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FORM 10-Q

(Mark One)

Commission file number: 0-26487

WOMEN FIRST HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)

          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 period 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 o

As of July 31, 2002, 22,940,133 shares of common stock, par value $.001 per share, were outstanding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a “safe harbor” for these types of statements.  To the extent statements in this Quarterly Report involve, without limitation, our expectations for growth, estimates of future revenue, expenses, profit, cash flow, balance sheet items or any other guidance on future periods, these statements are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.”  The forward-looking statements contained in this Quarterly Report are subject to various risks and uncertainties, including those identified in Item 5 below under the heading “Factors that May Affect Future Performance” and other risks identified from time to time in our filings with the Securities and Exchange Commission, press releases and other communications.  We undertake no obligation to release publicly the results of any revisions to these forward-looking statements or to reflect events or circumstances arising after the date hereof.

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WOMEN FIRST HEALTHCARE, INC.

INDEX TO FORM 10-Q

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PART 1 - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Women First HealthCare, Inc.
Consolidated Balance Sheets
(in thousands)

See accompanying notes.

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Women First HealthCare, Inc.
Unaudited Consolidated Statements of Operations
(in thousands, except per share data)

See accompanying notes.

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Women First HealthCare, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)

See accompanying notes.

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Women First HealthCare, Inc.
Notes to Consolidated Financial Statements - Unaudited
June 30, 2002

1.          Summary of Significant Accounting Policies

Basis of Presentation

          The accompanying unaudited financial statements of Women First HealthCare, Inc. (the “Company” or “Women First”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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 of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.  These financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Use of Estimates

          The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Revenue Recognition

          The Company recognizes revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.  In addition, the Company follows the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, which sets forth guidelines in the timing of revenue recognition based on factors such as passage of title, installation, payments and customer acceptance. The Company records sales for its pharmaceutical and self-care products at time of shipment. The Company provides for returns at the time of sale based on estimated merchandise returns. Other adjustments to its pharmaceutical product sales are made for product discounts, estimated chargebacks, Medicaid-sponsored payor allowance discounts and early payment discounts.

Comprehensive Income

          For the periods presented in the accompanying financial statements, the Company has no items for which comprehensive income (loss) would materially differ from the reported net income (loss).

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Net Income (Loss) Per Share

          Basic net income (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted net income per share includes common stock equivalent shares, comprised of shares of common stock issuable upon the exercise of stock options, warrants and conversion of preferred stock and a note payable, if dilutive.  There were 6.6 million potentially dilutive common shares at June 30, 2002 (not all were dilutive as of June 30, 2002).  Common stock equivalents are not included in the calculation of diluted net loss per share, as their impact would be antidilutive.

          Shares used in calculating basic and diluted earnings per share were as follows (in thousands):

New Accounting Pronouncements

          In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001.  Under these rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement.  As of June 30, 2002, the Company had goodwill and intangible assets valued at approximately $2.7 million.  During the second quarter of 2002, the Company performed the first of the required impairment tests of goodwill and indefinite lived intangible assets to determine if a transition impairment charge should be recognized under SFAS 142.  The tests showed that no impairment charge should be recognized.  The Company will hereafter at least annually test for impairment.

          Upon adoption of SFAS 142, the Company stopped amortizing goodwill and certain other intangibles.  This reduced annual amortization expense by approximately $236,000.

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2.          Inventory

          Inventory consists of the following components (in thousands):

3.          Product rights acquisition

          On June 25, 2002, the Company acquired exclusive worldwide rights and title to Vaniqa^® (eflornithine hydrochloride) Cream,13.9%, from a joint venture formed by Bristol-Myers Squibb Company (“BMS”) and The Gillette Company (“Gillette”).  Vaniqa^® is a topical cream clinically proven to slow the growth of unwanted facial hair in women.  Vaniqa^® was approved for marketing by the U.S.Food and Drug Administration in July 2000 and is the only prescription pharmaceutical available for this prevalent condition.  Vaniqa^® also has been granted regulatory approval in 25 international markets including the European Union, Canada and major Latin American countries.

          The Company paid $38,500,000 in cash to the joint venture parties for the Vaniqa^® product, including all related product rights, inventory, regulatory filings and patent rights.  The Company also secured the right to pursue an over-the-counter strategy and to develop enhanced formulations of Vaniqa^®.  The Company, BMS and Gillette entered into an Asset Purchase Agreement and License Agreement to provide for the sale or license of all of the joint venture parties’ Vaniqa^® assets.  The Company did not acquire any facilities, equipment or personnel in the transaction. BMS and the Company also entered into a related Supply Agreement, whereby BMS will continue to manufacture Vaniqa^® for three years following the acquisition.

          The Company financed the acquisition through the issuance of $28,000,000 of senior secured notes (the “Notes”) and $13,000,000 of convertible preferred stock (the “Preferred Stock”).

