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, 1997
[ ] 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
--------------------------
(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 -- 9,513,097 shares outstanding as of July 22,
1997
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
Unaudited Condensed Consolidated Balance Sheets -
June 30, 1997 and September 30, 1996.......... 3
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended June 30, 1997
and June 30, 1996............................ 4
Unaudited Condensed Consolidated
Statements of Operations -
Nine Months Ended June 30, 1997
and June 30, 1996............................ 5
Unaudited Condensed Consolidated
Statements of Cash Flows -
Nine Months Ended June 30, 1997
and March 31, 1996........................... 6
Notes to Unaudited Condensed Consolidated
Financial Statements............................ 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 11
Part II. Other Information
Exhibits and Reports on Form 8-K ............................... 15
SIGNATURES....................................................... 16<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1997 1996
----------- ------------
ASSETS
Current Assets:
Cash and equivalents $ 861,903 $ 2,914,080
Accounts receivable, net 414,659 457,226
Inventories, net 541,803 967,398
Prepaid expenses and other current assets 702,016 370,555
----------- ----------
Total current assets 2,520,381 4,709,259
Note receivable, net of unamortized discount 831,736 810,997
Intellectual property rights and other assets 1,154,933 1,283,550
PROPERTY, PLANT AND EQUIPMENT 3,976,815 4,933,194
Less accumulated depreciation and amortization (883,000) (471,377)
----------- -----------
Net Property, plant, and equipment 3,093,815 4,461,817
----------- -----------
TOTAL ASSETS $ 7,600,865 $11,265,623
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, net of unamortized discount $ 806,587 $1,986,570
Trade accounts payable 812,604 721,015
Accrued expenses and other current liabilities 553,195 1,168,668
Current portion long-term debt 39,346 1,736,706
----------- -----------
TOTAL CURRENT LIABILITIES 2,211,732 5,612,959
Long-term debt and capital lease obligations 520,738 477,296
Convertible debentures, net of unamortized
discount --- 1,910,000
Deferred gain on lease of facility (see Note 5) 1,847,744 ----
Other long-term liabilities 221,866 321,096
---------- -----------
TOTAL LIABILITIES 4,802,080 8,321,351
---------- ----------
STOCKHOLDERS' EQUITY:
Convertible preferred stock --- ---
Common stock 95,132 72,117
Additional Paid-in capital 37,758,786 33,373,072
Translation gain 257,583 83,858
Accumulated deficit (35,312,716)(30,584,775)
----------- -----------
Total Stockholders' Equity 2,798,785 2,944,272
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,600,865 $11,265,623
=========== ===========
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
1997 1996(a)
----------- -----------
Net revenues $ 814,403 $ 723,560
Cost of products sold 799,239 1,258,686
---------- -----------
Gross margin (loss) 15,164 (535,126
---------- -----------
Advertising & Promotion 173,158 556,437
Selling, general and administrative 759,403 701,629
---------- -----------
Total Operating Expenses 932,561 1,258,066
---------- -----------
Operating loss (917,397) (1,793,192
Interest, net and other expense 55,348 110,097
---------- ---------
Loss from continuing operations (972.745) (1,903,289)
Loss from discontinued operations --- ---
----------- -----------
Net loss $ (972,745) $(1,903,289)
=========== ===========
Net loss per common shares outstanding
Continuing Operations $ (0.11) $ (0.30)
Discontinued Operations --- ---
Weighted average number of common shares
outstanding 9,161,125 6,451,086
(a) Certain reclassifications have been made to the financial statement for the
quarter ended June 30, 1996 to conform to the current quarter presentation.
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
June 30,
1997 1996(a)
----------- -----------
Net revenues $ 2,016,419 $1,454,068
Cost of products sold 2,859,138 2,817,408
---------- -----------
Gross margin (loss) (842,719) (1,363,340)
---------- -----------
Advertising & Promotion 1,480,639 1,034,458
Selling, general and administrative 2,102,503 1,768,984
---------- -----------
Total Operating Expenses 3,583,142 2,803,442
---------- -----------
Operating loss (4,425,861) (4,166,782)
Interest, net and other expense 302,080 175,999
---------- ---------
Loss from continuing operations (4,727,941) (4,342,781)
Loss from discontinued operations --- (4,461)
----------- -----------
Net loss $(4,727,941) $(4,347,242)
=========== ===========
Net loss per common shares outstanding
Continuing Operations $ (0.58) $ (0.68)
Discontinued Operations --- ---
Weighted average number of common shares
outstanding 8,095,955 6,412,112
(a) Certain reclassifications have been made to the financial statement for the
nine months ended June 30, 1996 to conform to the current period presentation.
