Third Quarter Results

CHICAGO, August 13, 2002- The Female Health Company (OTC BB FHCO) today reported net revenues of $1,991,287 and net loss attributable to common stockholders of $2,833,919 ($0.18 per diluted share) including two non-cash charges for the three months ended June 30, 2002 compared to net revenues of $2,296,590 and net income attributable to common stockholders of $11,756 ($0.00 per diluted share) for three months ended June 30, 2001.  

The Company posted an operating loss for the three-month period ended June 30, 2002 of $2,506,428 compared to $206,434 of operating income for the same period last year.  The loss resulted from $2,598,255 in non-cash charges due to a one-time out of court settlement and stock compensation.  Excluding these non-cash charges, the Company would have recorded $91,827 of  operating income for the quarter ended June 30, 2002.  

Excluding the non-cash charges for the nine-month period, the Company would have had an operating profit of $198,489 vs. a loss of ($512,478) for the same 2001 period and would have recorded an operating income for five consecutive quarters.  The Company also recorded positive cash flow from operations for the first time for a six-month period for the period ended June 30, 2002.  In addition, year-to-date gross profit increased 49% on a 19% increase in revenue. 

“We are very pleased with the progress our Company has achieved, from an operational perspective, during the first nine months of fiscal 2002”, noted Mary Ann Leeper, President of The Female Health Company.  “The modest decline in third quarter revenues is a reflection of the timing of individual orders from public sector agencies for the Female Condom™.  As noted on previous quarterly reports in the past, revenues can fluctuate significantly, on a quarter-to-quarter basis, depending upon the timing of individual large orders and shipments.”  

In the third quarter, the Company recorded a non-cash charge to settle potential litigation with former debenture holders.  The settlement includes the issuance of 450,000 shares which may not be sold for one year without the Company’s permission, and the extension of expiration dates on 2.25 million warrants currently held by the former debenture holders to 2007.  The settlement eliminates all claims against the Company’s assets that had been used as debenture collateral, potential cash litigation costs, outcome uncertainty inherent in litigation and the diversion of management time.

The Company’s stock option plans are accounted for under variable accounting guidelines in accordance with APB Opinion 25 as it relates to plans which include vesting based on specific performance requirements.  The stock option compensation  charge in the third quarter of fiscal 2002 is the result of the increase in the Company’s stock price during the quarter and the repricing in May of options held within the plan.  The performance based stock option plan is defined as ‘variable’ because in the first of the Company’s two plans, one third of the options are vested after one year, one third when there is a positive cash flow for six months and one third when FHC’s stock price is $7.50/ share.  In the second, one third of the options vest when unit sales reach 13 million units for a 12 month period and operating earnings are positive, one third when unit sales reach 26 million in a 12 month period and operating earnings are positive and one third when FHC’s stock price reaches $5.00/ share. 

Net revenues decreased $305,303 for the current quarter, or 9 percent, compared with the same period last fiscal year.  The lower sales volume for the third quarter was attributable to significant quarter-to-quarter variation, which the Company expects, due to the timing of receipt of large orders, subsequent production scheduling and shipping of products. 

Gross profit increased $9,047, or 1 percent, to $917,358 from $908,311 for the same period last year.  The increase in gross profit resulted from the decrease in net revenues offset by a disproportionate decrease in cost of goods sold as a result of direct material efficiencies. 

Total operating expenses for the three-month period ended June 30, 2002, increased to $3,423,786 from $701,877 for the same period last year.  Total operating expenses, excluding charges from the out of court settlement and stock option compensation, were $825,531 for the quarter. 

The Company experienced a $132,813 increase in non-operating expenses to $294,581 for the current quarter compared to $161,768 for the same period during the prior fiscal year.  The increase during the current period is principally due to a higher level of debt  which resulted in a larger amount of non-cash expenses incurred from the amortization of discounts on the credit facility and notes payable than the third quarter of the prior year. 

Net revenues improved 19 percent to $5,921,756 for nine months period ended June 30, 2002 from $4,959,512 for the same period last fiscal year.  The higher sales volume was attributable to a substantial increase in shipments to global public sector customers.  

Gross profit increased $830,163, or 49%, to $2,530,907 from $1,700,744 for the same period last year.  The significant improvement in gross profit resulted from the increase in net revenues coupled with a less than proportionate increase in cost of goods sold.  This in part reflects the Company’s successful program to reduce manufacturing costs. 

Total operating expenses for the nine-month period ended June 30, 2002 increased to  $4,963,673 from $2,213,222 for the same period last year.  Excluding the non-cash charges for the out of court settlement and stock option compensation, total operating expenses were $2,332,418 and as a percentage of sales were 39% compared to 45% in the same period during the prior year. 

The Company posted an operating loss for the nine-month period ended June 30, 2002 of $2,432,766.  Excluding the non-cash charges due to a one-time out of court settlement and stock option compensation, the Company would have recorded $198,489 of operating income for the nine month period vs. a loss of $512,478 for the same prior year period as a result of improved gross profit and a reduction of other operating expenses.  

The Company experienced a $242,523 increase in non-operating expenses to $706,449 for the current nine-months compared to $463,926 for the same period in the prior fiscal year.  The increase during the current period is principally due to a higher level of debt outstanding than the same period last year which resulted in a larger amount of non-cash expenses incurred from the amortization of discounts on the credit facility and notes payable. 

The Female Health Company, based in Chicago, owns certain worldwide rights to FC Female Condomä including patents which have been issued in the United States, United Kingdom, Japan, France, Italy, Germany, Spain, The People’s Republic of China, Canada, New Zealand, South Korea and Australia.  FC Female Condomä is the only available product controlled by a woman that protects against sexually transmitted diseases including HIV/AIDS, and unintended pregnancy. 

“Safe Harbor” statement under the Private Securities Litigation Reform Action of 1995: The statements in this release which are not historical fact are forward-looking statements based upon the Company’s current plan and strategies, and reflect the Company’s current assessment of the risks and uncertainties related to its business, including such things as product demand and market acceptance; the economic and business environment and the impact of government pressures; currency risks; capacity; efficiency and supply constraints; and other risks detailed in the Company’s press releases, shareholder communications and Securities and Exchange Commission filings. Actual events affecting the Company and the impact of such events on the Company’s operations may vary from those currently anticipated. 

For more information about the Female Health Company, dial toll-free via fax, 1-800-PRO-INFO and enter company code “FHCO”. Also, visit the Company’s web site at www.femalehealth.com and www.femalecondom.org. If you would like to be added to an e-mail alert list, please send e-mail to FHCInvestor@aol.com.

THE FEMALE HEALTH COMPANY

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THE FEMALE HEALTH COMPANY

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