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 December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-18849
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THE FEMALE HEALTH COMPANY
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Wisconsin 39-1144397
--------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
875 N. Michigan Avenue, Suite 3660, Chicago, IL 60611
----------------------------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
(312) 280-1119
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(Issuer's Telephone Number, Including Area Code)
Not applicable
-----------------------------------------------
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X NO
---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
Common Stock, $.01 Par Value - 12,479,367 shares outstanding as of February 9,
2000
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
FORM 10-QSB
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND
ANALYSIS: PAGE
----
Cautionary Statement Regarding Forward Looking
Statements 3
Unaudited Condensed Consolidated Balance Sheet -
December 31, 1999 4
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended December 31, 1999
and December 31, 1998 5
Unaudited Condensed Consolidated
Statements of Cash Flows -
Three Months Ended December 31, 1999
and December 31, 1998 6
Notes to Unaudited Condensed Consolidated
Financial Statements 7
Management's Discussion and Analysis 13
PART II. OTHER INFORMATION 23
Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-QSB which are
not statements of historical fact are intended to be, and are hereby identified
as, "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to secure
adequate capital to fund operating losses, working capital requirements,
advertising and promotional expenditures and principal and interest payments on
debt obligations; the ultimate level of consumer demand for the female condom;
factors related to increased competition from existing and new competitors
including new product introduction, price reduction and increased spending on
marketing; limitations on the Company's opportunities to enter into and/or renew
agreements with international partners; the failure of the Company or its
partners to successfully market, sell, and deliver its product in international
markets; risks inherent in doing business on an international level, such as
laws governing medical devices that differ from those in the U.S., unexpected
changes in 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; the failure of management to anticipate, respond to and manage
changing business conditions; the loss of the services of executive officers and
other key employees and the Company's continued ability to attract and retain
highly-skilled and qualified personnel; and the costs and other effects of
litigation, governmental investigations, legal and administrative cases and
proceedings, settlements and investigations, and developments or assertions by
or against the Company relating to intellectual property rights.
3
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
ASSETS
<S> <C>
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 548,376
Accounts receivable, net. . . . . . . . . . . . . . . . . 663,726
Inventories, net. . . . . . . . . . . . . . . . . . . . . 1,266,574
Prepaid expenses and other current assets . . . . . . . . 404,546
-------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . 2,883,222
Intellectual property rights, net. . . . . . . . . . . . . . 732,577
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 158,311
PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . . . 3,930,922
Less accumulated depreciation and amortization . . . . . . . (2,103,546)
-------------
Net Property, plant, and equipment . . . . . . . . . . . . 1,867,376
-------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 5,641,486
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable, related party, net of unamortized discount $ 1,248,003
Convertible debenture, net of unamortized discount. . . . 1,082,105
Accounts payable. . . . . . . . . . . . . . . . . . . . . 518,682
Accrued expenses and other current liabilities. . . . . . 385,147
Preferred dividends payable . . . . . . . . . . . . . . . 28,631
-------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . 3,262,568
Deferred gain on lease of facility . . . . . . . . . . . . . 1,572,227
Other long-term liabilities. . . . . . . . . . . . . . . . . 73,176
-------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . 4,907,971
STOCKHOLDERS' EQUITY:
Convertible preferred stock. . . . . . . . . . . . . . . . . 6,600
Common stock . . . . . . . . . . . . . . . . . . . . . . . . 148,975
Additional paid-in-capital . . . . . . . . . . . . . . . . . 47,093,988
Unearned consulting compensation . . . . . . . . . . . . . . (147,414)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (46,521,158)
Accumulated other comprehensive income . . . . . . . . . . . 184,600
Treasury Stock, at cost. . . . . . . . . . . . . . . . . . . (32,076)
-------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . 733,515
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . $ 5,641,486
=============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Net revenues. . . . . . . . . . . . . . . . . . $ 847,295 $ 703,998
Cost of products sold . . . . . . . . . . . . . 916,893 861,451
-------------- ------------
Gross Profit (Loss) . . . . . . . . . . . . . . (69,598) (157,453)
-------------- ------------
Advertising & promotion . . . . . . . . . . . . 38,810 92,463
Selling, general and administrative . . . . . . 843,281 605,634
-------------- ------------
Total operating expenses. . . . . . . . . . . . 882,091 698,097
-------------- ------------
Operating (Loss). . . . . . . . . . . . . . . . (951,689) (855,550)
Interest, net and other expense . . . . . . . . 355,138 70,935
-------------- ------------
