U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-18849
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THE FEMALE HEALTH COMPANY
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(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)
875 N. Michigan Avenue, Suite 3660, Chicago, IL 60611
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(Address of Principal Executive Offices) (Zip Code)
(312) 280-1119
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(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 - 13,328,699 shares outstanding as of August 11,
2000
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND
ANALYSIS:
Cautionary Statement Regarding Forward Looking
Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Balance Sheet -
June 30, 2000 . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended June 30, 2000
and June 30, 1999 . . . . . . . . . . . . . . . . . . . . . . 5
Unaudited Condensed Consolidated
Statements of Operations -
Nine Months Ended June 30, 2000
and June 30, 1999 . . . . . . . . . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated
Statements of Cash Flows -
Nine Months Ended June 30, 2000
and June 30, 1999 . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Unaudited Condensed Consolidated
Financial Statements. . . . . . . . . . . . . . . . . . . . . 8
Management's Discussion and Analysis . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
Changes in Securities and Use of Proceeds. . . . . . . . . . . 24
Submission of Matters to a Vote of Security Holders. . . . . . 24
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
2
<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; the ultimate level of consumer demand for the female condom;
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; 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 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; 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; and the costs and other effects of
litigation, governmental investigations, legal and administrative cases and
proceedings, settlements and investigations, and developments or assertions by
or against the Company relating to intellectual property rights.
3
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
2000
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<S> <C>
ASSETS
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 395,806
Accounts receivable, net. . . . . . . . . . . . . . . . . 553,720
Inventories, net. . . . . . . . . . . . . . . . . . . . . 1,173,794
Prepaid expenses and other current assets . . . . . . . . 255,949
-------------
2,379,269
TOTAL CURRENT ASSETS
Intellectual property rights, net. . . . . . . . . . . . . . 643,281
149,681
Other assets
PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . . . 3,787,592
Less accumulated depreciation and amortization . . . . . . . (2,237,754)
-------------
Net Property, plant, and equipment . . . . . . . . . . . . 1,549,838
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 4,722,069
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable, related party, net of unamortized discount $ 1,163,522
Convertible debenture, net of unamortized discount. . . . 1,358,911
Accounts payable. . . . . . . . . . . . . . . . . . . . . 502,535
Accrued expenses and other current liabilities. . . . . . 406,686
Preferred dividends payable . . . . . . . . . . . . . . . 100,043
-------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . 3,531,697
Deferred gain on lease of facility . . . . . . . . . . . . . 1,442,800
Other long-term liabilities. . . . . . . . . . . . . . . . . 41,512
-------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . 5,016,009
STOCKHOLDERS' DEFICIT:
Convertible preferred stock. . . . . . . . . . . . . . . . . 6,600
Common stock . . . . . . . . . . . . . . . . . . . . . . . . 133,254
Additional paid-in-capital . . . . . . . . . . . . . . . . . 47,987,899
Unearned consulting compensation . . . . . . . . . . . . . . (76,360)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (48,405,221)
Accumulated other comprehensive income . . . . . . . . . . . 91,964
Treasury Stock, at cost. . . . . . . . . . . . . . . . . . . (32,076)
-------------
Total Stockholders' (Deficit). . . . . . . . . . . . . . . . (293,940)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT. . . . . . . . . $ 4,722,069
=============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . $ 1,377,932 $ 1,611,975
Cost of products sold . . . . . . . . . . . . . 1,220,769 1,585,553
Gross Profit. . . . . . . . . . . . . . . . . . 157,163 26,422
------------ ------------
Advertising & promotion . . . . . . . . . . . . 54,358 44,489
Selling, general and administrative . . . . . . 635,875 813,079
------------ ------------
Total operating expenses. . . . . . . . . . . . 690,233 857,568
------------ ------------
Operating (Loss). . . . . . . . . . . . . . . . (533,070) (831,146)
Amortization of debt issuance costs . . . . . . 31,032 69,650
Interest, net and other expense . . . . . . . . 268,690 114,225
------------ ------------
Income (Loss) before income taxes . . . . . . . (832,792) (1,015,021)
Provision for income taxes - -
------------ ------------
Net (Loss). . . . . . . . . . . . . . . . . . . $ (832,792) $(1,015,021)
Preferred dividends, Series 1 . . . . . . . . . 32,910 33,304
------------ ------------
Net (Loss) attributable to Common stockholders. $ (865,702) $(1,048,325)
============ ============
Net (Loss) Per Common Share Outstanding . . . . $ (0.07) $ (0.09)
Weighted Average Common Shares Outstanding. . . 12,824,651 11,094,925
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . $ 3,923,425 $ 3,409,695
Cost of products sold . . . . . . . . . . . . . 3,612,216 3,787,785
Gross Profit (Loss) . . . . . . . . . . . . . . 311,209 (378,090)
Advertising & promotion . . . . . . . . . . . . 169,000 219,333
Selling, general and administrative . . . . . . 2,085,001 2,129,111
------------ ------------
Total operating expenses. . . . . . . . . . . . 2,254,001 2,348,444
------------ ------------
Operating (Loss). . . . . . . . . . . . . . . . (1,942,792) (2,726,534)
Amortization of debt issuance costs . . . . . . 245,676 69,650
Interest, net and other expense . . . . . . . . 937,561 245,042
