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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-18849
THE FEMALE HEALTH COMPANY
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Wisconsin 39-1144397
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
919 N. Michigan Avenue, Suite 2208, Chicago, IL 60611
- ---------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(312) 280-2281
-----------------
(Issuer's Telephone Number, Including Area Code)
Not applicable
----------------------
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
Common Stock, $.01 Par Value - 10,415,757 shares outstanding
as of August 7, 1998
Transitional Small Business Disclosure Format (check one):
Yes _________ No X <PAGE>
FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Cautionary Statement Regarding Forward Looking
Statements . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Balance Sheet -
June 30, 1998 . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended June 30, 1998
and June 30, 1997 . . . . . . . . . . . . . . . . . 5
Unaudited Condensed Consolidated
Statements of Operations -
Nine Months Ended June 30, 1998
and June 30, 1997 . . . . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated
Statements of Cash Flows -
Nine Months Ended June 30, 1998
and June 30, 1997 . . . . . . . . . . . . . . . . . 7
Notes to Unaudited Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . 8
Management's Discussion and Analysis or Plan of
Operation . . . . . . . . . . . . . . . . . . . . . 14
Part II. Other Information
Exhibits and Reports on Form 8-K . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-QSB which are
not statements of historical fact are intended to be, and are hereby identified
as, "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to
secure adequate capital to fund operating losses, working capital requirements,
advertising and promotional expenditures and principal and interest payments on
debt obligations, factors related to increased competition from existing and
new competitors including new product introduction, price reduction and
increased spending on marketing, limitations on the Company's opportunities to
enter into and/or renew agreements with international partners, the failure of
the Company or its partners to successfully market, sell, and deliver its
product in international markets; and risks inherent in doing business on an
international level, such as laws governing medical devices that differ from
those in the U.S., unexpected changes in the regulatory requirements, political
risks, export restrictions, tariffs, and other trade barriers, and fluctuations
in currency exchange rates, the disruption of production at the Company's
manufacturing facility due to raw material shortages, labor shortages, and/or
physical damage to the Company's facilities, the Company's inability to manage
its growth and to adapt its administrative, operational and financial control
systems to the needs of the expanded entity and the failure of management to
anticipate, respond to and manage changing business conditions, the loss of the
services of executive officers and other key employees and the Company's
continued ability to attract and retain highly-skilled and qualified personnel,
the costs and other effects of litigation, governmental investigations, legal
and administrative cases and proceedings, settlements and investigations, and
developments or assertions by or against the Company relating to intellectual
property rights.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
June 30,
1998
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ASSETS
Current Assets:
Cash and equivalents $2,203,481
Accounts receivable, net 862,357
Inventories, net 784,636
Prepaid expenses and other current assets 213,384
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TOTAL CURRENT ASSETS 4,063,858
Intellectual property rights, net 938,956
Other assets 162,776
PROPERTY, PLANT AND EQUIPMENT 4,006,640
Less accumulated depreciation and amortization (1,448,072)
----------
Net Property, plant, and equipment 2,558,568
----------
TOTAL ASSETS $7,724,158
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, net of unamortized discount $ 767,538
Trade accounts payable 337,080
Accrued expenses and other current liabilities 301,677
Debt due within one year 641,173
Preferred dividends payable 116,686
----------
TOTAL CURRENT LIABILITIES 2,164,154
Capital lease obligations 9,591
Deferred gain on lease of facility (see Note 3) 1,759,197
Other long-term liabilities 196,438
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TOTAL LIABILITIES 4,129,380
STOCKHOLDERS' EQUITY:
Convertible preferred stock 6,800
Common stock 104,158
Additional Paid-in-capital 43,667,433
Accumulated deficit (40,610,254)
Translation gain 426,641
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Total Stockholders' Equity 3,594,778
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,724,158
==========
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,
---------------------
1998 1997(a)
----------- ----------
Net revenues $1,114,919 $ 814,403
Cost of products sold 990,383 799,239
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Gross margin (loss) 124,536 15,164
Advertising & Promotion 92,193 173,158
Selling, general and administrative 908,339 759,403
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Total Operating Expenses 1,000,532 932,561
