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 March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-18849
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)
919 N. Michigan Avenue, Suite 2208, Chicago, IL 60611
(Address of Principal Executive Offices) (Zip Code)
(312) 280-2281
(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 - 10,285,757 shares outstanding as of May 5, 1998
Transitional Small Business Disclosure Format (check one):
Yes _________ No X <PAGE>
FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Cautionary Statement Regarding Forward Looking
Statements . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Balance Sheet -
March 31, 1998 . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended March 31, 1998
and March 31, 1997 . . . . . . . . . . . . . . . . . 5
Unaudited Condensed Consolidated
Statements of Operations -
Six Months Ended March 31, 1998
and March 31, 1997 . . . . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated
Statements of Cash Flows -
Six Months Ended March 31, 1998
and March 31, 1997 . . . . . . . . . . . . . . . . . 7
Notes to Unaudited Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . 8
Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . 14
Part II. Other Information
Exhibits and Reports on Form 8-K . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24<PAGE>
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.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
1998
ASSETS
Current Assets:
Cash and equivalents $3,202,113
Accounts receivable, net 464,217
Inventories, net 755,154
Prepaid expenses and other current assets 186,816
----------
TOTAL CURRENT ASSETS 4,608,300
Intellectual property rights, net 973,975
Other assets 165,899
PROPERTY, PLANT AND EQUIPMENT 4,021,035
Less accumulated depreciation and amortization (1,311,066)
Net Property, plant, and equipment 2,709,969
----------
TOTAL ASSETS $8,458,143
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, net of unamortized discount $ 706,022
Trade accounts payable 418,725
Accrued expenses and other current liabilities 616,710
Debt due within one year 588,009
Preferred dividends payable 82,779
----------
TOTAL CURRENT LIABILITIES 2,412,245
Capital lease obligations 14,146
Deferred gain on lease of facility (see Note 3) 1,790,443
Other long-term liabilities 207,937
----------
TOTAL LIABILITIES 4,424,771
STOCKHOLDERS' EQUITY:
Convertible preferred stock 14,099
Common stock 95,509
Additional Paid-in-capital 43,305,158
Accumulated deficit (39,661,243)
Translation gain 279,849
-----------
Total Stockholders' Equity 4,033,372
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,458,143
===========
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
----------------------
1998 1997(a)
----------- -----------
Net revenues $1,619,949 $ 596,198
Cost of products sold 1,511,138 1,082,200
--------- ----------
Gross margin (loss) 108,811 (486,002)
Advertising & Promotion 110,307 828,115
Selling, general and administrative 686,914 718,348
--------- ----------
Total Operating Expenses 797,221 1,546,463
--------- ----------
Operating loss (688,410) (2,032,465)
Interest, net and other expense 39,974 416,069
--------- ---------
Pretax loss (728,384) (2,448,534)
Provision for income taxes ---- ----
--------- ----------
Net loss (728,384) (2,448,534)
Preferred dividends accreted, Series 2
(See Note 8) 817,000 ----
Preferred dividends, Series 1 33,534 ----
--------- ----------
et loss attributable to Common stockholders (1,578,918) (2,448,534)
========= ==========
Basic and diluted net loss
per common share outstanding $(0.17) $(0.32)
Weighted average number of common shares
outstanding 9,549,419 7,737,710
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
March 31,
----------------------
1998 1997(a)
---------- ----------
Net revenues $2,925,753 $1,202,016
Cost of products sold 3,091,792 2,059,899
----------- ----------
Gross margin (loss) (166,039) (857,883)
Advertising & Promotion 279,228 1,307,481
Selling, general and administrative 1,256,668 1,343,100
----------- ----------
Total Operating Expenses 1,535,896 2,650,581
----------- ----------
Operating loss (1,701,935) (3,508,464)
Interest, net and other expense 85,606 790,732
---------- ----------
Pretax loss (1,787,541) (4,299,196)
Provision for income taxes ---- ----
----------- -----------
Net loss $(1,787,541) $(4,299,196)
Preferred dividends accreted, Series 2 (See Note 8) 817,000 ----
Preferred dividends, Series 1 67,813 ----
----------- -----------
Net loss attributable to Common stockholders $(2,672,354) $(4,299,196)
=========== ===========
Basic and diluted net loss
per common share outstanding $ (0.28) $ (0.57)
Weighted average number of common shares
outstanding 9,546,883 7,563,371
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements. <PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended March 31,
-------------------------
1998 1997(a)
------------ ------------
OPERATIONS:
Net (loss) $(1,787,541) $ (4,299,196)
Adjusted for noncash and nonoperating items:
Depreciation and amortization 296,733 313,386
Noncash interest expense 166,640 301,178
Amortization of discounts on convertible debentures ---- 544,000
Reduction in inventory reserves (589,388) ----
Reduction in accounts receivable reserves (101,580) ----
Amortization of other assets 5,567 ----
Changes in operating assets and liabilities 904,193 (827,027)
---------- ----------
Net cash provided (used) in operating activities (1,105,376) (3,967,659)
INVESTING ACTIVITIES:
Capital expenditures (15,955) (77,980)
Proceeds from repayment of note receivable 750,000 ----
Lease of facility (see Note 3) ---- 3,288,185
---------- ----------
Net cash provided (used) in investing activities 734,045 3,210,205
FINANCING ACTIVITIES:
Borrowings 1,000,000 2,834,500
Debt repayments (1,033,270) (4,024,742)
Proceeds from the issuance of preferred stock 1,851,034 ----
Proceeds from the issuance of common stock upon
exercise of options and warrants 108,902 575,374
----------- ----------
Net cash provided (used) by financing activities 1,926,666 (614,868)
Effect of exchange rate change on cash
and equivalents 13,311 (46,657)
----------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,568,646 (1,418,979)
Cash and equivalents at beginning of period 1,633,467 2,914,080
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $3,202,113 $1,495,101
========== ==========
Schedule of noncash financing and investing activities:
Preferred dividends declared, Series 1 67,813 ----
Preferred dividends accreted, Series 2 817,000 ----
Issuance of warrants on notes payable 297,500 ----
Conversion of Convertible Debentures into Common Stock ---- $1,674,000
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - Basis of Presentation
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flow for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended September 30, 1997.
NOTE 2 - Earnings Per Share
Basic and diluted net (loss) per Common share outstanding is based on the
weighted average of shares of Common Stock outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully dilutive
earnings per share. All earnings per share in the accompanying financial
statements have been presented to conform to Statement No. 128 requirements.
The Company has "in the money" options and warrants outstanding of 1,136,196
and 200,000 as of March 31, 1998 and 1997, respectively. The Company also has
preferred stock outstanding as of March 31, 1997, which is convertible into
1,409,927 shares of common stock (see Note 5). The inclusion of the options,
warrants and convertible preferred stock in the computation of diluted earnings
per share would have resulted in a reduction of the loss per share
(antidilutive) and therefore both basic and diluted earnings per share amounts
were the same for each of the periods presented in the accompanying financial
statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 3 - Lease of Manufacturing Facility
On December 10, 1996, the Company entered into what is in essence a sale and
leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received 1,950,000 (Pounds)
representing approximately $3,365,000 for leasing the facility to a third party
for a nominal annual rental charge and for providing the third party an option
to purchase the facility for one pound during the period December 2006 to
December 2027.
As part of the same transaction, the Company entered into an agreement to lease
the facility back from the third party for base rents per year payable
quarterly until 2016 of 195,000 (Pounds) representing approximately $336,000.
The lease is renewable through 2027. The Company was also required to make a
security deposit of 195,000 (Pounds) representing approximately $336,000 to be
reduced in subsequent years. The facility had a net book value of 810,845
(Pounds) representing approximately $1,398,819 on the date of the transaction.
The 1,139,155 (Pounds) representing approximately $1,966,181 gain which
resulted from this transaction will be recognized ratably over the initial term
of the lease.
Concurrent with this transaction, the Company repaid the mortgage loan on this
property of 1,062,500 (Pounds) representing approximately $1,834,000.
NOTE 4 - Inventories
The components of inventory consist of the following:
March 31, 1998
--------------
Raw Material and work in process $ 714,117
Finished Goods 348,776
-----------
Inventory, Gross 1,062,893
Less: Inventory reserves (307,739)
-----------
Inventory, net $ 755,154
=========== <PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 5 - Sale of Convertible Preferred Stock
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.82 million, after commissions and expenses.
The Series 2 Preferred Stock automatically converted into Common Stock on a
one-for-one basis, on April 3, 1998 the date in which the registration
statement registering the resale of the Common Stock was declared effective by
the SEC. The investors received four-year Warrants to purchase 240,000 shares
of Common Stock exercisable at a price per share equal to the lesser of $3.425
or the average of the three closing bid prices per share of Common Stock for
any three consecutive trading days chosen by the investor during the 30 trading
day period ending on the trading day immediately prior to the exercise of the
Warrants. Individuals providing services to the Company's placement agent for
the above convertible Preferred Stock received Warrants to purchase 4,000
shares of Common Stock exercisable at any time prior to December 31, 2001, at
$4.11.
In September 1997, the Company raised approximately $1.6 million proceeds, net
of issuance costs of $96,252, in a private placement of 680,000 shares of 8%
cumulative convertible Preferred Stock. In addition, 52,000 Common Stock
purchase warrants were issued to the placement agents. Each share of Preferred
Stock is convertible into one share of the Company's Common Stock on or after
August 1, 1998. Annual Preferred Stock dividends will be paid if and as
declared by the Company's Board of Directors. No dividends or other
distributions will be payable on the Company's Common Stock unless dividends
are paid in full on the Preferred Stock. The shares may be redeemed at the
option of the Company, in whole or in part, on or after August 1, 2000, subject
to certain conditions, at $2.50 per share plus accrued and unpaid dividends.
In the event of a liquidation or dissolution of the Company, the Preferred
Stock would have priority over the Company's Common Stock.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 6 - Financial Condition
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred a loss of $6.3 million for the year ended September 30, 1997, a loss
of $1.8 million for the six months ended March 31, 1998 and as of March 31,
1998 had an accumulated deficit of $39.7 million. At March 31, 1998, the
Company had working capital of $2.2 million and stockholders' equity of $4.0
million. In the future, the Company expects to continue to broaden
distribution of the Female Condom through expanding partnerships in the major
markets including the United States, the European market and the Developing
World and to support its manufacturing operations to meet the increased demand.
As a result, operations in the near future are expected to continue to use
working capital. Management recognizes that the Company's continued operations
depend on its ability to raise additional capital through a combination of
equity or debt financing, strategic alliances and increased sales volumes.
At various points during the developmental stage of the product, the Company
was able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch The Female Condom.
Management believes that recent developments, including the Company's agreement
with the UNAIDS, a joint United Nations program on HIV/AIDS, provide an
indication of the Company's early success in broadening awareness and
distribution of the Female Condom and may benefit efforts to raise additional
capital and to secure additional agreements to promote and distribute the
Female Condom throughout other parts of the world.
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated short-term
requirements. Specifically, the Company entered into an agreement with Vector
Securities, International, Inc. (Vector), an investment banking firm
specializing in providing financial advisory services to healthcare and
life-science companies. Pursuant to this agreement, for a one-year period,
Vector will act as the Company's exclusive financial advisor for the purpose of
identifying and evaluating opportunities available to the Company for
increasing shareholder value. These opportunities may include selling all or a
portion of the business, assets or stock of the Company or entering into one or
more distribution arrangements relating to the Company's product. However, no
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 6 - Financial Condition (continued)
specific opportunity has yet been identified and there can be no assurance that
any such opportunities will be available to the Company or, if so available,
that the Company will ultimately elect to consummate any such transaction.<PAGE>
Further, there can be no assurance, assuming the Company raises additional
funds or enters into business agreements with third parties, that the Company
will achieve profitability or positive cash flow. If the Company is unable to
obtain adequate financing, management will be required to curtail certain of
the Company's operations or ultimately cease operations.
Note 7 - Restatement of 1997 Financial Statements
In March 1998, the Company discovered that its reporting of a charge to
interest expense for the amortization of discounts associated with a
"beneficial conversion feature" on two sets of convertible debentures issued in
August 1996 and February 1997 was not in accord with a March, 1997 SEC decision
regarding the reporting of such transactions.
The first set of debentures was issued August 12, 1996 for $2,000,000 at 8% and
the second set of debentures was issued February 20, 1997 for $2,020,000 at 8%,
both maturing after 3 years. Both sets of convertible debentures included a
conversion feature that was "in the money" as of the date of issuance (a
"beneficial conversion feature"). The beneficial conversion feature allowed
the debentures to be converted into Company Common stock at the lesser of
$5.275 per share for debentures No. 1 and $2.875 per share for debentures No. 2
(representing the average market price for the five days preceding the date the
debentures were sold) or 80% of the market price at the time the conversion
occurs. Fifty percent of the debentures could be converted into Company Common
stock after 45 days from the date of issuance and the remaining after 65 days
for both debentures.