------------ ------------
Income (Loss) before income taxes . . . . . . . (3,126,029) (3,041,226)
Provision for income taxes. . . . . . . . . . . - -
------------ ------------
Net (Loss). . . . . . . . . . . . . . . . . . . $(3,126,029) $(3,041,226)
Preferred dividends, Series 1 . . . . . . . . . 99,090 102,054
------------ ------------
Net (Loss) attributable to Common stockholders. $(3,225,119) $(3,143,280)
============ ============
Net (Loss) Per Common Share Outstanding . . . . $ (0.26) $ (0.29)
Weighted Average Common Shares Outstanding. . . 12,522,230 10,719,690
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months ended June 30,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATIONS:
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . $(3,126,029) $(3,041,226)
Adjusted for noncash items:
Depreciation and amortization . . . . . . . . . . . . . 474,443 425,016
Amortization of discounts on notes payable and
convertible debentures . . . . . . . . . . . . . . . . 844,997 332,994
Changes in operating assets and liabilities . . . . . . 961,986 (526,101)
------------ ------------
Net cash (used in) operating activities. . . . . . . . . (844,603) (2,809,317)
INVESTING ACTIVITIES:
Capital expenditures, Net cash (used in)
provided by investing activities. . . . . . . . . . . . (11,579) (22,129)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from related party notes issued . . . . . . . . 1,300,000 1,300,000
Payments on notes payable, related party . . . . . . . . (1,300,000) (1,558,043)
Proceeds from the issuance of convertible debentures . . - 1,500,000
Dividend paid on preferred stock . . . . . . . . . . . . (39,002) (116,255)
Purchase of Common Stock held in Treasury. . . . . . . . - (12,746)
Proceeds from the issuance of common stock upon
exercise of options and warrants. . . . . . . . . . . . - 226,878
Proceeds from issuance of common stock . . . . . . . . . 719,500 485,000
------------ ------------
Net cash provided by financing activities. . . . . . . . 680,498 1,953,835
------------ ------------
Effect of exchange rate changes on cash. . . . . . . . . 781 256,640
------------ ------------
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . (174,903) (749,972)
Cash at beginning of period. . . . . . . . . . . . . . . 570,709 1,480,287
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . $ 395,806 $ 730,315
============ ============
Schedule of noncash financing and investing activities:
Common stock issued for payment of preferred
stock dividends and convertible debenture
interest. . . . . . . . . . . . . . . . . . . . . . . . $ 48,160 29,972
Issuance of warrants on notes payable. . . . . . . . . . 350,989 1,304,515
Common stock issued for payment of consulting services . 79,680 84,375
Preferred dividends declared, Series 1 . . . . . . . . . 99,090 100,289
</TABLE>
See notes to unaudited condensed consolidated financial statements.
7
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
-----------------------
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flow for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
Operating results for the three and nine months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended September 30, 1999.
Principles of consolidation and nature of operations:
----------------------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, The Female Health Company - UK and The Female
Health Company - UK, plc. All significant intercompany transactions and accounts
have been eliminated in consolidation. The Female Health Company ("FHC" or the
"Company") is currently engaged in the marketing, manufacture and distribution
of a consumer health care product known as the Reality female condom, "Reality,"
in the U.S. and "femidom" or "femy" outside the U.S. The Female Health Company -
UK, is the holding company of The Female Health Company - UK, plc, which
operates a 40,000sq. ft. leased manufacturing facility located in London,
England.
Reclassifaction:
---------------
Certain expenses on the statements of income for the quarter and nine months
ended June 30, 1999 have been reclassified to be consistent with the
presentation shown for the quarter and nine months ended June 30, 2000.
NOTE 2 - Earnings Per Share
--------------------
Earnings per share (EPS): Basic EPS is computed by dividing income available to
-------------------------
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential common
shares consist of the incremental common shares issuable upon conversion of
convertible preferred or convertible debt and the exercise of stock options and
warrants for all periods. Fully diluted (loss) per share is not presented since
the effect would be anti-dilutive.
NOTE 3 - Comprehensive Income (Loss)
-----------------------------
Total Comprehensive Loss was $(954,440) and $(3,323,002) for the three and nine
months ended June 30, 2000 and $(768,313) and $(2,479,199) for the three and
nine months ended June 30, 1999.
8
<PAGE>
NOTE 4 - Inventories
-----------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------
<S> <C>
Raw material and work in process $ 321,614
Finished goods . . . . . . . . . 866,000
---------------
Inventory, gross . . . . . . . . 1,187,614
Less: Inventory reserves . . . . (13,820)
---------------
Inventory, net . . . . . . . . . $ 1,173,794
===============
</TABLE>
NOTE 5 - Sale of Convertible Preferred Stock
---------------------------------------
The Company has outstanding 660,000 shares of 8% cumulative Convertible
Preferred Stock - Series 1. Each share of preferred stock is convertible into
one share of the Company's Common Stock on or after August 1, 1998. Annual
preferred stock dividends will be paid if and as declared by the Company's Board
of Directors. No dividends or other distributions will be payable on the
Company's Common Stock unless dividends are paid in full on the Preferred Stock.
The shares may be redeemed at the option of the Company, in whole or in part, on
or after August 1, 2000, subject to certain conditions, at $2.50 per share plus
accrued and unpaid dividends. In the event of a liquidation or dissolution of
the Company, the Preferred Stock - Series 1 would have priority over the
Company's Common Stock.