Pretax (Loss) . . . . . . . . . . . . . . . . . (1,306,827) (926,485)
Provision for income taxes. . . . . . . . . . . ---- ----
-------------- ------------
Net (Loss). . . . . . . . . . . . . . . . . . . (1,306,827) (926,485)
Preferred dividends, Series 1 . . . . . . . . . 33,441 35,555
-------------- ------------
Net (Loss) attributable to Common stockholders. $ (1,340,268) $ (962,040)
============== ============
Net (Loss) Per Common Share Outstanding . . . . $ (0.11) $ (0.09)
Weighted Average of Common Shares Outstanding . 12,292,449 10,441,227
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months ended December 31,
-------------------------------
1999 1998
-------------- --------------
OPERATIONS:
<S> <C> <C>
Net (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,340,268) $ (962,040)
Adjusted for noncash items:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 271,566 140,091
Amortization of discounts on notes payable and convertible debentures . . 326,129 73,975
Recovery of inventory reserves. . . . . . . . . . . . . . . . . . . . . . (16,865) (1,510)
Provision for(recovery of) doubtful accounts, returns and discounts . . . (8,649) 10,035
Changes in operating assets and liabilities . . . . . . . . . . . . . . . 503,228 (106,974)
Net cash (used in) operating activities. . . . . . . . . . . . . . . . . . (264,859) (846,423)
-------------- --------------
INVESTING ACTIVITIES:
Capital expenditures, Net cash (used in) investing activities. . . . . . . (11,307) ----
-------------- --------------
FINANCING ACTIVITIES:
Dividend paid on preferred stock . . . . . . . . . . . . . . . . . . . . . (39,000) (146,228)
Purchase of Common Stock held in Treasury. . . . . . . . . . . . . . . . . ---- (6,568)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . 315,863 29,974
-------------- --------------
Net cash provided by (used in) financing activities. . . . . . . . . . . . 276,863 (122,822)
-------------- --------------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . (23,030) (6,502)
-------------- --------------
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . . . . (22,333) (975,747)
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 570,709 1,480,287
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 548,376 $ 504,540
============== ==============
Schedule of noncash financing and investing activities:
Common stock issued for payment of preferred stock dividends. . . . . . . $ 39,363 $ 16,626
Preferred dividends declared, Series 1 . . . . . . . . . . . . . . . . . . 33,441 35,555
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
-----------------------
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flow for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
Operating results for the three months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended September 30, 1999.
Principles of consolidation and nature of operations:
- ----------------------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, The Female Health Company - UK and The Female
Health Company - UK, plc. All significant intercompany transactions and accounts
have been eliminated in consolidation. The Female Health Company ("FHC" or the
"Company") is currently engaged in the marketing, manufacture and distribution
of a consumer health care product known as the Reality female condom, "Reality,"
in the U.S. and "femidom" or "femy" outside the U.S. The Female Health Company -
UK, is the holding company of The Female Health Company - UK, plc, which
operates a 40,000 sq. ft. leased manufacturing facility located in London,
England.
NOTE 2 - Earnings Per Share
--------------------
Earnings per share (EPS): The Company has adopted the provisions of Statement of
- ------------------------
Financial Accounting Standards (FAS) No. 128, Earnings Per Share. FAS No. 128
requires the presentation of "basic" and "diluted" EPS. Basic EPS is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the incremental
common shares issuable upon conversion of convertible preferred or convertible
debt and the exercise of stock options and warrants for all periods. Fully
diluted (loss) per share is not presented since the effect would be
anti-dilutive.
7
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NOTE 3 - Comprehensive Income (Loss)
-----------------------------
Total Comprehensive Loss was $(1,345,515) for the 3 months ended December 31,
1999 and $(911,204) for the 3 months ended December 31, 1998.
NOTE 4 - Inventories
-----------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------
<S> <C>
Raw Material and work in process $ 295,691
Finished Goods . . . . . . . . . 992,716
-------------------
Inventory, Gross . . . . . . . . 1,288,407
Less: Inventory reserves . . . . (21,833)
Inventory, net . . . . . . . . . $ 1,266,574
===================
</TABLE>
NOTE 5 - Sale of Convertible Preferred Stock
---------------------------------------
The Company has outstanding 660,000 shares of 8% cumulative Convertible
Preferred Stock - Series 1. Each share of preferred stock is convertible into
one share of the Company's Common Stock on or after August 1, 1998. Annual
preferred stock dividends will be paid if and as declared by the Company's Board
of Directors. No dividends or other distributions will be payable on the
Company's Common Stock unless dividends are paid in full on the Preferred Stock.
The shares may be redeemed at the option of the Company, in whole or in part, on
or after August 1, 2000, subject to certain conditions, at $2.50 per share plus
accrued and unpaid dividends. In the event of a liquidation or dissolution of
the Company, the Preferred Stock - Series 1 would have priority over the
Company's Common Stock.
NOTE 6 - Financial Condition
--------------------
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
incurred a net loss of $1.3 million for the three months ended December 31, 1999
and as of December 31, 1999 had an accumulated deficit of $46.5 million.
