SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-18849
The Female Health Company
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin 39-1144397
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
919 N. Michigan Avenue, Suite 2208, Chicago, IL 60611
----------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(312) 280-2281
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not applicable
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 7,181,662 shares outstanding as of
August 5, 1996
FORM 10-Q
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION: PAGE
----
Unaudited Condensed Consolidated Balance Sheets -
June 30, 1996 and September 30, 1995............... 3
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended June 30, 1996
and June 30, 1995.................................. 4
Unaudited Condensed Consolidated
Statements of Operations -
Nine Months Ended June 30, 1996
and June 30, 1995.................................. 5
Unaudited Condensed Consolidated
Statements of Cash Flows -
Nine Months Ended June 30, 1996
and June 30, 1995.................................. 6
Notes to Unaudited Condensed Consolidated
Financial Statements............................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........... 23
SIGNATURES................................................... 24
2
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1996 1995
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 429,043 $ 1,521,344
Trade accounts receivable, net 806,069 415,089
Inventories, net of allowance for obsolescence of
$1,300,000 and $1,000,000 at June 30, 1996 and
September 30, 1995, respectively 2,215,092 3,192,570
Prepaid expenses and other current assets 217,433 233,095
Net current assets of discontinued operations -- Note 3 --- 3,913,511
------------ ------------
Total Current Assets 3,667,637 9,275,609
Prepaid royalties --- 1,875,491
Intangibles and other assets 2,726,865 399,062
Property, plant and equipment 4,295,860 351,784
Less accumulated depreciation and amortization (342,874) (115,644)
------------ ------------
3,952,986 236,140
Net noncurrent assets of discontinued operations -- Note 3 --- 1,952,269
------------ ------------
$ 10,347,488 $ 13,738,571
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank $ --- $ 109,503
Notes payable to stockholders 2,160,000 ---
Trade accounts payable 1,110,386 1,121,549
Accrued royalty and exclusivity fees --- 4,761,198
Accrued expenses and other current liabilities 640,050 29,648
Due to stockholder --- 19,795
Current portion of long-term debt and capital
lease obligations 2,366,319 56,703
------------ ------------
Total Current Liabilities 6,276,755 6,098,396
Long-term debt and capital lease obligations, less 474,349 89,017
current maturities
Stockholders' Equity:
Convertible preferred stock --- ---
Common stock 65,311 63,928
Paid-in-capital 29,739,961 29,411,702
Translation gain (loss) 62,825 ---
Accumulated deficit (26,271,713) (21,924,472)
------------ ------------
Total Stockholders' Equity 3,596,384 7,551,158
------------ ------------
$ 10,347,488 $ 13,738,571
============ ============
See notes to unaudited condensed consolidated financial statements.
3
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
------------------------------------
1996 1995
----------- -----------
Net revenues $ 723,560 $ 598,862
Cost of products sold 924,286 437,024
----------- -----------
(200,726) 161,838
Expenses:
Sales and marketing 853,410 778,926
General and administrative 642,230 181,130
Research and new product
development 111,888 6,949
Reality exclusivity fees --- 851,551
----------- -----------
1,607,528 1,818,556
----------- -----------
Operating loss (1,808,254) (1,656,718)
Non operating expense (95,035) (4,262)
----------- -----------
Loss from continuing operations (1,903,289) (1,660,980)
Discontinued operations (Note 3):
Income from operations, net of
applicable income tax expense
of $0 and $1,531 --- 544,954
----------- -----------
Net Loss $(1,903,289) $(1,116,026)
=========== ===========
Net Income (loss) per common and
dilutive common equivalent shares
outstanding:
Continuing operations $ (0.30) $ (0.26)
Discontinued operations --- 0.09
----------- -----------
$ (0.30) $ (0.17)
=========== ===========
Weighted average number of common and
dilutive common equivalent shares
outstanding 6,451,086 6,368,065
=========== ===========
See notes to unaudited condensed consolidated financial statements.
