<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ............. TO ............
COMMISSION FILE NUMBER: 0-27576
ULTRAFEM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0435037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
130 WEST 42ND STREET, SUITE 1103
NEW YORK, NEW YORK 10036
(Address of principal executive offices)
(Zip Code)
212-921-2070
(Registrant's telephone number, including area code)
------------------------
805 THIRD AVENUE, 17TH FLOOR, NEW YORK, NEW YORK 10022
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At February 10, 1998, there were 8,557,003 shares of Common Stock, $.001 par
value, outstanding.
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<PAGE>
ULTRAFEM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................... 1
Balance Sheets as of December 31, 1997 and June 30, 1997.................................. 2
Statements of Operations for the Six Months and Three Months Ended December 31, 1997 and
1996.................................................................................... 3
Statements of Cash Flows for the Six Months Ended December 31, 1997 and 1996.............. 4
Notes to Financial Statements............................................................. 5-6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 7-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 12
Item 2. Changes in Securities..................................................................... 12
Item 3. Defaults upon Senior Securities........................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................... 12
Item 5. Other Information......................................................................... 12
Item 6 Exhibits and Reports on Form 8-K.......................................................... 12
Signatures .......................................................................................... 13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission. It is suggested that the following financial statements be
read in conjunction with the year end financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended June 30,
1997.
The results of operations for the six month period ended December 31, 1997
are not necessarily indicative of the results to be expected for the entire
fiscal year or for any other period.
1
<PAGE>
ULTRAFEM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $ 2,095,462 $ 20,751,393
Accounts receivable--less allowance for doubtful accounts of $85,000 and
$72,000....................................................................... 784,859 1,515,788
Inventory....................................................................... 4,714,925 4,581,944
Prepaid marketing and other current assets...................................... 1,186,903 1,420,330
-------------- --------------
Total Current Assets.......................................................... 8,782,149 28,269,455
Property and equipment--net....................................................... 12,077,551 11,227,028
Other assets--net................................................................. 1,173,002 1,209,810
-------------- --------------
TOTAL ASSETS.................................................................. $ 22,032,702 $ 40,706,293
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion--long-term debt................................................. $ 250,000 $ --
Accounts payable................................................................ 8,810,161 3,639,035
Accrued interest................................................................ 523,289 463,833
Accrued salaries................................................................ 2,979,084 2,823,615
Accrued marketing and selling................................................... 1,525,766 5,665,363
Other accrued liabilities....................................................... 1,925,168 2,359,797
-------------- --------------
Total Current Liabilities..................................................... 16,013,468 14,951,643
Long-term debt.................................................................... 450,000 700,000
Other liabilities................................................................. 195,745 186,412
-------------- --------------
Total Liabilities............................................................. 16,659,213 15,838,055
-------------- --------------
Stockholders' Equity:
Preferred stock, $.001 par value--authorized 5,000,000 shares $8 cumulative
Convertible Series A: none issued............................................. -- --
Common stock, $.001 par value--authorized 70,000,000 shares; outstanding
8,557,003 and 5,737,241 shares, respectively, (stated at)..................... 12,710 12,668
Additional paid-in capital...................................................... 82,982,320 82,622,208
Deficit......................................................................... (77,621,541) (57,766,638)
-------------- --------------
Total Stockholders' Equity.................................................... 5,373,489 24,868,238
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 22,032,702 $ 40,706,293
-------------- --------------
-------------- --------------
</TABLE>
See notes to financial statements.
2
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------------- ------------- ------------- ------------
Net sales............................................ $ 3,263,976 $ 654,830 $ 1,477,297 $ 462,290
-------------- ------------- ------------- ------------
Costs and Expenses:
Costs of sales (exclusive of depreciation)......... 2,059,581 772,914 891,200 414,537
Marketing, sales and distribution.................. 14,835,347 7,818,712 6,327,457 4,897,320
Research and development........................... 1,539,518 1,148,986 733,558 754,208
General and administrative......................... 4,419,206 3,737,217 2,342,977 1,812,660
Depreciation and amortization...................... 546,312 446,994 283,625 233,639
-------------- ------------- ------------- ------------
23,399,964 13,924,823 10,578,817 8,112,364
-------------- ------------- ------------- ------------
Loss from operations................................. 20,135,988 13,269,993 9,101,520 7,650,074
Interest income...................................... (287,803) (683,441) (70,932) (398,096)
Interest expense -- net of capitalized interest of
$62,537 and $30,714, respectively in 1997.......... 6,718 229,790 2,452 106,932
-------------- ------------- ------------- ------------
Net loss............................................. $ 19,854,903 $ 12,816,342 $ 9,033,040 $ 7,358,910
-------------- ------------- ------------- ------------
-------------- ------------- ------------- ------------
Net loss per share -- basic.......................... $ 2.33 $ 2.03 $ 1.06 $ 1.08
-------------- ------------- ------------- ------------
-------------- ------------- ------------- ------------
Weighted average number of common shares and
equivalents outstanding.......................... 8,539,445 6,327,111 8,577,003 6,826,601
-------------- ------------- ------------- ------------
-------------- ------------- ------------- ------------
</TABLE>
See notes to financial statements.