At December 31, 1999, the Company had working capital of $(0.4) million and
stockholders' equity of $0.7 million. In the near term, the Company expects
operating and capital costs to continue to exceed funds generated from
operations due principally to the Company's fixed manufacturing costs relative
to current production volumes and the ongoing need to commercialize the Female
Condom around the world. As a result, operations in the near future are expected
to continue to use working capital. Management
8
<PAGE>
recognizes that the Company's continued operations depend on its ability to
raise additional capital through a combination of equity or debt financing,
strategic alliances and increased sales volumes.
At various points during the developmental stage of the product, the Company was
able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the
Company was able to obtain FDA approval, worldwide rights, manufacturing
facilities and equipment and to commercially launch the Female Condom.
Management believes that recent developments, including the Company's agreement
with the UNAIDS, a joint United Nations program on HIV/AIDS, provide an
indication of the Company's early success in broadening awareness and
distribution of the Female Condom and may benefit future efforts to raise
additional capital and to secure additional agreements to promote and distribute
the Female Condom throughout other parts of the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm specializing
in providing financial advisory services to healthcare and life-science
companies. Pursuant to this agreement, as extended, Vector has acted as the
Company's exclusive financial advisor through December 31, 1999 for the purposes
of identifying and evaluating opportunities available to the Company for
increasing shareholder value. The Company and Vector are discussing extending
these arrangements. These opportunities may include selling all or a portion of
the business, assets or stock of the Company or entering into one or more
distribution arrangements relating to the Company's product. There can be no
assurance that any such opportunities will be available to the Company or, if so
available, that the Company will ultimately elect or be able to consummate any
such transaction. Management is currently determining whether the Company should
seek to extend this arrangement.
In May 19, 1999 and June 3, 1999 the Company issued an aggregate $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. See Note 7 of the Notes to
Unaudited Condensed Consolidated Financial Statements for additional detail.
On November 19, 1998, the Company executed an agreement with a private investor
(the "Equity Line Agreement"). This agreement provides for the Company, at its
sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $6.0 million of the Company's Common Stock, subject to a minimum
put of $1.0 million over the duration of the agreement. The Equity Line
Agreement expires on February 12, 2001 and, among other things, provides for
minimum and maximum puts ranging from $100,000 to $1,000,000 depending on the
Company's stock price and trading volume. Puts cannot occur more frequently
than every 20 trading days. Upon a proper put under this agreement, the investor
purchases Common Stock at a discount of (a) 12% from the then current average
market price of the Company's Common Stock, as determined
9
<PAGE>
under the Equity Line Agreement, if such average market price is at least $2 or
(b) 18% from the then current average market price if such average market price
is less than $2. In addition, the Company is required to pay its placement agent
sales commissions in Common Stock or cash, at the placement agent's discretion,
equal to 7% of the funds raised under the Equity Line Agreement and issue
warrants to the placement agent to purchase shares of Common Stock, at an
exercise price of $2.17 per share, equal to 10% of the shares sold by the
Company under the Equity Line Agreement. Pursuant to the Equity Line Agreement,
the Company issued the investor a Warrant to purchase 200,000 shares of Common
Stock at $2.17 per share.
The Company is required to draw down a minimum of $1 million during the term of
the Equity Line Agreement. If the Company does not draw down the minimum, the
Company is required to pay the investor a 12% fee on that portion of the $1
million minimum not drawn down at the end of the term of the Equity Line
Agreement. As of December 31, 1999, the Company has placed three puts for the
combined cash proceeds of $485,000 providing the investor with a total of
482,964 shares of the Company's Common Stock. Each put was executed while the
Company's stock price was below $2.00 per share and, therefore, the common stock
was sold at the 18% discount. The timing and amount of the stock sales under
the agreement are totally at the Company's discretion, subject to the Company's
compliance with each of the following conditions at the time the Company
requests a stock sale under the agreement:
- - the registration statement the Company filed with the SEC for sales of
stock under the Equity Line Agreement must remain in effect;
- - all of the Company's representations and warranties in the Equity Line
Agreement must be accurate and the Company must have complied with all of
the Company's obligations in the Equity Line Agreement;
- - there may not be any injunction, legal proceeding or law prohibiting the
Company's sale of the stock to the investor;
- - the Company's counsel must issue a legal opinion to the investor;
- - the sale must not cause the investor's ownership of the Company's common
stock to exceed 9.9% of the outstanding shares of the Company's common
stock;
- - the trading price of the Company's common stock over a five trading day
preceding the date of the sale must equal or exceed $1.00 per share; and
- - the average daily trading volume of the Company's common stock for a 20
trading day period preceding the date of the sale must equal or exceed
17,000 shares.
