|
|
|
|
7,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
19,320
|
|
|
$
|
14,824
|
|
|
$
|
1,630
|
|
|
$
|
795
|
|
*
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 has approximately $1,028,000 of outstanding accounts receivable
at September 30, 2007. No other customers had accounts receivable
in
excess of 10% of current assets at September 30,
2007.
|
|
(3)
|
Comprised
of multiple customers. One customer is considered to be a major
customer
(exceeds 10% of net sales) with sales accumulating approximately
12% of
total sales.
|
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
|
Note
11.
|
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
12.
|
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. Through September 30, 2007, the
Company has purchased 173,400 shares. The Board has approved the
continuation of this program through December 31, 2008.
|
Issuer
Purchases of Equity Securities:
|
Details
of Treasury Stock Purchases for the 9 Months
|
|
Period:
|
Total
Number of
Shares
Purchased
|
Average
Price Paid
Per
Share
|
Total
Cash Outlay
|
Maximum
Number of Shares that May Yet be Purchased Under the
Program
|
|
|
|
|
|
|
January
1, 2007 – September 30, 2007
|
173,400
|
$ 2.12
|
$ 367,671
|
826,600
|
|
Note
13.
|
Recent
Accounting Pronouncements
|
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
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This interpretation is effective for
the Company beginning October 1, 2007. The Company has determined that the
adoption of FIN 48 will not have a material effect on its consolidated financial
statements.
SAB
No. 108 Adoption and Evaluation
In
September 2006, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting
Bulletin No. 108 (“SAB No. 108”),
“Considering the Effects of Prior Year Misstatements in the
Current Year
Financial Statements”. SAB No. 108 addresses how the effects of prior year
uncorrected misstatements should be considered when quantifying misstatements
in
current year financial statements. SAB No. 108 requires an entity to evaluate
misstatements using a balance sheet and income statement approach and evaluate
whether either approach results in quantifying an error that is material in
light of relevant quantitative factors. The requirements of SAB No. 108 are
effective for the Company’s current fiscal year-end.
The
Company’s evaluation of SAB No. 108 has discovered an omission from a prior
period. In September 2004, the Board of Directors extended the term of 400,000
warrants to purchase common stock for an additional two years. While the
decision was properly recorded in the Board of Directors’ minutes, the fair
value of the extensions was not reflected in the Company’s financial statements
for the fiscal year ended September 30, 2004. The Company’s retained loss and
additional paid in capital as of September 30, 2006 has been increased by
approximately $137,000 to properly reflect the extensions’ fair value under the
guidance of SAB No. 108.
The
Female Health Company and Subsidiaries
Notes
to Consolidated Financial Statements
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.
The Company does not believe the adoption of 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
does
not believe SFAS 159 will have a material effect on its consolidated financial
statements.
SAB
109
expresses the current view of the staff that, consistent with the guidance
in
Statements No. 156,
Accounting for Servicing of Financial Assets
, and
No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities,
the expected net future cash flows related to the associated
servicing of the loan should be included in the measurement of all written
loan
commitments that are accounted for at fair value through earnings.
However, in accordance with Statement No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
, a
separate and distinct servicing asset or liability is not recognized for
accounting purposes until the servicing rights have been contractually separated
from the underlying loan by sale or securitization of the loan with servicing
retained. The SEC staff also cautions that this view is not intended to be
applied by analogy to any other instrument that contains a non-financial
element.
SAB
109
also indicated that the SEC staff believed that internally-developed intangible
assets, such as customer relationship intangible assets, should not be recorded
as part of the fair value of a derivative loan commitment. SAB 109 retains
that
staff view and broadens its application to all written loan commitments that
are
accounted for at fair value through earnings. The SEC staff expects registrants
to apply the guidance in the second preceding paragraph on a prospective basis
to derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. The Company does not believe SAB 109 will have an
effect on the Company’s consolidated financial statements.
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). The Company does not
believe SFAS No. 141R will have an effect on the Company’s consolidated
financial statements.
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.