3
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................................................... $ (19,854,903) $ (12,816,342)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation............................................................................... 474,872 253,354
Provision for doubtful accounts............................................................ 13,000 --
Amortization of debt issuance, consulting, licensing and patent costs...................... 71,440 193,640
Loss on disposal of equipment.............................................................. 9,816 7,724
Non-cash officers compensation............................................................. 385,226 385,183
Non-employee stock-based claim settlement.................................................. -- 338,535
Non-employee stock-based compensation...................................................... 92,356 --
Changes in operating assets and liabilities................................................ 1,219,675 897,726
--------------- ---------------
Net Cash Used in Operating Activities.................................................... (17,588,518) (10,740,180)
--------------- ---------------
Cash flows from investing activities:
Purchase of and deposits on property and equipment........................................... (1,384,979) (4,974,505)
Proceeds from sale of equipment.............................................................. 49,768 --
--------------- ---------------
Net Cash Used in Investing Activities...................................................... (1,335,211) (4,974,505)
--------------- ---------------
Cash flows from financing activities:
Proceeds from sale of common stock (net of related expenses)................................. -- 36,017,729
Proceeds from exercise of stock options and warrants......................................... 267,798 667,880
Repayment of borrowings...................................................................... -- (261,424)
--------------- ---------------
Net Cash Provided by Financing Activities.................................................. 267,798 36,424,185
--------------- ---------------
Net (decrease) increase in cash................................................................ (18,655,931) 20,709,500
Cash and cash equivalents, beginning of period................................................. 20,751,393 24,510,071
--------------- ---------------
Cash and cash equivalents, end of period....................................................... $ 2,095,462 $ 45,219,571
--------------- ---------------
--------------- ---------------
Changes in operating assets and liabilities consist of:
Decrease (increase) in accounts receivable................................................... $ 717,929 $ (216,872)
(Increase) in inventory...................................................................... (132,981) (2,250,735)
Decrease (increase) in prepaid marketing and other current assets............................ 233,427 (507,408)
(Increase) in other assets................................................................... (34,632) (28,165)
Increase in accounts payable................................................................. 5,171,126 582,979
(Decrease) increase in accrued liabilities................................................... (4,744,527) 3,239,096
Increase in other long-term liabilities...................................................... 9,333 78,831
--------------- ---------------
$ 1,219,675 $ 897,726
--------------- ---------------
--------------- ---------------
Supplementary information:
Cash paid during the year for:
Interest................................................................................... $ 9,799 $ 134,899
--------------- ---------------
--------------- ---------------
Taxes...................................................................................... $ -- $ --
--------------- ---------------
--------------- ---------------
Non-cash financing activities:
Conversion of convertible debt to common stock............................................... $ -- $ 130,000
--------------- ---------------
--------------- ---------------
Conversion of preferred stock to common stock................................................ $ -- $ 112,125
--------------- ---------------
--------------- ---------------
Other non-cash activities:
Issuance of options and warrants in connection with employee and non-employee stock-based
compensation............................................................................... $ 477,582 $ 723,718
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to financial statements.
4
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
During August 1996, Ultrafem, Inc. (the "Company" or "Ultrafem") began
selling the Company's product, INSTEAD-Registered Trademark-. Accordingly, the
Company is no longer considered a development stage enterprise as it was through
June 30, 1996.
The balance sheet as at December 31, 1997 and the statements of operations
and cash flows for the six months ended December 31, 1997 and 1996 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission, and, in the opinion of management, contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows for all
periods presented. Certain reclassifications have been made to conform with the
current presentation.
2. LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Loss per common and common equivalent share for the three and six months
ended December 31, 1997 and 1996 was computed using the weighted average number
of common shares outstanding during each period. The dilutive effect of
outstanding options, warrants and common stock equivalents for the three and six
months ended December 31, 1997 and 1996 were not considered as their effect was
antidilutive.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Raw materials.................................................... $ 669,586 $ 1,026,051
Work-in-process.................................................. -- 26,785
Finished goods................................................... 4,045,339 3,529,108
------------ ------------
$4,714,925 $ 4,581,944
------------ ------------
------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------- -------------
<S> <C> <C>
Machinery and equipment........................................ $ 4,555,080 $ 4,400,397
Office furniture and equipment................................. 861,185 744,614
Leasehold improvements......................................... 1,333,928 1,234,016
Construction in progress....................................... 6,733,409 5,785,501
------------- -------------
13,483,602 12,164,528
Less accumulated depreciation and amortization................. (1,406,051) (937,500)
------------- -------------
$ 12,077,551 $ 11,227,028
------------- -------------
------------- -------------
</TABLE>
5
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Patent and trademark costs....................................... $ 222,493 $ 222,493
Debt issuance costs.............................................. 23,734 23,734
Consulting agreement............................................. 275,000 275,000
Licensing agreements............................................. 400,000 400,000
Security deposits................................................ 533,305 498,673
------------ ------------
1,454,532 1,419,900
Less accumulated amortization.................................... (281,530) (210,090)
------------ ------------
$1,173,002 $ 1,209,810
------------ ------------
------------ ------------
</TABLE>
6. RELATED PARTY
On January 28, 1998, the Company terminated the employment arrangements with
John Andersen, former Chief Executive Officer and President, and Audrey
Contente, former Executive Vice President. In addition, as part of the
downsizing of the manufacturing facility, the Company terminated the employment
arrangement with Gary Nordmann, former Vice President, Operations. Due to
certain contractual uncertainties under the terms of their respective employment
arrangements and stock option plans, the Company cannot reasonably estimate, at
this time, the cost, if any, associated with their terminations.
A director and stockholder of the Company is the President and Chief
Executive Officer of a holding company which includes an advertising agency used
by the Company which was paid approximately $6,944,000 and $4,348,000 during the
six months ended December 31, 1997 and 1996, respectively. In addition,
approximately $7,104,000 and $6,072,000 owed to such agency are included in
accrued liabilities and accounts payable at December 31, 1997 and June 30, 1997,
respectively.
The Company entered into a Research Agreement with ReProtect, LLC, formed by
scientists associated with The Johns Hopkins University (including a current
director) who conduct research for the Company. Research and development
expenditures pursuant to the above agreement amounted to approximately $658,000
and $500,000 for the six months ended December 31, 1997 and 1996, respectively.
Included in prepaid marketing and other current assets at December 31, 1997 and
June 30, 1997 is $-0- and $83,300, respectively, of prepaid research and
development expenditures paid to ReProtect.
A director and stockholder of the Company is a partner of a law firm used by
the Company which was paid approximately $281,000 and $626,000 for the six
months ended December 31, 1997 and 1996, respectively. In addition,
approximately $245,000 and $102,000 owed to the law firm is included in accounts
payable and accrued expenses at December 31, 1997 and June 30, 1997,
respectively.
7. SUBSEQUENT EVENTS
During February 1998, the Company signed a one year operating lease for
office space in New York, New York. The rent expense for the new space will be
approximately $8,000 per month. The Company is currently negotiating the
assignment of its present corporate office lease.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Board of Directors terminated the Company's employment arrangements with
John Andersen, former Chief Executive Officer and President, and Audrey
Contente, former Executive Vice President. The Board has begun a search for a
new Chief Executive Officer and President. Pending the appointment of a new
Chief Executive Officer, the Company has established the Office of the Chief
Executive consisting of Dori M. Reap, Senior Vice President Finance, and Tonya
G. Hinch, Senior Vice President Marketing and Sales.
The Board has initiated this restructuring to facilitate the Company's
efforts with respect to a financing and other alternatives, including the
potential sale of the Company, its individual assets or distribution rights. The
Board also formed an Executive Committee consisting of Richard A. Cone, Joy V.
Jones, Martin Nussbaum and Charles D. Peebler, Jr. Further, Mr. Andersen will
remain a Director of the Company. On December 22, 1997, Barrie Zesiger resigned
from the Board of Directors. On February 9, 1998, Audrey Contente resigned from
the Board of Directors.