10
<PAGE>
While the Company believes that its existing capital resources will be adequate
to fund its currently anticipated capital needs, if they are not, the Company
may need to raise additional capital until its sales increase sufficiently to
cover operating expenses. In addition, there can be no assurance that the
Company will satisfy the conditions required for it to exercise puts under the
Equity Line Agreement. Accordingly, the Company may not be able to realize all
of the funds available to it under the Equity Line Agreement.
Further, there can be no assurances, assuming the Company successfully raises
additional funds or enters into business agreements with third parties, that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate financing, management will be required to sharply
curtail the Company's efforts to commercialize the Female Condom and to curtail
certain other of its operations or, ultimately, cease operations.
NOTE 7 - Sale of Convertible Debentures
---------------------------------
On May 19 and June 3, 1999, the Company issued an aggregate of $1.5 million of
convertible debentures and warrants to purchase 1,875,000 shares of the
Company's common stock to five accredited investors. Interest on the convertible
debentures is payable quarterly at a rate of 8% annually in cash or, at the
investors' option, common stock at its then current fair market value. From
December 2, 1999 until February 11, 2000, interest on the convertible debentures
was at the rate of 10% annually, and then returned to 8% annually. Repayment of
the convertible debentures is secured by a first security interest in all our
assets. The original principal balance plus any accrued but unpaid interest of
the convertible debentures may be convertible into the Company's common stock at
the investor's election at any time after one year based on a per share price
equal to the lesser of (a) 70% of the market price of the Company's Common Stock
at the time of conversion or (b) $1.00. The convertible debentures are payable
one year after issuance or, if the Company elects, two years after issuance. If
the term is extended for the extra one year, the Company must issue to the
investor at the time of extension, additional warrants to purchase 375,000
shares of Common Stock on the same term as the other warrants. Interest on the
convertible debentures is payable at 8% quarterly in cash or, at the investor's
option, Common Stock at its then current fair market value. Repayment of the
Convertible Debentures is secured by a first security interest in all of the
Company's assets. Additionally, warrants to purchase 337,500 shares of Common
Stock were issued to the Company's placement agent in this offering. The
warrants have a term of five years and are exercisable at an exercise price
equal to the lesser of 70% of the market price of the Common Stock at the time
of the exercise or $1.00.
The convertible debentures beneficial conversion feature is valued at $336,400
and the warrants to purchase 1,875,000 shares of common stock are valued at
$715,100. In accordance with SEC reporting requirements for such
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<PAGE>
transactions, the Company recorded the value of the beneficial conversion
feature and warrants (a total of $1,051,500) as additional paid in capital. The
corresponding amount of $1,051,500 was recorded as a discount on convertible
debentures and is amortized over 1 year using the interest rate method.
NOTE 8 - Industry Segments And Financial Information About Foreign and Domestic
- ------ -----------------------------------------------------------------------
Operations
- ----------
The Company currently operates primarily in one industry segment which includes
the development, manufacture and marketing of consumer health care products.
The Company operates in foreign and domestic regions. Information about the
Company's operations in different geographic areas (determined by the location
of the operating unit) is as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
(Amounts in Thousands) 1999 1998
-------------- -------------
<S> <C> <C>
Net revenues:
United States . . . . . . $ 647 $ 451
International . . . . . . 200 253
Operating profit (loss):
United States . . . . . . (1,183) (690)
International . . . . . . (158) (272)
Identifiable assets
United States . . . . . . 1,865 1,337
International . . . . . . 3,954 4,780
</TABLE>
On occasion, the Company's U.S. unit sells product directly to customers located
outside the U.S. Were such transactions reported by geographic destination of
the sale rather than the geographic location of the unit, U.S. revenues would be
decreased and International revenues increased by $11,000 and $1,900 as of
December 31, 1999 and 1998, respectively.
12
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The Female Health Company ("FHC" or the "Company") manufactures, markets and
sells the female condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
The female condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 40 additional
countries. Certain of these studies show that having the female condom
available allows women to have more options, resulting in an approximately 25%
increase in protected sex acts. Furthermore, certain studies show that when the
female condom is available as a choice in addition to the male condom, there is
an approximately 34% decrease in STDs, including HIV/AIDS.
The product is currently sold or available in either or both commercial sector
and public sector markets in over 31 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, Denmark,
and France. The Company has signed distribution agreements in Japan and
Bangladesh, and the Company anticipates that the product will be marketed in
these countries in the coming months. The Company's partner in Japan, Taiho
Pharmaceutical Co., Ltd. ("Taiho"), received regulatory approval from Koseisho,
the Japanese regulatory agency in November 1999. Taiho plans to introduce the
female condom as My Femy in the first half of calendar year 2000. The Company is
currently in discussions with potential distributors for key European countries,
India, The People's Republic of China and other countries.