          The Notes mature in September 2005 and bear interest at the initial rate of 11% per annum, which increases to 12.5% per annum 18 months from the closing and 13% per annum 24 months from the closing. Interest on the Notes is required to be paid in cash, except that the Company may pay interest amounts in excess of 11% per annum in cash or through the issuance of additional Notes.  The Notes may be redeemed by the Company at any time at a redemption price of 108% of the aggregate principal amount outstanding (the “Redemption Price”) plus accrued and unpaid interest.  The Notes are required to be redeemed with 100% of the proceeds of future loans and sales of debt securities and 75% of the proceeds of future sales of equity securities, subject to various exceptions, including, in the case of future sales of equity securities, acquisitions of pharmaceutical products and other assets meeting specified criteria. In addition, the holders of the Notes have the right to require the Company to redeem the Notes at the Redemption Price upon certain changes in control of the Company. For purposes of the Notes, a change in control would include an event where Edward F. Calesa, the Company’s Chairman and Chief Executive Officer, ceases to (i) beneficially own at least 4,500,000 shares of the Company’s Common Stock or (ii) serve as the Company’s Chief Executive Officer, unless either event is caused by his death at a time when the Company holds “key man” life insurance on Mr. Calesa for the benefit of the investors of at least $10,000,000 while all of the Notes are outstanding or a lower insurance amount that decreases proportionately as the Notes are redeemed, but not less than $5,000,000. The Company also must

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generally use 75% of its “excess cash flow” (as defined in the Note and Warrant Purchase Agreement) to redeem the Notes at 100% of the aggregate principal amount outstanding plus accrued but unpaid interest. The Notes prohibit additional indebtedness, subject to exceptions, and contain a variety of financial and other covenants. The Company’s obligations under the Notes are secured by a pledge of the Company’s interest in its Vaniqa-related assets

          The purchasers of the Notes also received warrants exercisable into 1,699,438 shares of Common Stock at an exercise price of $5.50 (subject to certain antidilution adjustments) per share for no additional consideration. The warrants expire in December 2006.

          The Preferred Stock has an aggregate initial stated value equal to $13,000,000, which accretes at a rate of 10% per annum, calculated quarterly, which increases to 11.5% per annum 18 months from the closing and 12.5% per annum 24 months from the closing. The Preferred Stock is convertible at any time at the option of the holders into shares of the Company’s Common Stock at a rate equal to the accreted stated value divided by $6.35, subject to certain antidilution adjustments. Unless previously converted, the Company will be required to redeem the Preferred Stock for cash at its accreted stated value plus accrued and unpaid dividends, if any, in June 2006. If the Company’s Common Stock trades at three times the conversion price of the Preferred Stock for a specified period of time, the Company may, at its option, require the mandatory conversion of the Preferred Stock or redeem the Preferred Stock, subject to the holders’ rights to convert to Common Stock before such optional redemption is completed. The holders of the Preferred Stock have the right to require the Company to redeem the Preferred Stock at 108% of its accreted stated value upon certain changes in control of the Company. For purposes of the Preferred Stock, a change in control would include an event where Mr. Calesa ceases to (i) beneficially own at least 4,500,000 shares of the Company’s Common Stock while the Notes are outstanding or 3,500,000 shares after the Notes have been redeemed or (ii) serve as the Company’s Chief Executive Officer, unless these events are caused by his death at a time when the Company holds “key man” life insurance on Mr. Calesa for the benefit of the investors of at least $10,000,000 while all of the Notes are outstanding or a lower insurance amount that decreases proportionately as the Notes are redeemed, but not less than $5,000,000. In addition, the Preferred Stock is required to be redeemed at 108% of its initial stated value with 100% of the proceeds of future loans and sales of debt securities (other than debt expressly permitted by the terms of the Preferred Stock) and 75% of the proceeds of future sales of equity securities, subject to the senior rights of the Notes to be redeemed first and to various other exceptions, including, in the case of future sales of equity securities, acquisitions of pharmaceutical products and other assets meeting specified criteria. The Company also must generally use 75% of its “excess cash flow” (as defined in the Certificate of Designation for the Preferred Stock) to redeem the Preferred Stock at 100% of its accreted stated value, subject to the senior rights of the Notes. In addition, in the event of a merger or acquisition of the Company, the Company may cause the Preferred Stock to be converted into cash, the securities offered in the transaction or a combination of the two so long as the value of the consideration is three times the conversion price of the Preferred Stock. The terms of the Preferred Stock contain a variety of covenants, including a limitation on the incurrence of debt. The Company’s obligations under the terms of the Preferred Stock are secured by a pledge of the Company’s interest in its Vaniqa-related assets, subject to the senior rights of the Notes.

          The financing was provided by certain affiliates of CIBC Capital Partners and Whitney & Co., LLC. Among other affirmative covenants, the Company agreed that the holders of the Notes and the Preferred Stock are entitled to appoint together a single non-voting observer to attend the Company’s Board of Directors Meetings until the amount of outstanding Notes and Preferred Stock decreases below 10% of the principal or stated value of Notes and Preferred Stock issued by the Company at the closing.