NOTE 6 - Financial Condition
--------------------
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a net loss attributable to common stockholders of $3.2 million for the
nine months ended June 30, 2000 and as of June 30, 2000 had an accumulated
deficit of $48.4 million. At June 30, 2000, the Company had working capital of
$(1.2) million and stockholders' deficit of $(.3) million. In the near term,
the Company expects operating and capital costs to continue to exceed funds
generated from operations due principally to the Company's manufacturing costs
relative to current production volumes and the ongoing need to commercialize the
Female Condom around the world. As a result, operations in the near future are
expected to continue to use working capital. Management recognizes that the
Company's continued operations depend on its ability to raise additional capital
through a combination of equity or debt financing, strategic alliances and
increased sales volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the Female Condom.
9
<PAGE>
NOTE 6 - Financial Condition - (Continued)
--------------------------------------
Management believes that recent developments, including the Company's agreement
with the UNAIDS, a joint United Nations program on HIV/AIDS, provide an
indication of the Company's early success in broadening awareness and
distribution of the Female Condom and may benefit future efforts to raise
additional capital and to secure additional agreements to promote and distribute
the Female Condom throughout other parts of the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm specializing
in providing financial advisory services to healthcare and life-science
companies. Pursuant to this agreement, as extended, Vector has acted as the
Company's exclusive financial advisor through June 30, 2000 for the purposes of
identifying and evaluating opportunities available to the Company for increasing
shareholder value. The Company and Vector are discussing extending these
arrangements. These opportunities may include selling all or a portion of the
business, assets or stock of the Company or entering into one or more
distribution arrangements relating to the Company's product. There can be no
assurance that any such opportunities will be available to the Company or, if so
available, that the Company will ultimately elect or be able to consummate any
such transaction. Management is currently determining whether the Company should
seek to extend this arrangement.
On May 19, 1999 and June 3, 1999 the Company issued an aggregate $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. See Note 7 of the Notes to
Unaudited Condensed Consolidated Financial Statements for additional detail.
On November 19, 1998, the Company executed an agreement with a private investor
(the "Equity Line Agreement"). This agreement provides for the Company, at its
sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $6.0 million of the Company's Common Stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires on February 12, 2001 and, among other things, provides for
minimum and maximum puts ranging from $100,000 to $1,000,000 depending on the
Company's stock price and trading volume. Puts cannot occur more frequently
than every 20 trading days. Upon a proper put under this agreement, the investor
purchases Common Stock at a discount of (a) 12% from the then current average
market price of the Company's Common Stock, as determined under the Equity Line
Agreement, if such average market price is at least $2 or (b) 18% from the then
current average market price if such average market price is less than $2. In
addition, the Company is required to pay its placement agent sales commissions
in Common Stock or cash, at the placement agent's discretion, equal to 7% of the
funds raised under the Equity Line Agreement and issue warrants to the placement
agent to purchase shares of Common Stock, at an exercise price of $2.17 per
share, equal to 10% of the Shares sold by the Company under the Equity Line
Agreement. Pursuant to the Equity Line Agreement, the Company issued the
investor a Warrant to purchase 200,000 shares of Common Stock at $2.17 per
share.
10
<PAGE>
NOTE 6 - Financial Condition - (Continued)
--------------------------------------
The Company is required to draw down a minimum of $1 million during the term of
the Equity Line Agreement. If the Company does not draw down the minimum, the
Company is required to pay the investor a 12% fee on that portion of the $1
million minimum not drawn down at the end of the two-year period. As of June 30,
2000, the Company has placed four puts for the combined cash proceeds of
$582,000 providing the Selling Stockholders with a total of 680,057 shares of
the Company's Common Stock. Each put was executed while the Company's stock
price was below $2.00 per share and therefore, the common stock was sold at the
18% discount. The timing and amount of the stock sales under the agreement are
totally at the Company's discretion, subject to the Company's compliance with
each of the following conditions at the time the Company requests a stock sale
under the agreement:
- the registration statement the Company filed with the SEC for sales of
stock under the agreement must remain in effect;
- all of the Company's representations and warranties in the agreement must
be accurate and the Company must have complied with all of the Company's
obligations in the Equity Line Agreement;
- there may not be any injunction, legal proceeding or law prohibiting the
Company's sale of the stock to Kingsbridge;
- the sale must not cause Kingsbridge's ownership of the Company's common
stock to exceed 9.9% of the outstanding shares of the Company's common
stock;
- the trading price of the Company's common stock over a five trading day
preceding the date of the sale must equal or exceed $1.00 per share; and
- the average daily trading volume of the Company's common stock for a 20
trading day period preceding the date of the sale must equal or exceed
17,000 shares.
The trading price of the Company's common stock was below $1.00 per share as of
June 30, 2000. Although Kingsbridge waived the condition relating to the
trading price of the Company's common stock for the fourth put completed during
the quarter ended June 30, 2000, the Company can make no assurance that
Kingsbridge will waive this condition or any other condition under the Equity
Line Agreement if the Company cannot satisfy such conditions to use the Equity
Line Agreement if needed in the future.
While the Company believes that its existing capital resources will be adequate
to fund its currently anticipated capital needs, if they are not, the Company
may need to raise additional capital until its sales increase sufficiently to
cover operating expenses. In addition, there can be no assurance that the
Company will satisfy the conditions required for it to exercise puts under the
Equity Line Agreement. Accordingly, the Company may not be able to realize all
of the funds available to it under the Equity Line Agreement.
