U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 1-13602
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THE FEMALE HEALTH COMPANY
-------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Wisconsin 39-1144397
---------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
515 N. State Street, Suite 2225, Chicago, IL 60610
-------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(312) 595-9123
----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Not applicable
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
Common Stock, $.01 Par Value - 16,503,329 shares outstanding
as of August 13, 2002
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION
AND ANALYSIS: PAGE
----
Cautionary Statement Regarding Forward Looking
Statements . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Balance Sheet -
June 30, 2002 . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated Statements of
Operations - Three Months Ended June 30, 2002
and June 30, 2001 . . . . . . . . . . . . . . . . . . . 5
Unaudited Condensed Consolidated Statements of
Operations - Nine Months Ended June 30, 2002
and June 30, 2001 . . . . . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated Statements of
Cash Flows - Nine Months Ended June 30, 2002
and June 30, 2001 . . . . . . . . . . . . . . . . . . 7
Notes to Unaudited Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . 8
Management's Discussion and Analysis . . . . . . . . . . 13
PART II. OTHER INFORMATION
Items 1 - 5 . . . . . . . . . . . . . . . . . . . . . . 22
Items 6 Exhibits and Reports on Form 8-K . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 24
2
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Certain statements included in this quarterly report on Form 10-QSB which are
not statements of historical fact are intended to be, and are hereby identified
as, "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to secure
adequate capital to fund operating losses, working capital requirements,
advertising and promotional expenditures and principal and interest payments on
debt obligations; factors related to increased competition from existing and new
competitors including new product introduction, price reduction and increased
spending on marketing; limitations on the Company's opportunities to enter into
and/or renew agreements with international partners, the failure of the Company
or its partners to successfully market, sell, and deliver its product in
international markets, and risks inherent in doing business on an international
level, such as laws governing medical devices that differ from those in the
U.S., unexpected changes in the regulatory requirements, political risks, export
restrictions, tariffs, and other trade barriers, and fluctuations in currency
exchange rates; the disruption of production at the Company's manufacturing
facility due to raw material shortages, labor shortages, and/or physical damage
to the Company's facilities; the Company's inability to manage its growth and to
adapt its administrative, operational and financial control systems to the needs
of the expanded entity and the failure of management to anticipate, respond to
and manage changing business conditions; the loss of the services of executive
officers and other key employees and the Company's continued ability to attract
and retain highly-skilled and qualified personnel; the costs and other effects
of litigation, governmental investigations, legal and administrative cases and
proceedings, settlements and investigations; and developments or assertions by
or against the Company relating to intellectual property rights.
3
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2002
-------------
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 869,923
Accounts receivable, net . . . . . . . . . . . . . . . . 1,327,089
Inventories. . . . . . . . . . . . . . . . . . . . . . . 1,169,341
Prepaid expenses and other current assets. . . . . . . . 362,968
-------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . 3,729,321
-------------
Certificate of Deposit. . . . . . . . . . . . . . . . . . . 119,186
Intellectual property rights, net . . . . . . . . . . . . . 405,177
Other assets . . . . . . . . . . . . . . . . . . . . . . . 153,118
-------------
677,481
-------------
PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . 3,867,443
Less accumulated depreciation and amortization. . . . . . . (3,099,742)
-------------
Net property, plant, and equipment . . . . . . . . . . . . 767,701
-------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . $ 5,174,503
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Note payable, related party, net of unamortized discount $ 805,085
Accounts payable . . . . . . . . . . . . . . . . . . . . 580,712
Accrued expenses and other current liabilities . . . . . 1,732,838
Preferred dividends payable. . . . . . . . . . . . . . . 100,725
-------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . 3,219,360
Note payable, bank, net of unamortized discount. . . . . 1,079,626
Convertible debentures . . . . . . . . . . . . . . . . . 450,000
Deferred gain on sale of facility. . . . . . . . . . . . 1,259,113
-------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . 6,008,099
-------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock. . . . . . . . . . . . . . . 6,600
Common stock . . . . . . . . . . . . . . . . . . . . . . 160,535
Additional paid-in-capital . . . . . . . . . . . . . . . 52,509,595
Unearned consulting compensation . . . . . . . . . . . . (79,501)
Accumulated deficit. . . . . . . . . . . . . . . . . . . (53,544,667)
Accumulated other comprehensive income . . . . . . . . . 145,918
Treasury stock, at cost. . . . . . . . . . . . . . . . . (32,076)
-------------
TOTAL STOCKHOLDERS' DEFICIT . . . . . . . . . . . . . . . . (833,596)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT . . . . . . . . $ 5,174,503
=============
See notes to unaudited condensed consolidated financial statements.
4
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
------------------
2002 2001
---- ----
Net revenues. . . . . . . . . . . . . . . . . . . . . $ 1,991,287 $ 2,296,590
Cost of products sold . . . . . . . . . . . . . . . . 1,073,929 1,388,279
------------ -----------
Gross profit. . . . . . . . . . . . . . . . . . . . . 917,358 908,311
------------ -----------
Advertising & promotion . . . . . . . . . . . . . . . 12,725 2,989
Selling, general and administrative . . . . . . . . . 790,426 660,744
Litigation settlement . . . . . . . . . . . . . . . . 1,289,397 ----
Stock compensation. . . . . . . . . . . . . . . . . . 1,331,238 38,144
------------ -----------
Total operating expenses. . . . . . . . . . . . . . . 3,423,786 701,877
------------ -----------
Operating income (loss) . . . . . . . . . . . . . . . (2,506,428) 206,434
Interest, net and other expense . . . . . . . . . . . 294,581 161,768
------------ -----------
Income(loss)before income taxes . . . . . . . . . . . (2,801,009) 44,666
Provision for income taxes . . . . . . . . . . . . . ---- ----
------------ -----------
Net income(loss). . . . . . . . . . . . . . . . . . . (2,801,009) 44,666
Preferred dividends, Series 1 . . . . . . . . . . . . 32,910 32,910
------------ -----------
Net income(loss) attributable to common stockholders. $(2,833,919) $ 11,756
============ ===========
Net income(loss) per common share outstanding . . . . $ (0.18) $ 0.00
Weighted average common shares outstanding. . . . . . 16,035,261 14,656,473
See notes to unaudited condensed consolidated financial statements.