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4.          Segment and Significant Customer Disclosures

          Information as to the segment operations is set forth below based on the nature of the products and services offered.  The Company evaluates performance based on several factors, of which the primary financial measure is business segment operating income or loss, defined as income or loss before other income/expense. Operating income or loss by segment does not include corporate overhead allocations. Transactions between segments are not significant. Each segment generates revenues primarily in the United States, and revenue from foreign sources is not significant. The Company does not evaluate segment performance or allocate resources based on a segment’s assets; therefore, assets are not reported by segment.  Included under corporate marketing and sales expense shown below for the three months and six months ended June 30, 2001 is $38,000 and $148,000, respectively, relating to Trialogue ^TM, a segment which the Company has phased out.

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          Sales to one customer represented 40.8% and 13.1% of net product revenue during the three-month periods ended June 30, 2002 and 2001, respectively.  Sales to the same customer represented 36.2% and 33.3% of net product revenue during the six-month periods ended June 30, 2002 and 2001, respectively.

ITEM 2.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.  This discussion may contain forward-looking statements that involve risks and uncertainties.  Our actual results may differ materially from the results discussed in such forward-looking statements.  Factors that might cause such a difference include, but are not limited to, those discussed below in “Item 5: Other Information - Factors That May Affect Future Performance” as well as those discussed in “Item 1:  Business — Risks and Uncertainties” in our Annual Report on Form 10-K for the year ended December 31, 2001.  We undertake no obligation to release publicly the results of any revisions to these forward-looking statements or to reflect events or circumstances arising after the date hereof.

Overview

          Women First is a specialty pharmaceutical company dedicated to improving the health and well-being of midlife women.  Our mission is to help midlife women make informed choices about their physical and emotional health and to provide pharmaceutical products and self-care products to help these women improve the quality of their lives.  We market these products in the United States through a number of channels including our dedicated sales force, our direct-to-consumer marketing programs through our internet sites, womenfirst.com and aswechange.com, and through our As We Change^® national mail order catalog.

          The pharmaceutical products we offer include the following:

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Results of Operations

          Net revenue.  For the three months ended June 30, 2002, total net revenue was $12.1 million as compared to $5.6 million in the prior year period.  Revenue in the current period was derived from the pharmaceutical division ($9.9 million or 81.5% of total net revenue) and consumer business ($2.2 million or 18.5% of total net revenue).  In last year’s second quarter, the pharmaceutical division contributed revenue of $3.5 million (62.7%) and consumer business contributed $2.1 million (37.3%).

          For the six months ended June 30, 2002, total net revenue was $21.5 million as compared to $12.7 million in the prior year six-month period.  Revenue in the current period was derived from the pharmaceutical division ($17.3 million or 80.2% of total net revenue) and consumer business ($4.2 million or 19.8% of total net revenue).  In last year’s six month period, the pharmaceutical division contributed revenue of $8.6 million (67.6%) and consumer business contributed $4.1 million (32.4%).  All of the current period revenue, and virtually all of the prior year revenue, is from product sales of our prescription products and sales of self-care products through our As We Change® national mail order catalog.

          Cost of sales.  Cost of sales, which is primarily comprised of amounts we pay to suppliers for product and amortization of product rights increased to $3.3 million in the three-month period ended June 30, 2002 from $1.3 million in the year earlier period.  For the six months ended June 30, 2002, cost of sales increased to $6.0 million from $3.8 million in the prior year.  The gross margin declined to 73.0% in the current quarter from 76.5% in the prior year’s period, primarily the result of amortization of product rights of $0.7 million in the current quarter.  There were no product amortization charges in the prior period.   For the six-month current period, the gross margin improved to 72.1% from 70.3%.   Business mix plays a large part in the gross margin calculation and the larger pharmaceutical division revenue contribution, with its higher gross margins, more than offset the increased costs associated with amortization of product rights.

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          Operating expenses.  Marketing and sales expenses, general and administrative expenses, research and development (collectively “operating expenses”) increased $1.6 million (27.4%) to $7.4 million in the three-month period ended June 30, 2002 from $5.8 million in the year earlier period.  The marketing and sales component grew at a 72.6% rate year over year, reflecting a larger sales force and increased marketing spending in support of Esclim^TM.  The increase in spending on marketing is in two main areas — our Test & Treat physician education program and marketing in conjunction with managed care.  General and administrative expenses declined 36.7%, primarily as a result of write-offs of bad debt affecting last year’s quarter and, to a lesser extent, the amortization of goodwill of As We Change last year.

          Operating expenses for the six-month period, exclusive of cost of sales, were $13.5 million, 15.1% higher than in the prior year period.  As was true for the quarter, the increase was most prominent in the marketing and sales component where the increase was 37.8% for the reasons noted above.  General and administrative expenses declined 28.1% year over year for principally the same reasons referred to above.

          Income (loss) from operations.  Income from operations in the three-month period ended June 30, 2002 was $1.4 million, an improvement of $2.9 million from the prior year period’s loss of $1.5 million.  The improvement is attributable to increased sales in the pharmaceutical division, offset somewhat by the decline in the gross margin and the growth in operating expenses.

          Income from operations in the six-month period ended June 30, 2002 was $2.0 million, an improvement of $4.9 million from the prior year period’s loss of $2.9 million.  The improvement is attributable to increased sales in the pharmaceutical division, offset by the growth in operating expenses.