In March 1997, the SEC staff concluded that a beneficial conversion feature
should be recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in capital. That
amount should be calculated at the date of issue as the difference between the
conversion price and the fair value of the common stock into which the security
is convertible. Any discount resulting from the beneficial conversion feature
increases the effective interest rate of the security and should be reflected
as a charge to interest expense.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 7 - Restatement of 1997 Financial Statements (continued)
The intrinsic value of the beneficial conversion feature as of the date of
issuance was $382,000 on debentures No. 1 and $398,000 on debentures No. 2 and,
as a result, the Company has restated the previously reported unaudited
condensed consolidated statements of operations for 1997 as follows:
March 31, 1997
Three Months Six Months
Ended Ended
-----------------------
Increase in interest expense and increase in
net loss attributable to common stockholders $ 300,000 $ 544,000
Increase in net loss per common share
outstanding (0.04) (0.07)
Note 8 - Preferred Dividends, Series 2
The Company's $2.0 million private placement of convertible preferred stock on
December 31, 1997, included a beneficial conversion feature valued at $500,000
and four-year warrants to purchase additional shares of common stock valued at
$317,000. In accordance with new SEC reporting requirements for such
transactions, the Company recorded the value of the beneficial conversion
feature and warrants, a total of $817,000 as additional paid-in capital at
March 31, 1998. The corresponding discount of $817,000 associated with the
issuance of the convertible preferred stock is a one-time, nonrecurring charge
that has been fully amortized and reflected as preferred dividends accreted in
the consolidated statements of operations for the quarter and six months ended
March 31, 1998. The dividend accretion had no impact on the Company's cash
flow from operations.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
GENERAL
The Female Health Company ("FHC" or the "Company") markets, manufactures and
sells The Female Condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
Safety and Efficacy
Clinical trials and actual multi-country marketing have established The Female
Condom as safe and effective. Studies show the following results:
Reduction in STDs 1) 34% {Results when Female Condom was
Reduction in Unprotected Sex 1) 25% available as an option vs. when
only the male condom was available.}
Prevention of Pregnancy- 95% When used properly with every sex
Effectiveness 2) act.
1) Supported by UNAIDS
2) Supported by USAID and conducted by Family Health International.
Recent studies completed in Japan for regulatory submission indicate the
efficacy of The Female Condom may be even higher than noted above.
No significant safety issues or side effects have been reported to date with
The Female Condom.
Cost Effectiveness
Preliminary results from a study supported by UNAIDS indicate making The Female
Condom available is highly cost effective for governments in terms of reducing
public health costs in both developed and developing countries.
Endorsements
Currently, The Female Condom is endorsed for use by the World Health
Organization (WHO), the United Nations Joint Programme on AIDS (UNAIDS) the
U.S. Agency for International Development (USAID) and a number of states and
cities in the United States.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Advantages vs. the Male Condom
The Female Condom is currently the only available barrier method controlled by
women which allows them to protect themselves from STDs, including HIV/AIDS and
unintended pregnancy. Although latex male condoms also offer protection
against STDs, The Female Condom possesses a certain number of advantages. The
most important advantage is that a woman can control whether or not she is
protected. Many men do not like to wear male condoms and may refuse to do so.
The material that is used for The Female Condom, polyurethane, offers a number
of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability
that The Female Condom sheath will tear during use. Clinical studies and
everyday use have shown that latex male condoms can tear between 4% and 8% of
the times they are used. Unlike latex, polyurethane quickly transfers heat, so
The Female Condom immediately warms to body temperature when it is inserted,
which may result in increased pleasure and sensation during use. The Product
offers an additional benefit to the 7% to 20% of the population that is
allergic to latex and who, as a result, may be irritated by latex male condoms.
To the Company's knowledge there is no reported allergy to date to
polyurethane. The Female Condom is also more convenient, providing the option
of insertions hours before sexual arousal and as a result is less disruptive
during sex than the male condom which requires sexual arousal for application.
Global Market
The market potential for The Female Condom is large and growing as highlighted
by the following:
- New cases of STDs each year: 300 million
- Estimated Annual Male Condom Market: 4.7 billion units
Strategy/Goals
The Company's strategy is to act as a manufacturer selling The Female Condom to
the global public sector, the U.S. public sector and commercial partners for
country specific marketing. The public sector customers and partners assume
the cost of shipping and marketing. As a result as volume increases , expenses
other than manufacturing costs will not increase appreciably.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Commercialization
The Product is currently sold to both commercial (private sector) and public
sector markets in ten countries. It is commercially marketed directly by the
Company in the United States and the United Kingdom and through marketing
partners in Canada, Holland, Brazil, Venezuela, South Korea and Taiwan. The
Company has signed distribution agreements in Japan and Bangladesh. In Japan,
the market for male condoms exceeds 600 million units. Oral contraceptives
have never been approved in Japan and, as a result, 85% of Japanese couples
seeking protection use condoms. The Company's partner in Japan, Taiho
Pharmaceuticals, a $1 billion subsidiary of Otsuka, submitted an application
for regulatory approval to Koseisho (Japanese equivalent of FDA) in October,
1997. After approval, which is expected in 1998, the Company will manufacture
the Product and supply it to Taiho. Taiho has responsibility for marketing and
distributing The Female Condom in Japan. Taiho has the exclusive right to
market The Female Condom in Japan provided it sells at least 1.8 million units
in the first year after regulatory approval and 1.3 million units each year
thereafter. The price at which Taiho will purchase the product is under
negotiation. Results of the clinical tests in Japan show that The Female
Condom may be more effective in preventing pregnancy than the male condom and
has a high acceptance rate of 70% among Japanese women. Taiho plans to market
The Female Condom under the name "Mylura Femy."
The Company is currently in discussions with potential distributors for India
and The People's Republic of China and other countries.
In addition to the commercial market, The Female Condom is sold to U.S. and the
global public sector customers. 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. Currently, city and state governments in New York,
Pennsylvania, Washington, Illinois, Chicago, Philadelphia, New York, San
Francisco, and Florida have purchased the Product for distribution with a
number of others expressing interest.
In 1996, the Company entered into a three-year agreement with UNAIDS, whereby
UNAIDS will facilitate the availability and distribution of The Female Condom
in the developing world. The Company will sell the Product to developing
countries at a reduced price based on the total number of units purchased. The
special reduced price is negotiated each year between the Company and UNAIDS.
Currently, the price is set at 0.38 (Pounds) per unit. Pursuant to this
agreement, The Product is currently being marketed in Zambia and Zimbabwe with
plans for 1998 market introductions in South Africa, Uganda, Tanzania, Cote
d'Ivoire and other countries. As part of the UNAIDS agreement, the South
African government recently ordered one and one-half million Female Condoms(
which were shipped by the Company prior to March 31, 1998. Recent orders also<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
include 1.2 million units for Uganda. In April, UNAIDS held a three-day meeting
in Pretoria, South Africa devoted exclusively to accelerating the introduction
of The Female Condom in developing countries. The meeting was attended by more
than 80 representatives from 15 countries from Southern and Eastern Africa.
Worldwide Regulatory Approvals
The Female Condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the
world, including receipt of a CE Mark in 1997 which allows the Company to
market The Female Condom throughout the European Union. In addition to the
United States and the European Union, several other countries have approved The
Female Condom for sale, including Canada, Russia, Australia, South Korea and
Taiwan. The Company expects The Female Condom to receive approval in Japan in
1998.
The Company believes that The Female Condom's( PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry. 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 The Female Condom.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
For the current quarter, sales increased $1,023,751, or 172%, compared with the
same period last year. The higher sales resulted from increased sales compared
to the same period last year in two of the Company's major market segments:
domestic public sector and global public sector.
The Female Health Company had revenues of $1,619,949 and a net loss of $728,384
($.08 per common share) for the three months ended March 31, 1998 compared to
revenues of $596,198 and a net loss of $2,448,534 ($.32 per common share) for
the three months ended March 31, 1997. As discussed more fully below, the
decrease in the Company's net loss was principally related to increased sales
volume, reduced expenditures for advertising and promotion, adjustments to
inventory reserves and reduced interest expense.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Cost of goods sold increased $428,938, or 40%, to $1,511,138 in the current
quarter from $1,082,200 for the same period last year. During the quarter the
Company reduced its reserve for inventory obsolescence based upon the increased
demand for product and the resulting lower inventory levels. The adjustment of
the inventory reserve reduced cost of goods sold by $300,000. There were no
adjustments to inventory reserves during the same period last year. <PAGE>
Advertising and promotional expenditures decreased $717,808, or 87%, to
$110,307 in the current quarter from $828,115 for the same period in the prior
year. Advertising and promotion relates almost exclusively to the U.S. consumer
market, and includes the costs of print advertising, trade and consumer
promotions, product samples and other marketing costs. Through expenditures to
date, the Company has established that The Female Condom is responsive to
promotion; but due to the Company's size, it doesn't possess the resources to
conduct a significant marketing program. Accordingly, the Company is in
discussions with potential partners for the U.S. that have the resources to
conduct such a marketing program. The prior period amounts largely reflect
expenditures for the Company's previous print advertising campaign and single
market test of the Company's television commercial.
Selling, general and administrative expenses decreased $31,434, or 4%, to
$686,914 in the current quarter from $718,348 for the same period last year.
The decrease reflects the Company's initiatives to reduce spending in all
administrative areas. The Company reduced its expenses associated with
telecommunication, legal, and financial matters in the United States and United
Kingdom.
Net interest and nonoperating expenses decreased to $39,974, or 90%, for the
current period from $416,069 for the same period the prior year. The decrease
is due to lower interest expense attributable to a decreased level of debt
outstanding during the quarter. During the same period last year, the Company
amortized $300,000 of discounts related to certain beneficial conversion
features included with the convertible debentures issued by the Company, see
note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997
For the six months ended March 31, 1998, sales increased $1,723,737, or 143%,
compared with the same period last year. The higher sales are due to increased
unit sales to domestic public sector agencies and the global public sector.
The Female Health Company had net revenues of $2,925,753 and a net loss of
$1,787,541 ($.19 per common share) for the six months ended March 31, 1998
compared to revenues of $1,202,016 and a net loss of $4,299,196 ($.57 per
common share) for the six months ended March 31, 1997. As discussed more fully<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
below, the decrease in the Company's net loss was principally related to
increased sales volume, reduced expenditures for advertising and promotion,
adjustments to inventory reserves and reduced interest expense.
Cost of goods sold increased $1,031,893, or 50%, to $3,091,792 in the current
period from $2,059,899 for the same period last year. Increases in the costs
of goods sold which are related to higher sales volumes, were offset, in part,
by a $589,388 reduction in the Company's reserve for inventory obsolescence.
The FDA's decision to extend the useful life of The Female Condom to five years
from three years and the reduction of finished goods inventories resulting from
the increased level of sales were the factors leading to the inventory reserve
adjustment. The Company did not adjust inventory reserves during the same
period last year.
Advertising and promotional expenditures decreased $1,028,253, or 79%, to
$279,228 for the six months ended March 31, 1998 from $1,307,481 for the same
period in the prior year. During the prior year increased advertising and
promotional expenditures supported the Company's print advertising campaign and
a single market test of the Company's television commercial. Through those
campaigns the Company believes that The Female Condom is responsive to
promotion. Due to capital constraints, advertising and promotional spending
were limited in the first six months of the current year.
Selling, general and administrative expenses decreased $86,432, or 6%, to
$1,256,668 in the current period from $1,343,100 for the same period last year.
The decrease primarily resulted from expenditures for research and development
and telecommunications.
Net interest and nonoperating expenses decreased to $85,606 for the current
period from $790,732 for the same period the prior year. During the prior year
the Company had a higher level of debt resulting from the issuance of
convertible debentures. The subsequent conversion of the debentures has
lowered the outstanding debt and decreased interest expense. <PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
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 first
six months of fiscal 1998, cash used in operations totaled $1.1 million. The
Company funded cash used in operations and improved its cash position with the
$1.8 million net proceeds received from the private placement offering of
convertible Preferred Stock and the collection of $0.7 million pursuant to the
prepayment of the $1 million promissory note the Company received in connection
with its sale of its former wholly-owned subsidiary, WPC Holdings, Inc. The
Company valued the promissory note at $0.7 million as of September 30, 1997.
Management believes that cash on hand at March 31, 1998 will be sufficient to
meet requirements for the balance of fiscal 1998. However, 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 March 31, 1998, the Company had current liabilities of $2.4 million
including a $1.0 million note payable due March 25, 1999, to Mr. Dearholt, a
Director of the Company. Mr. Dearholt beneficially owns 909,777 shares of the
Company's Common Stock as of March 31, 1998.
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, without revenues, is approximately
$0.4 million per month.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm
specializing in providing financial advisory services to healthcare and
life-science companies. Pursuant to this agreement, for a one-year period,
Vector will act as the Company's exclusive financial advisor for the purposes
of identifying and evaluating opportunities available to the Company for
increasing shareholder value. These opportunities may include selling all or a
portion of the business, assets or stock of the Company or entering into one or
more distribution arrangements relating to the Company's product. However, no
specific opportunity has yet been identified, and there can be no assurance
that any such opportunities will be available to the Company or, if so
available, that the Company will ultimately elect or be able to consummate any
such transaction.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
While management believes that revenue from sales of The Female Condom will
eventually exceed operating costs, and that, ultimately, operations will
generate sufficient funds to meet capital requirements, there can be no
assurance that such level of operations ultimately will be achieved, or be
achieved in the near term. Likewise, there can be no assurance that the
Company will be able to source all or any portion of its required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of The Female Condom generate sufficient
revenues to fund operations. In addition, any funds raised may be costly to
the Company and/or dilutive to stockholders.
If the Company is not able to source the required funds or any future capital
which becomes required, the Company may be forced to sell certain of its assets
or rights or cease operations. Further, if the Company is not able to source
additional capital, the lack of funds to promote the Female Condom may
significantly limit the Company's ability to realize value from the sale of
such assets or rights or otherwise capitalize on the investments made in The
Female Condom.
