<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1996
REGISTRATION NO. 333-11995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 3 TO
REGISTRATION STATEMENT
ON FORM S-1
UNDER THE SECURITIES ACT OF 1933
AND POST-EFFECTIVE AMENDMENT NO. 4
TO REGISTRATION STATEMENT ON
FORM S-1 (REGISTRATION NO. 33-97960)
UNDER THE SECURITIES ACT OF 1933
---------------------
ULTRAFEM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 3841 33-0435037
<S> <C> <C>
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification no.)
</TABLE>
---------------------
500 FIFTH AVENUE, SUITE 3620
NEW YORK, NEW YORK 10110
(212) 575-5740
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
JOHN W. ANDERSEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ULTRAFEM, INC.
500 FIFTH AVENUE, SUITE 3620
NEW YORK, NEW YORK 10110
(212) 575-5740
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
GERALD ADLER, ESQ. PAUL JACOBS, ESQ.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP FULBRIGHT & JAWORSKI
919 THIRD AVENUE L.L.P.
NEW YORK, NEW YORK 10022 666 FIFTH AVENUE
(212) 758-9500 NEW YORK, NEW YORK 10103
(212) 318-3206
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /X/ (Registration No. 33-97960)
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANTORY NOTE
This Registration Statement covers the registration of the offer and sale by
Ultrafem, Inc. (the "Company") of up to 2,000,000 shares of Common Stock of the
Company (the "Offering") (2,300,000 shares of Common Stock if the over-allotment
option is exercised in full). This Registration Statement is also Post-Effective
Amendment No. 4 to Registration Statement on Form S-1 (Reg. No. 33-97960)
registering the offer and sale by certain selling stockholders (the "Selling
Stockholders") of 4,301,303 shares of Common Stock of the Company (the
"Concurrent Offering"). The complete Prospectus relating to the Offering follows
immediately after this Explanatory Note. Following such Prospectus is the
complete Prospectus relating to the Concurrent Offering.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER , 1996
PROSPECTUS
2,000,000 SHARES
ULTRAFEM, INC. LOGO
COMMON STOCK
--------------
ALL OF THE 2,000,000 SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE (THE
"COMMON STOCK"), OFFERED HEREBY (THE "OFFERING") ARE BEING SOLD BY ULTRAFEM,
INC. ("ULTRAFEM" OR THE "COMPANY"). THE COMMON STOCK IS QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "UFEM." ON NOVEMBER 12, 1996, THE LAST SALE
PRICE OF THE COMMON STOCK AS REPORTED BY THE NASDAQ NATIONAL MARKET WAS $21 3/8
PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 HEREIN FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the underwriters identified elsewhere
herein (the "Underwriters") against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If the
Underwriters exercise this option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
------------------------
THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS, SUBJECT TO PRIOR
SALE, WHEN, AS AND IF ISSUED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO
APPROVAL OF CERTAIN LEGAL MATTERS BY COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE COMMON STOCK WILL BE MADE AGAINST PAYMENT THEREFOR
ON OR ABOUT , 1996, IN NEW YORK, NEW YORK.
-------------------
JEFFERIES & COMPANY, INC. HAMPSHIRE SECURITIES
CORPORATION
, 1996
<PAGE>
[inside front cover]
[PHOTO OF PRINT ADVERTISEMENT]
THIS IS A SAMPLE PRINT ADVERTISEMENT. THE COMPANY BEGAN SELLING INSTEAD IN
AUGUST 1996;
REVENUES TO DATE HAVE BEEN LIMITED.
INTRODUCING INSTEAD A MULTI-MEDIA MARKETING CAMPAIGN AS EXCITING AS THE
PRODUCT ITSELF.
[PHOTO OF MAGAZINES]
AN EXCITING PRINT CAMPAIGN IS NOW APPEARING IN MAJOR WOMEN'S MAGAZINES,
INCLUDING THOSE PICTURED, SHOWING AUDREY CONTENTE, THE INVENTOR OF INSTEAD,
ENJOYING HER ACTIVE LIFESTYLE.
PRINT ADVERTISEMENTS for INSTEAD appeared in these magazines in October
1996.
[PHOTO OF PRODUCT PACKAGING]
1-800-INSTEAD -- THE EASY-TO-REMEMBER NUMBER CUSTOMERS CAN CALL, AND IF THEY
WISH, SPEAK TO REGISTERED NURSES. THESE NURSES WILL HAVE PERSONALLY USED THE
PRODUCT AND CAN GUIDE USERS THROUGH ANY CONCERNS THEY MAY HAVE.
INSTEAD COMES IN DISTINCTIVE, INVITINGLY DESIGNED BOXES OF 6 COUNT, 16 COUNT
AND 24 COUNT PACKAGES.
[PHOTO OF DIRECT MAIL LITERATURE]
DIRECT MAIL -- THOUSANDS OF HEALTH CARE PROFESSIONALS AND CONSUMERS WILL
RECEIVE FREE SAMPLE KITS OR DISCOUNT COUPONS. THE OUTSIDE OF THE SAMPLE KIT
BOXES AND ENVELOPES CAPITALIZE ON THE EXCITEMENT AND APPROPRIATENESS OF A WOMAN
INVENTOR IN THIS CATEGORY. THEY READ: "A MAN COULDN'T HAVE INVENTED WHAT'S
INSIDE."
[PHOTO OF INFORMERCIAL]
How MUCH do you KNOW about your BODY?
EDU-MERCIAL -- A THIRTY MINUTE EDU-MERCIAL HAS BEEN CREATED TO LAUNCH
INSTEAD. FOCUSING ON WOMEN'S HEALTH, IT FEATURES A FEMALE HEALTH QUIZ, FOOTAGE
OF PAST ATTITUDES TOWARDS MENSTRUATION, CANDID TESTIMONIALS FROM ENTHUSIASTIC
CONSUMERS AND ENDORSEMENTS FROM TWO OB-GYN DOCTORS AND A NURSE WHO THINK INSTEAD
IS A MAJOR BREAK-THROUGH FOR WOMEN.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
(I) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (II)
GIVES EFFECT TO THE ONE-FOR-FOUR REVERSE STOCK SPLIT EFFECTED ON JULY 28, 1995
AND (III) IS BASED ON THE NUMBER OF SHARES OF COMMON STOCK AND OTHER SECURITIES
OUTSTANDING AS OF SEPTEMBER 30, 1996. EACH PROSPECTIVE INVESTOR IS URGED TO READ
THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
Ultrafem-Registered Trademark-, Inc. ("Ultrafem" or the "Company") was
formed to design, develop and manufacture products based upon its proprietary
and patented SoftCup-Registered Trademark- Technology to address women's health
care needs. The SoftCup Technology is a physical barrier-type vaginal device
designed to enhance the comfort, functionality and effectiveness of products
designed for women in the areas of feminine protection, contraception, the
prevention of sexually transmitted diseases ("STDs") and the treatment of
vaginal infections. The commercial products which will employ the SoftCup
Technology will be disposable, single use, universal size and made from a soft,
inert, thermoplastic material which becomes more pliable at body temperature and
molds to fit the individual user's anatomy.
The Company's business strategy is to develop and market proprietary
products based on its patented SoftCup Technology directed at high potential,
underserved segments of the women's health care market. The key elements of this
strategy are to (i) continue the launch of the Company's feminine protection
product, INSTEAD-TM-, in the United States, (ii) expand the Company's
manufacturing capabilities, (iii) develop and submit for Food and Drug
Administration ("FDA") clearance or pre-market approval products based upon the
SoftCup Technology for the medical product arena and (iv) pursue strategic
alliances with multi-national consumer product and pharmaceutical companies for
marketing, sales and distribution.
FEMININE PROTECTION PRODUCT -- INSTEAD-TM-
Management of the Company believes that INSTEAD-TM- represents one of the
most significant technological developments for feminine protection since the
introduction of the first commercial disposable tampon in 1933. INSTEAD-TM-
differs from other forms of feminine protection currently on the market in that
it collects, rather than absorbs, menstrual fluid. The Company believes that the
unique design of INSTEAD-TM- provides several distinct benefits over currently
available forms of feminine protection, including increased comfort, improved
performance, reduced health concerns and freedom to engage in most physical
(including sexual) activities during menstruation. The Company has obtained FDA
clearance to market INSTEAD-TM- in the United States. INSTEAD-TM- may also be
marketed in each of Belgium, Canada, Denmark, Finland, France, the Netherlands,
Spain, Sweden, Switzerland and the United Kingdom subject to compliance with
applicable international labeling laws and United States export requirements.
The Company initiated the launch of INSTEAD-TM- in the Fall of 1996 in the
Pacific Northwest, a region which the Company estimates represents approximately
8% of United States households and includes the major markets of San Francisco,
Seattle and Portland. The Company intends to introduce INSTEAD-TM- in stages
into additional significant geographic regions with full national distribution
anticipated to be achieved over a three year period, which may be accelerated or
delayed depending upon various factors including market acceptance by retailers
and consumers, and the availability of additional financing. The Company has
conducted market research and consumer use testing which indicate significant
consumer interest in INSTEAD-TM-. The Company intends to distribute INSTEAD-TM-
principally through supermarkets and drug stores. See "Risk Factors -- Inherent
Limitation of Market Research and Consumer Use Testing," "-- Need for Additional
Financing for Unforeseen Risks," "Business -- Product Testing," and "-- Strategy
and Plan of Operations."
3
<PAGE>
Management estimates that the domestic and international feminine protection
markets in developed countries are in excess of $9 billion annually. The United
States market for feminine protection products such as tampons and pads
generates approximately $1.8 billion in annual revenues (based on a 1995 report
by A.C. Nielsen). Approximately 58 million women between the ages of 18 and 54
use feminine protection products in the United States. Approximately 63% of
menstruating women in the United States use tampons exclusively or in
combination with pads (based on 1996 Simmons Market Research Bureau). The
European market for feminine protection products generates approximately $2.9
billion in annual revenues (based on a 1995 report by A.C. Nielsen) with an
estimated 105 million women between the ages of 18 and 54 using feminine
protection products. Other developed markets, including Canada, Latin America,
Mexico and Asia (other than China and India) represent a combined population in
excess of 200 million potential users.
MEDICAL PRODUCT APPLICATIONS
Ultrafem intends to develop additional applications of the SoftCup
Technology for vaginal delivery of agents for use in contraception, the
prevention of STDs, and the treatment of vaginal infections. The Company's
initial medical product under development is a contraceptive product which
combines the SoftCup Technology with the BufferGel Technology, which is licensed
by the Company for vaginal use on a worldwide basis. The BufferGel Technology,
which has the ability to maintain the normal vaginal pH balance while killing
sperm and most STD pathogens, was invented by scientists associated with The
Johns Hopkins University ("Johns Hopkins") with whom the Company has previously
conducted research. The Company has entered into a research and development
agreement with ReProtect, LLC ("ReProtect"), a company founded by these
scientists which will continue the investigation and development of medical
applications of the SoftCup Technology.
The United States market for contraceptive products such as condoms, oral
contraceptives, diaphragms and implantable contraceptives generates
approximately $2 billion in annual revenues (based on Theta Corporation, 1994).
Based on the population of women between the ages of 18 and 54, estimated to be
in excess of 300 million women in Europe and other developed markets, and
assuming that the frequency of use of contraceptive products is less than that
in the United States, management estimates the international markets for
contraceptives to be approximately $6 billion annually outside the United
States. Additionally, at least 330 million new cases of STDs occur each year
throughout the world (World Health Organization, 1995), indicating a significant
market for a STD prevention product.
RECENT DEVELOPMENTS
- - PRODUCT LAUNCH. INSTEAD-TM- is available for sale by retailers in the
Pacific Northwest, including in the major markets of San Francisco, Seattle, and
Portland. In order to introduce INSTEAD-TM- in the Fall of 1996, the Company
began selling INSTEAD-TM- in August 1996. Revenues to date have been limited.
Marketing and sales programs, such as print and TV advertising, sampling,
consumer promotion, direct mail, public and professional relations, and in-store
merchandising have been developed and are being utilized to generate consumer
awareness and trial.
- - PRODUCT DISTRIBUTION. The Company intends to distribute INSTEAD-TM-
primarily through supermarkets and drug stores. The Company has retained
Meridian Consulting Group ("Meridian") to provide sales management services,
including supervision of a broker network, development of trade promotion plans
and introductory sales presentations for the initial introduction of INSTEAD-TM-
into the United States market. Ultrafem has hired Morgan & Sampson Pacific, a
leading Health and Beauty Aid broker in the Northwest, as the broker for
INSTEAD-TM- in the Pacific Northwest. Sales calls in the Pacific Northwest to
date have resulted in commitments from retailers which account for more than 75%
of ACV (all commodity volume) in the food and drug classes of trade. These
include commitments for in-store merchandising and displays, on shelf dates, and
desired shelf space.
4
<PAGE>
- - COMMERCIAL PRODUCTION COMMENCED. Subsequent to the Company's initial public
offering ("IPO") in February 1996, the Company entered into a lease for
manufacturing and office space in Missoula, Montana and remodeled the
manufacturing space principally to create the controlled environment module that
secures the manufacturing equipment. The special thermoforming line which
produces INSTEAD-TM- completed high volume testing and, in June 1996, commenced
manufacturing commercial quantities of INSTEAD-TM- for the Fall 1996 launch. The
Company placed an order for a second semi-automated line scheduled to be
installed in the Fall of 1996 and an order for a fully automated line scheduled
to be installed in the Spring of 1997. The Company believes that its
manufacturing capacity will be sufficient to meet consumer demand. There can be
no assurance, however, that any of the foregoing goals or timetables can be met.
- - BUFFERGEL TECHNOLOGY RECEIVES HIVNET GRANT; PHASE I TRIALS SCHEDULED TO
BEGIN. The National Institute of Health ("NIH") has granted $2 million in
contracts to ReProtect and Johns Hopkins for the research and development of the
BufferGel Technology for contraception and the prevention of AIDS and other
STDs. Subsequent to the IPO, ReProtect was selected by HIVNET, a unit of the
NIH, to test the use of the BufferGel Technology as a vaginal microbicide for
the prevention of AIDS and other STDs. The FDA allowed an Investigational New
Drug ("IND") application permitting the BufferGel Technology to enter Phase I
clinical trials which are currently scheduled to begin in December 1996. The
Company plans to begin clinical trials of its contraceptive product upon
completion of the Phase I clinical trials of the BufferGel Technology. A portion
of these clinical trials may be funded by the net proceeds of the Offering. In
order to achieve this timetable, the Company will need to complete the
development of the contraceptive product by combining the SoftCup Technology and
the BufferGel Technology. The Company plans to simultaneously develop additional
applications of such technologies for treatment of vaginal infections and
topical and systemic therapies. There can be no assurance, however, that any of
the clinical trials will demonstrate the necessary degree of safety and
effectiveness required for FDA pre-market approval, that ReProtect will receive
the benefit of the entire $2 million under the NIH contracts or that any of the
foregoing goals or timetables can be met. See "Risk Factors -- Dependence on
Single Product" and "-- Risks Associated with Research and Development for Other
Applications of the SoftCup Technology."
The Company was incorporated under the laws of the State of Delaware on
March 22, 1990 by Audrey Contente, the founder of the Company and inventor of
the SoftCup Technology, and its principal executive office is located at 500
Fifth Avenue, Suite 3620, New York, New York 10110. The Company's telephone
number is (212) 575-5740.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,000,000 shares
Common Stock to be outstanding after the
Offering....................................... 7,889,651 shares (1)
Use of proceeds................................. For expenses relating to the continued
support and expansion of the launch of
INSTEAD-TM-, including marketing and
sales activities and capital
expenditures, for research to accelerate
the development of medical products and
funding certain clinical trials of such
products, to repay certain indebtedness,
and for general corporate and working
capital purposes. See "Use of Proceeds."
Risk factors.................................... The shares of Common Stock offered hereby
involve a high degree of risk and
immediate substantial dilution. See "Risk
Factors" and "Dilution."
Nasdaq National Market symbol................... UFEM
</TABLE>
- ------------------------
(1) Excludes 5,047,603 shares of Common Stock issuable upon the conversion or
exercise of certain currently outstanding securities of the Company, of
which 3,227,703 shares are being offered in the Concurrent Offering. See
"Concurrent Sales by Selling Stockholders."
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information for the five years ended June 30, 1996 are
derived from the audited financial statements of the Company. The financial
statements as of June 30, 1996 and for the three years then ended have been
audited by Deloitte & Touche LLP, independent auditors. The summary financial
information for the three months ended September 30, 1995 and 1996 have been
derived from the Company's unaudited financial statements which, in the opinion
of management, contain all adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the Company's financial
position and results of operations at such dates and for such periods. Operating
results for the three months ended September 30, 1996 are not necessarily
indicative of the results that may be expected in any other interim period or
for the full year. The summary financial information below should be read in
conjunction with the Company's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net Sales........................ $ -- $ -- $ -- $ -- $ -- $ -- $ 192,540
Cost of Sales (exclusive of
depreciation).................. -- -- -- -- -- -- 358,377
Marketing, Sales and
Distribution................... -- -- -- 123,531 2,406,277 345,416 2,921,392
General and Administrative
Expense........................ 2,141,249 1,139,339 1,387,784 1,444,911 5,095,261 597,529 1,924,557
Operating Income (Loss).......... (3,827,114) (2,020,786) (1,967,208) (1,916,450) (9,643,978) (1,091,743) (5,619,919)
Net Income (Loss)................ (3,831,536) (2,091,903) (2,303,940) (2,381,065) (9,819,980) (1,257,083) (5,457,432)
Net Income (Loss) Per Share:
Primary.......................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94)
Fully Diluted.................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94)
Weighted Average Common Shares
and Equivalents(1)............. 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(2)
----------- --------------
BALANCE SHEET DATA:
Working Capital(3)................................................................. $10,372,110 $ 46,772,110
Total Assets....................................................................... 26,766,632 59,735,820
Long-term Debt..................................................................... 700,000 700,000
Stockholders' Equity............................................................... 16,873,062 53,273,062
</TABLE>
- ------------------------------
(1) The weighted average number of common shares outstanding during the first
half of fiscal year 1996 (including the three months ended September 30,
1995), and during fiscal years 1995, 1994, 1993 and 1992 includes
incremental shares for the Common Stock, warrants and other potentially
dilutive securities issued and options granted to purchase Common Stock
which were issued within one year prior to the effective date of the IPO
(the "Incremental Shares"). Such Incremental Shares were determined
utilizing the treasury stock method. The effect of the assumed exercise of
stock options which were issued one year prior to the effective date of the
IPO and the effect of the assumed conversion of the convertible preferred
stock are not included because their effect is antidilutive.
(2) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the
Company at an assumed offering price of $20.00 per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(3) Includes current portion of long-term debt.
7
<PAGE>
CONCURRENT SALES BY SELLING STOCKHOLDERS
The registration statement of which this Prospectus forms a part also
includes a Prospectus with respect to an offering (the "Concurrent Offering") by
certain existing stockholders of the Company of an aggregate of up to 4,301,303
shares of Common Stock which includes certain shares which are issuable upon
conversion and/or exercise of certain outstanding securities. The Company will
not receive any proceeds from the sale of shares of Common Stock in the
Concurrent Offering. All of the shares offered in the Concurrent Offering may be
sold in the open market, in privately negotiated transactions or otherwise by
the holders thereof. The Company has, subject to certain exceptions, agreed not
to offer, issue or sell any shares of Common Stock or securities exercisable for
or convertible into shares of Common Stock for a 180 day period after the date
of this Prospectus without the prior written consent of Jefferies & Company,
Inc. ("Jefferies"). In addition, certain holders of Common Stock, including the
officers and directors of the Company, are subject to a contractual restriction
prohibiting the offer and/or sale of their shares of Common Stock or other
securities of the Company, prior to August 22, 1997, without the prior written
consent of Hampshire Securities Corporation ("Hampshire"). Hampshire has agreed
with Jefferies not to release any of such stockholders from the contractual
restriction without the prior written consent of Jefferies. See "Underwriting."
Sales of such securities by the selling stockholders or the potential of such
sales may have an adverse effect on the market price of the shares of Common
Stock offered hereby.
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS THAT
ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS,
INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONTAINED IN "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
SUCH STATEMENTS ARE BASED ON MANY ASSUMPTIONS AND ARE SUBJECT TO RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
IN THE FORWARD LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE IDENTIFIED BELOW AS WELL AS THOSE SET FORTH ELSEWHERE IN THIS
PROSPECTUS.
HISTORY OF LOSSES
From the Company's inception in March 1990 through June 30, 1996, the
Company had not generated any revenue, and has only recently begun generating
revenue. Revenues to date have been limited. The Company has expended more than
$21.0 million for, among other things, marketing, research and development
activities, engineering and design of fully automated manufacturing systems,
clinical testing, meeting domestic and international regulatory requirements,
domestic and international applications for patent protection, applications for
domestic trademark protection, and market research. The Company may encounter
difficulties experienced by companies which have only recently begun generating
revenues, many of which may be beyond the Company's control, such as
unanticipated problems and costs related to marketing INSTEAD-TM-. Management
expects to continue incurring operating losses for the foreseeable future, until
such time as the Company derives significant revenues from the sale of
INSTEAD-TM-. Sales of INSTEAD-TM- commenced in the Fall of 1996. There can be no
assurance that the Company will be profitable. The Company believes that the
financial resources available to it, together with the net proceeds of the
Offering, will satisfy the Company's working capital needs for at least 12
months. However, the Company may require additional financing if unforeseen
risks are encountered. See "-- Need for Additional Financing for Unforeseen
Risks" and "Business -- Strategy and Plan of Operations."
DEPENDENCE ON SINGLE PRODUCT
The Company's future profitability initially depends primarily on the
successful commercialization of INSTEAD-TM- as an alternative to currently
available feminine protection products. Should the introduction of INSTEAD-TM-
be unsuccessful for any reason, there would be a material adverse effect on the
Company's business, financial condition and results of operation. See "-- Risks
Associated with Research and Development for Other Applications of the SoftCup
Technology" and "Business -- Other Potential Applications of the SoftCup
Technology."
NEED FOR ADDITIONAL FINANCING FOR UNFORESEEN RISKS
The Company believes that the level of financial resources available to it
is an important factor in its ability to achieve the marketing and distribution
of INSTEAD-TM- and in its ability to develop and eventually bring medical
products to market. Management believes that the financial resources available
to it, together with the net proceeds of the Offering, will satisfy the
Company's working capital needs for at least 12 months. However, the Company may
require additional financing if unforeseen risks are encountered. If the Company
is unable to raise additional capital or arrange satisfactory working capital or
additional equity financing, the Company may be unable to complete the
distribution of INSTEAD-TM- into the full United States market. Additional
financings 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. See "-- Risks Associated
with Research and Development for Other Applications of the SoftCup Technology."
LACK OF MANUFACTURING EXPERIENCE; NEED TO ACHIEVE ECONOMIES OF SCALE AND LIMITED
MANUFACTURING RESOURCES
The Company has only limited experience in manufacturing quantities of
INSTEAD-TM- for the commercial market and has not yet manufactured INSTEAD-TM-
on a cost-efficient basis. There can be
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<PAGE>
no assurance that the Company will be able to manufacture quantities of
INSTEAD-TM- for the commercial market on a cost efficient basis, if at all. In
the future the Company will be required to increase the quantity of units it can
produce, reduce per-unit manufacturing costs and related marketing expenses and
achieve high quality standards in order to successfully market INSTEAD-TM- on a
commercial scale throughout the full United States market. These criteria will
only be satisfied if the Company is able to either enhance significantly its
existing production capabilities or enter into arrangements with third parties
capable of manufacturing INSTEAD-TM- on a cost-efficient basis. If the Company
encounters production difficulties or delays, including problems involving
production yield, quality control and assurance or supplies or components, there
could be a material adverse effect on the Company's business, financial
condition and results of operations. See "-- History of Losses" and "Business --
Manufacturing."
MARKETING RISKS; UNCERTAINTY OF CONSUMER ACCEPTANCE
The Company has incurred, and expects to continue to incur, substantial
marketing expense in launching INSTEAD-TM- into the United States market. The
marketing risks that the Company may encounter are compounded by the unique
nature of INSTEAD-TM-. Because INSTEAD-TM- is fundamentally different from
nearly all commercially available forms of feminine protection, successful
introduction of INSTEAD-TM- will face several obstacles, including a change in
established personal hygiene regimen and educating potential consumers on how to
use INSTEAD-TM-. Furthermore, the Company will be competing with other products
which are already familiar to the target audience, and the Company will be
required to incur substantial marketing expense in order to introduce
INSTEAD-TM- to consumers. There can be no assurance that the Company will
develop an effective marketing or advertising campaign to overcome these
obstacles. See "-- Risks Associated with Potential Competitive Response" and
"Business -- Marketing and Sales."
NECESSITY OF REGULATORY CLEARANCES TO MARKET
The production and distribution of INSTEAD-TM- are subject to regulation in
the United States and other countries in which INSTEAD-TM- may be sold. In 1993,
the FDA cleared the Company's pre-market notification submission under Section
510(k) of the Federal Food, Drug, and Cosmetic Act of 1938, as amended (the
"FDCA"). The FDA's clearance of this notification enables the Company to market
INSTEAD-TM- in the United States and to export it overseas subject to the
general controls provisions of the FDCA. Subsequent to FDA clearance of this
notification submission, certain modifications, which the Company believes are
minor, were made in the materials used in INSTEAD-TM- to improve the
manufacturing process. An applicable FDA regulation requires the filing of a new
510(k) notification when, among other things, there is a major change or
modification in the intended use of the device, or a change or modification in
material, chemical composition or manufacturing process, that could
significantly affect the device's safety or effectiveness. A device manufacturer
is responsible for making the initial determination as to whether a proposed
change to a cleared device or its intended use necessitates the filing of a new
510(k) notification. The Company has conducted testing subsequent to the
changes, which the Company believes are minor, in materials. The Company has
been advised by its regulatory counsel, Arent Fox Kintner Plotkin & Kahn, that
no additional 510(k) notification is required for these changes, although there
can be no assurance that the FDA will not require such a 510(k) notification. In
April 1994, the FDA informally proposed a guidance document pursuant to the
above-described regulation (which was revised in August 1995) that would require
submission of a new 510(k) notification when certain changes are made in medical
devices such as INSTEAD-TM-, including changes in materials and labeling. If a
new 510(k) notification were to be required by the FDA for the changes in
materials of INSTEAD-TM-, there can be no assurance that the FDA would clear a
new 510(k) notification submitted by the Company, or that the FDA would not
prohibit the Company from selling INSTEAD-TM- until the 510(k) notification was
cleared. The FDA review time for 510(k) notifications could be lengthy. The
failure to obtain a new 510(k) clearance, if required, on a timely basis, if at
all, would have a material adverse effect on the Company's business, financial
condition and results of operations.
10
<PAGE>
The Company has also decided to label INSTEAD-TM- with a 12 hour maximum
wear time. The labeling for INSTEAD-TM-, as cleared by the FDA in the original
510(k) notification, included an 8 hour maximum wear time. The Company conducted
a clinical study to support the safety of the 12 hour wear time. See "Business
- -- Product Testing." The Company does not believe a new 510(k) notification is
necessary to increase the maximum wear time to 12 hours. Prior to finalizing the
change in labeling, the Company met with the FDA on June 19, 1996. At that
meeting the results of these studies were discussed and the FDA requested that
the Company submit the results of its clinical testing, which the Company
provided on July 17, 1996. On October 25, 1996 the Company received a letter
from the FDA confirming that the Company could increase the wear time of
INSTEAD-TM- to 12 hours without filing a new 510(k) notification.
Any product with a 510(k) notification cleared by the FDA and its
manufacturer are subject to continuing regulatory review and the FDA has the
authority to, among other things, order or request restrictions on the
distribution of products or the withdrawal of products from market even after
clearance of a 510(k) submission is obtained.
The Company's manufacturing facility in Missoula, Montana is subject to the
Good Manufacturing Practices ("GMP") regulations which are promulgated by the
FDA, international quality standards and other regulatory requirements. The
failure by the Company to comply with the foregoing could adversely affect the
Company's production and financial condition. See also "Business -- Government
Regulation" and "-- Regulatory Status."
In order to distribute INSTEAD-TM- in foreign countries, the Company must
comply with all regulatory requirements of the countries in which the Company
intends to sell INSTEAD-TM-, including regulations with respect to labeling and
importing into such countries and FDA requirements for export thereto. There can
be no assurance that the Company will be able to comply with such requirements.
See "Business -- Regulatory Status." The Company will require FDA clearance or
pre-market approval to market other applications of the SoftCup Technology in
the United States.
PRODUCT LIABILITY; POSSIBILITY OF INSUFFICIENT INSURANCE COVERAGE
Testing, manufacturing and marketing of INSTEAD-TM- entail an inherent risk
of product liability, and such risk may be increased because INSTEAD-TM- is used
internally. The Company presently maintains what it believes to be a sufficient
level of product liability insurance. Such insurance is expensive and, in the
future, may not continue to be available on acceptable terms, if at all. The
Company's business, financial condition and results of operations may be
materially adversely affected by a successful product liability claim, or series
of such claims, in excess of any insurance coverage. There can be no assurance
that product liability claims will not be successfully asserted against the
Company. See "Business -- Product Testing."
COMPETITION
The market for feminine protection and medical products is presently
dominated by large, long-established and well-financed companies which have
substantially greater resources than the Company. There can be no assurance that
other companies will not develop new or enhanced feminine protection products
that are either more effective than INSTEAD-TM-, or would render INSTEAD-TM-
obsolete or non-competitive. In addition, there can be no assurance that
existing competitive companies will not increase their level of advertising and
marketing expenditures in response to the introduction of INSTEAD-TM-. See "--
Risks Associated with Potential Competitive Response" and "Business --
Competition."
RISKS ASSOCIATED WITH POTENTIAL COMPETITIVE RESPONSE
Subsequent to the IPO, the Company identified its target geography for the
initial launch of INSTEAD-TM-, established a broker network, and established
certain key trade accounts. The initial indications from the early stages of the
launch reflect higher costs related to trade, distribution and marketing
spending levels than previously anticipated. The Company believes that this is
due to the response to the launch of INSTEAD-TM- by companies with competitive
products. There can be no
11
<PAGE>
assurance that the Company's competitors will not significantly increase their
spending on promotional activities as a reaction to the introduction of
INSTEAD-TM-. See "-- Marketing Risks; Uncertainty of Consumer Acceptance."
INHERENT LIMITATION OF MARKET RESEARCH AND CONSUMER USE TESTING
The Company conducted test studies for the purposes of evaluating potential
consumer interest in INSTEAD-TM- and developing a market strategy for
INSTEAD-TM-. Due to the inherent limitations of market research and consumer
testing to accurately indicate consumer preferences, the results of such
research and tests may not accurately reflect INSTEAD-TM-'s actual market
potential. See "Business -- Marketing and Sales."
RISKS INHERENT IN OBTAINING AND PROTECTING PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its ability to obtain and
protect patents and trade secrets, and operate without infringing the
proprietary rights of other companies and individuals in the United States and
abroad. A continuation patent application based on, and including the subject
matter of, a patent application for the SoftCup Technology (for use for feminine
protection during menstruation either with or without vaginal drug delivery)
originally filed by Ms. Audrey Contente, the founder of the Company, was allowed
by the United States Patent and Trademark Office (the "Patent and Trademark
Office") on December 11, 1992. The United States patent was issued on March 22,
1994 and expires on March 22, 2011. Additional patent applications are pending
in the United States on other aspects and applications of the SoftCup Technology
and certain manufacturing processes related to such technology. The Company has
also filed international patent applications with respect to the SoftCup
Technology (for use for feminine protection during menstruation either with or
without vaginal drug delivery). There can be no assurance that any additional
patents will issue or that any issued patents will provide the Company with
competitive advantages or will not be challenged by other companies or
individuals. There can be no assurance that other companies and individuals will
not independently develop similar products, duplicate the SoftCup Technology or
design around the Company's patent. In addition, the Company could incur
substantial costs in defending suits brought against it on such intellectual
property rights or in prosecuting suits that the Company brings against other
parties to protect its intellectual property rights. The Company also relies on
trade secrets and other unpatented proprietary technology. The Company seeks to
protect its trade secrets and proprietary know-how in part with confidentiality
agreements with employees and consultants. There can be no assurance that the
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or independently developed by competitors or that others will not
independently develop substantially equivalent proprietary products and
processes or otherwise gain access to the Company's proprietary technology. See
"Business -- Patent Status and Patent Applications; Proprietary Technology."
RISKS ASSOCIATED WITH RESEARCH AND DEVELOPMENT FOR OTHER APPLICATIONS OF THE
SOFTCUP TECHNOLOGY
Although the Company is currently focusing its primary efforts and capital
resources on introducing INSTEAD-TM- into the United States and international
markets, the Company intends to apply a portion of the net proceeds of the
Offering to pursue research on potential medical and health care applications of
the SoftCup Technology. If such research leads to the development of new
products, the Company would require further additional capital and/or a
strategic partner to market and distribute such products. There can be no
assurance that such research or development will be successful, that these
additional potential applications of the SoftCup Technology will result in the
Company's introduction of other products or that any additional financing will
be available or, if available, will be on terms acceptable to the Company. See
"Business -- Other Potential Applications of the SoftCup Technology."
The Company's focus on research and development of medical applications of
the SoftCup Technology is contingent on many factors which are generally
difficult to identify and quantify. They are dependent on a number of factors
which are not in the Company's control, including the results of
12
<PAGE>
clinical trials and other scientific findings, and the regulatory requirements
of clinical testing and market approvals. See "-- Necessity of Regulatory
Clearances to Market" and "Business -- Government Regulation." Accordingly,
there can be no assurance that any of the goals or timetables described in this
Prospectus relating to other potential applications of the SoftCup Technology
can be met.
DISCRETION IN APPLICATION OF PROCEEDS
The Company may change the specific use or allocation of the net proceeds
from the Offering, except that in all events the Company will use at least
$3,430,812 of the net proceeds to repay certain indebtedness to the extent that
it is presented for repayment, and the balance of such proceeds to support the
launch of INSTEAD-TM- and to develop and commercialize medical and health care
products. See "Use of Proceeds." Management will have broad discretion to change
the allocation of the net proceeds within the above parameters; any change in
the allocation of the net proceeds will depend upon, among other things, changes
in the Company's business plans, the results of research and development
programs, the terms of collaborative arrangements and/or marketing plans,
regulations applicable to the Company, conditions in the industry, general
economic conditions and the Company's future revenue and expenses.
The Company believes that the net proceeds from the IPO, together with
additional working capital or equipment lease financing, are sufficient to
commence the introduction of INSTEAD-TM- into approximately 25 to 50% of the
United States markets. As of September 30, 1996, the Company had approximately
$16,663,098 of cash and cash equivalents on its balance sheet, principally
reflecting the remaining net proceeds from the IPO. The Company has introduced
INSTEAD-TM- into a region which the Company estimates represents approximately
8% of United States households; the Company anticipates that the balance of the
IPO net proceeds will be used to commence the introduction of INSTEAD-TM- into
additional regions in the United States market. Since the Company only recently
began generating revenues and in light of its decision to pursue this Offering,
the Company has not obtained any working capital or equipment lease financing to
date. The Company believes that financing in addition to the amount raised in
the IPO is necessary to complete the distribution of INSTEAD-TM- into 50% of the
United States market. The Company intends to use the net proceeds of this
Offering to support expansion of INSTEAD-TM- into additional geographic areas,
which together with other financial resources available to it, will enable the
Company to complete the distribution of INSTEAD-TM- into 50% of the United
States. The net proceeds of this Offering may help the Company accelerate the
timing of the national rollout although there can be no assurance that any such
acceleration will occur. The Company believes that the net proceeds from this
Offering, together with other financial resources available to it, will be
sufficient to satisfy the Company's working capital needs for at least 12
months, although depending on numerous factors, including competitive response
and the amount of net proceeds expended on research and development, the net
proceeds may last longer.
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent, in large part, on the continued service
of its key management, certain scientific and technical advisors and its ability
to attract and retain qualified employees. Competition for such employees is
intense. The Company has obtained key-person life insurance in the amount of $1
million for the life of John W. Andersen, the President, Chief Executive Officer
and Chairman of the Board of the Company. In addition, the Company has obtained
a key-person life insurance policy on Audrey Contente, an officer and founder of
the Company who invented the SoftCup Technology. There can be no assurance that
any such key-person life insurance will continue to be available in the future
to the Company at a satisfactory premium. See "Management."
DILUTION
Purchasers of shares in the Offering will suffer immediate and substantial
dilution of $13.32 per share in net tangible book value per share as of
September 30, 1996 (assuming an offering price of $20.00 per share). See
"Dilution" and "Underwriting."
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<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Amended and Restated By-Laws could have the effect of discouraging a third
party from pursuing a non-negotiated takeover of the Company and preventing
certain changes in control. The Restated Certificate of Incorporation provides
that the Board of Directors is divided into three classes. One class of
directors is elected at each annual meeting of stockholders for a three-year
term. The Restated Certificate of Incorporation restricts certain business
combinations with an interested stockholder (typically a beneficial owner of 15%
or more of the outstanding voting shares of the Company's capital stock,
excluding certain persons). In addition, the Amended and Restated By-Laws and
the Restated Certificate of Incorporation require advance notice to the Board of
Directors of stockholder proposals or stockholder nominees for directors to be
considered at the next annual meeting of stockholders and restrict the ability
of stockholders to call meetings. The Restated Certificate of Incorporation and
Amended and Restated By-Laws also limit the ability of stockholders to remove
directors, call stockholders meetings and act by written consent and provide
that vacancies in the Board of Directors may only be filled by a majority of the
remaining directors. In addition, the Company's Restated Certificate of
Incorporation authorizes the issuance of 5,000,000 shares of preferred stock
with such designation, rights and preferences as may be determined from time to
time by the Board of Directors. The Board of Directors may, without stockholder
approval, issue preferred stock with dividend, liquidation, conversion, voting
or other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. There can be no assurance that the Company will
not issue additional shares of preferred stock in the future. These provisions
could discourage a third party from pursuing a takeover of the Company at a
price considered attractive by many stockholders, since such provisions could
have the effect of delaying an acquiring party from gaining control of the
Company and its Board of Directors. See "Description of Capital Stock --
Preferred Stock" and "-- Certain Provisions of the Company's Certificate of
Incorporation and By-Laws."
LIMITED TRADING HISTORY; VOLATILITY OF PRICE
Prior to the IPO, there had been no public trading market for the Common
Stock, and there can be no assurance that a regular trading market for the
Common Stock will continue after the Offering or that the market price for the
Common Stock will not fall below the offering price. In addition, market prices
of securities of many companies in the earlier stages of development have
experienced wide fluctuations not necessarily related to the operating
performance of such companies. For example, the price of the Common Stock ranged
from $14 3/8 on May 1, 1996 to $36 on May 22, 1996, closing at $19 3/8 on June
28, 1996. On October 31, 1996 the staff of the Securities and Exchange
Commission (the "Commission") informed the Company that it had commenced an
informal inquiry with respect to certain matters, which the Company believes
relates to the volatility of the price of its Common Stock in the May and June
1996 period. The Company believes it has complied with all securities laws and,
although the Commission has not requested any information from the Company, the
Company has informed the Commission that it wishes to assist the Commission with
its inquiry. While there can be no assurance as to the scope or outcome of any
inquiry by the Commission, the Company believes that this matter will not have a
material adverse effect on its business, prospects, financial condition or
results of operations. The Company further believes that factors such as
legislative, regulatory and technological developments and quarterly variations
in financial results and market conditions could cause the market price of the
Common Stock to fluctuate substantially. These market fluctuations may adversely
affect the price of and market for the Common Stock and could result in
additional inquiries. See "Price Range of Common Stock."