5
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
June 30,
-----------------
2002 2001
---- ----
Net revenues . . . . . . . . . . . . . . . . $ 5,921,756 $ 4,959,512
Cost of products sold. . . . . . . . . . . . 3,390,849 3,258,768
------------ ------------
Gross profit . . . . . . . . . . . . . . . . 2,530,907 1,700,744
------------ ------------
Advertising & promotion. . . . . . . . . . . 33,800 110,155
Selling, general and administrative. . . . . 2,225,084 2,023,129
Litigation settlement . . . . . . . . . . . 1,289,397 ----
Stock compensation . . . . . . . . . . . . . 1,415,392 79,938
------------ ------------
Total operating expenses . . . . . . . . . . 4,963,673 2,213,222
------------ ------------
Operating loss . . . . . . . . . . . . . . . (2,432,766) (512,478)
Interest, net and other expense. . . . . . . 706,449 463,926
------------ ------------
Loss before income taxes . . . . . . . . . . (3,139,215) (976,404)
Provision for income taxes . . . . . . . . . ---- ----
------------ ------------
Net loss . . . . . . . . . . . . . . . . . . (3,139,215) (976,404)
Preferred dividends, Series 1. . . . . . . . 98,734 99,729
------------ ------------
Net loss attributable to common stockholders $(3,237,949) $(1,076,133)
============ ============
Net loss per common share outstanding. . . . $ (0.20) $ (0.07)
Weighted average common shares outstanding . 15,967,922 14,392,258
See notes to unaudited condensed consolidated financial statements.
6
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 2001
---- ----
OPERATIONS:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,139,215) $ (976,404)
Adjustment for noncash items:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 382,863 385,044
Interest added to certificate of deposit . . . . . . . . . . . . . . . . . (4,186) ----
Amortization of discounts on notes payable and convertible debentures. . . . 463,317 239,556
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,289,397 ----
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 1,415,392 79,938
Changes in operating assets and liabilities. . . . . . . . . . . . . . . . . (441,371) (352,952)
------------ -----------
Net cash (used in) operating activities . . . . . . . . . . . . . . . . . . . (33,803) (624,818)
------------ -----------
INVESTING ACTIVITIES:
Net cash (used in)investing activities, capital expenditures. . . . . . . . . (42,398) (36,415)
FINANCING ACTIVITIES:
Proceeds from note payable, bank . . . . . . . . . . . . . . . . . . . . . . 500,000 ----
Proceeds from issuance of convertible debentures . . . . . . . . . . . . . . ---- 450,000
Dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . (95,825) (107,186)
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . 60,000 300,000
------------ -----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . 464,175 642,814
------------ -----------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . 12,543 30,217
------------ -----------
INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,517 11,798
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 469,406 457,122
------------ -----------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 869,923 $ 468,920
============ ===========
Schedule of noncash financing and investing activities:
Renewal of notes payable with related parties . . . . . . . . . . . . . . . . $ 1,000,000 $1,300,000
Issuance of warrants on notes payable and credit facility . . . . . . . . . . 681,137 239,556
Common stock issued for payment of preferred stock dividends and
convertible debenture interest . . . . . . . . . . . . . . . . . . . . . . . 73,389 64,520
Preferred dividends declared, Series 1. . . . . . . . . . . . . . . . . . . . 98,734 99,729
See notes to unaudited condensed consolidated financial statements.
7
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
-----------------------
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flow for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
Operating results for the three and nine months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended September 30, 2001.
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 female condom, "FC," in the U.S.
and "femidom", "femy" and "the female condom" 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.
Use of estimates:
- ------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect certain reported amounts and disclosures. Actual results may differ
from those estimates.
Reclassification:
- -----------------
Certain expenses on the statements of operations for the three and nine months
ended June 30, 2001 have been reclassified to be consistent with the
presentation shown for the three and nine months ended June 30, 2002.
NOTE 2 - Earnings Per Share
--------------------
Earnings per share (EPS):
- -------------------------
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
is computed giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon conversion of convertible preferred or
convertible debt and the exercise of stock options and warrants for all periods.
Fully diluted (loss) per share is not presented since the effect would be
anti-dilutive.
8
NOTE 3 - Comprehensive Loss
-------------------
Total Comprehensive Income (Loss) was $(2,627,922) and $(3,017,099) for the
three and nine months ended June 30, 2002 and $16,175 and $(1,113,791) for the
three and nine months ended June 31, 2001.