CONTINUED LISTING ON THE AMERICAN STOCK EXCHANGE
The Company's common stock is listed for trading on the American Stock Exchange
(the "Exchange"). The Constitution of the Exchange provides that its Board of
Governors may, in its discretion, at any time, remove any security from
listing. Although the determination as to whether a security warrants
delisting is not based on any precise mathematical formula, the Exchange has
adopted a number of guidelines which it will consider when deciding whether to
delist an Exchange-traded security. Certain of these guidelines address the
issuer's financial condition. For example, the Exchange will consider
delisting the securities of an issuer which has stockholders' equity of less
than $2 million if the Company has sustained losses from continuing operations
and/or net losses in two of its three most recent fiscal years (which the
Company has) or which has stockholders' equity of less than $4 million if the
Company has sustained losses from continuing operations and/or net losses in
three of its four most recent fiscal years (which the Company has). The
Exchange will also consider delisting the stock of a company which has incurred
net losses in its five most recent fiscal years (which the Company has). As of
March 31, 1998, the Company had stockholders' equity of approximately $4.0
million. On February 5, 1998, the Company received a letter from the Exchange
noting that the Company has fallen below certain of the Exchange's continued
listing guidelines and indicating that the Exchange will review the Company's
listing eligibility. The letter specifically noted that the Company has fallen
below the Exchange's continued listing guidelines triggered by both (a) five<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
years of losses and (b) equity below $4 million since the Company had losses in
three of its four most recent fiscal years. Subsequent to management meeting
with representatives of the Exchange, the Company received a letter from the
Exchange dated April 21, 1998 in which the Exchange determined to continue to
list the Company until the Exchange can review the Company's June 30, 1998 Form
10-QSB and subject to the Company's favorable progress in satisfying the
Exchange's guidelines for continued listing and to the Exchange's routine
periodic review of the Company's SEC and other filings. There can be no
assurance that the Exchange will permit the continued listing of the Company's
common stock on the Exchange. If the Exchange delists trading of the Company's
common stock, investors would likely find it more difficult to obtain accurate
quotations of the price of the Company's common stock and to sell the common
stock on the open market.
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.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures The Female Condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States Dollar. In
addition, some of the Company's future international sales may 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.<PAGE>
PART II - OTHER INFORMATION
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). (1)
10.1 Company Promissory Note Payable to Stephen M. Dearholt
for $1 million dated March 25, 1998 and related Note
Purchase and Warrant Agreement, Warrants and Stock
Issuance Agreement.
27 Financial Data Schedule
(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 March 31, 1998. <PAGE>
EXHIBIT INDEX
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: May 14, 1998 /s/O.B. Parrish
----------------------------
O. B. Parrish, Chairman and Chief Executive
Officer and Principal Accounting Officer<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,202,113
<SECURITIES> 0
<RECEIVABLES> 464,217
<ALLOWANCES> 0
<INVENTORY> 755,154
<CURRENT-ASSETS> 4,608,300
<PP&E> 4,021,035
<DEPRECIATION> (1,311,066)
<TOTAL-ASSETS> 8,458,143
<CURRENT-LIABILITIES> 2,412,245
<BONDS> 0
0
14,099
<COMMON> 95,509
<OTHER-SE> 3,923,764
<TOTAL-LIABILITY-AND-EQUITY> 8,458,143
<SALES> 2,925,753
<TOTAL-REVENUES> 2,925,753
<CGS> 3,091,792
<TOTAL-COSTS> 3,091,792
<OTHER-EXPENSES> 1,535,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,606
<INCOME-PRETAX> (1,787,541)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (884,813)
<NET-INCOME> (2,672,354)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
EXHIBIT 10.1
PROMISSORY NOTE
$1,000,000.00 March 25, 1998
FOR VALUE RECEIVED, THE FEMALE HEALTH COMPANY, a Wisconsin corporation, prom-
ises to pay to the order of Stephen M. Dearholt, at his office in the City of
Milwaukee, Wisconsin, the principal sum of One Million Dollars ($1,000,000.00),
payable in full on March 25, 1999.
The unpaid principal balance hereof shall bear interest, payable monthly on the
last day of each calendar month commencing March 31, 1998, and at maturity
(whether stated maturity or upon acceleration), computed at a rate equal to 12%
per annum. Principal amounts unpaid at the maturity thereof (whether by fixed
maturity or acceleration) shall bear interest from and after maturity until
paid computed at a rate equal to 18% per annum. Principal of and interest on
this Note shall be payable in lawful money of the United States.
All interest payable on this note shall be computed for the actual number of
days elapsed using a daily rate determined by dividing the annual rate by 365.
Whenever any payment to be made hereunder shall be stated to be due on a
Saturday, Sunday or public holiday under the laws of the State of Wisconsin,
such payment may be made on the next succeeding business day, and such exten-
sion of time shall be included in the computation of interest on this note.
This note constitutes the Note issued under a Note Purchase and Warrant Agree-
ment dated as of the date hereof between the undersigned and Stephen M. Dear-
holt to which Agreement reference is hereby made for a statement of the terms
and conditions on which the loan evidenced hereby was made and for a descrip-
tion of the terms and conditions upon which this Note may be prepaid, in whole
or in part, or its maturity accelerated.
THE FEMALE HEALTH COMPANY
By: _____________________________
Chairman of the Board
and Chief Executive Officer<PAGE>
EXHIBIT 10.1
NOTE PURCHASE AND WARRANT AGREEMENT
March 25, 1998
Stephen M. Dearholt
Insurance Processing Center
741 North Milwaukee Street
Milwaukee, Wisconsin 53202
THE FEMALE HEALTH COMPANY, a Wisconsin corporation (the "Company"), and you
entered into a Note Purchase and Warrant Agreement, dated March 25, 1997
pursuant to which you purchased a promissory note in the principal amount of
$1,000,000 from the Company (the _1997 Note_). The Company hereby requests
that you, Stephen M. Dearholt (hereinafter referred to as the _Lender_),
surrender the 1997 Note in exchange for a new promissory note in the principal
amount of $1,000,000 from the Company on the terms and conditions set forth
below.
ARTICLE I
NOTE
1.1 Purchase of Note. On the date hereof the Lender will accept a promissory
note from the Company in the principal amount of $1,000,000 (the "Note") in the
form of Exhibit A attached hereto in exchange for and upon surrender of the
1997 Note, together with payment of all accrued interest on the 1997 Note to
the date hereof. The Note is being executed by the Company and delivered to
the Lender against the delivery and in full payment of the 1997 Note.
ARTICLE II
THE WARRANT
2.1 Issuance of Warrant. On the date hereof the Company shall issue to Lender
a warrant which shall entitle the Lender to purchase 200,000 of the issued and
outstanding shares of Common Stock, $.01 par value per share, of the Company on
the date of exercise at a purchase price of $2.25 per share (subject to
adjustment as provided therein) in the form attached hereto as Exhibit B (the
"Warrant").
ARTICLE III
REPRESENATIONS AND WARRANTIES OF COMPANY
The Company represents and warrants to the Lender as follows:
3.1 Organization. The Company is a corporation duly organized and existing in
active status under the laws of the State of Wisconsin, and has all requisite
power and authority, corporate or otherwise, to conduct its business and to own
its properties.
3.2 Authority. The execution, delivery and performance of this Agreement, the
Note, the Warrant and the Stock Issuance Agreement between the Company and<PAGE>
Lender of even date herewith (the "Stock Issuance Agreement") are within the
corporate powers of the Company, have been duly authorized by all necessary
corporate action and do not and will not (i) require any consent or approval of
the stockholders of the Company; (ii) violate any provision of the amended and
restated articles of incorporation or amended and restated by-laws of the
Company or of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award presently in effect having applicability to the
Company; (iii) require the consent or approval of, or filing or registration
with, any governmental body, agency or authority except for filing with the
Securities and Exchange Commission, applicable state securities regulatory
agencies and the American Stock Exchange, Inc. as required to register the
resale of any of the shares issued upon exercise of the Warrant or pursuant to
the Stock Issuance Agreement under the Securities Act of 1933, as amended, and
the securities laws of all applicable states and to register such shares on the
American Stock Exchange; or (iv) result in a breach of or constitute a default
under, or result in the imposition of any lien, charge or encumbrance upon any
property of the Company pursuant to, any <PAGE>
indenture or other agreement or instrument under which the Company is a party
or by which it or its properties may be bound or affected. This Agreement
constitutes, and the Note, the Warrant and the Stock Issuance Agreement when
executed and delivered hereunder will each constitute, legal, valid and binding
obligations of the Company enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency or similar laws
now or hereafter in effect affecting the enforceability of creditors' rights
generally and subject to general principles of equity.
3.3 Capital Stock. The authorized capital stock of the Company consists of
15,000,000 shares of Common Stock, $.01 par value per share and 5,000,000
shares of Class A Preferred Stock, $.01 par value per share. There are
presently outstanding 9,523,830 shares of Common Stock, and 680,000 and
729,927 shares of Class A Convertible Preferred Stock Series 1 and Series 2,
respectively. Other than (i) the Warrant and 200,000 shares of Common Stock to
be issued to the Lender upon certain contingencies set forth in a Stock
Issuance Agreement between the Company and Lender of even date, (ii) other
warrants to purchase shares of Common Stock issued to the Lender pursuant to a
Note Purchase and Warrant Agreement dated March 25, 1997, to the Lender and
William Lacy pursuant to a Note Purchase Agreement dated March 25, 1996, and to
the Lender and an affiliate of Lender pursuant to a Note Purchase and Warrant
Agreement dated November 21, 1995, (iii) warrant to purchase 150,000 shares of
common stock issued to Malcom McGuire, (iv) options to purchase 1,416,346
shares of the Company's Common Stock issued to certain employees, officers,
directors, consultants and affiliates of the Company (which number excludes
200,533 options which have been authorized but not issued), (v) warrants to
purchase up to 107,534 shares of the Company's Common Stock related to certain
convertible debentures issued by the Company, (vi) rights to purchase 1,409,927
shares of the Company's Common Stock upon conversion of the Series 1 and Series
2 Class A Convertible Preferred Stock issued by the Company, and (vii) warrants
to purchase up to 296,000 shares of the Company's Common Stock related to the
Series 1 and Series 2 Class Convertible Preferred Stock, there are no
subscriptions, options, warrants, rights or agreements (contingent or
otherwise) providing for the issuance by the Company of Common Stock or other
equity securities of the Company having rights, benefits or privileges equal or
superior to that of the Common Stock.
3.4 Full Disclosure. The Company is subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has
within the previous 12 months filed with the Securities and Exchange Commission
all reports, proxy statements and other information in respect to the Company
required under the Exchange Act. No such report or information filed with the
SEC within the previous 2 years, and no information or report furnished by the
Company to the Lender in connection with the negotiation or execution of this
Agreement (all of which information or reports so furnished are set forth in
Section 5.2 hereof), contained any misstatement of a material fact as of the
date when made or omitted to state a material fact required to be stated
therein or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading as of the date when
made.
ARTICLE IV
DEFAULTS
4.1 Defaults. The occurrence of any one or more of the following events shall
constitute an "Event of Default":<PAGE>
(a) The Company shall fail to pay any principal or interest due on the Note
within 5 days of its due date;
(b) Any representation or warranty made by the Company herein shall prove to
have been false in any material respect;
(c) The Company shall: (i) fail, or admit in writing its inability, to pay
its debts as they mature; or (ii) make a general assignment for the benefit of
creditors or to an agent authorized to liquidate any substantial amount of its
property; or (iii) become the subject of an "order for relief" within the
meaning of the United States Bankruptcy Code; or (iv) become the subject of a
creditor's petition for liquidation, reorganization or to effect a plan or
other arrangement with creditors which petition has not been dismissed or
stayed within 90 days of the filing thereof; or (v) apply to a court for the
appointment of a custodian or receiver for any of its assets; or (vi) have a
custodian or receiver appointed for substantially all of its assets (with or
without its consent); provided that, if the appointment is without the
Company's consent, such appointment has not been vacated or stayed within 90
days of such appointment; or (vii) otherwise become the subject of any
insolvency proceedings (and if such proceedings are commenced without the
Company's consent, such proceedings shall not have been dismissed within 90
days after commencement thereof) or propose or enter into any formal or
informal composition or arrangement with its creditors.
(d) This Agreement, the Note, the Warrant, or any other warrant described in
section 3.3(ii) hereof, shall, at any time after their respective execution and
delivery, and for any reason other than full performance thereof, cease to be
in full force and effect or be declared null and void, or the validity or
enforceability thereof or hereof shall be contested by the Company or any
shareholder of the Company, or the Company shall deny that it has any or
further liability or obligation thereunder or hereunder, as the case may be.
4.2 Acceleration of Obligations. Upon the occurrence of any Event of Default:
(a) As to any Event of Default (other than an Event of Default under section
4.1(c)) and at any time thereafter during which such Event of Default is
continuing, and in each case, the Lender may, by written notice to the Company,
immediately declare the unpaid principal balance of the Note, together with all
interest accrued thereon, to be immediately due and payable; and the unpaid
principal balance of and accrued interest on such Note shall thereupon be due
and payable without further notice of any kind, all of which are hereby waived,
and notwithstanding anything to the contrary herein or in the Note contained;
(b) As to any Event of Default under section 4.1(c), the unpaid principal
balance of the Note, together with all interest accrued thereon, shall
immediately and forthwith be due and payable, all without presentment, demand,
protest, or further notice of any kind, all of which are hereby waived,
notwithstanding anything to the contrary herein or in the Note contained; and
(c) As to each Event of Default, the Lender shall have all the remedies for
default provided by applicable law.
ARTICLE V
MISCELLANEOUS<PAGE>
5.l Expenses: Indemnities.