11
<PAGE>
NOTE 6 - Financial Condition - (Continued)
--------------------------------------
Further, there can be no assurances, assuming the Company successfully raises
additional funds or enters into business agreements with third parties, that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate financing, management will be required to sharply
curtail the Company's efforts to commercialize the Female Condom and to curtail
certain other of its operations or, ultimately, cease operations.
NOTE 7 - Sale of Convertible Debentures
---------------------------------
On May 19 and June 3, 1999, the Company issued an aggregate of $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. Interest on the convertible
debentures is payable quarterly at a rate of 8% annually in cash or, at the
investors' option, common stock at its then current fair market value. From
December 2, 1999 until February 11, 2000, interest on the convertible debentures
was at the rate of 10% annually, and then returned to 8% annually. Repayment of
the convertible debentures is secured by a first security interest in all
Company's assets. The original principal balance plus any accrued but unpaid
interest of the convertible debentures may be convertible into the Company's
common stock at the investor's election at any time after one year based on a
per share price equal to the lesser of (a) 70% of the market price of the
Company's Common Stock at the time of conversion or $1.00. The convertible
debentures were originally payable one year after issuance. However, the Company
elected under the terms of the convertible debentures to extend the due date to
two years after issuance. As a result of the Company electing to extend the
term of the debentures an additional year, the Company issued to the investors
at the time of extension, additional warrants to purchase 375,000 shares of
Common Stock on the same term as the other warrants.
Additionally, warrants to purchase 337,500 shares of Common Stock were issued to
the Company's placement agent in this offering. The warrants have a term of five
years and are exercisable at an exercise price equal to the lesser of 70% of the
market price of the Common Stock at the tome of the exercise or $1.00.
The convertible debentures beneficial conversion feature is valued at $336,400
and the warrants to purchase 1,875,000 shares of common stock are valued at
$715,100. In accordance with SEC reporting requirements for such transactions,
the Company recorded the value of the beneficial conversion feature and warrants
(a total of $1,051,500) as additional paid in capital.
The corresponding amount of $1,051,500 was recorded as a discount on convertible
debentures and is amortized over 1 year using the interest rate method.
12
<PAGE>
NOTE 8 - Industry Segments And Financial Information About Foreign and Domestic
-----------------------------------------------------------------------
Operations
----------
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations in different geographic areas (determined by the location
of the operating unit) is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
(Amounts in Thousands) 2000 1999
---------- ----------
<S> <C> <C>
Net revenues:
United States. . . . . . $ 1,542 $ 1,856
International. . . . . . 2,381 1,553
Operating profit (loss):
United States. . . . . . (3,344) (2,665)
International. . . . . . 119 (479)
Identifiable assets
United States. . . . . . 1,082 1,647
International. . . . . . 3,640 4,678
</TABLE>
On occasion, the Company's U.S. unit sells product directly to customers located
outside the U.S. Were such transactions reported by geographic destination of
the sale rather than the geographic location of the unit, U.S. revenues would be
decreased and International revenues increased by $36,540 and $96,514 as of June
30, 2000 and 1999, respectively. Additionally, U.S. operating loss reflects
$2,227,625 and $1,075,330 of unallocated worldwide corporate overhead for the
nine months ended June 30, 2000 and 1999, respectively.
13
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Female Health Company ("FHC" or the "Company") manufactures, markets and
sells THE FEMALE CONDOM around the world. It is the only product under a
woman's control which can prevent unintended pregnancy and sexually transmitted
diseases ("STDs"), including HIV/AIDS.
The female condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 40 additional
countries. Certain of these studies show that having the female condom
available increases protected sex acts and decreases the incidence of STDs.
The product is currently sold or available in various venues including
commercial (private sector) and public sector clinics in 75 countries. It is
commercially marketed directly by the Company in the United States and the
United Kingdom and through marketing partners in 15 countries, including Canada,
France and Japan. The Company is currently in discussions with potential
distributors for certain European countries, India, The People's Republic of
China and other countries.
As noted above, the female condom is sold to the global public sector. In the
U.S., the product is marketed to city and state public health clinics as well as
not-for-profit organizations such as Planned Parenthood. Following several years
of testing the efficacy and acceptability of the female condom, in 1996, the
Company entered into a three-year agreement with the Joint United Nations
Programme on AIDS (UNAIDS) which has subsequently been extended. In the
agreement, UNAIDS facilitates the availability and distribution of the female
condom in the developing world and the Company sells the product to developing
countries at a reduced price based on the total number of units purchased. The
current price per unit is approximately 0.38 (Pounds) (or $0.58). Pursuant to
this agreement, the product is currently available in 51 countries including
Zambia, Zimbabwe, Tanzania, Brazil, Uganda, South Africa, and Haiti. The Company
anticipates multiple launches will occur during the next two years under this
agreement, including launches in Kenya, Nigeria, Ghana, Cambodia, Bangladesh,
Columbia and Central American countries.
Product
The female condom is made of polyurethane, a thin but strong material that is
resistant to rips and tears during use. The female condom consists of a soft,
loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and helps to hold it in place. The other ring remains outside
the vagina after insertion. The female condom lines the vagina, preventing skin
from touching skin during intercourse. The female condom is prelubricated and
disposable and is intended for use during only one sex act.
14
<PAGE>
Global Market Potential
MALE CONDOM MARKET: It is estimated the global male condom market is 5.4 billion
units. The major segments are in the Global Public Sector, the U.S., Japan,
India and China.