NOTE 4 - Inventories
-----------
The components of inventory consist of the following:
JUNE 30, 2002
---------------
Raw Material and work in process $ 876,831
Finished Goods . . . . . . . . . 338,195
---------------
Inventory, Gross . . . . . . . . 1,215,026
Less: Inventory reserves . . . . (45,685)
---------------
Inventory, net . . . . . . . . . $ 1,169,341
===============
NOTE 5 - Financial Condition
--------------------
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a net loss of $3.2 million for the nine months ended June 30, 2002 and
as of June 30, 2002 had an accumulated deficit of $53.5 million. At June 30,
2002, the Company had working capital of $.5 million and stockholders' deficit
of $.8 million. In the near term, the Company expects operating and capital
costs to continue to exceed funds generated from operations due principally to
the Company's manufacturing costs relative to current production volumes and the
ongoing need to commercialize the Female Condom around the world. As a result,
operations in the near future are expected to continue to use working capital.
Management recognizes that the Company's continued operations may depend on its
ability to raise additional capital through a combination of equity or debt
financing, strategic alliances and increased sales volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the Female Condom.
Management believes that developments, including the Company's agreement with
the UNAIDS, a joint United Nations program on HIV/AIDS, and various distribution
partners in major countries, provide an indication of the Company's success in
broadening awareness and distribution of the Female Condom and may benefit
future efforts to raise additional capital and to secure additional agreements
to promote and distribute the Female Condom throughout other parts of the world.
9
NOTE 5- Financial Condition - (Continued)
------------------------------------
On May 18, 2001 the Company entered into an agreement with Heartland Bank
providing for a $2,000,000 credit facility. The unpaid balances on the note are
due May 18, 2004 and bear interest payable at a rate of 10% per annum. The
agreement contains certain covenants which include restrictions on the payment
of dividends and distributions and on the issuance of warrants. The Company may
borrow under the credit facility from time to time subject to conditions,
including obtaining personal guarantees of 125% of the amount outstanding under
the loan. In connection with the credit facility, the Company issued warrants to
Heartland bank to purchase the number of shares divided by the warrant purchase
price as of the date of exercise.
The warrant purchase price is equal to 70% of the "market price" of the Common
Stock as of the day immediately prior to the date the exercise notice is given
to the Company, but in no event shall the per share price be less than $.50 or
more than $1.00. In accounting for Heartland Bank's warrants, the Company has
designated 1,000,000 warrants valued at $270,800 and these are recorded by the
Company as additional paid in capital and a discount on the credit facility.
The Company initially borrowed $1,500,000 under the credit facility and obtained
guarantees of five individuals equal in total to the amount outstanding under
the loan. Three of the guarantors are directors of the Company and one of the
guarantors is a trust for the benefit of the Company's Chairman and Chief
Executive Officer. Each guarantor may be liable to Heartland Bank for up to 125%
of the guarantor's guarantee amount if the Company defaults under the credit
facility. The Company issued warrants to the five guarantors to purchase the
number of shares of the Company's Common Stock equal to the guarantee amount of
such guarantor divided by the warrant purchase price as of the date of exercise.
The warrant purchase price is equal to 70% of the "market price" of the Common
Stock as of the day immediately prior to the date the exercise notice is given
to the Company, but in no event shall the per share price be less than $.50 or
more than $1.00. The Company also issued additional warrants to purchase 100,000
shares of Common Stock to two guarantors with a warrant price of $.50 per share.
In accounting for the guarantors' warrants, the Company has designated 3,200,000
warrants valued at $667,578 and these are recorded by the Company as additional
paid in capital and a discount on the credit facility.
On December 18, 2001 and December 20, 2001 the Company borrowed an additional
aggregate $400,000 under the credit facility initially entered into on May 18,
2001. The Company obtained guarantees from two individuals to guarantee the
additional amount outstanding on the credit facility. Each guarantor may be
liable to Heartland Bank for up to 125% of the guarantor's guarantee amount if
the Company defaults under the credit facility. The Company issued warrants to
the two guarantors to purchase the number of shares of the Company's Common
Stock equal to the guarantee amount of such guarantor divided by the warrant
purchase price as of the date of exercise. The warrant purchase price is equal
to 70% of the "market price" of the Common Stock as of the day immediately prior
to the date the exercise notice is given to the Company, but in no event shall
the per share price be less than $.50 or more than $1.00. The Company also
issued additional warrants to purchase 100,000 shares of Common Stock to one of
the guarantors with a warrant price of $.50 per share. In accounting for the
guarantors' warrants, the Company has designated 900,000 warrants valued at
$326,127 and these are recorded by the Company as additional paid in capital and
a discount on the credit facility.
During the three months ended December 31, 2001, the Company completed a private
placement where 120,000 shares of the Company's common stock were sold for
$60,000. The stock sale was directly with an accredited investor. The Company
sold the shares to this investor at the price of $.50.
10
NOTE 5- Financial Condition - (Continued)
------------------------------------
On February 20, 2002 the Company borrowed an additional $100,000 under the
credit facility initially entered into on May 18, 2001. The Company obtained a
guarantee from one individual to guarantee the additional amount outstanding on
the credit facility. The guarantor may be liable to Heartland Bank for up to
125% of the guarantor's guarantee amount if the Company defaults under the
credit facility. The Company issued warrants to the one guarantor to purchase
the number of shares of the Company's Common Stock equal to the guarantee amount
of such guarantor divided by the warrant purchase price as of the date of
exercise. The warrant purchase price is equal to 70% of the "market price" of
the Common Stock as of the day immediately prior to the date the exercise notice
is given to the Company, but in no event shall the per share price be less than
$.50 or more than $1.00. In accounting for the guarantor's warrants, the Company
has designated 151,515 warrants valued at $89,300 and are recorded by the
Company as additional paid in capital and a discount on the credit facility.