(a) The Company shall pay, or reimburse the Lender for (i) all out-of-pocket
costs and expenses (including, without limitation, attorneys' fees and expenses
not to exceed $2,500) paid or incurred by the Lender in connection with the
negotiation, preparation, execution and delivery of this Agreement, the Note,
the Warrant, the Stock Issuance Agreement, and any other document required
hereunder or thereunder; (ii) all out-of-pocket costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses) paid or incurred
by the Lender in connection with the negotiation, preparation, execution and
delivery of any amendment, supplement, modification or waiver of any of the
documents referenced above or before and after judgment in enforcing,
protecting or preserving his rights under this Agreement, the Note, the
Warrant, the Stock Issuance Agreement, and other documents required hereunder
or thereunder; and (iii) any and all recording and filing fees and any and all
stamp, excise, intangibles and other taxes (other than income taxes), if any,
which may be payable or determined to be payable in connection with the
negotiation, preparation, execution, delivery, administration or enforcement of
this Agreement, the Note, the Warrant, the Stock Issuance Agreement, or any
other document required hereunder or thereunder or any amendment, supplement,
modification or waiver of or to any of the foregoing, or consummation of any of
the transactions contemplated hereby or thereby, including all costs and
expenses incurred in contesting the imposition of any such tax, and any and all
liability with respect to or resulting from any delay in paying the same,
whether such taxes are levied upon the Lender, the Company or otherwise.
(b) The Company agrees to indemnify the Lender against any and all losses,
claims, damages, liabilities and expenses, (including, without limitation,
reasonable attorneys' fees and expenses) incurred by the Lender arising out of
or resulting from (i) any acquisition or attempted acquisition of stock or
assets of another person or entity by the Company or any subsidiary, (ii) the
use of any of the proceeds of the loan made hereunder by the Company for the
making or furtherance of any such acquisition or attempted acquisition, (iii)
the construction or operation of any facility owned or operated by the Company
or any subsidiary, or resulting from any pollution or other environmental
condition on the site of, or caused by, any such facility, (iv) the
negotiation, preparation, execution, delivery and enforcement of this
Agreement, the Note, the Warrant, the Stock Issuance Agreement, and any other
document required hereunder or thereunder, including without limitation any
amendment, supplement, modification or waiver of or to any of the foregoing or
the consummation or failure to consummate the transactions contemplated hereby
or thereby, or the performance by the parties of their obligations hereunder or
thereunder, (v) any claim, litigation, investigation or proceedings related to
any of the foregoing, whether or not the Lender is a party thereto; provided,
however, that such indemnity shall not apply to any such losses, claims,
damages, liabilities or related expenses arising from (A) any breach by the
Lender of his obligations under this Agreement, or in his fiduciary duties as a
director of the Company for which he would not otherwise be entitled to
indemnification as a director of the Company, (B) any commitment made by the
Lender to a person other than the Company which would be breached by the
performance of the Lender's obligations under this Agreement or (C) Lender's
gross negligence or willful misconduct; and provided further that clauses (i),
(ii) and (iii) of this paragraph shall apply only to losses, claims, damages,
liabilities and expenses arising out of or resulting from third party claims.
(c) The foregoing agreements and indemnities shall remain operative and in
full force and effect regardless of termination of this Agreement, the<PAGE>
consummation of or failure to consummate either the transactions contemplated
by this Agreement or any amendment, supplement, modification or waiver, the
repayment of the loan made hereunder, the invalidity or unenforceability of any
term or provision of this Agreement, the Note, the Warrant, the Stock Issuance
Agreement, or any other document required hereunder or thereunder, any
investigation made by or on behalf of the Lender, or the content or accuracy of
any representation or warranty made under this Agreement or any other document
required hereunder or thereunder.
5.2 Securities Act of 1933. (a) With respect to the Note and the Warrant to
be issued to the Lender, the Lender hereby represents, warrants and covenants
as follows:
(i) He understands that the issuance of the Note and the Warrant has not been
registered under the Securities Act of 1933, as amended (the "Act") or
applicable state securities laws (collectively, the "Laws_) on the basis that
the issuance of the Note and the Warrant is exempt from such registration under
the Act and Laws based in part upon the representations made herein;
(ii) He does not presently intend to sell or otherwise dispose of the Note
or the Warrant being issued to him hereunder;
(iii) He is acquiring the Note and the Warrant for investment purposes only
and for his own account and not with a present view to sell or otherwise
distribute the same, and he will not sell or otherwise distribute the Note or
the Warrant without registration under the Act and applicable Laws or pursuant
to applicable exemptions therefrom;
(iv) He is an "accredited investor" under the Act and the rules
promulgated thereunder;
(v) He has been given access to and has carefully reviewed the Company's Form
10-Q for the first fiscal quarter of 1998, the Company's Form 10-K and annual
report to shareholders for the year ended September 30, 1997, and the Company's
Proxy Statement for the 1998 annual meeting of shareholders. He desires no
additional information to evaluate the merits and risks of the issuance of the
Note and the Warrant hereunder, and he is not relying upon any other
information in connection therewith.
(vi) He has been given an opportunity to ask questions of, and receive
answers from, management of the Company concerning the issuance of the Note and
the Warrant hereunder, and has been given access to all information which he
has deemed necessary to verify the accuracy of the information furnished to
him;
(vii) He has such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and risks of the
transactions contemplated by this Agreement, has carefully reviewed all
information indicated above and, by virtue of such review, understands and has
evaluated the merits and risks of his participation in such transactions and
has decided to go forward with such transactions; and
(viii) He understands that the Company is relying on the accuracy of the
statements contained herein in entering into this Agreement and the
transactions contemplated herein.<PAGE>
5.3 Successors. The provisions of this Agreement shall inure to the benefit of
any holder of the Note or Warrant, and shall inure to the benefit of and be
binding upon any successor to any of the parties hereto. No delay on the part
of the Lender or any holder of the Note or a Warrant in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise of any right, power or privilege hereunder preclude
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein specified are cumulative and are not
exclusive of any rights or remedies which the Lender or the holder of the Note
or a Warrant would otherwise have.
5.4 Survival. All agreements, representations and warranties made herein
shall survive the execution of this Agreement, the making of the loan hereunder
and the execution and delivery of the Note and the Warrant.
5.5 Wisconsin Law. This Agreement and the Note and Warrant issued hereunder
shall be governed by and construed in accordance with the internal laws of the
State of Wisconsin, except to the extent superseded by federal law.
5.6 Counterparts. This Agreement may be signed in any number of counterparts
with the same effect as if the signatures thereto and hereto were upon the same
instrument.
5.7 Notices. All communications or notices required under this Agreement
shall be deemed to have been given on the date when deposited in the United
States mail, postage prepaid, and addressed as follows (unless and until any of
such parties advises the other in writing of a change in such address): (a) if
to the Company, with the full name and address of the Company as shown on this
Agreement below; and (b) if to the Lender, with the full name and address of
the Lender as shown on this Agreement above.
5.8 Entire Agreement; No Agency. This Agreement and the other documents
referred to herein contain the entire agreement between the Lender and the
Company with respect to the subject matter hereof, superseding all previous
communications and negotiations, and no representation, undertaking, promise or
condition concerning the subject matter hereof shall be binding upon the Lender
unless clearly expressed in this Agreement or in the other documents referred
to herein. Nothing in this Agreement or in the other documents referred to
herein and no action taken pursuant hereto shall cause either the Company or
the Lender to be treated as an agent of the other, or shall be deemed to
constitute a partnership, association, joint venture or other entity.
5.9 Consent to Jurisdiction. The parties hereto hereby consent to the
exclusive jurisdiction of any state or federal court situated in Ozaukee County
or Milwaukee County, Wisconsin, and waive any objection based on lack of
personal jurisdiction, improper venue or forums non conveniens, with regard to
any actions, claims disputes or proceedings relating to this Agreement, the
Note, the Warrant or any other document delivered hereunder or in connection
herevith, or any transaction arising from or connected to any of the foregoing.
Nothing herein shall affect the parties' rights to serve process in any manner
permitted by law.
5.10 Waiver of Jury Trial. The Company and the Lender hereby jointly and
severally waive any and all right to trial by jury in any action or proceeding
relating to this Agreement, the Note, the Warrant or any other document
delivered hereunder or in connection herewith, or any transaction arising from<PAGE>
or connected to any of the foregoing. The Company and the Lender each
represent that this waiver is knowingly, willingly and voluntarily given.
If the foregoing is satisfactory to you please sign the form of acceptance
below and return a signed counterpart hereof to the Company, whereupon this
instrument will evidence a binding agreement between the Lender and the
Company.
Very truly yours,
THE FEMALE HEALTH COMPANY
Address: Suite 2208
919 North Michigan Avenue
Chicago, Illinois 60611
By: _______________________________
Chairman of the Board and
Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of
the date thereof.
________________________________
Stephen M. Dearholt<PAGE>
EXHIBIT 10.1
STOCK ISSUANCE AGREEMENT
THIS AGREEMENT, is made as of March 25, 1998 between STEPHEN M. DEARHOLT, an
adult resident of the State of Wisconsin ("Lender") and THE FEMALE HEALTH
COMPANY a Wisconsin corporation (the _Company").
RECITALS
A. The Company desires to issue and sell its Promissory Note in the principal
amount of One Million Dollars ($1,000,000) (the _Note") to Lender pursuant to a
Note Purchase and Warrant Agreement of even date between the Lender and the
Company (the "Note Purchase and Warrant Agreement_), and in exchange for and
upon surrender of the rights and interests of Lender under the Stock Issuance
Agreement, dated as March 25, 1997, between the Lender and the Company (the
_1997 Stock Issuance Agreement).
B. Lender has required, as a condition of providing the loan to the Company
under the Note Purchase and Warrant Agreement that the Company enter into this
Agreement and undertake the obligations and liabilities set forth herein.
C. It is necessary and in the business interests of the Company that the
Lender enter into the Note Purchase and Warrant Agreement.
COVENANTS:
IN CONSIDERATION OF these premises and other good and valuable consideration
receipt of which is hereby acknowledged, it is agreed that:
1. Issuance and Sale of Shares. (a) The Company agrees that in the event the
Company shall default in the payment of principal due on the Note and shall
fail to pay such principal amount within five (5) days of receipt of written
notice of default from the Lender, the Company shall issue to The Lender two
hundred thousand (200,000) fully paid and non-assessable shares of Common
Stock, $.01 par value per share, of the Company; provided that the Company
shall issue to the Lender a proportionately fewer or greater number of shares
of such Common Stock if the Company combines by reverse stock split or
otherwise or subdivides by stock split, stock dividend or otherwise its
outstanding Common Stock. The Company shall be obligated to issue, and the
Lender shall have the right to receive, all such shares without payment of any
further consideration whatsoever. Notwithstanding the foregoing, the Company
shall remain liable for all amounts remaining due under and in accordance with
the terms of the Note.
(b) At such time, if any, as the Company shall become obligated to issue
shares of its Common Stock to the Lender pursuant to Section 1(a) of this
Agreement, the Lender shall be entitled to receive a certificate or
certificates representing such shares of Common Stock, which certificate(s) may
contain a standard legend indicating that such shares have not been registered
under the Securities Act of 1933, as amended (the "Securities Act") and
prohibiting resale thereof without registration or an opinion of counsel that
an exemption from registration is available. Subject to the Company's Amended
and Restated Articles of Incorporation, certificates for the shares of Common
Stock required to be issued hereunder shall be delivered to the Lender within a
reasonable time, not exceeding ten days, after the Company shall have become
obligated to issue such shares pursuant to Section 1(a) hereof.<PAGE>
2. Reservation of Shares.
The Company covenants and agrees that the shares of Common Stock issuable
hereunder will, upon such issuance in accordance herewith, be duly authorized,
validly issued, fully paid and nonassessable (except as set forth in Section
180.0622(2)(b), Wis. Stats., as amended and interpreted) and free from all
taxes, liens and charges. The Company further covenants and agrees that, prior
to the Termination Date (as hereinafter defined) it will at all times have
authorized and reserved a sufficient number of shares of its Common Stock to
provide for the issuance of the shares required by this Agreement.
3. Issuance of Preferred Stock. Prior to the Termination Date, the Company
will not issue any capital stock of any class preferred as to dividends or as
to the distribution of assets upon voluntary or involuntary liquidation,
dissolution or winding up, unless the rights of the holders thereof shall be
limited to a fixed sum or percentage of par value in respect of participation
in dividends and in the distribution of such assets.
4. Anti-Dilution Provisions. The above provisions are, however, subject to
the following:
(a) If any capital reorganization or reclassification of the capital stock of
the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Lender shall hereafter have the right to receive upon
the basis and upon the terms and conditions specified in this Agreement and in
lieu of the shares of the Common Stock of the Company immediately theretofore
receivable hereunder, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore receivable hereunder had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any
such case appropriate provision shall be made with respect to the rights and
interests of the Lender hereunder to the end that the provisions hereof shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter issuable hereunder. The Company shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument executed and mailed to the Lender at
the last address specified pursuant to Section 11 hereof, the obligation to
issue and deliver to the Lender such shares of stock, securities or assets as,
in accordance with the foregoing provisions, he may be entitled to receive.
5. Certain Events. If any event occurs as to which the provisions for the
issuance of Common Stock set forth in this Agreement are not strictly
applicable or, if strictly applicable would not fairly protect the rights of
the Lender in accordance with the essential intent and principles of such
provisions, then the Board of Directors of the Company shall make an adjustment
in the application of such provisions, in accordance with such essential intent
and principles, so as to protect the Lender's rights as aforesaid.<PAGE>
6. Termination Date. The obligation of the Company to issue, and the right
of the Lender to receive, Common Stock pursuant to this Agreement shall
terminate at such time as the Company shall have made payment in full of the
Note, and such payments are not subject to any right of recovery (the
_Termination Date").