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Operating loss (875,996) (917,397)
Interest, net and other expense 39,109 153,348
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Pretax loss (915,105) (1,070,745)
Provision for income taxes ---- ----
---------- ----------
Net loss (915,105) (1,070,745)
Preferred dividends accreted, Series 2
(see Note 8) ---- ----
Preferred dividends, Series 1 33,907 ----
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Net loss attributable to Common stockholders (949,012) (1,070,745)
========== ==========
Basic and diluted net loss per common
share outstanding $(0.09) $(0.12)
Weighted average number of common shares
outstanding 10,371,469 9,161,125
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
June 30,
----------------------
1998 1997(a)
---------- ----------
Net revenues $4,040,672 $2,016,419
Cost of products sold 4,082,175 2,859,138
---------- ----------
Gross margin (loss) (41,503) (842,719)
Advertising & Promotion 371,421 1,480,639
Selling, general and administrative 2,165,007 2,102,503
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Total Operating Expenses 2,536,428 3,583,142
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Operating loss (2,577,931) (4,425,861)
Interest, net and other expense 124,714 944,080
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Pretax loss (2,702,645) (5,369,941)
Provision for income taxes ---- ----
---------- ----------
Net loss (2,702,645) (5,369,941)
Preferred dividends accreted, Series 2
(see Note 8) 817,000 ----
Preferred dividends, Series 1 101,720 ----
---------- ----------
Net loss attributable to Common stockholders $(3,621,365) (5,369,941)
========== ==========
Basic and diluted net loss per common
share outstanding $ (0.37) $ (0.66)
Weighted average number of common shares
outstanding 9,821,778 8,095,955
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements. <PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended June 30,
--------------------------
1998 1997(a)
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OPERATIONS:
Net (loss) $(2,702,645) $(5,369,941)
Adjusted for noncash and nonoperating items:
Depreciation and amortization 442,140 495,135
Noncash interest expense 243,419 577,574
Amortization of discounts on convertible
debentures ---- 642,000
Reduction in inventory reserves (652,192) ----
Reduction in accounts receivable reserves (101,386) ----
Amortization of other assets 8,008 ----
Changes in operating assets and liabilities 148,006 (809,443)
---------- ----------
Net cash provided (used) in operating activities (2,614,650) (4,464,675)
INVESTING ACTIVITIES:
Capital expenditures (16,918) (82,178)
Proceeds from repayment of note receivable 750,000 ----
Lease of facility (see Note 3) ---- 3,291,410
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Net cash provided in investing activities 733,082 3,209,232
FINANCING ACTIVITIES:
Borrowings 1,000,000 2,507,602
Debt repayments (1,040,347) (4,040,848)
Proceeds from the issuance of preferred stock 1,843,384 ----
Proceeds from the issuance of common stock upon
exercise of options and warrants 480,175 776,352
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Net cash provided (used) by financing activities 2,283,212 (756,894)
Effect of exchange rate change on cash and
equivalents 168,370 (39,840)
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INCREASE (DECREASE) IN CASH AND EQUIVALENTS 570,014 (2,052,177)
Cash and equivalents at beginning of period 1,633,467 2,914,080
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CASH AND EQUIVALENTS AT END OF PERIOD $2,203,481 $861,903
========== ==========
Schedule of noncash financing and investing
activities:
Preferred dividends declared, Series 1 $101,720 ----
Preferred dividends accreted, Series 2 817,000
Issuance of warrants on notes payable 297,500 ----
Conversion of Preferred Stock into Common Stock 7,299
Conversion of Convertible Debentures into Common Stock ---- $4,020,000
(a) Amounts have been restated see Note 7 of notes to unaudited condensed
consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - Basis of Presentation
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flow for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
Operating results for the three months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended September 30, 1997.
NOTE 2 - Earnings Per Share
Basic and diluted net (loss) per Common share outstanding is based on the
weighted average of shares of Common Stock outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully dilutive
earnings per share. All earnings per share in the accompanying financial
statements have been presented to conform to Statement No. 128 requirements.
The Company has "in the money" options and warrants outstanding of 1,357,866
and 670,400 as of June 30, 1998 and 1997, respectively. The Company also has
preferred stock outstanding as of June 30, 1998, which is convertible into
680,000 shares of common stock (see Note 5). The inclusion of the options,
warrants and convertible preferred stock in the computation of diluted earnings
per share would have resulted in a reduction of the loss per share
(antidilutive) and therefore both basic and diluted earnings per share amounts
were the same for each of the periods presented in the accompanying financial
statements.