In a press release dated December 19, 1997, Ultrafem, Inc. announced that
the completion of the previously disclosed financing is not imminent. In
addition to continuing its efforts with respect to a financing, the Company is
exploring other alternatives, including, the potential sale of the Company, its
individual assets or distribution rights.
The Company has taken significant steps to reduce its expenses and
restructure the organization. These steps include the Company reducing its work
force at its Missoula, Montana manufacturing facility and New York corporate
office by forty-six (46) employees representing one production shift and various
clerical and support staff. The Company is currently negotiating the assignment
of its present New York, New York corporate office lease. During February 1998,
the Company signed a one year operating lease for a new office space in New
York, New York with monthly rental payments of approximately $8,000. As a
consequence of these steps, the rate at which the Company is spending cash has
been significantly reduced from the Company's spending rate through the quarter
ending December 31, 1997. Management intends to continue taking steps to reduce
the rate at which the Company expends cash while at the same time maintaining
the Company's ability to continue the distribution of
INSTEAD-REGISTERED TRADEMARK- to the retail trade.
The Company's activities during the six months ended December 31, 1997 were
focused on the commercial introduction of INSTEAD-REGISTERED TRADEMARK-. The
introduction of INSTEAD-REGISTERED TRADEMARK- was initiated in the Fall of 1996
in the Pacific Northwest ("Wave I"), a region which the Company estimates
represents approximately 8% of U.S. households and includes the major markets of
San Francisco, Seattle, Portland, Spokane, Sacramento and Boise. Key retailers
carrying INSTEAD-REGISTERED TRADEMARK- in this geography include Albertsons,
Fred Meyer, Longs, Luckys, Safeway, Target, Thrifty Payless, and Walgreens. In
the Spring of 1997, the Company expanded the distribution of
INSTEAD-REGISTERED TRADEMARK- into the remaining Western United States ("Wave
II"), a region which the Company estimates represents approximately 16% of U.S.
households and includes the major markets of Los Angeles, San Diego, Phoenix,
Salt Lake City, Las Vegas and Denver. New key retailers in this geography
include Fry's, King Sooper, Osco, Ralph's, Vons and Wal-Mart. In the first half
of 1997, the Company began to distribute INSTEAD-REGISTERED TRADEMARK- on a
national basis to Target and Walgreens. During the quarter ended September 30,
1997, CVS/Revco, Eckerd and Rite-Aid began national distribution of
INSTEAD-REGISTERED TRADEMARK-.
During the quarter ended December 31, 1997, the Company continued marketing
and advertising activities for INSTEAD-REGISTERED TRADEMARK- directed to the
consumer audiences and retail trade at a reduced level of expenditures. These
activities were centered on maintaining the INSTEAD-Registered Trademark-
business. Despite significantly less marketing support in Wave I, AC Nielsen
dollar market share for the quarter ended December 27, 1997 only decreased
slightly from the quarter ended September 27, 1997 to 4.1% versus 4.4%.
In the Wave II area, AC Nielsen dollar market share in the additional 16%
geography had a 2.7% dollar market share for the quarter ended December 27,
1997.
7
<PAGE>
Manufacturing activities to support the launch of
INSTEAD-Registered Trademark- progressed during the six months ended December
31, 1997. For the six months ended December 31, 1997, gross margin exclusive of
depreciation was positive, as the Company maintained a level of production
adequate to absorb manufacturing costs. On January 6, 1998, the Company reduced
its work force at its Missoula, Montana manufacturing facility by forty (40)
employees, representing one production shift and various clerical and support
staff in a continuing effort to conserve cash.
In addition, research and development activities on new products continued.
In December 1997, Ultrafem completed its first clinical study of a contraceptive
product that combines BufferGel with SoftCup Technology.
The BufferGel Phase I clinical trial in the U.S. has also been completed.
The trial was sponsored by HIVNET, a unit of the National Institute of Health to
test the safety and acceptability of BufferGel for use as a vaginal microbicide
for preventing AIDS and other sexually transmitted diseases. Based on this
trial, HIVNET has determined that BufferGel is sufficiently safe and acceptable
to justify expanding the studies to four international sites; the first of these
additional studies is underway in Malawi, Africa. BufferGel was developed by
ReProtect, LLC scientists associated with Johns Hopkins University. Ultrafem has
the worldwide licensing rights to BufferGel and intends to bring to market
innovative vaginal products that combine the BufferGel and SoftCup technologies.