SUBSTANTIAL AMOUNT OF SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT
ON MARKET PRICE OF COMMON STOCK
Upon consummation of the Offering, the Company will have 7,889,651 shares of
Common Stock outstanding (8,189,651 shares if the Underwriters' over-allotment
option is exercised in full). In addition, as of September 30, 1996, there has
been reserved 5,047,603 shares of Common Stock for issuance upon the conversion
or exercise of outstanding securities. The 2,000,000 shares of Common
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<PAGE>
Stock to be sold in the Offering (2,300,000 shares if the Underwriters'
over-allotment option is exercised in full), other than shares which may be
purchased by "affiliates" of the Company, will be freely tradeable without
restriction or further registration under the Securities Act. The 3,910,000
shares of Common Stock sold in the IPO, other than shares which were purchased
by affiliates of the Company, are also freely tradable without restriction under
the Securities Act. In addition, an aggregate of 1,073,600 shares of Common
Stock which are outstanding and 3,227,703 shares of Common Stock which are
issuable upon the conversion or exercise of outstanding securities are
registered in the Concurrent Offering. The Company intends to file a
Registration Statement on Form S-8 with respect to up to 1,805,963 shares of
Common Stock issuable pursuant to its stock option plans and certain options and
warrants which have been granted to employees and consultants of the Company as
soon as practicable after the date of this Prospectus; such Registration
Statement would include 1,344,157 shares of Common Stock issuable upon
conversion or exercise of outstanding securities of the Company. Approximately
1,381,794 of the remaining shares of Common Stock outstanding and issuable upon
conversion or exercise of outstanding securities would be "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act ("Rule 144"), and may only be sold pursuant to a registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144. See
"Concurrent Sales by Selling Stockholders" and "Shares Eligible for Future
Sale."
All officers, directors and certain security holders agreed with Hampshire
in connection with the IPO not to, directly or indirectly, offer, sell, contract
to sell or otherwise dispose of their shares of Common Stock, or other
securities convertible into or exercisable for shares of Common Stock, without
the prior written consent of Hampshire, prior to August 22, 1997. An aggregate
of 4,831,305 shares of Common Stock outstanding and issuable upon conversion or
exercise of outstanding securities are subject to these lock-up arrangements.
Hampshire has agreed with Jefferies not to release any of such security holders
from the contractual restriction without the prior written consent of Jefferies.
The Company has, subject to certain exceptions, agreed not to offer, issue or
sell any shares of Common Stock or securities exercisable for or convertible
into shares of Common Stock for a 180 day period after the date of this
Prospectus without the prior written consent of Jefferies. No predictions can be
made as to the effect, if any, that market sales of shares of existing
stockholders or the availability of such shares for future sale will have on the
market price of shares of Common Stock prevailing from time to time. The
prevailing market price of the Common Stock after the Offering could be
adversely affected by future sales of substantial amounts of Common Stock by
existing stockholders. See "Certain Relationships and Related Party
Transactions," "Principal Stockholders," "Shares Eligible for Future Sale" and
"Underwriting."
LACK OF DIVIDENDS
The Company has generated limited revenues to date and does not expect to
pay cash dividends
for the foreseeable future.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$36,400,000 (approximately $41,800,000 if the Underwriters' over-allotment
option is exercised in full), after deducting underwriting discounts and
estimated offering expenses payable by the Company, based upon an assumed
offering price of $20.00 per share. The Company intends to use approximately
$3,430,812 of the net proceeds to repay the outstanding indebtedness described
below. The Company intends to use the balance of the net proceeds to provide
continued support for the launch of INSTEAD-TM- in the initial market and to
support expansion into additional geography, including increased marketing
spending and the advanced purchase of manufacturing equipment, for increased
investment in research and development of medical and health care products and
for general corporate purposes. See "Risk Factors -- Need for Additional
Financing for Unforeseen Risks" and "Business -- Other Potential Applications of
the SoftCup Technology." Pending such applications, the net proceeds will be
invested in certificates of deposit, government debt investments and other
short-term instruments.
The $3,430,812 of outstanding indebtedness which the Company intends to
repay with the net proceeds of the Offering includes approximately $2,875,000 of
principal and $484,015 of interest due on convertible notes due April 1997 which
bear interest at a rate of 10% per annum, and approximately $59,797 of principal
and $12,000 of interest in non-convertible notes due March 1997 bearing interest
at 10% per annum. The net proceeds from the issuance of the convertible notes,
which were issued in July and September 1995, were used for general corporate
purposes, including the payment of accrued interest on other outstanding
indebtedness which has since been retired, partial repayment of debt to Johns
Hopkins, the repayment of certain demand notes and expenses due to former
officers and repayment of a note to the Company's former law firm. The
non-convertible notes are due to individuals associated with ReProtect, one of
whom is a director of the Company.
The Company believes that the net proceeds from the IPO, together with
additional working capital or equipment lease financing, are sufficient to
commence the introduction of INSTEAD-TM- into approximately 25 to 50% of the
United States markets. As of September 30, 1996, the Company had approximately
$16,663,098 of cash and cash equivalents on its balance sheet, principally
reflecting the remaining net proceeds from the IPO. The Company has introduced
INSTEAD-TM- into a region which the Company estimates represents approximately
8% of United States households; the Company anticipates that the balance of the
IPO net proceeds will be used to commence the introduction of INSTEAD-TM- into
additional regions in the United States market. Since the Company only recently
began generating revenues and in light of its decision to pursue this Offering,
the Company has not obtained any working capital or equipment lease financing to
date. The Company believes that financing in addition to the amount raised in
the IPO is necessary to complete the distribution of INSTEAD-TM- into 50% of the
United States market. The Company intends to use the net proceeds of this
Offering to support expansion of INSTEAD-TM- into additional geographic areas,
which together with other financial resources available to it, will enable the
Company to complete the distribution of INSTEAD-TM- into 50% of the United
States. The net proceeds of this Offering may help the Company accelerate the
timing of the national rollout although there can be no assurance that any such
acceleration will occur. The Company believes that the net proceeds from this
Offering, together with other financial resources available to it, will be
sufficient to satisfy the Company's working capital needs for at least 12
months, although depending on numerous factors, including competitive response
and the amount of net proceeds expended on research and development, the net
proceeds may last longer. See "Risk Factors -- Need for Additional Financing for
Unforseen Risks."
The Company may change the specific use or allocation of the net proceeds
from the Offering, except that in all events the Company will use at least
$3,430,812 of the net proceeds to repay the indebtedness described above to the
extent the holders thereof do not convert such indebtedness into Common Stock,
and the balance of the proceeds to support the launch of INSTEAD-TM- and to
develop and commercialize medical and health care products. Any change in the
allocation of the proceeds will depend upon, among other things, changes in the
Company's business plans, the results of research
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<PAGE>
and development programs, the terms of collaborative arrangements and/or
marketing plans, regulations applicable to the Company, conditions in the
industry, general economic conditions and the Company's future revenue and
expenses.
PRICE RANGE OF COMMON STOCK
The Common Stock was initially offered to the public on February 22, 1996 at
a price of $10.00 per share and is quoted on the Nasdaq National Market. The
following table sets forth the range of high and low sale prices for the Common
Stock for the periods indicated as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal year 1996:
Third quarter (since February 22nd)..................................... $16 $11 1/8
Fourth quarter.......................................................... 36 11 3/4
Fiscal year 1997:
First quarter........................................................... 25 3/4 14
Second quarter (through November 12th).................................. 26 1/4 20
</TABLE>
On November 12, 1996, the last sale price of the Common Stock was $21 3/8 as
reported on the Nasdaq National Market. At September 30, 1996, there were 188
stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. It is the present intention of the Board
of Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board of Directors does not expect to declare
or pay any cash dividends in the foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term debt and
the capitalization of the Company at September 30, 1996 and as adjusted to give
effect to the sale of the 2,000,000 shares of Common Stock offered hereby, at an
assumed public offering price of $20.00 per share, and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Results of Operations" and the Company's financial statements and
notes thereto.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
<S> <C> <C>
Current Maturities of Long-term Debt:
Unsecured Convertible Notes................................. $ 2,875,000 $ --
Unsecured Notes to Former Officers.......................... 117,908 117,908(1)
Unsecured Notes to Trade and Other Creditors................ 63,548 3,751(1)
Subordinated Convertible Debentures......................... 152,432 152,432(1)
----------- -------------
Total Current Maturities of Long-term Debt................ 3,208,888 274,091(1)
Long-term Debt:
Convertible Debentures...................................... 700,000 700,000
Stockholders' Equity:
Preferred Stock, $.001 par value -- authorized 5,000,000
shares, of which 48,750 are designated as Convertible
Series A, none of which are issued and outstanding......... -- --
Common Stock, $.001 par value -- authorized 20,000,000
shares: issued and outstanding 5,889,651 and 7,889,651
shares as adjusted (2)..................................... 10,058 12,058
Additional Paid-In-Capital.................................. 43,366,219 79,764,219
Deficit..................................................... (26,503,215) (26,503,215)
----------- -------------
Total Stockholders' Equity................................ 16,873,062 53,273,062
----------- -------------
Total Capitalization...................................... $20,781,950 $ 54,247,153
----------- -------------
----------- -------------
</TABLE>
- ------------------------
(1) This debt which becomes due on various dates between October 1, 1996 and
December 31, 1996 will be repaid with a portion of the proceeds from the
IPO.
(2) Does not include 5,047,603 shares of Common Stock issuable upon the exercise
of options, warrants and other securities outstanding as of September 30,
1996 and 461,806 shares reserved for issuance pursuant to options under the
Company's stock option plans.
18
<PAGE>
DILUTION
The net tangible book value of the Common Stock at September 30, 1996 was
$16,286,920 or $2.77 per share. "Net tangible book value per share" is
determined by dividing the net tangible book value of the Company (total assets
less debt issuance costs, net of accumulated amortization and total liabilities)
by the number of shares of Common Stock outstanding. Without taking into account
any changes in net tangible book value after September 30, 1996, other than to
give effect to the sale of the shares of Common Stock offered hereby (at an
assumed public offering price of $20.00 per share), and after deducting the
underwriting discount and estimated offering expenses payable by the Company,
the pro forma net tangible book value of the Company at September 30, 1996 would
have been $52,686,920, or $6.68 per share. This represents an immediate increase
in net tangible book value of $3.91 per share to existing stockholders and an
immediate dilution of net tangible book value of $13.32 per share to new
investors purchasing shares of Common Stock in the Offering. The following table
illustrates this dilution per share.
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................................... $ 20.00
Net tangible book value per share as of September 30, 1996................ $ 2.77
Increase in net tangible book value per share attributable to the
Offering................................................................. 3.91
---------
Pro forma net tangible book value per share after the Offering.............. 6.68
---------
Dilution per share to new investors......................................... $ 13.32
---------
---------
</TABLE>
The following table sets forth as of September 30, 1996 for existing
stockholders and for new investors the number and percentage of total
outstanding shares of Common Stock purchased from the Company, the total
consideration (assuming a public offering price of $20.00 per share) and
percentage of total consideration paid to the Company, and the average price per
share paid, before deducting the underwriting discount and estimated offering
expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............. 5,889,651 74.65% $ 49,011,463 55.06% $ 8.32
New Investors..................... 2,000,000 25.35 40,000,000 44.94 20.00
--------- --------- ------------- ---------
Total......................... 7,889,651 100.00% $ 89,011,463 100.00%
--------- --------- ------------- ---------
--------- --------- ------------- ---------
</TABLE>
The foregoing table assumes no exercise or conversion of currently
outstanding securities which are convertible into or exercisable for Common
Stock. At September 30, 1996, there were outstanding securities which are
convertible into or exercisable for 5,047,603 shares of Common Stock at a
weighted average conversion/exercise price of $7.99 per share. See "Risk Factors
- -- Substantial Amount of Shares Eligible for Future Sale; Potential Adverse
Effect on Market Price of Common Stock," "Capitalization" and Note 6 of Notes to
Financial Statements.
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for the five years ended June 30, 1996 are
derived from the audited financial statements of the Company. The financial
statements as of June 30, 1996 and for the three years then ended have been
audited by Deloitte & Touche LLP, independent auditors. The selected financial
data for the three months ended September 30, 1995 and 1996 have been derived
from the Company's unaudited financial statements which, in the opinion of
management, contain all adjustments (consisting of normal and recurring
adjustments), necessary for a fair presentation of the Company's financial
position and results of operations at such dates and for such periods. Operating
results for the three months ended September 30, 1996 are not necessarily
indicative of the results that may be expected in any other interim period or
for the full year. The selected financial data below should be read in
conjunction with the Company's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales................... $ -- $ -- $ -- $ -- $ -- $ -- $ 192,540
Cost of Sales (exclusive of
depreciation)............. -- -- -- -- -- -- 358,377
Marketing, Sales and
Distribution.............. -- -- -- 123,531 2,406,277 345,416 2,921,392
Research and Development.... 1,668,752 830,761 452,552 181,475 1,403,557 70,616 394,778
General and Administrative
Expense................... 2,141,249 1,139,339 1,387,784 1,444,911 5,095,261 597,529 1,924,557
Interest Expense............ 4,422 71,117 336,732 464,615 665,381 168,160 122,858
Interest Income............. -- -- -- -- (489,379) (2,820) (285,345)
Depreciation and
Amortization.............. 17,113 50,686 126,872 166,533 738,883 78,182 213,355
----------- ----------- ----------- ----------- ------------ ----------- -----------
Net Income (Loss)........... $(3,831,536) $(2,091,903) $(2,303,940) $(2,381,065) $ (9,819,980) $(1,257,083) $(5,457,432)
----------- ----------- ----------- ----------- ------------ ----------- -----------
----------- ----------- ----------- ----------- ------------ ----------- -----------
Net Income (Loss) Per
Share..................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94)
----------- ----------- ----------- ----------- ------------ ----------- -----------
----------- ----------- ----------- ----------- ------------ ----------- -----------
Supplementary Net Income
(Loss) Per Share (1)...... -- -- -- -- -- -- $ (0.90)
-----------
-----------
Weighted Average Common
Shares and Equivalents
(2)....................... 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (3)......... $ (901,394) $(2,386,815) $(2,438,701) $(2,662,142) $ 17,962,533 $(1,114,979) $10,372,110
Total Assets................ 489,340 670,147 603,424 766,959 29,407,936 3,184,903 26,766,632
Long-term Debt.............. 350,000 787,358 2,880,075 4,032,493 700,000 7,590,680 700,000
Stockholders' (Deficiency)
Equity.................... (960,666) (2,573,795) (4,733,714) (6,011,780) 21,283,944 (7,268,863) 16,873,062
</TABLE>
- ------------------------------
(1) Represents what the net income (loss) per share would have been had the
Offering and retirement of the principal amount of the outstanding
indebtedness to be repaid from the net proceeds of the Offering, referred to
in "Use of Proceeds," occurred at the beginning of fiscal year 1997. This
amount was computed by dividing adjusted net loss (net loss as reported
adjusted for the interest expense for the three months ended September 30,
1996 associated with the outstanding indebtedness) by the adjusted weighted
average common shares and equivalents (common shares and equivalents
outstanding as reported plus the number of shares of Common Stock, assuming
an offering price of $20.00 per share, the proceeds of which were used to
retire the outstanding indebtedness).
(2) The weighted average number of common shares outstanding during the first
half of fiscal year 1996 (including the three months ended September 30,
1995), and during fiscal years 1995, 1994, 1993 and 1992 includes the
Incremental Shares. Such Incremental Shares were determined utilizing the
treasury stock method. The effect of the assumed exercise of stock options
which were issued one year prior to the effective date of the IPO and the
effect of the assumed conversion of the convertible preferred stock are not
included because their effect is antidilutive.
(3) Includes current portion of long-term debt.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's activities during the year ended June 30, 1996 and the three
months ended September 30, 1996 were focused on the launch of INSTEAD-TM-, which
commenced in the Fall of 1996. The lead market for the initial rollout is in the
Pacific Northwest, a region which the Company estimates represents approximately
8% of U.S. households, and includes the major markets of San Francisco, Seattle
and Portland. In May 1996 the Company finalized the lead market distribution
network by contracting with Morgan & Sampson Pacific, a retail broker with
expertise in the Health and Beauty Aid business as well as the feminine
protection market segment.
Manufacturing activities to support the launch of INSTEAD-TM- progressed
during the second half of fiscal year 1996 and the three months ended September
30, 1996. Manufacturing space was leased and remodeling began. The special
thermoforming equipment required to manufacture INSTEAD-TM- completed high
volume testing and in June 1996 commenced manufacturing INSTEAD-TM- for the Fall
1996 launch.
In addition to INSTEAD-TM- launch activities, research and development
activities on new products continued in the fourth quarter of fiscal year 1996
and the first quarter of fiscal year 1997. The BufferGel Technology developed by
the Company's research and development partner, ReProtect, was selected by
HIVNET for funding of clinical trials to test its use for the prevention of AIDS
and other STDs. The Phase I clinical trials are currently scheduled to begin in
December 1996.
The following table sets forth, for the periods indicated, the percentage
increases or decreases of certain items included in the Company's statement of
operations.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM PRIOR PERIOD
---------------------------------------------------------
<S> <C> <C> <C>
THREE MONTHS
ENDED SEPTEMBER 30,
JUNE 30, 1995 JUNE 30, 1996 1996 COMPARED
COMPARED WITH COMPARED WITH WITH THREE MONTHS
JUNE 30, 1994 JUNE 30, 1995 ENDED SEPTEMBER 30, 1995
--------------- ------------- -------------------------
Net Sales (1)......................... -- -- --
Cost of Sales (exclusive of
depreciation) (1).................... -- -- --
Marketing, Sales and Distribution..... -- % 1,847.9% 745.8%
General and Administrative Expense.... 4.1 252.6 222.1
Research and Development Expense...... (59.9) 673.4 459.0
Loss from Operations.................. (2.6) 403.2 414.8
Interest Income (2)................... -- -- --
Interest Expense...................... 38.0 43.2 (26.9)
Depreciation and Amortization......... 31.3 343.7 172.9
Net Loss.............................. 3.3% 312.4% 334.1%
</TABLE>
- ------------------------
(1) This percentage is not meaningful since the Company began generating sales
in August 1996.
(2) This percentage is not meaningful since the Company did not generate
interest income in prior periods.
21
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES
Net sales for the three months ended September 30, 1996 were $192,540
resulting from the shipment of INSTEAD-TM-. The Company was a development stage
company for the three months ended September 30, 1995 and generated no sales.
COST OF SALES (EXCLUSIVE OF DEPRECIATION)
Cost of sales during the three months ended September 30, 1996 were
$358,377. The Company was a development stage company during the three months
ended September 30, 1995 and incurred no cost of sales. The cost of sales for
the three months ended September 30, 1996 was attributable to start-up and
manufacturing costs associated with the production of INSTEAD-TM- to support
related sales. The Company has not reached a level of production adequate to
absorb the Company's manufacturing costs on a cost efficient basis.
MARKETING, SALES AND DISTRIBUTION
Marketing, sales and distribution expense increased 745.8% to $2,921,392 for
the three months ended September 30, 1996 from $345,416 for the three months
ended September 30, 1995. This increase was principally attributable to certain
expenses incurred in connection with the launch of INSTEAD-TM- during the three
months ended September 30, 1996 for marketing and advertising for television,
print, internet, sampling and coupon mailings to generate consumer trial and
awareness of INSTEAD-TM-.
RESEARCH AND DEVELOPMENT
Research and development expense increased 459.0% to $394,778 for the three
months ended September 30, 1996 from $70,616 for the three months ended
September 30, 1995. The increase was primarily attributable to payments to
ReProtect under the terms of the Company's research and development agreement.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 222.1% to $1,924,557 for the
three months ended September 30, 1996 from $597,529 for the three months ended
September 30, 1995. This increase was primarily due to non-cash charges
resulting from the issuance of options and warrants to purchase Common Stock at
prices below fair market value to officers and a director of the Company and in
connection with the settlement of a claim. This increase was also due, to a
lesser extent, to increases in legal fees, increases in salaries attributable to
administrative support staff, and increases in financial public relations
expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 172.9% to $213,355 for the
three months ended September 30, 1996 from $78,182 for the three months ended
September 30, 1995. This increase was attributable to the increase in the
depreciation of property and equipment and the increase in the amortization of
deferred debt issuance costs.
INTEREST EXPENSE
Interest expense was $122,858 and $168,160 for the three months ended
September 30, 1996 and 1995, respectively. The decrease of 26.9% for the three
months ended September 30, 1996 compared to the three months ended September 30,
1995 was attributable to the repayment of debt by the Company.
INTEREST INCOME
Interest income was $285,345 and $2,820 for the three months ended September
30, 1996 and 1995, respectively. The increase for the three months ended
September 30, 1996 compared to the three
22
<PAGE>
months ended September 30, 1995 was attributable to the money received by the
Company during February, 1996 from its IPO which was invested in cash
equivalents during the three months ended September 30, 1996.
FISCAL YEARS ENDED JUNE 30, 1996, 1995 AND 1994
NET SALES AND COSTS OF SALES (EXCLUSIVE OF DEPRECIATION)
The Company began generating sales in August 1996 and therefore there were
no revenues or costs of sales in these fiscal years.
MARKETING, SALES AND DISTRIBUTION
Marketing, sales and distribution expense increased 1,847.9% to $2,406,277
for the year ended June 30, 1996 from $123,531 for the year ended June 30, 1995.
The increase was primarily due to expenses related to the launch of INSTEAD-TM-
which had been planned for, and commenced in, the Fall of 1996, including market
research, development of trade promotion plans and package design.
Plans for the lead market geography were developed and in the year ended
June 30, 1996 the Company retained Morgan & Sampson Pacific to gain widespread
distribution and merchandising support of INSTEAD-TM- to retailers in the lead
market. Staffing additions in that year to facilitate product launch and
operations included a Senior Marketing Product Manager.
Marketing, sales and distribution expense increased to $123,531 for the year
ended June 30, 1995 compared to $-0- for the year ended June 30, 1994. This
increase was attributable to marketing expenses related to INSTEAD-TM-.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 252.6% to $5,095,261 for the
year ended June 30, 1996 from $1,444,911 for the year ended June 30, 1995. The
increase was primarily due to non-cash charges resulting from the issuance of
options to purchase Common Stock at prices below fair market value to officers
and a director of the Company and legal fees and, to a lesser extent, due to
increases in salaries, travel, professional fees and other general operating
expenses.
Staffing additions in the year ended June 30, 1996 to facilitate product
launch and operations included a Vice President of Operations at the Montana
facility and a Corporate Controller.
General and administrative expense increased 4.1% to $1,444,911 for the year
ended June 30, 1995 from $1,387,784 for the year ended June 30, 1994. The
increase for the year ended June 30, 1995 compared to June 30, 1994 was
primarily due to increases in salaries and signing bonuses attributable to
officers of the Company who are principally engaged in the development of the
Company's business plan and equity financing activities and related travel
expenses, offset in part by reduced legal expenses.
RESEARCH AND DEVELOPMENT
Research and development expense increased 673.4% to $1,403,557 for the year
ended June 30, 1996 from $181,475 for the year ended June 30, 1995. The increase
was primarily attributable to research expenses of $343,200 paid to ReProtect
under the terms of the Company's research and development agreement and to
production start-up expenses, including those described below. To a lesser
extent the increase was due to other research and testing expenses related to
INSTEAD-TM-, as well as legal expenses.
Production start-up expenses included procurement of a manufacturing
facility as well as completion of line testing. A lease was entered into for
manufacturing and office space. Remodeling began on the manufacturing space
principally to create the controlled environment module that secures the
manufacturing equipment. Equipment orders were placed for INSTEAD-TM-'s first
manufacturing line. The first piece of special equipment to manufacture the
product, which is called the thermoforming line, completed testing at Remmele
Engineering, Inc. in St. Paul, Minnesota and has been installed at Ultrafem's
Montana facility and is producing product for the launch of INSTEAD-TM-. In June
1996 the
23
<PAGE>
Company commenced manufacturing quantities of INSTEAD-TM- for the commercial
market, and estimates that it has produced an aggregate of approximately 2.2
million units of INSTEAD-TM- through August 14, 1996.
The BufferGel Technology developed by the Company's research and development
partner, ReProtect, has been selected by HIVNET for funding of clinical trials
to test its use as a vaginal microbicide for the prevention of AIDS and other
STDs. Furthermore, the FDA has permitted the BufferGel Technology to enter Phase
I clinical trials, which are currently scheduled to begin in December 1996. The
BufferGel Technology is the first non-detergent AIDS prevention technology to be
selected by HIVNET to proceed to clinical trials. See "Business -- Other
Potential Applications of the SoftCup Technology."
Research and development expense decreased 59.9% to $181,475 for the year
ended June 30, 1995 from $452,552 for the year ended June 30, 1994. The decrease
for the year ended June 30, 1995 compared to June 30, 1994 was primarily
attributable to reduced expenditures incurred by the Company with independent
contract research groups and lower manufacturing facility costs associated with
the Company's decision to move to smaller manufacturing facilities.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $738,883 for the year ended June 30, 1996
and $166,533 for the year ended June 30, 1995. The 343.7% increase for the year
ended June 30, 1996 compared to the year ended June 30, 1995 was attributable to
increases in the amortization of deferred debt issuance costs.
Depreciation and amortization was $166,533 for the year ended June 30, 1995
and $126,872 for the year ended June 30, 1994. The 31.3% increase for the year
ended June 30, 1995 compared to 1994 was primarily attributable to increases in
the amortization of deferred offering costs.
INTEREST EXPENSE
Interest expense was $665,381 for the year ended June 30, 1996 and $464,615
for the year ended June 30, 1995. The 43.2% increase for the year ended June 30,
1996 compared to the year ended June 30, 1995 was attributable to the increase
in debt incurred by the Company in the year ended June 30, 1996. At June 30,
1996 the Company repaid approximately $4.9 million of debt. See " -- Liquidity
and Capital Resources."
Interest expense was $464,615 for the year ended June 30, 1995 and $336,732
for the year ended June 30, 1994. The 38.0% increase in 1995 compared to 1994
was attributable to increases in debt incurred by the Company in each of the
respective comparable periods.
INTEREST INCOME
Interest income was $489,379 for the year ended June 30, 1996 compared to
$-0- for the year ended June 30, 1995. The increase for the year ended June 30,
1996 compared to the year ended June 30, 1995 was attributable to the money
received by the Company in February 1996 from its IPO which was invested in cash
equivalents during the period ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for funds has increased from period to period as it has
incurred expenses for, among other things, research and development activities,
engineering and design of fully automated manufacturing systems, clinical
testing, meeting domestic and international regulatory requirements,
applications for domestic and international patent protection, applications for
domestic trademark protection and market research. Since its inception, the
Company funded these needs through private placements of its equity and debt
securities. The Company received net proceeds in excess of approximately
$12,300,000 through private sales of these securities from inception through
September 30, 1996. See "Prior Financings."
24
<PAGE>
In February 1996, the Company received proceeds of $34,085,611, net of
related expenses of $5,014,389, in connection with the sale of 3,910,000 shares
of Common Stock in the IPO. At September 30, 1996 the Company had $16,663,098 in
cash and cash equivalents. From June 30, 1996 to September 30, 1996, the
Company's cash position decreased by $7,846,973, principally reflecting
$5,451,308 used in operating activities, $2,946,550 used for purchase of
property and equipment, and $103,125 for the repayment of debt offset in part by
$654,010 in proceeds from the exercise of stock options and warrants. As of June
30, 1996, the Company's cash position increased by $24,436,681, principally
reflecting the net proceeds from the IPO and $6,147,451 in net proceeds from the
sale of convertible and nonconvertible promissory notes and exercise of stock
options and warrants. The net proceeds from the IPO and the net proceeds from
such sales of other securities were used as follows: $5,569,315 for the
repayment of debt and payment of debt issuance costs, $7,575,453 were used in
operating activities and $2,651,618 for construction in the manufacturing plant
and purchase of property and equipment.
The Company's working capital and capital requirements will depend on
numerous factors, including the progress of the staged market introduction of
INSTEAD-TM-, the Company's research and development activities, the level of
resources that the Company devotes to the developmental, clinical, regulatory
and marketing aspects of its products and the extent to which strategic
alliances with multi-national pharmaceutical or consumer product companies are
formed. At September 30, 1996, the Company had commitments in the amount of
approximately $6,955,000, of which $3,635,000 was unpaid, for the purchase of
manufacturing equipment and improvements to the manufacturing facility to
support start-up production and improvements to the new New York office space.
Included in accounts payable and accrued liabilities at September 30, 1996 was
approximately $249,000 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 development. In addition, the
Company will also continue to incur additional research and development
expenses; these expenses may include amounts expended on prototype development,
prototype manufacturing, laboratory and human clinical studies, as well as
market research.
The Company's stockholders' equity decreased by $4,410,882 from June 30,
1996 to September 30, 1996 reflecting a net loss by the Company for the three
months ended September 30, 1996 of $5,457,432, offset in part by proceeds from
the exercise of stock options and warrants, issuance of below market value stock
warrants in connection with the settlement of a claim and conversion of
convertible debt into Common Stock of $1.1 million. The Company's stockholders'
equity increased by $27,295,724 from June 30, 1995 to June 30, 1996 reflecting
the net proceeds from the IPO of $34,085,611, proceeds from the exercise of
stock options and warrants of $1,869,522, conversion of accounts payable to
warrants, issuance of below market value stock options and warrants in
connection with professional services and licensing agreements and conversion of
convertible debt into Common Stock of $1.1 million, offset by the Company's net
loss for the year ended June 30, 1996 of $9,819,980.
The Company intends to use approximately $3,430,812 of the net proceeds of
the Offering to repay certain outstanding indebtedness and to use the balance of
such net proceeds to provide continued support for the launch of INSTEAD-TM- in
the initial market and to support expansion into additional geography, including
increased marketing spending and the advanced purchase of manufacturing
equipment, for increased investment in research and development of medical and
health care products and for general corporate purposes.
The Company believes that the level of financial resources available to it
is an important factor in its ability to achieve the marketing and distribution
of INSTEAD-TM- and in its ability to develop and eventually bring medical
products to market. The Company believes that the financial resources available
to it, together with the net proceeds from the Offering, will satisfy the
Company's working capital needs for at least 12 months. However, the Company may
require additional financing if unforeseen risks are encountered. If the Company
is unable to raise additional capital or arrange
25
<PAGE>
satisfactory working capital or additional equity financing, the Company may be
unable to complete the distribution of INSTEAD-TM- into the full United States
market. Additional financings 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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for the
Company beginning July 1, 1996. The standard encourages, but does not require,
companies to recognize compensation expense of grants for stock, stock options
and other equity instruments to employees based on fair value accounting rules.
SFAS No. 123 requires companies that choose not to adopt the new fair value
accounting rules to disclose pro forma net income and earnings per share under
the new method. The Company will continue to apply APB opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share in its annual financial
statements.
26
<PAGE>
BUSINESS
GENERAL
Ultrafem, Inc. was formed to design, develop and manufacture products based
upon its proprietary and patented SoftCup Technology to address women's health
care needs. The SoftCup Technology is a physical barrier-type vaginal device
designed to enhance the comfort, functionality and effectiveness of products
designed for women in the areas of feminine protection, contraception, the
prevention of STDs and the treatment of vaginal infections. The commercial
products which will employ the SoftCup Technology will be disposable, single
use, universal size and made from a soft, inert, thermoplastic material which
becomes more pliable at body temperature and molds to fit the individual user's
anatomy.
FEMININE PROTECTION PRODUCT -- INSTEAD-TM-
Management believes that INSTEAD-TM- represents one of the most significant
technological developments for feminine protection since the introduction of the
first commercial disposable tampon in 1933. INSTEAD-TM- differs from other forms
of feminine protection currently on the market in that it collects, rather than
absorbs, menstrual fluid. The Company believes that the unique design of
INSTEAD-TM- provides several distinct benefits over currently available forms of
feminine protection, including increased comfort, improved performance, reduced
health concerns and freedom to engage in most physical (including sexual)
activities during menstruation. The Company has obtained FDA clearance to market
INSTEAD-TM- in the United States. INSTEAD-TM- may also be marketed in each of
Belgium, Canada, Denmark, Finland, France, the Netherlands, Spain, Sweden,
Switzerland and the United Kingdom subject to compliance with applicable
international labeling laws and United States export requirements.
The Company initiated the launch of INSTEAD-TM- in the Fall of 1996 in the
Pacific Northwest, a region which the Company estimates represents approximately
8% of United States households and includes the major markets of San Francisco,
Seattle and Portland. The Company intends to introduce INSTEAD-TM- in stages
into additional significant geographic regions with full national distribution
anticipated to be achieved over a three year period, which may be accelerated or
delayed depending upon various factors including market acceptance by retailers
and consumers, and the availability of additional financing. The Company has
conducted market research and consumer use testing which indicate significant
consumer interest in INSTEAD-TM-. The Company intends to distribute INSTEAD-TM-
principally through supermarkets and drug stores. See "Risk Factors -- Inherent
Limitation of Market Research and Consumer Use Testing," "-- Need for Additional
Financing for Unforeseen Risks," "Business -- Product Testing" and "-- Strategy
and Plan of Operations."
Management estimates that the domestic and international feminine protection
markets in developed countries are in excess of $9 billion annually. The United
States market for feminine protection products such as tampons and pads
generates approximately $1.8 billion in annual revenues (based on a 1995 report
by A.C. Nielsen). Approximately 58 million women between the ages of 18 and 54
use feminine protection products in the United States. Approximately 63% of
menstruating women in the United States use tampons exclusively or in
combination with pads (based on 1996 Simmons Market Research Bureau). The
European market for feminine protection products generates approximately $2.9
billion in annual revenues (based on a 1995 report by A.C. Nielsen) with an
estimated 105 million women between the ages of 18 and 54 using feminine
protection products. Other developed markets, including Canada, Latin America,
Mexico and Asia (other than India and China) represent a combined population in
excess of 200 million potential users.
MEDICAL PRODUCT APPLICATIONS
Ultrafem intends to develop additional applications of the SoftCup
Technology, for vaginal delivery of agents for use in contraception, the
prevention of STDs, and the treatment of vaginal infections. The Company's
initial product under development is a contraceptive which combines the SoftCup
Technology with the BufferGel Technology, which is licensed by the Company for
vaginal use on a worldwide basis. The BufferGel Technology was invented by
scientists associated with Johns Hopkins
27
<PAGE>
with whom the Company has previously conducted research. The Company has entered
into a research and development agreement with ReProtect, a company founded by
these scientists which will continue the investigation and development of
medical applications of the SoftCup Technology.
Subsequent to the IPO, the FDA allowed an IND application permitting the
BufferGel Technology to enter Phase I clinical trials to test its use as a
vaginal microbicide for the prevention of AIDS and other STDs. These Phase I
clinical trials are currently scheduled to commence in December 1996 and are
being funded by HIVNET, a unit of the NIH. The Company plans to begin clinical
trials of its contraceptive product upon completion of the Phase I clinical
trials of the BufferGel Technology. A portion of these clinical trials may be
funded by the net proceeds of the Offering. In order to achieve this timetable,
the Company will need to complete the development of the contraceptive product
by combining the SoftCup Technology and the BufferGel Technology. There can be
no assurance, however, that any of the foregoing goals or timetables can be met,
or that any of the clinical trials will demonstrate the necessary degree of
safety and effectiveness required for FDA pre-market approval. See "Risk Factors
- -- Dependence on Single Product," "-- Risks Associated with Research and
Development for Other Applications of the SoftCup Technology" and "Business --
Other Potential Applications of the SoftCup Technology."
The United States market for contraceptive products such as condoms, oral
contraceptives, diaphragms and implantable contraceptives generates
approximately $2 billion in annual revenues (based on Theta Corporation, 1994).
Based on the population of women between the ages of 18 and 54, estimated to be
in excess of 300 million women in Europe and other developed markets, and
assuming that the frequency of use of contraceptive products is less than that
in the United States, management estimates the international markets for
contraceptives to be approximately $6 billion annually outside the United
States. Additionally, at least 330 million new cases of STDs occur each year
throughout the world (World Health Organization, 1995), indicating a significant
market for a STD prevention product.
STRATEGY AND PLAN OF OPERATIONS
The Company's business strategy is to develop and market proprietary
products based on its patented SoftCup Technology directed at high potential,
underserved segments of the women's health care market. The key elements of this
strategy are to (i) continue the launch of INSTEAD-TM- in the United States,
(ii) expand the Company's manufacturing capabilities, (iii) develop and submit
for FDA clearance or pre-market approval products based upon the SoftCup
Technology for the medical product arena and (iv) pursue strategic alliances
with multi-national consumer product and pharmaceutical companies for marketing,
sales and distribution.
The Company intends to market INSTEAD-TM- as an innovative alternative to
tampons and sanitary napkins. The Company intends to introduce INSTEAD-TM- in
stages into significant geographic regions with full national distribution
anticipated to be achieved over a three year period, which may be accelerated or
delayed depending upon various factors including market acceptance by retailers
and consumers, and the availability of additional financing. The Company
commenced initial regional distribution of INSTEAD-TM- in the Pacific Northwest
in the Fall of 1996, including the major markets of San Francisco, Seattle and
Portland. The Company believes that the financial resources available to it,
together with the net proceeds of the Offering, will satisfy the Company's
working capital needs for at least 12 months. Distribution in foreign markets
could occur simultaneously, provided an appropriate strategic partner is
identified. No assurance can be given that the foregoing goals or timetables can
be met. See "Risk Factors -- Need for Additional Financing for Unforeseen
Risks."
The Company intends to develop a contraceptive product and to simultaneously
develop additional applications of the combination of the SoftCup Technology
with the BufferGel Technology for treatment of vaginal infections and topical
and systemic therapies. The Company plans to begin clinical trials of a
contraceptive product upon completion of the Phase I clinical trials relating to
use of the BufferGel Technology as a vaginal microbicide for the prevention of
AIDS and other STDs. These Phase I clinical trials, which are currently
scheduled to begin in December 1996, are being funded by
28
<PAGE>
HIVNET. Any introduction of new products would be dependent on individual
product development, obtaining regulatory clearances, the confirmation of the
commercial viability of any such product and the development of strategic
partnerships to support international market penetration. See "Risk Factors --
Risks Associated with Research and Development of Other Applications of the
SoftCup Technology" and "Business -- Other Potential Applications of the SoftCup
Technology."
MARKETING AND SALES
The Company is marketing INSTEAD-TM- as an innovative alternative to
existing feminine protection products, including tampons and sanitary napkins.
When the marketing campaign is expanded into the full United States market, it
will be directed specifically at the Company's target consumer audience of
approximately 58 million women. See " -- Feminine Protection Market -- Domestic
Market." The Company, in conjunction with Bozell Worldwide, Inc., a leading
multi-national advertising and marketing communications company, has developed
detailed plans integrating consumer advertising, professional advertising,
consumer research, professional and consumer public relations, and direct
marketing. See "Certain Relationships and Related Party Transactions."
The Company has implemented marketing programs directed at the consumer
target audience, the professional target audience and the retail trade. Plans
for the consumer target audience include a multimedia consumer advertising
campaign comprised of television, print and the Internet. Product sampling and
couponing via mail, advertising, public relations and print are also being
utilized. To date, all marketing programs have been substantially directed to
the Pacific Northwest. The Company intends to increase marketing to other
geographic regions as the national rollout of INSTEAD-TM- continues.
The professional target audience is defined as Obstetrician/Gynecologists,
Obstetrician/Gynecologist Nurses and Pharmacists. Plans for a professional
campaign have been formulated and include presentations at scientific meetings,
education for health and fitness organizations, by-lined articles in
professional journals, brochures for distribution through physicians' offices as
well as advertising in professional journals and through direct mail. The first
by-lined article ("Latest Developments in Menstrual Protection") appeared April
15, 1996 in CONTEMPORARY OB/GYN and was authored by Richard M. Soderstrom, M.D.,
a member of the Company's Scientific Advisory Board.
The Company intends to distribute INSTEAD-TM- principally through
supermarkets and drug stores. See " -- Strategy and Plan of Operations."
Management believes that this marketing approach should enable it to compete
effectively for sales and shelf space with its larger, better capitalized
competitors. The Company has retained Meridian to formulate selling strategies
and implement sales plans by trade channel and key accounts. Meridian will
provide the sales management organization which will supervise a broker network
and which will develop trade promotion plans and introductory sales
presentations for the initial introduction of INSTEAD-TM- into the United States
market. The fees for such services are currently $42,500 per month plus
additional fees for special projects requested by the Company. The Company
expects that this amount will increase in the future as INSTEAD-TM- is
introduced into additional geographies. Ultrafem has hired Morgan & Sampson
Pacific, a leading Health and Beauty Aid broker in the Northwest, as the broker
for INSTEAD-TM- in the Pacific Northwest. The use of brokers is predominant in
the Health and Beauty Aid business. Management believes that Morgan & Sampson
Pacific is capable of being the broker representing Ultrafem in as much as 25%
of the United States market. Morgan & Sampson Pacific is compensated on a
commission basis, based on a percentage of sales of INSTEAD-TM-, as well as
bonus compensation based on meeting certain sales goals. Sales calls in the
Pacific Northwest to date have resulted in commitments from retailers which
account for more than 75% of ACV (all commodity volume) in the food and drug
classes of trade. These include commitments for in-store merchandising and
displays, on shelf dates, and desired shelf positioning.