NOTE 3 - Lease of Manufacturing Facility
On December 10, 1996, the Company entered into what is in essence a sale and
leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received 1,950,000 (Pounds)
representing approximately $3,365,000 for leasing the facility to a third party
for a nominal annual rental charge and for providing the third party an option
to purchase the facility for one pound during the period December 2006 to
December 2027.<PAGE>
As part of the same transaction, the Company entered into an agreement to lease
the facility back from the third party for base rents per year payable
quarterly until 2016 of 195,000 (Pounds) representing approximately $336,000.
The lease is renewable through 2027. The Company was also required to make a
security deposit of 195,000 (Pounds) representing approximately $336,000 to be
reduced in subsequent years. The facility had a net book value of 810,845
(Pounds) representing approximately $1,398,819 on the date of the transaction.
The 1,139,155 (Pounds) representing approximately $1,966,181 gain which
resulted from this transaction will be recognized ratably over the initial term
of the lease.
Concurrent with this transaction, the Company repaid the mortgage loan on this
property of 1,062,500 (Pounds) representing approximately $1,834,000.
NOTE 4 - Inventories
The components of inventory consist of the following:
June 30, 1998
-------------
Raw Material and work in process $ 569,585
Finished Goods 459,664
----------
Inventory, Gross 1,029,249
Less: Inventory reserves (244,613)
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Inventory, net $ 784,636
==========
NOTE 5 - Sale of Convertible Preferred Stock
On December 31, 1997, the Company completed a private placement of 729,927
shares of Class A Convertible Preferred Stock - Series 2 (the "Series 2
Preferred Stock") and Warrants to purchase 240,000 shares of Common Stock. The
Series 2 Preferred Stock was sold at a per share price of $2.74, resulting in
net proceeds to the Company of $1.82 million, after commissions and expenses.
The Series 2 Preferred Stock automatically converted into Common Stock on a
one-for-one basis, on April 3, 1998, the date in which the registration
statement registering the resale of the Common Stock was declared effective by
the SEC. The investors received four-year Warrants to purchase 240,000 shares
of Common Stock exercisable at a price per share equal to the lesser of $3.425
or the average of the three closing bid prices per share of Common Stock for
any three consecutive trading days chosen by the investor during the 30 trading
day period ending on the trading day immediately prior to the exercise of the
Warrants. Individuals providing services to the Company's placement agent for
the above convertible Preferred Stock received Warrants to purchase 4,000
shares of Common Stock exercisable at any time prior to December 31, 2001, at
$4.11 per share.
In September 1997, the Company raised approximately $1.6 million net proceeds,
after issuance costs of $96,252, in a private placement of 680,000 shares of 8%
cumulative convertible Preferred Stock - Series 1. In addition, warrants to
purchase 52,000 shares of Common Stock were issued to the placement agents.
Each share of Preferred Stock is convertible into one share of the Company's
Common Stock on or after August 1, 1998. Annual Preferred Stock dividends will
be paid if and as declared by the Company's Board of Directors. No dividends
or other distributions will be payable on the Company's Common Stock unless<PAGE>
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 loss of $6.3 million for the year ended September 30, 1997, a loss
of $2.7 million for the nine months ended June 30, 1998 and as of June 30, 1998
had an accumulated deficit of $40.6 million. At June 30, 1998, the
Company had working capital of $1.9 million and stockholders' equity of $3.6
million. In the future, the Company expects to continue to broaden
distribution of the Female Condom through expanding partnerships in the major
markets including the United States, the European market and the developing
World and to support its manufacturing operations to meet the increased demand.
As a result, operations in the near future are expected to continue to use
working capital. Management recognizes that the Company's continued operations
depend on its ability to raise additional capital through a combination of
equity or debt financing, strategic alliances and increased sales volumes. At
various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch The Female Condom.
Management believes that recent developments, including the broadening of
distribution of the product under the Company's agreement with the UNAIDS, a
joint United Nations program on HIV/AIDS, provide an indication of the
Company's continued success in broadening awareness and distribution of the
Female Condom. The expanding distribution may benefit efforts to raise
additional capital and to secure additional agreements to promote and
distribute the Female Condom throughout other parts of the world.