The World Health Organization (WHO) estimates there are more than 300 million
new cases of STDs worldwide each year, excluding HIV, and most of those diseases
are more easily transmitted to women than to men. UNAIDS estimates that there
are currently approximately 34 million people worldwide who are infected with
HIV/AIDS and there are approximately 16,000 people per day who are newly
infected. In the United States, the Center for Disease Control noted that in
1995, five of the ten most frequently reported diseases were STDs. The Center
also has noted that one in five Americans over the age of 12 has Herpes and 1 in
every 3 sexually active people will get an STD by age 24. Women are currently
the fastest growing group infected with HIV and are expected to comprise the
majority of the new cases by the coming year.
Currently there are only two products that prevent the transmission of HIV/AIDS
through sexual intercourse --the latex male condom and the female condom.
The Company is currently in discussion with WHO and UNAIDS regarding the role
the Female Condom will play as part of the International Partnership Against
Aids in Africa. The partnership is a coalition of African governments, the
United Nations, donors and the private and community sectors. Its mission is
over the next decade to help reduce the number of new HIV infections in Africa,
promote care of HIV positive persons and to mobilize society to halt the advance
of AIDS.
Advantages vs. the Male Condom
The female condom is currently the only available barrier contraceptive method
controlled by women which allows them to protect themselves from unintended
pregnancy and STDs, including HIV/AIDS. The most important advantage is that a
woman can control whether or not she is protected as many men do not like to
wear male condoms and may refuse to do so.
The polyurethane material that is used for the female condom offers a number of
benefits over latex, the material that is most commonly used in male condoms.
Polyurethane is 40% stronger than latex, reducing the probability that the
female condom sheath will tear during use. Clinical studies and everyday use
have shown that latex male condoms can tear as much as 4% to 8% of the times
they are used. Unlike latex, polyurethane quickly transfers heat, so the female
condom immediately warms to body temperature when it is inserted, which may
result in increased pleasure and sensation during use. The product offers an
additional benefit to the 7% to 20% of the population that is allergic to latex
and who, as a result, may be irritated by latex male condoms. To the Company's
knowledge, there is no reported allergy to date to polyurethane. The female
condom is also more convenient, providing the option of insertion hours before
sexual arousal and as a result is less disruptive during sexual intimacy than
the male condom which requires sexual arousal for application.
15
<PAGE>
Cost Effectiveness
Over the past two years several studies have been completed which show that
providing the female condom in public clinics in both the United States and
countries in the developing world, is at a minimum cost effective and usually
cost saving. This is important information for governments to have in
determining where their public health dollars are allocated. These studies have
been or are about to be published and also presented at various scientific
meetings around the world.
Worldwide Regulatory Approvals
The female condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the world,
including receipt of a CE Mark in 1997 which allows the Company to market the
female condom throughout the EU. In addition to the United States and the EU,
several other countries have approved the female condom for sale, including
Canada, Japan, Russia, Australia, South Korea and Taiwan.
The Company believes that, in addition to its patent coverage, the female
condom's PMA approval and FDA classification as a Class III Medical Device
create a significant barrier to entry in the US. The Company estimates that it
would take a minimum of four to six years to implement, execute and receive FDA
approval of a PMA to market another type of female condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the manufacture
and distribution of the female condom.
Strategy
The Company's strategy is to act as a manufacturer, selling the female condom to
the global public sector, United States public sector and commercial partners
for country-specific marketing. The public sector and commercial partners
assume the cost of shipping and marketing the product. As a result, as volume
increases, the Company's operating expenses will not increase significantly.
16
<PAGE>
Commercial Markets
The Company markets the product directly in the United States and United
Kingdom. The Company has commercial partners who have launched the product in
15 countries including Canada, Japan, and France. The most recent launch was in
Japan on April 25, 2000 by the Company's partner, Taiho Pharmaceuticals. To
date, the launch and results are proceeding as planned.
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than 1.7 billion male condoms are distributed
worldwide by the public sector each year. The female condom is seen as an
important addition to prevention strategies by the public sector because studies
show that making the female condom available decreases the amount of unprotected
sex by as much as one-third over offering only a male condom.
The Company has a multi-year agreement with UNAIDS to supply the female condom
to developing countries at a reduced price which is negotiated each year based
on the Company's cost of production. The current price per unit is approximately
0.38 (pounds) (or $.58).
In the United States, the product is marketed to city and state public health
clinics, as well as not-for-profit organizations such as Planned Parenthood.
Currently 10 major cities and 15 state governments, including the states of New
York, Pennsylvania, Florida, Mississippi, California, Louisiana, Maryland, New
Jersey, South Carolina and Illinois and the cities of Chicago, Philadelphia, New
York and Houston have purchased the product for distribution with a number of
others expressing interest. All major cities and states have reordered product
after their initial shipments.
State-of-the-Art Manufacturing Facility
The Company manufactures the female condom in a 40,000 square-foot leased
facility in London, England. The facility is currently capable of producing 60
million units per year. With additional equipment, this capacity can be
significantly increased.
Government Regulation
In the U.S., the U.S. Food and Drug Administration ("FDA") regulate the female
condom. Pursuant to section 515(a)(3) of the Safe Medical Amendments Act of 1990
(the "SMA Act"), the FDA may temporarily suspend approval and initiate
withdrawal of the Pre-Market Approval ("PMA") if the FDA finds that the female
condom is unsafe or ineffective, or on the basis of new information with respect
to the device, which, when evaluated together with information available at the
time of approval, indicates a lack of reasonable assurance that the device is
safe or effective under the conditions of use prescribed, recommended, or
suggested in the labeling. Failure to comply with the conditions of FDA
approval invalidates the approval order. Commercial distribution of a device
that is not in compliance with these conditions is a violation of the SMA Act.