See notes to unaudited condensed consolidated financial statements. <PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
June 30,
1997 1996
----------- -----------
OPERATIONS:
Net (loss) $(4,727,941) $(4,347,242)
Adjusted for noncash and nonoperating items:
Depreciation and amortization 495,135 367,964
Noncash interest 577,574 5,495
Changes in operating assets and liabilities (809,442) (167,397)
----------- -----------
Net cash provided (used) in operating activities (4,464,675) (4,141,180)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (82,178) (648,004)
In connection with the purchase of Chartex --- (5,191,565)
In connection with the sale of Holdings --- 6,568,392
Lease of facility (see Note 5) 3,291,410 ---
----------- -----------
Net cash provided (used) in investing activities 3,209,232 728,823
----------- -----------
FINANCING ACTIVITIES:
Borrowings 2,507,602 2,160,000
Debt repayments (4,040,848) (171,214)
Proceeds from the issuance of common stock
and warrants 776,352 329,642
----------- -----------
Net cash provided (used) in financing activities (756,894) 2,318,428
----------- -----------
Effect of exchange rate change on cash and
equivalents (39,840) 1,628
----------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,052,177) (1,092,301)
Cash and equivalents at beginning of period 2,914,080 1,521,344
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 861,903 $ 429,043
=========== ===========
Schedule of noncash financing and investing activities:
Conversion of Convertible Debentures into
Common Stock $ 4,020,000 $ ---
See notes to unaudited condensed consolidated financial statements.<PAGE>
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. Certain reclassifications have been made to the prior period
financial statements to conform to the current period presentation.
Operating results for the three months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended September 30, 1996.
NOTE 2 - Net Income (Loss) Per Share
Income (loss) per share is calculated using the weighted average number of
shares of the Company's common stock outstanding during the period.
The FASB has issued Statement No. 128, Earnings per Share, which requires the
presentation of basic and, under certain circumstances, diluted earnings per
share by all public companies which have common stock or potential common
stock, such as options, warrants and convertible securities. Diluted per-share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce the loss or increase the
income per common share from continuing operations. The Company has numerous
potential issues of common stock outstanding that become exercisable if certain
conditions are met, including options to employees and options and stock
purchase warrants to certain non-employees. Shares issuable upon the exercise
of vested, in-the-money stock options and warrants totaled 695,067 and 407,333
as of June 30, 1997 and June 30, 1996, respectively. If the Company had
applied Statement No. 128 in the accompanying financial statements only basic
loss per-share data would have been required. The inclusion of common stock
equivalents in per-share data would have resulted in a reduction in the loss
per share for each of the periods as compared to the amounts reported for the
basic per-share data. <PAGE>
NOTE 3 - Discontinued Operations and Sale of Holdings
On December 10, 1995, the Company's Board of Directors approved a formal plan
to sell WPC Holdings, Inc., the Company's then wholly-owned subsidiary,
("Holdings"). As a result of adopting a formal plan of disposition of Holdings
(which contained the leisure time, institutional health care and other products
segments), the Company accounted for Holdings as a discontinued operation from
December 10, 1995 until the January 29, 1996 sale date.
On June 20, 1995, the Company entered into a stock purchase agreement with WPC
Acquisition Corporation for the sale of the issued and outstanding common stock
of Holdings. The sale of Holdings was approved by the Company's shareholders
on January 18, 1996, and was consummated on January 29, 1996. The excess of
the Company's investment in Holdings at closing (adjusted for intercompany
amounts and the reimbursement to Holdings of certain expenses and after
deducting the net deferred operating losses of Holdings for the period October
1, 1995 through the date of sale) over the fair value of the consideration
received was $4,461. The Company recorded the excess as a loss on sale of
discontinued operations during the quarter ended March 30, 1996.
Note 4 - Acquisition of Chartex
On February 1, 1996, the Company completed the purchase of all of the issued
and outstanding share capital of Chartex Resources Limited the parent company
and sole owner of stock in Chartex International, PLC (collectively referred to
as "Chartex"). Chartex owns certain worldwide intellectual property and
proprietary manufacturing technology for the female condom. Chartex operates a
manufacturing facility in London, England to supply the worldwide needs of the
female condom. The acquisition of Chartex was accounted for as a purchase.
The fair value of total consideration paid for Chartex was less than the fair
value of the net assets purchased by $7.5 million. The Company reduced, on a
pro rata basis, the fair value of Chartex's long-term assets by the amount of
this bargain purchase.