As noted above, the female condom is sold to the global public sector. In the
U.S., the product is marketed to city and state public health clinics as well as
not-for-profit organizations such as Planned Parenthood. Following several years
of testing the efficacy and acceptability of the female condom, in 1996, the
Company entered into a three-year agreement with the Joint United Nations
Programme on AIDS (UNAIDS) which has subsequently been extended. In the
agreement, UNAIDS facilitates the availability and distribution of the female
condom in the developing world and the Company sells the product to developing
countries at a reduced price based on the total number of units purchased. The
current price per unit is approximately 0.38 Pounds, or $0.62. Pursuant to
this agreement, the product is currently being marketed in Zambia, Zimbabwe,
Tanzania, Cote d' Ivoire, Bolivia, Haiti, South Africa and other countries. The
Company anticipates multiple launches will occur during the next two years under
this agreement, including launches in Kenya, Nigeria, Ghana, Cambodia,
Bangladesh, Columbia and Central American countries.
13
<PAGE>
Product
The female condom is made of polyurethane, a thin but strong material which is
resistant to rips and tears during use. The female condom consists of a soft,
loose fitting sheath and two flexible O rings. One of the rings is used to
insert the device and helps to hold it in place. The other ring remains outside
the vagina after insertion. The female condom lines the vagina, preventing skin
from touching skin during intercourse. The female condom is prelubricated and
disposable and is intended for use during only one sex act.
Global Market Potential
The World Health Organization (WHO) estimates there are more than 300 million
new cases of STDs worldwide each year, excluding HIV, and most of those diseases
are more easily transmitted to women than to men. UNAIDS estimates that there
are currently approximately 33 million people worldwide who are infected with
HIV/AIDS and there are approximately 15,000 people per day who are newly
infected. In the United States, the Center for Disease Control noted that in
1995, five of the ten most frequently reported diseases were STDs. The Center
also has noted that one in five Americans over the age of 12 has Herpes and 1 in
every 3 sexually active people will get an STD by age 24. Women are currently
the fastest growing group infected with HIV and are expected to comprise the
majority of the new cases by the coming year.
Currently there are only two products that prevent the transmission of HIV/AIDS
through sexual intercourse --the latex male condom and the female condom.
The United Nations recently established a goal to reduce the incidence of
HIV/Aids in young people in developing countries by 25% by 2005. The Company is
currently in discussion with WHO and UNAIDS regarding the role the Female Condom
can play in achieving the UN goal.
MALE CONDOM MARKET: It is estimated the global annual market for male condoms is
4.7 billion units. However, the majority of all acts of sexual intercourse,
excluding those intended to result in pregnancy, are completed without
protection. As a result, it is estimated the potential market for barrier
contraceptives is much larger than the identified male condom market.
Advantages vs. the Male Condom
The female condom is currently the only available barrier contraceptive method
controlled by women which allows them to protect themselves from unintended
pregnancy and STDs, including HIV/AIDS. The most important advantage is that a
woman can control whether or not she is protected as many men do not like to
wear male condoms and may refuse to do so.
The polyurethane material that is used for the female condom offers a number of
benefits over latex, the material that is most commonly used in male
14
<PAGE>
condoms. Polyurethane is 40% stronger than latex, reducing the probability that
the female condom sheath will tear during use. Clinical studies and everyday
use have shown that latex male condoms can tear as much as 4% to 8% of the times
they are used. Unlike latex, polyurethane quickly transfers heat, so the female
condom immediately warms to body temperature when it is inserted, which may
result in increased pleasure and sensation during use. The product offers an
additional benefit to the 7% to 20% of the population that is allergic to latex
and who, as a result, may be irritated by latex male condoms. To the Company's
knowledge, there is no reported allergy to date to polyurethane. The female
condom is also more convenient, providing the option of insertion hours before
sexual arousal and as a result is less disruptive during sexual intimacy than
the male condom which requires sexual arousal for application.
Cost Effectiveness
At the 1998 World AIDS Conference held in Geneva, Switzerland, UNAIDS presented
the results from its cost-effectiveness study which indicated that making the
female condom available is highly cost effective in reducing public health costs
in developing countries.
Worldwide Regulatory Approvals
The female condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the world,
including receipt of a CE Mark in 1997 which allows the Company to market the
female condom throughout the EU. In addition to the United States and the EU,
several other countries have approved the female condom for sale, including
Canada, Russia, Australia, South Korea and Taiwan. The Company's partner in
Japan, Taiho, received regulatory approval from Koseisho, the Japanese
regulatory agency in November 1999.
The Company believes that the female condom's PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry. The Company estimates that it would take a minimum of four to six years
to implement, execute and receive FDA approval of a PMA to market another type
of female condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the manufacture
and distribution of the female condom.
Strategy
The Company's strategy is to act as a manufacturer, selling the female condom to
the global public sector, United States public sector and commercial partners
for country-specific marketing. The public sector and commercial partners
assume the cost of shipping and marketing the product. As a result, as volume
increases, the Company's operating expenses will not increase significantly.