Until internally generated funds are sufficient to meet cash requirements, FHC
will remain dependent upon its ability to generate sufficient capital from
outside sources. While management believes that net revenues from sales of the
Female Condom will eventually exceed operating costs and that ultimately
operations will generate sufficient funds to meet capital requirements as it did
in the third quarter of fiscal 2002, there can be no assurance that such level
of operations will be achieved again. Likewise, there can be no assurance that
the Company will be able to source all or any portion of future required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of the Female Condom generate sufficient net
revenues to fund operations. In addition, any funds raised may be costly to the
Company and/or dilutive to stockholders. If the Company is not able to source
the required funds or any future capital which becomes required, the Company may
be forced to sharply curtail the Company's efforts to promote the female condom,
to attempt to sell certain of its assets and rights or to curtail certain of its
operations and may ultimately be forced to cease operations. Currently, the
Company has made no plans to sell any assets nor has it identified any assets to
be sold or potential buyers.
NOTE 6 - Industry Segments And Financial Information About Foreign and Domestic
-----------------------------------------------------------------------
Operations
----------
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations by geographic area is as follows:
(Amounts in Thousands)
Net Sales to External
Customer For the
Nine months ended Long-Term Assets
, June 30, as of June 30,
2002 2001 2002 2001
------ ------ ------ ------
United States . . . . . . . . . . . . $2,131 $2,184 $ 154 $ 22
Brazil . . . . . . . . . . . . . . . 1,049 331 - -
Ghana . . . . . . . . . . . . . . . . * 273
South Africa . . . . . . . . . . . . 594 732 - -
United Kingdom . . . . . . . . . . . * * 1,291 1,663
Zimbabwe . . . . . . . . . . . . . . 786 * - -
Other . . . . . . . . . . . . . . . . 1,362 1,440 - -
------ ------ ------ ------
$5,922 $4,960 $1,445 $1,685
------ ------ ------ ------
* Less than 5 percent of total net sales
11
NOTE 7 - Contingent Liabilities & Litigation Settlement
--------------------------------------------------
The testing, manufacturing and marketing of consumer products by the Company
entail an inherent risk that product liability claims will be asserted against
the Company. The Company maintains product liability insurance coverage for
claims arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
The former holders of the $1,500,000 convertible debentures issued on May 19,
1999 and June 3, 1999 alleged that the Company was in default with respect to
the perfection of the former holders' security interest in the Company's assets.
The former holders demanded the issuance of 1,500,000 shares of the Company's
common stock to the former holders due to this alleged default. On July 23, 2002
the Company and the former holders settled the dispute out of court. The Company
agreed to issue 450,000 shares of the Company's common stock to the former
convertible debenture holders and to extend the expiration dates of 2.25 million
warrants held by the former holders to 2007. The former convertible debenture
holders agreed to release their security interest in the Company's assets. The
issuance of the shares and the extension of the expiration date of the warrants
have been recorded in accordance with Financial Accounting Standards Board No.
5. In accounting for the litigation settlement, the Company designated the value
of the newly issued shares and extended warrants at $1,289,397. The fair value
of extending the warrants was estimated at the date of settlement using the
Black-Scholes pricing model assuming expected volatility of 63.4 and a risk-free
interest rate of 6.26%. These non-cash costs are recorded as litigation
settlement on the three and nine-month statement of operations and as accrued
expenses and other current liabilities on the June 30, 2002 balance sheet.
NOTE 8 - Related Parties
----------------
It has been and currently is the policy of the Company that transactions between
the Company and its officers, directors, principal shareholders or affiliates
are to be on terms no less favorable to the Company than could be obtained from
unaffiliated parties. The Company intends that any future transactions between
the Company and its officers, directors, principal shareholders or affiliates
will be approved by a majority of the directors who are not financially
interested in the transaction.
NOTE 9 - Stock Compensation
-------------------
In September 2001, certain option holders waived their rights to exercise their
options until the Company amended its Amended and Restated Articles of
Incorporation to increase the number of shares of common stock authorized for
issuance. To obtain this waiver, the Company agreed to re-price these options at
$.56 per share once the amendment was approved. The Company's stock was trading
at less than $.56 per share when the waivers were obtained.
On May 8, 2002 shareholders approved an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the total number of authorized
shares of the Company's common stock from 27,000,000 to 35,500,000 shares.
Since the amendment was approved, options to purchase an aggregate of 2,659,800
shares of common stock have been re-priced to $.56 per share. The Company will
continue to account for all of its stock options in accordance with variable
plan accounting guidance provided in APB 25 and related interpretations. This
accounting treatment requires the Company to record expense with respect to
stock options on a periodic basis based upon the amount, if any, by which the
fair market value of the common stock exceeds the exercise price of the stock
options. The reduction in the exercise price of the re-priced options and the
increase in the stock price of the Company's common stock as of June 30, 2002
resulted in the Company recording $1,308,858 of stock compensation expense
related to the Company's stock options under variable plan accounting for the
three-month period ended June 30, 2002. For the nine months ended June 30, 2002,
the Company recorded $1,341,858 of stock compensation expense pertaining to the
Company's stock options.
12
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Female Health Company ("FHC" or the "Company") manufactures, markets and
sells the female condom (FC), the only FDA-approved product under a woman's
control which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
FC has undergone extensive testing for efficacy, safety and acceptability 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 in various venues including
commercial (private sector) and public sector clinics in over 80 countries. It
is commercially marketed in 17 countries by various FHC country specific
partners, including the United States, United Kingdom, Japan, Canada, Holland,
France, Venezuela, and Brazil. The company signed a non-binding memorandum of
understanding with Hindustan Latex Limited for distribution in India.
