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, 2000
[ ] 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
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
875 N. Michigan Avenue, Suite 3660, Chicago, IL 60611
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(Address of Principal Executive Offices) (Zip Code)
(312) 280-1119
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(Issuer's Telephone Number, Including Area Code)
Not applicable
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(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 practicable date:
Common Stock, $.01 Par Value - 14,445,672 shares outstanding as of February 12,
2001
Transitional Small Business Disclosure Format (check one):
Yes No X
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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, 2000 4
Unaudited Condensed Consolidated
Statements of Operations -
Three Months Ended December 31, 2000
and December 31, 1999 5
Unaudited Condensed Consolidated
Statements of Cash Flows -
Three Months Ended December 31, 2000
and December 31, 1999 6
Notes to Unaudited Condensed Consolidated
Financial Statements 7
Management's Discussion and Analysis 12
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-QSB which are
not statements of historical fact are intended to be, and are hereby identified
as, "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to secure
adequate capital to fund operating losses, working capital requirements,
advertising and promotional expenditures and principal and interest payments on
debt obligations; factors related to increased competition from existing and new
competitors including new product introduction, price reduction and increased
spending on marketing; limitations on the Company's opportunities to enter into
and/or renew agreements with international partners, the failure of the Company
or its partners to successfully market, sell, and deliver its product in
international markets, and risks inherent in doing business on an international
level, such as laws governing medical devices that differ from those in the
U.S., unexpected changes in the regulatory requirements, political risks, export
restrictions, tariffs, and other trade barriers, and fluctuations in currency
exchange rates; the disruption of production at the Company's manufacturing
facility due to raw material shortages, labor shortages, and/or physical damage
to the Company's facilities; the Company's inability to manage its growth and to
adapt its administrative, operational and financial control systems to the needs
of the expanded entity and the failure of management to anticipate, respond to
and manage changing business conditions; the loss of the services of executive
officers and other key employees and the Company's continued ability to attract
and retain highly-skilled and qualified personnel; the costs and other effects
of litigation, governmental investigations, legal and administrative cases and
proceedings, settlements and investigations; and developments or assertions by
or against the Company relating to intellectual property rights.
3
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31,
2000
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ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 485,616
Accounts receivable, net . . . . . . . . . . . . . . . . . 955,319
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 492,255
Prepaid expenses and other current assets. . . . . . . . . 177,538
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TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . 2,110,728
Intellectual property rights, net . . . . . . . . . . . . . . 555,768
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 141,573
PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . . 3,604,714
Less accumulated depreciation and amortization. . . . . . . . (2,343,965)
Net Property, plant, and equipment. . . . . . . . . . . . . 1,260,749
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TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 4,068,818
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable, related party, net of unamortized discount. $ 1,260,167
Convertible debenture, net of unamortized discount . . . . 1,437,761
Accounts payable . . . . . . . . . . . . . . . . . . . . . 729,802
Accrued expenses and other current liabilities . . . . . . 349,470
Preferred dividends payable. . . . . . . . . . . . . . . . 45,285
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TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . 3,822,485
Deferred gain on lease of facility. . . . . . . . . . . . . . 1,323,305
Other long-term liabilities . . . . . . . . . . . . . . . . . 13,088
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TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 5,158,878
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock . . . . . . . . . . . . . . . . . 6,600
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . 143,481
Additional paid-in-capital. . . . . . . . . . . . . . . . . . 48,502,559
Unearned consulting compensation. . . . . . . . . . . . . . . (70,895)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (49,655,080)
Accumulated other comprehensive income. . . . . . . . . . . . 15,351
Treasury Stock, at cost . . . . . . . . . . . . . . . . . . . (32,076)
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Total stockholders' equity (deficit). . . . . . . . . . . . . (1,090,060)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT). . . . . $ 4,068,818
=============
See notes to unaudited condensed consolidated financial statements.