7. Issue Tax. The issuance of certificates for shares of Common Stock
pursuant to this Agreement shall be made without charge to the Lender for any
issuance tax in respect thereof.
8. Registration Rights. All references in this Section 8 to Common Stock
shall be deemed to include Other Securities as applicable.
8.1 Demand Registration. At any time following the issuance of Common Stock
pursuant to this Agreement, the Lender may demand registration under the
Securities Act of all or part of the Common Stock which has been issued
pursuant to this Agreement, on Form S-1 or any similar long-form registration
or, in the Company's sole discretion, on Form S-2 or S-3 or any similar
short-form registration, if available under applicable rules of the SEC. The
written request to be delivered by the Lender to the Company pursuant to this
Section 8.1 shall (i) specify the number of shares intended to be offered and
sold by the Lender, (ii) express the present intent of the Lender to offer such
shares for distribution, and (iii) describe the nature and method of the
proposed offer and sale thereof. The registration requested pursuant to this
Section 8.1 is referred to herein as _Demand Registration_, which term shall
also include any Demand Registration as defined in any of the Lender Stock
Documents referenced in Section 8.1(a) hereof.
(a) Number of Registrations. Notwithstanding any contrary provision contained
in this Agreement (except the last sentence of this Section 8.1(a) which shall
continue to apply), the Note Purchase and Warrant Agreement between the Company
and Stephen M. Dearholt of even date, the Warrant issued by the Company to
Stephen M. Dearhold as of even date, the Note Purchase and Warrant Agreement
between the Company and Stephen M. Dearholt dated as of March 25, 1997, the
Warrant issued by the Company to Stephen M. Dearholt dated as of March 25,
1997, the Note Purchase and Warrant Agreement by and among the Company and
Stephen M. Dearholt dated as of March 25, 1996, the Warrant issued by the
Company to Stephen M. Dearholt dated as of March 25, 1996, and the Warrant
issued by the Company to Stephen M. Dearholt dated as of November 21, 1995
(collectively the _Lender Stock Documents_), the Lender shall be entitled to an
unlimited number of Demand Registrations under all such documents, and shall be
entitled to include all or part of the stock received under any or all of such
documents in any Demand Registration; provided, however, that, except for
Demand Registrations requested pursuant to the last sentence of this Section
8.1(a), any such Demand Registration shall include at least two hundred
thousand (200,000) shares of Common Stock (subject to adjustment pursuant to
Section 4(a)). A registration initiated as a Demand Registration may be
withdrawn at any time at the request of the Lender; provided that in the event
a registration initiated as a Demand Registration is so withdrawn, all
registration expenses in connection with such withdrawn registration shall be
paid by the Lender. In the event the Lender shall pledge or assign his rights
and interests to all or part of the Common Stock issued to him hereunder or
issued to him upon the exercise of his rights under any of the Lender Stock
Documents as collateral pursuant to a borrowing, the rights to Demand
Registrations hereunder may be assigned and transferred to a lender (and only
one lender at any given time) in connection therewith and said lender shall be
entitled to request such Demand Registrations at any time without regard to the<PAGE>
two hundred thousand (200,000) share minimum under the first sentence of this
Section 8.1(a) and notwithstanding the provisions of the first sentence of
Section 8.1(c) below.
(b) Priority on Demand Registration. The Company will not include in the
Demand Registration any securities which are not Common Stock owned by the
Lender, without the written consent of the Lender. If the Demand Registration
is an underwritten offering, and the managing underwriters advise the Company
in writing that in their opinion the number of shares of Common Stock requested
to be included exceeds the number of shares of Common Stock which can be sold
in such offering without adversely affecting the market price of the Company's
Common Stock, the Company will include in such registration, prior to the
inclusion of any securities which are not shares of Common Stock owned by the
Lender, the number of shares of Common Stock owned by the Lender requested to
be included which in the opinion of such underwriters can be sold without such
adverse affect; and the balance of the shares of Common Stock which the Lender
requested to be included in such offering shall be withheld from sale for a
period of time requested by the underwriters, but not to exceed one hundred
twenty (120) days.
(c) Restrictions on Demand Registration. Subject to the last sentence of
Section 8.1(a), the Company will not be obligated to effect a Demand
Registration within one hundred twenty (120) days after the effective date of a
registration in which the Lender was given an opportunity to participate in a
registered offering pursuant to Section 8.2. The Company may postpone for up
to ninety (90) days the filing or the effectiveness of a registration statement
for a Demand Registration if the Company and the Lender reasonably and in good
faith agree that such Demand Registration might have an adverse effect on any
proposal or plan by the Company to engage in any financing, acquisition of
assets (other than in the ordinary course of business) or any corporate
reorganization, merger, consolidation, tender offer or similar transaction.
(d) Selection of Underwriters. If the Demand Registration involves an
underwritten public offering, the Company will have the right to select the
investment banker(s) and manager(s) to administer the offering, subject to the
Lender's approval (which will not be unreasonably withheld) of such investment
banker(s) and managers(s).
8.2 Participation in Registered Offerings. If the Company at any time or
times proposes or is required to register any of its Common Stock or other
equity securities for public sale in an underwritten public offering for cash
(other than in connection with any stock option, bonus or other employee
benefit plan or arrangement) under the Securities Act or any applicable state
securities law, it will each such time give written notice to the Lender of its
intention to do so. Upon the written request of the Lender given within thirty
(30) business days after receipt of any such notice (which request shall state
the intended method of disposition of such equity securities and shall state in
reasonable detail, to the extent practicable, the net consideration, after all
commissions and discounts which the prospective seller expects to receive upon
such disposition), the Company shall use all reasonable efforts to cause all
such Common Stock issued hereunder which the Lender so requested to be
registered (which request will not be for less than two hundred thousand
(200,000) shares of Common Stock to be registered under the Securities Act and
any applicable state securities laws (provided, that if the managing
underwriter advises that less than all of the registered shares of equity
securities should be offered for sale so as not to materially and adversely
affect the price or salability of the offering being registered by the Company<PAGE>
or the Lender for a period not to exceed one hundred twenty (120) days, the
Lender will withhold from sale for such period of time such number of shares of
Common Stock as the underwriter may specify; provided further that a pro rata
number of shares proposed to be offered by the Company and all other
shareholders of the Company also shall be similarly withheld from sale), all to
the extent requisite to permit the sale or other disposition (in accordance
with the intended method of disposition thereof as aforesaid) by the
prospective seller or sellers of the securities so registered. In the event an
underwriter is involved with a registration initiated by the Company of the
Common Stock, and the Lender requests to participate in the registration, the
Lender must commit to sell through the underwriter. The Company may, in its
sole discretion, withdraw any registration contemplated by this Section 8.2 and
abandon the proposed offering in which the Lender had requested to participate
without any further obligation to the Lender with respect to such registration
statement or offering; provided however that the Lender shall be indemnified by
the Company for any fees, costs and expense of and incidental to such
registration, excluding the fees and disbursements of counsel acting solely on
behalf of the Lender.
8.3 Obligations of The Lender. It shall be a condition precedent to the
obligation of the Company to register any Common Stock pursuant to Sections 8.1
and 8.2 hereof that the Lender shall (i) furnish to the Company such
information regarding the Common Stock held by him and the intended method of
disposition thereof and other information concerning the Lender as the Company
shall reasonably request and as shall be required in connection with the
registration statement to be filed by the Company; (ii) agree to abide by such
additional or customary terms affecting the proposed offering as reasonably may
be requested by the managing underwriter of such offering, including a
requirement, if applicable, to withhold (on a pro-rata basis) from the public
market for a period of at least one hundred twenty (120) days after any such
offering, any shares excluded from the offering at the instance of the
underwriter as permitted under Sections 8.1 and 8.2 hereof; and (iii) agree in
writing in form satisfactory to the Company to pay the underwriting discounts
and commissions applicable to the Common Stock being sold by the Lender.
8.4 Registration Proceedings. If and whenever the Company is required by the
provisions of Sections 8.1 and 8.2 hereof to effect the registration of the
Common Stock under the Securities Act, until the securities covered by such
registration statement have been sold or for six (6) months after
effectiveness, whichever is the shorter period of time, the Company shall:
(a) Promptly prepare and file with the SEC a registration statement with
respect to such Common Stock and use all reasonable efforts to cause such
registration statement to become effective as soon as practicable after the
filing thereof and to remain effective, subject to the Company's right to
withdraw any registration contemplated by Section 8.2 hereof;
(b) Prepare and file with the SEC such amendments to such registration
statement and supplements to the prospectus contained therein as may be
necessary to keep such registration statement effective;
(c) Furnish to the Lender and to the underwriters of the securities being
registered such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
underwriters may reasonably request in order to facilitate the public offering
of such securities;<PAGE>
(d) Use all reasonable efforts to register or qualify the securities covered
by such registration statement under such state securities or _Blue Sky" laws
of such jurisdictions as the Lender may reasonably request within twenty (20)
days prior to the original filing of such registration statement, except that
the Company shall not for any purpose be required to qualify to do business as
a foreign corporation in any jurisdiction wherein it is not so qualified, and
except that the Company shall not be required to so register or qualify in more
than twenty (20) such jurisdictions if in the good faith judgment of the
managing underwriter such additional registrations or qualifications would be
unreasonably expensive or harmful to the consummation of the proposed offering;
(e) Notify the Lender, promptly after it shall receive notice thereof, of the
time when such registration statement has become effective or a supplement to
any prospectus forming a part of such registration statement has been filed;
(f) Notify the Lender promptly of any request by the SEC for the amending or
supplementing of such registration statement or prospectus or for additional
information;
(g) Prepare and file with the SEC, promptly upon the request of the Lender,
any amendments or supplements to such registration statement or prospectus
which, in the opinion of counsel for the Lender and counsel for the underwriter
or manager of the offering, are required under the Securities Act or the rules
and regulations thereunder in connection with the distribution of Common Stock
by the Lender;
(h) Prepare and promptly file with the SEC and promptly notify the Lender of
the filing of such amendment or supplement to such registration statement or
prospectus as may be necessary to correct any statements or omissions if, at
the time when a prospectus relating to such securities is required to be
delivered under the Securities Act, any event shall have occurred as the result
of which any such prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading;
(i) In case the Lender or any underwriter for the Lender is required to
deliver a prospectus at a time when the prospectus then in circulation is not
in compliance with the Securities Act, the Company will prepare and file such
supplements or amendments to such registration statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
the Securities Act;
(j) Advise the Lender, promptly after it shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the SEC suspending the
effectiveness of such registration statement or the initiation or threatening
of any proceeding for that purpose and promptly use all reasonable efforts to
prevent the issuance of any stop order or to obtain its withdrawal if such stop
order should be issued;
(k) Not file any amendment or supplement to such registration statement or
prospectus to which the Lender shall reasonably have objected on the grounds
that such amendment or supplement does not comply in all material respects with
the requirements of the Securities Act or the rules and regulations thereunder,
after having been furnished with a copy thereof at least two (2) business days
prior to the filing thereof; and<PAGE>
(l) At the request of the Lender (i) use all reasonable efforts to obtain and
furnish on the effective date of the registration statement or, if such
registration includes an underwritten public offering, at the closing provided
for in the underwriting agreement, an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, addressed to
the underwriters, if any, and to the Lender, which shall contain such opinions
as are customary in an underwritten public offering, or, if the offering is not
underwritten, shall state that such registration statement has become effective
under the Securities Act and that (or substantially to the effect that): (a)
to the best of such counsel's knowledge, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Securities Act; (b)
the registration statement, related prospectus and each amendment or supplement
thereto comply as to form in all material respects with the requirements of the
Securities Act and applicable rules and regulations of the SEC thereunder
(except that such counsel need express no opinion as to financial statements,
schedules or other financial or statistical data contained therein); (c) such
counsel has no reason to believe that either the registration statement or the
prospectus or any amendment or supplement thereto (other than financial
statements and schedules or financial and statistical data, as to which such
counsel need not comment) contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; (d) the description in the
registration statement or prospectus or any amendment or supplement thereto of
all legal and governmental matters and all contracts and other legal documents
or instruments described therein are accurate in all material respects; and (e)
such counsel does not know of any legal or governmental proceedings, pending or
threatened, required to be described in the registration statement or
prospectus or any amendment or supplement thereto which are not described as
required, nor of any contracts or documents or instruments of the character
required to be described in the registration statement or prospectus or
amendment or supplement thereto or to be filed as exhibits to the registration
statement, which are not described and filed as required; and (ii) use all
reasonable efforts to obtain letters dated on such effective date, and such
closing date, if any, from the independent certified public accountants of the
Company, addressed to the underwriters, if any, and to the Lender, stating that
they are independent certified public accountants within the meaning of the
Securities Act and dealing with such matters as the underwriters may request,
or, if the offering is not underwritten, stating that in the opinion of such
accountants, the financial statements and other financial data pertaining to
the Company included in the registration statement or the prospectus or any
amendment or supplement thereto comply in all material respects with the
applicable accounting requirements of the Securities Act; such opinion of
counsel shall additionally cover such legal matters with respect to the
registration and with respect to which such opinion is being given as the
Lender may reasonably request; such letter from the independent certified
public accountants shall additionally cover such other financial matters,
including information as to the period ending not more than five (5) business
days prior to the date of such letter, with respect to the registration
statement and prospectus, as the Lender may reasonably request.