The results of Chartex are combined with the Company after the February 1, 1996
acquisition date. Unaudited pro forma consolidated results of operations for
the nine month period ended June 30, 1996 as though Chartex had been acquired
as of October 1, 1995 follow:
Nine Months
Ended
June 30,
1996
-----------
Net revenues $1,510,000
Net loss (5,741,000)
Net loss per share $ (0.90)
Weighted average number of common
shares outstanding 6,412,112
The above amounts reflect adjustments for amortization of intangibles, and
depreciation based upon revalued purchased assets, imputed interest on borrowed
funds and the elimination of intercompany transactions. The pro forma
information is not necessarily indicative of the results that would have
occurred had the purchase been made at the beginning of the period or of the
future results of the combined operations.<PAGE>
NOTE 5 - Lease of Manufacturing Facility
On December 10, 1996, the Company's subsidiary, Chartex Resources, Ltd.
("Chartex") 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 up front consideration of 1,950,000 Pounds
Sterling for leasing the facility to a third party for a nominal annual rental
charge and for providing the third party with an option to purchase the
facility for 1 Pound Sterling 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 195,000 pounds per year until 2016.
The Company was also required to make a security deposit of 195,000 pounds to
be reduced in subsequent years. The facility had a net book value of 762,307
pounds on the date of the transaction. The 1,139,155 pounds 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.
NOTE 6 - Inventories
The components of inventory consist of the following:
June 30,
1997
Raw Material and work in process $ 304,049
Finished Goods 1,859,904
----------
Inventory, gross 2,163,953
Less: Inventory reserves (1,622,152)
----------
Inventory, net $ 541,801
==========
NOTE 7 - Sale of Convertible Preferred Stock
Subsequent to June 30, 1997, the Company commenced the Private Placement of
800,000 shares ($2.50 per share) of Class A Convertible Preferred Stock
("Preferred Stock"), $.01 Par Value, with an over-allotment, if exercised, for
an additional 240,000 shares. Each share of Preferred Stock is convertible into
one share of the Company's common stock on or after August 1, 1998. The shares
are redeemable by the Company on or after August 1, 2000 at a price per share
of $2.50 plus accrued but unpaid dividends. Each share of Preferred Stock will
receive annual dividends of $.20 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. In the event of a liquidation or dissolution of the Company, the
Preferred Stock would have priority over the Company's common stock. Under
certain conditions, the Company's Placement Agents will receive 80,000 warrants
(104,000 if the over-allotment is exercised) to purchase common stock for $2.50
on or after August 1, 1998. As of August 13, 1997, the Company had received
commitments for 800,000 shares for net proceeds of $1.8 million, $2.0 million
in gross proceeds less selling commissions and offering expenses.<PAGE>
NOTE 8 - 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 $8.7 million for the year ended September 30, 1996, a loss
of $4.7 million for the nine months ended June 30, 1997 and as of June 30, 1997
had an accumulated deficit of $35.1 million. At June 30, 1997, the Company had
working capital of $.3 million and stockholders' equity of $2.8 million.
Consistent with the availability of resources, the Company expects to incur
substantial expenditures in fiscal 1997 in an effort to support its
manufacturing operations and increase awareness and distribution of the female
condom around the globe.
For the Company to begin generating cash from operations, sales of the female
condom will have to increase significantly from current levels. Increased
sales of the female condom are dependent on the following: demand where
marketing has been initiated including the United States and in the global
public sector; launches in countries where the Company has partners including
Japan and Canada; and concluding new partnership agreements for other key new
markets or in existing markets. Management is currently holding discussions
with potential partners for distribution of the female condom in major markets
around the world. While management is confident that it will be able to
conclude arrangements for additional distribution, no assurance can be given
that successful agreements will be reached in the near term or at all.
Until sales increase sufficiently to cover fixed overheads and advertising
costs, management recognizes that the Company must generate additional capital
and/or modify its current operating plans. Thus, management's plans include
the sale of additional equity or debt securities under appropriate market
conditions during the current fiscal year. However, there can be no assurance
that such actions will be consummated. At various points during the
developmental stage of the product, the Company was able to secure additional
capital, in large part through the sale of equity and debt securities. As a
result, the Company was able to obtain FDA approval, certain worldwide rights,
manufacturing facilities and equipment, and to commercially launch the female
condom. Management believes that recent developments, including increasing
sales volume, the Company's multi-year agreement with UNAIDS for potential
first year distribution of more than eight million devices in developing
countries and significant interest by potential partners, provides 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. 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. While the Company intends to pursue these opportunities to
raise additional capital, no assurances can be given that the Company will be
successful in raising additional capital. Further, there can be no assurance,
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 support the female condom and to curtail certain other of
its operations or to cease operations. <PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Female Health Company ("FHC" or the "Company") markets and manufactures the
female condom, the only product approved by the United States Food and Drug
Administration ("FDA"), which is under a woman's control that prevents
unintended pregnancy and sexually transmitted diseases ("STDs"), including
HIV/AIDS. The Company owns certain global intellectual property rights
relating to the female condom including: patents in the United States, Japan,
the European Union, and The People's Republic of China; and regulatory
approvals in certain countries, including a Pre-Market Approval ("PMA") in the
United States and the CE Mark in the European Union. The Company also owns
certain proprietary manufacturing technology and equipment related to the
production of the female condom.