17
<PAGE>
Competition
The Company's female condom participates in the same market as male condoms but
is not seen as competing - rather additive in terms of prevention and choice.
However, it should be noted that latex male condoms cost less and have brand
names that are more widely recognized than the female condom. In addition, male
condoms are generally manufactured and marketed by companies with significantly
greater financial resources than the Company. It is also possible that other
parties may develop a female condom. These competing products could be
manufactured, marketed and sold by companies with significantly greater
financial resources than those of the Company.
Patents and Trademarks
The Company currently holds product and technology patents in the United States,
Japan, the United Kingdom, France, Italy, Germany, Spain, the European Patent
Convention, Canada, The People's Republic of China, New Zealand, Singapore, Hong
Kong and Australia. These patents expire between 2005 and 2113. Additional
product and technology patents are pending in Brazil, South Korea, Germany,
Japan and several other countries. The patents cover the key aspects of the
female condom, including its overall design and manufacturing process. The
Company licenses the trademark "Reality" in the United States and has trademarks
on the names "femidom" and "femy" in certain foreign countries. The Company has
also secured, or applied for, 27 trademarks in 14 countries to protect the
various names and symbols used in marketing the product around the world. In
addition, the experience that has been gained through years of manufacturing the
female condom has allowed the Company to develop trade secrets and know-how,
including certain proprietary production technologies that further secure its
competitive position.
RESULTS OF OPERATIONS
-----------------------
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The Company had net revenues of $1,377,932 and a net loss of $865,702 for the
three months ended June 30, 2000 compared to net revenues of $1,611,975 and a
net loss of $1,048,325 for the three months ended June 30, 1999.
The Company's operating loss for the 3 months ended June 30, 2000 was $533,070
compared to $831,146 for the same period last year for a decrease of 36%. As
discussed more fully below, the decrease in the Company's net operating loss was
result of an increase in gross profit coupled with a decrease in selling,
general and administrative expenses. The decrease in the net loss resulted from
the reduction in the net operating loss offset somewhat by an increase in
non-operating interest expenses. This is the second consecutive quarter in
which the Company has registered a gross profit without adjustment.
Net revenues decreased $234,043 in the current quarter, or 15%, compared with
the same period last year. The lower net revenues occurred because of lower unit
sales shipped to domestic customers. The Company expects significant quarter to
quarter variation due to the timing of receipt of large orders, subsequent
production scheduling, and shipping of products as various countries launch the
product. The Company believes this variation between quarters will continue for
several quarters to come until reorders form an increasing portion of total
sales.
18
<PAGE>
Cost of goods sold decreased $364,784 to $1,220,769 in the current quarter from
$1,585,553 for the same period last year. The cost of goods sold as a percentage
of sales improved to 89% in the current quarter compared to 98% during the same
period in the prior year. The decline in the percentage is a result of a larger
portion of the Company's total sales being comprised of international and global
public sector business (61%) than during the same period in the prior year
(52%). The costs of goods sold per unit for international and global public
sector business is less expensive because of the efficiencies related to the
production of the bulk sized product sold.
Advertising and promotional expenditures increased $9,869 to $54,358 in the
current quarter from $44,489 for the same period in the prior year.
Selling, general and administrative expenses decreased $177,204, or 22%, to
$635,875 in the current quarter from $813,079 for the same period last year.
The decrease reflects a decrease in consulting and legal fees than incurred in
the prior fiscal year's third quarter.
Net interest and non-operating expenses increased $154,465 to $268,690 for the
current period from $114,225 for the same period last year. The increase exists
because the Company had a higher level of debt outstanding than the same period
last year, as a result of the issuance of convertible debentures. The result is
a larger amount of non-cash expenses incurred from the amortization of discounts
on notes payable and convertible debentures than the third quarter of the prior
year.
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
The Female Health Company had net revenues of $3,923,425 and a net loss of
$3,225,119 for the nine months ended June 30, 2000 compared to net revenues of
$3,409,695 and a net loss of $3,143,280 for the nine months ended June 30, 1999.
The Company's operating loss for the 9 months ended June 30, 2000 was $1,942,792
compared to $2,726,534 for the same period last year for a decrease of 29%. As
discussed in more detail in the following paragraphs, the decrease in the
Company's net operating loss was a result of gross profit improvements and
reductions in operating expenses principally from a decline in advertising and
promotion expenses. The increase in the net loss resulted from an increase in
non-operating interest expenses and amortization of debt issuance costs more
than offsetting the reduced operating loss. As a result, the Company recorded a
gross profit of $311,209 for the nine month period in 2000 versus a gross loss
of $378,090 for the same 1999 period.
For the nine months ended June 30, 2000, net revenues increased $513,730, or
15%, compared with the same period last year. The higher net revenues occurred
because of increased unit sales shipped to international customers.
Units shipped and orders in-house totaled 7.4 million units at June 30, 2000
compared to 4.9 million at June 30, 1999 for an increase of 51%. The Company
expects significant quarter to quarter variation due to the timing of receipt of
large orders, subsequent production scheduling, and shipping of products as
various countries launch the product. The Company believes this variation
between quarters will continue for several quarters to come until reorders form
an increasing portion of total sales.