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated short-term
requirements. Previously, 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, Vector is acting as the
Company's exclusive financial advisor for the purpose of identifying and
evaluating opportunities available to the Company for increasing shareholder
value. These opportunities may include selling all or a portion of the
business, assets or stock of the Company or entering into one or more
distribution arrangements relating to the Company's product. However, no
specific opportunity has yet been identified and there can be no assurance that
any such opportunities will be available to the Company or, if so available,
that the Company will ultimately elect to consummate any such transaction.
Further, there can be no assurance, assuming the Company raises additional
funds or enters into business agreements with third parties, that the Company
will achieve profitability or positive cashflow. If the Company is unable to<PAGE>
obtain adequate financing, management will be required to curtail certain of
the Company's operations or ultimately cease operations.
Note 7 - Restatement of 1997 Financial Statements
In March 1998, the Company discovered that its reporting of a charge to
interest expense for the amortization of discounts associated with a
"beneficial conversion feature" on two sets of convertible debentures issued in
August 1996 and February 1997 was not in accord with a March, 1997 SEC decision
regarding the reporting of such transactions. The first set of debentures was
issued August 12, 1996 for $2,000,000 at 8% and the second set of debentures
was issued February 20, 1997 for $2,020,000 at 8%, both maturing after 3 years.
Both sets of convertible debentures included a conversion feature that was "in
the money" as of the date of issuance (a "beneficial conversion feature"). The
beneficial conversion feature allowed the debentures to be converted into
Company Common stock at the lesser of $5.275 per share for debentures No. 1 and
$2.875 per share for debentures No. 2 (representing the average market price
for the five days preceding the date the debentures were sold) or 80% of the
market price at the time the conversion occurs. Fifty percent of the
debentures could be converted into Company Common stock after 45 days from the
date of issuance and the remaining after 65 days for both debentures.
In March 1997, the SEC staff concluded that a beneficial conversion feature
should be recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in capital. That
amount should be calculated at the date of issue as the difference between the
conversion price and the fair value of the common stock into which the security
is convertible. Any discount resulting from the beneficial conversion feature
increases the effective interest rate of the security and should be reflected
as a charge to interest expense.
The intrinsic value of the beneficial conversion feature as of the date of
issuance was $382,000 on debentures No. 1 and $398,000 on debentures No. 2 and,
as a result, the Company has restated the previously reported unaudited
condensed consolidated statements of operations for 1997 as follows:
June 30, 1997
-----------------------
Three Months Six Months
Ended Ended
---------- ---------
Increase in interest expense and increase in
net loss attributable to common stockholders $ 98,000 $ 642,000
Increase in net loss per common share
outstanding $(0.01) $(0.08)
Note 8 - Preferred Dividends, Series 2
The Company's $2.0 million private placement of convertible Preferred Stock -
Series 2 on December 31, 1997 included a beneficial conversion feature valued
at $500,000 and four-year warrants to purchase additional shares of common
stock valued at $317,000. In accordance with new SEC reporting requirements
for such transactions, the Company recorded the value of the beneficial
conversion feature and warrants, a total of $817,000 as additional paid-in
capital. The corresponding discount of $817,000, associated with the issuance<PAGE>
of the convertible preferred stock is a one-time, non-recurring charge that has
been fully amortized and reflected as preferred dividends accreted in the
consolidated statements of operations for the quarter and nine months ended
June 30, 1998. The dividend accretion had no impact on the Company's cashflow
from operations.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
GENERAL
The Female Health Company ("FHC" or the "Company") manufactures, markets and
sells The Female Condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
Safety and Efficacy
Clinical trials and actual multi-country marketing have established The Female
Condom as safe and effective. Studies show the following results:
Reduction in STDs 1) 34% {Results when Female Condom was
Reduction in Unprotected Sex 1) 25% available as an option vs. when
only the male condom was available.}
Prevention of Pregnancy- 95% When used properly with every sex
Effectiveness 2) act.
1) Supported by UNAIDS
2) Supported by USAID and conducted by Family Health International.
Recent studies completed in Japan for regulatory submission indicate the
efficacy of The Female Condom may be even greater than noted above.
No significant safety issues or side effects have been reported to date with
The Female Condom.
Cost Effectiveness
Preliminary results from a cost effectiveness study supported by UNAIDS
indicate making The Female Condom available is highly cost effective for
governments in terms of reducing public health costs in both developed and
developing countries.