15
<PAGE>
Commercial Markets
The Company markets the product directly in the United States and United
Kingdom. The Company has commercial partners which have recently launched the
product in Canada, Brazil, Venezuela, Denmark, South Korea, Holland and France.
The Company has signed agreements with partners in Japan and Bangladesh where
launches are expected during the coming year.
Japanese Market
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have only recently been approved in Japan and, as a result, 85%
of Japanese couples seeking protection use condoms. The Female Health Company's
partner in Japan is Taiho, a $1 billion Japanese health care company. Taiho
has more than 600 salespersons and distribution in 40,000 drug stores. The
agreement between the Company and Taiho required Taiho to perform clinical
testing of the product in Japan and obtain the necessary regulatory approvals.
Approval was received in November 1999. The Company will manufacture the
product and supply it to Taiho, which will have responsibility for marketing and
distributing the female condom in Japan. Taiho plans to market the female condom
under the name "My Femy" during the last week of April 2000.
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than 1.5 billion male condoms are distributed
worldwide by the public sector each year. The female condom is seen as an
important addition to prevention strategies by the public sector because studies
show that the availability of the female condom decreases the amount of
unprotected sex by as much as 25% over male condoms alone. Currently, the
female condom is promoted by WHO, UNAIDS, the United States Agency for
International Development, many nongovernment organizations around the world and
a number of city and state public health departments in the United States.
The Company has a multi-year agreement with UNAIDS to supply the female condom
to developing countries at a reduced price which is negotiated each year to be
equal to the Company's production costs directly attributable to the production
of the female condom in the prior year. The current price is approximately 38
pence sterling, or $0.62, per unit. This agreement has been automatically
renewed for a term expiring on December 31, 2000, and will continue to
automatically renew for additional one-year periods unless the Company or UNAIDS
give prior notice of termination. During the last year, the female condom has
been launched in the countries of Zimbabwe, Tanzania, Bolivia, Haiti, South
Africa and Zambia. It is anticipated that multiple product launches will
occur in several countries during the next two years, including in the countries
of Kenya, Nigeria, Ghana, Cambodia, Bangladesh, Columbia and Central American
countries.
16
<PAGE>
In the United States, the product is marketed to city and state public health
clinics, as well as not-for-profit organizations such as Planned Parenthood.
Currently 10 major cities and 15 state governments, including the states of New
York, Pennsylvania, Florida, Connecticut, Hawaii, Louisiana, Maryland, New
Jersey, South Carolina and Illinois and the cities of Chicago, Philadelphia, New
York and Houston have purchased the product for distribution with a number of
others expressing interest. All major cities and states have reordered product
after their initial shipments.
State-of-the-Art Manufacturing Facility
The Company manufactures the female condom in a 40,000 square-foot leased
facility in London, England. The facility is currently capable of producing 60
million units per year. With additional equipment, this capacity can be
significantly increased.
Government Regulation
In the U.S., the female condom is regulated by the U.S. Food and Drug
Administration ("FDA"). Pursuant to section 515(a)(3) of the Safe Medical
Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend approval
and initiate withdrawal of the Pre-Market Approval ("PMA") if the FDA finds that
the female condom is unsafe or ineffective, or on the basis of new information
with respect to the device, which, when evaluated together with information
available at the time of approval, indicates a lack of reasonable assurance that
the device is safe or effective under the conditions of use prescribed,
recommended, or suggested in the labeling. Failure to comply with the
conditions of FDA approval invalidates the approval order. Commercial
distribution of a device that is not in compliance with these conditions is a
violation of the SMA Act.
Competition
The Company's female condom participates in the same market as male condoms but
is not seen as competing - rather additive in terms of prevention and choice.
However, it should be noted that latex male condoms cost less and have brand
names that are more widely recognized than the female condom. In addition, male
condoms are generally manufactured and marketed by companies with significantly
greater financial resources than the Company. It is also possible that other
parties may develop a female condom. These competing products could be
manufactured, marketed and sold by companies with significantly greater
financial resources than those of the Company.
Patents and Trademarks
The Company currently holds product and technology patents in the United States,
Japan, the United Kingdom, France, Italy, Germany, Spain, the European Patent
Convention, Canada, The People's Republic of China, New Zealand, Singapore, Hong
Kong and Australia. These patents expire between 2005 and 2113. Additional
product and technology patents are pending in Brazil, South Korea, Germany,
Japan and several other countries. The patents cover the key aspects of the
female condom, including its overall design and manufacturing process. The
Company licenses the trademark "Reality" in the United States and has trademarks
on the names "femidom" and "femy" in certain foreign countries. The Company has
also secured, or applied for, 27 trademarks in 14 countries to protect the
various names and symbols used in marketing the product around the world. In
addition, the experience that has been gained through years of
17
<PAGE>
manufacturing the female condom has allowed the Company to develop trade secrets
and know-how, including certain proprietary production technologies, that
further secure its competitive position.