          Interest and other income.  In the three-month period ended June 30, 2002, interest and other income was $86,000 and consists entirely of interest income on our cash balances.  In the prior year period, this amount was $88,000.  For the six months ended June 30, 2002, interest and other income was $0.1 million consisting entirely of interest income on our cash balances.  In the last year’s six month period, interest and other income was $0.4 million, $0.2 million of which was attributable to accretion of a $0.5 million non-compete from a related party.

          Interest expense.  Interest expense was $0.4 million and $0.8 million respectively for the three-month and six-month periods ended June 30, 2002.  Both amounts were comprised primarily of interest on our convertible debt to Elan plus imputed interest on our note to Wyeth.  Interest on the senior secured notes issued to finance Vaniqa® accrued for only five days in each period and was insignificant.  For the first 18 months following the closing of the Vaniqa® transaction, quarterly interest expense and the amortization of deferred debt expense related to the transaction will be $1.3 million.  The quarterly interest expense will increase 18 months after the closing to $1.4 million and again 24 months after the closing to $1.5 million.

          Accretion of beneficial conversion feature.  The Company incurred a one-time, non-cash charge of $1.0 million for the beneficial conversion feature of our convertible preferred stock issued to finance Vaniqa®.  At the time of issuance, the conversion price was less than the market price of the Company’s publicly traded common stock.

          Accretion of stated value of convertible preferred stock.  For the three-month and six-month periods ended June 30, 2002, the Company recognized an expense of $18,000, which represented the amount by

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which the stated value of the convertible preferred stock issued to finance the Vaniqa® acquisition accreted in accordance with the terms of the convertible preferred stock.  This expense covered the five days the stock was outstanding during both periods.  For the first 18 months following the closing of the Vaniqa® transaction, quarterly expense related to the accretion of stated value will be approximately $0.3 million.  The quarterly expense will increase 18 months after the closing to approximately $0.4 million and again 24 months after the closing to approximately $0.5 million.

          The liquidation preference of the convertible preferred stock is equal to the accreted stated value, plus accrued and unpaid dividends, if any.  Each share of convertible preferred stock is convertible into a number of shares of our common stock equal to the accreted stated value divided by the conversion price.

Segment Reporting

          We operate in two segments: (i) the pharmaceutical division which is responsible for marketing and sales of prescription products and pH paper, a diagnostic product; and (ii) the consumer division which is responsible for marketing and sales of self-care products.  Each segment is a strategic business unit that offers different products and services. They are each managed separately because they perform different services utilizing different and distinct operations.

Pharmaceutical Division

          The Pharmaceutical Division reported revenues of $9.9 million in the second quarter of 2002, an increase of $6.4 million or 183% from last year’s second quarter.  For the six months ended June 30, 2002, the division recorded revenues of $17.3 million, an increase from the prior year of $8.7 million, or 102%. All of our pharmaceutical products, including Vaniqa®, produced revenue in 2002.  In last year’s second quarter and six-month periods, revenue was recorded on Ortho-Est® Tablets and Esclim™ only.

          Our gross margin decreased to 76.6% in the first quarter of 2002 from 87.7% in the prior year period and decreased to 75.5% in the first half of 2002 from 77.7% in the prior year first half.  This is primarily the result of including product amortization charges of $0.7 million in cost of sales in the second quarter of 2002 and $1.3 million in the first half of 2002.  There were no product rights being amortized in the comparable prior periods.

          Operating expenses in the second quarter 2002, exclusive of cost of sales, were $4.9 million or $2.3 million (92.3%) above the prior year period.  For the six month period ended June 30, 2002, operating expenses, exclusive of cost of sales, were $8.7 million or $2.9 million (50.8%) higher than in the prior period.  Both increases reflect higher spending in support of Esclim™ for additional sales force added in late 2001 and for marketing programs in support of the product’s formulary listings with AdvancePCS, Caremark and Express Scripts.

          As a result of factors discussed above, the Pharmaceutical Division recorded profits of $2.7 million in the second quarter and $4.4 million for the first six months of 2002 compared to a profit of $0.5 million and $0.9 million in the comparable prior year periods.

Consumer Division

          The Consumer Division reported revenues of $2.2 million and $4.3 million for the second quarter and first half of 2002 respectively.  This compares with revenues of $2.1 million and $4.1 million in the

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comparable prior year periods.  Net product revenues increased by $0.2 million both for the quarter and year to date, reflecting 7.6% and 3.7% increases over the prior years’ comparable periods, respectively.  Commensurate with our name acquisition program, mailing of catalogs increased from 2.3 million in the first six months of 2001 to 2.6 million in the first six months of 2002.  This has resulted in a decrease in revenue generated per catalog, from $1.71 2001 to $1.53 in 2002. Revenues from shipping and handling also increased.  Shipping revenue per order increased 19%, from $6.03 in the first six months of 2001 to $7.16 in the first six months of 2002, and is attributed to an increase in our rates and improvements in shipping efficiencies we implemented earlier this year.

          The gross margin for the second quarter of 2002 was 57.0%, which compares to 57.7% for the comparable period last year.  The gross margin increased to 58.1% for the six-month period ended June 30, 2002 from 54.9% in the year earlier period.  An improvement in our product mix resulting from increases in our higher margin products, specifically our supplements and skin care product lines, contributed to the improved margin for the first six months of 2002.  There was also an improvement in our gross margin associated with the increase in our shipping operations described above.