4
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended June 30,
------------------------------------
1996 1995
----------- -----------
Net revenues $ 1,454,068 $ 1,581,764
Cost of products sold 2,121,741 1,127,996
----------- -----------
(667,673) 453,768
Expenses:
Sales and marketing 1,650,744 3,871,150
General and administrative 1,573,148 784,705
Research and new product
development 266,500 74,364
Reality exclusivity fees --- 2,578,941
----------- -----------
3,490,392 7,309,160
----------- -----------
Operating loss (4,158,065) (6,855,392)
Non operating expense (184,716) (20,328)
----------- -----------
Loss from continuing operations (4,342,781) (6,875,720)
Discontinued operations (Note 3):
Loss from operations, net of
applicable income tax benefit
of $0 and $13,469 (4,461) (74,793)
----------- -----------
Net Loss $(4,347,242) $(6,950,513)
=========== ===========
Net loss per common and
dilutive common equivalent shares
outstanding:
Continuing operations $ (0.68) $ (1.17)
Discontinued operations --- (0.01)
----------- -----------
$ (0.68) $ (1.18)
=========== ===========
Weighted average number of common and
dilutive common equivalent shares
outstanding 6,412,112 5,900,370
=========== ===========
See notes to unaudited condensed consolidated financial statements.
5
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended June 30,
1996 1995
----------- -----------
Operating Activities:
Net (loss) $(4,347,242) $(6,950,513)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Provision for Reality exclusivity fees 2,578,941
Depreciation and amortization 367,964 48,412
Provision for doubtful accounts and
returns 111,450 26,801
Provision for inventory obsolescence 300,000 ---
Changes in operating assets and
liabilities of continuing operations (573,352) (621,334)
Discontinued operations -- noncash
charges and working capital changes (1,284,004)
----------- -----------
Net cash provided by (used in) operating
activities (4,141,180) (6,201,697)
Investing Activities:
Equipment purchases, net of disposals (648,004) (2,064)
Purchase of Chartex (5,191,565) ---
Other (83,026)
Investing activities of discontinued
operations (187,835)
Sale of WPC Holdings 7,250,000 ---
Expenses incurred with sale of WPC Holdings (681,608) ---
----------- -----------
Net cash provided by (used in) investing
activities 728,823 (272,925)
Financing Activities:
Proceeds from issuance of Common Stock and
other, net of related costs 329,642 3,142,514
Proceeds from issuance of notes to
stockholders 2,160,000 ---
Increase (Decrease) in notes payable (109,503) 199,116
Payments of long-term capital lease
obligations (41,916) (30,210)
Payment to shareholder (19,795) ---
Financing activities of discontinued
operations 110,170
----------- -----------
Net cash provided by financing activities 2,318,428 3,421,590
----------- -----------
Effect of exchange rate on cash 1,628
----------- -----------
Increase (decrease) in cash and cash equivalents (1,092,301) (3,053,032)
Cash and cash equivalents at the beginning of period 1,521,344 3,525,145
----------- -----------
Cash and cash equivalents at end of period $ 429,043 $ 472,113
=========== ===========
See notes to unaudited condensed consolidated financial statements.
6
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1 - BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q 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. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended September 30,
1995.
NOTE 2 - NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
--------------------------------------------------------
Income (loss) per Common and Common Equivalent share is based on the
weighted average number of shares of Common Stock and common stock equivalents,
if dilutive, outstanding during the period.
NOTE 3 - DISCONTINUED OPERATIONS
-----------------------
On January 29, 1996, the Company completed the sale of the net assets of
WPC Holdings, Inc. ("Holdings") for total consideration of $8.75 million, valued
for accounting purposes at $8.285 million. The excess of the Company's
investment in Holdings at closing (adjusted for intercompany amounts and the
reimbursement to Holdings of certain expenses and after deducting the net
deferred operating losses of Holdings for the period October 1, 1995 through the
date of sale) over the fair value of the consideration received was $4,461. The
Company recorded the excess as a loss on sale of discontinued operations during
the quarter ended March 31, 1996. Prior to its sale, Holdings (which contained
the Company's leisure time, institutional health care and other products
segments) was accounted for as a discontinued operation, using a March 10, 1995
measurement date and statements have been reclassified to reflect the
discontinuation of these segments. The Company has realized income from
discontinued operations during the period from the measurement date (March 10,
1995) through the date of disposal (January 29, 1996) and ultimately realized a
loss on the sale of Holdings. Since the measurement date and through September
30, 1995, the Company has recorded income from discontinued operations of
$684,346. The Company deferred recogni-
7
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
NOTE 3 - DISCONTINUED OPERATIONS - CONTINUED
-----------------------------------
tion of its 100% share of Holdings loss of $(229,000) for the period October
1, 1995 through January 29, 1996. The deferred loss has been included with
other expenses incurred in connection with the sale of Holdings.