There can be no assurance that the Company's marketing plans and strategies
will be successfully implemented. See "Risk Factors -- Marketing Risks;
Uncertainty of Consumer Acceptance" and " -- Risks Associated with Potential
Competitive Response."
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<PAGE>
The Company works with an array of outside marketing and sales professionals
who are supporting the launch of INSTEAD-TM-. The Company's in-house marketing
and sales professionals both supervise and coordinate the Company's use of
outside professionals. The Company currently plans to continue to outsource a
significant portion of its marketing and sales activities, since outside
professionals contribute significant and diverse skills, knowledge of trade, and
marketing and sales experience to the Company, at a cost which the Company could
not currently provide in-house.
FEMININE PROTECTION MARKET
BACKGROUND
The menstrual cycle normally begins between the ages of 12 and 13 and
continues to menopause, which generally occurs between the ages of 46 and 54.
The cycle averages 28 days, with the normal period lasting from five to six
days. The period begins with one to three days of heavy flow and then tapers to
a daily light flow over several more days.
Some women use either tampons or sanitary napkins on an exclusive basis.
Many women use both tampons and sanitary napkins because there is a general
dissatisfaction associated with the use of any single product. Management
believes that INSTEAD-TM- provides women with significant advantages over the
currently available feminine protection products and expects to attract women
that use both sanitary napkins and tampons.
INSTEAD-TM- is a new product and women will need to become accustomed to
using it. Some women may find digital insertion unappealing. INSTEAD-TM-, like
certain other vaginal products, is not recommended for women who have had toxic
shock syndrome ("TSS"), use an IUD, or have anatomical abnormalities.
INSTEAD-TM- also should not be used immediately after childbirth. INSTEAD-TM- is
neither flushable nor biodegradable.
DOMESTIC MARKET
The United States feminine protection product market has grown approximately
11% from 1992 to 1995, with annual revenues increasing from approximately $1.6
billion in 1992 to approximately $1.8 billion in 1995. In 1995, the market was
divided between sanitary napkins, with a market share measured in dollars of
62%, and tampons, with a market share measured in dollars of 38%.
<TABLE>
<CAPTION>
($MILLION) % OF ($MILLION) % OF
PRODUCT TYPE 1992 MARKET SHARE 1995 MARKET SHARE
- ------------------------------------------------------------ ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Sanitary Napkins............................................ $ 941 59% $ 1,084 62%
Tampons..................................................... 643 41 677 38
----------- --- ----------- ---
Total................................................... $ 1,584 100% $ 1,761 100%
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
- ------------------------
Source: A.C. Nielsen
Management believes approximately 58 million women between the ages 18 and
54 use feminine protection products and represent the Company's target user
group in the United States domestic market. Based on the Company's market
research, management expects to ultimately generate trial of INSTEAD-TM- by
approximately 15-17 million women in this target audience. There can be no
assurance that INSTEAD-TM- will be tried by such number of women, or that such
women will remain as users of INSTEAD-TM-.
30
<PAGE>
EUROPEAN AND OTHER DEVELOPED MARKETS
The European market for feminine protection products generated approximately
$2.9 billion in revenues in 1995, which represents a 7.5% increase over the
prior two years (based on 1995 Nielsen). According to such report, pantyliners
and pads had a 76% market share and tampons had a 24% share.
<TABLE>
<CAPTION>
($MILLION) % OF ($MILLION) % OF
PRODUCT TYPE 1993 MARKET SHARE 1995 MARKET SHARE
- ------------------------------------------------------------ ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Pantyliner.................................................. $ 424 16% $ 483 17%
Towels (Pads)............................................... 1,638 60 1,739 59
Tampons..................................................... 643 24 688 24
----------- --- ----------- ---
Total................................................... $ 2,705 100% $ 2,910 100%
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
- ------------------------
Source: A.C. Nielsen
Management believes approximately 105 million women between the ages of 18
and 54 use feminine protection products in Europe and represent the Company's
target user group in this market.
Other developed markets, including Canada, Latin America, Mexico and Asia
(other than India and China) present a combined population in excess of 200
million potential users.
MANUFACTURING
The Company has developed a patent pending process for manufacturing
INSTEAD-TM-. Custom-designed, state-of-the-art process equipment is essential to
the Company's manufacturing strategy. Management has collaborated with several
equipment manufacturers to engineer the necessary equipment to fully automate
the manufacturing process. In October 1995, the Company retained Remmele
Engineering, Inc. to design, build and install equipment for the first
semi-automated line capable of producing approximately 4 million units per month
on a three shift basis to support start-up production. The Company has ordered a
second semi-automated line and a fully automated line. The Company believes that
its manufacturing capacity will be sufficient to meet consumer demand. To
commercialize INSTEAD-TM- successfully, the Company will have to increase the
number of units it can produce, reduce per-unit manufacturing costs and achieve
the high-quality standards required. See "Risk Factors -- Lack of Manufacturing
Experience; Need to Achieve Economies of Scale and Limited Manufacturing
Resources."
Subsequent to the IPO, the Company entered into a lease for manufacturing
and office space and remodeled the manufacturing space principally to create the
controlled environment module which will secure the manufacturing equipment. The
piece of special equipment to manufacture the product, which is called the
thermoforming line, completed high volume testing at Remmele Engineering, Inc.
in St. Paul, Minnesota and has been installed at the Ultrafem Montana facility
and is producing product for the Fall 1996 launch of INSTEAD-TM-. The flow
wrapper machine that will put INSTEAD-TM- into individual "intimate wraps" and
the cartoning machine that will put INSTEAD-TM- into 6, 16, and 24 count cartons
are also in place. In June 1996 the Company commenced manufacturing quantities
of INSTEAD-TM- for the commercial market, and estimates that it has produced an
aggregate of approximately 2.2 million units of INSTEAD-TM- through August 14,
1996.
The Company has developed thermoplastic formulations which are proprietary
to the Company. They are permeable to many commercially established drugs and
are easily welded to each other and to other delivery components. Management
believes the performance of these formulations in combination with the
manufacturing process is an important component of developing a practical, low
cost production process. See "-- Patent Status and Patent Applications;
Proprietary Technology."
OTHER POTENTIAL APPLICATIONS OF THE SOFTCUP TECHNOLOGY
The SoftCup Technology has significant potential medical and health care
applications. Management plans to develop commercial applications of the SoftCup
Technology to be used as a vaginal drug
31
<PAGE>
delivery system because, by virtue of direct contact with vaginal mucous
membranes, the SoftCup Technology can provide an easy and direct method for
topical and systemic vaginal drug treatments. The Company believes that these
products have significant commercial applications for contraception, prevention
of STDs, treatments of vaginal infections and topical and systemic therapies.
Under a research agreement, which expired by its terms on June 30, 1993,
Johns Hopkins investigated using the SoftCup Technology as a delivery system for
monoclonal antibodies and other agents as protection against pregnancy and STDs.
The laboratory experiments conducted at Johns Hopkins indicated that the SoftCup
Technology can deliver the BufferGel both to the surface of the cervix and to
the lumenal surfaces of the vagina. Dr. Richard A. Cone and Dr. Kevin J. Whaley,
who are affiliated with Johns Hopkins, and along with Dr. Thomas Moench,
previously conducted research for the Company in connection with the research
agreement with Johns Hopkins. These individuals formed ReProtect which will
continue the investigation of using the SoftCup Technology as a vaginal drug
delivery system of agents for contraception, prevention of STDs, treatments of
vaginal infections and for topical and systemic therapies. Dr. Richard A. Cone
is a member of the Company's Board of Directors. See "Management -- Directors
and Executive Officers." Dr. Thomas R. Moench, formerly an Assistant Professor
of Medicine at Johns Hopkins, is an expert in virology, molecular biology and
monoclonal antibody production. From 1984 through 1993, he served on the faculty
of Johns Hopkins as a consultant physician in Infectious Diseases. He developed
an animal model for studying the vaginal and rectal (transmucosal) transmission
of an AIDS-like disease in cats caused by feline immunodeficiency virus. Dr.
Kevin J. Whaley, an Associate Research Scientist in Biophysics and an Adjunct
Faculty member, Population Dynamics/Reproductive Biology, Johns Hopkins, is an
expert on monoclonal antibodies and vaccines that protect against both pregnancy
and disease and on vaginal drug delivery.
Two of the scientists who formed ReProtect invented the BufferGel
Technology, which ReProtect has licensed to the Company. The Company believes
that this BufferGel Technology, when combined with the patented SoftCup
Technology, will provide enhanced protection against pregnancy and STDs as well
as enhanced treatments for vaginal infections. The BufferGel Technology has the
ability to maintain the normal vaginal pH balance while killing sperm and most
STD pathogens. The mechanical barrier action of the SoftCup Technology combined
with the BufferGel Technology may fill the needs for an effective woman
controlled prophylactic contraceptive as well as vaginal anti-infective. The NIH
has granted $2 million in contracts for the research and development of the
BufferGel Technology for contraception and the prevention of AIDS and other
STDs. There can be no assurance, however, that ReProtect will receive the
benefit of the entire $2 million under the NIH contracts.
The FDA has allowed an IND application permitting the BufferGel Technology
to enter Phase I clinical trials which are currently scheduled to begin in
December 1996. These Phase I clinical trials are being funded by HIVNET, a unit
of the NIH, to test the use of the BufferGel Technology as a vaginal microbicide
for the prevention of AIDS and other STDs. The Company plans to begin clinical
trials of a contraceptive product upon completion of the Phase I clinical
trials. In order to achieve this timetable, the Company will need to complete
development of the contraceptive product by combining the SoftCup Technology and
the BufferGel Technology. The Company will simultaneously develop additional
applications of the combination of the SoftCup Technology and the BufferGel
Technology, for treatment of vaginal infections and topical and systemic
therapies with a view towards seeking FDA approval to enter clinical trials for
such applications. The Company also intends to develop other vaginal drug
delivery products, including for the prevention of STDs. There can be no
assurance, however, that any of the foregoing goals or timetables can be met, or
that any of the clinical trials will demonstrate the necessary degree of safety
and effectiveness required for FDA pre-market approval. See "Risk Factors --
Dependence on Single Product" and "-- Risks Associated with Research and
Development for Other Applications of the SoftCup Technology."
ReProtect expects to conduct research at Johns Hopkins in accordance with a
ten year License, Research and Development Agreement between the Company and
ReProtect (the "ReProtect Agreement") under which the Company will provide
ReProtect at least $1 million annually for research.
32
<PAGE>
ReProtect is party to a research agreement with Johns Hopkins which expires
August 31, 1999. In addition, ReProtect also has an independent research
facility and could conduct research independent of Johns Hopkins by upgrading
its current facilities. The ReProtect Agreement provides the Company with an
exclusive, worldwide license for the use of the BufferGel Technology coupled
with the SoftCup Technology, for which ReProtect received a one time payment of
$100,000, a royalty of $.01 per unit of the product sold and ten and one-half
year options to purchase 125,000 shares of Common Stock at an exercise price of
$8.00 per share and 100,000 shares of Common Stock at an exercise price of $6.00
per share, exercisable upon the attainment of certain milestones. In addition,
ReProtect has granted the Company a worldwide license for vaginal use of the
BufferGel Technology without the SoftCup Technology, for which ReProtect
received a one time payment of $100,000, options to purchase 175,000 shares of
Common Stock at an exercise price of $8.00 per share, exercisable upon the
attainment of certain milestones, and a royalty of either 5% or 3% (depending on
whether a patent has been issued) of net sales of the BufferGel Technology
(without the SoftCup Technology). The ReProtect Agreement contains the parties'
agreement to negotiate in good faith to extend the term, as well as other
customary provisions in agreements of this type, including provisions relating
to noncompetition, confidentiality and early termination of the agreement and
the licenses therein under certain circumstances.
The Company plans to continue pursuing other potential applications of the
SoftCup Technology. Beyond the potential applications discussed above, the
ongoing longer-range research and development with the ReProtect research team
will focus on the development of vaginal delivery of monoclonal antibodies
against sperm and STD pathogens. Management believes that these natural
protective agents will facilitate a new generation of products for vaginal
protection and therapy. The Company will require FDA clearance or pre-market
approval to market different applications of the SoftCup Technology in the
United States. See "Risk Factors -- Necessity of Regulatory Clearances to
Market."
In order to facilitate the development of other applications of the SoftCup
Technology, the Company currently plans to hire an executive to coordinate and
advance medical product development. The Company is conducting a search for such
executive and has identified several potential candidates.
STRATEGIC ALLIANCES
The Company is seeking domestic and international strategic alliances with
multinational pharmaceutical and/or consumer product companies to support the
launch of INSTEAD-TM- into international markets and to support the development
of other commercial applications of the SoftCup Technology. In addition,
following the successful introduction of INSTEAD-TM- into the United States
market, the Company will consider entering into an alliance with a strategic
partner who could potentially act as an ongoing distribution partner for the
full United States market. The Company believes that forming strategic alliances
with multinational pharmaceutical and/or consumer product companies will enhance
both its ability to successfully bring INSTEAD-TM- to international markets and
its capability to develop new applications for the SoftCup Technology, such as
contraception and vaginal drug delivery applications. See "Risk Factors -- Risks
Associated with Research and Development of Other Applications of the SoftCup
Technology."
The Company has retained a number of consultants specializing in health care
and business strategy to assist it in formulating and implementing the strategic
alliance strategy. The Company and its consultants have contacted a selected
list of target companies as potential strategic partners and are currently
engaged in preliminary discussions regarding formation of strategic alliances
with companies in both the United States and in Europe.
PRODUCT TESTING
The Company has completed extensive laboratory testing of INSTEAD-TM- for
the purpose of satisfying the FDA's safety requirements. The Company has
conducted biocompatibility, toxicity and microbiological testing both IN VITRO
(outside a living organism) and IN VIVO (inside a living organism).
33
<PAGE>
Management believes, based on the non-absorbent nature of INSTEAD-TM- and the
results of tests performed by two independent laboratories on the materials of
which INSTEAD-TM- is made and human clinical trials, that INSTEAD-TM- is safe.
For a discussion of potential product liability issues, see "Risk Factors --
Product Liability; Possibility of Insufficient Insurance Coverage."
The tests for toxicity and biocompatibility were conducted by the Company
through independent laboratories in compliance with good laboratory practice
("GLP") regulations. Management believes the results of these tests demonstrate
INSTEAD-TM-'s safety. Arent Fox Kintner Plotkin & Kahn, FDA regulatory counsel
to the Company, has advised the Company that such results, which have been
submitted to the FDA, satisfy current FDA safety testing requirements for this
type of product.
The microbiological testing that was conducted demonstrated that INSTEAD-TM-
did not alter the growth of bacteria normally present in the vaginal micro flora
and did not cause the production of Toxic Shock Syndrome Toxin-l. All studies
were conducted by an independent laboratory in accordance with GLP regulations.
All test results described herein were submitted to the FDA in connection with
the 510(k) notification relating to INSTEAD-TM-. See "-- Regulatory Status."
Subsequent to the IPO, the Company completed human clinical test studies to
determine the safety of longer wear times of INSTEAD-TM-. While the Company did
not believe it necessary to conduct clinical testing to increase the maximum
wear time of INSTEAD-TM- since the devices to which it was found substantially
equivalent by the FDA either do not have a maximum wear time or can be worn for
at least 12 to 14 hours, if not longer, the Company conducted a clinical study
to support the safety of the 12 hour wear time. The study was conducted by The
Crucible Group of Atlanta, Georgia, following review by an Institutional Review
Board, and was analyzed by MTC-BRI International, Inc. ("MTC-BRI") of Rockville,
Maryland. The study evaluated the effect of use of INSTEAD-TM- on the vaginal
micro flora in approximately 100 women for 8, 12, and 24 hours. The
investigators concluded that increasing the wear time to 12 or even 24 hours
does not result in increased colonization by the etiologic agent of TSS, does
not lead to increased colonization by pathogens that cause bacterial vaginosis,
does not lead to increased colonization by E. COLI, the most common agent
causing urinary tract infections, and does preserve the normal
LACTOBACILLUS-predominant vaginal flora. In response to the results of such
testing the Company increased the recommended wear time from 8 to 12 hours. See
"Risk Factors -- Necessity of Regulatory Clearances to Market."
COMPANY-SPONSORED RESEARCH
QUANTITATIVE CONCEPT AND ATTITUDE RESEARCH
In September 1991, the Company engaged CLT Research Associates, a market
research firm, to conduct a feminine protection product survey to help the
Company evaluate the commercial viability of INSTEAD-TM-. Such survey was
conducted in October/November 1991 in 20 metropolitan markets among a total of
750 women aged 18-45 (all of whom used feminine protection products). The major
findings of this study indicated that:
CONSUMER NEED -- Approximately half of all women surveyed were
dissatisfied with existing feminine protection products due in part to
problems of comfort, performance and safety. The Company believes that
these problems are addressed by INSTEAD-TM-.
POSITIONING -- INSTEAD-TM-'s perceived benefits matched the features
women desired in a feminine protection product. This finding validates
the Company's plans to position INSTEAD-TM- as the innovative
alternative in feminine protection based on improved comfort and
performance.
TRIAL -- One out of three women indicated they would purchase
INSTEAD-TM- based on exposure to a concept statement and seeing the
actual product. Almost half (48%) of the women indicated that they would
expect INSTEAD-TM- to cost more than what they now spend per period for
feminine protection, and 42% of the women would expect INSTEAD-TM- to
cost the same as what they now spend.
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<PAGE>
CONCEPT POSITIONING RESEARCH
In March 1994, The Heller Research Group, a market research firm engaged by
the Company, conducted three concept positioning tests in 10 metropolitan areas
among a combined total of 300 women aged 21-49 (all of whom used feminine
protection products currently on the market). The results indicated that there
is considerable interest in INSTEAD-TM-, with over one-third of the women
indicating willingness to try INSTEAD-TM- after reviewing the concept statement
and seeing the actual product. The research indicated that it is possible that
INSTEAD-TM- can be priced at a premium vis-a-vis tampons. On average,
respondents indicated a willingness to purchase INSTEAD-TM- at a price which
represents a 16% premium to tampons.
CONSUMER USE TESTING
During the nine-month period of November 1991 through July 1992, INSTEAD-TM-
was use tested among a total of 300 women, ages 18-55, at seven different
geographical locations in the United States. Respondents were users of sanitary
napkins and tampons. Each woman used INSTEAD-TM- on a trial basis through three
consecutive menstrual cycles and, in total, over 13,000 units were used.
The research concluded that approximately 80% of the women were interested
in continuing to use INSTEAD-TM-, with approximately 54% of the women indicating
they would be likely to use
INSTEAD-TM- as their primary method of feminine protection in the future. The
Company believes based on this research that the remaining 26% of these women
would be likely to use INSTEAD-TM- for occasional use. Pricing was not a factor
which was considered in this usage test.
The Company is not aware of any other consumer research regarding the
satisfaction of consumers with currently available feminine protection products.
CONSUMER COMMUNICATION QUALITATIVE TESTING
Commencing August 1995, consumer focus groups, consisting of 600 women
across the United States, were conducted to finalize consumer communication with
respect to advertising, packaging and user instructions. As a result of these
focus groups, the Company determined to include the twelve hour wear time usage
claim in its advertising, public relations and packaging.
PATENT STATUS AND PATENT APPLICATIONS; PROPRIETARY TECHNOLOGY
A United States patent with respect to the SoftCup Technology (for use for
feminine protection during menstruation either with or without vaginal drug
delivery) was issued on March 22, 1994. Foreign patent applications
corresponding thereto were filed by the Company in Australia, Belgium, Brazil,
Canada, Denmark, France, Germany, Italy, the Netherlands, Spain, Sweden,
Switzerland and the United Kingdom.
The Company has in the past and will continue to pursue in the future patent
protection for its technology and products that are patentable. The Company's
original patent application was filed by Ms. Contente and subsequently assigned
to the Company. The patent contains claims covering the use of the SoftCup
Technology for menstruation either with or without vaginal drug delivery. The
Company has filed a United States continuation application with additional
claims on other aspects of the SoftCup Technology. In addition, the Company has
filed provisional patent applications in the United States on the method of
manufacturing the SoftCup Technology. A provisional patent application provides
a priority filing date which may be relied on for one year by regular United
States and foreign applications. Period of pendency of the provisional
applications is not included in the twenty year United States patent term.
Ultrafem intends to follow up its provisional applications with regular
applications within such one year period. To further protect its technology, the
Company intends to file additional patent applications on inventions relating to
processing technology, specific vaginal drug delivery systems and other new
product applications.
The Company relies on trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company requires its employees and consultants and other advisors
to execute confidentiality agreements. There can be no assurance that these
agreements will provide meaningful protection for the Company's trade secrets
35
<PAGE>
in the event of unauthorized use or disclosure of such information or that
others will not independently develop substantially equivalent proprietary
information and manufacturing techniques or otherwise gain access to the
Company's trade secrets.
TRADEMARKS
The Company registered trademarks with the United States Patent and
Trademark Office for "SoftCup" and "Ultrafem" in 1992 and 1993, respectively.
The Company has also filed an application to register the trademark
"INSTEAD-TM-" in the United States, Argentina, Australia, Brazil, Canada, Chile,
India, Korea, Mexico, Pakistan, Panama, Paraguay, Philippines, Uruguay, Russia,
Switzerland, Taiwan, Venezuela, and the European Community. The INSTEAD-TM- mark
was published for opposition in the United States on April 16, 1996; no
oppositions were filed during the 30 day opposition period. The Company believes
the INSTEAD-TM- mark will be registered in the United States in January 1996 or
shortly thereafter. In addition, the Company is pursuing a trademark application
in Turkey.
REGULATORY STATUS
Government regulation, both domestic and foreign, will be a significant
factor in manufacturing and marketing INSTEAD-TM-. The lengthy process of
seeking FDA and foreign government clearance and the ongoing process of
complying with applicable federal statutes and regulations require expending
substantial resources.
In 1993, the FDA cleared the Company's pre-market notification submission
under Section 510(k) of the FDCA. The FDA's clearance of this notification
enables the Company to market INSTEAD-TM- in the United States and to export it
overseas subject to the general controls provisions of the FDCA. Subsequent to
FDA clearance of this notification submission, modifications, which the Company
believes to be minor, were made to the formulation of certain materials used in
INSTEAD-TM- to improve the manufacturing process. An applicable FDA regulation
requires the filing of a new 510(k) notification when, among other things, there
is a major change or modification in the intended use of the device, or a change
or modification in material, chemical composition or manufacturing process, that
could significantly affect the device's safety or effectiveness. A device
manufacturer is responsible for making the initial determination as to whether a
proposed change to a cleared device or its intended use necessitates the filing
of a new 510(k) notification. The Company conducted a full range of
toxicological testing subsequent to the changes in materials, including
laboratory tests to determine the effect on the vaginal micro flora and on the
production of the toxin which causes TSS. The results of the studies confirmed
that these changes did not affect the safety of the product. As a result, the
Company, and its regulatory counsel, do not believe a new 510(k) notification
was necessary to make this change. The Company's rationale and support for the
change are in records as required by FDA GMP regulations and are available for
inspection by the FDA.
In April 1994, the FDA informally proposed a guidance document pursuant to
the above-described regulation (which was revised in August 1995) that would
require submission of a new 510(k) notification when certain changes are made in
medical devices such as INSTEAD-TM-, including changes in materials and
labeling. If this proposal becomes effective in its current proposed form, a
resubmission of the 510(k) notification of INSTEAD-TM- may be required. In
addition, any product with a 510(k) notification cleared by the FDA and its
manufacturer are subject to continuing regulatory review and the FDA has the
authority to, among other things, order or request restrictions on the
distribution of products or the withdrawal of products from market even after
clearance of a 510(k) submission is obtained. See "Risk Factors -- Necessity of
Regulatory Clearances to Market."
The Company has also decided to label INSTEAD-TM- with a 12 hour maximum
wear time. The labeling for INSTEAD-TM-, as cleared by the FDA in the original
510(k) notification, included an 8 hour maximum wear time. While the Company did
not believe it necessary to conduct clinical testing to increase the maximum
wear time since the devices to which INSTEAD-TM- was found substantially
equivalent by the FDA either do not have a maximum wear time or can be worn for
at least 12 to 14 hours, if not longer, the Company conducted a clinical study
to support the safety of the 12 hour wear time. See " --Product Testing." The
study was conducted by The Crucible Group of Atlanta, Georgia.
36
<PAGE>
The investigators concluded that increasing the wear time of INSTEAD-TM- to 12
or even 24 hours does not result in increased colonization by the etiologic
agent of TSS, does not lead to increased colonization by pathogens that cause
bacterial vaginosis, does not lead to increased colonization by E. COLI, the
most common agent causing urinary tract infections, and does preserve the normal
LACTOBACILLUS-predominant vaginal flora. Since there has not been a change in
the intended use of the product, and the Company's clinical studies have
demonstrated that the 12 hour maximum wear time is safe, and since the wear time
is similar to that for devices to which the product was found "substantially
equivalent" by the FDA, the Company does not believe a new 510(k) notification
is necessary to increase the maximum wear time to 12 hours. Prior to finalizing
the change in labeling, the Company met with the FDA on June 19, 1996. At that
meeting the results of the studies were discussed. The FDA requested that the
Company submit these results of its clinical testing, which the Company provided
on July 17, 1996. On October 25, 1996 the Company received a letter from the FDA
confirming that the Company could increase the wear time of INSTEAD-TM- to 12
hours without filing a new 510(k) notification. See "Risk Factors -- Necessity
of Regulatory Clearances to Market."
The Company's manufacturing facility in Missoula, Montana is subject to GMP
regulations which are promulgated by the FDA, international quality standards
and other regulatory requirements. The failure by the Company to comply with the
foregoing could adversely affect the Company's production and financial
condition.
The Company has obtained Canadian government acceptance to market
INSTEAD-TM- in Canada. INSTEAD-TM- may be marketed in each of Belgium, Denmark,
Finland, France, the Netherlands, Spain, Sweden, Switzerland and the United
Kingdom subject to compliance with applicable labeling laws and FDA requirements
concerning exports. Regulatory approvals or clearances are being pursued in
Argentina, Australia, Brazil, Germany, India, Italy, Mexico, Pakistan, Russia,
Saudi Arabia, Turkey, and the United Arab Emirates; however, there can be no
assurance that the Company will be able to comply with any such requirements.
The potential health care applications of the SoftCup Technology will
require FDA clearance or pre-market approval in accordance with the FDCA
applicable regulations. Although most of the potential uses do not incorporate
new chemical compounds, the Company will be required to submit applications for
each such use involving an already marketed drug, as a new form of delivery is
involved. Obtaining such approval or clearance can entail a lengthy process and
significant expense, including potential costs of clinical trials to demonstrate
safety and efficacy. See "Risk Factors -- Necessity of Regulatory Clearances to
Market."
In conjunction with developing other applications of the SoftCup Technology,
the Company has formulated a comprehensive regulatory strategy and has retained
MTC-BRI, an international contract research organization which specializes in
managing regulated health care products. MTC-BRI assists in determining that
potential products will meet applicable FDA requirements. Within MTC-BRI, the
project team for the Company is headed by Dr. David L. West who previously was
FDA Deputy Director, Office of Device Evaluation, Center for Devices and
Radiological Health.
GOVERNMENT REGULATION
Medical devices are regulated in the United States under the 1976 Medical
Device Amendments ("MDA") to the FDCA, and under pertinent implementing
regulations issued by the FDA. Every medical device in United States commercial
distribution is classified by the FDA as a Class I, II or III device. All three
classes require compliance with the general device controls of the MDA
(provisions governing establishment registration; product listing; adulteration;
misbranding; pre-market notification; notification of unreasonable risk; repair,
replacement or refund; recalls; device records and reports; and GMP
regulations). A Class II device must comply with such MDA general controls and
any applicable performance standard or other special controls promulgated by the
FDA. A Class III device must be clinically tested for safety and effectiveness
for its intended use(s) and obtain the
37
<PAGE>
FDA's approval of a pre-market approval application ("PMA") containing the
results of such tests before it can be marketed. Thereafter, such a device must
comply with the conditions of approval of the PMA and with the MDA general
controls.
Each new medical device product never before commercially distributed in the
United States is automatically deemed a Class III device requiring pre-market
approval, unless it can be demonstrated that it is substantially equivalent in
intended use, design, materials and/or technological characteristics to one or
more predicate medical devices that were on the market before the MDA enactment
date of May 28, 1976, thereby establishing that the new device is as safe and
effective as the predicate device. Such substantial equivalence is demonstrated
by a manufacturer in a 510(k) pre-market notification submission, which must be
filed with the FDA at least 90 days before the product's targeted date of first
commercial distribution. Marketing of the device is not allowed until the FDA
clears the 510(k) notification submission.
FDA clearance of a supplemental 510(k) submission is required before any
significant change can be made to an already-marketed device in design,
materials, chemical composition, energy source or manufacturing process that
could affect the product's safety or effectiveness. Where a 510(k) notification
submission is based on a predicate device that has been classified by the FDA in
Class III, the 510(k) submission must also include a certification that the
submitter has conducted a reasonable search for all data and information
relevant to the predicate device and the device for which 510(k) clearance is
sought, as well as a summary of all safety and effectiveness data for both
devices. A device cleared through the 510(k) process that is substantially
equivalent to a predicate Class III device for which the FDA ultimately
establishes a PMA requirement will eventually have to receive approval of its
own PMA to remain on the market, unless it is the fifth or subsequent device of
its kind that has been commercially distributed in the United States, in which
case no PMA is required.
Menstrual cups such as INSTEAD-TM- are classified as Class II medical
devices by the FDA pursuant to applicable FDA regulations. Submission and
clearance of a 510(k) notification, through a finding of "substantial
equivalence" is required under the FDCA to market a Class II medical device in
the United States. The FDA cleared the 510(k) notification for INSTEAD-TM- on
October 5, 1993.
The FDA has promulgated regulations establishing stringent GMP requirements
for all medical devices. The FDA conducts periodic inspections of manufacturing
plants to ensure compliance with these regulations. Failure of compliance can
result in regulatory action of the kinds stated below.
The FDA has statutory authority to institute civil administrative
proceedings or court enforcement actions against medical device manufacturers or
distributors for violations of applicable requirements of the MDA and FDA
implementing regulations. A finding of liability in an administrative proceeding
can result in the imposition of civil monetary penalties. Court enforcement
actions, involving seizure of products, injunction against continued
distribution of products or criminal prosecution, can result, respectively, in
destruction of products, orders against further distribution of products or
criminal fines if the FDA prevails. The FDA can also require the recall of an
already-marketed medical device when the agency believes that the product would
cause serious adverse health consequences or deaths if marketing were allowed to
continue.
Exports of medical devices manufactured in the United States are allowed if
the devices have satisfied applicable pre-market requirements and are not
adulterated or misbranded. Exports of medical devices manufactured in the United
States are allowed without prior FDA export approval if the product has
satisfied applicable pre-market approval or notification requirements and is not
adulterated or misbranded. An unapproved medical device manufactured in the
United States can also be exported to 23 "Tier 1" countries without prior FDA
export approval, if the device has valid marketing authorization in a "Tier 1"
country and the device complies with the laws of the importing country, subject
to notification to the FDA at the time of export. Exports of medical devices not
approved in the United States to non- "Tier 1" countries require prior FDA
approval. In addition, exports of unapproved medical devices manufactured in the
United States for export for clinical
38
<PAGE>
investigations in "Tier 1" countries or where marketing authorization is
imminent in a "Tier 1" country may be made without prior FDA approval, provided
that a notice is submitted to the FDA at the time of export.
COMPETITION
The market for feminine protection products is presently dominated by large
and well-financed companies which have substantially greater resources than the
Company. The Company believes that certain of such competitors have increased
their marketing efforts in response to the anticipated launch of INSTEAD-TM-.
Management believes INSTEAD-TM- has significant distinct benefits when compared
to other feminine protection products currently available and that, upon
introducing INSTEAD-TM-, the Company believes it will be the sole provider of
this type of feminine protection. For a discussion of certain risks related to
competition, see "Risk Factors -- Competition," "-- Risks Associated with
Potential Competitive Response," "-- Marketing Risks; Uncertainty of Consumer
Acceptance" and "-- Risks Inherent in Obtaining and Protecting Patents and
Proprietary Technology." In addition, the market for contraceptives and other
medical products is presently dominated by large and well-financed companies
which have substantially greater resources than the Company, and the ability of
the Company to compete in this area is dependent to a large extent on its
ability to successfully develop products, have such products cleared for market,
and the ability to manufacture any such products on a cost-efficient basis. See
"Risk Factors -- Risks Associated with Research and Development for Other
Applications of the SoftCup Technology."
RAW MATERIALS
INSTEAD-TM- is manufactured from a thermoplastic elastomer which is
available from a wide variety of domestic and international sources and is
currently supplied by Shell Chemical Company pursuant to a written sales
contract. Management has identified several sources of supply of raw materials
and believes such materials are readily available from such other sources. A
change in the supplier of a raw material would not require further FDA
clearance. See "-- Regulatory Status" and "Risk Factors -- Necessity of
Regulatory Clearances to Market."
PROPERTIES
The Company currently leases office space at 500 Fifth Avenue, Suite 3620,
New York, New York 10110 for its principal executive offices for a monthly base
rent of $5,610, and additional office space on a month to month basis for
approximately $2,000 per month. The lease expires in November 1997. The Company
has entered into a ten year lease for office space at 805 Third Avenue, New
York, New York for its principal office which provides for monthly base rent of
approximately $42,233 for the first two years, which increases to a maximum of
approximately $48,682 per month by the end of the term. The Company has entered
into a three and one-half year sublease for a portion of such space under which
pursuant to its terms the subtenant will pay approximately $13,000 per month.
Since May 1996, the Company has entered into leases on a minimum twelve month
basis for modular office space in Missoula, Montana, with rental payments of
$1,230 per month and $1,350 per month, respectively. The Company has also
entered into three year leases beginning in April 1996 and February 1996 for its
administrative office and manufacturing facility in Missoula, Montana at a
monthly rent of $2,345 and $6,500, respectively.
EMPLOYEES
As of September 30, 1996, the Company had 67 full-time employees. The
Company believes its relations with its employees are satisfactory. None of the
Company's employees are covered by a collective bargaining agreement or
represented by a collective bargaining unit.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company. The executive officers of the
Company are elected for a term of one year or until their successors are duly
elected and qualify; however, certain of the executive officers have employment
agreements which provide for longer terms of office. See "-- Employment
Agreements and Certain Agreements with Management."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John W. Andersen..................................... 60 President; Chief Executive Officer; Director and
Chairman of the Board of Directors
Audrey Contente...................................... 53 Executive Vice President and Founder; Director
Dori M. Reap......................................... 45 Senior Vice President of Finance and Administration;
Chief Financial Officer and Secretary
Tonya G. Hinch....................................... 33 Senior Vice President, Marketing and Sales
Gary Nordmann........................................ 54 Vice President, Operations
Wendell Guthrie...................................... 46 Director of Manufacturing
Richard A. Cone...................................... 60 Director
Joy Vida Jones....................................... 46 Director
Martin Nussbaum...................................... 49 Director
Charles D. Peebler, Jr............................... 60 Director
Barrie Zesiger....................................... 51 Director
</TABLE>
EXECUTIVE OFFICERS AND KEY PERSONNEL
JOHN W. ANDERSEN has been the Chairman of the Board, Chief Executive Officer
and President of the Company since July 1994. He has an extensive background in
consumer product management, including food, beverage and personal products. He
has been the Chief Executive Officer of five consumer companies over the past 20
years and has substantial experience in Japan and western Europe. From June 1993
until July 1994, Mr. Andersen was self-employed. For the period of 1990 to 1993,
Mr. Andersen was President and Chief Executive Officer of Johanna Dairies, a
subsidiary of John Labatt Limited with annual sales of approximately $1 billion.
From 1983 to 1989, he was President, Chief Executive Officer and Director of
Whitbread North America, Inc., a beverage subsidiary of Whitbread PLC with
annual sales of approximately $450 million. Prior to 1983, Mr. Andersen served
as Executive Vice President of Marriott Corporation, President and Chief
Executive Officer of Sonoma Vineyards, and Vice President of Norton Simon, Inc.
AUDREY CONTENTE is the Executive Vice President and a Director of the
Company, as well as the Founder of the Company and inventor of the SoftCup
Technology. Ms. Contente is responsible for manufacturing and product
development. Ms. Contente has served as a Director of the Company since its
formation in March 1990; as an Executive Vice President since July 1996; as a
Senior Vice President from July 1993 to June 1996; and as Senior Vice President
of Manufacturing and Product Development from November 1995 to June 1996. Ms.
Contente also served as Chairman of the Board of the Company from March 1990 to
July 1993, and Chief Executive Officer of the Company from May 1992 to July
1993. She has experience in marketing and sales, business development and
biomedical instrumentation. As a result of years of research in feminine hygiene
technology which led to the
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<PAGE>
ultimate design of the SoftCup Technology, Ms. Contente applied for a United
States patent and subsequently founded the Company. She began her career in
sales in 1976 with J.T. Baker Chemical Co. where she was responsible for selling
biomedical instrumentation and supplies. From 1980 to 1990 she was the principal
of Audrey Contente & Associates, a management consulting firm specializing in
strategic planning and market development projects. During this 10-year period,
she devoted substantial and continuous effort in researching, designing and
developing the SoftCup Technology and INSTEAD-TM-.
DORI M. REAP has been the Senior Vice President of Finance and
Administration and Chief Financial Officer of the Company since August 1, 1995.
She became Secretary of the Corporation in June 1996. She has been in senior
financial positions over the past 18 years in major consumer products companies
and has significant experience in finance, business planning and analysis,
restructuring and information systems. Ms. Reap was Chief Financial Officer of
The Franklin Mint in 1994. For the period of 1990 to 1993, Ms. Reap was Vice
President and Chief Financial Officer of Johanna Dairies, a subsidiary of John
Labatt Limited, with annual sales of approximately $1 billion. From 1978 to
1989, Ms. Reap worked for Frito Lay, Inc., a subsidiary of PepsiCo, Inc., in
successively senior positions and as Finance Director from 1985 to 1989.
TONYA G. HINCH joined the Company in November 1995 as the Senior Vice
President, Marketing and Sales of the Company. She has ten years of experience
marketing women's personal care and broad-based consumer products. Ms. Hinch
worked at Neutrogena from 1991 to 1995, last serving as General Manager of
Neutrogena Haircare. From 1987 to 1991, Ms. Hinch worked at Clairol,
specializing in new product development and last serving as Senior Marketing
Manager in New Products. From 1985 to 1987, Ms. Hinch was employed at Procter &
Gamble, last serving as an Assistant Brand Manager.
GARY NORDMANN joined the Company full-time in April 1996 as the Vice
President, Operations. He also served as a consultant to the Company from May
1994 to March 1996. He has had over 20 years experience in senior management
positions in consumer product companies with manufacturing operations. Mr.
Nordmann worked at Johanna Dairies, a subsidiary of John Labatt Limited, from
1991 to 1994 as Vice President, Finance and Administration, and at Whitbread
North America, Inc., a subsidiary of Whitbread PLC, as Executive Vice President,
Finance and Administration from 1983 to 1990. Mr. Nordmann worked for Marriott
Corporation, Inc., from 1981 to 1983, Mattel, Inc. from 1977 to 1981, PepsiCo
from 1972 to 1977, and S.C. Johnson & Son, Inc. from 1970 to 1972.
WENDELL GUTHRIE has been the Director of Manufacturing since March 1996 and
prior to that served as Vice President of Manufacturing for the Company since
July 1991. He has over 20 years of experience in all phases of manufacturing and
quality assurance with medical products, from design through manufacturing
engineering. From 1968 to 1991, he worked for American Dental Manufacturing
Company ("ADM"), an FDA registered manufacturer and distributor of dental
instruments and related products, as Quality Assurance Manager and later as Vice
President and Chief Operating Officer. During that time he also developed the
products for, and served as Vice President and Chief Executive Officer of, two
subsidiaries of ADM, Omnitech and DMD, manufacturers and distributors of
chemical disinfectants and direct mail professional dental products.
DIRECTORS
RICHARD A. CONE, a Director of the Company since 1994, has been a Professor
of Biophysics and Biology at Johns Hopkins since 1973. Dr. Cone trained in
Physics at the Massachusetts Institute of Technology and at the University of
Chicago (Ph.D. 1963). In 1979 he jointly received the Cole Award from the
Biophysical Society for discovering the fluid-like nature of cell membranes.