          Operating expenses, exclusive of cost of sales, in the second quarter increased slightly (1.8%) from the prior year’s comparable period.  For the six-month period, operating expenses declined 4.8% this year from last year.  Part of the decline in both periods was related to the discontinuance of amortization of goodwill and indefinite lived intangible assets as required under SFAS 142.  For the quarter and year to date, we have increased our spending on catalog costs, as we increased our circulation 11%, from 2.3 million catalogs in 2001 to 2.6 million, primarily in the second quarter.  Effective cost reduction programs have been implemented through the rest of our operations, resulting in reductions of $0.1 million, or 11%, for the second quarter of 2002 compared to the same period last year, and $0.3 million, or 10%, for the first six months of 2002 compared to the same period last year.

          As a result of the above, the Consumer Division reported profits of $54,000 and $93,000 for the second quarter and first half of 2002 respectively compared to a profit of $1,000 in last year’s second quarter and a loss of $0.2 million in last year’s first half.

Corporate

          Corporate general and administrative operating expenses declined $0.7 million to $1.3 million in the second quarter of 2002 from $2.0 million in the comparable prior period.  For the six-month period, the decline in 2002 was $0.8 million to $2.5 million from $3.3 million in the first six months of 2001.  The reduction was primarily the result of write-offs of bad debt affecting last year’s periods.

Critical Accounting Policies and Estimates

          Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those relating to revenue recognition.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily

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apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

          We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements.

  Revenue recognition

          We recognize revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.  In addition, we follow the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, which sets forth guidelines in the timing of revenue recognition based on factors such as passage of title, installation, payments and customer acceptance.

  Reserve for returns, chargebacks and discounts and allowance for doubtful accounts

          Our ability to collect outstanding receivables from third-party payers is critical to our operating performance and cash flows.  As of June 30, 2002, the reserve for product returns, chargebacks and discounts is 16.0% of the total amount of receivables in the pharmaceutical division.  We determined this valuation based on an analysis of product shipments, new and total prescription trends, and the amount of product in the distribution channel.  Every quarter we analyze this reserve and make adjustments based on actual returns, chargebacks, discounts and product distribution sell-through.  The allowance for doubtful accounts at June 30, 2002 is 0.7% of the total receivable and is established by reviewing the accounts receivable aging on an individual customer basis.  Based on this review, the allowance is established and adjusted quarterly as necessary.

  Acquired product rights and amortization

          We amortize pharmaceutical products over the estimated economic useful life, generally 15 years.  We assess the useful life on a product-by-product basis based on the estimated marketability and future sales volume, which are dependent on a variety of factors, including the introduction of new products by competitors and continued use of existing product.  In practice, pharmaceutical prescription products are long lived because doctors continue to prescribe drugs that they have grown comfortable with and where the product risk profile is well known.

Factors Affecting Results of Operations

          We earned a profit of $0.3 million for the six months ended June 30, 2002.  We incurred losses of $3.4 million, $22.6 million, $33.5 million and $9.4 million in the years ended December 31, 2001, 2000, 1999 and 1998 respectively.  2001 marked the first complete year of operations under our new management and the new strategic direction of owning and licensing pharmaceutical products as opposed to co-promoting them.  While we have realigned our expense structure with expected revenues, many of our expenses are fixed, especially in the short term, and our revenues are variable.  Because of this, our results of operations have varied during our short operating history and we expect that they will continue to fluctuate, perhaps significantly, in the future.  In addition, other factors may cause fluctuations in our revenues and results of operations in the future, including the following:

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          To the extent our revenues do not cover our expenses, we may be unable to reduce spending commitments in a timely manner to compensate for any unexpected revenue shortfall and may experience unanticipated losses.  As a result of these factors, our operating results in one or more future periods may fail to meet the expectations of investors.

Liquidity and Capital Resources

          At June 30, 2002, our working capital was $19.7 million compared to $21.4 million at December 31, 2001.  Cash and cash equivalents were $15.4 million at June 30, 2002 compared to $19.4 million at December 31, 2001.

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          In our short history, we have had two primary sources of liquidity — revenues from product sales and educational grants and proceeds from private placements of equity and debt securities and our initial public offering of common stock.  We have generated $104.4 million in revenues since our inception and raised $122.2 million from equity offerings.  In addition, we have incurred debt, totaling $43.0 million as of June 30, 2002, to finance the acquisition of the rights to market the pharmaceutical products we sell.

          In addition to operating expenses, our primary use of funds has been and will continue to be to fund capital expenditures and to obtain the rights to market and distribute products.  While we intend to continue pursuing the potential addition of a prescription product or product line, either through acquisition or licensing, we currently have no firm commitments.  We believe that additional product acquisitions will almost certainly require use of funds.

          Net cash used in operating activities was $1.2 million for the six months ended June 30, 2002.  Net cash used in investing activities was $42.6 million for the same period.  Investing activities consisted primarily of payments made to acquire the rights and title to Vaniqa® and to transfer product manufacturing and $0.5 million of loans made to officers of Women First.  Net cash provided by financing activities was $39.9 million for the same period and consists mainly of proceeds from the issuance of convertible preferred stock and notes payable in connection with the Vaniqa® acquisition.