Endorsements
Currently, The Female Condom is endorsed for use by the World Health
Organization (WHO), the United Nations Joint Programme on AIDS (UNAIDS), the
U.S. Agency for International Development (USAID), many NGO's (non-government
organizations) around the world, and a number of city and state public health
departments in the United States.
At the June 1998 World AIDS Conference in Geneva, Switzerland The Female Condom
appeared in over 50 studies, speeches and exhibition booths.
Advantages vs. the Male Condom
The Female Condom is currently the only available barrier method controlled by
women which allows them to protect themselves from unintended pregnancy and
STDs, including HIV/AIDS. This is an important advantage as many men do not
like to wear male condoms and may refuse to do so.<PAGE>
The material that is used for The Female Condom, polyurethane, offers a number
of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability
that The Female Condom sheath will tear during use. Clinical studies and
everyday use have shown that latex male condoms can tear as much as 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 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 sex than the male
condom which requires sexual arousal for application.
Global Market
The market potential for The Female Condom is large and growing as highlighted
by the following:
- New cases of STDs each year: 300 million
- Estimated Annual Male Condom Market: 4.7 billion units
Strategy/Goals
The Company's strategy is to act as a manufacturer selling The Female Condom to
the global public sector, the U.S. public sector and commercial partners for
country specific marketing. The public sector customers and partners assume
the cost of shipping and marketing. As a result, as volume increases, expenses
other than manufacturing costs will not increase appreciably.
Commercialization
The Product is currently available through private and public sector or special
government programs in thirty countries. It is commercially marketed directly
by the Company in the United States and the United Kingdom and through
marketing partners in Canada, Holland, Brazil, Venezuela, South Korea and
Taiwan. The Company has signed distribution agreements in Japan and
Bangladesh. In Japan, the market for male condoms exceeds 600 million units.
Oral contraceptives have never been approved in Japan and, as a result, 85% of
Japanese couples seeking protection use condoms. The Company's partner in
Japan, Taiho Pharmaceuticals, a $1 billion subsidiary of Otsuka, submitted an
application for regulatory approval to Koseisho (Japanese equivalent of FDA) in
October, 1997. After approval, which is expected in 1998, the Company will
manufacture the Product and supply it to Taiho. Taiho has responsibility for
marketing and distributing The Female Condom in Japan. Taiho has the exclusive
right to market The Female Condom in Japan provided it sells at least 1.8
million units in the first year after regulatory approval and 2 million units
thereafter. The price at which Taiho will purchase the product is under
negotiation. Results of the clinical tests in Japan show that The Female
Condom may be more effective in preventing pregnancy than the male condom and
has a high acceptance rate of 70% among Japanese women. Taiho plans to market
The Female Condom under the name "Mylura Femy."
The Company is currently in discussions with potential distributors for India
and The People's Republic of China and other countries.<PAGE>
In addition to the commercial market, The Female Condom is sold to U.S. and
global public sector customers. In the U.S., the Product is marketed to city
and state public health clinics as well as not-for-profit organizations such as
Planned Parenthood. Currently, fourteen major city and state governments
including New York, Pennsylvania, Florida, Connecticut, Hawaii, Louisiana,
Maryland, New Jersey, South Carolina, Illinois, Chicago, Philadelphia, New York
City, and Houston have purchased the Product for distribution with a number of
others expressing interest. All fourteen major cities and states have
reordered product after initial shipments.
In 1996, the Company entered into a three-year agreement with UNIADS, whereby
UNAIDS will facilitate the availability and distribution of The Female Condom
in the developing world. The Company will sell the Product to developing
countries at a reduced price based on the total number of units purchased. The
special reduced price is negotiated each year between the Company and UNAIDS.
Currently, the price is set at 0.38 (Pounds) per unit. Pursuant to this
agreement, The Product is currently being marketed in Zambia and Zimbabwe with
plans for 1998 market introductions in South Africa, Uganda, Tanzania, Cote
d'Ivoire and other countries. As part of the UNAIDS agreement, the South
African government recently ordered one and one-half million Female Condoms(
which were shipped by the Company prior to March 31, 1998. Recent orders also
include 1.2 million units for Uganda. In April, UNAIDS held a three-day meeting
in Pretoria, South Africa devoted exclusively to accelerating the introduction
of The Female Condom in developing countries. The meeting was attended by more
than 80 representatives from 15 countries from Southern and Eastern Africa.
The Company is now receiving reorders from countries which initially purchased
The Female Condom under the UNAIDS program.