8.5 Expenses. With respect to each inclusion of Common Stock of the Lender in
a registration statement pursuant to Sections 8.1 and 8.2 hereof, all
registration expenses, fees, costs and expenses of and incidental to such
registration, including any pubic offering in connection therewith, shall be
borne by the Company (including the fees and disbursements of advisors retained
by the Lender and counsel acting solely on behalf of the Lender); provided,<PAGE>
however, that the Lender shall bear his pro rata share of the underwriting
discount and commissions. The fees, costs and expenses of registration to be
borne by the Company shall include, without limitation, all registration,
filing and NASD fees, printing expenses, fees and disbursements of counsel and
accountants for the Company (including the cost of any special audit requested
in order to effect such registration), fees and disbursements of counsel for
the underwriter or underwriters of such securities (if the Company and/or
selling security holders are required to bear such fees and disbursements), all
legal fees and disbursements and other expenses of complying with state
securities or "Blue Sky_ laws of any jurisdiction in which the securities to be
offered are to be registered or qualified.
8.6 Indemnification of The Lender. Subject to the conditions set forth below,
in connection with any registration of securities pursuant to Sections 8.1 or
8.2 hereof, the Company agrees to indemnify and hold harmless the Lender as
follows:
(a) Against any and all loss, claim, damage and expense whatsoever arising out
or based upon (including, but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing or defending any litigation,
commenced or threatened, or any claim whatsoever based upon) any untrue or
alleged untrue statement of a material fact contained in any preliminary
prospectus (if used prior to the effective date of the registration statement),
the registration statement or the final prospectus (as from time to time
amended and supplemented if the Company shall have filed with the SEC any
amendment thereof or amendment thereto) if used within the period during which
the Company is required to keep the registration statement or prospectus
current, or in any application or other document executed by the Company or
based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Company's securities under the securities
laws thereof; or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; or any
other violation of applicable federal or state statutory or regulatory
requirements or limitations relating to action or inaction by the Company in
the course of preparing, filing, or implementing such registered offering;
provided, however, that the indemnity agreement contained in this Section
8.6(a) shall not apply to any loss, claim, damage, liability or action arising
out of or based upon any untrue or alleged untrue statement or omission made in
reliance upon and in conformity with any information furnished in writing to
the Company by or on behalf of the Lender expressly for use in connection
therewith;
(b) Subject to the proviso contained in the last sentence of Section 8.6(a)
above, against any and all loss, liability, claim, damage and expense
whatsoever to the extent of the aggregate amount paid in settlement of any
litigation, commenced or threatened, or of any claim whatsoever based upon any
such untrue statement or omission or any such alleged untrue statement or
omission (including, but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing or defending against any such
litigation or claim) if such settlement is effected with the written consent of
the Company and no indemnity shall inure to the benefit of the Lender if the
person asserting the claim failed to receive a copy of the final prospectus at
or prior to the written confirmation of the sale of shares of Common Stock to
such person if the untrue statement or omission had been corrected in such
final prospectus and the failure to receive such final prospectus is not a
necessary element of such person's claim;<PAGE>
(c) In no case shall the Company be liable under this indemnity agreement with
respect to any claim made against the Lender unless the Company shall be
notified, by letter or by telegram confirmed by letter, of any claim made or
action commenced against him, reasonably promptly (but in any event within
twenty (20) days of receipt of such claim or, in the event that any summons or
other service of process requires a responsive pleading within thirty (30) days
or less time, within ten (10) days after receipt of such summons or other
process) after the Lender shall have received notice of such claim or been
served with the summons or other legal process giving information as to the
nature and basis of the claim, but failure to so notify the Company shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. The Company shall be entitled to participate at its
own expense in the defense of any suit brought to enforce any such claim, but
if the Company elects to assume the defense, such defense shall be conducted by
counsel chosen by it, provided that such counsel is reasonably satisfactory to
the Lender. In the event the Company elects to assume the defense of any such
suit and retain such counsel, the Lender shall, after the date the Lender is
notified of such election, bear the fees and expenses of any counsel thereafter
retained by the Lender as well as any other expenses thereafter incurred by the
Lender in connection with the defense thereof; provided, however, that the
Company shall bear the fees and expenses of any such separate counsel retained
by the Lender if the counsel representing the Company has a conflict of
interest (which is not waived) with the Lender which would prohibit such
counsel from representing the Lender.
8.7 Indemnification of Company. In connection with any registered offering
pursuant to Section 8.1 and 8.2 above, the Lender agrees to indemnify and hold
harmless the Company and each of the officers and directors and agents of it
and each other person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act against any and all such losses, liabilities,
claims, damages and expenses as are indemnified against by the Company under
Section 8.6 hereof; provided, however, that such indemnification shall be
limited to statements or omissions, if any, made (or in settlement of any
litigation effected with the written consent of the Lender alleged to have been
made) in any preliminary prospectus, the registration statement or prospectus
or any amendment or supplement thereof or any application or other document in
reliance upon, and in conformity with, written information furnished in respect
of the Lender, by or on behalf of the Lender expressly for use in any
preliminary prospectus, the registration statement or prospectus or any
amendment or supplement thereof or in any such application or other document.
In case any action shall be brought against the Company, or any other person so
indemnified based on any preliminary prospectus, the registration statement or
prospectus or any amendment or supplement thereof or any such application or
other documents, in respect of which indemnity may be sought against the
Lender, it shall have the rights and duties given to the Company, and each
other person so indemnified shall have the rights and duties given to the
Lender, by the provisions of Section 8.6(c) hereof. The Company agrees to
notify the Lender promptly after the assertion of any claim against the Company
in connection with the sale of securities covered by this Agreement.
8.8 Future Registration Rights. The Company may agree with its shareholders
other than the Lender to allow their participation in any registered offering
which may be requested pursuant to Section 8.1 hereof, provided all such rights
of participation by shareholders other than the Lender shall be subordinated to
the rights of the Lender herein, in a manner reasonably satisfactory to the
Lender and his counsel.<PAGE>
9. Definitions. When used in this Agreement, the following terms shall have
the meanings specified:
(a) "Affiliate" shall mean any Person directly or indirectly controlling,
controlled by or under direct or indirect common control with another Person.
A Person shall be deemed to control a corporation if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such corporation, whether through the ownership of
voting securities, by contract or otherwise.
(b) "Common Shares" shall mean and include the Company's presently authorized
shares of Common Stock and shall also include any capital stock of any class of
the Company hereafter authorized which shall not be limited to a fixed sum or
percentage of par value in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Company; provided
that the shares issuable pursuant to this Agreement shall include shares
designated as Common Stock of the Company on the date hereof or, in case of any
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in Section 4(a) hereof.
(c) _Common Stock" shall mean the common stock, $.01 par value per share, of
the Company.
(d) "Other Securities", as used in Section 8 hereof, shall mean any stock
(other than Common Stock) and other securities of the Company or any other
Person (corporate or otherwise) which the Lender at any time shall be entitled
to receive, or shall have received, under this Agreement, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall have
been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 hereof or otherwise.
(e) "Person" shall mean and include an individual, partnership, corporation,
trust, joint venture, incorporated organization and a government or any
department or agency thereof.
(f) "Termination Date" shall have the meaning assigned thereto in Section 6
hereof.
10. Descriptive Headings. The descriptive headings of the several sections of
this Agreement are inserted for convenience only and do not constitute a part
of this Agreement.
11. Notices. Any notice or other communication pursuant to this Agreement
shall be in writing and shall be deemed sufficiently given upon receipt, if
personally delivered or telecopied (with receipt acknowledged), or if mailed,
upon deposit with the United States Postal Service by first class, certified or
registered mail, postage prepaid, return receipt requested, addressed as
follows:
(a) If to the Company, to The Female Health Company, 919 North Michigan
Street, Suite 2208, Chicago, Illinois 60611, Attention: Secretary, or such
other address as the Company has designated in writing to the Lender.<PAGE>
(b) If to the Lender, to Stephen Dearholt, Insurance Processing Center, 741
North Milwaukee Street, Milwaukee Wisconsin 53202 or to such other address as
The Lender has designated in writing to the Company.
12. Governing Law: Consent to Jurisdiction. The Company and the Lender each
hereby consents to the exclusive jurisdiction of any state or federal court
situated in Milwaukee County, Wisconsin, and waives any objection based on lack
of personal jurisdiction, improper venue or forum non conveniens, with regard
to any actions, claims, disputes or proceedings relating to this Agreement, or
any document delivered hereunder or in connection herewith, or any transaction
arising from or connected to any of the foregoing. Nothing herein shall affect
either party's right to serve process in any manner permitted by law, or limit
either party's right to bring proceedings against the other or their property
or assets in the competent courts of any other jurisdiction or jurisdictions.
This Agreement shall be construed and interpreted in accordance with the
internal laws of the State of Wisconsin.
13. Successors and Assigns. The provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
14. Further Assurances. The Company agrees that it will execute and record
such documents as the Lender shall reasonably request to secure for the Lender
any of the rights represented by this Agreement.
15. 1997 Stock Issuance Agreement. This Agreement supersedes and replaces the
1997 Stock Issuance Agreement in its entirety, which shall be of no further
force or effect as of the date hereof.
16. Entire Agreement: Amendment and Modifications. This Agreement constitutes
the entire agreement between the Lender and the Company with respect to the
subject matter hereof, superseding all previous communications and
negotiations, and no representation, understanding, promise or condition
concerning the subject matter hereof shall be binding upon either party unless
expressed herein. This Agreement may be amended, modified or supplemented only
by written agreement of the Company and the Lender.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE FEMALE HEALTH COMPANY
By: ______________________
______________________
Chairman of the Board
and Chief Executive
Officer
___________________________
Stephen M. Dearholt<PAGE>
EXHIBIT 10.1
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAW. THIS WARRANT AND ANY
INTEREST HEREIN MAY BE OFFERED, TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF ONLY
IF REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IF AN EXEMPTION
FROM REGISTRATION IS AVAILABLE, AND ONLY IN STRICT COMPLIANCE WITH APPLICABLE
STATE SECURITIES LAWS AND REGULATIONS.
WARRANT
FOR THE PURCHASE OF
COMMON STOCK
OF
THE FEMALE HEALTH COMPANY, INC.
Warrant Number 6
THIS CERTIFIES THAT, FOR VALUE RECEIVED, Stephen M. Dearholt, or assigns, is
entitled to subscribe for and purchase from The Female Health Company, Inc. a
Wisconsin corporation (the Company"), 200,000 shares of the fully paid and
non-assessable shares of Common Stock, $.01 par value per share, of the
Company, at the Purchase Price (as hereinafter defined) per share.
This Warrant and all warrants issued in substitution or exchange for all or
part hereof are herein individually called a _Warrant_ and collectively the
_Warrants".
1. Definitions. When used in this Warrant, the following terms shall
have the meanings specified:
(a) "Affiliate" shall mean any Person directly or indirectly controlling,
controlled by or under direct or indirect common control with another Person.
A Person shall be deemed to control a corporation if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such corporation, whether through the ownership of
voting securities, by contract or otherwise.
(b) "Common Shares" shall mean and include the Company's presently authorized
shares of Common Stock and shall also include any capital stock of any class of
the Company hereafter authorized which shall not be limited to a fixed sum or
percentage of par value in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Company; provided
that the shares purchasable pursuant to this Warrant shall include shares
designated as Common Stock of the Company on the date of original issue of this<PAGE>
Warrant or, in case of any reclassification of the outstanding shares thereof,
the stock, securities or assets provided for in Section 5(a) hereof.
(c) "Common Stock" shall mean the common stock, $.01 par value per share, of
the Company.
(d) "Expiration Date" shall mean the earliest to occur of the following: (i)
the exercise of all of the rights to purchase Common Stock represented by this
Warrant; or (ii) March 25, 2006.
(e) _Holder_ shall mean Stephen M. Dearholt and any permitted transferee or
assignee of all or part of this Warrant and the rights hereunder; provided
that, as used in Section 12 hereof such term shall also include any holder or
holders of Common Stock (or Other Securities) issued on the exercise of this
Warrant other than Persons who received such Common Stock (or Other Securities)
in a public offering or pursuant to Rule 144 promulgated under the Securities
Act of 1933, as amended.
(f) "Holder Group_ shall have the meaning assigned thereto in Section 10
hereof.
(g) "Purchase Price" shall mean the per share purchase price of $2.25 (subject
to adjustment under Section 5) to be paid for shares of Common Stock purchased
pursuant to the exercise of this Warrant.
(h) _Other Securities", as used in Section 12 hereof, shall mean any stock
(other than Common Stock) and other securities of the Company or any other
Person (corporate or otherwise) which the Holder of this Warrant at any time
shall be entitled to receive, or shall have received, on the exercise of this
Warrant, in lieu of or in addition to Common Stock, or which at any time shall
be issuable or shall have been issued in exchange for or in replacement of
Common Stock or Other Securities pursuant to Section 5 hereof or otherwise.
(i) "Person shall mean and include an individual, partnership, corporation,
trust, joint venture, incorporated organization and a government or any
department or agency thereof.
2. Exercise: Issuance of Certificates: Payment for Shares. This Warrant
may be exercised by the Holder, in whole or in part, at any time and from time
to time on or after March 25, 1998, by the surrender of this Warrant (properly
endorsed if required), and payment by the Holder to the Company of the Purchase
Price for each share of Common Stock purchased with respect to such exercise by
wire transfer or certified or cashiers check. Upon such surrender and payment,
the Holder shall be entitled to receive a certificate or certificates
representing the shares of Common Stock so purchased, which certificate(s) may
contain a standard legend indicating that such shares have not been registered
under the Securities Act and prohibiting resale thereof without registration or
an opinion of counsel that an exemption from registration is available. The
Company agrees that the shares so purchased shall be deemed to be issued to the
Holder as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been surrendered and payment made for
such shares as aforesaid. Subject to the Company's Amended and Restated
Articles of Incorporation, certificates for the shares of Common Stock so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding ten days, after the rights represented by this Warrant shall have
been so exercised. If the rights of the Holder of this Warrant are exercised
in part, the number of shares of Common Stock which thereafter may be purchased<PAGE>
pursuant to this Warrant shall be reduced accordingly and the Company shall
reissue a Warrant or Warrants of like tenor representing in the aggregate the
right to purchase the number of shares of Common Stock as so reduced.