          We believe that based on our current performance and future plans, our existing cash balances will be sufficient to fund our operations, make planned capital expenditures and meet our debt service commitments for the foreseeable future, but we may need additional capital to acquire prescription products or companies.  If cash generated by operations is insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities or obtain credit facilities.  We currently do not have any lines of credit.  The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders.  We may not be able to raise any such capital, if needed, on terms acceptable to Women First or at all.  The extent of our needs for additional liquidity will depend on our future operating performance, which is itself dependent on a number of factors, many of which we cannot control, including prevailing economic conditions, availability of other sources of liquidity, and financial, business, regulatory and other factors affecting our business and operations.

          Our senior secured notes, issued in conjunction with our financing of Vaniqa®, contain financial covenants that we will have to comply with beginning in the third quarter of 2002.  These covenants require us to maintain a minimum earnings before interest, taxes, depreciation and amortization, or EBITDA, a minimum net worth and a minimum fixed charge coverage ratio.  In addition, we have restrictions on our ability to create liens, sell assets and make capital expenditures under the terms of the senior secured notes.  If we fail to comply with these requirements, our lenders can accelerate payment of the notes.

          The following table highlights our contractual and commercial obligations and when they are due (in thousands):

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ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Our distribution and license agreement with Laboratoires Fournier S.A. requires us to calculate the purchase price of the Esclim^™ estradiol transdermal product in euros.  As a result, our operating results for this product are exposed to changes in exchange rates between the U.S. dollar and the European euro. We do not believe that this exposure is material.

PART II - OTHER INFORMATION

ITEM 1.          LEGAL PROCEDINGS

          None.

ITEM 2.           CHANGES IN SECURITIES AND USE OF PROCEEDS

          On June 25, 2002, we acquired exclusive worldwide rights and title to Vaniqa®.  We financed the acquisition through the issuance of $28,000,000 of senior secured notes (the “Notes”), together with warrants to purchase 1,699,438 shares of our common stock at an exercise price of $5.50 (subject to certain antidilution adjustments) per share (the “Warrants”), and $13,000,000 of convertible preferred stock (the “Preferred Stock”).  The Warrants expire in December 2006.  We sold the Notes, Warrants and Preferred Stock to institutional investors in a private placement pursuant to Rule 506 under the Securities Act of 1933.  The purchasers have represented to us that they are accredited investors, the securities were acquired for their own account and not with a view to any distribution thereof to the public and the absence of general solicitation or advertising.

          The Notes mature in September 2005 and bear interest at the initial rate of 11% per annum, which increases to 12.5% per annum 18 months from the closing and 13% per annum 24 months from the closing.  Interest on the Notes is required to be paid in cash, except that we may pay interest amounts in excess of 11% per annum in cash or through the issuance of additional Notes.  We may redeem the Notes at any time at a redemption price of 108% of the aggregate principal amount outstanding (the “Redemption Price”) plus accrued and unpaid interest.  We are required to redeem the Notes with 100% of the proceeds of future loans and sales of debt securities and 75% of the proceeds of future sales of equity securities, subject to various exceptions, including, in the case of future sales of equity securities, acquisitions of pharmaceutical products and other assets meeting specified criteria.  In addition, the holders of the Notes have the right to require us to redeem the Notes at the Redemption Price upon certain changes in control of Women First.  For purposes of the Notes, a change in control would include an event where Edward F. Calesa, our Chairman and Chief Executive Officer, ceases to (i) beneficially own at least 4,500,000 shares of our common stock or (ii) serve as our Chief Executive Officer, unless either event is caused by his death at a time when we hold “key man” life insurance on Mr. Calesa for the benefit of the investors of at least $10,000,000 while all of the Notes are outstanding or a lower insurance amount that decreases proportionately as the Notes are redeemed, but not less than $5,000,000. We also must generally use 75% of our “excess cash flow” (as defined in the Note and Warrant Purchase Agreement) to redeem the Notes at 100% of the aggregate principal amount outstanding plus accrued but unpaid interest.  The Notes prohibit additional indebtedness, subject to exceptions, and contain a variety of financial and other covenants.  Our obligations under the Notes are secured by a pledge of our interest in our Vaniqa-related assets.