Net revenues of the discontinued operations were as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------- ------------- -------------
Net revenues $ -0- $ 6,231,457 $ 3,258,346 $10,676,869
Net assets of Holdings have been segregated on the consolidated balance
sheets from their historic classifications to separately identify them. Details
of such amounts (exclusive of cash of $1,297,766 as of September 30, 1995) were
as follows:
September 30
1995
------------
Accounts receivable-net.............. $ 1,436,736
Inventory............................ 3,030,483
Prepaid expense and other............ 339,310
Trade accounts payable............... (439,640)
Accrued expenses..................... (328,715)
Current maturities of capital lease
obligations........................ (124,663)
-----------
Net current assets of discontinued
operations......................... $ 3,913,511
============
Property, plant and equipment-net.... $ 2,469,898
Intangibles-net...................... 890,843
Other assets......................... 75,340
Long-term portion of capital lease
obligations........................ (1,458,204)
Minority interest.................... (25,608)
------------
Net noncurrent assets of discontinued
operations......................... $ 1,952,269
============
8
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
NOTE 3 - DISCONTINUED OPERATIONS - CONTINUED
-----------------------------------
The purchaser of Holdings has assumed responsibility for all Holdings
obligations. However, the Company remains contingently liable for certain
obligations incurred prior to the sale of Holdings unless and until the Company
is able to get releases from such liabilities from the third-party creditors
(the "Contingent Liabilities"). The Company would have recourse against the
purchaser of Holdings if it were required to meet these obligations. These
Contingent Liabilities include the lease of Holdings facilities and employment
agreements with certain officers of Holdings, which total future payments are
approximately $3.5 million and $1.0 million, respectively, at June 30, 1996.
Accordingly, if the buyer fails to pay any of the Contingent Liabilities the
Company would be required to pay them and then seek to collect from the buyer
the amount paid by the Company.
NOTE 4 - ACQUISITION OF CHARTEX
----------------------
On February 1, 1996 the Company completed its purchase of all of the issued
and outstanding share capital of Chartex Resources Limited the parent company
and sole owner of stock in Chartex International, PLC from Stamina Investments
Limited ("Stamina").
The results of Resources and Chartex are combined with the Company after
the February 1, 1996 acquisition date.
Unaudited proforma consolidated results of continuing operations for the
three months ended June 30, 1996 and 1995 and for the nine months ended June 30,
1996 and 1995 as though Chartex had been acquired as of October 1, 1994 follow:
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net revenues $ 724,000 $ 741,000 $1,510,000 $1,884,000
Net loss (1,903,000) (1,463,000) (5,741,000) (8,712,000)
Net loss per share $ (0.30) $ (0.23) $ (0.90) $ (1.48)
Weighted average number of =========== =========== =========== ===========
common and dilutive common
equivalent shares outstanding 6,451,086 6,368,065 6,412,112 5,900,370
=========== =========== =========== ===========
9
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
NOTE 4 - ACQUISITION OF CHARTEX - CONTINUED
----------------------------------
The above amounts reflect adjustments for amortization of intangibles, and
depreciation based upon revalued purchased assets, imputed interest on borrowed
funds, and elimination of intercompany transactions.
NOTE 5 - FINANCIAL CONDITION
-------------------
Sales of the female condom do not presently generate sufficient revenues to
fund operations. The Company expects that this will be the case until at least
the third quarter of fiscal 1997. It is estimated that the cash break-even
volume is an annualized rate of approximately 18.8 million units. Accordingly,
the Company's operating plan requires it to source significant additional
working capital.
During the quarter ended June 30, 1996 the Company commenced a public stock
offering which subsequently raised approximately $2.8 million, net of estimated
expenses, as further discussed in Note 6. Further, the Company was awarded up to
a $744,000 economic development grant by the U.K. Regional Selective Assistance
Program (the "Program") of which approximately $310,000 has been received, with
the remainder payable in future years based on the achievement of certain
employment, operational and investment goals. (The Company is required to
utilize 50% of any amounts it receives from this grant to prepay a portion of
the (Pounds)520,000 note which the Company issued as part of the consideration
of the Chartex Acquisition; in addition, the grant is repayable by the Company
to the Program if certain conditions of the grant are not satisfied. Subsequent
to June 30, 1996, the Company repaid (Pounds)150,000 of the aforementioned
note, leaving a balance of (Pounds)370,000.)
The Company is continuing to pursue the establishment of a working capital
credit line which would be based on eligible accounts receivable and either a
refinancing or sale and leaseback of the Chartex manufacturing facility. (The
current $1.6 million mortgage on the Chartex manufacturing facility expires in
October 1996. The most recent appraisal of this facility sets its current open
market value, as defined, at approximately $3.4 million.) Management believes
that the additional equity generated by the public stock offering will have a
positive effect on its efforts. However, there can be no assurance that the
Company will be able to source all or any portion of this required capital
through these or other sources or that such amounts, if raised, will be
sufficient to operate the Company until sales of female condom generate
sufficient revenues to fund operations. In addition, further fund raising may be
costly to the Company and/or dilutive to
10
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
NOTE 5 - FINANCIAL CONDITION - CONTINUED
-------------------------------
existing shareholders. 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.