Worldwide Regulatory Approvals
The Female Condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the
world, including receipt of a CE Mark in 1997 which allows the Company to
market The Female Condom throughout the European Union. In addition to the
United States and the European Union, several other countries have approved The
Female Condom for sale, including Canada, Russia, Australia, South Korea and
Taiwan. The Company expects The Female Condom to receive approval in Japan in
1998.
The Company believes that FDA's classification of The Female Condom as a Class
III Medical Device, requiring a PMA approval to market by FDA, creates a
significant barrier to entry. The Company estimates that it would take a
minimum of four to six years to implement, execute, and receive FDA approval of
a PMA to market another type of female condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the
manufacture and distribution of The Female Condom.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
For the current quarter, sales increased $300,516, or 37%, compared with the
same period last year. The higher sales resulted from increased sales in the
domestic public sector and global public sector. <PAGE>
The Female Health Company had revenues of $1,114,919 and a net loss of $915,105
($.09 per common share) for the three months ended June 30, 1998 compared to
revenues of $814,403 and a net loss of $1,070,745 ($.12 per common share) for
the three months ended June 30, 1997. As discussed more fully below, the
decrease in the Company's net loss was principally related to increased sales
volume, reduced expenditures for advertising and promotion, adjustments to
inventory reserves and reduced interest expense.
Cost of goods sold increased $191,144, or 24%, to $990,383 in the current
quarter from $799,239 for the same period last year. During the quarter, the
Company reduced its reserve for inventory obsolescence based upon the increased
demand for product and the resulting lower inventory levels. The adjustment of
the inventory reserve reduced cost of goods sold by $63,126. There were no
adjustments to inventory reserves during the same period last year.
Advertising and promotional expenditures decreased $80,965, or 47%, to $92,193
in the current quarter from $173,158 for the same period in the prior year.
Advertising and promotion relates almost exclusively to the U.S. consumer
market, and includes the costs of print advertising, trade and consumer
promotions, product samples and other marketing costs. Through expenditures to
date, the Company has established that The Female Condom is responsive to
promotion; but due to the Company's size, it doesn't possess the resources to
conduct a significant marketing program. Accordingly, the Company is in
discussions with potential partners for the U.S. that have the resources to
conduct such a marketing program. The prior period amounts largely reflect
expenditures for the Company's previous print advertising campaign and single
market test of the Company's television commercial.
Selling, general and administrative expenses increased $148,936, or 20%, to
$908,339 in the current quarter from $759,403 for the same period last year.
The Company granted employee incentive bonuses of restricted stock in lieu of
cash during the quarter ended June 30, 1998 increasing total compensation
expense by $307,625. The Company did not grant salary increases or employee
incentive stock bonuses in the prior year. Excluding this non-cash charge,
expenses for the quarter totaled $600,714, a decrease of $158,689 or 21%
compared with the prior year quarter.
Net interest and non-operating expenses decreased $114,239 to $39,109, or 74%,
for the current period from $153,348 for the same period the prior year. The
decrease is due to lower interest expense attributable to a decreased level of
debt outstanding during the quarter. During the same period last year, the
Company amortized $98,000 of discounts related to certain beneficial conversion
features included with the convertible debentures issued by the Company, see
note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.
Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997
For the nine months ended June 30, 1998, sales increased $2,024,253, or 100%,
compared with the same period last year. The higher sales are due to increased
unit sales to domestic public sector agencies and the global public sector.
The Female Health Company had net revenues of $4,040,672 and a net loss of
$2,702,645 ($.28 per common share) for the nine months ended June 30, 1998
compared to revenues of $2,016,419 and a net loss of $5,369,941 ($.66 per
common share) for the nine months ended June 30, 1997. As discussed more fully
below, the decrease in the Company's net loss was principally related to<PAGE>
increased sales volume, reduced expenditures for advertising and promotion,
adjustments to inventory reserves and reduced interest expense.
Cost of goods sold increased $1,223,037, or 43%, to $4,082,175 in the current
period from $2,859,138 for the same period last year. Increases in the costs
of goods sold which are related to higher sales volumes, were offset, in part,
by a $649,387 reduction in the Company's reserve for inventory obsolescence.
The FDA's decision to extend the useful life of The Female Condom to five years
from three years and the reduction of finished goods inventories resulting from
the increased level of sales were the factors leading to the inventory reserve
adjustment. The Company did not adjust inventory reserves during the same
period last year.