The following table sets forth, for the periods indicated, the percentage
increases or (decreases) of certain items included in the Company's statements
of operations:
<TABLE>
<CAPTION>
PERCENTAGE INCREASE (DECREASE) FROM PRIOR
PERIOD
--------------------------------------------
<S> <C> <C>
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
COMPARED WITH 1996 COMPARED WITH 1996
--------------------- ---------------------
Net sales............................................................... 398.4% 219.6%
Cost of sales (exclusive of depreciation)............................... 166.5 115.0
Marketing, sales and distribution....................................... 89.7 29.2
Research and development................................................ 34.0 (2.7)
General and administration.............................................. 18.2 29.3
Depreciation and amortization........................................... 22.2 21.4
Interest income......................................................... (57.9) (82.2)
Interest expense........................................................ (97.1) (97.7)
Net loss................................................................ 54.9 22.7
</TABLE>
SIX MONTHS 1997 VS. SIX MONTHS 1996 AND THREE MONTHS 1997 VS. THREE MONTHS 1996
NET SALES
Net sales increased 398.4% to $3,263,976 during the six months ended
December 31, 1997 compared to $654,830 during the six months ended December 31,
1996. The Company attributes this increase primarily to expanded distribution of
INSTEAD-REGISTERED TRADEMARK- to the Western United States in the Spring of 1997
compared to distribution, which began during August 1996, only in the Pacific
Northwest during the six months ended December 31, 1996. This increase was also
due to expanded distribution on a national basis to retailers such as Target,
Walgreens, CVS/Revco, Eckerd and Rite-Aid and greater store sales in the
comparable Pacific Northwest market where the Company was in the same market
during both quarters.
Net sales increased 219.6% to $1,477,297 during the three months ended
December 31, 1997 compared to $462,290 for the three months ended December 31,
1996 for the reasons set forth in the six months analysis.
8
<PAGE>
COST OF SALES (EXCLUSIVE OF DEPRECIATION)
Cost of sales increased 166.5% to $2,059,581 during the six months ended
December 31, 1997 compared to $772,914 during the six months ended December 31,
1996, exclusive of depreciation. The Company attributes this increase primarily
to increased manufacturing costs associated with the production of
INSTEAD-REGISTERED TRADEMARK- to support related increased sales and samples.
Cost of sales increased 115.0% to $891,200 during the three months ended
December 31, 1997 compared to $414,537 for the three months ended December 31,
1996 for the reasons set forth in the six month analysis.
MARKETING, SALES AND DISTRIBUTION
Marketing, sales and distribution expense increased 89.7% to $14,835,347
during the six months ended December 31, 1997 compared to $7,818,712 during the
six months ended December 31, 1996. The Company attributes this increase
primarily to expenses incurred in connection with the continued expansion of
INSTEAD-REGISTERED TRADEMARK- into the Pacific Northwest, into further western
geography and initiation of distribution into selected national accounts. This
included marketing, advertising for television, print, sampling and coupon
mailings to generate consumer trial and awareness of
INSTEAD-REGISTERED TRADEMARK- and, to a lesser extent, administration of the
various marketing and sales programs and market research.
Marketing, sales and distribution expense increased 29.2% to $6,327,457
during the three months ended December 31, 1997 compared to $4,897,320 for the
three months ended December 31, 1996 for the reasons set forth in the six month
analysis.
RESEARCH AND DEVELOPMENT
Research and development increased 34% to $1,539,518 during the six months
ended December 31, 1997 compared to $1,148,986 during the six months ended
December 31, 1996. The Company attributes this increase primarily to consulting
fees in connection with developing a strategic plan regarding the Company's
health care products, payments to ReProtect under the terms of the Company's
research and development agreement, and to a lesser extent legal expenses. These
increases were offset in part by lower expenses in connection with the
development of the contraceptive product prototypes and employee recruiting
expenses.
Research and development decreased 2.7% to $733,558 during the three months
ended December 31, 1997 compared to $754,208 during the three months ended
December 31, 1996 primarily due to decreased expenses in connection with the
development of the contraceptive product prototypes and employee recruiting and
relocation expenses offset in part by increases in consulting fees in connection
with developing a strategic plan regarding the Company's health care products,
payments to ReProtect under the terms of the Company's research and development
agreement, and to a lesser extent legal expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 18.2% to $4,419,206 during the
six months ended December 31, 1997 compared to $3,737,217 during the six months
ended December 31, 1996. This increase was primarily due to salaries
attributable to support general and administrative activities, office related
expenses and to a lesser extent, increases in professional fees and consulting
expenses. This was offset in part by non-cash charges during the quarter ended
December 31, 1996 resulting from the issuance of warrants to purchase Common
Stock in connection with the settlement of a claim and a reduction in financial
investor relation expenses.