NOTE 6 - PUBLIC STOCK OFFERING
---------------------
On June 17, 1996 the Company registered 1,776,580 shares of Common Stock
for sale, consisting of up to 1,500,000 shares being offered by the Company to
the public for a thirty day period on a "best efforts" basis, up to 96,000
shares to be issued to the Company's secondary placement agent as compensation
for consulting and other services, and the remaining 180,580 shares being
registered for sale from time to time by certain selling shareholders, none of
whom are present directors or officers.
As of the July, 18, 1996 ending date, the offering resulted in 700,000
shares of stock being sold by the Company at a per share price of $4.40 and
gross proceeds of $3,080,000. (650,000 of these shares were sold after June 30,
1996 and as such the resulting gross proceeds of $2,860,000 and related issuance
costs are not reflected in the accompanying financial information.) While the
exact amount of the related expenses is not yet known, management expects the
net proceeds from this offering to be in excess of $2.8 million. Approximately
$159,000 of issuance cost has been recorded as of June 30, 1996 and classified
as other assets. None of this amount was prorated against proceeds recorded to
date of $220,000. In addition, 60,000 shares of the Company's common stock was
issued to the secondary placement agent.
NOTE 7 - INVENTORIES
-----------
The components of inventory consist of the following:
June 30, September 30,
1996 1995
------------- ----------------
Raw Material $ 14,000 $ ---
Work In Process 23,000
Finished Goods 3,478,000 4,193,000
Less Allowance (1,300,000) (1,000,000)
------------- ----------------
$ 2,215,000 $ 3,193,000
============= ================
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
-------
Continuing operations reflect the Female Health Company's operations in the
U.S. and, for the period after February 1, 1996, the operations of Chartex. (See
also Note 3 and Note 4 of the Notes to Unaudited Condensed Consolidated
Financial Statements for a discussion of certain matters associa-ted with the
sale of Holdings and the purchase of Chartex.) In essence, the Female Health
Company is now a startup, boutique company dedicated to women's health on a
global basis. The Company does not believe that its historical results of
operations are necessarily indicative of future results.
The Company's only current product is the female condom, which is sold
under the trade name "Reality(R)" in the United States and "Femidom" or "Femy"
in certain other countries around the world.
As the only patented product commercially available which is controlled by
the woman and which offers protection against unintended pregnancy and sexually
transmitted disease, including AIDS, management believes the female condom
provides a significant global opportunity to the Company.
The female condom is a revolutionary new product which is in the early
stages of commercialization. The female condom has been on retailers' shelves in
the United States since approximately September 1994 and has been launched in
more than 14 other countries since 1992. Initial sales were substantially lower
than management's expectations; to date, sales in 1996 have met management's
expectations. However, the ultimate level of acceptance of the female condom
around the world is not yet known. Management believes that with the expansion
of distribution into the Asian markets, expansion of the distribution and social
marketing in the developing world and the additional marketing and promotion to
consumers in the United States, sales will increase substantially. However, if
this sales increase does not occur, the Company will continue to report
operating losses and the Company's viability may ultimately be in jeopardy.
The Company estimates that approximately 18.8 million female condoms must
be sold annually worldwide at an average selling price of $1.00 each to break
even on a cash basis. This is equivalent to use of the female condom by
approximately 525,000 women, world-wide, an average of three times per month.
The $1.00 per device average selling price is based on the Company's estimate of
projected mix in sales of devices based on current prices.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The devices sold worldwide were as follows for the periods indicated:
Three Months ended Nine Months ended
June 30, June 30,
------------------------- ---------------------------
1996 1995 1996 1995
--------- ---------- ----------- ----------
U.S. devices sold 530,000 324,000 1,066,000 978,000
Ex-U.S devices sold 327,000 211,000 541,000 364,000
--------- ---------- ----------- ----------
Total worldwide devices sold 857,000 535,000 1,607,000 1,342,000
========= ========== =========== ==========
COMMERCIAL LAUNCH OF REALITY IN THE UNITED STATES
The launch of Reality began in September 1994. Following the Chartex
acquisition in February 1996 a new marketing campaign was initiated in March
1996. The program continues to be education-based but is more specific regarding
use of the female condom. It is directed to the private and public sectors and
includes outreach programs, seminars, workshops, advertising in young adult
magazines and on urban music radio stations. The educational components answer
the questions of "what is the female condom?"; "how is it used?"; "how does it
protect?"; "why is it important to practice safer sex?"; and "who should try the
female condom?" The campaign also emphasizes that using the female condom feels
good, i.e., you can practice safer sex without decreasing pleasure.