Advertising and promotional expenditures decreased $1,109,218, or 75%, to
$371,421 for the nine months ended June 30, 1998 from $1,480,639 for the same
period in the prior year. Advertising and promotion relates almost exclusively
to the U.S. consumer market, and includes the costs of print advertising, trade
and consumer promotions, product samples and other marketing costs. Through
expenditures to date, the Company has established that The Female Condom is
responsive to promotion; but due to the Company's size, it doesn't possess the
resources to conduct a significant marketing program. Accordingly, the Company
is in discussions with potential partners for the U.S. that have the resources
to conduct such a marketing program. The prior period amounts largely reflect
expenditures for the Company's previous print advertising campaign and single
market test of the Company's television commercial.
Selling, general and administrative expenses increased $62,504, or 3%, to
$2,165,007 in the current period from $2,102,503 for the same period last year.
The Company's initiatives to reduce spending in all administrative areas have
resulted in reductions in the expenses associated with telecommunication,
legal, and financial matters in the United States and United Kingdom. These
reductions were offset by increased compensation expense.
Net interest and non-operating expenses decreased $819,366 to $124,714 for the
current period from $944,080 for the same period the prior year. During the
prior year the Company had a higher level of debt resulting from the issuance
of convertible debentures. The subsequent conversion of the debentures has
lowered the outstanding debt and decreased interest expense.
Year to date total operating expenses were $2,536,428, a decrease of
$1,046,714, or 29% compared with the prior period year to date total operating
expenses of $3,583,142. In the current period, total operating expenses
decreased to 63% of net revenues. For the same period last year, total
operating expenses were 177% of net revenues.
In addition, during the same period last year, the Company amortized $642,000
of discounts related to certain beneficial conversion features included with
the convertible debentures issued by the Company, see note 7 of Notes to
Unaudited Condensed Consolidated Financial Statements.
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 1998, cash used in operations totaled $2.6 million. The
Company funded cash used in operations and improved its cash position with the
$1.8 million net proceeds received from the private placement offering of<PAGE>
convertible Preferred Stock and the collection of $0.7 million pursuant to the
prepayment of the $1 million promissory note the Company received in connection
with its sale of its former wholly-owned subsidiary, WPC Holdings, Inc. The
Company valued the promissory note at $0.7 million as of September 30, 1997.
Management believes that cash on hand at June 30, 1998 will be sufficient to
meet requirements for the balance of calendar 1998. However, until internally
generated funds are sufficient to meet cash requirements, the Company will
remain dependent upon its ability to generate sufficient capital from outside
sources.
At June 30, 1998, the Company had current liabilities of $2.2 million including
a $1.0 million note payable due March 25, 1999, to Mr. Dearholt, a Director of
the Company. As of June 30, 1998, Mr. Dearholt beneficially owns 1,189,777
shares of the Company's Common Stock.
In the near term, the Company's management expects operating and capital costs
to continue to exceed funds generated from operations, due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize The Female Condom around the world. It is
estimated that the Company's cash burn rate, without revenues, is approximately
$0.4 million per month.
While management believes that revenue from sales of The Female Condom will
eventually exceed operating costs, and that, ultimately, operations will
generate sufficient funds to meet capital requirements, there can be no
assurance that such level of operations ultimately will be achieved, or be
achieved in the near term. Likewise, there can be no assurance that the
Company will be able to source all or any portion of its required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of The Female Condom generate sufficient
revenues to fund operations. In addition, any funds raised may be costly to
the Company and/or dilutive to stockholders.
If the Company is not able to source the required funds or any future capital
which becomes required, the Company may be forced to sell certain of its assets
or rights or cease operations. Further, if the Company is not able to source
additional capital, the lack of funds to promote the Female Condom may
significantly limit the Company's ability to realize value from the sale of
such assets or rights or otherwise capitalize on the investments made in The
Female Condom.