3. Affirmative Covenants.
(a) The Company covenants and agrees that the shares of Common Stock issuable
upon exercise of the rights represented by this Warrant will, upon such
exercise and issuance in accordance herewith, be duly authorized, validly
issued, fully paid and nonassessable (except as set forth in Section
180.0622(2)(b), Wis. Stats., as amended and interpreted) and free from all
taxes, liens and charges with respect to the issue. The Company further
covenants and agrees that, until the Expiration Date, the Company will at all
times have authorized, and reserved for the purpose of issue upon total or
partial exercise of the rights represented by this Warrant, a sufficient number
of shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant.
(b) The Company further covenants and agrees that, until the Expiration Date,
the Company will deliver to the Holder copies of all reports and information
filed by the Company with the Securities and Exchange Commission ("SEC")
pursuant to the Securities Exchange Act of 1934, as amended, within 10 days
after receiving a written request from the Holder.
4. Issuance of Preferred Stock. So long as this Warrant remains
outstanding, the Company will not issue any capital stock of any class
preferred as to dividends or as to the distribution of assets upon voluntary or
involuntary liquidation, dissolution or winding up, unless the rights of the
holders thereof shall be limited to a fixed sum or percentage of par value in
respect of participation in dividends and in the distribution of such assets.
5. Anti-Dilution Provisions. The above provisions are, however, subject
to the following:
(a) If any capital reorganization or reclassification of the capital stock of
the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder hereof shall hereafter have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the Holder
of this Warrant to the end that the provisions hereof shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof, together with such
adjustment in the Purchase Price as may be applicable with respect thereto so
that the aggregate price to be paid for shares issued pursuant to this Warrant<PAGE>
shall be neither increased nor decreased. The Company shall not effect any
such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument executed and mailed to the Holder hereof at the last
address of such Holder appearing on the books of the Company, the obligation to
deliver to such Holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such Holder may be entitled to
purchase.
(b) In case any time:
(l) the Company shall declare any cash dividend on its Common Stock at a rate
in excess of the rate of the last cash dividend theretofore paid;
(2) the Company shall pay any dividend payable in stock upon its Common Stock,
make any distribution (other than regular cash dividends) to the holders of its
Common Stock or redeem any shares of its Common Stock;
(3) the Company shall offer for subscription pro rata to the holders of its
Common Stock any additional shares of stock of any class or other rights;
(4) there shall be any capital reorganization, reclassification of the capital
stock of the Company, or consolidation or merger of the Company with, or sale
of all or substantially all of its assets to another corporation; or
(5) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first class mail, postage prepaid, addressed to the Holder of this Warrant
at the address of such Holder as shown on the books of the Company, of the date
on which (aa) the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights, or (bb) such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall also specify the date as of which the holders of Common Stock of record
shall participate in such dividend distribution or subscription rights, or
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be. Such
written notice shall be given at least 15 days prior to the action in question
and not less than 15 days prior to the record date or the date on which the
Company's transfer books are closed in respect thereto.
6. Certain Events. If any event occurs as to which the provisions of
this Warrant are not strictly applicable or, if strictly applicable would not
fairly protect the rights of the Holder in accordance with the essential intent
and principles of such provisions, then the Board of Directors of the Company
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect the Holder's rights
as aforesaid.
7. Term of Warrant. This Warrant shall remain outstanding and
exercisable until the Expiration Date. To the extent not previously exercised,
the rights to purchase Common Stock represented by this Warrant shall thereupon
terminate.<PAGE>
8. Issue Tax. The issuance of certificates for shares of Common Stock
upon the total or partial exercise of this Warrant shall be made without charge
to the Holder for any issuance tax in respect thereof.
9. Closing of Books. The Company will at no time close its transfer
books against the transfer of this Warrant or act in any manner which
interferes with the timely exercise of the rights represented by this Warrant.
10. Transfer of Warrant. Subject to any registration or qualification
requirements under the Securities Act and applicable state securities laws,
this Warrant and all rights hereunder are transferable, in whole or in part,
without charge to the Holder, by the Holder in person or by duly authorized
attorney, upon surrender of this Warrant to the Company properly endorsed;
provided that the Company may require in connection with such transfer an
opinion of counsel to the effect that such transfer qualifies for an exemption
from the registration requirements of the Securities Act. If this Warrant is
transferred in part in accordance with the terms hereof, the Company shall
reissue a Warrant or Warrants of like tenor representing in the aggregate the
right to purchase the number of shares of Common Stock represented by this
Warrant immediately prior to such transfer and thereafter the Holder and all
transferees and assignees shall constitute the "Holder Group_ for purposes of
Section 12 hereof.
11. No Voting Rights. This Warrant shall not entitle the Holder to any voting
rights as a shareholder of the Company.
12. Registration Rights. All references in this Section 12 to Common Stock
shall be deemed to include Other Securities as applicable.
12.1 Demand Registration. At any time (whether before or after the Expiration
Date) following the exercise of the right to purchase Common Stock pursuant to
this Warrant, a Holder may demand registration under the Securities Act of
1933, as amended (the "Securities Act") of the resale of all or part of the
Common Stock issuable or which has been issued upon exercise of this Warrant,
on Form S-1 or any similar long-form registration or, in the Company's sole
discretion, on Form S-2 or S-3 or any similar short-form registration, if
available under applicable rules of the SEC. If such request is made by less
than all Holders, the Company shall send written notice of such registration
request to the remaining Holders within 15 days of receipt of the initial
registration request. Unless a remaining Holder shall deliver to the Company,
within 20 days after such notice is sent by the Company, a written request for
inclusion in the registration demanded by the initial request of all or part of
the Common Stock issuable or which has been issued upon exercise of the Warrant
held by such remaining Holder, all rights of such remaining Holder under this
Section 12.1 shall be terminated. The written request to be delivered by a
Holder to the Company pursuant to this Section 12.1 shall (i) specify the
number of shares intended to be offered and sold by the Holder, (ii) express
the present intent of the Holder to offer such shares for distribution, and
(iii) describe the nature and method of the proposed offer and sale thereof.
The registration requested pursuant to this Section 12.1 is referred to herein
as _Demand Registration_, which term shall also include any Demand Registration
as defined in any of the Dearholt Stock Documents referenced in Section 12.1(a)
hereof.
(a) Number of Registrations. Notwithstanding any contrary provision contained
in this document, the Note Purchase and Warrant Agreement between the Company<PAGE>
and Stephen M. Dearholt of even date, the Stock Issuance Agreement between such
parties of even date (the _1998 Stock Issuance Agreement_), the Note Purchase
and Warrant Agreement between the Company and Stephen M Dearholt dated as of
March 25, 1997, the Warrant issued by the Company to Stephen M. Dearholt dated
as of March 25, 1997, the Note Purchase and Warrant Agreement by and among the
Company and Stephen M. Dearholt dated as of March 25, 1996, the Warrant issued
by the Company to Stephen M. Dearholt dated as of March 26, 1996, and the
Warrant issued by the Company to Stephen M. Dearholt dated as of November 21,
1995 (collectively, the _Dearholt Stock Documents_), the Holder Group shall be
entitled to an unlimited number of Demand Registrations under all such Dearholt
Stock Documents, and shall be entitled to include all or part of the stock
received under any or all of such Dearholt Stock Documents in any Demand
Registration, as the Holder Group shall request from time to time; provided,
however, that, except for Demand Registrations requested pursuant to the last
sentence of this Section 12.1(a), any such Demand Registration shall include at
least two hundred thousand (200,000) shares of Common Stock (subject to
adjustment pursuant to Section 5(a)). A registration initiated as a Demand
Registration may be withdrawn at any time at the request of the Holders of a
majority of the shares of the Common Stock requested to be included in such
Demand Registration (the "Required Percentage"); provided that in the event a
registration initiated as a Demand Registration is so withdrawn, all expenses
in connection with such withdrawn registration (including, without limitation,
reasonable fees of counsel and accountants for the Company) shall be paid by
the participating Holders, pro rata. In the event Stephen M. Dearholt shall
pledge or assign his rights and interests to all or part of the Common Stock
issued to him upon exercise of this Warrant, or upon exercise of his rights
under any of the Dearholt Stock Documents, as collateral pursuant to a
borrowing, the rights to Demand Registrations hereunder may be assigned and
transferred to said lender (and only one lender at any given time) in
connection therewith, and said lender shall be entitled to request such Demand
Registrations at any time, without regard to the two hundred thousand (200,000)
share minimum under the first sentence of this Section 12.1(a), and
notwithstanding the provisions of the first sentence of Section 12.1(c) below.
(b) Priority on Demand Registrations. The Company will not include in the
Demand Registration any securities which are not Common Stock owned by a
Holder, without the written consent of the Required Percentage of Holders. If
the Demand Registration is an underwritten offering, and the managing
underwriters advise the Company in writing that in their opinion the number of
shares of Common Stock requested to be included exceeds the number of shares of
Common Stock which can be sold in such offering without adversely affecting the
market price of the Company's Common Stock, the Company will include in such
registration (pro rata from shares of Common Stock requested to be included by
each participating Holder), prior to the inclusion of any securities which are
not shares of Common Stock owned by a Holder, the number of shares of Common
Stock owned by the Holders requested to be included which in the opinion of
such underwriters can be sold without such adverse affect; and the balance of
the shares of Common Stock which Holder requested to be included in such
offering shall be withheld from sale for a period of time requested by the
underwritten, but not to exceed one hundred twenty (120) days.
(c) Restrictions on Demand Registration. Subject to the next following
sentence and the last sentence of Section 12.1(a) above, the Company will not
be obligated to effect a Demand Registration within one hundred twenty (120)
days after the effective date of a registration in which the Holder was given
an opportunity to participate in a registered offering pursuant to Section 12.2
hereof. In the event that a Holder requests to participate in a registration<PAGE>
under Section 12.2 hereof and satisfies the conditions of Section 12.3, and for
whatever reason all of the shares of Common Stock which such Holder so requests
to be registered are not registered or are not permitted to be offered for sale
and sold prior to shares of Common Stock or other equity securities being
registered and offered by the Company in such registration, then the provisions
of the first sentence of this Section 12.1(c) shall not apply, and the Company
shall be obligated to effect a Demand Registration requested by such Holder as
soon as practicable in accordance with the terms hereof. The Company may
postpone for up to ninety (90) days the filing or the effectiveness of a
registration statement for a Demand Registration if the Company and the
Required Percentage of Holders reasonably and in good faith agree that such
Demand Registration might have an adverse effect on any proposal or plan by the
Company to engage in any financing, acquisition of assets (other than in the
ordinary course of business) or any corporate reorganization, merger,
consolidation, tender offer or similar transaction.
(d) Selection of Underwriters. If the Demand Registration involves an
underwritten public offering, the Company will have the right to select the
investment banker(s) and manager(s) to administer the offering, subject to the
approval of the Required Percentage of Holders (which will not be unreasonably
withheld) of such investment banker(s) and managers(s).
12.2 Participation in Registered Offerings. If the Company at any time or
times proposes or is required to register any of its Common Stock or other
equity securities for public sale in an underwritten public offering for cash
(other than in connection with any stock option, bonus or other employee
benefit plan or arrangement) under the Securities Act or any applicable state
securities law, it will each such time give written notice to each Holder of
its intention to do so. Upon the written request of a Holder given within
thirty (30) business days after receipt of any such notice (which request shall
state the intended method of disposition of such equity securities and shall
state in reasonable detail, to the extent practicable, the net consideration,
after all commissions and discounts which the prospective seller or sellers
expect to receive upon such disposition), the Company shall use all reasonable
efforts to cause all such Common Stock which the Holder so requested to be
registered (which request will not be for less than two hundred thousand
(200,000) shares of Common Stock) to be registered under the Securities Act and
any applicable state securities laws (provided, that if the managing
underwriter advises that less than all of the registered shares of equity
securities should be offered for sale so as not to materially and adversely
affect the price or salability of the offering being registered by the Company
or the participating Holders for a period not to exceed one hundred twenty
(120) days, the participating Holders will, if requested by the Company,
withhold from sale for such period of time such number of shares of Common
Stock (pro rata from the shares of Common Stock requested to be included by the
participating Holders) as the underwriter may specify; provided further that in
such event a pro rata number of shares proposed to be offered by the Company
and all other shareholders of the Company also shall be similarly withheld from
sale), all to the extent requisite to permit the sale or other disposition (in
accordance with the intended method of disposition thereof as aforesaid) by the
prospective seller or sellers of the securities so registered. In the event an
underwriter is involved with a registration initiated by the Company of the
Common Stock, and a Holder requests to participate in the registration, the
Holder must commit to sell through the underwriter. The Company may, in its
sole discretion, withdraw any registration contemplated by this Section 12.2
and abandon the proposed offering in which a Holder had requested to
participate without any further obligation to such Holder with respect to such<PAGE>
registration statement or offering; provided however that such Holder shall be
indemnified by the Company for any fees, costs and expense of and incidental to
such registration, excluding the fees and disbursements of counsel acting
solely on behalf of such Holder.