4
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
December 31,
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2000 1999
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Net revenues. . . . . . . . . . . . . . . . . . $ 1,213,625 $ 847,295
Cost of products sold . . . . . . . . . . . . . 1,129,874 916,893
------------ ------------
Gross profit (loss) . . . . . . . . . . . . . . 83,751 (69,598)
------------ ------------
Advertising and promotion . . . . . . . . . . . 86,081 38,810
Selling, general and administrative . . . . . . 500,250 747,707
------------ ------------
Total operating expenses. . . . . . . . . . . . 586,331 786,517
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Operating (loss). . . . . . . . . . . . . . . . (502,580) (856,115)
Amortization of debt issuance costs . . . . . . - 95,574
Interest, net and other expense . . . . . . . . 116,769 355,138
------------ ------------
Net (loss) before income taxes. . . . . . . . . (619,349) (1,306,827)
Provision for income taxes. . . . . . . . . . . ---- ----
------------ ------------
Net (loss). . . . . . . . . . . . . . . . . . . (619,349) (1,306,827)
Preferred dividends, Series 1 . . . . . . . . . 33,271 33,441
------------ ------------
Net (loss) attributable to common stockholders. (652,620) (1,340,268)
============ ============
Net (loss) per common share outstanding . . . . $ (0.05) $ (0.11)
Weighted average of common shares outstanding . 14,075,236 12,292,449
See notes to unaudited condensed consolidated financial statements.
5
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months ended
December 31,
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2000 1999
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OPERATIONS:
Net (loss). . . . . . . . . . . . . . . . . . . . $(619,349) $(1,306,827)
Adjusted for noncash items:
Depreciation and amortization . . . . . . . . . 116,932 271,566
Amortization of discounts on notes payable and
convertible debentures . . . . . . . . . . . . 87,747 326,129
Changes in operating assets and liabilities . . 291,210 444,273
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Net cash (used in) operating activities . . . . . (123,460) (264,859)
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INVESTING ACTIVITIES:
Capital expenditures, Net cash (used in)
provided by investing activities. . . . . . . . - (11,307)
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FINANCING ACTIVITIES:
Dividend paid on preferred stock. . . . . . . . . (95,986) (39,000)
Proceeds from issuance of common stock. . . . . . 250,000 315,863
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Net cash provided by financing activities . . . . 154,014 276,863
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Effect of exchange rate changes on cash . . . . . (2,060) (23,030)
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INCREASE (DECREASE) IN CASH . . . . . . . . . . . 28,494 (22,333)
Cash at beginning of period . . . . . . . . . . . 457,122 570,709
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CASH AT END OF PERIOD . . . . . . . . . . . . . . $ 485,616 $ 548,376
========== ============
Schedule of noncash financing and investing
activities:
Common stock issued for payment of preferred
stock dividends and convertible debenture
interest. . . . . . . . . . . . . . . . . . . . $ 26,016 39,363
Preferred dividends declared, Series 1. . . . . . 33,271 33,441
See notes to unaudited condensed consolidated financial statements.
6
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, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2001. 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, 2000.
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 40,000sq. ft. leased manufacturing facility located in London,
England.
Reclassification:
- -----------------
Certain items on the statements of income and cash flows for the quarter ended
December 31, 1999 have been reclassified to be consistent with the presentation
shown for the quarter ended December 31, 2000.
NOTE 2 - Earnings Per Share
--------------------
Earnings per share (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
NOTE 3 - Comprehensive Income (Loss)
-----------------------------
Total Comprehensive Loss was $(659,659) for the three months ended December 31,
2000 and $(1,345,515) for the three months ended December 31, 1999.
NOTE 4 - Inventories
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The components of inventory consist of the following:
DECEMBER 31, 2000
-------------------
Raw material and work in process $ 415,650
Finished goods . . . . . . . . . 147,601
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Inventory, gross . . . . . . . . 563,251
Less: Inventory reserves . . . . (70,996)
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Inventory, net . . . . . . . . . $ 492,255
===================
NOTE 5 - 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 $0.7 million for the three months ended December 31, 2000
and as of December 31, 2000 had an accumulated deficit of $49.7 million. At
December 31, 2000, the Company had working capital of $(1.7) million and
stockholders' equity of $(1.1) 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 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 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.
8
NOTE 5 - Financial Condition - (Continued)
--------------------------------------
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, 2000 for the purposes
of identifying and evaluating opportunities available to the Company for
increasing shareholder value. These opportunities may include selling all or a
portion of the business, assets or stock of the Company or entering into one or
more distribution arrangements relating to the Company's product. 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.
On 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.
Between September and November 1999 the Company completed a private placement of
983,333 shares of the Company's common stock for $737,500, of which $500,000 was
received through September 30, 1999. The stock sales were directly with
accredited investors and included one current director of the Company. The
Company sold the shares to these investors at a price of $.75 per share.