CONTINUED LISTING ON THE AMERICAN STOCK EXCHANGE
The Company's common stock is listed for trading on the American Stock Exchange
(the "Exchange"). The Constitution of the Exchange provides that its Board of
Governors may, in its discretion, at any time, remove any security from
listing. Although the determination as to whether a security warrants
delisting is not based on any precise mathematical formula, the Exchange has
adopted a number of guidelines which it will consider when deciding whether to
delist an Exchange-traded security. Certain of these guidelines address the
issuer's financial condition. For example, the Exchange will consider
delisting the securities of an issuer which has stockholders' equity of less
than $2 million if the Company has sustained losses from continuing operations
and/or net losses in two of its three most recent fiscal years (which the
Company has) or which has stockholders' equity of less than $4 million if the
Company has sustained losses from continuing operations and/or net losses in
three of its four most recent fiscal years (which the Company has). The<PAGE>
Exchange will also consider delisting the stock of a company which has incurred
net losses in its five most recent fiscal years (which the Company has). As of
June 30, 1998, the Company had stockholders' equity of approximately $3.6
million. On February 5, 1998, the Company received a letter from the Exchange
noting that the Company has fallen below certain of the Exchange's continued
listing guidelines and indicating that the Exchange will review the Company's
listing eligibility. The letter specifically noted that the Company has fallen
below the Exchange's continued listing guidelines triggered by both (a) five
years of losses and (b) equity below $4 million since the Company had losses in
three of its four most recent fiscal years. Management of the Company met with
representatives of the Exchange and, thereafter the Company received a letter
from the Exchange dated April 21, 1998 in which the Exchange determined to
continue to list the Company's Common Stock until the Exchange can review the
Company's June 30, 1998 Form 10-QSB and subject to the Company's favorable
progress in satisfying the Exchange's guidelines for continued listing and to
the Exchange's routine periodic review of the Company's SEC and other filings.
There can be no assurance that the Exchange will permit the continued listing
of the Company's common stock on the Exchange. If the Exchange delists trading
of the Company's common stock, investors would likely find it more difficult to
obtain accurate quotations of the price of the Company's common stock and to
sell the common stock on the open market.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased selling, general and administrative
expenses. Historically, the Company has absorbed increased costs and expenses
without increasing selling prices.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures The Female Condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales are
likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States Dollar. In
addition, some of the Company's future international sales may be in developing
nations where dramatic political or economic changes are possible. Such factors
may adversely affect the Company's results of operations and financial
condition.
YEAR 2000 COMPLIANCE
The Company does not believe it has a material risk associated with the Year
2000 issue in connection with its own internally-used computer software since
the Company's operations are not highly dependent on computer software.
Although the Company utilizes computer software for a variety of applications,
including billing, it has a fairly limited customer and supplier base.
Accordingly, even if the Company's computer software experiences Year 2000
problems, the Company believes it could continue to operate without incurring a
material adverse effect on its financial condition or results of operations.
The Company is not currently able to determine the potential effect on the
Company of Year 2000 compliance by the Company's customers and suppliers.<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of its shareholders on April 8, 1998. At
the meeting, shareholders were asked to elect O.B. Parrish, Mary Ann Leeper,
Ph.D., William R. Gargiulo, Jr., Stephen M. Dearholt and David R. Bethune to
the Board of Directors to serve until the 1999 Annual Meeting and to ratify the
appointment of McGladrey & Pullen LLP as the Company's independent public
accountants for the fiscal year ending September 30, 1998. The results of the
shareholder voting is listed below:
Matter Voted on: For Against WithheldAbstentions Broker
non-votes
O.B. Parrish 8,745,488 243,875
William R. Gargiulo 8,745,588 243,775
Mary Ann Leeper Ph.D. 8,744,334 245,029
Stephen M. Dearholt 8,745,638 243,725
David R. Bethune 8,745,038 244,325
Ratification of
Independent Public
Accountants 8,780,629 185,144 23,590<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws. (2)
4.1 Amended and Restated Articles of Incorporation. (1)
4.2 Articles II, VII, and XI of the Amended and Restated
By-Laws (included in Exhibit 3.2). (2)
27 Financial Data Schedule
_____________________________
(1) Incorporated herein by reference to the Company's
Registration Statement on Form S-3, filed with the Securities
and Exchange Commission on February 13, 1998.
(2) Incorporated herein by reference to the Company's 1995
Form 10-KSB.
(b) Report on Form 8-K - No reports on Form 8-K were filed during the quarter
ended June 30, 1998. <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, 1998 /s/O.B. Parrish
--------------------------------------
O. B. Parrish, Chairman and
Chief Executive Officer and
Acting Principal Accounting Officer<PAGE>
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