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          The Preferred Stock has an aggregate initial stated value equal to $13,000,000, which accretes at a rate of 10% per annum, calculated quarterly, which increases to 11.5% per annum 18 months from the closing and 12.5% per annum 24 months from the closing.  The Preferred Stock is convertible at any time at the option of the holders into shares of our common stock at a rate equal to the accreted stated value divided by $6.35, subject to certain antidilution adjustments.  Unless previously converted, we will be required to redeem the Preferred Stock for cash at its accreted stated value plus accrued and unpaid dividends, if any, in June 2006.  If our common stock trades at three times the conversion price of the Preferred Stock for a specified period of time, we may, at our option, require the mandatory conversion of the Preferred Stock or redeem the Preferred Stock, subject to the holders’ rights to convert to common stock before such optional redemption is completed.  The holders of the Preferred Stock have the right to require us to redeem the Preferred Stock at 108% of its accreted stated value upon certain changes in control of Women First.  For purposes of the Preferred Stock, a change in control would include an event where Mr. Calesa ceases to (i) beneficially own at least 4,500,000 shares of our common stock while the Notes are outstanding or 3,500,000 shares after the Notes have been redeemed or (ii) serve as our Chief Executive Officer, unless these events are caused by his death at a time when we hold “key man” life insurance on Mr. Calesa for the benefit of the investors of at least $10,000,000 while all of the Notes are outstanding or a lower insurance amount that decreases proportionately as the Notes are redeemed, but not less than $5,000,000. In addition, we are required to redeem the preferred Stock at 108% of its initial stated value with 100% of the proceeds of future loans and sales of debt securities (other than debt expressly permitted by the terms of the Preferred Stock) and 75% of the proceeds of future sales of equity securities, subject to the senior rights of the Notes to be redeemed first and to various other exceptions, including, in the case of future sales of equity securities, acquisitions of pharmaceutical products and other assets meeting specified criteria. We also must generally use 75% of our “excess cash flow” (as defined in the Certificate of Designation for the Preferred Stock) to redeem the Preferred Stock at 100% of its accreted stated value, subject to the senior rights of the Notes.  In addition, in the event of a merger or acquisition involving Women First, we may cause the Preferred Stock to be converted into cash, the securities offered in the transaction or a combination of the two so long as the value of the consideration is three times the conversion price of the Preferred Stock.  The terms of the Preferred Stock contain a variety of covenants, including a limitation on the incurrence of debt.  Our obligations under the terms of the Preferred Stock are secured by a pledge of our interest in our Vaniqa-related assets, subject to the senior rights of the Notes.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

          None.

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          The Annual Meeting of the Stockholders of the Company was held on June 5, 2002.  The purpose of the meeting was (i) to elect two directors, (ii) to approve an amendment to the Company’s 1998 Long-Term Incentive Plan (“1998 Plan”), which increased the number of shares of common stock available for issuance thereunder from 2,949,985 to 3,949,985 shares, and (iii) to ratify the selection of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending December 31, 2002.

          At the meeting, Edward F. Calesa and Dennis M. Jones were elected for three-year terms expiring at the 2005 Annual Meeting.  Continuing as directors are Richard L. Rubin, Ph.D., and Michael T. Sember, whose terms expire at the 2003 Annual Meeting and Nathan Kase, M.D., whose term expires at the 2004 Annual Meeting.

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Votes cast at the 2002 Annual Meeting were as follows:

ITEM 5.          OTHER INFORMATION

Factors that May Affect Future Performance

          The following information sets forth factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report and those we may make from time to time.  For a more detailed discussion of the factors that could cause actual results to differ, see “Item 1: Business — Risks and Uncertainties” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

We have been in business a short time and have experienced significant losses since our inception.

          We are an early stage company with a history of losses.  We have incurred significant losses since we were founded in November 1996, accumulating a deficit of $68.6 million through June 30, 2002.  Although we were profitable in the fourth quarter of 2001, and the first and second quarters of 2002, we may not be able to achieve profitability on an annual basis or to sustain profitability on a quarterly basis in the future.  Early stage companies such as ours frequently encounter problems, delays and expenses.  These include, but are not limited to, unanticipated problems and additional costs related to marketing, competition, manufacturing and product acquisitions and development.  These problems may be beyond our control, and in any event, could adversely affect our results of operations.

If our products do not achieve and maintain market acceptance, we will be unable to realize our operating objectives.

          Our estrogen replenishment therapy products may not maintain market acceptance.  Esclim^™, our lead product, and our Ortho-Est^® Tablets compete in the estrogen replenishment therapy, or ERT, market.  In July 2002, researchers affiliated with the National Cancer Institute reported that women on ERT after menopause ran a higher risk of ovarian cancer after ten years of use.  This study and others could decrease the demand for our Esclim^™ and Ortho-Est^® Tablets products.  These products also compete with combination estrogen/progestin hormonal replenishment therapy, or HRT.  In July 2002, the National Institutes of Health announced that its National Heart, Lung and Blood Institute had stopped the clinical trial of HRT in healthy menopausal women because of an increased risk of invasive breast cancer, heart attacks, strokes and blood clots.  While this study noted no increased risk of breast cancer, heart attacks, strokes or blood clots for women on ERT, the perception of such a risk could decrease the demand for our Esclim^™ and Ortho-Est^® Tablets products.

          Other products we have acquired, such as Midrin^®, Bactrim^™, Equagesic^®, Synalgos^®, and Vaniqa^® that were previously marketed by the parties from whom we purchased them, and those products we may

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acquire in the future, if any, likewise may not achieve or maintain market acceptance.  The market acceptance of all of our products will depend on, among other factors:

          Our business model assumes that our marketing programs and strategies and the growth in our target market will result in increased revenues.  If our marketing programs and strategies do not succeed in generating increased revenues, we will be unable to realize our operating objectives.  If the clinicians we target do not recommend and prescribe the products we offer or if midlife women do not regularly use these products, we will experience losses in the future and our business will be adversely affected.