As noted above, FC is sold to the global public sector. In the U.S., the
product is marketed to city and state public health clinics as well as
not-for-profit organizations such as Planned Parenthood. Under an agreement
with UNAIDS, UNAIDS facilitates the availability and distribution of FC in the
developing world and the Company sells the product to developing countries at a
reduced price based on the Company's cost of production. Currently over 80
developing countries purchase FC under the terms of this agreement.
PRODUCT
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 from touching skin during intercourse. FC is
pre-lubricated and disposable and is intended for use during only one sex act.
RAW MATERIALS
Polyurethane is the principal raw material the Company uses to produce FC. The
Company has entered into a supply agreement with Deerfield Urethane, Inc. for
the purchase of all of the Company's requirements of polyurethane. Under this
agreement, the parties negotiate pricing on an annual basis. The original term
of the agreement extended to December 31, 1995 and thereafter automatically
renews for an additional one-year period unless either party gives at least 12
months prior written notice of termination.
13
GLOBAL MARKET POTENTIAL
HIV/AIDS is the most devastating pandemic that humankind has faced in recorded
history. UNAIDS and the World Health Organization ("WHO") estimate that more
than 60 million people have been infected with the virus and the current
estimate is that over 40 million people globally are living with HIV. AIDS is
not the only sexually transmitted disease that the global public health
community is battling. In the United States, the Center for Disease Control and
Protection noted that one in five Americans over the age of 12 has Herpes and 1
in every 3 sexually active people will get an STD by age 24. Women are
currently the fastest growing group (globally) infected with HIV and are
expected to comprise the majority of the new cases in the coming year.
Currently there are only two products that prevent the transmission of HIV/AIDS
through sexual intercourse --the latex male condom and FC.
Male Condom Market: It is estimated the global annual market for male condoms is
close to 5 billion units. However, the majority of all acts of sexual
intercourse, excluding those intended to result in pregnancy, are completed
without protection. As a result, it is estimated the potential market for
barrier contraceptives is much larger than the identified male condom market.
ADVANTAGES VERSUS THE MALE CONDOM
FC is currently the only available barrier contraceptive method controlled by
women which allows them to protect themselves from unintended pregnancy and
STDs, including HIV/AIDS. The most important advantage is that using FC, a woman
has a prevention method she controls as many men do not like to wear male
condoms and may refuse to do so.
The polyurethane material that is used for FC offers a number of benefits over
latex, the material that is most commonly used in male condoms. Polyurethane is
much stronger than latex, reducing the probability that FC sheath will tear
during use. Unlike latex, polyurethane quickly transfers heat, so FC
immediately warms to body temperature when it is inserted, which may result in
increased pleasure and sensation during use. The product offers an additional
benefit to the 7% to 20% of the population that is allergic to latex and who, as
a result, may be irritated by latex male condoms. To the Company's knowledge,
there is no reported allergy to date to polyurethane. FC is also more
convenient, providing the option of insertion hours before sexual arousal and as
a result is less disruptive during sexual intimacy than the male condom which
requires sexual arousal for application.
COST EFFECTIVENESS
Various studies have been reported in the literature on the cost-effectiveness
of FC. The studies show that making FC available is highly cost effective in
reducing public health costs in developing countries as well as in the U.S.
Further studies show that including FC in prevention programs to high risk
groups is not only cost-effective but cost-saving.
14
WORLDWIDE REGULATORY APPROVALS
FC received Pre-Market Approval ("PMA") as a Class III Medical Device from the
U.S. Food and Drug Administration ("FDA") in 1993. The extensive clinical
testing and scientific data required for FDA approval laid the foundation for
approvals throughout the rest of the world, including receipt of a CE Mark in
1997 which allows the Company to market FC throughout the European Union ("EU").
In addition to the United States and the EU, other countries (with registration
requirements) have approved FC for sale, including Canada, Russia, Australia,
Japan, South Korea and Taiwan.
The Company believes that FC's PMA and FDA classification as a Class III Medical
Device create a significant barrier to entry in the US. The Company estimates
that it would take a minimum of four to six years to implement, execute and
receive FDA approval of a PMA to market another type of female condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the manufacture
and distribution of FC.
STRATEGY
The Company's strategy is to act as a manufacturer, selling FC to the global
public sector, United States public sector and commercial partners for
country-specific marketing. The public sector and commercial partners assume
the cost of shipping and marketing the product. As a result, as volume
increases, the Company's operating expenses will not increase significantly.
COMMERCIAL MARKETS
The Company markets the product directly in the United Kingdom. The Company has
distribution agreements with commercial partners in 17 countries including the
United States, Japan, Canada, Brazil, Venezuela, Denmark, Holland, France and
India. The agreements are generally exclusive for a single country. Under these
agreements, each partner markets and distributes FC in a single country and the
Company manufacturers FC and sells the product to the partner for distribution
in that country.
RELATIONSHIPS AND AGREEMENTS WITH PUBLIC SECTOR ORGANIZATIONS
Currently, it is estimated more than 1.5 billion male condoms are distributed
worldwide by the public sector each year. FC is seen as an important addition
to prevention strategies by the public sector because studies show that the
availability of FC decreases the amount of unprotected sex by as much as 25%
over male condoms alone.
The Company has an agreement with UNAIDS to supply FC to developing countries at
a reduced price which is negotiated each year based on the Company's cost of
production. The current price per unit is approximately 0.38 (pounds), or
approximately $0.58. Under the agreement, UNAIDS and the Company cooperate in
education efforts and marketing FC in developing countries. Sales of FC are
made directly to public health authorities in each country at the price
established by the agreement with UNAIDS. The term of the agreement currently
expires on December 31, 2002, but automatically renews for additional one-year
periods unless either party gives at least 90 days prior written notice of
termination.