Since 1979 he has been pursuing research to develop improved methods for
protecting against STDs and unwanted pregnancy. He is an expert on the
protective properties of mucus secretions and the mechanisms by which antibodies
protect mucus epithelia against pathogens. He is Managing Director of ReProtect,
a research and development company he co-founded in 1993 with Thomas R. Moench
and Kevin J. Whaley to develop products that protect reproductive health.
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<PAGE>
JOY VIDA JONES, a Director of the Company since 1992, has practiced law for
the last nineteen years, having received a J.D. from New York University School
of Law (1976). She was a partner at Rogers & Wells when she left the firm in
1993 after 10 years of practice there. She has served since 1990 as a Trustee of
the Calvert Social Investment Fund, which made an investment in the Company.
Since June 1993, Ms. Jones has acted as a personal manager to musicians. She is
a Trustee of her alma mater, Sarah Lawrence College (B.A. 1971), as well as
several funds and societies.
MARTIN NUSSBAUM, a Director of the Company since 1996, has been a partner of
the law firm of Shereff, Friedman, Hoffman & Goodman, LLP since 1976. The
Company has retained Shereff, Friedman, Hoffman & Goodman, LLP in the past and
during the fiscal year. See "Certain Relationships and Related Party
Transactions" and "Legal Matters."
CHARLES D. PEEBLER, JR., a Director of the Company since 1995, is President
and Chief Executive Officer, as well as director, of Bozell, Jacobs, Kenyon &
Eckhardt, Inc. ("BJK&E"), the 14th largest marketing communications company in
the world. He also serves as Chief Executive Officer of Bozell Worldwide, Inc.,
BJK&E's major advertising agency division. Mr. Peebler joined Bozell Worldwide,
Inc. in 1958 and became President in 1965. The Company has retained Bozell
Worldwide and certain of its affiliates in the past and during the current
fiscal year. See "Certain Relationships and Related Party Transactions." Mr.
Peebler, in addition to serving on the boards of a number of non-profit
organizations, is a member of the Board of Directors of American Radio Systems.
BARRIE ZESIGER, a Director of the Company since 1993, is a Managing Director
in charge of operations for Zesiger Capital Group LLC, a New York City money
management firm. She worked as a security analyst for the Madison Fund from 1968
to 1970 and in the private practice of law from 1974 to 1984, having received
her J.D. degree from the Stanford University Law School. Having formerly served
on a number of non-profit cultural boards, she currently serves as the Vice
Chair of the Asphalt Green, Inc., an innovative non-profit sports and fitness
center in New York City with programs that promote self-improvement, personal
achievement, and lifetime health. Ms. Zesiger is also a private investor in the
Company.
SCIENTIFIC ADVISORY BOARD
The Company established a Scientific Advisory Board (the "SAB") to advise
the Company on selected scientific, technical and regulatory matters. The SAB
members have been involved since 1990 as advisors to the Company in the areas of
research and development, clinical safety testing, and have served on a
continual basis as consultants to the Company for specific scientific and
technical meetings. The SAB has provided related assistance for the SoftCup
Technology and INSTEAD-TM-. Members of the SAB have been granted stock options
and one member, Ted Cohen, M.D., has invested in the Company. See "-- Options
Granted in Last Fiscal Year." From time to time the Company also requests that
certain members of the SAB participate in specific projects for which the
Company has in the past and will in the future compensate SAB members on a per
diem basis. Sharon Hillier, Ph.D. declined to accept the stock options which are
granted to SAB members from time to time due to the guidelines of the university
with which she is affiliated; consequently, in May 1996, the Company entered
into a Consulting Agreement with Dr. Hillier which provides for a one-year term,
an automatic renewal option, an initial one time payment of $10,000 and an
annual consulting fee of $10,000 per year, in addition to per diem compensation
for certain additional consulting services which Dr. Hillier may provide in the
future and reimbursement of out of pocket expenses. The current five members of
the SAB are as follows:
TED COHEN, M.D., Chairman of the SAB, has been in private practice in
obstetrics, gynecology and infertility since 1978, and is associated with St.
Barnabas Medical Center located in New Jersey, which is one of the largest
Obstetrics and Gynecology centers on the East Coast. He is President of Suburban
OB/GYN Associates in New Jersey, a private obstetric and gynecology medical
practice and is now associated with Suburban Woman's Physicians, a large private
practice in obstetrics and gynecology.
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<PAGE>
In addition to being a member of the American College of Obstetricians and
Gynecologists, he is also active in other medical societies. Dr. Cohen has
published articles in various medical journals over the past few years.
ELIZABETH B. CONNELL, M.D. has served as a Professor of Obstetrics &
Gynecology at Emory University School of Medicine, located in Atlanta, Georgia
since 1981. She has served as the Chairman of the FDA's Obstetric and Gynecology
Device Advisory Panel from 1988 to 1992; as a member of the FDA Panel on Review
of Obstetrical and Gynecological Devices from 1976 to 1979; and as a member of
the FDA Obstetrics and Gynecology Advisory Committee from 1970 to 1978.
SHARON HILLIER, PH.D., an expert in genital tract infections, is an
Associate Professor of Obstetrics & Gynecology at the University of Pittsburgh,
and Director, Reproductive Infectious Disease Research, Magee-Women's Hospital
located in Pittsburgh, Pennsylvania since 1995. Since obtaining her doctoral
degree in 1984, Dr. Hillier has been awarded eight major grants for research
studies dealing with gynecological health and diseases of the female
reproductive tract. She has published over 80 scientific papers on various
aspects of gynecological bacteriology and microbiology.
W. MARK SALTZMAN, PH.D., an expert in controlled release of substances from
polymers, with a specialty in intravaginal delivery, is currently Professor of
Chemical Engineering at Cornell University in Ithaca, New York. He received his
doctorate in Medical Engineering from Massachusetts Institute of
Technology/Harvard Medical School and was a Post-Doctoral Associate at
Massachusetts Institute of Technology. Dr. Saltzman has received numerous honors
in medical engineering, including the Allan C. Davis Medal as Maryland's
Outstanding Young Engineer, has been awarded over 15 grants for research studies
dealing with controlled release polymers and cellular interactions and has
published over 70 scientific papers on various aspects of polymer controlled
release mechanisms.
RICHARD SODERSTROM, M.D., Clinical Professor of Obstetrics & Gynecology at
University of Washington Medical School since 1974, located in the State of
Washington, is a gynecologist specializing in reproductive health. He has
received numerous distinguished service awards for his work in the field, and
has published more than 100 clinical papers on various aspects of reproductive
health. Dr.
Soderstrom is active in several medical societies and currently serves as an
advisor to the FDA on devices in Obstetrics and Gynecology.
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EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company, as
well as certain other compensation paid or accrued for the fiscal years ended
June 30, 1996 and 1995 to the Company's President and Chief Executive Officer
and the four other most highly compensated executive officers of the Company
whose annual compensation exceeds $100,000. See also "-- Employment Agreements
and Certain Agreements with Management."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------
LONG TERM
COMPENSATION AWARDS
-------------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS (#)
- ------------------------------------------ ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
John W. Andersen.......................... 1996 $ 250,000 $ 195,000(1) $ 56,627(2) --
President and Chief 1995 $ 20,833 -- -- 574,862
Executive Officer,
Chairman of the Board
Audrey Contente........................... 1996 $ 570,164(3) -- -- --
Executive Vice 1995 $ 74,286 -- -- --
President, Founder and Director
Dori M. Reap.............................. 1996 $ 150,000 $ 75,000 $ 25,401(4) 150,000
Senior Vice President, Finance 1995 -- -- -- --
and Administration, Chief
Financial Officer and Secretary
Tonya G. Hinch............................ 1996 $ 97,917 $ 30,000 $ 28,997(5) 100,000
Senior Vice President, 1995 -- -- -- --
Marketing and Sales
Gary Nordmann............................. 1996 $ 32,308 -- $ 37,775(6) 30,000
Vice President, Operations 1995 -- -- $ 33,897(6) --
</TABLE>
- ------------------------
(1) Mr. Andersen became entitled to a signing bonus of $195,000 upon the
execution of his employment agreement in July 1994. A portion of the signing
bonus was paid out of the proceeds of the IPO. See "Management -- Employment
Agreements and Certain Agreements with Management."
(2) Includes payment of $24,818 premium on a universal life insurance policy.
(3) Includes Ms. Contente's base salary for fiscal year 1996 of $175,000 and
$395,164 of accrued salary for fiscal years 1992, 1993 and 1994, a portion
of which was paid out of the proceeds of the IPO.
(4) Includes relocation allowance of $20,580.
(5) Includes relocation allowance of $28,791.
(6) Consists of consulting fees paid to Mr. Nordmann, who served as a consultant
to the Company prior to becoming the Vice President, Operations in March
1996.
STOCK OPTION PLAN
In October 1990, the Board of Directors approved a stock option plan (the
"1990 Stock Option Plan"), which was subsequently approved by the stockholders
of the Company. The 1990 Stock Option Plan authorized the grant of options for
up to 250,000 shares of Common Stock to employees, officers, directors,
consultants and advisors. In May 1993, the Board of Directors approved the
number of
44
<PAGE>
shares authorized to be granted under the 1990 Stock Option Plan to increase to
900,000 which was subsequently approved by the stockholders of the Company. The
1990 Stock Option Plan is designed to provide an incentive to the officers and
certain other key employees of and consultants to the Company by making
available to them an opportunity to acquire a proprietary interest in the
Company or to increase their proprietary interest in the Company.
The Compensation Committee of the Board of Directors administers the 1990
Stock Option Plan. The Compensation Committee has the full power and authority,
subject to the provisions of the 1990 Stock Option Plan, to designate
participants, grant options and determine the terms of all options. The
Compensation Committee has the right to make adjustments with respect to options
granted under the 1990 Stock Option Plan in order to prevent dilution of the
rights of any holder. Members of the Compensation Committee are not eligible to
receive options under the 1990 Stock Plan.
The terms of specific options are determined by the Compensation Committee.
Options granted may be non-qualified or incentive stock options. The exercise
price per share for a non-qualified option is subject to the determination of
the Compensation Committee. Incentive stock options may not be granted at less
than 100% of the fair market value at the date of grant. Each option will be
exercisable after the period or periods specified in the option agreement.
The 1990 Stock Option Plan meets the requirements of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which exempts
the acquisition of certain options under the 1990 Stock Option Plan from the
operation of Section 16(b) under the Exchange Act.
Upon the exercise of an option, the option holder shall pay to the Company
the exercise price plus the amount of the required Federal and state withholding
taxes, if any. Options may be exercised and the withholding obligation may be
paid for with cash or shares of Common Stock. Shares surrendered on exercise
will be valued at the market price for the Common Stock, generally based on
average closing prices of the Common Stock over a 30-day period prior to
exercise, less the option exercise price. The period after termination of
employment during which an option may be exercised is as determined by the
Compensation Committee.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
year ended June 30, 1996 to each of the executives named in the Summary
Compensation Table above who received options during such year:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
PERCENTAGE OF ASSUMED ANNUAL RATES OF
TOTAL OPTIONS STOCK PRICE APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE --------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% 10%
- ------------------------- --------- ------------- ----------- ---------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dori M. Reap............. 50,000 17.5% $ 6.00 August 1, 2005 $ 188,500 $ 478,000
100,000 35.1 8.00 August 1, 2005 503,000 1,275,000
Tonya G. Hinch........... 100,000 35.1 8.00 November 6, 2005 503,000 1,275,000
Gary Nordmann............ 30,000 10.5 10.50 March 8, 2006 198,000 502,500
</TABLE>
During September 1995, each member of the SAB (other than Sharon Hillier,
Ph.D.) was granted an option under the 1990 Stock Option Plan to purchase 5,000
shares of Common Stock at an exercise price of $8.00 per share. Each option is
exercisable immediately with respect to 2,000 shares, with the balance of the
option becoming exercisable in equal increments on the first, second and third
anniversary of the date of issuance (provided the holder is still serving on the
SAB). The holder of such an option may exercise the option with respect to the
vested portion, in accordance with its terms, for a period of one year after
ceasing to be a member of the SAB for any reason. Sharon Hillier, Ph.D. declined
to accept the stock options which are granted to SAB members from time to time
due to the guidelines of the university with which she is affiliated. See
"Management -- Scientific Advisory Board."
45
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Board of Directors presently consists of seven persons. The Company's
Board of Directors is divided into three classes. Directors of each class will
be elected at the annual meeting of stockholders held in the year in which the
term for such class expires and will serve thereafter for three years. John W.
Andersen and Charles D. Peebler, Jr. serve as Class 1 Directors with their terms
expiring at the 1996 Annual Meeting of Stockholders, Audrey Contente and Joy
Vida Jones serve as Class 2 Directors with their terms expiring at the 1997
Annual Meeting of Stockholders and Richard A. Cone, Barrie Zesiger and Martin
Nussbaum serve as Class 3 Directors with their terms expiring at the 1998 Annual
Meeting of Stockholders. For further information on the effect of the classified
Board, see "Description of Capital Stock -- Certain Provisions of the
Certificate of Incorporation and By-Laws."
COMMITTEES OF THE BOARD
The Board of Directors has established a Compensation Committee, consisting
of Charles D. Peebler, Jr., Barrie Zesiger and Martin Nussbaum. The Compensation
Committee is responsible for approving (or, at the election of the Compensation
Committee, recommending to the Board) compensation arrangements for officers and
directors of the Company, reviewing benefit plans and administering the 1990
Stock Option Plan.
The Board of Directors has established an Audit Committee, consisting of
Barrie Zesiger, Charles D. Peebler, Jr. and Joy Vida Jones. The Audit Committee
is responsible for selecting (or, at the election of the Audit Committee,
recommending to the Board) the independent auditors of the Company, evaluating
the independent auditors, reviewing the scope of the annual audit with
management and the independent auditors, consulting with management and the
independent auditors as to the systems of internal accounting controls and
reviewing the non-audit services performed by the independent auditors.
1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1995 Stock Option Plan for Non-Employee Directors (the "1995 Stock
Option Plan"), which was approved by the Company's stockholders, provides that
upon becoming a director (and persons who were non-employee directors on the
date of adoption of the 1995 Stock Option Plan, upon the adoption date) receive
a one-time grant of a ten-year option to purchase 15,000 shares of Common Stock
at an exercise price equal to the fair market value of the Common Stock on the
date immediately preceding the date of grant. Of the aggregate number of shares
issuable under such option, 5,000 shares vest immediately and the remaining
10,000 shares vest in equal installments of 2,500 shares on each of the first
four anniversaries of the date of grant, provided that the holder is then still
serving as a director of the Company. The holder of such an option may exercise
the option with respect to the vested portion of the option, in accordance with
its terms, for a period of one year after ceasing to be a member of the Board of
Directors due to death or permanent disability. There are an aggregate of
250,000 shares reserved for issuance under the 1995 Stock Option Plan.
EMPLOYMENT AGREEMENTS AND CERTAIN AGREEMENTS WITH MANAGEMENT
Mr. Andersen is the Chairman of the Board, Chief Executive Officer and
President of the Company. Mr. Andersen entered into a five year employment
agreement with the Company, dated July 29, 1994, which, as amended, provides for
a base salary of $250,000 per annum. The base salary increases to $350,000 upon
the earlier to occur of (i) the formation of a strategic alliance or (ii) the
introduction of INSTEAD-TM- to at least five percent of the United States or
European market. His base salary will increase to $500,000 when the later of
such conditions is achieved. A "strategic alliance" is defined as the formation
of an alliance with one or more multinational pharmaceutical and/or consumer
product companies to facilitate developing and marketing the Company's product
line. Mr. Andersen will receive royalties of $.005 for each unit of INSTEAD-TM-
sold and $.01 for each unit of product based on the SoftCup Technology sold for
medical purposes. Upon the execution of his employment agreement, Mr. Andersen
received an option exercisable to purchase 10% of the number of shares of Common
Stock outstanding on a fully-diluted basis (as defined) immediately before the
IPO at an aggregate exercise price of $2.5 million. Such option is exercisable
with respect to 20% of the shares subject
46
<PAGE>
thereto upon the date of grant (subject to forfeiture in limited cases) and the
balance of the option vesting in equal installments upon the Company's
attainment of each of the following goals: (w) raising development financing of
approximately $5-$10 million, (x) closing of an initial public offering, (y)
distributing the INSTEAD-TM- to the public in one half or more of the United
States or Europe and (z) achieving annual revenues of $100 million; provided,
however, that in any event the full amount shall vest upon the following:
termination of the agreement by the Company for reasons other than for cause;
change of control; termination by Mr. Andersen for good reason; or six months
prior to the expiration of the agreement. Upon the execution of the agreement
Mr. Andersen became entitled to a signing bonus of $195,000, a portion of which
was paid out of the proceeds of the IPO.
Ms. Contente is the Executive Vice President and Founder of the Company, as
well as a Director of the Company. Ms. Contente entered into a five year
employment agreement with the Company, dated July 1, 1996, which provides for a
base salary of $230,000 per annum. This base salary increases to $300,000 upon
the earlier to occur of (i) the formation of a strategic alliance or (ii) the
introduction of INSTEAD-TM- to at least five percent of the United States or
European market. Her base salary will increase to $350,000 when the later of
such conditions is achieved. A "strategic alliance" is defined as the formation
of an alliance with one or more multinational pharmaceutical and/or consumer
product companies to facilitate developing and marketing the Company's product
line. Ms. Contente will receive royalties of $.005 for each unit of product
based on the SoftCup Technology sold. Under the employment agreement, Ms.
Contente is entitled to medical, life and disability insurance coverage. In
mid-1990, as part of the organization of the Company, Ms. Contente received
526,250 shares of Common Stock in exchange for assigning to the Company all
pending patent applications, trademarks, copyrights, technology and similar
rights associated with products relating to or evolving from the patent
application filed by Ms. Contente and relating to the SoftCup Technology. In
mid-1992, Ms. Contente received options to purchase 75,000 shares of Common
Stock, which vests over a five-year period at an exercise price of $8.00 per
share; such option will vest immediately upon a change of control of the Company
(as defined therein). Upon the execution of the agreement Ms. Contente became
entitled to a signing bonus of $75,000. In connection with the execution of her
employment agreement, Ms. Contente entered into a Name, Likeness, and Voice
Release and Agreement (the "Release"). The Release provides that Ms. Contente
will serve as a spokesperson for INSTEAD-TM- in both television and print/media
campaigns for which Ms. Contente will receive $12,500 for the television
campaign, $12,500 for the print/media campaign. Ms. Contente is entitled to
receive an additional $12,500 for the television campaign and $12,500 for the
print/media campaign if such campaign is actively used by the Company to support
the rollout of INSTEAD-TM- into certain additional geographic areas. If the
Company decides to produce a new television campaign or print/media campaign
using Ms. Contente as spokesperson then Ms. Contente will receive an additional
$25,000. After the employment agreement is terminated, Ms. Contente will no
longer be required to provide further services under the Release; however, the
Company will have the ability to use her name and likeness in the campaigns for
up to a year after termination, and in connection with INSTEAD-TM- in
perpetuity.
Ms. Reap is Senior Vice President of Finance and Administration and Chief
Financial Officer of the Company. Ms. Reap entered into a five year employment
agreement dated August 1, 1995, which provides for a base salary of $150,000 per
annum. This base salary increases to $175,000 upon the earlier to occur of (i)
the formation of a strategic alliance or (ii) the introduction of INSTEAD-TM- to
at least five percent of the United States or European market. Her base salary
will increase to $200,000 when the later of such conditions is achieved. A
"strategic alliance" is defined as the formation of an alliance with one or more
multinational pharmaceutical and/or consumer product companies to facilitate
developing and marketing the Company's product line. Ms. Reap received options
to purchase 150,000 shares of the Common Stock (100,000 at an exercise price of
$8.00 per share and 50,000 at an exercise price of $6.00 per share). Such
options are exercisable with respect to 20% of the shares subject thereto upon
the date of grant; 20% upon the closing of the IPO; 20% upon the first to occur
of (a) consummation of a strategic alliance with proceeds to Ultrafem exceeding
$8 million or (b) completion by Ultrafem of a second public offering with
proceeds to the Company exceeding $20
47
<PAGE>
million; 20% at such time as Ultrafem's product becomes available for sale to
the general public in one-half or more of the United States or European market,
measured demographically; and 20% upon the realization of the Company of EBITDA
(as defined) equal to or in excess of $20 million in any fiscal period of 12
months. Such options will vest regardless of the achievement of such milestones
no later than six months prior to the expiration of the term of her employment
agreement. In addition, such options will vest immediately upon a change of
control of the Company (as defined therein). Upon the execution of her agreement
Ms. Reap was entitled to a signing bonus of $75,000, a portion of which was paid
out of the proceeds of the IPO.
Ms. Hinch is Senior Vice President, Marketing and Sales of the Company. Ms.
Hinch entered into a five year employment agreement dated November 6, 1995,
which provides for a base salary of $150,000 per annum. This base salary
increases to $175,000 upon the earlier to occur of (i) the formation of a
strategic alliance or (ii) the introduction of INSTEAD-TM- to at least five
percent of the United States or European market. Her base salary will increase
to $200,000 when the later of such conditions is achieved. A "strategic
alliance" is defined as the formation of an alliance with one or more
multinational pharmaceutical and/or consumer product companies to facilitate
developing and marketing the Company's product line. Ms. Hinch received an
option to purchase 100,000 shares of the Common Stock at an exercise price of
$8.00 per share. Such option is exercisable with respect to 20% of the shares
subject thereto upon the execution of her employment agreement; 20% upon the
successful introduction of INSTEAD-TM- into a minimum of 5% of the United States
or European market to be measured by the revenue and distribution targets set
forth in the option; 20% upon the consummation of a strategic alliance with
proceeds to Ultrafem exceeding $8 million; 20% at such time as Ultrafem's
product becomes available for sale to the general public in one-half or more of
the United States or European market, measured demographically; and 20% upon the
realization of Ultrafem of EBITDA (as defined) equal to or in excess of $20
million in any fiscal period of 12 months. Such option will vest regardless of
the achievement of such milestones no later than six months prior to the
expiration of the term of her employment agreement. In addition, such option
will vest immediately upon a change of control of the Company (as defined
therein). Upon the execution of her agreement Ms. Hinch was entitled to a
signing bonus of $30,000, a portion of which was paid out of the proceeds of the
IPO.
Mr. Nordmann is Vice President, Operations of the Company. Mr. Nordmann
entered into a three year employment agreement dated April 1, 1996, which
provides for a base salary of $140,000 per annum. Mr. Nordmann received an
option to purchase 30,000 shares of the Common Stock at an exercise price of
$10.50 per share, exercisable upon the occurrence of certain events. Such option
will vest regardless of the achievement of such milestones no later than six
months prior to the expiration of the term of his employment agreement. In
addition, such option may vest immediately at the discretion of the Board of
Directors upon a change of control of the Company (as defined therein).
Each of the employment agreements listed above (i) contains certain
non-competition provisions, (ii) provides that the executive may participate in
incentive bonus plans which may be adopted in the future by the Company, once
the Company has begun selling its products to the general public, and (iii) with
respect to Ms. Reap, Ms. Hinch and Mr. Nordmann, provides for the reimbursement
of certain relocation expenses. The employment agreement for each of Mr.
Andersen, Ms. Contente, Ms. Reap, Ms. Hinch and Mr. Nordmann provides that if
the agreement is terminated by the Company (which in the case of Mr. Andersen
would include a failure on its part to renew the agreement at the end of its
term) without "Due Cause" (as defined) or by the executive (other than Mr.
Nordmann) for Good Reason (as defined) or during the first year following a
Change of Control (as defined), the agreement provides for severance payments
equal to the annual salary in effect at the time of termination payable monthly
for a period of twenty-four months with respect to Mr. Andersen and Ms.
Contente, twelve months with respect to Ms. Reap and Ms. Hinch, and six months
with respect to Mr. Nordmann, or in a lump sum, and in certain cases, fringe and
other benefits. Ms. Contente's employment agreement also provides for severance
payments equal to the base salary in effect at the time of termination for a six
month period upon the non-renewal of her employment agreement.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 30, 1996
(except as otherwise noted) and as adjusted to reflect the sale by the Company
of the shares of Common Stock offered hereby with respect to the beneficial
ownership of the Common Stock by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each director of the Company, (iii) each named officer of the Company listed in
the Summary Compensation Table above, and (iv) all officers and directors of the
Company as a group. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock beneficially owned by them. Each person in the
following chart is deemed to be the beneficial owner of any shares of Common
Stock that can be acquired by such person within 60 days from September 30, 1996
upon the conversion of convertible securities or the exercise of warrants or
options.
COMMON STOCK BENEFICIALLY OWNED
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING(1)
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
NAME NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------- ----------- --------------- ----------- ---------------
Audrey Contente (2)(3)(4)................................ 592,500 10.0% 592,500 7.5%
Barrie Zesiger (3)(5).................................... 888,474 14.1% 888,474 10.7%
Richard A. Cone (3)(6)................................... 20,000 * 20,000 *
Joy V. Jones (3)(7)...................................... 7,500 * 7,500 *
Martin Nussbaum (3)(8)................................... 10,925 * 10,925 *
Charles D. Peebler, Jr. (3).............................. 14,750 * 14,750 *
John Andersen (2)(3)(9).................................. 347,167 5.6% 347,167 4.2%
Dori M. Reap (2)(10)..................................... 90,000 1.5% 90,000 1.1%
Tonya G. Hinch (2)(11)................................... 40,000 * 40,000 *
Albert L. Zesiger (12)................................... 888,474 14.1% 888,474 10.7%
Mellon Bank Corporation (13)............................. 840,000 14.3% 840,000 10.7%
Directors and executive officers as a group
(consists of 10 persons) (5)............................ 1,975,566 29.7% 1,975,566 22.8%
</TABLE>
- ------------------------
* Less than 1%
(1) Each beneficial owner's percentage ownership is determined by assuming that
convertible securities, options or warrants that are held by such person
(but not those held by any other person) and which are exercisable within 60
days of September 30, 1996 have been exercised.
(2) Officer.
(3) Director.
(4) Ms. Contente has granted an option to each of Jeffrey Simon and Frank Cole
to purchase 106,250 shares of Common Stock, and an option to Arthur Appleman
to purchase 12,500 shares of Common Stock, each such option at an exercise
price of $2.00 per share ("Optioned Shares") and with an expiration date of
December 1, 1998. The Optioned Shares are subject to a voting trust, to be
voted by a majority of Ms. Contente, Ms. Zesiger and Mr. Andersen, as voting
trustees. The voting trust will terminate on the earliest of (i) the
transfer of the Optioned Shares to Messrs. Cole, Simon and Appleman, (ii)
August 22, 1997, or (iii) upon the breach of certain representations
contained in the agreement.
(5) Includes 411,828 shares of Common Stock and 370,200 shares of Common Stock
issuable upon the exercise or conversion of convertible securities of the
Company, both of which are held in accounts managed by Zesiger Capital
Group, LLC, an investment advisor, for which Albert L.
49
<PAGE>
Zesiger, Ms. Zesiger's husband, is a Managing Director. Ms. Zesiger
disclaims beneficial ownership of such shares. Also includes 40,000 shares
of Common Stock and 12,500 shares of Common Stock issuable upon the exercise
or conversion of convertible securities of the Company which are owned by
Mr. Zesiger; Ms. Zesiger disclaims beneficial ownership of such shares. See
also footnote 12. Includes 16,238 shares which are issuable upon the
exercise of an outstanding option and warrant which are exercisable within
60 days of September 30, 1996. Does not include the Optioned Shares which
are subject to a voting trust of which Ms. Zesiger is a voting trustee. See
footnote 4. Information as to Ms. Zesiger is as of October 7, 1996.
(6) Does not include 400,000 shares of Common Stock issuable upon exercise of
options granted to ReProtect in the ReProtect Agreement.
(7) Includes options to purchase 7,500 shares of Common Stock which are
exercisable within 60 days of September 30, 1996; however, exercise of Ms.
Jones' options is subject to certain restrictions. Does not include 150,000
shares of Common Stock beneficially owned by the Calvert Social Investment
Fund, of which Ms. Jones is a trustee. Ms. Jones disclaims beneficial
ownership of such shares of Common Stock, except to the extent of her
beneficial ownership in the Calvert Social Investment Fund.
(8) Includes option to purchase 5,000 shares of Common Stock and warrants to
purchase 3,940 shares of Common Stock which are exercisable within 60 days
of September 30, 1996. See "Certain Relationships and Related Party
Transactions" and "Legal Matters."
(9) Includes options to purchase 344,917 shares of Common Stock and warrants to
purchase 375 shares of Common Stock which are exercisable within 60 days of
September 30, 1996 and 1,875 shares of Common Stock. Does not include
additional options to purchase 229,945 shares of Common Stock upon the
attainment of certain milestones. Does not include the Optioned Shares which
are subject to a voting trust of which Mr. Andersen is a voting trustee. See
footnote 4.
(10) Includes options to purchase 90,000 shares of Common Stock which are
exercisable within 60 days of September 30, 1996.
(11) Includes option to purchase 40,000 shares of Common Stock which is
exercisable within 60 days of September 30, 1996.
(12) Includes 411,828 shares of Common Stock and 370,200 shares of Common Stock
issuable upon the exercise or conversion of convertible securities of the
Company which are held in accounts managed for certain parties through
Zesiger Capital Group, LLC, an investment advisor, for which Mr. Zesiger is
a Managing Director. Mr. Zesiger has dispositive power with respect to such
shares but disclaims beneficial ownership of such shares. Also includes
37,708 shares of Common Stock and 16,238 shares of Common Stock issuable
upon the exercise or conversion of convertible securities of the Company
which are owned by Barrie Zesiger, Mr. Zesiger's wife; Mr. Zesiger disclaims
beneficial ownership of such shares. Includes 12,500 shares which are
issuable upon the exercise of an outstanding warrant which is exercisable
within 60 days of September 30, 1996. Information as to Mr. Zesiger is as of
October 7, 1996.
(13) The Mellon Bank Corporation, located at One Mellon Bank Center, Pittsburgh,
Pennsylvania 15258, owns such shares of Common Stock through its
subsidiaries, Mellon Bank, N.A. and The Dreyfus Corporation. Information
based on Schedule 13G filed by the Mellon Bank Corporation and its
subsidiaries with the Securities and Exchange Commission on September 11,
1996.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Effective October 1, 1990, the Company entered into a Termination Benefits
Agreement (the "Termination Benefits Agreement") with Ms. Contente. Both the
Termination Benefits Agreement and Ms. Contente's employment agreement provide
for payment of various severance and other benefits if Ms. Contente's employment
is terminated. Ms. Contente is also entitled to an immediate vesting of stock
options for 75,000 shares of Common Stock if her employment is terminated by
reason of a change in control of the Company resulting from certain shareholder
derivative litigation.
The Company also entered into various indemnity agreements with Ms.
Contente, dated as of October 1, 1990 as amended on April 23, 1992, and
indemnity agreements with certain former officers and directors. The indemnity
agreements provide Ms. Contente and these former officers and directors with
certain indemnities for claims against the Company and Ms. Contente and the
former officers and directors, respectively.
On March 2, 1992, Albert L. Zesiger and John S. Stafford, stockholders of
the Company, filed a derivative action against the Company, Ms. Contente and a
former director seeking damages and injunctive relief. On June 5, 1993, the
court approved a settlement agreement dated May 19, 1993 (the "Settlement
Agreement"), under which the defendants admitted no wrongdoing. The Settlement
Agreement provides, among other things, for the appointment of, in the
alternative, a seven or nine member Board, appointment of a new Chairman and
Chief Executive Officer, establishment of an Audit/Finance Committee of the
Board, issuance of warrants to purchase an aggregate of 25,000 shares of Common
Stock to the plaintiffs at an exercise price of $8.00 per share, and release of
all related claims. The Settlement Agreement provides that the limitations on
the composition and size of the Board of Directors last until the Company's 1995
Annual Meeting of Shareholders. As part of the Settlement Agreement, Ms.
Contente resigned as Chief Executive Officer and Chairman of the Board and
agreed, for a two-year period commencing the date of the Settlement Agreement,
not to serve in such capacities or be responsible for overseeing the Company's
daily management or operation.
On May 12, 1992, each of Jeffrey Simon and Frank Cole, who were Directors of
the Company, loaned $50,000 to the Company. On June 12, 1992, the principal
balance of these loans and accrued but unpaid interest were converted into
shares of Common Stock at a conversion price of $8.00 per share. Mr. Cole
simultaneously purchased an additional 6,250 shares at $8.00 per share. Messrs.
Simon and Cole made additional loans to the Company in 1992 and 1993 totaling
$226,010 (Mr. Simon -- $85,000 and Mr. Cole -- $141,010). Mr. Cole resigned as a
director of the Company in July 1993. The Company repaid each lender $10,000 in
1993. The $206,010 remaining balance bore interest at 6% per annum and was
repaid from the proceeds of a private placement in 1995.
In December 1993, January 1994 and September 1994, the Company issued
promissory notes aggregating $476,679 to certain former officers for accrued but
unpaid salaries. The notes are for terms of two to three years and bear interest
at 6% and 10% per annum. Certain of these notes in the principal amount of
$255,646 were repaid upon completion of the IPO. In January 1995, the Company
issued two promissory notes to Audrey Contente, each with a principal amount of
$156,771.56 and a maturity date of September 30, 1996. Both notes were repaid
upon the consummation of the IPO.
On April 14, 1994, a majority of the stockholders, acting by written consent
in lieu of a meeting, removed certain of the directors (including Messrs. Broms
and Simon), but not Ms. Contente and Barrie Zesiger, from the Board of Directors
and appointed six members of the Board to serve until April 14, 1995 or when
their successors were elected.
During 1994, the Company borrowed a total of $135,000 from nine individuals,
including four current Directors. The loans require payment of 10% interest per
annum until maturity. Each lender was granted (i) the option of receiving, in
lieu of the repayment of interest and principal, 1,875 shares of Common Stock at
a price of $8.00 per share and (ii) warrants to purchase 375 shares of Common
Stock at an exercise price of $10.00 per share for a five-year period expiring
on June 30, 1999. As of June 30, 1995, all of the nine individuals had converted
their loans into shares of Common Stock.
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Charles D. Peebler, Jr., a member of the Board of Directors of the Company,
is the President and Chief Executive Officer, as well as a Director, of BJK&E, a
worldwide marketing and communications company. The Company has retained Bozell
Worldwide, Inc. ("Bozell"), a wholly-owned subsidiary of BJK&E, to assist in
marketing, advertising creative work and media planning for the Company. In
March 1996, the Company issued a five year warrant to purchase 50,000 shares of
Common Stock to Bozell. The warrant has an exercise price of $10.00 per share
and was issued in consideration of certain services provided in connection with
the launch of INSTEAD-TM-.
The Company had retained Bozell Sawyer Miller ("BSM"), a communications
management concern and a wholly-owned subsidiary of Bozell, to act as a
consultant for the Company's corporate communications and financial public
relations work, for which the Company has paid hourly fees and out-of-pocket
expenses; BSM is currently acting as a consultant with respect to certain public
relations matters. KRC Research and Consulting, a division of BSM, has performed
consumer research on INSTEAD-TM-. The Company believes that transactions entered
into with Bozell and its subsidiaries and divisions are on terms which are at
least as favorable as those which the Company could have obtained from an
unrelated third party.
One of the Company's directors is a partner of Shereff, Friedman, Hoffman &
Goodman, LLP, a law firm which the Company has retained since fiscal year 1995.
The total amount of fees paid to such firm by the Company in fiscal year 1996
was $647,000 and in fiscal year 1995 was $29,888. SFH&G Investors, a partnership
comprised of the partners of Shereff, Friedman, Hoffman & Goodman, LLP, holds a
warrant to purchase an aggregate of 35,000 shares of Common Stock. See "Legal
Matters."
PRIOR FINANCINGS
In January 1996, the Company raised $100,000 through a private placement to
a single investor of a $100,000 non-convertible promissory note due the earlier
of January 26, 1997 or the closing of the IPO, bearing interest at a rate of 10%
per annum and a Class C Warrant to purchase 20,000 shares of Common Stock at an
exercise price of $8.00 per share. The Class C Warrant is not exercisable until
the first anniversary of the date of issuance and has a term of five years. The
non-convertible note was repaid upon completion of the IPO.
In a 1995 private placement (the "1995 Unit Private Placement"), the Company
raised $5,950,000 through the sale of Units. Each "Unit" consisted of one
$50,000 non-convertible promissory note bearing interest of 10% per annum, one
$50,000 convertible promissory note bearing interest of 10% per annum, one Class
A Warrant to purchase 10,000 shares of Common Stock at a purchase price equal to
$5.00 per share and one Class B Warrant to purchase 10,000 shares of Common
Stock at a purchase price equal to $12.50 per share. Certain investors in a
previous private placement consummated in 1993 (the "Existing Investors") agreed
to amend and restate their promissory notes and invest the principal amount of
such notes in the amount of $1,650,000 in the 1995 Unit Private Placement. Ms.
Jones, a director of the Company, is a director of Calvert Social Investment
Fund which is one of the Existing Investors. See "Management--Directors." Other
Existing Investors were paid principal and interest aggregating $222,577 from
the proceeds of the 1995 Unit Private Placement. The non-convertible notes were
repaid upon the completion of the IPO, and the convertible notes mature in April
1997. On December 31, 1995 certain Existing Investors were issued warrants to
purchase an additional aggregate of 165,000 shares of Common Stock because the
secured notes which they held were not paid; such warrants contain the same
terms as the Class A Warrants.
In early calendar year 1995, the Company raised $670,000 through a private
placement sale of units (the "1995 Preferred Stock Private Placement"). Each
unit consisted of (i) 1,950 shares of Series A Preferred Stock, for an allocated
purchase price of $195,000, with each such share (a) being convertible, at any
time at the option of the holder, into Common Stock of the Company at a
conversion rate of 12.5 shares of Common Stock for each such share, subject to
adjustment for certain dilutive events, (b) being entitled to cumulative annual
dividends of $8.00, (c) participating with the
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Common Stock in any dividend after payment of said $8.00, (d) having a
liquidation preference of $100.00 and (e) being entitled to the number of votes
equal to the number of shares of Common Stock into which such share can be
converted, and (ii) a warrant, exercisable for a five year period, to purchase
21,250 shares of Common Stock at an exercise price of $10.00 per share, subject
to adjustment for certain dilutive events for an allocated purchase price of
$5,000. The Company sold 2.25 units to a group of investors represented by a
common advisor for $450,000 on the same terms and conditions as the 1995
Preferred Stock Private Placement, except for certain registration rights.
In March 1995, the Company issued to certain trade creditors notes in the
total principal amount of $444,237. The notes bear interest at 10% per annum and
mature in September 1996, December 1996 and February 1997. Notes in the
principal amount of $37,500 were repaid with accrued interest from the proceeds
of the 1995 Unit Private Placement, and notes in the principal amount of $42,000
were repaid upon the completion of the IPO. Subsequent to the IPO, the Company
repaid the principal amount of $364,737 and interest of $9,118 of such notes.
In 1994, the Company borrowed a total of $135,000 from nine individuals,
including four current directors. The loans bear interest at the rate of 10%
interest per annum and were to mature upon the earlier to occur of (i) the date
the Company receives $600,000 of financing or (ii) 180 days from the date of
issuance of the loan. Each lender was granted (i) the option of receiving, in
lieu of the repayment of interest and principal, 1,875 shares of Common Stock at
a conversion price of $8.00 per share and (ii) warrants to purchase 375 shares
of Common Stock at an exercise price of $10.00 per share exercisable for a five
year period expiring on June 30, 1999. As of June 30, 1995, all of the nine
individuals had converted their loans to Common Stock.
In a 1994 private placement, the Company raised $450,000 through the sale of
units, composed in the aggregate of (i) $225,000 in subordinated convertible
debentures, (ii) five year warrants to purchase 47,813 shares of Common Stock at
an exercise price of $10.00 per share, and (iii) 28,125 shares of Common Stock
at $8.00 per share. Each debenture had a face amount of $100,000 and was sold
for an allocated purchase price of $95,000. The debentures accrue interest at
the rate of 10% per annum (compounded annually), and mature on the earlier to
occur of (i) August 31, 1996, or (ii) at the option of the holder, the date the
Company successfully effects any single financing in excess of $10 million. Each
debenture is convertible into shares of Common Stock at a conversion price of
$10.00 per share, subject to adjustment upon the occurrence of certain events
such as stock dividends, stock splits and recapitalizations. Holders of shares
of Common Stock acquired upon conversion of these debentures have certain
registration rights.