12.3 Obligations of the Holder. It shall be a condition precedent to the
obligation of the Company to register any Common Stock of a Holder pursuant to
Sections 12.1 and 12.2 hereof that such Holder shall (i) furnish to the Company
such information regarding the Common Stock held by it and the intended method
of disposition thereof and other information concerning such Holder as the
Company shall reasonably request and as shall be required in connection with
the registration statement to be filed by the Company; (ii) agree to abide by
such additional or customary terms affecting the proposed offering as
reasonably may be requested by the managing underwriter of such offering,
including a requirement, if applicable, to withhold (on a pro-rata basis) from
the public market for a period of at least one hundred twenty (120) days after
any such offering, any shares excluded from the offering at the instance of the
underwriter as permitted under Sections 12.1 and 12.2 hereof; and (iii) agree
in writing in form satisfactory to the Company to pay the underwriting
discounts and commissions applicable to the Common Stock being sold by such
Holder (subject to the maximum amounts set forth in Section 12.5 hereof).
12.4 Registration Proceedings. If and whenever the Company is required by the
provisions of Sections 12.1 and 12.2 hereof to effect the registration of the
Common Stock under the Securities Act, until the securities covered by such
registration statement have been sold or for six (6) months after
effectiveness, whichever is the shorter period of time, the Company shall:
(a) Promptly prepare and file with the SEC a registration statement with
respect to such Common Stock and use all reasonable efforts to cause such
registration statement to become effective as soon as practicable after the
filing thereof and to remain effective, subject to the Company's right to
withdraw any registration contemplated by Section 12.2 hereof;
(b) Prepare and file with the SEC such amendments to such registration
statement and supplements to the prospectus contained therein as may be
necessary to keep such registration statement effective;
(c) Furnish to each participating Holder and to the underwriters of the
securities being registered such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as such underwriters may reasonably request in order to facilitate
the public offering of such securities;
(d) Use all reasonable efforts to register or qualify the securities covered
by such registration statement under such state securities or _Blue Sky_ laws
of such jurisdictions as the participating Holders may reasonably request
within twenty (20) days prior to the original filing of such registration
statement, except that the Company shall not for any purpose be required to
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified, and except that the Company shall not be required to so
register or qualify in more than twenty (20) such jurisdictions if in the good
faith judgment of the managing underwriter such additional registrations or
qualifications would be unreasonably expensive or harmful to the consummation
of the proposed offering;<PAGE>
(e) Notify each participating Holder, promptly after the Company shall receive
notice thereof, of the time when such registration statement has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(f) Notify each participating Holder promptly of any request by the SEC for
the amending or supplementing of such registration statement or prospectus or
for additional information;
(g) Prepare and file with the SEC, promptly upon the request of a
participating Holder, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such Holder and
counsel for the underwriter or manager of the offering, are required under the
Securities Act or the rules and regulations thereunder in connection with the
distribution of Common Stock by such Holder;
(h) Prepare and promptly file with the SEC and promptly notify each
participating Holder of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event
shall have occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
(i) In case a participating Holder or any underwriter for a Holder is required
to deliver a prospectus at a time when the prospectus then in circulation is
not in compliance with the Securities Act, the Company will prepare and file
such supplements or amendments to such registration statement and such
prospectus or prospectuses as may be necessary to permit compliance with the
requirements of the Securities Act;
(j) Advise each participating Holder, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation
or threatening of any proceeding for that purpose and promptly use all
reasonable efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
(k) Not file any amendment or supplement to such registration statement or
prospectus to which a participating Holder shall reasonably have objected on
the grounds that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or the rules and
regulations thereunder, after having been furnished with a copy thereof at
least two (2) business days prior to the filing thereof; and
(l) At the request of a participating Holder (i) use all reasonable efforts to
obtain and furnish on the effective date of the registration statement or, if
such registration includes an underwritten public offering, at the closing
provided for in the underwriting agreement, an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to each participating Holder, which
shall contain such opinions as are customary in an underwritten public
offering, or, if the offering is not underwritten, shall state that such
registration statement has become effective under the Securities Act and that
(or substantially to the effect that): (a) to the best of such counsel's<PAGE>
knowledge, no stop order suspending the effectiveness thereof has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act; (b) the registration statement, related
prospectus and each amendment or supplement thereto comply as to form in all
material respects with the requirements of the Securities Act and applicable
rules and regulations of the SEC thereunder (except that such counsel need
express no opinion as to financial statements, schedules or other financial or
statistical data contained therein); (c) such counsel has no reason to believe
that either the registration statement or the prospectus or any amendment or
supplement thereto (other than financial statements and schedules or financial
and statistical data, as to which such counsel need not comment) contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; (d) the description in the registration statement or prospectus or
any amendment or supplement thereto of all legal and governmental matters and
all contracts and other legal documents or instruments described therein are
accurate in all material respects; and (e) such counsel does not know of any
legal or governmental proceedings, pending or threatened, required to be
described in the registration statement or prospectus or any amendment or
supplement thereto which are not described as required, nor of any contracts or
documents or instruments of the character required to be described in the
registration statement or prospectus or amendment or supplement thereto or to
be filed as exhibits to the registration statement, which are not described and
filed as required; and (ii) use all reasonable efforts to obtain letters dated
on such effective date, and such closing date, if any, from the independent
certified public accountants of the Company, addressed to the underwriters, if
any, and to each participating Holder, stating that they are independent
certified public accountants within the meaning of the Securities Act and
dealing with such matters as the underwriters may request, or, if the offering
is not underwritten, stating that in the opinion of-such accountants, the
financial statements and other financial data pertaining to the Company
included in the registration statement or the prospectus or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act; such opinion of counsel shall
additionally cover such legal matters with respect to the registration and with
respect to which such opinion is being given as a participating Holder may
reasonably request; such letter from the independent certified public
accountants shall additionally cover such other financial matters, including
information as to the period ending not more than five (5) business days prior
to the date of such letter, with respect to the registration statement and
prospectus as a participating Holder may reasonably request.
12.5 Expenses. With respect to each inclusion of Common Stock of a Holder in a
registration statement pursuant to Sections 12.1 and 12.2 hereof, all
registration expenses, fees, costs and expenses of and incidental to such
registration, including any public offering in connection therewith shall be
borne by the Company (excluding the fees and disbursements of advisors retained
by the Holder and counsel acting solely on behalf of the Holder); provided,
however, that the Holder shall bear the Holder's pro rata share of the
underwriting discount and commissions (up to a maximum aggregate amount equal
to 8% of the offering price of the Holder's shares so offered). The fees,
costs and expenses of registration to be borne by the Company shall include,
without limitation, all registration, filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company (including
the cost of any special audit requested in order to effect such registration),
fees and disbursements of counsel for the underwriter or underwriters of such
securities (if the Company and/or selling security holders are required to bear<PAGE>
such fees and disbursements), all legal fees and disbursements and other
expenses of complying with state securities or blue Sky laws of any
jurisdiction in which the securities to be offered are to be registered or
qualified.
12.6 Indemnification of Holders. Subject to the conditions set forth below, in
connection with any registration of securities pursuant to Sections 12.1 or
12.2 hereof, the Company agrees to indemnify and hold harmless each Holder and
each person, if any, who controls the Holder (and the respective officers,
directors and agents of Holders), within the meaning of Section 15 of the
Securities Act, as follows:
(a) Against any and all loss, claim, damage and expense whatsoever arising out
or based upon (including, but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing or defending any litigation,
commenced or threatened, or any claim whatsoever based upon) any untrue or
alleged untrue statement of a material fact contained in any preliminary
prospectus (if used prior to the effective date of the registration statement),
the registration statement or the final prospectus (as from time to time
amended and supplemented if the Company shall have filed with the SEC any
amendment thereof or amendment thereto) if used within the period during which
the Company is required to keep the registration statement or prospectus
current, or in any application or other document executed by the Company or
based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Company's securities under the securities
laws thereof; or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; or any
other violation of applicable federal or state statutory or regulatory
requirements or limitations relating to action or inaction by the Company in
the course of preparing, filing, or implementing such registered offering;
provided, however, that the indemnity agreement contained in this Section
12.6(a) shall not apply to any loss, claim, damage, liability or action arising
out of or based upon any untrue or alleged untrue statement or omission made in
reliance upon and in conformity with any information furnished in writing to
the Company by or on behalf of the Holder expressly for use in connection
therewith;
(b) Subject to the proviso contained in the last sentence of Section 12.6(a)
above, against any and all loss, liability, claim, damage and expense
whatsoever to the extent of the aggregate amount paid in settlement of any
litigation, commenced or threatened, or of any claim whatsoever based upon any
such untrue statement or omission or any such alleged untrue statement or
omission (including, but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing or defending against any such
litigation or claim) if such settlement is effected with the written consent of
the Company and no indemnity shall inure to the benefit of the Holder or any
controlling person thereof if the person asserting the claim failed to receive
a copy of the final prospectus at or prior to the written confirmation of the
sale of shares of Common Stock to such person if the untrue statement or
omission had been corrected in such final prospectus and the failure to receive
such final prospectus is not a necessary element of such person's claim;
(c) In no case shall the Company be liable under this indemnity agreement with
respect to any claim made against the Holder or any such controlling person (or
its respective officers, directors and agents) unless the Company shall be
notified, by letter or by telegram confirmed by letter, of any claim made or<PAGE>
action commenced against such persons, reasonably promptly (but in any event
within twenty (20) days of receipt of such claim or, in the event that any
summons or other service of process requires a responsive pleading within
thirty (30) days or less time, within ten (10) days after receipt of such
summons or other process) after such person shall have received notice of such
claim or been served with the summons or other legal process giving information
as to the nature and basis of the claim, but failure to so notify the Company
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. The Company shall be entitled to
participate at its own expense in the defense of any suit brought to enforce
any such claim, but if the Company elects to assume the defense, such defense
shall be conducted by counsel chosen by it, provided that such counsel is
reasonably satisfactory to the Holder. In the event the Company elects to
assume the defense of any such suit and retain such counsel, the Holder shall,
after the date the Holder is notified of such election, bear the fees and
expenses of any counsel thereafter retained by the Holder as well as any other
expenses thereafter incurred by the Holder in connection with the defense
thereof; provided, however, that the Company shall bear the fees and expenses
of any such separate counsel retained by the Holder if the counsel representing
the Company has a conflict of interest (which is not waived) with the Holder
which would prohibit such counsel from representing the Holder.
12.7 Indemnification of Company. Each Holder participating in any registered
offering pursuant to Section 12.1 or 12.2 above agrees to indemnify and hold
harmless the Company and each of the officers and directors and agents of it
and each other person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act against any and all such losses, liabilities,
claims, damages and expenses as are indemnified against by the Company under
Section 12.6 hereof; provided, however, that such indemnification shall be
limited to statements or omissions, if any, made (or in settlement of any
litigation effected with the written consent of the Holder alleged to have been
made) in any preliminary prospectus, the registration statement or prospectus
or any amendment or supplement thereof or any application or other document in
reliance upon, and in conformity with, written information furnished in respect
of the Holder, by or on behalf of the Holder expressly for use in any
preliminary prospectus, the registration statement or prospectus or any
amendment or supplement thereof or in any such application or other document.
In case any action shall be brought against the Company, or any other person so
indemnified based on any preliminary prospectus, the registration statement or
prospectus or any amendment or supplement thereof or any such application or
other documents, in respect of which indemnity may be sought against a Holder,
it shall have the rights and duties given to the Company, and each other person
so indemnified shall have the rights and dudes given to a Holder, by the
provisions of Section 12.6(c) hereof. The Company agrees to notify the Holder
promptly after the assertion of any claim against the Company in connection
with the sale of securities covered by this Warrant.
12.8 Future Registration Rights. The Company may agree with its shareholders
other than the Holders to allow their participation in any registered offering
which may be requested pursuant to Section 12.1 hereof, provided all such
rights of participation by shareholders other than the Holders shall be
subordinated to the rights of the participating Holders herein, in a manner
reasonably satisfactory to the Required Percentage of such Holders and their
counsel.<PAGE>
13. Descriptive Headings. The descriptive headings of the several sections of
this Warrant are inserted for convenience only and do not constitute a part of
this Warrant.
14. Notices. Any notice or other communication pursuant to this Warrant shall
be in writing and shall be deemed sufficiently given upon receipt, if
personally delivered or telecopied (with receipt acknowledged), or if mailed,
upon deposit with the United States Postal Service by first class, certified or
registered mail, postage prepaid, return receipt requested, addressed as
follows:
(a) If to the Company, to The Female Health Company, 919 North Michigan
Street, Suite 2208, Chicago, Illinois 60611, Attention: Secretary, or such
other address as the Company has designated in writing to the Holder.
(b) If to the Holder, to Stephen M. Dearholt, Insurance Processing Center, 741
North Milwaukee Street, Milwaukee, Wisconsin 53202 or to such other address as
the Holder has designated in writing to the Company.
15. Replacement of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and upon
receipt of written indemnification of the Company by the Holder in form and
substance reasonably satisfactory to the Company, the Company shall execute and
deliver to the Holder a new Warrant of like date, tenor and denomination.
16. Governing Law. This Warrant shall be construed and interpreted in
accordance with the internal laws of the State of Wisconsin.
17. Successors and Assigns. The provisions of this Warrant shall be binding
upon and inure to the benefit of the Company and the Holder and their
respective successors, assigns and transferees.
18. Further Assurances. The Company agrees that it will execute and record
such documents as the Holder shall reasonably request to secure for the Holder
any of the rights represented by this Warrant.
19. Amendment and Modifications. This Warrant may be amended, modified or
supplemented only by written agreement of the Company and the Holder.
IN WlTNESS WHEREOF, The Female Health Company has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated as of March
25, 1998.
THE FEMALE HEALTH COMPANY
By: _____________________
_____________________
Chairman of the Board
and Chief Executive Officer<PAGE>