During the year ended September 30, 2000, the Company completed private
placements of 1,305,000 shares of the Company's common stock for $697,500, of
which $597,500 was received through September 30, 2000. The stock sales were
directly with accredited investors and included two current directors of the
Company. The Company sold the shares to these investors at prices which ranged
from $.50 and $.75 per share.
During the quarter ended December 31, 2000, the Company completed private
placements of 600,000 shares of the Company's common stock for $300,000, of
which $250,000 was received through December 31, 2000. The stock sales were
directly with accredited investors and included one director of the Company. The
Company sold the shares to these investors at a price of $.50 per share.
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 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
9
NOTE 5 - Financial Condition - (Continued)
--------------------------------------
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 two-year period. As of December
31, 2000, the Company has placed four puts for the combined cash proceeds of
$582,000 providing the investor with a total of 680,057 shares of the Company's
Common Stock.
As of February 12, 2001, the Equity Line Agreement expired. As of December 31,
2000, the Company accrued in its financial statements for the 12% fee on the
portion of the minimum equity line not utilized.
Until internally generated funds are sufficient to meet cash requirements, FHC
will remain dependent upon its ability to generate sufficient capital from
outside sources. 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 will ultimately 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.
10
NOTE 6 - Industry Segments And Financial Information About Foreign and Domestic
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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:
Three Months Ended
December 31,
(Amounts in Thousands) 2000 1999
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Net revenues:
United States . . . . . $ 3 $ 647
International . . . . . 1,211 200
Operating profit (loss):
United States . . . . . (319) (330)
International . . . . . (184) (526)
Identifiable assets
United States . . . . . 555 1,687
International . . . . . 3,514 3,954
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 $0 and $11,000 as of December
31, 2000 and 1999, respectively. Beginning October 1, 2000 revenues derived from
sales to the U.S. public and trade sectors are accounted for as international
revenues. In the first quarter of fiscal 2001 U.S. sales comprised $815,000 of
the international total.
11
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. It is the only HIV/AIDS product specifically
developed and approved by regulatory agencies in the U.S., the European Union,
Japan and The People's Republic of China, among others, since the epidemic began
about 20 years ago for the prevention of the transmission of HIV/AIDS through
sexual contact.
The Female Condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 50 additional
countries. Certain of these studies show that having the Female Condom
available increases protected sex acts and decreases the incidence of STDs.
The product is currently sold or available in various venues including
commercial (private sector) outlets, public sector clinics and research programs
in over 75 countries. It is commercially marketed in 14 countries including the
U.S., the U.K., Canada, France and Japan.
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. 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 will sell 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 $0.55. Pursuant to this agreement, the product
is currently available in over 70 countries with major programs in about 10
countries including Zimbabwe, Tanzania, Brazil, Uganda, South Africa, Namibia,
Ghana, and Haiti.
Product
The Female Condom is made of polyurethane, a thin but strong material that 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 one sex act.
12
Global Market Potential
Male condom market: It is estimated the global annual market for male condoms is
5.4 billion units. The major segments are in the Global Public sector, the U.S.,
Japan, India and The People's Republic of China. 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.
HIV/AIDS is an epidemic far more extensive than what was predicted. UNAIDS and
the World Health Organization ("WHO") now estimate that the number of people
living with HIV/AIDS stands at about 36 million, more than 50% higher than WHO's
original projection in 1991 for year end 2000. Further, African countries with
over 80% of the reported cases are experiencing devastating effects to their
economic growth. Gross domestic product in hard-hit countries such as South
Africa is projected to decrease 13% - 22% by 2010. Based on these recently
released figures, UNAIDS has initiated a new strong campaign to persuade African
leaders to immediately initiate broad education out-reach prevention programs
with support from the international community.
The focus is extending to Eastern Europe and Asia as the estimated number of
cases of HIV/AIDS has, according to UNAIDS, exponentially jumped in the last
year. Major prevention and education out-reach programs are being planned and
implemented in these countries.
In the United States, the Center for Disease Control and Prevention reports that
one in four Americans has an STD, one in five adults 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 sexual transmission of
HIV/AIDS and other STDs -- the latex male condom and the Female Condom.