Management believes potential global sales of the female condom are
significant. The statistics regarding the global incidence of sexually
transmitted diseases and unintended pregnancies are grim and getting worse.
Until recently, the only birth-control and STD prevention option for
sexually-active individuals was the male condom. Every year an estimated four
billion male condoms are distributed worldwide. Management believes that
because the female condom offers certain advantages over the male condom and
because most potential customers have not yet tried the female condom, a
significant opportunity exists to increase the product's usage and market
share.
Recent developments supporting this view include the following:
A study supported by the Joint United Nations Global Programme on AIDS
("UNAIDS") evaluated the effects of providing the female condom to high risk
groups. The study compared data from a group which had both female and male
condoms to a group which had only male condoms. The study showed that the
group which had availability to the female condom had a 34% lower incidence
rate of STDs compared to the group which had only male condoms. In addition,
the study showed that use of the female condom led to 25% fewer unprotected sex
acts compared to the group which had only male condoms. The results of this
study led UNAIDS to announce its intention to promote the female condom as a
valuable weapon in the fight against HIV/AIDS.
Clinical studies conducted in Japan on the female condom were published in the
July 1997 issue of "The World of Obstetrics and Gynecology," a leading Japanese
medical journal. The clinical investigators stated that "the results from the
study show that the female condom is acceptable to Japanese couples, is
efficacious, and can be used safely. It is judged to be a highly useful
medical device."<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In June, the female condom was launched in Zimbabwe with the brand name Care
Contraceptive Sheath ("Care") by Population Services International ("PSI"), a
non-governmental organization, on behalf of the National AIDS Coordination
Program and the Zimbabwe National Family Planning Council. The launch of Care
was the first utilizing a branded female condom in Africa. Johnson & Johnson
distributes Care in Zimbabwe on behalf of PSI. Preliminary research
commissioned by PSI in early 1997 showed that 56% of men and 50% of women in
Zimbabwe were interested in using the female condom.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30,1996
The Female Health Company had revenues of $814,403 and a net loss of $972,745
($.11 per common share) for the three months ended June 30, 1997 compared to
revenues of $723,560 and a net loss of $1,903,289 ($.30 per common share) for
the three months ended June 30,1996. As discussed more fully below, the
Company's net loss was principally related to excess capacity at its
manufacturing facility and administrative expenses structured to support a
greater sales level than achieved to date.
For the current quarter, net sales increased $90,843, or 13%, compared with the
same period last year. The higher sales resulted primarily from increased
sales to global public sector markets offset by a decline in shipments to an
international distributor which purchased product in the third quarter last
year for a fourth quarter commercial launch.
Cost of goods sold decreased $459,446 to $799,239 in the current quarter from
$1,258,685 for the same period last year. Both the current quarter and the
comparable period last year reflect the costs of excess capacity at the
Company's manufacturing facility. The decline in cost of goods sold was caused
by a $457,430 reduction in the provision for obsolete inventory. Subsequent to
the establishment of the reserve for obsolete inventory in fiscal 1996, the FDA
increased the useful life of the Company's product from three years to five
years. Based in large part on this change, the Company adjusted its inventory
obsolescence reserves in the current quarter.
Advertising and promotional expenditures decreased $383,279 to $173,158 in the
current quarter from $556,437 for the same period in the prior year. The
decline reflected a reduction in current period print advertising in the US
compared to the third quarter last year.
Selling, general and administrative expenses increased $57,774, or 8%, to
$759,403 in the current quarter from $701,629 for the same period last year.
The higher costs reflected increased spending for investor relations and
employee compensation, partially offset by lower spending on research and
development. <PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Continued
Net interest and nonoperating expenses decreased to $55,349 for the current
period from $110,097 for the same period the prior year. The decrease is due
to one-time nonoperating income offset partially by higher interest expense
attributable to an increased level of debt outstanding.