In October and November 1994, the Company issued to certain trade creditors
subordinated convertible debentures for an aggregate principal amount of
$172,432. Such debentures have a two year term, bear interest at 10% per annum
and are convertible into Common Stock at a conversion price of $10.00 per share.
In a 1993 private placement, the Company issued (i) $1.85 million of secured
promissory notes and (ii) warrants to purchase 370,000 shares of Common Stock at
an initial exercise price equal to $9.00 per share. These secured promissory
notes were reinvested by certain Existing Investors in the 1995 Unit Private
Placement described above.
Between December 1991 and October 1992, the Company borrowed an aggregate of
$700,000 from the Montana Board of Science and Technology Development ("MBSTD")
evidenced by convertible debentures which bear interest at the rate of 10.5% per
annum (compounded annually), of which $350,000 was borrowed to fund expenditures
relating to the Company's manufacturing facility in Montana (the foregoing loans
are collectively referred to as the "MBSTD Loans"). The MBSTD Loans are
convertible into shares of Common Stock at a conversion price of $5.00 per
share, with accrued interest being waived upon conversion. The conversion price
is subject to adjustment if the Company issues shares of Common Stock or
convertible securities at a price less than $5.00 per share. MBSTD
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was also granted certain "piggy-back" registration rights. Principal amounts on
the MBSTD Loans are due as follows: $250,000 on December 20, 1998; $100,000 on
April 10, 1999; and $350,000 on October 19, 1999, along with related accrued
interest.
In late 1991 the Company sold an aggregate of 200,000 shares of Common Stock
for an aggregate purchase price of $1,200,000. During 1991, the Company sold an
additional 318,500 shares of Common Stock for an aggregate purchase price of
$2,548,000. In 1990 the Company issued 132,500 shares of Common Stock to certain
investors for an aggregate purchase price of $530,000.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $.001 per share, and 5,000,000 shares of Preferred
Stock, par value $.001 per share.
COMMON STOCK
As of September 30, 1996, there were 5,889,651 shares of Common Stock
outstanding held of record by 188 persons.
Holders of shares of Common Stock are entitled to one vote per share,
without cumulative voting, on all matters to be voted on by stockholders.
Therefore, the holders of more than 50% of the shares voting for the election of
directors can elect all the Directors. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a liquidation
or dissolution of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding preferred stock. Holders of shares of Common
Stock, as such, have no conversion, preemptive or other subscription rights, and
there are no redemption provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby, when issued against the consideration set forth in this Prospectus, will
be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of the Preferred Stock,
none of which shares are outstanding as of September 30, 1996. The Board of
Directors of the Company has the authority at any time and from time to time to
establish and designate one or more series of preferred stock, to fix the number
of shares of any series (which number may vary between series) and to fix the
dividend rights and preferences, the redemption price (if any) and terms,
liquidation rights, sinking fund provisions (if any), conversion provisions (if
any) and the voting powers (if any). The Board of Directors, without stockholder
approval, could issue preferred stock with voting and conversion rights that
could adversely affect the voting power of holders of the Common Stock. Certain
companies have used the issuance of preferred stock as an anti-takeover device,
and the Board of Directors of the Company could, without stockholder approval,
issue preferred stock with certain voting, conversion and/or redemption rights
that could discourage any attempt to obtain control of the Company in a
transaction not approved by the Board of Directors. The Board of Directors has
authorized the issuance of 48,750 shares of Series A Preferred Stock and
previously issued 6,532.5 shares of Series A Preferred Stock. As of September
30, 1996 all issued and outstanding shares of Series A Preferred Stock had been
converted into Common Stock. The rights, preferences, privileges, restrictions
and other matters relating to such shares are as follows:
DIVIDENDS. Each share of Series A Preferred Stock is entitled to receive
cumulative dividends at an annual rate of $8.00 per share. Upon conversion into
Common Stock, all cumulative dividends in arrears will be forfeited. Holders of
Series A Preferred Stock are entitled to receive such cumulative annual
dividends prior to the payment of any dividend in respect of the Common Stock
(the "Series A Preferred Stock Dividend Preference"). If the Series A Preferred
Stock Dividend Preference is not either fully paid or declared, then no
distribution shall be made on any Common Stock (although the
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arrearage shall accumulate) and the Company will not redeem or purchase any
Common Stock or make monies available for a sinking fund for the redemption or
purchase of any Common Stock. Holders of Series A Preferred Stock are entitled
to share in any dividend after payment of the Series A Preferred Stock Dividend
Preference in the proportion that the number of Series A Preferred Stock
outstanding bears to the total number of all shares outstanding (whether
preferred stock or Common Stock), treating such holders as if they had converted
such Series A Preferred Stock into Common Stock.
LIQUIDATION PREFERENCE. Upon reducing the Company's capital (which results
in a distribution of assets) or upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company (collectively, a "Liquidating Event"),
the holders of the Series A Preferred Stock shall be entitled to receive, before
any distribution of assets to the holders of the Common Stock, a liquidation
preference (the "Series A Preferred Stock Liquidation Preference"). For each
outstanding share of Series A Preferred Stock, the Series A Preferred Stock
Liquidation Preference shall be equal to the sum of (i) One Hundred Dollars
($100.00) and (ii) any unpaid Series A Preferred Stock Dividend Preference. The
Series A Preferred Stock Dividend Preference shall be paid after the Series A
Preferred Stock Liquidation Preference, and the Series A Preferred Stock
Liquidation Preference shall be distributed ratably among the holders of the
Series A Preferred Stock in proportion to the number of shares owned by each
holder of such stock. After payment of the Series A Preferred Stock Liquidation
Preference, the Company's assets available for distribution shall be distributed
among the holders of Series A Preferred Stock and Common Stock PRO RATA, based
on the number of shares of stock held by each, treating such holders of Series A
Preferred Stock as if they had converted such stock into Common Stock
immediately before such distribution. If, upon any Liquidating Event, the
amounts payable with respect to the Series A Preferred Stock and any other stock
of the Company ranking as to any such distribution on a parity with the Series A
Preferred Stock are not paid in full, the holders of the Series A Preferred
Stock and such parity stock shall share ratably in any such distribution of
assets of the Company in proportion to the full preferential amounts to which
they are entitled.
VOTING. In general, the holder of each share of the Series A Preferred
Stock shall (i) be entitled to the number of votes equal to the number of shares
of Common Stock into which such share of Series A Preferred Stock could be
converted on the record date for the vote or the date of the solicitation of any
written consent of stockholders, (ii) have voting rights and powers equal to the
voting rights and powers of the Common Stock and (iii) be entitled to notice of
any stockholders' meeting in accordance with the By-Laws of the Company.
Fractional votes shall not, however, be permitted.
RIGHT TO CONVERT. Each share of Series A Preferred Stock shall be
convertible, at any time at the option of the holder, into shares of Common
Stock at a conversion rate equal to the quotient obtained by dividing One
Hundred Dollars ($100.00) by a conversion price, initially equal to $8.00 per
share (the "Conversion Price"). The Conversion Price shall be adjusted from time
to time to protect against dilution. No fractional share shall be issued upon
the conversion of any share or shares of Series A Preferred Stock. See "--
Anti-Dilution" below.
ANTI-DILUTION. If the Company issues any shares of Common Stock or
convertible preferred stock, or rights to purchase Common Stock, warrants,
options, other rights or other securities (to the extent such other rights or
securities are convertible into or exchangeable or exercisable for shares of
Common Stock) for consideration per share less than the prevailing Conversion
Price, then the Conversion Price in effect immediately before such issuance
shall be adjusted to a price equal to the consideration per share received by
the Company. If the number of shares of Common Stock outstanding is increased by
a Common Stock dividend or by subdivision or split-up of Common Stock, then the
Conversion Price shall be appropriately decreased in proportion to such increase
in outstanding shares. If the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of Common Stock, then the
Conversion Price shall be appropriately increased in proportion to such decrease
in outstanding shares.
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If there is any reorganization, reclassification, consolidation or merger
(including a merger in which the Company is the surviving entity) of the
Company, then each share of Series A Preferred Stock shall (in lieu of being
exercisable for shares of Common Stock), after such reorganization,
reclassification, consolidation or merger, be exercisable into the kind and
number of shares of stock or other securities or property (including cash) of
the Company or of the corporation resulting from such consolidation or surviving
such merger to which the holder of the number of shares of Common Stock
deliverable (immediately before the time of such reorganization,
reclassification, consolidation or merger) upon conversion of such Series A
Preferred Stock would have been entitled upon such reorganization,
reclassification, consolidation or merger.
AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall
automatically convert into shares of Common Stock immediately upon (i) the
closing of the sale of the Common Stock in a firm commitment, underwritten
public offering registered under the Securities Act (other than a registration
relating solely to a transaction under Rule 145 thereunder or to an employee
benefit plan), at a public offering price equal to or exceeding $20.00 per share
of Common Stock (appropriately adjusted for any recapitalization) and the
aggregate net proceeds to the Company (before deduction for underwriters'
commissions and expenses relating to the issuance, including without limitation
fees of the Company's counsel) of which equal or exceed $15.0 million or (ii)
receipt by the Company of the affirmative vote, at a duly noticed stockholders'
meeting or pursuant to a duly solicited written consent of approval of the
holders of at least a majority of the outstanding shares of the Series A
Preferred Stock voting together as a single class, in favor of converting all of
the Series A Preferred Stock into Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in certain business combinations with
a person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date such person became an
interested stockholder unless: (i) the transaction resulting in the acquiring
person's becoming an interested stockholder, or the business combination, is
approved by the Board of Directors of the Company before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the Company in the same transaction which makes
it an interested stockholder (excluding certain employee stock option plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the Company's board of directors and by the
holders of at least 66 2/3% of the Company's outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested stockholder.
An "interested stockholder" is defined as any person that is (x) the owner of
15% or more of the outstanding voting stock of the Company or (y) an affiliate
or associate of the Company and was the owner of 15% or more of the outstanding
voting stock of the Company at any time within the three year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder.
DIRECTORS' LIABILITY
The Company's Restated Certificate of Incorporation contains provisions to
(i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty (other than breaches of the duty
of loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
DGCL, for any transaction from which the director derived an improper personal
benefit or any act or omission occurring prior to the date when the provision
became effective) and (ii) indemnify its directors and officers to the fullest
extent permitted by Section 145 of the DGCL, including circumstances in which
indemnification is otherwise discretionary. The Company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
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CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Restated Certificate of Incorporation and Amended and Restated
By-Laws contain several provisions that may be deemed to have the effect of
making more difficult the acquisition of control of the Company by means of a
hostile tender offer, open market purchases, a proxy contest or otherwise. The
provisions of the Restated Certificate of Incorporation and the Amended and
Restated By-Laws discussed below are designed to help to ensure that holders of
Common Stock are treated fairly and equally in a multistep acquisition. In
addition, they are intended to encourage persons seeking to acquire control of
the Company to initiate such an acquisition through arm's-length negotiations
with the Company's Board of Directors.
CLASSIFIED BOARD OF DIRECTORS. The Company's Restated Certificate of
Incorporation provides that the Board of Directors shall be divided into three
classes of directors serving staggered terms. One class of directors will be
elected at each annual meeting of stockholders for a three-year term. See
"Management -- Classified Board of Directors." Thus, at least two annual
meetings of stockholders, instead of one, generally will be required to change
the majority of the Company's Board of Directors. This may have the effect of
making it more difficult to acquire control of the Company by means of a hostile
tender offer, open market purchases, a proxy contest or otherwise.
STOCKHOLDER MEETINGS. Subject only to the rights of holders of preferred
stock, only a majority of the Company's Board of Directors, the Chairman, the
President or Chief Executive Officer will be able to call an annual meeting of
stockholders and only a majority of the Company's Board of Directors, by
majority vote, or the Chairman, the President or the Chief Executive Officer,
will be able to call a special meeting of stockholders. In addition, subject
only to the rights of holders of preferred stock, stockholders may not take any
action by written consent.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The Company's Restated
Certificate of Incorporation provides that certain business combinations such as
mergers and stock and assets sales, with an interested stockholder (typically a
beneficial owner of more than 15% of the outstanding voting shares of the
Company's capital stock, excluding certain persons), be approved by (a) the
holders of 75% of the voting power of the then outstanding voting shares, voting
together as a single class, and (b) at least a majority of the voting power of
the then outstanding voting shares, voting as a single class, which are not
owned beneficially, directly or indirectly, by the interested stockholder,
unless the transaction is approved by a majority of certain directors or meets
certain fair price provisions.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. The Company's Restated Certificate of Incorporation establishes
advance notice procedures with regard to stockholder nominations, other than by
or at the direction of the Board of Directors, of candidates for election as
directors. The Amended and Restated By-Laws establishes advance notice
procedures with regard to stockholder proposals other than by or at the
direction of the Board of Directors of business to be brought before a meeting.
VOTE REQUIRED TO AMEND OR REPEAL CERTAIN PROVISIONS OF THE COMPANY'S
RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS. The
Company's Restated Certificate of Incorporation establishes certain super
majority voting requirements to amend or repeal certain provisions of the
Company's Restated Certificate of Incorporation and Amended and Restated
By-Laws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 7,889,651 shares of
Common Stock outstanding (8,189,651 shares if the Underwriters' over-allotment
option is exercised in full). In addition, as of September 30, 1996, there has
been reserved 5,047,603 shares of Common Stock for issuance upon the conversion
or exercise of outstanding securities. The 2,000,000 shares of Common Stock to
be sold in the Offering (2,300,000 shares if the Underwriters' over-allotment
option is exercised in full), other than shares which may be purchased by
"affiliates" of the Company, will be freely tradeable without restriction or
further registration under the Securities Act. The 3,910,000 shares of Common
Stock sold in the IPO, other than shares which were purchased by affiliates of
the Company, are also freely tradable without restriction under the Securities
Act. In addition, an aggregate of 1,073,600 shares of Common Stock which are
outstanding and 3,227,703 shares of Common Stock which are issuable upon the
conversion or exercise of outstanding securities are registered in the
Concurrent Offering. The Company intends to file a Registration Statement on
Form S-8 with respect to up to 1,805,963 shares of Common Stock issuable
pursuant to its stock option plans and certain options and warrants which have
been granted to employees and consultants of the Company as soon as practicable
after the date of this Prospectus; such Registration Statement would include
1,344,157 shares of Common Stock issuable upon conversion or exercise of
outstanding securities of the Company. Approximately 1,381,794 of the remaining
shares of Common Stock outstanding and issuable upon conversion or exercise of
outstanding securities would be "restricted securities," as that term is defined
under Rule 144, and may only be sold pursuant to a registration statement under
the Securities Act or an applicable exemption from the registration requirements
of the Securities Act, including Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least two years from the later of the date such
restricted shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (78,897 shares based on the number of shares
to be outstanding immediately after the Offering or 111,174 shares assuming all
of the shares offered in the Concurrent Offering are issued), or the average
weekly trading volume in the public market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain requirements as to the manner
and notice of sale and the availability of public information concerning the
Company.
Affiliates may sell shares not constituting restricted shares in accordance
with the foregoing volume limitations and other restrictions, but without regard
to the two year holding period. Restricted shares held by affiliates of the
Company eligible for sale in the public market under Rule 144 are subject to the
foregoing volume limitations and other restrictions. Further, under Rule 144(k),
if a period of at least three years has elapsed between the later of the date
restricted shares were acquired from the Company and the date they were acquired
from an affiliate of the Company, and the person was not an affiliate for at
least three months prior to the sale, such person would be entitled to sell the
shares immediately without regard to volume limitations and the other conditions
described above. The Commission has proposed to amend the holding period of
restricted securities being sold in reliance on Rule 144 to (i) a one year
holding period rather than a two year holding period for resales of restricted
securities by affiliates or non-affiliates which comply with the volume
limitations and the other conditions described above, and (ii) a two year
holding period rather than a three year holding period for resales by
non-affiliates which, in reliance on Rule 144(k), do not comply with the volume
limitations and the other conditions described above.
In addition, as of September 30, 1996 the Company had outstanding securities
which are exercisable for or convertible into an aggregate of 5,047,603 shares
of Common Stock at a weighted average exercise/conversion price of $7.99. Of
such shares, 4,194,425 are subject to lock-up agreements.
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All officers, directors and certain security holders, agreed with Hampshire
in connection with the IPO not to, directly or indirectly, offer, sell, contract
to sell or otherwise dispose of their shares of Common Stock or other securities
of the Company, without the prior written consent of Hampshire prior to August
22, 1997. Hampshire has agreed with Jefferies not to release any of such
security holders from the contractual restriction without the prior written
consent of Jefferies. The Company has, subject to certain exceptions, agreed not
to offer, issue or sell any shares of Common Stock or securities exercisable for
or convertible into shares of Common Stock for a 180 day period after the date
of this Prospectus without the prior written consent of Jefferies. No
predictions can be made as to the effect, if any, that market sales of shares of
existing stockholders or the availability of such shares for future sale will
have on the market price of shares of Common Stock prevailing from time to time.
The prevailing market price of Common Stock after the Offering could be
adversely affected by future sales of substantial amounts of Common Stock by
existing stockholders.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to Jefferies & Company, Inc. and Hampshire
Securities Corporation (the "Underwriters"), and the Underwriters have severally
agreed to purchase, the number of shares of Common Stock set forth opposite
their respective names in the table below at the price set forth on the cover
page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
Jefferies & Company, Inc.........................................................
Hampshire Securities Corporation.................................................
-----------
Total........................................................................ 2,000,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Common Stock offered hereby is subject to certain
conditions. The Underwriters are committed to purchase all of the shares of the
Common Stock offered hereby (other than those covered by the over-allotment
option described below), if any are purchased.
The Underwriters propose to offer the Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus, and
to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per share to certain other dealers. After the
Offering, the public offering price, the concession to selected dealers and the
reallowance to other dealers may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 300,000 additional
shares of Common Stock at the public offering price less the underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase additional shares of
Common Stock proportionate to such Underwriter's initial commitment as indicated
in the preceding table. The Underwriters may exercise such right of purchase
only for the purpose of covering over-allotments, if any, made in connection
with the sale of the shares of Common Stock.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company has agreed with the Underwriters not to offer, issue or sell any
shares of Common Stock or securities exercisable for or convertible into shares
of Common Stock for a period of 180 days from the date of this Prospectus,
subject to certain limited exceptions, without the prior written consent of
Jefferies. In connection with the IPO, certain holders of Common Stock owning an
aggregate of 4,831,305 shares, including all of the officers and directors of
the Company, agreed not to publicly sell or otherwise dispose of their shares of
Common Stock, securities of the Company convertible into, or exercisable or
exchangeable for, shares of Common Stock, or shares of Common Stock received
upon conversion, exercise, or exchange of such securities, without the prior
consent of Hampshire until August 22, 1997. Hampshire has agreed with Jefferies
not to release any of such security holders from the contractual restriction
without the prior written consent of Jefferies. See "Risk Factors -- Substantial
Amount of Shares Eligible For Future Sale; Potential Adverse Effect on Market
Price of Common Stock."
Certain of the Underwriters and selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in the
Common Stock on the Nasdaq Stock Market in accordance with Rule 10b-6A under the
Exchange Act. Rule 10b-6A permits, upon the
60
<PAGE>
satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also market makers in the security
being distributed to engage in limited market making transactions during the
period when Rule 10b-6 under the Exchange Act would otherwise prohibit such
activity. Rule 10b-6A prohibits underwriters and selling group members engaged
in passive market making generally from entering a bid or effecting a purchase
at a price that exceeds the highest bid for those securities on the Nasdaq Stock
Market by a market maker that is not participating in the distribution. Under
Rule 10b-6A each underwriter or selling group member engaged in passive market
making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately preceding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be distributed.
OTHER MATTERS RELATING TO HAMPSHIRE
Hampshire acted as the placement agent in connection with the 1995 Unit
Private Placement and received a $539,482 commission and reimbursement of
certain expenses in connection with such offering. As of August 31, 1996,
persons associated with Hampshire or related thereto own an aggregate of
$175,000 principal amount of the notes and warrants to purchase up to 105,000
shares of Common Stock.
Hampshire acted as representative of the underwriters in connection with the
IPO and received commissions of approximately $3,128,000 and reimbursement of
certain expenses in connection with the offering, as well as a 2%
non-accountable expense allowance and warrants to purchase an aggregate of
327,500 shares of Common Stock at an exercise price of $16.50 per share.
In connection with the IPO, the Company agreed that, for the three year
period commencing on February 22, 1996, Hampshire has the right to appoint a
designee as an observer at all meetings of the Company's Board of Directors.
This designee has the right to attend all meetings of the Board of Directors and
shall be entitled to receive reimbursement for all out-of-pocket expenses of
attendance at such meetings. In addition, such designee shall be indemnified and
insured to the same extent as the Company's directors. The shares of Common
Stock issuable upon exercise of the warrant which Hampshire received in
connection with the IPO are registered in the Concurrent Offering.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Shereff,
Friedman, Hoffman & Goodman, LLP, New York, New York, and for the Underwriters
by Fulbright & Jaworski L.L.P., New York, New York. Certain regulatory legal
matters will be passed upon for the Company by Arent Fox Kintner Plotkin & Kahn,
Washington, D.C. Mr. Nussbaum, a Director of the Company, is a member of
Shereff, Friedman, Hoffman & Goodman, LLP, New York, New York. See "Principal
Stockholders" and "Certain Relationships and Related Party Transactions."
61
<PAGE>
EXPERTS
The financial statements included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Washington, DC 20549, or at the Commission's regional offices:
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 19948.
The Common Stock is traded on the Nasdaq National Market.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to such Registration Statement and exhibits. A copy of the Registration
Statement on file with the Commission may be obtained from the Commission's
principal office in Washington, D.C., upon payment of the fees prescribed by the
Commission.
Copies of the Registration Statement may be obtained from the Commission at
its principal office upon payment of prescribed fees. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed as
an exhibit to the Registration Statement, each such statement is qualified in
all respects by reference to the applicable document filed with the Commission.
The Registration Statement of which this Prospectus forms a part has been filed
electronically through the Commission's Electronic Data Gathering Analysis and
Retrieval System and may be obtained through the Commission's website on the
Internet (http://www.sec.gov).
62
<PAGE>
ULTRAFEM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' (Deficiency) Equity............................................................ F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of
Ultrafem, Inc.:
We have audited the accompanying balance sheets of Ultrafem, Inc. (the
"Company") as of June 30, 1996 and 1995, and the related statements of
operations, stockholders' (deficiency) equity, and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
August 12, 1996 (August 27, 1996 as to Note 7)
F-2
<PAGE>
ULTRAFEM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
-------------------------------- ---------------
1995 1996 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 73,390 $ 24,510,071 $ 16,663,098
Accounts receivable......................................... -- -- 157,806
Inventory................................................... -- 266,951 1,176,443
Prepaid marketing and other current assets.................. 10,714 609,503 1,568,333
--------------- --------------- ---------------
Total Current Assets.................................... 84,104 25,386,525 19,565,680
Property and equipment -- net................................. 302,719 2,875,153 5,704,695
Other assets -- net........................................... 380,136 1,146,258 1,496,257
--------------- --------------- ---------------
Total Assets............................................ $ 766,959 $ 29,407,936 $ 26,766,632
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Short-term debt............................................. $ 530,549 $ -- $ --
Current portion -- long-term debt........................... 293,389 3,442,013 3,208,888
Accounts payable............................................ 327,881 893,548 1,710,811
Accrued interest............................................ 638,315 724,932 762,541
Accrued salaries............................................ 391,534 1,426,093 1,662,363
Other accrued liabilities................................... 564,578 937,406 1,848,967
--------------- --------------- ---------------
Total Current Liabilities............................... 2,746,246 7,423,992 9,193,570
Long-term debt................................................ 4,032,493 700,000 700,000
--------------- --------------- ---------------
Total Liabilities....................................... 6,778,739 8,123,992 9,893,570
--------------- --------------- ---------------
Stockholders' (Deficiency) Equity:
Preferred stock, $.001 par value -- authorized, 5,000,000
shares $8 cumulative Convertible Series A: issued and
outstanding 6,532.5 and 1,121.25 shares stated at
liquidation preference of $653,250 and $112,125,
respectively.............................................. 653,250 112,125 --
Common Stock, $.001 par value -- authorized 20,000,000
shares; outstanding 1,389,412, 5,737,241 and 5,889,651
shares, respectively (stated at).......................... 5,558 9,905 10,058
Additional paid-in capital.................................. 4,555,215 42,207,697 43,366,219
Deficit..................................................... (11,225,803) (21,045,783) (26,503,215)
--------------- --------------- ---------------
Total Stockholders' (Deficiency) Equity................. (6,011,780) 21,283,944 16,873,062
--------------- --------------- ---------------
Total Liabilities and Stockholders' (Deficiency)
Equity................................................. $ 766,959 $ 29,407,936 $ 26,766,632
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................. $ -- $ -- $ -- $ -- $ 192,540
Cost and Expenses:
Cost of sales (exclusive of
depreciation)...................... -- -- -- -- 358,377
Marketing, sales and distribution... -- 123,531 2,406,277 345,416 2,921,392
Research and development............ 452,552 181,475 1,403,557 70,616 394,778
General and administrative.......... 1,387,784 1,444,911 5,095,261 597,529 1,924,557
Depreciation and amortization....... 126,872 166,533 738,883 78,182 213,355
------------- ------------- ------------- ------------- -------------
Loss from operations.................. 1,967,208 1,916,450 9,643,978 1,091,743 5,619,919
Interest income....................... -- -- (489,379) (2,820) (285,345)
Interest expense...................... 336,732 464,615 665,381 168,160 122,858
------------- ------------- ------------- ------------- -------------
Net loss.............................. $ 2,303,940 $ 2,381,065 $ 9,819,980 $ 1,257,083 $ 5,457,432
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net loss per share.................... $ 0.87 $ 0.87 $ 2.74 $ 0.49 $ 0.94
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average number of common
shares and equivalents outstanding... 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL
CONVERTIBLE ----------------------- PAID-IN
SERIES A SHARES AMOUNT CAPITAL (DEFICIT)
----------- ------------ --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993.................................. 1,312,812 $ 5,251 $ 3,961,752 $ (6,540,798)
Issuance of stock for consulting services (valued at
$8.00 per share)..................................... 1,500 6 11,994 --
Issuance of options and warrants (valued at $0.23529
per option and warrant).............................. -- -- 132,021 --
Net loss.............................................. -- -- -- (2,303,940)
----------- ------------ --------- ------------- --------------
BALANCE, JUNE 30, 1994.................................. 1,314,312 5,257 4,105,767 (8,844,738)
Sales of stock ($8.00 per share) net of costs of
$74,720.............................................. 28,125 113 150,167 --
Issuance of stock warrants ($0.23529 per warrant)..... -- -- 28,000 --
Issuance of stock for consulting and other services
(valued at $8.00 to $15.66 per share)................ 30,100 120 221,660 --
Conversion of convertible debt........................ 16,875 68 134,932 --
Sales of Series A Preferred Stock ($100 per share) net
of costs of $100,505................................. $ 653,250 -- -- (100,505) --
Issuance of options and warrants (valued at $0.23529
per option and warrant).............................. -- -- -- 15,194 --
Net loss.............................................. -- -- -- -- (2,381,065)
----------- ------------ --------- ------------- --------------
BALANCE, JUNE 30, 1995.................................. 653,250 1,389,412 5,558 4,555,215 (11,225,803)
Sales of stock ($10.00 per share) net of costs of
$5,014,389........................................... -- 3,910,000 3,910 34,081,701 --
Exercise of stock options and warrants................ -- 298,104 298 1,869,224 --
Sale of warrants...................................... -- -- -- 527 --
Issuance of options and warrants...................... -- -- -- 945,044 --
Conversion of preferred stock to common stock ($5.00
per share)........................................... (541,125) 108,225 108 541,017 --
Conversion of convertible debt ($5.00 to $10.00 per
share)............................................... -- 31,500 31 214,969 --
Net loss.............................................. -- -- -- -- (9,819,980)
----------- ------------ --------- ------------- --------------
BALANCE, JUNE 30, 1996.................................. 112,125 5,737,241 9,905 42,207,697 (21,045,783)
Exercise of stock options and warrants................ -- 116,960 118 578,432 --
Issuance of warrants ($10.00 per share)............... -- -- -- 337,500 --
Issuance of stock..................................... -- 25 -- 500 --
Conversion of preferred stock to common stock
($5.00 per share).................................... (112,125) 22,425 22 112,103 --
Conversion of convertible debt
($10.00 per share)................................... -- 13,000 13 129,987
Net loss.............................................. (5,457,432)
----------- ------------ --------- ------------- --------------
BALANCE, SEPTEMBER 30, 1996
(unaudited)............................................ $ -- 5,889,651 $ 10,058 $ 43,366,219 $ (26,503,215)
----------- ------------ --------- ------------- --------------
----------- ------------ --------- ------------- --------------
<CAPTION>
TOTAL
-------------
<S> <C>
BALANCE, JUNE 30, 1993.................................. $ (2,573,795)
Issuance of stock for consulting services (valued at
$8.00 per share)..................................... 12,000
Issuance of options and warrants (valued at $0.23529
per option and warrant).............................. 132,021
Net loss.............................................. (2,303,940)
-------------
BALANCE, JUNE 30, 1994.................................. (4,733,714)
Sales of stock ($8.00 per share) net of costs of
$74,720.............................................. 150,280
Issuance of stock warrants ($0.23529 per warrant)..... 28,000
Issuance of stock for consulting and other services
(valued at $8.00 to $15.66 per share)................ 221,780
Conversion of convertible debt........................ 135,000
Sales of Series A Preferred Stock ($100 per share) net
of costs of $100,505................................. 552,745
Issuance of options and warrants (valued at $0.23529
per option and warrant).............................. 15,194
Net loss.............................................. (2,381,065)
-------------
BALANCE, JUNE 30, 1995.................................. (6,011,780)
Sales of stock ($10.00 per share) net of costs of
$5,014,389........................................... 34,085,611
Exercise of stock options and warrants................ 1,869,522
Sale of warrants...................................... 527
Issuance of options and warrants...................... 945,044
Conversion of preferred stock to common stock ($5.00
per share)........................................... --
Conversion of convertible debt ($5.00 to $10.00 per
share)............................................... 215,000
Net loss.............................................. (9,819,980)
-------------
BALANCE, JUNE 30, 1996.................................. 21,283,944
Exercise of stock options and warrants................ 578,550
Issuance of warrants ($10.00 per share)............... 337,500
Issuance of stock..................................... 500
Conversion of preferred stock to common stock
($5.00 per share).................................... --
Conversion of convertible debt
($10.00 per share)................................... 130,000
Net loss.............................................. (5,457,432)
-------------
BALANCE, SEPTEMBER 30, 1996
(unaudited)............................................ $ 16,873,062
-------------
-------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------ ----------------------------
1994 1995 1996 1995 1996
------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss..................................... $ (2,303,940) $ (2,381,065) $ (9,819,980) $ (1,257,083) $ (5,457,432)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................. 61,542 62,996 79,184 15,847 109,284
Amortization of debt issuance,
consulting, licensing and
patent costs............................ 65,320 103,535 659,699 62,335 104,071
Amortization of debt discount............ 43,578 43,480 -- -- --
Loss on disposal of equipment............ -- -- -- -- 7,724
Non-cash officers compensation........... -- -- 1,411,871 38,463 192,970
Non-employee stock based compensation.... 12,000 221,780 385,044 -- --
Non-employee stock based claim
settlement.............................. -- -- -- -- 338,000
Other non-cash items..................... 44,964 15,194 -- -- --
Changes in operating assets and
liabilities............................. 311,993 1,103,808 (291,271) (185,745) (745,925)
------------ ------------ -------------- ------------ --------------
Net Cash Used in Operating
Activities............................ (1,764,543) (830,272) (7,575,453) (1,326,183) (5,451,308)
------------ ------------ -------------- ------------ --------------
Cash flows from investing activities:
Purchase of and deposits on property and
equipment................................... (23,667) (3,028) (2,651,618) -- (2,946,550)
------------ ------------ -------------- ------------ --------------
Net Cash Used in Investing
Activities............................ (23,667) (3,028) (2,651,618) -- (2,946,550)
------------ ------------ -------------- ------------ --------------
Cash flows from financing activities:
Proceeds from secured notes.................. 1,850,000 -- -- -- --
Proceeds from issuance of subordinated
convertible debentures...................... -- 225,000 -- -- --
Proceeds from sale of convertible
debentures.................................. -- -- 2,125,000 2,125,000 --
Proceeds from notes payable.................. -- 135,000 2,227,870 2,127,870 --
Proceeds from sale of preferred stock (net of
related expenses)........................... -- 552,745 -- -- --
Proceeds from sale of common stock (net of
related expenses)........................... -- 150,280 34,085,611 -- --
Proceeds from sale of options and warrants... -- 28,000 527 -- --
Proceeds from exercise of stock options and
warrants.................................... -- -- 1,794,054 -- 654,010
Repayment of borrowings...................... (30,000) (84,800) (4,852,287) (614,155) (103,125)
Debt issue costs............................. (31,500) (110,025) (717,023) (719,662) --
------------ ------------ -------------- ------------ --------------
Net Cash Provided by Financing
Activities............................ 1,788,500 896,200 34,663,752 2,919,053 550,885
------------ ------------ -------------- ------------ --------------
Net increase (decrease) in cash.............. 290 62,900 24,436,681 1,592,870 (7,846,973)
------------ ------------ -------------- ------------ --------------
Cash and cash equivalents, beginning of
period...................................... 10,200 10,490 73,390 73,390 24,510,071
------------ ------------ -------------- ------------ --------------
Cash and cash equivalents, end of period..... $ 10,490 $ 73,390 $ 24,510,071 $ 1,666,260 $ 16,663,098
------------ ------------ -------------- ------------ --------------
------------ ------------ -------------- ------------ --------------
</TABLE>
(Continued on next page)
See notes to financial statements.
F-6
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------ ----------------------------
1994 1995 1996 1995 1996
------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Changes in operating assets and liabilities
consist of:
(Increase) in accounts receivable..... $ -- $ -- $ -- $ -- $ (157,806)
(Increase) in inventory............... -- -- (266,951) -- (909,492)
(Increase) decrease in prepaid
marketing and other current assets... 51,696 (2,841) (523,322) (71,133) (1,034,290)
(Increase) in other assets............ (56,379) (151,272) (233,798) (112,461) (454,070)
Increase in accounts payable.......... 97,388 937,594 650,667 92,221 817,263
Increase (decrease) in accrued
liabilities.......................... 219,288 320,327 82,133 (94,372) 992,470
------------ ------------ ------------- ---------- ------------
$ 311,993 $ 1,103,808 $ (291,271) $ (185,745) $ (745,925)
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Supplementary Information:
Cash paid during the year for:
Interest............................ $ 178,170 $ 955 $ 578,764 $ 250,415 $ 77,754
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Taxes............................... $ 1,348 $ 1,271 $ 4,094 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Non-cash financing activities:
Conversion of accounts payable and
accrued liabilities to long-term
debt................................. $ 373,555 $ 1,586,666 $ -- $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of notes payable to common
stock................................ $ -- $ 135,000 $ -- $ -- $ 130,000
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Issuance of warrants in connection
with debt offering................... $ 87,057 $ -- $ -- $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of secured notes and notes
payable to convertible debentures.... $ -- $ -- $ 850,000 $ 850,000 $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of secured notes to notes
payable.............................. $ -- $ -- $ 850,000 $ 850,000 $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of convertible debt to
common stock......................... $ -- $ -- $ 215,000 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of accounts payable to
warrants............................. $ -- $ -- $ 85,000 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Issuance of below market value options
and warrants in connection with
professional services, licensing and
consulting agreements................ $ -- $ -- $ 860,044 $ -- $ 338,000
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of preferred stock to
common stock......................... $ -- $ -- $ 541,125 $ -- $ 112,125
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Amounts receivable from the issuance
of common stock...................... $ -- $ -- $ 75,467 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Ultrafem, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on March 22, 1990 and is engaged in the
manufacturing and sale of its proprietary feminine protection product. At June
30, 1996, principal operations had commenced and during August 1996 the Company
began selling its product INSTEAD-TM-; accordingly, the Company is no longer
considered a development stage enterprise as it was through June 30, 1996. There
is no assurance that commercially successful products will be developed nor that
the Company will achieve a profitable level of operations.
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts of assets and
liabilities and 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.
CASH AND CASH EQUIVALENTS -- Cash equivalents include short-term investments
principally in commercial paper with an original maturity of three months or
less when purchased.
CONCENTRATION OF CREDIT RISK -- The Company places its temporary cash
investments and investments with high credit quality financial institutions and
by policy, limits the amount of credit exposure with any one financial
institution.
INVENTORY -- Inventories are stated at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost less
accumulated depreciation. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets which are between 3 and 10
years.
LICENSING COSTS -- Licensing costs are amortized over the life of the
license, which is ten years, using the straight-line method. Royalties based on
units sold will be expensed as incurred.
DEBT ISSUANCE COSTS -- Debt issuance costs in connection with various debt
agreements are amortized over the lives of the promissory notes issued in
connection with such agreements.
DEBT DISCOUNT -- Debt discount in connection with the issuance of debt with
stock purchase warrants are amortized over the life of the related obligation
and is included in interest expense in the accompanying statements of
operations.
PATENT COSTS -- Patent costs are stated at cost less accumulated
amortization. Patent costs are amortized using the straight-line method over the
17-year life of the patent when obtained, or expensed if not obtained. The
carrying value of intangible assets are periodically reviewed by the Company to
ensure that impairments are recognized when the future operating cash flows
expected to be derived from such intangible assets are less than their carrying
value.
STOCK OFFERING COSTS -- Costs incurred in connection with the sale of the
Company's equity securities are recorded as a reduction of the proceeds when
received. Costs incurred prior to the receipt of proceeds from the sale of the
Company's equity securities are capitalized until the proceeds are received or
expensed if such sale is not consummated.
RESEARCH AND DEVELOPMENT COSTS -- Research and development costs are
expensed as incurred.
MARKETING COSTS -- Marketing costs are expensed the first time the
advertisement or promotion takes place.
F-8
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION -- Revenue is recognized upon shipment of merchandise.
REVERSE STOCK SPLIT -- Effective July 28, 1995, the stockholders of the
Company approved a one-for-four reverse split of its common stock. All
references in the accompanying financial statements to the number of shares and
per share amounts have been retroactively restated to reflect this transaction.
LONG-LIVED ASSETS -- The Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," which is effective for fiscal years
beginning after December 15, 1995. The Company does not expect the effect on its
financial condition and results of operations from the adoption of this
statement to be material.
RECENTLY ISSUED ACCOUNTING STANDARD -- In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which is effective for the Company beginning July 1, 1996. The
standard encourages, but does not require, companies to recognize compensation
expense of grants for stock, stock options and other equity instruments to
employees based on fair value accounting rules. SFAS No. 123 requires companies
that choose not to adopt the new fair value accounting rules to disclose pro
forma net income and earnings per share under the new method. The Company will
continue to apply APB opinion No. 25 to its stock based compensation awards to
employees and will disclose the required pro forma effect on net income and
earnings per share in its annual financial statements.
LOSS PER COMMON AND COMMON EQUIVALENT SHARE -- Loss per common and common
equivalent share for the years ended June 30, 1996, 1995 and 1994 and for the
three months ended September 30, 1996 and 1995 was computed using the weighted
average number of common shares outstanding during each period. The weighted
average number of common shares outstanding during the first half of fiscal year
1996 (including the three months ended September 30, 1995), and during fiscal
years 1995 and 1994 includes incremental shares for the common stock, warrants
and other potentially dilutive securities issued and options granted to purchase
common stock which were issued within one year prior to the effective date of
the Company's initial public offering (the "Incremental Shares"). Such
Incremental Shares were determined utilizing the treasury stock method. The
effect of the assumed exercise of stock options which were issued in periods
prior to the one-year period previously mentioned and the effect of the assumed
conversion of the convertible preferred stock are not included for 1995 and 1994
because their effect is antidilutive. Loss per common share assuming full
dilution is not presented because such calculation is antidilutive.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior year
balances in order to conform with the current year presentation.