15
STATE-OF-THE-ART MANUFACTURING FACILITY
The Company manufactures FC in a 40,000 square-foot leased facility in London,
England. The facility is currently capable of producing 60 million units per
year. With additional equipment, this capacity can be significantly increased.
On April 22, 2002 the Company's subsidiary, Female Health Company (UK) plc
received the prestigious Queen's award for Enterprise, the highest honor that
can be bestowed on a UK business. The award, given in the Queen's Golden Jubilee
year, has been made in recognition of the Company's outstanding international
trade achievements.
GOVERNMENT REGULATION
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.
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. 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 in the United States,
Japan, the United Kingdom, France, Italy, Germany, Spain, the European Patent
Convention, Canada, The People's Republic of China, Brazil, South Korea and
Australia. These patents expire between 2005 and 2013. Additional technology
patents are pending in Japan. The patents cover the key aspects of FC, including
its overall design and manufacturing process. The Company terminated its license
of the trademark "Reality" in the United States and now has the registered
trademark FC Female Condom in the United States. The Company has trademarked
"femidom" and "femy" in certain foreign countries. The Company has also secured,
or applied for, 13 trademarks in 26 countries to protect the various names and
symbols used in marketing the product around the world. In addition, the
experience that has been gained through years of manufacturing FC has allowed
the Company to develop trade secrets and know-how, including certain proprietary
production technologies that further secure its competitive position.
16
RESULTS OF OPERATIONS
- -----------------------
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
The Company had net revenues of $1,991,287 and a net loss attributable to common
stockholders of $2,833,919 for the three months ended June 30, 2002 compared to
net revenues of $2,296,590 and net income attributable to common stockholders of
$11,756 for the three months ended June 30, 2001. Without the current quarter's
non-cash charges for the litigation settlement and compensation related to stock
options, the net loss attributable to common stockholders would have been
$235,664.
Net revenues decreased $305,303 in the current quarter, or 13%, compared with
the same period last year. The lower net revenues occurred because of lower unit
sales shipped to global and domestic public sector customers.
The Company expects significant quarter to quarter variation due to the timing
of receipt of large orders, subsequent production scheduling, and shipping of
products as various countries launch the product. The Company believes this
variation between quarters will continue for several quarters to come until
reorders form an increasing portion of total net revenues.
Cost of products sold decreased $314,350 to $1,073,929 in the current quarter
from $1,388,279 for the same period last year. The cost of products sold
decrease of 23% on a 13% sales decrease resulted in a improvement in costs of
products sold as a percentage of sales from 54% in the current quarter compared
to 60% during the same period in the prior year. Savings relating to raw
material purchases provided for a reduction in direct material costs per unit
during the current quarter compared to the same period last year and resulted in
the decrease in cost of products sold between periods.
Advertising and promotional expenditures increased $9,736 to $12,725 in the
current quarter from $2,989 for the same period in the prior year.
Selling, general and administrative expenses increased $129,682, or 20%, to
$790,426 in the current quarter from $660,744 for the same period last year.
The change reflects an increase in insurance, U.K. rents and property taxes and
global selling expenses in the current quarter compared to similar costs
incurred in the prior fiscal year's third quarter. As a percentage of sales;
selling, general and administrative expenses were 40% in the current quarter
compared to 29% during the same period in the prior year.
Total operating expenses increased $2,721,909 to $3,423,786 in the current
quarter from $701,877 for the same period last year. $2,598,255, or 95%, of this
increase represents non-cash costs incurred from the litigation settlement and
stock option expenses during the current year's third quarter. Further
explanation of these costs is provided in the Notes to Unaudited Condensed
Consolidated Financial Statements section in Notes 7 and 9, respectively.
The Company recorded an operating loss of $2,506,428 for the current year's
third quarter. Without the non-cash charges for the litigation settlement and
compensation related to stock options, the Company would have recorded operating
income of $91,827.
Net interest and other expenses increased $132,813 to $294,581 for the current
period from $161,768 for the same period last year. The increase occurred
because the Company had a larger amount of non-cash expenses incurred from the
amortization of discounts on note payable and credit facility than the third
quarter of the prior year.
17
NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO NINE MONTHS ENDED JUNE 30, 2001
The Company had net revenues of $5,921,756 and a net loss attributable to common
stockholders of $3,237,949 for the nine months ended June 30, 2002 compared to
net revenues of $4,959,512 and a net loss attributable to common stockholders of
$1,076,133 for the nine months ended June 30, 2001. Without the current fiscal
year's non-cash charges for the litigation settlement and compensation related
to stock options, the net loss attributable to common stockholders would have
been $606,694.
Net revenues for the nine-month period increased $962,244, or 19%, compared with
the same period last year. The higher net revenues occurred because of higher
unit sales shipped to global public sector customers. For the fifth consecutive
quarter global unit shipments surpassed one million units.
Cost of products sold increased $132,081 to $3,390,849 for the current fiscal
year from $3,258,768 for the same period last year. The cost of products sold
increase of 4% on a 19% sales increase resulted in a improvement in costs of
products sold as a percentage of sales from 57% in the current fiscal year
compared to 66% during the same period in the prior year. As unit sales
increase, fixed manufacturing costs do not require additional costs to be
incurred, enabling the Company to produce at a lower cost of goods sold per
unit. Due to this change and the sales increase, gross profit increased
$830,163, or 49%, to $2,530,907 from $1,700,744 during the prior fiscal year. As
a percentage of sales, gross profit was 43% for nine months ended June 30, 2002
compared to 34% for the same period last year.