19
<PAGE>
Cost of goods sold decreased $175,569, or 5%, to $3,612,216 for the nine months
ended June 30, 2000 from $3,787,785 for the same period last year. The decrease
occurred as a result of a larger portion of the Company's total sales being
comprised of international and global public sector business (68%) than during
the same period in the prior year (46%). The cost of goods sold per unit for
international and global public sector business is less expensive because of the
efficiencies related to the production of the bulk sized product sold.
Advertising and promotional expenditures decreased $50,333, or 23%, to $169,000
for the nine months ended June 30, 2000 from $219,333 for the same period in the
prior year. Advertising and promotion relates almost exclusively to the U.S.
consumer market, and includes the costs of print advertising, trade and consumer
promotions, product samples and other marketing costs. Through expenditures to
date, 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.
Selling, general and administrative expenses decreased $44,110, or 2%, to
$2,085,001 in the current period from $2,129,111 for the same period last year.
The decrease reflects a decrease in consulting and legal fees than incurred in
the prior year's first nine months.
Amortization of debt issuance costs increased $176,026 to $245,676 for the nine
months ended June 30, 2000 from $69,650 for the same period in the prior year.
The increase is due to the amortization period of debt issuance costs relating
to the issuance of convertible debentures in May and June 1999. See Note 7 of
the Notes to Unaudited Condensed Consolidated Financial Statements for further
detail regarding the specifics of the transaction.
Net interest and non-operating expenses increased $692,519 to $937,561 for the
current period from $245,042 for the same period the prior year. The increase
exists because the Company had a higher level of debt outstanding during the
current fiscal year than the same period last year as a result of the issuance
of convertible debentures. The result is a larger amount of non-cash expenses
incurred from the amortization of discounts on notes payable and convertible
debentures than the first nine months of the prior year.
Factors That May Affect Operating Results and Financial Condition
The Company's future operating results and financial condition are dependent on
the Company's ability to increase demand for and to cost-effectively manufacture
sufficient quantities of the female condom. Inherent in this process is a
number of factors that the Company must successfully manage in order to achieve
favorable future results and improve its financial condition.
20
<PAGE>
Reliance on a Single Product
The Company expects to derive the vast majority, if not all, of its future
revenues from the female condom, its sole current product. While management
believes the global potential for the female condom is significant, the product
is in the early stages of commercialization and, as a result, the ultimate level
of consumer demand around the world is not yet known. To date, sales of the
female condom have not been sufficient to cover the Company's operating costs.
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a global
distribution network for the product by completing partnership arrangements with
companies with the necessary marketing and financial resources and local market
expertise. To date, this strategy has resulted in numerous in-country
distributions in the public sector, particularly in Africa and Latin America.
Several partnership agreements have been completed for the commercialization of
the female condom in private sector markets around the world. However, the
Company is dependent on country governments as well as city and state public
health departments within the United States to continue their commitment to
prevention of STDs, including AIDS, by including female condoms in their
programs. The Company is also dependent on finding appropriate partners for the
private sector markets around the world. Once an agreement is completed, the
Company is reliant on the effectiveness of its partners to market and distribute
the product. Failure by the Company's partners to successfully market and
distribute the female condom or failure of country governments to implement
prevention programs which include distribution of barrier methods against the
AIDS crisis, or an inability of the Company to secure additional agreements for
AIDS crisis, or an inability of the Company to secure additional agreements for
new markets either in the public or private sectors could adversely affect the
Company's financial condition and results of operations.
Inventory and Supply
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market and Foreign Currency Risks
The Company manufactures the female condom in a leased facility located in
London, England. Further, a material portion of the Company's sales are in
foreign markets. Manufacturing costs and sales to foreign markets are subject to
normal currency risks associated with changes in the exchange rate of foreign
currencies relative to the United States dollar. To date, the Company's
management has not deemed it necessary to utilize currency hedging strategies to
manage its currency risks. On an ongoing basis, management continues to
evaluate its commercial transactions and is prepared to employ currency hedging
strategies when it believes such strategies are appropriate. In addition, some
of the Company's future international sales may be in developing nations where
dramatic political or economic changes are possible. Such factors may adversely
affect the Company's results of operations and financial condition.
21
<PAGE>
Government Regulation
The female condom is subject to regulation by the FDA, pursuant to the federal
Food, Drug and Cosmetic Act ("the FDA Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices," which include testing, quality
control and documentation procedures. The Company's compliance with applicable
regulatory requirements is monitored through periodic inspections by the FDA.
The failure to comply with applicable regulations may result in fines, delays or
suspensions of clearances, seizures or recalls of products, operating
restrictions, withdrawal of FDA approval and criminal prosecutions. The
Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the FDA.
Liquidity and Sources of Capital
Historically, the Company has incurred cash operating losses relating to
expenses incurred to develop and promote the Female Condom. During the first
nine months of fiscal 2000, cash used in operations totaled $.8 million. The
Company used net proceeds from the issuance of the Company's common stock and
cash on hand in order to fund cash used in operations.
While the Company believes that its existing capital resources (including
expected proceeds from sales of common stock pursuant to the Equity Line
Agreement) will be adequate to fund its currently anticipated capital needs, if
they are not, the Company will need to raise additional capital until its sales
increase sufficiently to cover operating expenses. 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.
See Note 6 to the Unaudited Consolidated Financial Statements for additional
information regarding the Company's liquidity and sources of capital.