The outreach program has been augmented in several cities and states by the
respective departments of health. Examples are ongoing programs in Philadelphia,
Pennsylvania and Chicago, Illinois. These cities continue to purchase large
quantities of the female condom, using them in on-the-street outreach programs
in communities at high risk to sexually transmitted diseases.
Currently Reality is distributed in all 50 states; it is available in over
35,000 pharmacies; is listed in 38 Medicaid or similar state programs and is
available free or at a significantly discounted price in over 1000 public
clinics.
MARKETING PROGRAMS AND ACTIVITIES OUTSIDE THE UNITED STATES
Subsequent to acquiring Chartex, and in addition to developing the business
within the United States, the Company has focused on expanding its business in
additional international markets. The product was recently launched in Korea
with better than expected results. Orders since January 1996 total 900,000
units. The Company's marketing partner in Japan (a $1
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
billion dollar health subsidiary of a $5 billion dollar company) plans to launch
the product early in 1997 and the Company is conducting ongoing discussions with
potential partners to market the female condom in Taiwan and in mainland China.
The Company is also holding discussions with potential marketing partners in
Mexico and Canada.
In addition, extensive discussions are ongoing with the World Health
Organization (WHO), UNAIDS, USAID and other such international health
organizations regarding the social marketing and distribution of the female
condom in the developing world. It is estimated these organizations purchase and
distribute more than one billion male condoms each year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
CONTINUING OPERATIONS
As previously noted, the Company acquired Chartex on February 1, 1996.
As such, the financial results of Chartex are only reflected in the Company's
financial statements after that date.
The Company recorded a $124,698 or 21% increase in net revenues to $723,560
for the three months ended June 30, 1996 compared to the same period in the
previous year. Net revenues pertain exclusively to sales of the female condom.
The acquisition of Chartex in February 1996 increased current period net
revenues by approximately $186,000. This was offset in part by a decline in
average selling prices in the United States, due to increased public sector
business, consistent with the Company's strategy to increase unit sales. Unit
sales ending June 30, 1996 increased 63% compared to June 30, 1995, excluding a
special ex-US promotion program.
The Company incurred a loss of $(200,726) at the gross margin level for the
three months ended June 30, 1996 versus a gross profit of $161,838 in the prior
year. This loss is primarily due to fixed manufacturing overheads at the Chartex
facilities. It is anticipated that gross margins will improve significantly once
these fixed overheads are covered by increasing volume. It is estimated the
Company's cash breakeven point, including manufacturing overheads and other
expenses, is 18.8 million units per year.
Now that the Company owns Chartex and the manufacturing facility it is
the Company's strategy to sharply increase volume through sales to the global
public sector such as WHO, UNAIDS and USAID, etc. at special prices based on
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR
FINANCIAL CONDIOION AND RESULTS OF OPERATION
volume purchased. The Company believes this will cover the fixed overheads,
permit better prices to the public sector and provide the cost basis for
significant profits.
Sales and marketing expense increased by $74,484 to $853,410 (including
approximately $102,000 incurred at Chartex) in the current year quarter compared
to the same period in the prior year. Beginning in March 1996, the Company
initiated a new advertising campaign in the United States offering consumers the
opportunity to call for a free sample of the female condom, a manufacturer's
coupon and various product information. The Company believes that maintaining
these promotional programs will result in continued increases in sales. Prior
year quarter amounts included the continuation of the marketing and promotion
associated with the national commercial "launch" of Reality in the U.S.
From July 7 to 11, 1996, the Company participated in the XI International
Conference on AIDS held in Vancouver, BC, Canada. With 15,000 delegates from
around the world, there were 24 studies presented that included the female
condom. These were conducted in multiple countries including: Brazil, Bolivia,
Costa Rica, Haiti, Mexico, Senegal, South Africa, Zambia, Zimbabwe, The Ivory
Coast and the US. Results were positive, including the following:
. "Among women who were presented with a hierarchy of choices for prevention
methods, 86% chose the female condom, resulting in an overall reduction in
the number of unprotected acts of intercourse." Gollub et al., "The Women's
Safer Sex Hierarchy: Initial Responses to Counseling on Women's Methods of
STD/HIV Prevention in an STD Clinic" Philadelphia Department of Public
Health.