Advertising and promotional expenditures decreased $76,355 to $33,800 for the
nine months ended June 30, 2002 from $110,155 for the same period in the prior
year. The decline resulted from a reduction in advertising costs between these
periods and an elimination of promotional expenses during the nine months ended
June 30, 2002.
Selling, general and administrative expenses increased $201,955, or 10%, to
$2,225,084 in the current fiscal year from $2,023,129 for the same period last
year. The change reflects increases in insurance, legal and global selling
expenses partially offset by a reduction in consulting expenses incurred during
the comparative periods. As a percent of sales, selling, general and
administrative expenses were 38% during the nine months ended June 30, 2002
compared to 41% for the same period last year.
Total operating expenses increased $2,750,451 to $4,963,673 for the nine months
ended June 30, 2002 from $2,213,222 for the same period last year. $2,631,255,
or 96%, of this increase represents non-cash costs the litigation settlement and
stock option expenses incurred during the nine months ended June 30, 2002.
Further explanation of these costs is provided in the Notes to Unaudited
Condensed Consolidated Financial Statements section in Notes 7 and 9,
respectively.
The Company recorded an operating loss of $2,432,766 for the nine months ended
June 30, 2002. Without the non-cash charges for the litigation settlement and
compensation related to stock options, the Company would have recorded operating
income of $198,489.
Net interest and other expenses increased $242,523 to $706,449 for the nine
months ended June 30, 2002 from $463,926 for the same period last year. The
increase occurred because the Company had a larger amount of non-cash expenses
incurred from the amortization of discounts on note payable and credit facility
than the same period of the prior year.
18
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 and to cost-effectively manufacture
sufficient quantities of the female condom. Inherent in this process is 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 net
revenues from the female condom, its sole current product. While management
believes the global potential for the female condom is significant, the product
is in the early stages of commercialization and, as a result, the ultimate level
of consumer demand around the world is not yet known. To date, sales of the
female condom have not been sufficient to cover the Company's operating costs,
on an annual basis.
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a global
distribution network for the product by completing partnership arrangements with
companies with the necessary marketing and financial resources and local market
expertise. To date, this strategy has resulted in numerous in-country
distributions in the public sector, particularly in Africa, Latin America and
recently in India. Several partnership agreements have been completed for the
commercialization of the female condom in private sector markets around the
world. However, the Company is dependent on country governments as well as city
and state public health departments within the United States to continue their
commitment to prevention of STDs, including AIDS, by including female condoms in
their programs. The Company is also dependent on finding appropriate partners
for the private sector markets around the world. Once an agreement is completed,
the Company is reliant on the effectiveness of its partners to market and
distribute the product. Failure by the Company's partners to successfully market
and distribute the female condom or failure of country governments to implement
prevention programs which include distribution of barrier methods against the
AIDS crisis, or an inability of the Company to secure additional agreements for
AIDS crisis, or an inability of the Company to secure additional agreements for
new markets either in the public or private sectors could adversely affect the
Company's financial condition and results of operations.
As part of this strategy the Company has entered into two recent agreements.
On November 29, 2001, the Company signed a non-binding memorandum of
understanding with Hindustan Latex Limited ("HLL"), an Indian government
organization and India's largest male condom manufacturer. HLL distributes to
public sector customers including government and non-government organizations
and to consumers through 160,000 retail outlets. Jointly with HLL a marketing
strategy will be developed for the country of India. Over time, the Company
anticipates that HLL and the Company will explore manufacturing options within
India.
On December 18, 2001, the Company announced the appointment of Total Access
Group ("TAG") as the exclusive distributor for public sector sales within a 15
state region in the western United States. TAG is a privately held national
distributor to the United States public sector and serves over 2,500 customers,
which include state and local health departments, community based organizations,
HIV/STD prevention organizations, Planned Parenthood clinics and family planning
organizations. TAG is a full service distributor and will provide marketing,
education and customer service support. TAG is required to purchase 2,190,000
units within a three year period to retain exclusive distribution rights.
19
Inventory and Supply
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market and Foreign Currency Risks
The Company manufactures the female condom in a leased facility located in
London, England. Further, a material portion of the Company's sales are in
foreign markets. Manufacturing costs and sales to foreign markets are subject to
normal currency risks associated with changes in the exchange rate of foreign
currencies relative to the United States dollar. To date, the Company's
management has not deemed it necessary to utilize currency hedging strategies to
manage its currency risks. On an ongoing basis, management continues to
evaluate its commercial transactions and is prepared to employ currency hedging
strategies when it believes such strategies are appropriate. In addition, some
of the Company's future international sales may be in developing nations where
dramatic political or economic changes are possible. Such factors may adversely
affect the Company's results of operations and financial condition.
Government Regulation
The female condom is subject to regulation by the FDA, pursuant to the federal
Food, Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices," which include testing, quality
control and documentation procedures. The Company's compliance with applicable
regulatory requirements is monitored through periodic inspections by the FDA.
The failure to comply with applicable regulations may result in fines, delays or
suspensions of clearances, seizures or recalls of products, operating
restrictions, withdrawal of FDA approval and criminal prosecutions. The
Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the FDA.
Liquidity and Sources of Capital
Historically, the Company has incurred cash operating losses relating to
expenses incurred to develop and promote the Female Condom. During the nine
months ended June 30, 2002, cash used in operations totaled less than $.1
million. The Company used net proceeds from the issuance of the Company's
common stock and additional borrowings on the company's credit facility to fund
cash used in operations, capital expenditures, payment of preferred stock
dividends and an increase in its cash position.