General and administrative expense increased 29.3% to $2,342,977 during the
three months ended December 31, 1997 compared to $1,812,660 for the three months
ended December 31, 1996 for principally the same reasons set forth in the six
month analysis.
9
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 22.2% to $546,312 during the six
months ended December 31, 1997 compared to $446,994 during the six months ended
December 31, 1996. This increase was attributable to the increase in the
depreciation of property and equipment offset by a decrease in the amortization
of deferred debt issuance costs.
Depreciation and amortization increased 21.4% to $283,625 during the three
months ended December 31, 1997 compared to $233,639 for the three months ended
December 31, 1996 for the reasons set forth in the six month analysis.
INTEREST EXPENSE
Interest expense was $6,718 and $229,790 for the six months ended December
31, 1997 and 1996, respectively. For the six months ended December 31, 1997,
interest expense was offset by $62,537, resulting from capitalized interest for
construction in progress. The Company also attributes this decrease to the
repayment of debt by the Company and conversion of convertible debt to Common
Stock.
Interest expense was $2,452 and $106,932 for the three months ended December
31, 1997 and 1996, respectively. For the three months ended December 31, 1997,
interest expense was offset by $31,823, resulting from capitalized interest for
construction in process. The Company also attributes this decrease to the
reasons set forth in the six month analysis.
INTEREST INCOME
Interest income was $287,803 and $683,441 for the six months ended December
31, 1997 and 1996, respectively. The decrease was attributable to lower cash and
cash equivalent balances during the six months ended December 31, 1997 compared
to December 31, 1996.
Interest income was $70,932 and $398,096 for the three months ended December
31, 1997 and 1996, respectively. The decrease was attributable to the same
reasons set forth in the six month analysis.
LIQUIDITY AND CAPITAL RESOURCES
The Company announced on December 19, 1997 that the completion of the
previously disclosed financing is not imminent. In addition to continuing its
efforts with respect to a financing, the Company is exploring other
alternatives, including, the potential sale of the Company, its individual
assets or distribution rights. The Company's ability to continue the rollout of
INSTEAD-REGISTERED TRADEMARK- and its other activities is dependent upon its
ability to obtain needed working capital through additional equity and/or debt
financing. However, there is no assurance that additional capital will be
obtained.
At December 31, 1997, the Company had $2.1 million in cash and cash
equivalents. From June 30, 1997 to December 30, 1997, the Company's cash
position decreased by $18.7 million, principally reflecting $17.6 million used
in operating activities, $1.4 million used for the purchase of and deposits on
property and equipment, offset in part by $.3 million from the exercise of stock
options and warrants.
Unless additional debt or equity financing can be secured, the Company will
not be able to meet the following obligations. At December 31, 1997, the Company
has a working capital deficiency of approximately $7,231,000 and an accumulated
deficit of approximately $77,622,000. At December 31, 1997, the Company had
commitments in the amount of approximately $5,749,000, of which $2,024,500 was
unpaid, principally for the purchase of manufacturing equipment and improvements
to the manufacturing facility to support increased levels of production.
Included in accounts payable and accrued liabilities at December 31, 1997 was
approximately $858,000 of these unpaid commitments. In addition, in February
1996, the Company and ReProtect entered into a License, Research and Product
Development Agreement under which the Company is obligated to pay ReProtect a
minimum of $1 million per year for research and
10
<PAGE>
development. The Company will also continue to incur additional expenses for
research and development, prototype manufacturing, laboratory and human clinical
studies, regulatory and patent as well as market research.
As a consequence of certain steps the Company has already taken, the rate at
which the Company is spending cash has been significantly reduced from the
Company's spending rate through the quarter ending December 31, 1997. Management
intends to continue taking steps to reduce the rate at which the Company expends
cash while at the same time maintaining the Company's ability to continue the
distribution of INSTEAD-REGISTERED TRADEMARK- to the retail trade.