Our business model requires the development and profitability of our pharmaceutical division and reaching breakeven in our consumer division.  If we fail to implement key elements of our business plan, we may not succeed.

          We have embarked on an ambitious plan to provide prescription and non-prescription products to midlife women.  There is a limited market awareness of our company and the products and services we offer.  We must generate expanded market demand for the products we offer by convincing OB/GYNs, nurse practitioners and physicians’ assistants focused on women’s health to prescribe and recommend the products we offer, as well as manage different distribution channels for the products we offer.  If we do not generate sufficient demand for our products, our business may not succeed.

Any failure by us to obtain rights to additional products and successfully integrate them may limit our growth potential to our current organic growth.  We are uncertain of our ability to obtain additional financing at favorable terms for future product acquisitions.

          We plan to obtain rights to additional products through license or acquisition agreements to expand our business beyond its current size.  Our failure to obtain rights to market products or to acquire products on acceptable terms or to integrate these products into our organization may limit our growth opportunities if our current sales do not grow as anticipated.  We may not be able to identify appropriate licensing or acquisition candidates in the future.  Even if we identify an appropriate candidate, competition for it may be intense.  We may not be able to successfully negotiate the terms of a license or acquisition agreement on commercially acceptable terms.  The negotiation of agreements to obtain rights to additional products could divert our management’s time and resources from our existing business.  Moreover, we may be unable to finance an acquisition or integrate a new product or company into our existing business.

          Although we believe that our existing cash balances will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future, we may need additional capital to acquire prescription products or companies.  For example, in June 2002, we financed the acquisition of Vaniqa^® through the issuance of $28 million of senior secured notes and $13 million of convertible preferred stock.  Future funding, if needed, may not be available on acceptable terms, if at all.  If

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additional funds are needed and not available, we may be required to postpone obtaining new products through license or acquisition.  This could have the effect of limiting our growth.  If we raise additional funds through the issuance of equity securities or we issue equity securities for one or more significant acquisitions, the percentage ownership of our then-current stockholders may be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.  If we raise additional funds through the issuance of debt securities, these new securities could have certain rights, preferences and privileges senior to those of the holders of our common stock, and the terms of these debt securities could impose restrictions on our operations.

Our quarterly financial results may fail to meet or exceed the expectations of investors, which could cause the price of our stock to decline significantly.

          Our quarterly operating results may fail to meet or exceed the expectations of securities analysts or investors because of a number of factors, including the following:

          Failure to meet or exceed the expectations of securities analysts or investors could have a material adverse effect on our stock price.

The health care industry and the markets for the products we offer are very competitive.  We may not be able to compete effectively, especially against established industry competitors with significantly greater financial resources.

          The health care industry is highly competitive.  Most of our competitors are large, well-known pharmaceutical, life science and health care companies that have considerably greater financial, sales, marketing and technical resources than we have.  Additionally, these competitors have research and development capabilities that may allow them to develop new or improved products that may compete with product lines we market and distribute.  The pharmaceutical industry is characterized by continuous product development and technological change.

          The pharmaceutical products we offer face significant competition.  Ortho-Est^® Tablets compete in the ERT market, a market dominated by Premarin^™, a product manufactured by Wyeth-Ayerst Laboratories, Inc., a division of Wyeth.  The Esclim^™ estradiol transdermal system competes in the ERT market against products made by Berlex Laboratories, Watson Laboratories, Inc., Novogyne Pharmaceuticals and Novartis Pharmaceutical.  The ERT products we market also compete with HRT products marketed by Wyeth, Parke-Davis, a division of Pfizer, Solvay Pharmaceuticals, Inc., Barr Laboratories, Inc., Pharmacia Corporation and others, as well as generic HRT products.  Esclim^™ is not available generically but there is a generic ERT patch available.  Ortho-Est^® Tablets face significant generic competition.  The ERT products we market also compete with non-hormonal replenishment

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therapy products marketed by Merck & Co., Inc. and Eli Lilly & Company.  Each of these competitors has substantially greater marketing, sales and financial resources than we do.

          Midrin^® competes against a class of drugs called triptans as well as against generic competitors.  Triptans are manufactured by several companies, including GlaxoSmithKline (Imitrex^®), Merck & Co. (Maxalt^®) and AstraZeneca Pharmaceuticals LP (Zomig^®).  Bactrim^™ competes in the antibacterial market against Cotrim^™ marketed by Teva Pharmaceuticals, Septra^®, manufactured by Monarch, a division of King Pharmaceuticals, and generic products made by High Tech Pharmaceutical Co., United Research Laboratories and Mutual Pharmaceutical Co., among others.  Equagesic^® competes against Flexeril^®, manufactured by Merck & Co., and Valium^®, manufactured by Roche Labs, as well as against generic cyclobenzaprine and generic diazepam.  Synalgos^® competes against hydrocodone products such as Vicodin^® from Abbott Laboratories and codeine products such as Tylenol^® with Codeine, manufactured by McNeil Consumer Healthcare, a subsidiary of Johnson & Johnson.