Until internally generated funds are sufficient to meet cash requirements, the
Company will remain dependent upon its ability to generate sufficient capital
from outside sources.
At June 30, 2002, the Company had current liabilities of $3.2 million including
a $1.0 million note payable due March 25, 2003 to Mr. Dearholt, a Director of
the Company. As of June 30, 2002, Mr. Dearholt beneficially owned 4,439,412
shares of the Company's Common Stock.
In the near term, the Company's management expects operating and capital costs
to continue to exceed funds generated from operations, due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize the Female Condom around the world. It is
estimated that the Company's cash burn rate, net with revenues, is less than
$0.1 million per year.
20
The Company believes that net revenue from sales of the female condom will
eventually exceed operating costs, and that, ultimately, operations will
generate sufficient funds to meet capital requirements as it did on a cash basis
during the third quarter of fiscal year 2002; however, the Company can make no
assurance that it will achieve such level of operations again. Likewise, the
Company can make no assurance that the Company will be able to source all or any
portion of its required capital through the sale of debt or equity or, if
raised, the amount will be sufficient to operate until sales of the female
condom generate sufficient net revenues to fund operations. In addition, any
funds raised may be costly to the Company and/or dilutive to its shareholders.
If the Company is unable to raise adequate financing when needed, the Company
may be required to sharply curtail the Company's efforts to promote the female
condom, to attempt to sell certain of its assets and rights or to curtail
certain of its operations and may ultimately be forced to cease operations.
Currently, the Company is focused on growing its business and, therefore, the
Company has made no plans to sell any assets nor has it identified any assets to
be sold or potential buyers.
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 selling, general and administrative
expenses. Historically, the Company has absorbed increased costs and expenses
without increasing selling prices.
21
ITEMS 1-5
- ----------
ITEM 2(C)
- -----------
The former holders of the $1,500,000 convertible debentures issued on May 19,
1999 and June 3, 1999 alleged that the Company was in default with respect to
the perfection of the former holders' security interest in the Company's assets.
The former holders demanded the issuance of 1,500,000 shares of the Company's
common stock to the former holders due to this alleged default.
On July 23, 2002 the Company and the former holders settled the dispute out of
court. The Company agreed to issue 450,000 shares of the Company's common stock
to the former convertible debenture holders and to extend the expiration dates
of 2.25 million warrants held by the former holders to 2007. The former
convertible debenture holders agreed to release their security interest in the
Company's assets.
The Company believes it has satisfied the exemption from the securities
registration requirement provided by section 4(2) of the Securities Act and
Regulation D promulgated thereunder in this offering since the shares were
issued to sophisticated, accredited investors, who provided representations
which the Company deemed necessary to satisfy itself that they were accredited
investors and were purchasing the stock for investment and not with a view to
resale in connection with a public offering.
ITEM 4
- -------
The Company held the 2002 Annual Meeting of its shareholders on May 8, 2002. At
the meeting, shareholders were asked to approve an amendment to the Company's
Amended and Restated Articles of Incorporation to increase the total number of
authorized shares of the Company's common stock from 27,000,000 to 35,500,000,
to elect O.B. Parrish, Mary Ann Leeper, Ph.D., William R. Gargiulo, Jr., Stephen
M. Dearholt, David R. Bethune, Michael R. Walton, James R. Kerber, and Richard
E. Wenninger to the Board of Directors to serve until the 2003 Annual Meeting,
and to ratify the appointment of McGladrey & Pullen, LLP as the Company's
independent public accountants for the fiscal year ending September 30, 2002.
The results of the shareholder voting is listed below:
Matter Voted On: For Against Withheld Abstentions
---------- ------- -------- -----------
Increase number of authorized shares to 35,500,000 14,716,450 238,136 58,536
O.B. Parrish . . . . . . . . . . . . . . . . . . . 14,962,295 50,834
William R. Gargiulo,Jr.. . . . . . . . . . . . . . 14,961,795 51,334
Mary Ann Leeper Ph.D.. . . . . . . . . . . . . . . 14,962,295 50,834
Stephen M. Dearholt. . . . . . . . . . . . . . . . 14,960,095 53,034
David R. Bethune . . . . . . . . . . . . . . . . . 14,961,695 51,434
Michael R. Walton. . . . . . . . . . . . . . . . . 14,959,795 53,334
James R. Kerber. . . . . . . . . . . . . . . . . . 14,959,895 53,234
Richard E. Wenninger . . . . . . . . . . . . . . . 14,959,695 53,434
Ratification of Independent Public Accountants . . 14,949,533 37,150 26,446
22
- ------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------------
(a) Exhibits.
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Amended and Restated Articles of Incorporation. (1)
4.2 Articles II, VII, and XI of the Amended and Restated
By-Laws (included in Exhibit 3.2). (2)
4.3 Amended and Restated Articles of Incorporation.
- --------------------------
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-3, filed with the Securities and Exchange
Commission on February 13, 1998.
(2) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
(b) Report on Form 8-K - No reports on Form 8-K were filed during the quarter
ended June 30, 2002.
23
SIGNATURES
Pursuant to the requirements 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.
THE FEMALE HEALTH COMPANY
DATE: August 13, 2002 /s/ O.B. Parrish
----------------------------------
O.B. Parrish, Chairman
and Chief Executive Officer
/s/ Robert R. Zic
----------------------------------
Robert R. Zic, Director of Finance
(Principal Accounting Officer)
24