UNAUDITED QUARTERLY FINANCIAL INFORMATION -- In the opinion of management,
the Company's unaudited financial statements contain all adjustments (consisting
of normal and recurring adjustments), necessary for a fair presentaion of the
Company's financial position and results of operations at such dates and for
such periods.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1996, the fair values of cash, cash equivalents,
non-convertible short-term debt and current portion of long-term debt, accounts
payable, accrued interest, accrued salaries and other accrued liabilities
approximated their carrying values because of the short-term nature of these
instruments. The estimated fair values of the convertible debt subject to fair
value disclosures was
F-9
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
2. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
determined by reference to the quoted market price of the Company's Common Stock
at September 30, 1996, multiplied by the number of common shares the debt is
convertible into, and the related carrying amounts at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
------------- --------------
<S> <C> <C> <C>
Convertible Debt............................... $ 3,727,432 $ 16,886,869
------------- --------------
------------- --------------
</TABLE>
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Raw materials.................................... $ -- $ 258,919 $ 499,014
Work-in-process.................................. -- -- 40,985
Finished goods................................... -- 8,032 636,444
------------- ------------- -------------
$ -- $ 266,951 $ 1,176,443
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Machinery and equipment.......................... $ 392,049 $ 1,480,205 $ 1,516,896
Office furniture and equipment................... 52,082 105,096 138,551
Laboratory equipment............................. 49,766 49,766 48,691
Leasehold improvements........................... 762 439,172 472,521
Computer equipment............................... -- 267,970 309,994
Construction in progress......................... -- 804,068 3,583,278
------------- ------------- -------------
494,659 3,146,277 6,069,931
Less accumulated depreciation and amortization... (191,940) (271,124) (365,236)
------------- ------------- -------------
$ 302,719 $ 2,875,153 $ 5,704,695
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-10
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Patent and trademark costs....................... $ 164,632 $ 222,493 $ 259,846
Debt issuance costs.............................. 232,817 971,490 971,490
Deferred debt and warrant offering costs......... 137,273 -- --
Deferred second offering costs................... -- 70,000 458,744
Consulting agreement............................. -- 275,000 275,000
Licensing agreements............................. -- 400,000 400,000
Security deposits................................ 14,270 35,830 63,803
------------- ------------- -------------
548,992 1,974,813 2,428,883
Less accumulated amortization.................... (168,856) (828,555) (932,626)
------------- ------------- -------------
$ 380,136 $ 1,146,258 $ 1,496,257
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
6. DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER
JUNE 30, 30,
---------------------- -----------
1995 1996 1996
---------- ---------- -----------
Unsecured demand notes to former
officers, interest at 6% per year
(b)................................... $ 206,010 $ -- $ --
<S> <C> <C> <C>
Unsecured note to Johns Hopkins
University, due March, 1995, interest
at 7.5% per year (c).................. 324,539 -- --
---------- ---------- -----------
$ 530,549 $ -- $ --
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-11
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
6. DEBT (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Unsecured notes, due June, 1995, interest at 10%
per year (a).................................... $ 1,850,000 $ -- $ --
Unsecured convertible notes, due April, 1997
interest at 10% per
year (a)........................................ -- 2,875,000 2,875,000
Convertible debentures, due December, 1998 to
October, 1999, interest compounded annually at
10.5% per year (f).............................. 700,000 700,000 700,000
Unsecured notes to former officers, due December,
1995 to December, 1996, interest at 6% or 10%
per year (b).................................... 476,680 221,033 117,908
Unsecured notes to officer/shareholder, due
September, 1996, interest at 10% per year (b)... 313,543 -- --
Unsecured notes to trade and other creditors, due
October, 1996 to March, 1997, interest at 9% or
10% per year (d)................................ 588,227 63,548 63,548
Subordinated convertible debentures, due on
demand or due August, 1996 to November, 1996,
interest at 10% per year (e).................... 397,432 282,432 152,432
------------- ------------- -------------
4,325,882 4,142,013 3,908,888
Less current maturities.......................... (293,389) (3,442,013) (3,208,888)
------------- ------------- -------------
$ 4,032,493 $ 700,000 $ 700,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Annual maturities on long-term debt as of June 30, 1996 during the next five
years are:
<TABLE>
<CAPTION>
PERIOD
ENDED
JUNE 30,
-------------
<S> <C>
1997........................................................................... $ 3,442,013
1998........................................................................... --
1999........................................................................... 350,000
2000........................................................................... 350,000
2001........................................................................... --
-------------
$ 4,142,013
-------------
-------------
</TABLE>
- ------------------------
(a) During June, 1995, the Company entered into an Agreement with an investment
banking firm, Hampshire Securities Corporation ("Hampshire") for the private
placement of securities, which closed during July, 1995 and September, 1995
(the "1995 Unit Private Placement"), in which the Company raised $5,950,000
through the sale of Units. Each "Unit" consisted of one $50,000 non-
convertible promissory note bearing interest at 10% per annum (the
"Non-Convertible Notes"),
F-12
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
6. DEBT (CONTINUED)
one $50,000 convertible promissory note bearing interest at 10% per annum
and which is convertible into shares of Common Stock at a conversion price
per share equal to $5.00 (the "Convertible Notes"), one Class A Warrant to
purchase 10,000 shares of Common Stock at a purchase price per share equal
to $5.00 and one Class B Warrant to purchase 10,000 shares of Common Stock
at a purchase price per share equal to $12.50. Both Class A and Class B
Warrants expire five years from the date of issuance. In June, 1996 a
Convertible Note in the principal amount of $100,000 was converted into
20,000 shares of Common Stock. Certain holders of the Secured Notes which
were issued in a 1993 private placement agreed to amend and restate their
promissory notes and invest the principal amount of such notes in the amount
of $1,650,000 in the 1995 Unit Private Placement. On July 28, 1995, the
other Existing Investors were paid their principal and interest of $200,000
and $22,557, respectively, from the proceeds of the 1995 Unit Private
Placement. In addition, through June 30, 1996, interest of $186,281 was paid
related to the $1,650,000 Secured Notes. The Non-Convertible Notes in the
amount of $2,975,000 plus interest in the amount of $162,319 was paid on
February 27, 1996.
Under the terms of the 1995 Unit Private Placement, because the holders of
the $1,650,000 Secured Notes were not paid by December 31, 1995, they were
issued additional warrants to purchase a maximum of 165,000 shares of Common
Stock at an exercise price per share equal to $5.00. Holders of 350,000
existing warrants issued under the 1993 private placement, which are
exercisable at an exercise price equal to $9 per share were extended for
three years, as the holders of the warrants agreed not to dispose of the
warrants or the underlying Common Stock prior to August 22, 1997. Hampshire
was paid $539,482 in connection with the 1995 Unit Private Placement through
September 25, 1995.
(b) Unsecured notes to former officers and an officer/stockholder of the Company
represent loans made to the Company and accrued salaries which were
converted to promissory notes. Of such unsecured notes, principal in the
amount of $725,199 plus interest in the amount of $116,039 was paid through
June 30, 1996.
(c) As of June 30, 1995, the unsecured note was owed to The Johns Hopkins
University ("Johns Hopkins") by the Company under the terms of a research
and development agreement which expired June 30, 1993. $200,000 was paid on
September 7, 1995 and $124,539 plus interest of $58,999 was paid on April
19, 1996.
(d) During October, 1994 and March, 1995, the Company issued to certain trade
and other creditors unsecured notes in the principal amount of $588,227. Of
such unsecured notes, principal in the amount of $524,679 plus interest in
the amount of $24,260 was paid through September 30, 1996. As of June 30,
1996, June 30, 1995 and September 30, 1996 the Company owed a member of the
Board of Directors and a principal of ReProtect, LLC ("ReProtect") $15,099,
$30,198 and $15,099, respectively. During 1996, $15,099 of principal and
$1,415 of interest was paid to this director. Additionally, two other
principals of ReProtect were owed $44,698, $89,396 and $44,698 at June 30,
1996, June 30, 1995 and September 30, 1996, respectively. During 1996,
$44,698 of principal and $4,188 of interest was paid to these two
individuals.
(e) During October, 1994, the Company raised $450,000 through a private
placement of units composed in the aggregate of (i) $225,000 in subordinated
convertible debentures which accrues interest at 10% annually, maturing on
August 31, 1996 and convertible into 22,500 shares of Common Stock at $10.00
per share, (ii) warrants, exercisable for a five-year period, to purchase
47,813 shares of Common Stock at $10.00 per share, and (iii) 28,125 shares
of Common Stock at
F-13
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
6. DEBT (CONTINUED)
$8.00 per share. These shares of Common Stock, including those issuable upon
the conversion of the debentures or the exercise of the warrants, were
registered in a concurrent offering with the initial public offering. During
June, 1996 through August, 1996 subordinated convertible debentures in the
principal amount of $225,000 were converted into 22,500 shares of Common
Stock.
In October and November, 1994, the Company issued to certain trade creditors
subordinated convertible debentures for a total principal amount of
$172,432. Each such debenture has a two-year term, bears interest at 10% per
annum and is convertible into Common Stock at $10.00 per share. During June,
1996, $20,000 was converted into 2,000 shares of Common Stock.
During 1994, the Company borrowed a total of $135,000 from nine individuals,
including four current Directors. The loans required payment of 10% interest
per annum until maturity. Each lender was granted (i) the option of
receiving, in lieu of the repayment of interest and principal, 1,875 shares
of Common Stock at a price of $8.00 per share and (ii) warrants to purchase
375 shares of Common Stock at $10.00 per share for a five-year period
expiring on June 30, 1999. As of June 30, 1995, all of the nine individuals
have converted their loans into Common Stock.
(f) Between December, 1991 and October, 1992, the Company borrowed an aggregate
of $700,000 from the Montana Board of Science and Technology Development
evidenced by convertible debentures, of which $350,000 was borrowed to fund
expenditures relating to the Company's facility in Montana. The convertible
debentures are convertible into shares of Common Stock at $5.00 per share,
with accrued interest being waived upon conversion.
In January, 1996, the Company raised an additional $100,000 through a private
placement to a single investor of a $100,000 non-convertible promissory note
due the earlier of January 26, 1997 or the closing of the initial public
offering, bearing interest at a rate of 10% per annum and a Class C Warrant
to purchase 20,000 shares of Common Stock at an exercise price of $8.00 per
share. The Class C Warrant is not exercisable until the first anniversary of
the date of issuance and has a term of five years. The Company paid the
entire principal amount of $100,000 plus interest of $877 on February 27,
1996.
7. STOCK OPTIONS AND WARRANTS
In October, 1990, the Board of Directors authorized the 1990 Stock Option
Plan (the "1990 Plan") under which options to purchase up to 250,000 shares of
the Common Stock may be granted to employees, officers, directors, consultants
and advisors. In May, 1993, the number of shares covered was increased to
900,000 shares by resolution of the Board of Directors. The Board of Directors
is authorized to set the exercise period, the number of shares subject to each
option, the grantees receiving the options, and the exercise price at their best
determination of fair market value.
Options granted generally become exercisable over five years and expire ten
years from the date of grant. The Plan also provides for the granting of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1954, as amended.
On September 28, 1995, the Company adopted the 1995 Stock Option Plan for
Non-Employee Directors, a non-qualified stock option plan (the "1995 Plan"). The
1995 Plan reserves for the issuance of up to 250,000 shares of the Common Stock
pursuant to stock options to be granted to the Company's non-employee directors.
Over a period of six months, each of the five non-employee directors was granted
an option to purchase 15,000 shares of the Common Stock at fair market value
($8.00 and $14.50 per share). Such options become immediately exercisable with
respect to one-third
F-14
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
of the shares of Common Stock (5,000 shares), the remaining 10,000 shares of
Common Stock vest in equal annual installments over the next four years
following the anniversary date of the initial grant. The options expire ten
years from date of grant.
The following summarizes the stock option transactions under the 1990 Plan
for the years ended June 30, 1996, 1995, 1994 and the three months ended
September 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF PER SHARE
SHARES OPTION PRICE
---------- ------------------
<S> <C> <C>
Outstanding at June 30, 1993................................. 432,000 $4.00 -- $ 8.00
Granted.................................................... 4,500 $8.00
Canceled................................................... (107,500) $8.00
Outstanding at June 30, 1994................................. 329,000 $4.00 -- $ 8.00
Granted.................................................... 3,750 $4.00
Canceled................................................... (24,556) $8.00
Outstanding at June 30, 1995................................. 308,194 $4.00 -- $ 8.00
Granted.................................................... 310,000 $6.00 -- $10.50
Canceled................................................... (5,000) $8.00
Exercised.................................................. (8,591) $8.00
Outstanding at June 30, 1996................................. 604,603 $4.00 -- $10.50
Exercised.................................................. (6,250) $4.00
Outstanding at September 30, 1996............................ 598,353 $4.00 -- $10.50
Available for future grant September 30, 1996................ 286,806
Exercisable at September 30, 1996............................ 417,000 $4.00 -- $10.50
</TABLE>
A director and officers of the Company were issued options to purchase
624,862 shares of the Common Stock at $4.35 and $6.00 per share, resulting in
compensation expenses of approximately $3,348,000 which are amortized over the
remaining lives of their respective contracts. The expense for the year ended
June 30, 1996 and for the three months ended September 30, 1996 and 1995 was
$1,411,871, $192,970 and $38,463, respectively; accrued salaries as at June 30,
1996 and September 30, 1996 includes $1,411,871 and $1,604,841, respectively. Of
these options, options to purchase 574,862 shares of Common Stock are not
pursuant to either the 1990 Plan or the 1995 Plan. As of September 30, 1996,
options to purchase 344,917 shares of Common Stock are exercisable by the
officer/director of the Company.
As of June 30, 1996, the Board of Directors authorized and granted options
to purchase 479,125 shares of Common Stock at exercise prices of $4.00 to $8.00
per share, which vest over ten years. These options are not included in the 1990
Plan or the 1995 Plan. As of June 30, 1996, and September 30, 1996 options to
purchase 76,625 and 6,250 shares of Common Stock, respectively, have been
exercised respectively. Of these options, options to purchase 100,000 shares of
Common Stock were issued at $6.00 per share resulting in capitalized licensing
costs of $200,000 which will be amortized over the life of the research
agreement which is ten years.
The Company has warrants outstanding to purchase 2,665,187 shares of the
Common Stock at exercise prices varying from $0.004 per share to $16.50 per
share which generally vest over a three to five year period. Through September
30, 1996, warrants to purchase 343,806 shares of Common Stock with exercise
prices ranging from $0.004 to $10.00 per share were exercised. On August 1,
1995, warrants to purchase 26,625 shares of Common Stock at exercise prices of
$4.00 and $6.00 per share were exchanged for stock options. In April, 1996, the
Company issued a five-year warrant to purchase
F-15
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
200,000 shares of Common Stock at an exercise price of $11.00 per share (which
was below fair market value) in connection with the execution of a consulting
agreement. This resulted in an additional $275,000 consulting expense which will
be amortized over the three year term of the agreement. In June, 1996, the
Company issued five year warrants to purchase 20,000 shares of Common Stock at
an exercise price of $10.00 (which was below fair market value) in connection
with legal services provided to the Company. This resulted in an additional
$235,000 legal expense during the year ended June 30, 1996. On August 27, 1996
the Company issued five year warrants to purchase 30,000 shares of Common Stock
at an exercise price of $10.00 per share (which was below fair market value) in
connection with the settlement of a claim with certain individuals. This
resulted in an additional expense of $337,500 during the three months ended
September 30, 1996. The expenses referred to above were calculated as the excess
of fair market value over the grant price.
8. INCOME TAXES
The Company has a net operating loss ("NOL") carryforward of approximately
$26,503,000 for financial reporting purposes and approximately $12,500,000 for
tax purposes with research and development credit carryforward of approximately
$116,000 expiring in the years 2006 through 2010. The Company has not reflected
any benefit of such net operating loss carryforward in the accompanying
financial statements in accordance with Financial Accounting Standards Board
Statement No. 109 as the realization of this deferred tax benefit is not more
than likely. The NOL carryforward for tax purposes expires in the years 2006
through 2010. The difference between financial reporting and tax purposes
results from the temporary difference caused by the capitalization of start-up
expenditures for tax purposes as required by Internal Revenue Code Section 195.
The Tax Reform Act of 1986 provided for a limitation on the use of NOL
carryforwards, following certain ownership changes. As a result of transactions
in the Company's stock during 1993 through 1996, a change of ownership of
greater than 50%, as defined, may have occurred. Under such circumstances, the
potential benefits from utilization of tax carryforward may be substantially
limited or reduced on an annual basis.
9. OTHER RELATED PARTY TRANSACTIONS AND AGREEMENTS
During 1990, as part of the organization of the Company, the founder of the
Company and a Senior Vice-President and Director received 526,250 shares of the
Common Stock in exchange for assigning to the Company all pending patent
applications, trademarks, copyrights, technology and similar rights associated
with products relating to or evolving from the patent application filed by the
Senior Vice-President and Director. In addition, under the terms of an
employment agreement dated May 15, 1992, a royalty of $0.005 for each device
sold, as defined, will be paid. At September 30, 1996, $3,754 has been accrued
under this agreement.
On July 29, 1994 and as amended August 1, 1995, the Company entered into an
employment agreement with the President and Chief Executive Officer of the
Company. Among other matters he will receive a royalty of $0.005 for each unit
of feminine protection product sold and $0.01 for each unit sold for medical
purposes. At September 30, 1996, $3,754 has been accrued under this agreement
for the sale of units for feminine protection.
A director and stockholder of the Company is the Chairman of the Executive
Committee of an advertising agency used by the Company which was paid
approximately $1,077,000, $1,758,000 and $60,000 during the year ended June 30,
1996 and during the three months ended September 30, 1996 and 1995,
respectively. In addition, $560,000, $121,875 and $1,529,000 owed to such agency
are included in accrued liabilities and accounts payable at June 30, 1996, June
30, 1995 and September 30,
F-16
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
9. OTHER RELATED PARTY TRANSACTIONS AND AGREEMENTS (CONTINUED)
1996, respectively. In March, 1996, the Company issued a five year warrant to
purchase 50,000 shares of Common Stock at an exercise price of $10.00 per share
in repayment of $50,000 of fees owed to such agency, which were incurred in
connection with the launch of INSTEAD-TM-. This resulted in an additional
advertising expense of $118,500.
In March, 1996, the Company issued a five year warrant to purchase 35,000
shares of Common Stock to an entity formed by the partners of Shereff, Friedman,
Hoffman & Goodman, LLP, a law firm which provided legal services in connection
with the Company's initial public offering. The warrant has an exercise price of
$10.00 per share and was issued in repayment of $35,000 of legal fees which were
incurred in connection with the initial public offering. This resulted in an
additional legal expense of approximately $27,000 and a charge to additional
paid-in capital of $56,000. A partner of the law firm was appointed to the
Company's Board of Directors in April, 1996 and was issued five-year warrants to
purchase 15,000 shares of Common Stock at $14.50 per share. The total amount of
fees paid by the Company to such law firm was approximately $647,000, $30,000,
$222,000 and $157,000 for the years ended June 30, 1996 and June 30, 1995 and
for the three months ended September 30, 1996 and 1995, respectively. In
addition, $95,000, $50,000 and $179,000 owed to the law firm is included in
accrued liabilities at June 30, 1996, June 30, 1995 and September 30, 1996,
respectively.
The Company entered into a Research Agreement with Johns Hopkins commencing
July 1, 1991, which expired June 30, 1993. The Company reached an agreement (the
"ReProtect Agreement") with a company, ReProtect, formed by scientists
(including a current director) who previously conducted research for the Company
under this expired Research Agreement, to conduct research for the Company. The
ReProtect Agreement is for a ten year term and provides that the Company will
provide ReProtect $1 million annually for research after the IPO. The ReProtect
Agreement provides the Company with an exclusive license for the use of the
BufferGel Technology coupled with the SoftCup Technology, for which ReProtect
received a one time payment of $100,000, a ten year option to purchase 225,000
shares of Common Stock, exercisable upon the attainment of certain milestones
and will receive a royalty of $.01 per unit of the product sold. In addition,
ReProtect granted the Company a ten year license for vaginal use of the
BufferGel Technology without the SoftCup Technology, for which ReProtect
received a one time payment of $100,000, options to purchase 175,000 shares of
Common Stock, exercisable upon the attainment of certain milestones, and a
royalty of either 5% or 3% (depending on whether a patent has been issued) of
net sales of the BufferGel Technology (without the SoftCup Technology). The
ReProtect Agreement contains the parties' agreement to negotiate in good faith
to extend the term, as well as other customary provisions in agreements of this
type, including provisions relating to early termination of the agreement under
certain circumstances. Research and development expenditures pursuant to the
above agreements amounted to approximately $626,500, $60,230, $356,000 and
$250,000 for each of the years ended June 30, 1996, 1995, 1994, and for the
three months ended September 30, 1996, respectively. Included in prepaid
marketing and other current assets at June 30, 1996 and September 30, 1996 is
$83,300 of prepaid research and development expenditures paid to ReProtect.
10. PREFERRED STOCK
In 1995, the Company raised $670,000 through a private placement sale of
units. Each unit consisted of (1) 1,950 shares of Series A Preferred Stock, for
an allocated purchase price of $195,000, and (2) a warrant, exercisable for a
five-year period, to purchase 21,250 shares of Common Stock at $10.00 per share,
subject to adjustment for certain dilutive events for an allocated purchase
price of $5,000.
F-17
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
10. PREFERRED STOCK (CONTINUED)
Each share of Series A Preferred Stock is initially (a) convertible, at any
time at the option of the Holder, into Common Stock at a conversion rate of 12.5
shares of Common Stock for each such share, subject to adjustment for certain
dilutive events, (b) entitled to cumulative annual dividends of $8.00, (c)
participating with the Common Stock in any dividend after payment of said $8.00,
(d) has a liquidation preference of $100.00 and (e) entitled to the number of
votes equal to the number of shares of Common Stock into which such share can be
converted.
During the year ended June 30, 1996 and the three months ended September 30,
1996, 5,411.25 shares and 1,121.25 shares of Series A Preferred Stock were
converted into 108,225 shares and 22,425 shares, respectively, of Common Stock.
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES
The Company leases office and manufacturing facilities. Certain of these
leases require the Company to pay certain executory costs (such as insurance and
maintenance). In July, 1996, the Company signed a ten year lease for new office
space in New York, New York. The Company obtained a one year renewable standby
letter of credit, expiring in July, 1997, in the amount of approximately
$439,000 as rent security for the above premises collateralized by certain
marketable securities.
Future minimum lease payments for operating leases, including the new office
lease, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 337,027
1998........................................................................... 362,743
1999........................................................................... 451,571
2000........................................................................... 386,438
2001........................................................................... 386,438
Thereafter..................................................................... 2,244,198
-------------
$ 4,168,415
-------------
-------------
</TABLE>
Rental expense was approximately $123,000, $108,000, $223,000, $126,629 and
$11,787 and for the years ended June 30, 1996, 1995 and 1994 and for the three
months ended September 30, 1996 and 1995, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with four officers, two of
whom are directors of the Company.
The agreements all provide for the following: base salaries increasing upon
achievement of certain conditions, incentive bonus plans, severance benefits and
non-compete agreements. Certain of the agreements also include a five-year term,
signing bonuses, stock options upon attainment of specified goals, and royalties
on sales of the product.
F-18
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
MANUFACTURING EQUIPMENT AND IMPROVEMENTS
The Company has commitments in the amount of approximately $6,955,000 of
which approximately $3,635,000 was unpaid at September 30, 1996, for the
purchase of manufacturing equipment, improvements to the manufacturing facility
to support start-up production and leasehold improvements to the new New York
office space. The total commitments include approximately $693,800 and
approximately $149,000 of estimated costs to be incurred for improvements to the
New York office space, at June 30, 1996 and September 30, 1996, respectively.
12. INITIAL PUBLIC OFFERING
On February 27, 1996, the Company successfully completed its initial public
offering of Common Stock. The initial public offering was consummated with the
sale of 3,910,000 shares of its Common Stock at $10.00 per share with proceeds
of $34,085,611, net of related expenses of $5,014,389.
F-19
<PAGE>
[inside back cover]
[PHOTO OF MANUFACTURING PLANT]
INSTEAD IS MANUFACTURED ON CUSTOM-DESIGNED, STATE-OF-THE-ART EQUIPMENT AT
THE ULTRAFEM MONTANA FACILITY.
[PHOTO OF PRODUCT]
INSTEAD IS A DISPOSABLE, PATENTED PRODUCT THAT COLLECTS RATHER THAN ABSORBS
MENSTRUAL FLUID. ITS FLEXIBILITY MAKES IT EASY TO INSERT AND REMOVE.
A CUP-LIKE DEVICE THAT IS INSERTED INTO THE UPPER VAGINAL CANAL UNDER A
WOMAN'S CERVIX, INSTEAD GIVES UP TO TWELVE HOURS OF SAFE, COMFORTABLE
PROTECTION.
THE SOFT, INERT MATERIAL CONFORMS TO A WOMAN'S ANATOMY TO HELP FIT
COMFORTABLY AND SECURELY.
[PHOTO OF PRODUCT DISPLAY]
SALES CALLS IN THE PACIFIC NORTHWEST TO DATE HAVE RESULTED IN COMMITMENTS
FROM RETAILERS WHICH ACCOUNT FOR MORE THAN 75% OF ACV (ALL COMMODITY VOLUME) IN
THE FOOD AND DRUG CLASSES OF TRADE.
ULTRAFEM HAS OBTAINED FDA CLEARANCE TO MARKET INSTEAD IN THE UNITED STATES
AND FDA CLEARANCE FOR EXPORT OVERSEAS.
CONSUMERS OUTSIDE THE ORIGINAL LEAD MARKET CAN PURCHASE INSTEAD BY MAIL
THROUGH A SPECIAL TOLL FREE (888-367-9636) NUMBER.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Concurrent Sales by Selling Stockholders....... 8
Risk Factors................................... 9
Use of Proceeds................................ 16
Price Range of Common Stock.................... 17
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 19
Selected Financial Data........................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 21
Business....................................... 27
Management..................................... 40
Principal Stockholders......................... 49
Certain Relationships and Related Party
Transactions.................................. 51
Prior Financings............................... 52
Description of Capital Stock................... 54
Shares Eligible for Future Sale................ 58
Underwriting................................... 60
Legal Matters.................................. 61
Experts........................................ 62
Available Information.......................... 62
Index to Financial Statements.................. F-1
</TABLE>
2,000,000 SHARES
ULTRAFEM, INC. LOGO
COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.
HAMPSHIRE SECURITIES
CORPORATION
, 1996
<PAGE>
PROSPECTUS
4,301,303 SHARES
ULTRAFEM, INC. LOGO
COMMON STOCK
This Prospectus relates to the offer and sale by the holders thereof (the
"Selling Stockholders"), of 4,301,303 shares of common stock, par value $.001
per share (the "Common Stock"), of Ultrafem, Inc. ("Ultrafem" or the "Company")
including 3,227,703 shares issuable upon conversion or exercise of certain
outstanding securities convertible into or exercisable for shares of Common
Stock. (The shares of Common Stock offered hereby are sometimes referred to
herein as the "Securities.") The Company's Common Stock is quoted on the Nasdaq
National Market under the trading symbol "UFEM." On November 12, 1996, the last
reported sales price for the Common Stock on the Nasdaq National Market was
$21 3/8 per share. See "Price Range of Common Stock."
Subject to certain agreed upon lock-up periods more fully described below,
the Securities may be sold from time to time by the Selling Stockholders
directly, or through agents designated from time to time or through dealers or
underwriters also to be designated, on terms to be determined at the time of
sale. To the extent required, the specific Securities to be sold, the names of
the Selling Stockholders, the purchase price, the public offering price, the
names of any such agents, dealers or underwriters and any applicable commission
or discount with respect to a particular offer will be set forth in an
accompanying Prospectus supplement (or, if required, a post-effective amendment
to the Registration Statement of which this Prospectus forms a part). The
distribution of the Securities may be effected in one or more transactions that
may take place on the Nasdaq National Market or the over-the-counter market,
including ordinary broker's transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees, commissions or discounts may be paid by
the Selling Stockholders in connection with such sales. Certain Selling
Stockholders have agreed to effect such sales through Hampshire Securities
Corporation ("Hampshire"), one of the Representatives of the several
underwriters (the "Underwriters"), for a concurrent offering of Common Stock by
the Company. See "Concurrent Public Offering" and "Plan of Distribution."
The Selling Stockholders and intermediaries through whom the Securities are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Securities, and any
profits realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Stockholders
against certain liabilities, including liabilities under the Securities Act.
The Company will not receive any of the proceeds from the sale of Securities
offered hereby. Expenses of this Offering, estimated at $50,000, are payable by
the Company. The aggregate proceeds to the Selling Stockholders from the sale of
the Securities will be the purchase price of the Securities sold, less the
aggregate underwriting fees, discounts and commissions, if any. See "Selling
Stockholders."
A registration statement under the Securities Act with respect to an
underwritten public offering of shares of Common Stock by the Company has been
filed with the Securities and Exchange Commission (the "Commission"). The
Company will receive approximately $ in net proceeds from the concurrent
public offering (assuming no exercise of the Underwriters' over-allotment
option) after payment of underwriting discounts and commissions and estimated
expenses of such public offering. See "Concurrent Public Offering."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A SUBSTANTIAL
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET
FORTH UNDER "RISK FACTORS" ON PAGE 9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER , 1996.
<PAGE>
[inside front cover]
[PHOTO OF PRINT ADVERTISEMENT]
THIS IS A SAMPLE PRINT ADVERTISEMENT. THE COMPANY BEGAN SELLING INSTEAD IN
AUGUST 1996;
REVENUES TO DATE HAVE BEEN LIMITED.
INTRODUCING INSTEAD A MULTI-MEDIA MARKETING CAMPAIGN AS EXCITING AS THE
PRODUCT ITSELF.
[PHOTO OF MAGAZINES]
AN EXCITING PRINT CAMPAIGN IS NOW APPEARING IN MAJOR WOMEN'S MAGAZINES,
INCLUDING THOSE PICTURED, SHOWING AUDREY CONTENTE, THE INVENTOR OF INSTEAD,
ENJOYING HER ACTIVE LIFESTYLE.
PRINT ADVERTISEMENTS FOR INSTEAD APPEARED IN THESE MAGAZINES IN OCTOBER
1996.
[PHOTO OF PRODUCT PACKAGING]
1-800-INSTEAD -- THE EASY-TO-REMEMBER NUMBER CUSTOMERS CAN CALL, AND IF THEY
WISH, SPEAK TO REGISTERED NURSES. THESE NURSES WILL HAVE PERSONALLY USED THE
PRODUCT AND CAN GUIDE USERS THROUGH ANY CONCERNS THEY MAY HAVE.
INSTEAD COMES IN DISTINCTIVE, INVITINGLY DESIGNED BOXES OF 6 COUNT, 16 COUNT
AND 24 COUNT PACKAGES.
[PHOTO OF DIRECT MAIL LITERATURE]
DIRECT MAIL -- THOUSANDS OF HEALTH CARE PROFESSIONALS AND CONSUMERS WILL
RECEIVE FREE SAMPLE KITS OR DISCOUNT COUPONS. THE OUTSIDE OF THE SAMPLE KIT
BOXES AND ENVELOPES CAPITALIZE ON THE EXCITEMENT AND APPROPRIATENESS OF A WOMAN
INVENTOR IN THIS CATEGORY. THEY READ: "A MAN COULDN'T HAVE INVENTED WHAT'S
INSIDE."
[PHOTO OF INFORMERCIAL]
How MUCH do you KNOW about your BODY?
EDU-MERCIAL -- A THIRTY MINUTE EDU-MERCIAL HAS BEEN CREATED TO LAUNCH
INSTEAD. FOCUSING ON WOMEN'S HEALTH, IT FEATURES A FEMALE HEALTH QUIZ, FOOTAGE
OF PAST ATTITUDES TOWARDS MENSTRUATION, CANDID TESTIMONIALS FROM ENTHUSIASTIC
CONSUMERS AND ENDORSEMENTS FROM TWO OB-GYN DOCTORS AND A NURSE WHO THINK INSTEAD
IS A MAJOR BREAK-THROUGH FOR WOMEN.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
(I) GIVES EFFECT TO THE ONE-FOR-FOUR REVERSE STOCK SPLIT EFFECTED ON JULY 28,
1995, (II) GIVES EFFECT TO THE SALE BY THE COMPANY OF 2,000,000 SHARES OF COMMON
STOCK IN THE CONCURRENT OFFERING (ASSUMING THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED) AND (III) IS BASED ON THE NUMBER OF SHARES OF COMMON
STOCK AND OTHER SECURITIES OUTSTANDING AS OF SEPTEMBER 30, 1996. EACH
PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
Ultrafem-Registered Trademark-, Inc. ("Ultrafem" or the "Company") was
formed to design, develop and manufacture products based upon its proprietary
and patented SoftCup-Registered Trademark- Technology to address women's health
care needs. The SoftCup Technology is a physical barrier-type vaginal device
designed to enhance the comfort, functionality and effectiveness of products
designed for women in the areas of feminine protection, contraception, the
prevention of sexually transmitted diseases ("STDs") and the treatment of
vaginal infections. The commercial products which will employ the SoftCup
Technology will be disposable, single use, universal size and made from a soft,
inert, thermoplastic material which becomes more pliable at body temperature and
molds to fit the individual user's anatomy.
The Company's business strategy is to develop and market proprietary
products based on its patented SoftCup Technology directed at high potential,
underserved segments of the women's health care market. The key elements of this
strategy are to (i) continue the launch of the Company's feminine protection
product, INSTEAD-TM-, in the United States, (ii) expand the Company's
manufacturing capabilities, (iii) develop and submit for Food and Drug
Administration ("FDA") clearance or pre-market approval products based upon the
SoftCup Technology for the medical product arena and (iv) pursue strategic
alliances with multi-national consumer product and pharmaceutical companies for
marketing, sales and distribution.
FEMININE PROTECTION PRODUCT -- INSTEAD-TM-
Management of the Company believes that INSTEAD-TM- represents one of the
most significant technological developments for feminine protection since the
introduction of the first commercial disposable tampon in 1933. INSTEAD-TM-
differs from other forms of feminine protection currently on the market in that
it collects, rather than absorbs, menstrual fluid. The Company believes that the
unique design of INSTEAD-TM- provides several distinct benefits over currently
available forms of feminine protection, including increased comfort, improved
performance, reduced health concerns and freedom to engage in most physical
(including sexual) activities during menstruation. The Company has obtained FDA
clearance to market INSTEAD-TM- in the United States. INSTEAD-TM- may also be
marketed in each of Belgium, Canada, Denmark, Finland, France, the Netherlands,
Spain, Sweden, Switzerland and the United Kingdom subject to compliance with
applicable international labeling laws and United States export requirements.
The Company initiated the launch of INSTEAD-TM- in the Fall of 1996 in the
Pacific Northwest, a region which the Company estimates represents approximately
8% of United States households and includes the major markets of San Francisco,
Seattle and Portland. The Company intends to introduce INSTEAD-TM- in stages
into additional significant geographic regions with full national distribution
anticipated to be achieved over a three year period, which may be accelerated or
delayed depending upon various factors including market acceptance by retailers
and consumers, and the availability of additional financing. The Company has
conducted market research and consumer use testing which indicate significant
consumer interest in INSTEAD-TM-. The Company intends to distribute INSTEAD-TM-
principally through supermarkets and drug stores. See "Risk Factors -- Inherent
Limitation of Market Research and Consumer Use Testing," "-- Need for Additional
Financing for Unforeseen Risks," "Business -- Product Testing," and "-- Strategy
and Plan of Operations."
3
<PAGE>
Management estimates that the domestic and international feminine protection
markets in developed countries are in excess of $9 billion annually. The United
States market for feminine protection products such as tampons and pads
generates approximately $1.8 billion in annual revenues (based on a 1995 report
by A.C. Nielsen). Approximately 58 million women between the ages of 18 and 54
use feminine protection products in the United States. Approximately 63% of
menstruating women in the United States use tampons exclusively or in
combination with pads (based on 1996 Simmons Market Research Bureau). The
European market for feminine protection products generates approximately $2.9
billion in annual revenues (based on a 1995 report by A.C. Nielsen) with an
estimated 105 million women between the ages of 18 and 54 using feminine
protection products. Other developed markets, including Canada, Latin America,
Mexico and Asia (other than China and India) represent a combined population in
excess of 200 million potential users.
MEDICAL PRODUCT APPLICATIONS
Ultrafem intends to develop additional applications of the SoftCup
Technology for vaginal delivery of agents for use in contraception, the
prevention of STDs, and the treatment of vaginal infections. The Company's
initial medical product under development is a contraceptive product which
combines the SoftCup Technology with the BufferGel Technology, which is licensed
by the Company for vaginal use on a worldwide basis. The BufferGel Technology,
which has the ability to maintain the normal vaginal pH balance while killing
sperm and most STD pathogens, was invented by scientists associated with The
Johns Hopkins University ("Johns Hopkins") with whom the Company has previously
conducted research. The Company has entered into a research and development
agreement with ReProtect, LLC ("ReProtect"), a company founded by these
scientists which will continue the investigation and development of medical
applications of the SoftCup Technology.
The United States market for contraceptive products such as condoms, oral
contraceptives, diaphragms and implantable contraceptives generates
approximately $2 billion in annual revenues (based on Theta Corporation, 1994).
Based on the population of women between the ages of 18 and 54, estimated to be
in excess of 300 million women in Europe and other developed markets, and
assuming that the frequency of use of contraceptive products is less than that
in the United States, management estimates the international markets for
contraceptives to be approximately $6 billion annually outside the United
States. Additionally, at least 330 million new cases of STDs occur each year
throughout the world (World Health Organization, 1995), indicating a significant
market for a STD prevention product.
RECENT DEVELOPMENTS
- - PRODUCT LAUNCH. INSTEAD-TM- is available for sale by retailers in the
Pacific Northwest, including in the major markets of San Francisco, Seattle, and
Portland. In order to introduce INSTEAD-TM- in the Fall of 1996, the Company
began selling INSTEAD-TM- in August 1996. Revenues to date have been limited.
Marketing and sales programs, such as print and TV advertising, sampling,
consumer promotion, direct mail, public and professional relations, and in-store
merchandising have been developed and are being utilized to generate consumer
awareness and trial.
- - PRODUCT DISTRIBUTION. The Company intends to distribute INSTEAD-TM-
primarily through supermarkets and drug stores. The Company has retained
Meridian Consulting Group ("Meridian") to provide sales management services,
including supervision of a broker network, development of trade promotion plans
and introductory sales presentations for the initial introduction of INSTEAD-TM-
into the United States market. Ultrafem has hired Morgan & Sampson Pacific, a
leading Health and Beauty Aid broker in the Northwest, as the broker for
INSTEAD-TM- in the Pacific Northwest. Sales calls in the Pacific Northwest to
date have resulted in commitments from retailers which account for more than 75%
of ACV (all commodity volume) in the food and drug classes of trade. These
include commitments for in-store merchandising and displays, on shelf dates, and
desired shelf space.
4
<PAGE>
- - COMMERCIAL PRODUCTION COMMENCED. Subsequent to the Company's initial public
offering ("IPO") in February 1996, the Company entered into a lease for
manufacturing and office space in Missoula, Montana and remodeled the
manufacturing space principally to create the controlled environment module that
secures the manufacturing equipment. The special thermoforming line which
produces INSTEAD-TM- completed high volume testing and, in June 1996, commenced
manufacturing commercial quantities of INSTEAD-TM- for the Fall 1996 launch. The
Company placed an order for a second semi-automated line scheduled to be
installed in the Fall of 1996 and an order for a fully automated line scheduled
to be installed in the Spring of 1997. The Company believes that its
manufacturing capacity will be sufficient to meet consumer demand. There can be
no assurance, however, that any of the foregoing goals or timetables can be met.
- - BUFFERGEL TECHNOLOGY RECEIVES HIVNET GRANT; PHASE I TRIALS SCHEDULED TO
BEGIN. The National Institute of Health ("NIH") has granted $2 million in
contracts to ReProtect and Johns Hopkins for the research and development of the
BufferGel Technology for contraception and the prevention of AIDS and other
STDs. Subsequent to the IPO, ReProtect was selected by HIVNET, a unit of the
NIH, to test the use of the BufferGel Technology as a vaginal microbicide for
the prevention of AIDS and other STDs. The FDA allowed an Investigational New
Drug ("IND") application permitting the BufferGel Technology to enter Phase I
clinical trials which are currently scheduled to begin in December 1996. The
Company plans to begin clinical trials of its contraceptive product upon
completion of the Phase I clinical trials of the BufferGel Technology. A portion
of these clinical trials may be funded by the net proceeds of the Concurrent
Offering. In order to achieve this timetable, the Company will need to complete
the development of the contraceptive product by combining the SoftCup Technology
and the BufferGel Technology. The Company plans to simultaneously develop
additional applications of such technologies for treatment of vaginal infections
and topical and systemic therapies. There can be no assurance, however, that any
of the clinical trials will demonstrate the necessary degree of safety and
effectiveness required for FDA pre-market approval, that ReProtect will receive
the benefit of the entire $2 million under the NIH contracts or that any of the
foregoing goals or timetables can be met. See "Risk Factors -- Dependence on
Single Product" and "-- Risks Associated with Research and Development for Other
Applications of the SoftCup Technology."