At June 30, 2000, the Company had current liabilities of $3.5 million including
a $1.0 million note payable due March 25, 2001 and a $250,000 note payable due
February 12, 2001 both to Mr. Dearholt, a Director of the Company. As of June
30, 2000, Mr. Dearholt beneficially owns 2,496,720 shares of the Company's
Common Stock.
The Company also secured a $50,000 note payable due February 18, 2001 from Mr.
Parrish, the Chairman of the Board and Chief Executive Officer of the Company.
As of June 30, 2000, Mr. Parrish beneficially owns 696,501 shares of the
Company's Common Stock.
On June 14, 2000, the Company sold 500,000 shares of Common Stock to two
investors, including 400,000 shares to a trust for the benefit of one of Mr.
Dearholt's children, at a price of $0.50 per share, representing a discount of
6% of the market price of the Common Stock on that date.
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
$0.1 million per month.
22
<PAGE>
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.
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.
23
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEMS 1-5. NOT APPLICABLE EXCEPT AS PROVIDED BELOW.
----------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
----------------------------------------------------------
2(c) The Company sold 500,000 shares of common stock to two investors in
June 2000, including 400,000 shares to a trust for the benefit of a child of
Stephen M. Dearholt, a director of the Company. The Company received cash
proceeds of $250,000 from this sale. The Company believes it has satisfied the
exemption from the securities registration requirement provided by section 4(2)
of the Securities Act and Regulation D promulgated thereunder in this offering
since the securities were sold in a private placement to sophisticated,
accredited investors, who provided representations which the Company deemed
necessary to satisfy itself that were accredited investors and were purchasing
for investment and not with a view to resale in connection with a public
offering.
On May 19, 2000 and June 3, 2000, the Company issued warrants to purchase
375,000 shares of common stock to five investors, in connection with the
one-year extension of the due date of a $1,500,000 convertible debenture. The
exercise price of the warrants is the lesser of 70% of market value or $1.00 per
share. The warrants expire upon the earlier of their exercise or four years
after the date of their issuance. The Company believes that it has satisfied
the exemption from the securities registration requirement provided by section
4(2) of the Securities Act in connection with this issuance.
During the quarter ended June 30, 2000, the Company sold 197,093 shares of
Common Stock to a private investor under an equity line agreement. The Company
received net cash proceeds of $97,000. The Company believes that it has
satisfied the exemption from the securities registration requirement provided
by section 4(2) of the Securities Act in connection with this issuance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------------------------
The Company held an Annual Meeting of its shareholders on May 5, 2000. At the
meeting, shareholders were asked to elect O.B. Parrish, Mary Ann Leeper, Ph.D.,
William R. Gargiulo, Jr., Stephen M. Dearholt, David R. Bethune, Michael R.
Walton and James R. Kerber to the Board of Directors to serve until the 2001
Annual Meeting, to ratify the appointment of McGladery & Pullen LLP as the
Company's independent public accountants for the fiscal year ending September
30, 2000 and to amend the company's Amended and Restated Articles of
Incorporation to increase the Company's authorized stock. The results of the
shareholder voting is listed below:
<TABLE>
<CAPTION>
Matter Voted On: For Against Withheld Abstentions Broker non-votes
<S> <C> <C> <C> <C> <C>
O.B. Parrish. . . . . . . . . . . . . . . . . . 11,559,264 234,781
William R. Gargiulo,Jr. . . . . . . . . . . . . 11,550,264 243,781
Mary Ann Leeper Ph.D. . . . . . . . . . . . . . 11,541,214 252,831
Stephen M. Dearholt . . . . . . . . . . . . . . 11,539,749 254,296
David R. Bethune. . . . . . . . . . . . . . . . 11,540,049 253,996
Michael R. Walton . . . . . . . . . . . . . . . 11,530,049 263,996
James R. Kerber . . . . . . . . . . . . . . . . 11,521,949 272,096
Ratification of Independent Public Accountants 11,623,220 150,014 20,811
Amendment of Restated Articles of Incorporation 11,123,715 639,830 30,500
</TABLE>
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Amended and Restated Articles of Incorporation. (1)
4.2 Articles II, VII, and XI of the Amended and Restated By-
Laws (included in Exhibit 3.2).(2)
4.3 Amended and Restated Articles of Incorporation.
10.1 Warrant to purchase 250,000 shares of the Company's
common stock issued to Gary Benson on May 19, 2000.
10.2 Warrant to purchase 25,000 shares of the Company's
common stock issued to Daniel Bishop on June 3, 2000.
10.3 Warrant to purchase 25,000 shares of the Company's
common stock issued to Robert Johander on June 3, 2000.
10.4 Warrant to purchase 50,000 shares of the Company's
common stock issued to Michael Snow on June 3, 2000.
10.5 Warrant to purchase 25,000 shares of the Company's
common stock issued to W.G. Securities Limited
Partnership on June 3, 2000.
10.6 Stock Purchase Agreement, dated as of June 14, 2000,
between the Company and The John W. Dearholt Trust
27 Financial Data Schedule
_____________________________
<FN>
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-3, filed with the Securities and Exchange Commission on
February 13, 1998.
(2) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
(b) Report on Form 8-K - No reports on Form 8-K were filed during the
quarter ended June 30, 2000.
</TABLE>
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FEMALE HEALTH COMPANY
DATE: August 11, 2000 /s/O.B. Parrish
----------------------------------------------
O.B. Parrish, Chairman and
Chief Executive Officer
/s/o/Robert R. Zic
----------------------------------------------
Robert R. Zic, Director of
Finance (Principal Accounting Officer)
26