Nine Months Ended June 30, 1997 Compared to Nine Months Ended June 30,1996
The Female Health Company had net revenues of $2,016,419 and a net loss of
$4,727,941 ($.58 per common share) for the nine months ended June 30, 1997
compared to revenues of $1,454,068 and a net loss of 4,347,242 ($.68 per common
share) for the nine months ended June 30, 1996. As discussed more fully below,
the increase in the Company's net loss was principally caused by unabsorbed
manufacturing overheads due to excess capacity, and increased advertising and
administrative expenditures.
Nine Months Ended June 30, 1997 Compared to Nine Months Ended June 30,1996
For the nine months ended June 30, 1997, sales increased $562,351, or 39%,
compared with the same period last year. The higher sales are due to increased
unit sales to domestic public sector agencies, US retailers, global public
sector customers, and FHC's international distribution partners, partially
offset by lower unit prices on sales to domestic public sector agencies.
Cost of goods sold increased $41,731 to $2,859,138 in the current nine month
period from $2,817,408 for the same period last year. The increase was
primarily due to the inclusion of fixed manufacturing overheads at the
Company's manufacturing facility in all months of the current fiscal year
compared to seven months in the comparable period last year offset by a
reduction in the provision for obsolete inventory in the current period.
Advertising and promotional expenditures increased $446,181 to $1,480,639 for
the nine months ended June 30, 1997 from $1,034,458 for the same period in the
prior year. The current period amounts largely reflect a continuation of the
Company's print advertising campaign and a single market test of the Company's
television commercial.
Selling, general and administrative expenses increased $333,520, or 19%, to
$2,102,503 in the current period from $1,768,984 for the same period last year.
The increase primarily reflected higher expenses for investor relations, legal
and employee compensation offset by lower research and development
expenditures.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest and nonoperating expenses increased to $302,080 for the current
period from $175,999 for the same period the prior year. The increase is due
to higher interest expense attributable to a higher level of debt and higher
cost borrowings partially offset by nonoperating income.
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 year 1997, cash used in operations totaled $4.5 million.
In addition, debt repayments during the first nine months amounted to $4.0
million. The Company funded cash used in operations and debt repayments with
the funds received from leasing its manufacturing facility ($3.3 million, see
Note 5), cash available at the beginning of the period ($2.9 million), and the
sale of debt and equity securities ($3.3 million). During the first nine
months of the 1997 fiscal year, $4.0 million of the Company's convertible
debentures were converted into Common Stock. As a result, as of June 30, 1997,
the Company had no convertible debentures outstanding.
At June 30, 1997, the Company had current liabilities of $2.2 million,
including a $1.0 million note payable due March 25, 1998. The Company will
need to raise additional capital to fund expected operating losses and
short-term debt repayment requirements.
Management believes that sales of the female condom will increase as a result
of additional marketing and consumer education in the United States, new
partnership agreements for key markets, and as a result of increased shipments
to global public sector customers. With increased sales and a commensurate
rise in production levels, management expects losses to decline, and at certain
levels of sales and production, to become profitable. Accordingly, the
Company's current plan to increase sales includes substantial expenditures
aimed at developing the market for the female condom around the world.
Management recognizes that the Company must secure additional funds in the near
term to accomplish its current plans. As a result, management's current plans
include the sale of additional equity or debt. <PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND SOURCES OF CAPITAL - (continued)
Management has held preliminary discussions with potential investors regarding
the Company's capital requirements. These parties have expressed interest in
providing financing under certain circumstances. While the Company intends to
aggressively pursue these opportunities, there can be no assurance that the
Company will be able to source all or any portion of the required capital
through these or other sources or that such amount, if raised, will be
sufficient to operate the Company until sales of the female condom generate
sufficient revenues to fund operations. In addition, any such funds raised
would likely be costly to the Company and/or dilutive to existing shareholders.
If the Company is unable to secure adequate financing, management will be
required to sharply curtail the Company's efforts to support the female condom
and to curtail certain other of its operations, or cease operations.
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. The Company attempts to pass on increased costs and expenses by
increasing selling prices, when possible, and by improved efficiencies of
operations.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures the female condom in a 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>
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)
27 Financial Data Schedule
(b) Report on Form 8-K - No reports on Form 8-K were filed during the quarter
ended June 30, 1997.<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 14, 1997 /s/O.B. Parrish
---------------------------
O. B. Parrish, Chairman
and Chief Executive Officer
DATE: August 14, 1997 /s/Mark A. Osborn
------------------------------
Mark A. Osborn, Vice President
and Chief Financial Officer<PAGE>