The Company was incorporated under the laws of the State of Delaware on
March 22, 1990 by Audrey Contente, the founder of the Company and inventor of
the SoftCup Technology, and its principal executive office is located at 500
Fifth Avenue, Suite 3620, New York, New York 10110. The Company's telephone
number is (212) 575-5740.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by Selling Stockholders.... 4,301,303 shares(1)
Common Stock outstanding prior to this
Offering...................................... 5,889,651 shares(2)
Shares of Common Stock to be outstanding after
Offering...................................... 11,117,354 shares(3)
Use of proceeds................................. The Company will not receive any of the
proceeds from the sale of shares of
Common Stock by the Selling Stockholders.
Risk factors.................................... The Securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution."
Nasdaq National Market symbol................... UFEM
</TABLE>
- ------------------------
(1) Includes 1,073,600 shares of Common Stock held by the Selling Stockholders
and offered hereby and 3,227,703 shares of Common Stock issuable upon
conversion or exercise of securities convertible into or exercisable for
Common Stock held by the Selling Stockholders and offered hereby.
(2) Includes 1,073,600 shares of Common Stock held by the Selling Stockholders
and offered hereby. Excludes 5,047,603 shares of Common Stock issuable upon
the conversion or exercise of securities which are convertible into or
exercisable for Common Stock, of which 3,227,703 are held by the Selling
Stockholders and offered hereby, and 2,000,000 shares of Common Stock
issuable in connection with the Concurrent Offering.
(3) Includes 1,073,600 shares of Common Stock held by the Selling Stockholders
and offered hereby, 3,227,703 shares of Common Stock issuable upon
conversion or exercise of securities which are convertible into or
exerciseable for Common Stock held by the Selling Stockholders and offered
hereby and 2,000,000 shares of Common Stock issuable in connection with the
Concurrent Offering. Excludes 1,819,900 shares of Common Stock issuable upon
the conversion or exercise of securities which are convertible into or
exercisable for Common Stock which are not offered hereby.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information for the five years ended June 30, 1996 are
derived from the audited financial statements of the Company. The financial
statements as of June 30, 1996 and for the three years then ended have been
audited by Deloitte & Touche LLP, independent auditors. The summary financial
information for the three months ended September 30, 1995 and 1996 have been
derived from the Company's unaudited financial statements which, in the opinion
of management, contain all adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the Company's financial
position and results of operations at such dates and for such periods. Operating
results for the three months ended September 30, 1996 are not necessarily
indicative of the results that may be expected in any other interim period or
for the full year. The summary financial information below should be read in
conjunction with the Company's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Net Sales........................ $ -- $ -- $ -- $ -- $ -- $ -- $ 192,540
Cost of Sales (exclusive of
depreciation)................. -- -- -- -- -- -- 358,377
Marketing, Sales and
Distribution.................. -- -- -- 123,531 2,406,277 345,416 2,921,392
General and Administrative
Expense....................... 2,141,249 1,139,339 1,387,784 1,444,911 5,095,261 597,529 1,924,557
Operating Income (Loss).......... (3,827,114) (2,020,786) (1,967,208) (1,916,450) (9,643,978) (1,091,743) (5,619,919)
Net Income (Loss)................ (3,831,536) (2,091,903) (2,303,940) (2,381,065) (9,819,980) (1,257,083) (5,457,432)
Net Income (Loss) Per Share:
Primary.......................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94)
Fully Diluted.................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94)
Weighted Average Common Shares
and Equivalents(1)............ 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(2)
----------- --------------
BALANCE SHEET DATA:
Working Capital(3)................................................................ $10,372,110 $ 46,772,110
Total Assets...................................................................... 26,766,632 59,735,820
Long-term Debt.................................................................... 700,000 700,000
Stockholders' Equity.............................................................. 16,873,062 53,273,062
</TABLE>
- ------------------------------
(1) The weighted average number of common shares outstanding during the first
half of fiscal year 1996 (including the three months ended September 30,
1995), and during fiscal years 1995, 1994, 1993 and 1992 includes
incremental shares for the Common Stock, warrants and other potentially
dilutive securities issued and options granted to purchase Common Stock
which were issued within one year prior to the effective date of the IPO
(the "Incremental Shares"). Such Incremental Shares were determined
utilizing the treasury stock method. The effect of the assumed exercise of
stock options which were issued one year prior to the effective date of the
IPO and the effect of the assumed conversion of the convertible preferred
stock are not included because their effect is antidilutive.
(2) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the
Company in the Concurrent Offering at an assumed offering price of $20.00
per share and the application of the estimated net proceeds therefrom. See
"Capitalization."
(3) Includes current portion of long-term debt.
7
<PAGE>
CONCURRENT PUBLIC OFFERING
The registration statement of which this Prospectus forms a part also
includes a Prospectus with respect to an underwritten public offering (the
"Concurrent Offering") of 2,000,000 shares of Common Stock (2,300,000 shares,
assuming the Underwriters' over-allotment option is exercised in full). The
Company will receive approximately $ in net proceeds from the Concurrent
Offering (assuming no exercise of the Underwriters' over-allotment option) after
payment of underwriting discounts and commissions and estimated expenses of the
Concurrent Offering. The offer and sale of Common Stock by the Selling
Stockholders hereby is referred to in this Prospectus as the "Offering."
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS THAT
ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS,
INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONTAINED IN "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
SUCH STATEMENTS ARE BASED ON MANY ASSUMPTIONS AND ARE SUBJECT TO RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING, BUT NOT
LIMITED TO, THOSE IDENTIFIED BELOW AS WELL AS THOSE SET FORTH ELSEWHERE IN THIS
PROSPECTUS.
HISTORY OF LOSSES
From the Company's inception in March 1990 through June 30, 1996, the
Company had not generated any revenue, and has only recently begun generating
revenue. Revenues to date have been limited. The Company has expended more than
$21.0 million for, among other things, marketing, research and development
activities, engineering and design of fully automated manufacturing systems,
clinical testing, meeting domestic and international regulatory requirements,
domestic and international applications for patent protection, applications for
domestic trademark protection, and market research. The Company may encounter
difficulties experienced by companies which have only recently begun generating
revenues, many of which may be beyond the Company's control, such as
unanticipated problems and costs related to marketing INSTEAD-TM-. Management
expects to continue incurring operating losses for the foreseeable future, until
such time as the Company derives significant revenues from the sale of
INSTEAD-TM-. Sales of INSTEAD-TM- commenced in the Fall of 1996. There can be no
assurance that the Company will be profitable. The Company believes that the
financial resources available to it, together with the net proceeds of the
Concurrent Offering, will satisfy the Company's working capital needs for at
least 12 months. However, the Company may require additional financing if
unforeseen risks are encountered. See "-- Need for Additional Financing for
Unforeseen Risks" and "Business -- Strategy and Plan of Operations."
DEPENDENCE ON SINGLE PRODUCT
The Company's future profitability initially depends primarily on the
successful commercialization of INSTEAD-TM- as an alternative to currently
available feminine protection products. Should the introduction of INSTEAD-TM-
be unsuccessful for any reason, there would be a material adverse effect on the
Company's business, financial condition and results of operation. See "-- Risks
Associated with Research and Development for Other Applications of the SoftCup
Technology" and "Business -- Other Potential Applications of the SoftCup
Technology."
NEED FOR ADDITIONAL FINANCING FOR UNFORESEEN RISKS
The Company believes that the level of financial resources available to it
is an important factor in its ability to achieve the marketing and distribution
of INSTEAD-TM- and in its ability to develop and eventually bring medical
products to market. Management believes that the financial resources available
to it, together with the net proceeds of the Concurrent Offering, will satisfy
the Company's working capital needs for at least 12 months. However, the Company
may require additional financing if unforeseen risks are encountered. If the
Company is unable to raise additional capital or arrange satisfactory working
capital or additional equity financing, the Company may be unable to complete
the distribution of INSTEAD-TM- into the full United States market. Additional
financings 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. See "-- Risks Associated
with Research and Development for Other Applications of the SoftCup Technology."
LACK OF MANUFACTURING EXPERIENCE; NEED TO ACHIEVE ECONOMIES OF SCALE AND LIMITED
MANUFACTURING RESOURCES
The Company has only limited experience in manufacturing quantities of
INSTEAD-TM- for the commercial market and has not yet manufactured INSTEAD-TM-
on a cost-efficient basis. There can be
9
<PAGE>
no assurance that the Company will be able to manufacture quantities of
INSTEAD-TM- for the commercial market on a cost-efficient basis, if at all. In
the future the Company will be required to increase the quantity of units it can
produce, reduce per-unit manufacturing costs and related marketing expenses and
achieve high quality standards in order to successfully market INSTEAD-TM- on a
commercial scale throughout the full United States market. These criteria will
only be satisfied if the Company is able to either enhance significantly its
existing production capabilities or enter into arrangements with third parties
capable of manufacturing INSTEAD-TM- on a cost-efficient basis. If the Company
encounters production difficulties or delays, including problems involving
production yield, quality control and assurance or supplies or components, there
could be a material adverse effect on the Company's business, financial
condition and results of operations. See "-- History of Losses" and "Business --
Manufacturing."
MARKETING RISKS; UNCERTAINTY OF CONSUMER ACCEPTANCE
The Company has incurred, and expects to continue to incur, substantial
marketing expense in launching INSTEAD-TM- into the United States market. The
marketing risks that the Company may encounter are compounded by the unique
nature of INSTEAD-TM-. Because INSTEAD-TM- is fundamentally different from
nearly all commercially available forms of feminine protection, successful
introduction of INSTEAD-TM- will face several obstacles, including a change in
established personal hygiene regimen and educating potential consumers on how to
use INSTEAD-TM-. Furthermore, the Company will be competing with other products
which are already familiar to the target audience, and the Company will be
required to incur substantial marketing expense in order to introduce
INSTEAD-TM- to consumers. There can be no assurance that the Company will
develop an effective marketing or advertising campaign to overcome these
obstacles. See "-- Risks Associated with Potential Competitive Response" and
"Business -- Marketing and Sales."
NECESSITY OF REGULATORY CLEARANCES TO MARKET
The production and distribution of INSTEAD-TM- are subject to regulation in
the United States and other countries in which INSTEAD-TM- may be sold. In 1993,
the FDA cleared the Company's pre-market notification submission under Section
510(k) of the Federal Food, Drug, and Cosmetic Act of 1938, as amended (the
"FDCA"). The FDA's clearance of this notification enables the Company to market
INSTEAD-TM- in the United States and to export it overseas subject to the
general controls provisions of the FDCA. Subsequent to FDA clearance of this
notification submission, certain modifications, which the Company believes are
minor, were made in the materials used in INSTEAD-TM- to improve the
manufacturing process. An applicable FDA regulation requires the filing of a new
510(k) notification when, among other things, there is a major change or
modification in the intended use of the device, or a change or modification in
materials, chemical composition or manufacturing process, that could
significantly affect the device's safety or effectiveness. A device manufacturer
is responsible for making the initial determination as to whether a proposed
change to a cleared device or its intended use necessitates the filing of a new
510(k) notification. The Company has conducted testing subsequent to the
changes, which the Company believes are minor, in materials. The Company has
been advised by its regulatory counsel, Arent Fox Kintner Plotkin & Kahn, that
no additional 510(k) notification is required for these changes, although there
can be no assurance that the FDA will not require such a 510(k) notification. In
April 1994, the FDA informally proposed a guidance document pursuant to the
above-described regulation (which was revised in August 1995) that would require
submission of a new 510(k) notification when certain changes are made in medical
devices such as INSTEAD-TM-, including changes in material and labeling. If a
new 510(k) notification were to be required by the FDA for the changes in
materials of INSTEAD-TM-, there can be no assurance that the FDA would clear a
new 510(k) notification submitted by the Company, or that the FDA would not
prohibit the Company from selling INSTEAD-TM- until the 510(k) notification was
cleared. The FDA review time for 510(k) notifications could be lengthy. The
failure to obtain a new 510(k) clearance, if required, on a timely basis, if at
all, would have a material adverse effect on the Company's business, financial
condition and results of operations.
10
<PAGE>
The Company has also decided to label INSTEAD-TM- with a 12 hour maximum
wear time. The labeling for INSTEAD-TM-, as cleared by the FDA in the original
510(k) notification, included an 8 hour maximum wear time. The Company conducted
a clinical study to support the safety of the 12 hour wear time. See "Business
- -- Product Testing." The Company does not believe a new 510(k) notification is
necessary to increase the maximum wear time to 12 hours. Prior to finalizing the
change in labeling, the Company met with the FDA on June 19, 1996. At that
meeting the results of these studies were discussed and the FDA requested that
the Company submit the results of its clinical testing, which the Company
provided on July 17, 1996. On October 25, 1996 the Company received a letter
from the FDA confirming that the Company could increase the wear time of
INSTEAD-TM- to 12 hours without filing a new 510(k) notification.
Any product with a 510(k) notification cleared by the FDA and its
manufacturer are subject to continuing regulatory review and the FDA has the
authority to, among other things, order or request restrictions on the
distribution of products or the withdrawal of products from market even after
clearance of a 510(k) submission is obtained.
The Company's manufacturing facility in Missoula, Montana is subject to the
Good Manufacturing Practices ("GMP") regulations which are promulgated by the
FDA, international quality standards and other regulatory requirements. The
failure by the Company to comply with the foregoing could adversely affect the
Company's production and financial condition. See also "Business -- Government
Regulation" and "-- Regulatory Status."
In order to distribute INSTEAD-TM- in foreign countries, the Company must
comply with all regulatory requirements of the countries in which the Company
intends to sell INSTEAD-TM-, including regulations with respect to labeling and
importing into such countries and FDA requirements for export thereto. There can
be no assurance that the Company will be able to comply with such requirements.
See "Business -- Regulatory Status." The Company will require FDA clearance or
pre-market approval to market other applications of the SoftCup Technology in
the United States.
PRODUCT LIABILITY; POSSIBILITY OF INSUFFICIENT INSURANCE COVERAGE
Testing, manufacturing and marketing of INSTEAD-TM- entail an inherent risk
of product liability, and such risk may be increased because INSTEAD-TM- is used
internally. The Company presently maintains what it believes to be a sufficient
level of product liability insurance. Such insurance is expensive and, in the
future, may not continue to be available on acceptable terms, if at all. The
Company's business, financial condition and results of operations may be
materially adversely affected by a successful product liability claim, or series
of such claims, in excess of any insurance coverage. There can be no assurance
that product liability claims will not be successfully asserted against the
Company. See "Business -- Product Testing."
COMPETITION
The market for feminine protection and medical products is presently
dominated by large, long-established and well-financed companies which have
substantially greater resources than the Company. There can be no assurance that
other companies will not develop new or enhanced feminine protection products
that are either more effective than INSTEAD-TM-, or would render INSTEAD-TM-
obsolete or non-competitive. In addition, there can be no assurance that
existing competitive companies will not increase their level of advertising and
marketing expenditures in response to the introduction of INSTEAD-TM-. See "--
Risks Associated with Potential Competitive Response" and "Business --
Competition."
RISKS ASSOCIATED WITH POTENTIAL COMPETITIVE RESPONSE
Subsequent to the IPO, the Company identified its target geography for the
initial launch of INSTEAD-TM-, established a broker network, and established
certain key trade accounts. The initial indications from the early stages of the
launch reflect higher costs related to trade, distribution and marketing
spending levels than previously anticipated. The Company believes that this is
due to the response to the launch of INSTEAD-TM- by companies with competitive
products. There can be no
11
<PAGE>
assurance that the Company's competitors will not significantly increase their
spending on promotional activities as a reaction to the introduction of
INSTEAD-TM-. See "-- Marketing Risks; Uncertainty of Consumer Acceptance."
INHERENT LIMITATION OF MARKET RESEARCH AND CONSUMER USE TESTING
The Company conducted test studies for the purposes of evaluating potential
consumer interest in INSTEAD-TM- and developing a market strategy for
INSTEAD-TM-. Due to the inherent limitations of market research and consumer
testing to accurately indicate consumer preferences, the results of such
research and tests may not accurately reflect INSTEAD-TM-'s actual market
potential. See "Business -- Marketing and Sales."
RISKS INHERENT IN OBTAINING AND PROTECTING PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend, in part, on its ability to obtain and
protect patents and trade secrets, and operate without infringing the
proprietary rights of other companies and individuals in the United States and
abroad. A continuation patent application based on, and including the subject
matter of, a patent application for the SoftCup Technology (for use for feminine
protection during menstruation either with or without vaginal drug delivery)
originally filed by Ms. Audrey Contente, the founder of the Company, was allowed
by the United States Patent and Trademark Office (the "Patent and Trademark
Office") on December 11, 1992. The United States patent was issued on March 22,
1994 and expires on March 22, 2011. Additional patent applications are pending
in the United States on other aspects and applications of the SoftCup Technology
and certain manufacturing processes related to such technology. The Company has
also filed international patent applications with respect to the SoftCup
Technology (for use for feminine protection during menstruation either with or
without vaginal drug delivery). There can be no assurance that any additional
patents will issue or that any issued patents will provide the Company with
competitive advantages or will not be challenged by other companies or
individuals. There can be no assurance that other companies and individuals will
not independently develop similar products, duplicate the SoftCup Technology or
design around the Company's patent. In addition, the Company could incur
substantial costs in defending suits brought against it on such intellectual
property rights or in prosecuting suits that the Company brings against other
parties to protect its intellectual property rights. The Company also relies on
trade secrets and other unpatented proprietary technology. The Company seeks to
protect its trade secrets and proprietary know-how in part with confidentiality
agreements with employees and consultants. There can be no assurance that the
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or independently developed by competitors or that others will not
independently develop substantially equivalent proprietary products and
processes or otherwise gain access to the Company's proprietary technology. See
"Business -- Patent Status and Patent Applications; Proprietary Technology."
RISKS ASSOCIATED WITH RESEARCH AND DEVELOPMENT FOR OTHER APPLICATIONS OF THE
SOFTCUP TECHNOLOGY
Although the Company is currently focusing its primary efforts and capital
resources on introducing INSTEAD-TM- into the United States and international
markets, the Company intends to apply a portion of the net proceeds of the
Concurrent Offering to pursue research on potential medical and health care
applications of the SoftCup Technology. If such research leads to the
development of new products, the Company would require further additional
capital and/or a strategic partner to market and distribute such products. There
can be no assurance that such research or development will be successful, that
these additional potential applications of the SoftCup Technology will result in
the Company's introduction of other products or that any additional financing
will be available or, if available, will be on terms acceptable to the Company.
See "Business -- Other Potential Applications of the SoftCup Technology."
The Company's focus on research and development of medical applications of
the SoftCup Technology is contingent on many factors which are generally
difficult to identify and quantify. They are dependent on a number of factors
which are not in the Company's control, including the results of
12
<PAGE>
clinical trials and other scientific findings, and the regulatory requirements
of clinical testing and market approvals. See "-- Necessity of Regulatory
Clearances to Market" and "Business -- Government Regulation." Accordingly,
there can be no assurance that any of the goals or timetables described in this
Prospectus relating to other potential applications of the SoftCup Technology
can be met.
DISCRETION IN APPLICATION OF PROCEEDS IN CONCURRENT OFFERING
The Company may change the specific use or allocation of the net proceeds
from the Concurrent Offering, except that in all events the Company will use at
least $3,430,812 of the net proceeds to repay certain indebtedness to the extent
that it is presented for repayment, and the balance of such proceeds to support
the launch of INSTEAD-TM- and to develop and commercialize medical and health
care products. Management will have broad discretion to change the allocation of
the net proceeds within the above parameters; any change in the allocation of
the net proceeds will depend upon, among other things, changes in the Company's
business plans, the results of research and development programs, the terms of
collaborative arrangements and/or marketing plans, regulations applicable to the
Company, conditions in the industry, general economic conditions and the
Company's future revenue and expenses.
The Company believes that the net proceeds from the IPO, together with
additional working capital or equipment lease financing, are sufficient to
commence the introduction of INSTEAD-TM- into approximately 25 to 50% of the
United States markets. As of September 30, 1996, the Company had approximately
$16,663,098 of cash and cash equivalents on its balance sheet, principally
reflecting the remaining net proceeds from the IPO. The Company has introduced
INSTEAD-TM- into a region which the Company estimates represents approximately
8% of United States households; the Company anticipates that the balance of the
IPO net proceeds will be used to commence the introduction of INSTEAD-TM- into
additional regions in the United States market. Since the Company only recently
began generating revenues and in light of its decision to pursue the Concurrent
Offering, the Company has not obtained any working capital or equipment lease
financing to date. The Company believes that financing in addition to the amount
raised in the IPO is necessary to complete the distribution of INSTEAD-TM- into
50% of the United States market. The Company intends to use the net proceeds of
the Concurrent Offering to support expansion of INSTEAD-TM- into additional
geographic areas, which together with other financial resources available to it,
will enable the Company to complete the distribution of INSTEAD-TM- into 50% of
the United States. The net proceeds of the Concurrent Offering may help the
Company accelerate the timing of the national rollout although there can be no
assurance that any such acceleration will occur. The Company believes that the
net proceeds from the Concurrent Offering, together with other financial
resources available to it, will be sufficient to satisfy the Company's working
capital needs for at least 12 months, although depending on numerous factors,
including competitive response and the amount of net proceeds expended on
research and development, the net proceeds may last longer.
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent, in large part, on the continued service
of its key management, certain scientific and technical advisors and its ability
to attract and retain qualified employees. Competition for such employees is
intense. The Company has obtained key-person life insurance in the amount of $1
million for the life of John W. Andersen, the President, Chief Executive Officer
and Chairman of the Board of the Company. In addition, the Company has obtained
a key-person life insurance policy on Audrey Contente, an officer and founder of
the Company who invented the SoftCup Technology. There can be no assurance that
any such key-person life insurance will continue to be available in the future
to the Company at a satisfactory premium. See "Management."
DILUTION
Purchasers of shares in the Concurrent Offering will suffer immediate and
substantial dilution of $13.32 per share in net tangible book value per share as
of September 30, 1996 (assuming an offering price of $20.00 per share). See
"Dilution."
13
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Amended and Restated By-Laws could have the effect of discouraging a third
party from pursuing a non-negotiated takeover of the Company and preventing
certain changes in control. The Restated Certificate of Incorporation provides
that the Board of Directors is divided into three classes. One class of
directors is elected at each annual meeting of stockholders for a three-year
term. The Restated Certificate of Incorporation restricts certain business
combinations with an interested stockholder (typically a beneficial owner of 15%
or more of the outstanding voting shares of the Company's capital stock,
excluding certain persons). In addition, the Amended and Restated By-Laws and
the Restated Certificate of Incorporation require advance notice to the Board of
Directors of stockholder proposals or stockholder nominees for directors to be
considered at the next annual meeting of stockholders and restrict the ability
of stockholders to call meetings. The Restated Certificate of Incorporation and
Amended and Restated By-Laws also limit the ability of stockholders to remove
directors, call stockholders meetings and act by written consent and provide
that vacancies in the Board of Directors may only be filled by a majority of the
remaining directors. In addition, the Company's Restated Certificate of
Incorporation authorizes the issuance of 5,000,000 shares of preferred stock
with such designation, rights and preferences as may be determined from time to
time by the Board of Directors. The Board of Directors may, without stockholder
approval, issue preferred stock with dividend, liquidation, conversion, voting
or other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. There can be no assurance that the Company will
not issue additional shares of preferred stock in the future. These provisions
could discourage a third party from pursuing a takeover of the Company at a
price considered attractive by many stockholders, since such provisions could
have the effect of delaying an acquiring party from gaining control of the
Company and its Board of Directors. See "Description of Capital Stock --
Preferred Stock" and "-- Certain Provisions of the Company's Certificate of
Incorporation and By-Laws."
LIMITED TRADING HISTORY; VOLATILITY OF PRICE
Prior to the IPO, there had been no public trading market for the Common
Stock, and there can be no assurance that a regular trading market for the
Common Stock will continue after the Concurrent Offering or that the market
price for the Common Stock will not fall below the offering price. In addition,
market prices of securities of many companies in the earlier stages of
development have experienced wide fluctuations not necessarily related to the
operating performance of such companies. For example, the price of the Common
Stock ranged from $14 3/8 on May 1, 1996 to $36 on May 22, 1996, closing at
$19 3/8 on June 28, 1996. On October 31, 1996 the staff of the Securities and
Exchange Commission (the "Commission") informed the Company that it had
commenced an informal inquiry with respect to certain matters, which the Company
believes relate to the volatility of the price of its Common Stock in the May
and June 1996 period. The Company believes it has complied with all securities
laws and, although the Commission has not requested any information from the
Company, the Company has informed the Commission that it wishes to assist the
Commission with its inquiry. While there can be no assurance as to the scope or
outcome of any inquiry by the Commission, the Company believes that this matter
will not have a material adverse effect on its business, prospects, financial
condition or results of operations. The Company further believes that factors
such as legislative, regulatory and technological developments and quarterly
variations in financial results and market conditions could cause the market
price of the Common Stock to fluctuate substantially. These market fluctuations
may adversely affect the price of and market for the Common Stock and could
result in additional inquiries. See "Price Range of Common Stock."
SUBSTANTIAL AMOUNT OF SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT
ON MARKET PRICE OF COMMON STOCK
Upon consummation of the Concurrent Offering, the Company will have
7,889,651 shares of Common Stock outstanding (8,189,651 shares if the
Underwriters' over-allotment option is exercised in full). In addition, as of
September 30, 1996, there has been reserved 5,047,603 shares of Common Stock for
issuance upon the conversion or exercise of outstanding securities. The
2,000,000 shares of
14
<PAGE>
Common Stock to be sold in the Concurrent Offering (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full), other than shares
which may be purchased by "affiliates" of the Company, will be freely tradeable
without restriction or further registration under the Securities Act. The
3,910,000 shares of Common Stock sold in the IPO, other than shares which were
purchased by affiliates of the Company, are also freely tradable without
restriction under the Securities Act. In addition, an aggregate of 1,073,600
shares of Common Stock which are outstanding and 3,227,703 shares of Common
Stock which are issuable upon the conversion or exercise of outstanding
securities are registered in the Offering. The Company intends to file a
Registration Statement on Form S-8 with respect to up to 1,805,963 shares of
Common Stock issuable pursuant to its stock option plans and certain options and
warrants which have been granted to employees and consultants of the Company as
soon as practicable after the date of this Prospectus; such Registration
Statement would include 1,344,157 shares of Common Stock issuable upon
conversion or exercise of outstanding securities of the Company. Approximately
1,381,794 of the remaining shares of Common Stock outstanding and issuable upon
conversion or exercise of outstanding securities would be "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act ("Rule 144"), and may only be sold pursuant to a registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144. See
"Concurrent Public Offering" and "Shares Eligible for Future Sale."
All officers, directors and certain security holders agreed with Hampshire
in connection with the IPO not to, directly or indirectly, offer, sell, contract
to sell or otherwise dispose of their shares of Common Stock, or other
securities convertible into or exercisable for shares of Common Stock, without
the prior written consent of Hampshire, prior to August 22, 1997. An aggregate
of 4,831,305 shares of Common Stock outstanding and issuable upon conversion or
exercise of outstanding securities are subject to these lock-up arrangements.
Hampshire has agreed with Jefferies not to release any of such security holders
from the contractual restriction without the prior written consent of Jefferies.
The Company has, subject to certain exceptions, agreed not to offer, issue or
sell any shares of Common Stock or securities exercisable for or convertible
into shares of Common Stock for a 180 day period after the date of this
Prospectus without the prior written consent of Jefferies. No predictions can be
made as to the effect, if any, that market sales of shares of existing
stockholders or the availability of such shares for future sale will have on the
market price of shares of Common Stock prevailing from time to time. The
prevailing market price of the Common Stock after the Concurrent Offering could
be adversely affected by future sales of substantial amounts of Common Stock by
existing stockholders. See "Certain Relationships and Related Party
Transactions," "Principal Stockholders" and "Shares Eligible for Future Sale."
LACK OF DIVIDENDS
The Company has generated limited revenues to date and does not expect to
pay cash dividends for the foreseeable future.
15
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Securities by the
Selling Stockholders.
PRICE RANGE OF COMMON STOCK
The Common Stock was initially offered to the public on February 22, 1996 at
a price of $10.00 per share and is quoted on the Nasdaq National Market. The
following table sets forth the range of high and low sale prices for the Common
Stock for the periods indicated as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal year 1996:
Third quarter (since February 22nd)........................................................... $ 16 $ 11 1/8
Fourth quarter................................................................................ 36 11 3/4
Fiscal year 1997:
First quarter................................................................................. 25 3/4 14
Second quarter (through November 12th)........................................................ 26 1/4 20
</TABLE>
On November 12, 1996, the last sale price of the Common Stock was $21 3/8 as
reported on the Nasdaq National Market. At September 30, 1996, there were 188
stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock to date. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. It is the present intention of the Board
of Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board of Directors does not expect to declare
or pay any cash dividends in the foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term debt and
the capitalization of the Company at September 30, 1996 and as adjusted to give
effect to the sale of the 2,000,000 shares of Common Stock offered in the
Concurrent Offering, at an assumed public offering price of $20.00 per share,
and the application of the estimated net proceeds therefrom. This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Results of Operations" and the Company's financial statements and notes thereto.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- ------------
<S> <C> <C>
Current Maturities of Long-term Debt:
Unsecured Convertible Notes................................... $ 2,875,000 $ --
Unsecured Notes to Former Officers............................ 117,908 117,908(1)
Unsecured Notes to Trade and Other Creditors.................. 63,548 3,751(1)
Subordinated Convertible Debentures........................... 152,432 152,432(1)
----------- ------------
Total Current Maturities of Long-term Debt.................. 3,208,888 274,091(1)
Long-term Debt:
Convertible Debentures........................................ 700,000 700,000
Stockholders' Equity:
Preferred Stock, $.001 par value -- authorized 5,000,000
shares, of which 48,750 are designated as Convertible Series
A, none of which are issued and outstanding.................. -- --
Common Stock, $.001 par value -- authorized 20,000,000 shares:
issued and outstanding 5,889,651 and 7,889,651 shares as
adjusted (2)................................................. 10,058 12,058
Additional Paid-In-Capital.................................... 43,366,219 79,764,219
Deficit....................................................... (26,503,215) (26,503,215)
----------- ------------
Total Stockholders' Equity.................................. 16,873,062 53,273,062
Total Capitalization........................................ $20,781,950 $ 54,247,153
----------- ------------
----------- ------------
</TABLE>
- ------------------------
(1) This debt which becomes due on various dates between October 1, 1996 and
December 31, 1996 will be repaid with a portion of the proceeds from the
IPO.
(2) Does not include 5,047,603 shares of Common Stock issuable upon the exercise
of options, warrants and other securities outstanding as of September 30,
1996 and 461,806 shares reserved for issuance pursuant to options under the
Company's stock option plans.
17
<PAGE>
DILUTION
The net tangible book value of the Common Stock at September 30, 1996 was
$16,286,920 or $2.77 per share. "Net tangible book value per share" is
determined by dividing the net tangible book value of the Company (total assets
less debt issuance costs, net accumulated amortization and total liabilities) by
the number of shares of Common Stock outstanding. Without taking into account
any changes in net tangible book value after September 30, 1996, other than to
give effect to the sale of the shares of Common Stock offered in the Concurrent
Offering (at an assumed public offering price of $20.00 per share), and after
deducting the underwriting discount and estimated offering expenses payable by
the Company, the pro forma net tangible book value of the Company at September
30, 1996 would have been $52,686,920, or $6.68 per share. This represents an
immediate increase in net tangible book value of $3.91 per share to existing
stockholders and an immediate dilution of net tangible book value of $13.32 per
share to new investors purchasing shares of Common Stock in the Concurrent
Offering. The following table illustrates this dilution per share.
<TABLE>
<S> <C> <C>
Assumed public offering price per share.................................... $ 20.00
Net tangible book value per share as of September 30, 1996............... $ 2.77
Increase in net tangible book value per share attributable to the
Concurrent Offering..................................................... 3.91
---------
Pro forma net tangible book value per share after the Concurrent
Offering.................................................................. 6.68
---------
Dilution per share to new investors........................................ $ 13.32
---------
---------
</TABLE>
The following table sets forth as of September 30, 1996 for existing
stockholders and for new investors the number and percentage of total
outstanding shares of Common Stock purchased from the Company, the total
consideration (assuming a public offering price of $20.00 per share) and
percentage of total consideration paid to the Company, and the average price per
share paid, before deducting the underwriting discount and estimated offering
expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ---------------- --------- -------------
Existing Stockholders.......................... 5,889,651 74.65% $ 49,011,463 55.06% $ 8.32
New Investors.................................. 2,000,000 25.35 40,000,000 44.94 20.00
----------- --------- ---------------- ---------
Total...................................... 7,889,651 100.00% $ 89,011,463 100.00%
----------- --------- ---------------- ---------
----------- --------- ---------------- ---------
</TABLE>
The foregoing table assumes no exercise or conversion of currently
outstanding securities which are convertible into or exercisable for Common
Stock. At September 30, 1996, there were outstanding securities which are
convertible into or exercisable for 5,047,603 shares of Common Stock at a
weighted average conversion/exercise price of $7.99 per share. See "Risk Factors
- -- Substantial Amount of Shares Eligible for Future Sale; Potential Adverse
Effect on Market Price of Common Stock," "Capitalization" and Note 6 of Notes to
Financial Statements.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for the five years ended June 30, 1996 are
derived from the audited financial statements of the Company. The financial
statements as of June 30, 1996 and for the three years then ended have been
audited by Deloitte & Touche LLP, independent auditors. The selected financial
data for the three months ended September 30, 1995 and 1996 have been derived
from the Company's unaudited financial statements which, in the opinion of
management, contain all adjustments (consisting of normal and recurring
adjustments), necessary for a fair presentation of the Company's financial
position and results of operations at such dates and for such periods. Operating
results for the three months ended September 30, 1996 are not necessarily
indicative of the results that may be expected in any other interim period or
for the full year. The selected financial data below should be read in
conjunction with the Company's financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMNBER 30,
--------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- ------------
STATEMENT OF OPERATIONS DATA:
Net Sales.................. $ -- $ -- $ -- $ -- $ -- $ -- $ 192,540
Cost of Sales (exclusive of
depreciation)............. -- -- -- -- -- -- 358,377
Marketing, Sales and
Distribution.............. -- -- -- 123,531 2,406,277 345,416 2,921,392
Research and Development... 1,668,752 830,761 452,552 181,475 1,403,557 70,616 394,778
General and Administrative
Expense................... 2,141,249 1,139,339 1,387,784 1,444,911 5,095,261 597,529 1,924,557
Interest Expense........... 4,422 71,117 336,732 464,615 665,381 168,160 122,858
Interest Income............ -- -- -- -- (489,379) (2,820) (285,345)
Depreciation and
Amortization.............. 17,113 50,686 126,872 166,533 738,883 78,182 213,355
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net Income (Loss).......... $(3,831,536) $(2,091,903) $(2,303,940) $(2,381,065) $(9,819,980) $(1,257,083) (5,457,432)
----------- ----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net Income (Loss) Per
Share..................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94)
----------- ----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ----------- ------------
Supplementary Net Income
(Loss) Per Share (1)...... -- -- -- -- -- -- $ (0.90)
------------
------------
Weighted Average Common
Shares and Equivalents
(2)....................... 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (3)........ $ (901,394) $(2,386,815) $(2,438,701) $(2,662,142) $17,962,533 $(1,114,979) $ 10,372,110
Total Assets............... 489,340 670,147 603,424 766,959 29,407,936 3,184,903 26,766,632
Long-term Debt............. 350,000 787,358 2,880,075 4,032,493 700,000 7,590,680 700,000
Stockholders' (Deficiency)
Equity.................... (960,666) (2,573,795) (4,733,714) (6,011,780) 21,283,944 (7,268,863) 16,873,062
</TABLE>
- ------------------------------
(1) Represents what the net income (loss) per share would have been had the
Concurrent Offering and retirement of the principal amount of the
outstanding indebtedness to be repaid from the net proceeds of the
Concurrent Offering, occurred at the beginning of fiscal year 1996. This
amount was computed by dividing adjusted net loss (net loss as reported
adjusted for the 1996 interest expense associated with the outstanding
indebtedness) by the adjusted weighted average common shares and equivalents
(common shares and equivalents outstanding as reported plus the number of
shares of Common Stock, assuming an offering price of $20.00 per share, the
proceeds of which were used to retire the outstanding indebtedness).
(2) The weighted average number of common shares outstanding during the first
half of fiscal year 1996 (including the three months ended September 30,
1995), and during fiscal years 1995, 1994, 1993 and 1992 includes the
Incremental Shares. Such Incremental Shares were determined utilizing the
treasury stock method. The effect of the assumed exercise of stock options
which were issued one year prior to the effective date of the IPO and the
effect of the assumed conversion of the convertible preferred stock are not
included because their effect is antidilutive.
(3) Includes current portion of long-term debt.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's activities during the year ended June 30, 1996 and the three
months ended September 30, 1996 were focused on the launch of INSTEAD-TM-, which
commenced in the Fall of 1996. The lead market for the initial rollout is in the
Pacific Northwest, a region which the Company estimates represents approximately
8% of U.S. households, and includes the major markets of San Francisco, Seattle
and Portland. In May 1996 the Company finalized the lead market distribution
network by contracting with Morgan & Sampson Pacific, a retail broker with
expertise in the Health and Beauty Aid business as well as the feminine
protection market segment.
Manufacturing activities to support the launch of INSTEAD-TM- progressed
during the second half of fiscal year 1996 and the three months ended September
30, 1996. Manufacturing space was leased and remodeling began. The special
thermoforming equipment required to manufacture INSTEAD-TM- completed high
volume testing and in June 1996 commenced manufacturing INSTEAD-TM- for the Fall
1996 launch.
In addition to INSTEAD-TM- launch activities, research and development
activities on new products continued in the fourth quarter of fiscal year 1996
and the first quarter fiscal year 1997. The BufferGel Technology developed by
the Company's research and development partner, ReProtect, was selected by
HIVNET for funding of clinical trials to test its use for the prevention of AIDS
and other STDs. The Phase I clinical trials are currently scheduled to begin in
December 1996.
The following table sets forth, for the periods indicated, the percentage
increases or decreases of certain items included in the Company's statement of
operations.
<TABLE>
<CAPTION>
INCREASE (DECREASE) FROM PRIOR PERIOD
---------------------------------------------------
<S> <C> <C> <C>
THREE MONTHS
ENDED SEPTEMBER 30,
JUNE 30, 1995 JUNE 30, 1996 1996 COMPARED WITH
COMPARED WITH COMPARED WITH THREE MONTHS ENDED
JUNE 30, 1994 JUNE 30, 1995 SEPTEMBER 30, 1995
------------- ------------- ---------------------
Net Sales (exclusive of depreciation)(1)... -- -- --
Cost of Sales(1)........................... -- -- --
Marketing, Sales and Distribution.......... --% 1,847.9% 745.8%
General and Administrative Expense......... 4.1 252.6 222.1
Research and Development Expense........... (59.9) 673.4 459.0
Loss from operations....................... (2.6) 403.2 414.8
Interest Income(2)......................... -- -- --
Interest Expense........................... 38.0 43.2 (26.9)
Depreciation and Amortization.............. 31.3 343.7 172.9
Net Loss................................... 3.3% 312.4% 334.1%
</TABLE>
- ------------------------
(1) This percentage is not meaningful since the Company began generating sales
in August 1996.
(2) This percentage is not meaningful since the Company did not generate
interest income in prior periods.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES
Net sales for the three months ended September 30, 1996 were $192,540
resulting from the shipment of INSTEAD-TM-. The Company was a development stage
company for the three months ended September 30, 1995 and generated no sales.
20
<PAGE>
COST OF SALES (EXCLUSIVE OF DEPRECIATION)
Cost of sales during the three months ended September 30, 1996 were
$358,377. The Company was a development stage company during the three months
ended September 30, 1995 and incurred no cost of sales. The cost of sales for
the three months ended September 30, 1996 was attributable to the start-up and
manufacturing costs associated with the production of INSTEAD-TM- to support
related sales. The Company has not reached a level of production adequate to
absorb the Company's manufacturing costs on a cost efficient basis.