<PAGE>
licenses the trademark "Reality" in the United States and has trademarks on the
names "femidom" and "femy" in certain foreign countries. The Company has also
secured, or applied for, 27 trademarks in 14 countries to protect the various
names and symbols used in marketing the product around the world. In addition,
the experience that has been gained through years of manufacturing the female
condom has allowed the Company to develop trade secrets and know-how, including
certain proprietary production technologies, that further secure its competitive
position.
RESULTS OF OPERATIONS
- -----------------------
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
Sales increased $143,297 in the current quarter, or 20%, compared with the same
period last year. Units shipped and orders in-house totaled 5.4 million units at
December 31, 1999 compared to 3.4 million at December 31, 1998 for an increase
of 58%. The Company expects significant quarter to quarter variation due to the
timing of receipt of large orders, subsequent production scheduling, and
shipping of products as various countries launch the product. The Company
believes this variation between quarters will continue for several quarters to
come until reorders form an increasing portion of total sales.
The Company had revenues of $847,295 and a net loss of $1,340,268 for the three
months ended December 31, 1999 compared to revenues of $703,998 and a net loss
of $962,040 for the three months ended December 31, 1998. As discussed more
fully below, the increase in the Company's net loss was primarily related to
increases in operating expenses and non-operating interest expenses associated
with the Company's issuance of convertible debentures during the third quarter
of fiscal year 1999.
Cost of goods sold increased $55,442 to $916,893 in the current quarter from
$861,451 for the same period last year. The percentage increase in cost of goods
sold between the comparative quarters is slightly less than the related
percentage sales increase.
Advertising and promotional expenditures decreased $53,653 to $38,810 in the
current quarter from $92,463 for the same period in the prior year.
Selling, general and administrative expenses increased $237,647, or 39%, to
$843,281 in the current quarter from $605,634 for the same period last year.
The increase reflects an increase in selling, accounting and financing costs.
The increase in selling expenses is a result of an expansion of sales staff
utilized for public sector sales compared to that which was in existence during
the prior period. As a result of the need to obtain additional financing the
Company incurred accounting costs and non-cash expenses related to warrants
issued for investment service personnel at a cost substantially greater than
incurred in the prior fiscal year's first quarter.
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<PAGE>
Net interest and non-operating expenses increased $284,203 to $355,138 for the
current period from $70,935 for the same period last year. The increase exists
because the Company had a higher level of debt outstanding than the same period
last year, as a result of the issuance of convertible debentures. The result is
a larger amount of non-cash expenses incurred from the amortization of discounts
on notes payable and convertible debentures than the first quarter of the prior
year.
Factors That May Affect Operating Results and Financial Condition
The Company's future operating results and financial condition are dependent on
the Company's ability to increase demand for and to cost-effectively manufacture
sufficient quantities of the female condom. Inherent in this process are a
number of factors that the Company must successfully manage in order to achieve
favorable future results and improve its financial condition.
Reliance on a Single Product
The Company expects to derive the vast majority, if not all, of its future
revenues from the female condom, its sole current product. While management
believes the global potential for the female condom is significant, the product
is in the early stages of commercialization and, as a result, the ultimate level
of consumer demand around the world is not yet known. To date, sales of the
female condom have not been sufficient to cover the Company's fixed operating
costs.
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a global
distribution network for the product by completing partnership arrangements with
companies with the necessary marketing and financial resources and local market
expertise. To date, this strategy has resulted in numerous in-country
distributions in the public sector, particularly in Africa and Latin America.
Several partnership agreements have been completed for the commercialization of
the female condom in private sector markets around the world. However, the
Company is dependent on country governments as well as city and state public
health departments within the United States to continue their commitment to
prevention of STDs, including AIDS, by including female condoms in their
programs. The Company is also dependent on finding appropriate partners for the
private sector markets around the world. Once an agreement is completed, the
Company is reliant on the effectiveness of its partners to market and distribute
the product. Failure by the Company's partners to successfully market and
distribute the female condom or failure of country governments to implement
prevention programs which include distribution of barrier methods against the
AIDS crisis, or an inability of the Company to secure additional agreements for
AIDS crisis, or an inability of the Company to secure additional agreements for
new markets either in the public or private sectors could adversely affect the
Company's financial condition and results of operations.
19
<PAGE>
Inventory and Supply
All of the key components for the manufacture of the female condom are
essentially available from either multiple sources or multiple locations within
a source.