. Almost all women liked the female condom very much or fairly well (90-100%
for prostitutes, 90% for urban women and 100% for rural women). Kiragga et
al., Acceptability of the Female Condom in Uganda" Mulago Hospital,
Kampala, Uganda.
General and administrative expenses increased by $461,100 to $642,230 for
the current year period compared to $181,130 for the same period of the
preceding year. The addition of Chartex accounted for most of this increase.
Research and new product development expense increased by $104,939 to
$111,888 (including approximately $14,000 incurred at Chartex) for the current
year quarter compared to $6,949 for the same period of the preceding year.
Expenses during the current quarter relate to clinical supplies in connection
with on-going government-funded clinical trials as well as a study funded by
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the Company which is evaluating the use of the female condom in preventing
sexually - transmitted diseases (STDs). As a condition of the FDA approval of
Reality, the Company agreed to provide product and assistance (but not funding)
in conjunction with studies to be conducted and funded by the National Institute
of Health ("NIH"). The US Government is currently providing in excess of $8
million dollars in funding for Reality studies.
Prior to the Chartex acquisition, the Company was obligated to pay
exclusivity fees to Chartex for the right to sell the female condom in the U.S.,
Canada and Mexico. In the quarter ended June 30, 1995 these amounts totaled
$851,551. The Company ceased accruing further exclusivity fees under its
licensing agreements with Chartex beginning with the fourth quarter of fiscal
1995 due to certain ongoing discussions with Chartex.
Nonoperating expense of $95,035 for the quarter ended June 30, 1996 is
$90,773 higher than the same period of the previous year due principally to
interest on borrowings from shareholders and the addition of interest on
Chartex's debt obligations.
The Company recorded a $242,309 increase in losses to a $1,903,289 loss
from continuing operations for the current year quarter compared to a $1,660,980
loss for the same period of the prior year. This increased loss is principally
due to the absorption of fixed manufacturing overheads and administrative costs
associated with Chartex and increased research and new product development
expenses, which were partly offset by the elimination of the accrual for
exclusivity expense associated with the Reality license agreement, as explained
above.
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
CONTINUING OPERATIONS
As previously noted, the Company acquired Chartex on February 1, 1996.
As such, the financial results of Chartex are only reflected in the Company's
financial statements after that date.
The Company reported a $127,696 decrease in net revenues to $1,454,068 for
the nine months ended June 30, 1996 compared to the same period of the preceding
year. Net revenues pertain exclusively to sales of the female condom. The
February 1, 1996 Chartex acquisition increased current year sales by
approximately $314,000, while the prior year period included a portion of the
initial stocking for the national launch of the female condom in the U.S.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Current year net revenues were also negatively impacted due to reduced marketing
and promotion of Reality during the earlier quarters of the year and a decline
in average U.S. selling prices.
The Company incurred a loss of $(667,673) at the gross margin level for the
nine month period ended June 30, 1996 compared to a gross profit of $453,768 in
the prior year. Management attributes this loss primarily to the effect of
having excess manufacturing capacity at Chartex and a $300,000 additional
inventory writedown in 1996 to reflect estimated inventory which may expire
prior to sale.
The excess manufacturing capacity relates to fixed manufacturing overheads.
It is anticipated this will improve significantly once volume increases to the
point of covering these overheads. It is estimated that the Company's cash
breakeven point, including manufacturing overheads as well as all other costs,
is 18.8 million units per year.
Now that the Company owns Chartex and the manufacturing facility it is
the Company's strategy to sharply increase volume through sales to the global
public sector such as WHO, UNAIDS and USAID, etc. at special prices based on
volume purchased. The Company believes this will cover the fixed overheads,
permit better prices to the public sector and provide the cost basis for
significant profits.
Sales and marketing expenses decreased $2,220,406 from $3,871,150 for the
nine month period ended June 30, 1995 to $1,650,744 (including approximately
$142,000 incurred since February 1, 1996 at Chartex) for the nine month period
ended June 30, 1996. Prior year amounts included the marketing and promotion
associated with the national launch of Reality in the U.S. Because of the
Company's limited working capital availability, marketing and promotion
activities were curtailed during the earlier quarters of fiscal 1996.
General and administrative expense totaled $1,573,148 for the nine month
period ended June 30, 1996 compared to $784,705 for the same period of the
preceding year. The acquisition of Chartex accounts for most of this increase.