The Company is currently in discussion with WHO and UNAIDS regarding the role
the Female Condom will play as part of the International Partnership Against
Aids in Africa. The partnership is a coalition of African governments, the
United Nations, donors and the private and community sectors. Its mission is
over the next decade to help reduce the number of new HIV infections in Africa,
promote care of HIV positive persons and mobilize society to halt the advance of
AIDS.
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
women can control whether or not she is protected as many men do not like to
wear male condoms and may refuse to do so.
13
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 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
Over the past two years several studies have been completed which show that
providing the Female Condom in public clinics in both the United States and
countries in the developing world is, at a minimum, cost effective and usually
cost saving. This is important information for governments to have in
determining where their public health dollars are allocated. These studies have
been or are about to be published and also have been presented at various
scientific meetings around the world.
Worldwide Regulatory Approvals
The Female Condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the world,
including receipt of a CE Mark in 1997 which allows the Company to market the
Female Condom throughout the European Union ("EU"). In addition to the United
States and the EU, several other countries have approved the Female Condom for
sale, including Brazil, Mexico, Canada, The People's Republic of China, Japan,
Russia, and Australia.
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.
14
Commercial Markets
The Company has commercial partners which have launched the product in countries
including the U.S., the U.K., Canada, Japan and France.
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than 1.7 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 one-third over offering only a male condom.
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 based
on the Company's cost of production. The current price per unit is
approximately 0.38 (pounds), or $.55.
In the United States, the product is marketed to city and state public health
clinics, as well as not-for-profit organizations. The Female Condom is
available in all 50 states with major programs in the states of New York,
Florida, California, Louisiana, Maryland, New Jersey, South Carolina and
Illinois and the cities of Chicago, Philadelphia, New York and Houston. 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.
15
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 2013. Due to a change
in patent regulations, The U.S. product patent, which formerly expired on April
14, 2005, has had its expiration extended until April 14, 2007 providing the
Company with two additional years of protection. 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 manufacturing the Female
Condom has allowed the Company to develop trade secrets and know-how, including
certain proprietary production technologies, which further secure its
competitive position.
16
RESULTS OF OPERATIONS
- -----------------------
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999
The Company had revenues of $1,213,625 and a net loss of $652,620 for the three
months ended December 31, 2000 compared to revenues of $847,295 and a net loss
of $1,340,268 for the three months ended December 31, 1999.
The Company's operating loss for the three months ended December 31, 2000 was
$502,580 compared to $865,115 for the same period last year for a decrease of
42%. As discussed more fully below, the decrease in the Company's net operating
loss was result of an increase in gross profit coupled with a decrease in
selling, general and administrative expenses. The decrease in the net loss
resulted from the reduction in the net operating loss and a decrease in
amortization of debt issuance costs and non-operating interest expenses.
Sales increased $366,330 in the current quarter, or 43%, compared with the same
period last year. The higher sales occurred because of higher unit sales shipped
to domestic customers.
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.
Cost of goods sold increased $212,981 to $1,129,874 in the current quarter from
$916,893 for the same period last year. The increase of 23% in cost of goods
sold on a 43% sales increase resulted in an improvement in cost of goods sold as
a percentage of sales of 93% in the current quarter compared to 108% during the
same period in the prior year. The decline in cost of goods sold as a percentage
of sales is primarily a result of a change resulting from the Company's U.S.
sales being almost exclusively comprised of a new sized product (1000 pack)
compared to offering only a small sized product (60 pack) during the same period
in the prior year. The costs of goods sold per unit for the new "1000 pack" is
less expensive because of the efficiencies related to the production of the bulk
sized product sold.
Advertising and promotional expenditures increased $47,271 to $86,081 in the
current quarter from $38,810 for the same period in the prior year. The increase
primarily resulted from prior year in-store promotion expenses not accounted for
until the first quarter of fiscal 2001.
Selling, general and administrative expenses decreased $247,457, or 33%, to
$500,250 in the current quarter from $747,707 for the same period last year.
The change reflects the impact of a reduction of finance, sales and
administrative staff and thereby related labor costs, and reduced costs in the
areas of investor relations, computer and legal fees in the current quarter
compared to that incurred in the prior fiscal year's first quarter.
17
The Company did not incur non-cash amortization of debt issuance costs during
the first quarter compared to $95,574 for the first quarter of the prior year.