Global Market and Foreign Currency Risks
The Company manufactures the female condom in a leased facility located in
London, England. Further, a material portion of the Company's 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. To
date, the Company's management has not deemed it necessary to utilize currency
hedging strategies to manage its currency risks. On an ongoing basis,
management continues to evaluate its commercial transactions and is prepared to
employ currency hedging strategies when it believes such strategies are
appropriate. In addition, some of the Company's future international sales may
be in developing nations where dramatic political or economic changes are
possible. Such factors may adversely affect the Company's results of operations
and financial condition.
Government Regulation
The female condom is subject to regulation by the FDA, pursuant to the federal
Food, Drug and Cosmetic Act ("the FDA Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain "Good Manufacturing Practices," which include testing, quality
control and documentation procedures. The Company's compliance with applicable
regulatory requirements is monitored through periodic inspections by the FDA.
The failure to comply with applicable regulations may result in fines, delays or
suspensions of clearances, seizures or recalls of products, operating
restrictions, withdrawal of FDA approval and criminal prosecutions. The
Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the FDA.
Liquidity and Sources of Capital
Historically, the Company has incurred cash operating losses relating to
expenses incurred to develop and promote the Female Condom. During the first
three months of fiscal 2000, cash used in operations totaled $0.3 million. The
Company used net proceeds from the issuance of the Company's common stock in
order to fund cash used in operations; thereby avoiding a reduction of its cash
position.
While the Company believes that its existing capital resources (including
expected proceeds from sales of common stock pursuant to the Equity Line
Agreement) will be adequate to fund its currently anticipated capital needs, if
they are not, the Company will need to raise additional capital until its
20
<PAGE>
sales increase sufficiently to cover operating expenses. Until internally
generated funds are sufficient to meet cash requirements, the Company will
remain dependent upon its ability to generate sufficient capital from outside
sources. See Note 6 to Unaudited Condensed Consolidated Financial Statements for
additional information regarding the Company's liquidity and capital resources.
At December 31, 1999, the Company had current liabilities of $3.3 million
including a $1.0 million note payable due March 25, 2000 and a $250,000 note
payable due February 12, 2000 both to Mr. Dearholt, a Director of the Company.
As of December 31, 1999, Mr. Dearholt beneficially owns 1,734,220 shares of the
Company's Common Stock.
The Company also secured a $50,000 note payable due February 18, 2000 from Mr.
Parrish, the Chairman of the Board and Chief Executive Officer of the Company.
As of December 31, 1999, Mr. Parrish beneficially owns 484,001 shares of the
Company's Common Stock.
As of the date of the filing of this report, the Company, Mr. Dearholt and Mr.
Parrish plan to extend the aforementioned notes in the current fiscal year as
each notes' terms expire.
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
$0.3 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.
DELISTING ON THE AMERICAN STOCK EXCHANGE
On February 5, 1999, the Company's Common Stock was delisted from the American
Stock Exchange since it did not meet all of the criteria for continued listing.
Commencing on February 9, 1999, the Common Stock has been quoted on the OTC
Bulletin Board under the symbol "FHCO". Although the
21
<PAGE>
Company believes the OTC Bulletin Board has and will continue to provide an
efficient market for the purchase and sale of the Company's Common Stock,
investors may 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
than was the case when the stock was listed on the American Stock Exchange. In
addition, companies whose stock is listed on the American Stock Exchange must
adhere to the rules of such exchange. These rules include various corporate
governance procedures which, among other items, require the company to obtain
shareholder approval prior to completing certain transactions such as, among
others, issuances of common stock equal to 20% or more of the company's then
outstanding common stock for less than the greater of book or market value or
the issuance of certain stock options. Companies whose stock is quoted on the
OTC Bulletin Board are not subject to these or any comparable rules.
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.
22
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEMS 1-5. Not Applicable except as provided below.
- -----------------------------------------------------
ITEM 2(c) The Company sold 316,668 shares of common stock to three investors
in November 1999. The Company received cash proceeds of $237,500 from these
sales. The Company believes it has satisfied the exemption from the securities
registration requirement provided by section 4(2) of the Securities Act and
Regulation D promulgated thereunder in this offering since the securities were
sold in a private placement to sophisticated, accredited investors, who provided
representations which the Company deemed necessary to satisfy itself that they
were accredited investors and were purchasing for investment and not with a view
to resale in connection with a public offering.
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)
4.3 Amended and Restated Articles of Incorporation.
27 Financial Data Schedule
_____________________________
(1) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2, filed with the Securities and Exchange Commission on
October 16, 1999.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form S-18, filed with the Securities and Exchange Commission on May
25, 1990.
(b) Report on Form 8-K - No reports on Form 8-K were filed during the
quarter ended December 31, 1999.
23
<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: February 14, 2000 /s/O.B. Parrish
----------------------------
O.B. Parrish, Chairman and Chief Executive
Officer
/s/o/Robert R. Zic
--------------------
Robert R. Zic, Chief Financial Officer
24
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