The Company's stockholders' equity decreased by approximately $19.5 million
from June 30, 1997 to December 31, 1997 reflecting a net loss for the six months
ended December 31, 1997 of approximately $19.9 million offset by proceeds from
the exercise of stock options and warrants and non-employee stock-based
compensation in the amount of approximately $.4 million.
The Company believes that the financial resources available to it is an
important factor in its ability to achieve the marketing and distribution of
INSTEAD-Registered Trademark- and its ability to develop and eventually bring
women's health care products to market. The Company's need for funds has
increased from period to period as it has incurred expenses for, among other
things, the manufacturing, marketing and distribution of
INSTEAD-Registered Trademark-, research and development activities, engineering
and design of fully automated manufacturing systems, clinical testing, meeting
domestic and international patent protection, applications for domestic
trademark protection and market research. The Company is currently seeking to
raise funds in a private placement. The securities sold in the private placement
will not be registered under the Securities Act of 1933, as amended, and may not
be offered or sold in the United States absent registration or in an applicable
exemption from registration requirements of such Act. Additional financing may
require the issuance of new equity securities, and there can be no assurance
that the Company will be able to obtain working capital or additional financing
at a favorable rate, if at all.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements involve risks
and uncertainties that may cause the Company's actual results to differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such differences include the following: dependence on the
Company's single product; the need for additional financing to successfully
market and distribute INSTEAD-Registered Trademark- as well as for unforeseen
risks; the changing priorities of customers, inherent limitations of market
research and accuracy of syndicated data purchased by the Company, as well as
other marketing risks; the Company's need to achieve economies of scale in its
manufacturing operations; the uncertainty of consumer acceptance; the necessity
of regulatory clearances to market its products; potential product liability;
risks associated with the Company's proprietary technology; risks associated
with the research and development for other applications of the SoftCup
Technology; and risks associated with a competitive response to the Company's
product. The Company urges readers to carefully review the risks and factors
discussed more completely under the heading "Risk Factors" in the Company's
Prospectus dated November 13, 1996 and the description of the Company's business
in Form 10-K for the year ended June 30, 1997.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously announced by the Company in a press release, Audrey Contente,
former Executive Vice President and director of the Company, filed a charge
against Ultrafem, Inc. and John Andersen, former Chief Executive Officer of the
Company, with the Equal Employment Opportunity Commission alleging sexual
harassment and retaliation. Following an administrative dismissal of that charge
requested by Ms. Contente, on February 9, 1998 Audrey Contente, former Executive
Vice President filed a similar complaint in the United States District Court
Southern District of New York against Ultrafem, Inc. and all members of the
Board of Directors. Additionally, the complaint alleges a breach of her
employment agreement and seeks to rescind her patent transfer and royalty
agreements. The Company denies the material allegations of the complaint and
believes that there is no basis for liability and plans to vigorously defend the
matter.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on 8-K
On January 30, 1998, the Company issued a press release and filed Form 8-K.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
ULTRAFEM, INC.
By: /s/ DORI M. REAP
-----------------------------------------
Dori M. Reap
OFFICE OF THE CHIEF EXECUTIVE,
SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION, SECRETARY AND CHIEF
FINANCIAL OFFICER
By: /s/ TONYA G. HINCH
-----------------------------------------
Tonya G. Hinch
OFFICE OF THE CHIEF EXECUTIVE, SENIOR VICE
PRESIDENT, MARKETING AND SALES
</TABLE>
Dated: February 13, 1998
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRAFEM,
INC. FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND THE SIX MONTHS THEN ENDED AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 2,095,462
<SECURITIES> 0
<RECEIVABLES> 869,859
<ALLOWANCES> 85,000
<INVENTORY> 4,714,925
<CURRENT-ASSETS> 8,782,149
<PP&E> 13,483,602
<DEPRECIATION> 1,406,051
<TOTAL-ASSETS> 22,032,702
<CURRENT-LIABILITIES> 16,013,468
<BONDS> 0
0
0
<COMMON> 12,710
<OTHER-SE> 5,360,779
<TOTAL-LIABILITY-AND-EQUITY> 22,032,702
<SALES> 3,263,976
<TOTAL-REVENUES> 3,263,976
<CGS> 2,059,581
<TOTAL-COSTS> 23,399,964
<OTHER-EXPENSES> (287,803)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,718
<INCOME-PRETAX> (19,854,903)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,854,903)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,854,903)
<EPS-PRIMARY> (2.33)
<EPS-DILUTED> 0
</TABLE>