The elimination of the aforementioned costs is due to the completion of the
amortization period in the third quarter of the 2000 fiscal year. The
amortization of debt issuance costs related to the issuance of convertible
debentures which began in May and June 1999. The Company has not issued new
convertible debentures subsequent to that time.
Net interest and non-operating expenses decreased $238,369 to $116,769 for the
current period from $355,138 for the same period last year. The decrease exists
because the Company had a smaller 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 is 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 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.
18
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 sales are 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 "FDC 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 2001, cash used in operations totaled $0.1 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.
The Company's currently anticipated needs include financing an aggregate payment
on convertible debentures in the principal amount of $1,500,000 due to five
accredited investors between May and June 2001. Presently, the Company has
established a special project designed to raise sufficient capital to cover this
payment. However, there is no guarantee the Company will be successful and the
Company will remain dependent upon its ability to generate sufficient capital
from outside sources to cover all of its operating needs.
At December 31, 2000, the Company had current liabilities of $3.8 million
including a $1.0 million note payable due March 25, 2001 and a $250,000 note
payable due February 12, 2001 both to Mr. Dearholt, a Director of the Company.
As of December 31, 2000, Mr. Dearholt beneficially owns 2,705,583 shares of the
Company's Common Stock.
19
The Company also secured a $50,000 note payable due February 18, 2001 from Mr.
Parrish, the Chairman of the Board and Chief Executive Officer of the Company.
As of December 31, 2000, Mr. Parrish beneficially owns 506,501 shares of the
Company's Common Stock.
The Company, Mr. Dearholt and Mr. Parrish plan to extend the aforementioned
notes in the current fiscal year as each notes' terms expire. The $250,000 note
payable due February 12, 2001 was extended with similar terms to those set in
the prior year's note.
The Company's current liabilities at December 31, 2000 also include $1,500,000
of convertible debentures originally issued on May 19 and June 3, 1999, to five
accredited investors. The convertible debentures originally had a one-year
term. However, the Company elected under the terms of the convertible
debentures to extend the repayment term for an additional year. $1 million of
the convertible debentures is due on May 19, 2001, with the remaining $500,000
due on June 3, 2001. Repayment of the convertible debentures is secured by a
first security interest in all of the Company's assets. The holder of $1
million of the convertible debentures has alleged that the Company is in default
with respect to perfection of the investors' security interest in the Company's
assets, and has made a demand pursuant to the default provisions of the
convertible debentures for immediate repayment of all amounts outstanding under
the convertible debentures and for the issuance of 1,500,000 shares of common
stock to the investors. The Company disputes this claim and intends to
vigorously defend its position, although no assurance can be given as to the
outcome of this matter.
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, with revenues, is less than $0.1
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. Until internally generated funds are sufficient to
meet capital requirements, the Company will remain dependent on its ability to
generate sufficient capital from outside sources. The Company will also need to
raise additional capital to repay the $1,500,000 of convertible debentures
before they come due. 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.
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.
20
PART II - OTHER INFORMATION
---------------------------
ITEMS 1-5. NOT APPLICABLE
- ----------------------------
ITEM 2 (C)
- ------------
The Company sold 600,000 shares of common stock to four investors between
November 2000 and February 2001. The Company received cash proceeds of $300,000
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 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 Articles of Amendment to Amended and Restated Articles
of Incorporation. (2)
3.3 Amended and Restated By-Laws. (3)
4.1 Amended and Restated Articles of Incorporation. (1)
4.2 Articles of Amendment to Amended and Restated Articles
of Incorporation. (2)
4.3 Articles II, VII, and XI of the Amended and Restated
By-Laws (included in Exhibit 3.2). (3)
_____________________________
(1) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2, filed with the Securities and Exchange Commission on
October 19, 1999.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2, filed with the Securities and Exchange Commission on
September 21, 2000.
(3) Incorporated herein by reference to the Company's 1995 Form
10-KSB.
(b) Report on Form 8-K - No reports on Form 8-K were filed during
the quarter ended December 31, 2000.
21
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, 2001 /s/O.B. Parrish
---------------------------
O.B. Parrish, Chairman and Chief Executive
Officer
/s/o/Robert R. Zic
--------------------
Robert R. Zic, Director of
Finance (Principal Accounting
Officer)
22