Research and development expense increased $192,136 to $266,500 (including
approximately $23,000 incurred since February 1, 1996 at Chartex) for the
current nine month period compared to $74,364 for the same period of the prior
year. The increase relates primarily to costs incurred in connection with on-
going clinical trials as previously discussed.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Prior to the Chartex acquisition, the Company was obligated to pay
exclusivity fees to Chartex for the right to sell the female condom in the U.S.,
Canada and Mexico. For the nine months ended June 30, 1995 these amounts totaled
$2,578,941. The Company ceased accruing further exclusivity fees under its
licensing agreements with Chartex beginning with the fourth quarter of fiscal
1995 due to certain ongoing discussions with Chartex.
Nonoperating expenses increased $164,388 to $184,716 for the current nine
month period compared to the same period of the prior year. This increase is due
principally to interest on borrowings from shareholders incurred during the
current year and the addition of interest on Chartex debt obligations since the
Chartex acquisition.
DISCONTINUED OPERATIONS
The Company recognized a loss of $4,461 as a result of the January 1996
sale of Holdings (see also Note 3 of the Notes to Unaudited Condensed
Consolidated Financial Statements).
FINANCIAL CONDITION
The following discussion covers significant changes in certain balance
sheet accounts between September 30, 1995 and June 30, 1996.
Cash and cash equivalents at June 30, 1996 has decreased to $429,043 which
is $1,092,301 less than at September 30, 1995. This decrease funded a portion of
the Company's net loss. Additionally, the Company used $2,160,000 of borrowings
from stockholders and the excess of cash generated from the sale of Holdings
over cash used to acquire Chartex in order to finance the $(4,347,242) net loss
for the nine months ended June 30, 1996. (See the Unaudited Condensed
Consolidated Statement Of Cash Flow for the Nine Months ended June 30, 1996 for
a more complete analysis.)
Trade accounts receivable increased by $390,980 to $806,069 primarily as a
result of the acquisition of Chartex and the timing of certain U.S. public
sector collections.
Inventory totaled $2,215,092 (net of $1.3 million in reserves) at June 30,
1996 which is $977,478 lower than at September 30, 1995. The Chartex acquisition
added approximately $537,000 of inventory at June 30, 1996; however this
increase was offset by the additional reserve of $300,000 and the approximately
$1,214,000 reduction of U.S. inventory as the Company continues to sell on-hand
product in the U.S. Current U.S. inventory levels continue to
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
be higher than the Company would like. Management believes that this inventory
will, after reserves, be sold in the normal course of business; however, if the
level of sales does not increase as predicted in the fourth quarter the Company
may experience additional inventory writedowns.
Intangibles and other assets increased $2,327,803 to $2,726,865 at June 30,
1996 as a result of the acquisition of Chartex's intellectual property rights
and patents, the receipt of a long-term note and warehousing credit as part of
the Holdings sale and the capitalization of approximately $159,000 of S-1
offering costs (to be charged against paid-in capital during the fourth quarter
of fiscal 1996).
Property, plant and equipment, net of accumulated depreciation, increased
$3,716,846 primarily as a result of the Chartex acquisition.
Net current assets of discontinued operations of $3,913,511 and net
noncurrent assets of discontinued operations of $1,952,269 were eliminated in
conjunction with the sale of Holdings. (See also Note 3 to the Notes to
Unaudited Condensed Consolidated Financial Statements.)
Notes payable to shareholders increased by $2,160,000 as a result of bridge
financing incurred during the current fiscal year. Proceeds were used to fund
pre-closing and on-going funding commitments to Chartex; to pay certain expenses
associated with the sale of Holdings and the purchase of Chartex; and to provide
working capital for current operations.
LIQUIDITY AND SOURCES OF CAPITAL
Cash used in operations for the nine month period ended June 30, 1995
reflect substantial sales and marketing expenses incurred in the commercial
launch of Reality in the U.S. combined with lower than expected sales during
this period. For the nine month period ended June 30, 1996 the Company incurred
substantial operating expenses that include operating cash for Chartex since
February 1, 1996. Due to a shortage of available cash, the Company was able to
spend only nominal amounts on marketing Reality in the earlier quarters of 1996.
Initially and through 1995 sales were significantly lower than an-
ticipated; in 1996, sales have met management's expectations and management
believes that with additional marketing and consumer education, sales will
increase. Further, the Company expects that it will need to incur a significant
amount of marketing and promotion expenditures in the US related
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to the female condom in the fourth quarter of 1996 and fiscal 1997. Current
marketing efforts will continue to be directed at encouraging consumer trial of
the product. Because the Company has a significant level of "paid-for"
inventory, proceeds from increased sales of the female condom are expected to be
able to fund a meaningful portion of the ongoing marketing and promotion effort
in the U.S. The ultimate level of marketing expenditures required after fiscal
1996 will depend in large part on the results of the Company's fiscal 1996
marketing effort. At present, the Company believes that its sales and marketing
budget in the U.S. for fiscal years after 1996 will be approximately $2.5
million to $3.5 million per year and will be primarily funded through sales of
its female condom.
The Company has received multiple inquiries and is actively discussing the
marketing of the female condom with potential partners in several countries. The
Company's Korean partner launched the product in January, 1996 and through July,
orders totaled 900,000 units, exceeding management's expectations. Orders from
such international arrangements are paid for via letter of credit at the time of
shipment, thus eliminating receivables and improving cash flow. The Company's
Japanese partner plans to launch early in 1997. The Company is in various stages
of discussions with potential partners in Taiwan, mainland China, Canada and
Mexico. Due to the Company's January 1996 sale of Holdings and its February 1996
acquisition of Chartex, the Company does not believe that its historical
liquidity and capital structure are necessarily representative of its future
structure or requirements.
At June 30, 1996 the Company had current liabilities of $6.3 million. This
amount includes $1.16 million of notes payable to shareholders which are due in
November 1996, $1.0 million of notes payable to shareholders which are due in
March 1997, a mortgage loan of $1.6 million due in October 1996 and $0.7 million
in note payable payments which were paid to the former owner of Chartex in July
1996. Management will also need to fund the operating losses which are expected
to continue until at least the third quarter of fiscal 1997.
During the quarter ended June 30, 1996 the Company commenced a public stock
offering which subsequently raised approximately $2.8 million, net of estimated
expenses. (See also Note 6 of the Notes to Unaudited Condensed Consolidated
Financial Statements.) Further, the Company was awarded a $744,000 economic
development grant by the U.K. Regional Selective Assistance Program (the
"Program") of which approximately $310,000 has been received with the remainder
payable in future years based on the achievement of certain employment,
operational and investment goals. (The Company is required to utilize 50% of any
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amounts it receives from this grant to prepay a portion of the (Pounds)520,000
note which the Company issued as part of the consideration of the Chartex
acquisition; in addition, the grant is repayable by the Company to the Program
if certain conditions of the grant are not satisfied.) Subsequent to June 30,
1996 the Company repaid (Pounds)150,000, leaving a balance of (Pounds)370,000.
The Company is continuing to pursue the establishment of a working capital
credit line which would be based on eligible accounts receivable and either a
refinancing or sale and leaseback of the Chartex manufacturing facility. (The
current $1.6 million mortgage on the Chartex manufacturing facility expires in
October, 1996. The most recent appraisal of this facility sets its current open
market value, as defined, at approximately $3.4 million.) Management believes
that the additional equity generated by the public stock offering will have a
positive effect on its efforts. However, there can be no assurance that the
Company will be able to source all or any portion of this required capital
through these or other sources or that such amounts, if raised, will be
sufficient to operate the Company until sales of the female condom generate
sufficient revenues to fund operations. In addition, further fund raising may be
costly to the Company and/or dilutive to existing shareholders. 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.
Management is not aware of any material outstanding product liability
claims or lawsuits which would have a material effect on the Company's results
of operations, financial position or cash flow.
The Company's current level of expenditures has been established to support
a higher level of revenues associated with the female condom. The Company will
continue to report operating losses until such revenues significantly increase
or the Company significantly reduces its cost structure. 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 its
existing female condom inventory and to capitalize on the existing investments
in the female condom's development, FDA approval and marketing to date in the
normal course of business.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 general and administrative expenses. The
Company attempts to pass on increased costs and expenses by increasing selling
prices, when possible, and by improved efficiencies of operations.
22
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 of Company/1/
4.1 Amended and Restated Articles of Incorporation, (same as Exhibit 3.1)./1/
4.2 Articles II, VII, and XI of the Amended and Restated By-laws of the Company (included in Exhibit
3.2)./1/
10.1 Consultant Warrant Agreement between the Company and C.C.R.I. Corporation dated March 13, 1995, as
amended on April 22, 1996./2/
27 Financial Data Schedule
- ---------------
/1/ Incorporated herein by reference to the Company's December 31, 1995
Form 10-Q.
/2/ Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as filed with the Securities and Exchange Commission
("SEC") on April 23, 1996.
b.) Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the
quarterly period ended June 30, 1996.
23
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 13, 1996 /s/ O. B. Parrish
----------------------------
O. B. Parrish, Chairman, Chief
Executive Officer and Principal
Accounting Officer
24
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
27 Financial Data Schedule
25