MARKETING, SALES AND DISTRIBUTION
Marketing, sales and distribution expense increased 745.8% to $2,921,392 for
the three months ended September 30, 1996 from $345,416 for the three months
ended September 30, 1995. This increase was principally attributable to certain
expenses incurred in connection with the launch of INSTEAD-TM- during the three
months ended September 30, 1996 for marketing and advertising for television,
print, internet, sampling and coupon mailings to generate consumer trial and
awareness of INSTEAD-TM-.
RESEARCH AND DEVELOPMENT
Research and development expense increased 459.0% to $394,778 for the three
months ended September 30, 1996 from $70,616 for the three months ended
September 30, 1995. The increase was primarily attributable to payments to
ReProtect under the terms of the Company's research and development agreement.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 222.1% to $1,924,557 for the
three months ended September 30, 1996 from $597,529 for the three months ended
September 30, 1995. This increase was primarily due to non-cash charges
resulting from the issuance of options and warrants to purchase common stock to
officers and a director of the Company and in connection with the settlement of
a claim at prices below fair market value. This increase was also due, to a
lesser extent, to increases in legal fees, increases in salaries attributable to
administrative support staff, and financial public relations expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 172.9% to $213,355 for the
three months ended September 30, 1996 from $78,182 for the three months ended
September 30, 1995. This increase was attributable to the increase in the
depreciation of property and equipment and the increase in the amortization of
deferred debt issuance costs.
INTEREST EXPENSE
Interest expense was $122,858 and $168,160 for the three months ended
September 30, 1996 and 1995, respectively. The decrease of 26.9% for the three
months ended September 30, 1996 compared to the three months ended September 30,
1995 was attributable to the repayment of debt by the Company.
INTEREST INCOME
Interest income was $285,345 and $2,820 for the three months ended September
30, 1996 and 1995, respectively. The increase for the three months ended
September 30, 1996 compared to the three months ended September 30, 1995 was
attributable to the money received by the Company during February, 1996 from its
IPO which was invested in cash equivalents during the three months ended
September 30, 1996.
FISCAL YEARS ENDED JUNE 30, 1996, 1995 AND 1994
NET SALES AND COSTS OF SALES
The Company began generating sales in August 1996 and therefore there were
no revenues or costs of sales in these fiscal years.
21
<PAGE>
MARKETING, SALES AND DISTRIBUTION
Marketing, sales and distribution expense increased 1,847.9% to $2,406,277
for the year ended June 30, 1996 from $123,531 for the year ended June 30, 1995.
The increase was primarily due to expenses related to the launch of INSTEAD-TM-
which had been planned for, and commenced in, the Fall of 1996, including market
research, development of trade promotion plans and package design.
Plans for the lead market geography were developed and in the year ended
June 30, 1996 the Company retained Morgan & Sampson Pacific to gain widespread
distribution and merchandising support of INSTEAD-TM- to retailers in the lead
market. Staffing additions in that year to facilitate product launch and
operations included a Senior Marketing Product Manager.
Marketing, sales and distribution expense increased to $123,531 for the year
ended June 30, 1995 compared to $-0- for the year ended June 30, 1994. This was
attributable to marketing expenses related to INSTEAD-TM-.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 252.6% to $5,095,261 for the
year ended June 30, 1996 from $1,444,911 for the year ended June 30, 1995. The
increase was primarily due to non-cash charges resulting from the issuance of
options to purchase Common Stock to officers and a director of the Company at
prices below fair market value and legal fees and, to a lesser extent, due to
increases in salaries, travel, professional fees and other general operating
expenses.
Staffing additions in the year ended June 30, 1996 to facilitate product
launch and operations included a Vice President of Operations at the Montana
facility and a Corporate Controller.
General and administrative expense increased 4.1% to $1,444,911 for the year
ended June 30, 1995 from $1,387,784 for the year ended June 30, 1994. The
increase for the year ended June 30, 1995 compared to June 30, 1994 was
primarily due to increases in salaries and signing bonuses attributable to
officers of the Company, who are principally engaged in the development of the
Company's business plan and equity financing activities and related travel
expenses, offset in part by reduced legal expenses.
RESEARCH AND DEVELOPMENT
Research and development expense increased 673.4% to $1,403,557 for the year
ended June 30, 1996 from $181,475 for the year ended June 30, 1995. The increase
was primarily attributable to research expenses of $343,200 paid to ReProtect
under the terms of the Company's research and development agreement and to
production start-up expenses, including those described below. To a lesser
extent the increase was due to other research and testing expenses related to
INSTEAD-TM-, as well as legal expenses.
Production start-up expenses included procurement of a manufacturing
facility as well as completion of line testing. A lease was entered into for
manufacturing and office space. Remodeling began on the manufacturing space
principally to create the controlled environment module that secures the
manufacturing equipment. Equipment orders were placed for INSTEAD-TM-'s first
manufacturing line. The first piece of special equipment to manufacture the
product, which is called the thermoforming line, completed testing at Remmele
Engineering, Inc. in St. Paul, Minnesota and has been installed at Ultrafem's
Montana facility and is producing product for the launch of INSTEAD-TM-. In June
1996 the Company commenced manufacturing quantities of INSTEAD-TM- for the
commercial market, and estimates that it has produced an aggregate of
approximately 2.2 million units of INSTEAD-TM- through August 14, 1996.
The BufferGel Technology developed by the Company's research and development
partner, ReProtect, has been selected by HIVNET for funding of clinical trials
to test its use as a vaginal microbicide for the prevention of AIDS and other
STDs. Furthermore, the FDA has permitted the BufferGel Technology to enter Phase
I clinical trials, which are currently scheduled to begin in December 1996. The
BufferGel Technology is the first non-detergent AIDS prevention technology to be
selected by HIVNET to proceed to clinical trials. See "Business -- Other
Potential Applications of the SoftCup Technology."
22
<PAGE>
Research and development expense decreased 59.9% to $181,475 for the year
ended June 30, 1995 from $452,552 for the year ended June 30, 1994. The decrease
for the year ended June 30, 1995 compared to June 30, 1994 was primarily
attributable to reduced expenditures incurred by the Company with independent
contract research groups and lower manufacturing facility costs associated with
the Company's decision to move to smaller manufacturing facilities.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $738,883 for the year ended June 30, 1996
and $166,533 for the year ended June 30, 1995. The 343.7% increase for the year
ended June 30, 1996 compared to the year ended June 30, 1995 was attributable to
increases in the amortization of deferred debt issuance costs.
Depreciation and amortization was $166,533 for the year ended June 30, 1995
and $126,872 for the year ended June 30, 1994. The 31.3% increase for the year
ended June 30, 1995 compared to 1994 was primarily attributable to increases in
the amortization of deferred offering costs.
INTEREST EXPENSE
Interest expense was $665,381 for the year ended June 30, 1996 and $464,615
for the year ended June 30, 1995. The 43.2% increase for the year ended June 30,
1996 compared to the year ended June 30, 1995 was attributable to the increase
in debt incurred by the Company in the year ended June 30, 1996. At June 30,
1996 the Company repaid approximately $4.9 million of debt. See "-- Liquidity
and Capital Resources."
Interest expense was $464,615 for the year ended June 30, 1995 and $336,732
for the year ended June 30, 1994. The 38.0% increase in 1995 compared to 1994
was attributable to increases in debt incurred by the Company in each of the
respective comparable periods.
INTEREST INCOME
Interest income was $489,379 for the year ended June 30, 1996 compared to
$-0- for the year ended June 30, 1995. The increase for the year ended June 30,
1996 compared to the year ended June 30, 1995 was attributable to the money
received by the Company in February 1996 from its IPO which was invested in cash
equivalents during the period ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for funds has increased from period to period as it has
incurred expenses for, among other things, research and development activities,
engineering and design of fully automated manufacturing systems, clinical
testing, meeting domestic and international regulatory requirements,
applications for domestic and international patent protection, applications for
domestic trademark protection and market research. Since its inception, the
Company funded these needs through private placements of its equity and debt
securities. The Company received net proceeds in excess of approximately
$12,300,000 through private sales of these securities from inception through
September 30, 1996. See "Prior Financings."
In February 1996, the Company received proceeds of $34,085,611, net of
related expenses of $5,014,389, in connection with the sale of 3,910,000 shares
of Common Stock in the IPO. At September 30, 1996 the Company had $16,663,098 in
cash and cash equivalents. From June 30, 1996 to September 30, 1996, the
Company's cash position decreased by $7,846,973, principally reflecting
$5,451,308 used in operating activities, $2,946,550 used for purchase of
property and equipment, and $103,125 for the repayment of debt offset in part by
$654,010 in proceeds from the exercise of stock options and warrants. As of June
30, 1996, the Company's cash position increased by $24,436,681, principally
reflecting the net proceeds from the IPO and $6,147,451 net proceeds from the
sale of convertible and nonconvertible promissory notes and exercise of stock
options and warrants. The net proceeds from the IPO and the net proceeds from
such sales of other securities were used as follows: $5,569,315 for repayment of
debt and payment of debt issuance costs, $7,575,453 were used in operating
activities and $2,651,618 for construction in the manufacturing plant and
purchase of property and equipment.
23
<PAGE>
The Company's working capital and capital requirements will depend on
numerous factors, including the progress of the staged market introduction of
INSTEAD-TM-, the Company's research and development activities, the level of
resources that the Company devotes to the developmental, clinical, regulatory
and marketing aspects of its products and the extent to which strategic
alliances with multi-national pharmaceutical or consumer product companies are
formed. At September 30, 1996, the Company had commitments in the amount of
approximately $6,955,000, of which $3,635,000 was unpaid, for the purchase of
manufacturing equipment and improvements to the manufacturing facility to
support start-up production and improvements to the new New York office space.
Included in accounts payable and accrued liabilities at September 30,1996 was
approximately $249,000 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 development. In addition, the
Company will also continue to incur additional research and development
expenses; these expenses may include amounts expended on prototype development,
prototype manufacturing, laboratory and human clinical studies, as well as
market research.
The Company's stockholders' equity decreased by $4,410,882 from June 30,
1996 to September 30, 1996 reflecting a net loss by the Company for the three
months ended September 30, 1996 of $5,457,432 offset in part by proceeds from
the exercise of stock options and warrants, issuance of below market value stock
warrants in connection with the settlement of a claim and conversion of
convertible debt into Common Stock of $1.1 million. The Company's stockholders'
equity increased by $27,295,724 from June 30, 1995 to June 30, 1996 reflecting
the net proceeds from the IPO of $34,085,611, proceeds from the exercise of
stock options and warrants of $1,869,522, conversion of accounts payable to
warrants, issuance of below market value stock options and warrants in
connection with professional services and licensing agreements and conversion of
convertible debt to common stock of $1.1 million, offset by the Company's net
loss for the year ended June 30, 1996 of $9,819,980.
The Company intends to use approximately $3,430,812 of the net proceeds of
the Concurrent Offering to repay certain outstanding indebtedness and to use the
balance of such net proceeds to provide continued support for the launch of
INSTEAD-TM- in the initial market and to support expansion into additional
geography, including increased marketing spending and the advanced purchase of
manufacturing equipment, for increased investment in research and development of
medical and health care products and for general corporate purposes.
The Company believes that the level of financial resources available to it
is an important factor in its ability to achieve the marketing and distribution
of INSTEAD-TM- and in its ability to develop and eventually bring medical
products to market. The Company believes that the financial resources available
to it, together with the net proceeds from the Concurrent Offering, will satisfy
the Company's working capital needs for at least 12 months. However, the Company
may require additional financing if unforeseen risks are encountered. If the
Company is unable to raise additional capital or arrange satisfactory working
capital or additional equity financing, the Company may be unable to complete
the distribution of INSTEAD-TM- into the full United States market. Additional
financings 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.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for the
Company beginning July 1, 1996. The standard encourages, but does not require,
companies to recognize compensation expense of grants for stock, stock options
and other equity instruments to employees based on fair value accounting rules.
SFAS No. 123 requires companies that choose not to adopt the new fair value
accounting rules to disclose pro forma net income and earnings per share under
the new method. The Company will continue to apply APB opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share in its annual financial
statements.
24
<PAGE>
BUSINESS
GENERAL
Ultrafem, Inc. was formed to design, develop and manufacture products based
upon its proprietary and patented SoftCup Technology to address women's health
care needs. The SoftCup Technology is a physical barrier-type vaginal device
designed to enhance the comfort, functionality and effectiveness of products
designed for women in the areas of feminine protection, contraception, the
prevention of STDs and the treatment of vaginal infections. The commercial
products which will employ the SoftCup Technology will be disposable, single
use, universal size and made from a soft, inert, thermoplastic material which
becomes more pliable at body temperature and molds to fit the individual user's
anatomy.
FEMININE PROTECTION PRODUCT -- INSTEAD-TM-
Management believes that INSTEAD-TM- represents one of the most significant
technological developments for feminine protection since the introduction of the
first commercial disposable tampon in 1933. INSTEAD-TM- differs from other forms
of feminine protection currently on the market in that it collects, rather than
absorbs, menstrual fluid. The Company believes that the unique design of
INSTEAD-TM- provides several distinct benefits over currently available forms of
feminine protection, including increased comfort, improved performance, reduced
health concerns and freedom to engage in most physical (including sexual)
activities during menstruation. The Company has obtained FDA clearance to market
INSTEAD-TM- in the United States. INSTEAD-TM- may also be marketed in each of
Belgium, Canada, Denmark, Finland, France, the Netherlands, Spain, Sweden,
Switzerland and the United Kingdom subject to compliance with applicable
international labeling laws and United States export requirements.
The Company initiated the launch of INSTEAD-TM- in the Fall of 1996 in the
Pacific Northwest, a region which the Company estimates represents approximately
8% of United States households and includes the major markets of San Francisco,
Seattle and Portland. The Company intends to introduce INSTEAD-TM- in stages
into additional significant geographic regions with full national distribution
anticipated to be achieved over a three year period, which may be accelerated or
delayed depending upon various factors including market acceptance by retailers
and consumers, and the availability of additional financing. The Company has
conducted market research and consumer use testing which indicate significant
consumer interest in INSTEAD-TM-. The Company intends to distribute INSTEAD-TM-
principally through supermarkets and drug stores. See "Risk Factors -- Inherent
Limitation of Market Research and Consumer Use Testing," "-- Need for Additional
Financing for Unforeseen Risks," "Business -- Product Testing" and "-- Strategy
and Plan of Operations."
Management estimates that the domestic and international feminine protection
markets in developed countries are in excess of $9 billion annually. The United
States market for feminine protection products such as tampons and pads
generates approximately $1.8 billion in annual revenues (based on a 1995 report
by A.C. Nielsen). Approximately 58 million women between the ages of 18 and 54
use feminine protection products in the United States. Approximately 63% of
menstruating women in the United States use tampons exclusively or in
combination with pads (based on 1996 Simmons Market Research Bureau). The
European market for feminine protection products generates approximately $2.9
billion in annual revenues (based on a 1995 report by A.C. Nielsen) with an
estimated 105 million women between the ages of 18 and 54 using feminine
protection products. Other developed markets, including Canada, Latin America,
Mexico and Asia (other than India and China) represent a combined population in
excess of 200 million potential users.
MEDICAL PRODUCT APPLICATIONS
Ultrafem intends to develop additional applications of the SoftCup
Technology, for vaginal delivery of agents for use in contraception, the
prevention of STDs, and the treatment of vaginal infections. The Company's
initial product under development is a contraceptive which combines the SoftCup
Technology with the BufferGel Technology, which is licensed by the Company for
vaginal use on a
25
<PAGE>
worldwide basis. The BufferGel Technology was invented by scientists associated
with Johns Hopkins with whom the Company has previously conducted research. The
Company has entered into a research and development agreement with ReProtect, a
company founded by these scientists which will continue the investigation and
development of medical applications of the SoftCup Technology.
Subsequent to the IPO, the FDA allowed an IND application permitting the
BufferGel Technology to enter Phase I clinical trials to test its use as a
vaginal microbicide for the prevention of AIDS and other STDs. These Phase I
clinical trials are currently scheduled to commence in December 1996 and are
being funded by HIVNET, a unit of the NIH. The Company plans to begin clinical
trials of its contraceptive product upon completion of the Phase I clinical
trials of the BufferGel Technology. A portion of these clinical trials may be
funded by the net proceeds of the Concurrent Offering. In order to achieve this
timetable, the Company will need to complete the development of the
contraceptive product by combining the SoftCup Technology and the BufferGel
Technology. There can be no assurance, however, that any of the foregoing goals
or timetables can be met, or that any of the clinical trials will demonstrate
the necessary degree of safety and effectiveness required for FDA pre-market
approval. See "Risk Factors -- Dependence on Single Product," "-- Risks
Associated with Research and Development for Other Applications of the SoftCup
Technology" and "Business -- Other Potential Applications of the SoftCup
Technology."
The United States market for contraceptive products such as condoms, oral
contraceptives, diaphragms and implantable contraceptives generates
approximately $2 billion in annual revenues (based on Theta Corporation, 1994).
Based on the population of women between the ages of 18 and 54, estimated to be
in excess of 300 million women in Europe and other developed markets, and
assuming that the frequency of use of contraceptive products is less than that
in the United States, management estimates the international markets for
contraceptives to be approximately $6 billion annually outside the United
States. Additionally, at least 330 million new cases of STDs occur each year
throughout the world (World Health Organization, 1995), indicating a significant
market for a STD prevention product.
STRATEGY AND PLAN OF OPERATIONS
The Company's business strategy is to develop and market proprietary
products based on its patented SoftCup Technology directed at high potential,
underserved segments of the women's health care market. The key elements of this
strategy are to (i) continue the launch of INSTEAD-TM- in the United States,
(ii) expand the Company's manufacturing capabilities, (iii) develop and submit
for FDA clearance or pre-market approval products based upon the SoftCup
Technology for the medical product arena and (iv) pursue strategic alliances
with multi-national consumer product and pharmaceutical companies for marketing,
sales and distribution.
The Company intends to market INSTEAD-TM- as an innovative alternative to
tampons and sanitary napkins. The Company intends to introduce INSTEAD-TM- in
stages into significant geographic regions with full national distribution
anticipated to be achieved over a three year period, which may be accelerated or
delayed depending upon various factors including market acceptance by retailers
and consumers, and the availability of additional financing. The Company
commenced initial regional distribution of INSTEAD-TM- in the Pacific Northwest
in the Fall of 1996, including the major markets of San Francisco, Seattle and
Portland. The Company believes that the financial resources available to it,
together with the net proceeds of the Concurrent Offering, will satisfy the
Company's working capital needs for at least 12 months. Distribution in foreign
markets could occur simultaneously, provided an appropriate strategic partner is
identified. No assurance can be given that the foregoing goals or timetables can
be met. See "Risk Factors -- Need for Additional Financing for Unforeseen
Risks."
The Company intends to develop a contraceptive product and to simultaneously
develop additional applications of the combination of the SoftCup Technology
with the BufferGel Technology for treatment of vaginal infections and topical
and systemic therapies. The Company plans to begin clinical trials of a
contraceptive product upon completion of the Phase I clinical trials relating to
use of the BufferGel Technology as a vaginal microbicide for the prevention of
AIDS and other STDs. These
26
<PAGE>
Phase I clinical trials, which are currently scheduled to begin in December
1996, are being funded by HIVNET. Any introduction of new products would be
dependent on individual product development, obtaining regulatory clearances,
the confirmation of the commercial viability of any such product and the
development of strategic partnerships to support international market
penetration. See "Risk Factors -- Risks Associated with Research and Development
of Other Applications of the SoftCup Technology" and "Business -- Other
Potential Applications of the SoftCup Technology."
MARKETING AND SALES
The Company is marketing INSTEAD-TM- as an innovative alternative to
existing feminine protection products, including tampons and sanitary napkins.
When the marketing campaign is expanded into the full United States market, it
will be directed specifically at the Company's target consumer audience of
approximately 58 million women. See "-- Feminine Protection Market -- Domestic
Market." The Company, in conjunction with Bozell Worldwide, Inc., a leading
multi-national advertising and marketing communications company, has developed
detailed plans integrating consumer advertising, professional advertising,
consumer research, professional and consumer public relations, and direct
marketing. See "Certain Relationships and Related Party Transactions."
The Company has implemented marketing programs directed at the consumer
target audience, the professional target audience and the retail trade. Plans
for the consumer target audience include a multimedia consumer advertising
campaign comprised of television, print and the Internet. Product sampling and
couponing via mail, advertising, public relations and print are also being
utilized. To date, all marketing programs have been substantially directed to
the Pacific Northwest. The Company intends to increase marketing to other
geographic regions as the national rollout of INSTEAD-TM- continues.
The professional target audience is defined as Obstetrician/Gynecologists,
Obstetrician/Gynecologist Nurses and Pharmacists. Plans for a professional
campaign have been formulated and include presentations at scientific meetings,
education for health and fitness organizations, by-lined articles in
professional journals, brochures for distribution through physicians' offices as
well as advertising in professional journals and through direct mail. The first
by-lined article ("Latest Developments in Menstrual Protection") appeared April
15, 1996 in CONTEMPORARY OB/GYN and was authored by Richard M. Soderstrom, M.D.,
a member of the Company's Scientific Advisory Board.
The Company intends to distribute INSTEAD-TM- principally through
supermarkets and drug stores. See "-- Strategy and Plan of Operations."
Management believes that this marketing approach should enable it to compete
effectively for sales and shelf space with its larger, better capitalized
competitors. The Company has retained Meridian to formulate selling strategies
and implement sales plans by trade channel and key accounts. Meridian will
provide the sales management organization which will supervise a broker network
and which will develop trade promotion plans and introductory sales
presentations for the initial introduction of INSTEAD-TM- into the United States
market. The fees for such services are currently $42,500 per month plus
additional fees for special projects requested by the Company. The Company
expects that this amount will increase in the future as INSTEAD-TM- is
introduced into additional geographies. Ultrafem has hired Morgan & Sampson
Pacific, a leading Health and Beauty Aid broker in the Northwest, as the broker
for INSTEAD-TM- in the Pacific Northwest. The use of brokers is predominant in
the Health and Beauty Aid business. Management believes that Morgan & Sampson
Pacific is capable of being the broker representing Ultrafem in as much as 25%
of the United States market. Morgan & Sampson Pacific is compensated on a
commission basis, based on a percentage of sales of INSTEAD-TM-, as well as
bonus compensation based on meeting certain sales goals. Sales calls in the
Pacific Northwest to date have resulted in commitments from retailers which
account for more than 75% of ACV (all commodity volume) in the food and drug
classes of trade. These include commitments for in-store merchandising and
displays, on shelf dates, and desired shelf positioning.
27
<PAGE>
There can be no assurance that the Company's marketing plans and strategies
will be successfully implemented. See "Risk Factors -- Marketing Risks;
Uncertainty of Consumer Acceptance" and "-- Risks Associated with Potential
Competitive Response."
The Company works with an array of outside marketing and sales professionals
who are supporting the launch of INSTEAD-TM-. The Company's in-house marketing
and sales professionals both supervise and coordinate the Company's use of
outside professionals. The Company currently plans to continue to outsource a
significant portion of its marketing and sales activities, since outside
professionals contribute significant and diverse skills, knowledge of trade, and
marketing and sales experience to the Company, at a cost which the Company could
not currently provide in-house.
FEMININE PROTECTION MARKET
BACKGROUND
The menstrual cycle normally begins between the ages of 12 and 13 and
continues to menopause, which generally occurs between the ages of 46 and 54.
The cycle averages 28 days, with the normal period lasting from five to six
days. The period begins with one to three days of heavy flow and then tapers to
a daily light flow over several more days.
Some women use either tampons or sanitary napkins on an exclusive basis.
Many women use both tampons and sanitary napkins because there is a general
dissatisfaction associated with the use of any single product. Management
believes that INSTEAD-TM- provides women with significant advantages over the
currently available feminine protection products and expects to attract women
that use both sanitary napkins and tampons.
INSTEAD-TM- is a new product and women will need to become accustomed to
using it. Some women may find digital insertion unappealing. INSTEAD-TM-, like
certain other vaginal products, is not recommended for women who have had toxic
shock syndrome ("TSS"), use an IUD, or have anatomical abnormalities.
INSTEAD-TM- also should not be used immediately after childbirth. INSTEAD-TM- is
neither flushable nor biodegradable.
DOMESTIC MARKET
The United States feminine protection product market has grown approximately
11% from 1992 to 1995, with annual revenues increasing from approximately $1.6
billion in 1992 to approximately $1.8 billion in 1995. In 1995, the market was
divided between sanitary napkins, with a market share measured in dollars of
62%, and tampons, with a market share measured in dollars of 38%.
<TABLE>
<CAPTION>
($MILLION) % OF ($MILLION) % OF
PRODUCT TYPE 1992 MARKET SHARE 1995 MARKET SHARE
- ------------------------------------------------------------ ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Sanitary Napkins............................................ $ 941 59% $ 1,084 62%
Tampons..................................................... 643 41 677 38
----------- --- ----------- ---
Total................................................... $ 1,584 100% $ 1,761 100%
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
- ------------------------
Source: A.C. Nielsen
Management believes approximately 58 million women between the ages 18 and
54 use feminine protection products and represent the Company's target user
group in the United States domestic market. Based on the Company's market
research, management expects to ultimately generate trial of INSTEAD-TM- by
approximately 15-17 million women in this target audience. There can be no
assurance that INSTEAD-TM- will be tried by such number of women, or that such
women will remain as users of INSTEAD-TM-.
28
<PAGE>
EUROPEAN AND OTHER DEVELOPED MARKETS
The European market for feminine protection products generated approximately
$2.9 billion in revenues in 1995, which represents a 7.5% increase over the
prior two years (based on 1995 Nielsen). According to such report, pantyliners
and pads had a 76% market share and tampons had a 24% share.
<TABLE>
<CAPTION>
($MILLION) % OF ($MILLION) % OF
PRODUCT TYPE 1993 MARKET SHARE 1995 MARKET SHARE
- ------------------------------------------------------------ ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Pantyliner.................................................. $ 424 16% $ 483 17%
Towels (Pads)............................................... 1,638 60 1,739 59
Tampons..................................................... 643 24 688 24
----------- --- ----------- ---
Total................................................... $ 2,705 100% $ 2,910 100%
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
- ------------------------
Source: A.C. Nielsen
Management believes approximately 105 million women between the ages of 18
and 54 use feminine protection products in Europe and represent the Company's
target user group in this market.
Other developed markets, including Canada, Latin America, Mexico and Asia
(other than India and China) present a combined population in excess of 200
million potential users.
MANUFACTURING
The Company has developed a patent pending process for manufacturing
INSTEAD-TM-. Custom-designed, state-of-the-art process equipment is essential to
the Company's manufacturing strategy. Management has collaborated with several
equipment manufacturers to engineer the necessary equipment to fully automate
the manufacturing process. In October 1995, the Company retained Remmele
Engineering, Inc. to design, build and install equipment for the first
semi-automated line capable of producing approximately 4 million units per month
on a three shift basis to support start-up production. The Company has ordered a
second semi-automated line and a fully automated line. The Company believes that
its manufacturing capacity will be sufficient to meet consumer demand. To
commercialize INSTEAD-TM- successfully, the Company will have to increase the
number of units it can produce, reduce per-unit manufacturing costs and achieve
the high-quality standards required. See "Risk Factors -- Lack of Manufacturing
Experience; Need to Achieve Economies of Scale and Limited Manufacturing
Resources."
Subsequent to the IPO, the Company entered into a lease for manufacturing
and office space and remodeled the manufacturing space principally to create the
controlled environment module which will secure the manufacturing equipment. The
piece of special equipment to manufacture the product, which is called the
thermoforming line, completed high volume testing at Remmele Engineering, Inc.
in St. Paul, Minnesota and has been installed at the Ultrafem Montana facility
and is producing product for the Fall 1996 launch of INSTEAD-TM-. The flow
wrapper machine that will put INSTEAD-TM- into individual "intimate wraps" and
the cartoning machine that will put INSTEAD-TM- into 6, 16, and 24 count cartons
are also in place. In June 1996 the Company commenced manufacturing quantities
of INSTEAD-TM- for the commercial market, and estimates that it has produced an
aggregate of approximately 2.2 million units of INSTEAD-TM- through August 14,
1996.
The Company has developed thermoplastic formulations which are proprietary
to the Company. They are permeable to many commercially established drugs and
are easily welded to each other and to other delivery components. Management
believes the performance of these formulations in combination with the
manufacturing process is an important component of developing a practical, low
cost production process. See "-- Patent Status and Patent Applications;
Proprietary Technology."
OTHER POTENTIAL APPLICATIONS OF THE SOFTCUP TECHNOLOGY
The SoftCup Technology has significant potential medical and health care
applications. Management plans to develop commercial applications of the SoftCup
Technology to be used as a vaginal drug delivery system because, by virtue of
direct contact with vaginal mucous membranes, the SoftCup
29
<PAGE>
Technology can provide an easy and direct method for topical and systemic
vaginal drug treatments. The Company believes that these products have
significant commercial applications for contraception, prevention of STDs,
treatments of vaginal infections and topical and systemic therapies.
Under a research agreement, which expired by its terms on June 30, 1993,
Johns Hopkins investigated using the SoftCup Technology as a delivery system for
monoclonal antibodies and other agents as protection against pregnancy and STDs.
The laboratory experiments conducted at Johns Hopkins indicated that the SoftCup
Technology can deliver the BufferGel both to the surface of the cervix and to
the lumenal surfaces of the vagina. Dr. Richard A. Cone and Dr. Kevin J. Whaley,
who are affiliated with Johns Hopkins, and along with Dr. Thomas Moench,
previously conducted research for the Company in connection with the research
agreement with Johns Hopkins. These individuals formed ReProtect which will
continue the investigation of using the SoftCup Technology as a vaginal drug
delivery system of agents for contraception, prevention of STDs, treatments of
vaginal infections and for topical and systemic therapies. Dr. Richard A. Cone
is a member of the Company's Board of Directors. See "Management Directors and
Executive Officers." Dr. Thomas R. Moench, formerly an Assistant Professor of
Medicine at Johns Hopkins, is an expert in virology, molecular biology and
monoclonal antibody production. From 1984 through 1993, he served on the faculty
of Johns Hopkins as a consultant physician in Infectious Diseases. He developed
an animal model for studying the vaginal and rectal (transmucosal) transmission
of an AIDS-like disease in cats caused by feline immunodeficiency virus. Dr.
Kevin J. Whaley, an Associate Research Scientist in Biophysics and an Adjunct
Faculty member, Population Dynamics/Reproductive Biology, Johns Hopkins, is an
expert on monoclonal antibodies and vaccines that protect against both pregnancy
and disease and on vaginal drug delivery.
Two of the scientists who formed ReProtect invented the BufferGel
Technology, which ReProtect has licensed to the Company. The Company believes
that this BufferGel Technology, when combined with the patented SoftCup
Technology, will provide enhanced protection against pregnancy and STDs as well
as enhanced treatments for vaginal infections. The BufferGel Technology has the
ability to maintain the normal vaginal pH balance while killing sperm and most
STD pathogens. The mechanical barrier action of the SoftCup Technology combined
with the BufferGel Technology may fill the needs for an effective woman
controlled prophylactic contraceptive as well as vaginal anti-infective. The NIH
has granted $2 million in contracts for the research and development of the
BufferGel Technology for contraception and the prevention of AIDS and other
STDs. There can be no assurance, however, that ReProtect will receive the
benefit of the entire $2 million under the NIH contracts.
The FDA has allowed an IND application permitting the BufferGel Technology
to enter Phase I clinical trials which are currently scheduled to begin in
December 1996. These Phase I clinical trials are being funded by HIVNET, a unit
of the NIH, to test the use of the BufferGel Technology as a vaginal microbicide
for the prevention of AIDS and other STDs. The Company plans to begin clinical
trials of a contraceptive product upon completion of the Phase I clinical
trials. In order to achieve this timetable, the Company will need to complete
development of the contraceptive product by combining the SoftCup Technology and
the BufferGel Technology. The Company will simultaneously develop additional
applications of the combination of the SoftCup Technology and the BufferGel
Technology, for treatment of vaginal infections and topical and systemic
therapies with a view towards seeking FDA approval to enter clinical trials for
such applications. The Company also intends to develop other vaginal drug
delivery products including for the prevention of STDs. There can be no
assurance, however, that any of the foregoing goals or timetables can be met, or
that any of the clinical trials will demonstrate the necessary degree of safety
and effectiveness required for FDA pre-market approval. See "Risk Factors --
Dependence on Single Product" and "-- Risks Associated with Research and
Development for Other Applications of the SoftCup Technology."
30
<PAGE>
ReProtect expects to conduct research at Johns Hopkins in accordance with a
ten year License, Research and Development Agreement between the Company and
ReProtect (the "ReProtect Agreement") under which the Company will provide
ReProtect at least $1 million annually for research. ReProtect is a party to a
research agreement with Johns Hopkins which expires August 31, 1999. In
addition, ReProtect also has an independent research facility and could conduct
research independent of Johns Hopkins by upgrading its current facilities. The
ReProtect Agreement provides the Company with an exclusive, worldwide license
for the use of the BufferGel Technology coupled with the SoftCup Technology, for
which ReProtect received a one time payment of $100,000, a royalty of $.01 per
unit of the product sold and ten and one-half year options to purchase 125,000
shares of Common Stock at an exercise price of $8.00 per share and 100,000
shares of Common Stock at an exercise price of $6.00 per share, exercisable upon
the attainment of certain milestones. In addition, ReProtect has granted the
Company a worldwide license for vaginal use of the BufferGel Technology without
the SoftCup Technology, for which ReProtect received a one time payment of
$100,000, options to purchase 175,000 shares of Common Stock at an exercise
price of $8.00 per share, exercisable upon the attainment of certain milestones,
and a royalty of either 5% or 3% (depending on whether a patent has been issued)
of net sales of the BufferGel Technology (without the SoftCup Technology). The
ReProtect Agreement contains the parties' agreement to negotiate in good faith
to extend the term, as well as other customary provisions in agreements of this
type, including provisions relating to noncompetition, confidentiality and early
termination of the agreement and the licenses therein under certain
circumstances.
The Company plans to continue pursuing other potential applications of the
SoftCup Technology. Beyond the potential applications discussed above, the
ongoing longer-range research and development with the ReProtect research team
will focus on the development of vaginal delivery of monoclonal antibodies
against sperm and STD pathogens. Management believes that these natural
protective agents will facilitate a new generation of products for vaginal
protection and therapy. The Company will require FDA clearance or pre-market
approval to market different applications of the SoftCup Technology in the
United States. See "Risk Factors -- Necessity of Regulatory Clearances to
Market."
In order to facilitate the development of other applications of the SoftCup
Technology, the Company currently plans to hire an executive to coordinate and
advance medical product development. The Company is conducting a search for such
executive and has identified several potential candidates.
STRATEGIC ALLIANCES
The Company is seeking domestic and international strategic alliances with
multinational pharmaceutical and/or consumer product companies to support the
launch of INSTEAD-TM- into international markets and to support the development
of other commercial applications of the SoftCup Technology. In addition,
following the successful introduction of INSTEAD-TM- into the United States
market, the Company will consider entering into an alliance with a strategic
partner who could potentially act as an ongoing distribution partner for the
full United States market. The Company believes that forming strategic alliances
with multinational pharmaceutical and/or consumer product companies will enhance
both its ability to successfully bring INSTEAD-TM- to international markets and
its capability to develop new applications for the SoftCup Technology, such as
contraception and vaginal drug delivery applications. See "Risk Factors -- Risks
Associated with Research and Development of Other Applications of the SoftCup
Technology."
The Company has retained a number of consultants specializing in health care
and business strategy to assist it in formulating and implementing the strategic
alliance strategy. The Company and its consultants have contacted a selected
list of target companies as potential strategic partners and are currently
engaged in preliminary discussions regarding formation of strategic alliances
with companies in both the United States and in Europe.
31
<PAGE>
PRODUCT TESTING
The Company has completed extensive laboratory testing of INSTEAD-TM- for
the purpose of satisfying the FDA's safety requirements. The Company has
conducted biocompatibility, toxicity and microbiological testing both IN VITRO
(outside a living organism) and IN VIVO (inside a living organism). Management
believes, based on the non-absorbent nature of INSTEAD-TM- and the results of
tests performed by two independent laboratories on the materials of which
INSTEAD-TM- is made and human clinical trials, that INSTEAD-TM- is safe. For a
discussion of potential product liability issues, see "Risk Factors -- Product
Liability; Possibility of Insufficient Insurance Coverage."
The tests for toxicity and biocompatibility were conducted by the Company
through independent laboratories in compliance with good laboratory practice
("GLP") regulations. Management believes the results of these tests demonstrate
INSTEAD-TM-'s safety. Arent Fox Kintner Plotkin & Kahn, FDA regulatory counsel
to the Company, has advised the Company that such results, which have been
submitted to the FDA, satisfy current FDA safety testing requirements for this
type of product.
The microbiological testing that was conducted demonstrated that INSTEAD-TM-
did not alter the growth of bacteria normally present in the vaginal micro flora
and did not cause the production of Toxic Shock Syndrome Toxin-l. All studies
were conducted by an independent laboratory in accordance with GLP regulations.
All test results described herein were submitted to the FDA in connection with
the 510(k) notification relating to INSTEAD-TM- See "-- Regulatory Status."
Subsequent to the IPO, the Company completed human clinical test studies to
determine the safety of longer wear times of INSTEAD-TM- . While the Company did
not believe it necessary to conduct clinical testing to increase the maximum
wear time of INSTEAD-TM- since the devices to which it was found substantially
equivalent by the FDA either do not have a maximum wear time or can be worn for
at least 12 to 14 hours, if not longer, the Company conducted a clinical study
to support the safety of the 12 hour wear time. The study was conducted by The
Crucible Group of Atlanta, Georgia, following review by an Institutional Review
Board, and was analyzed by MTC-BRI International, Inc. ("MTC-BRI") of Rockville,
Maryland. The study evaluated the effect of use of INSTEAD-TM- on the vaginal
micro flora in approximately 100 women for 8, 12, and 24 hours. The
investigators concluded that increasing the wear time to 12 or even 24 hours
does not result in increased colonization by the etiologic agent of TSS, does
not lead to increased colonization by pathogens that cause bacterial vaginosis,
does not lead to increased colonization by E. COLI, the most common agent
causing urinary tract infections, and does preserve the normal
LACTOBACILLUS-predominant vaginal flora. In response to the results of such
testing the Company increased the recommended wear time from 8 to 12 hours. See
"Risk Factors -- Necessity of Regulatory Clearances to Market."
COMPANY-SPONSORED RESEARCH
QUANTITATIVE CONCEPT AND ATTITUDE RESEARCH
In September 1991, the Company engaged CLT Research Associates, a market
research firm, to conduct a feminine protection product survey to help the
Company evaluate the commercial viability of INSTEAD-TM-. Such survey was
conducted in October/November 1991 in 20 metropolitan markets among a total of
750 women aged 18-45 (all of whom used feminine protection products). The major
findings of this study indicated that:
CONSUMER NEED -- Approximately half of all women surveyed were dissatisfied
with existing feminine protection products due in part to problems of comfort,
performance and safety. The Company believes that these problems are addressed
by INSTEAD-TM-.
POSITIONING -- INSTEAD-TM-'s perceived benefits matched the features women
desired in a feminine protection product. This finding validates the Company's
plans to position INSTEAD-TM- as the innovative alternative in feminine
protection based on improved comfort and performance.
32
<PAGE>
TRIAL -- One out of three women indicated they would purchase INSTEAD-TM-
based on exposure to a concept statement and seeing the actual product. Almost
half (48%) of the women indicated that they would expect INSTEAD-TM- to cost
more than what they now spend per period for feminine protection, and 42% of the
women would expect INSTEAD-TM- to cost the same as what they now spend.
CONCEPT POSITIONING RESEARCH
In March 1994, The Heller Research Group, a market research firm engaged by
the Company, conducted three concept positioning tests in 10 metropolitan areas
among a combined total of 300 women aged 21-49 (all of whom used feminine
protection products currently on the market). The results indicated that there
is considerable interest in INSTEAD-TM-, with over one-third of the women
indicating willingness to try INSTEAD-TM- after reviewing the concept statement
and seeing the actual product. The research indicated that it is possible that
INSTEAD-TM- can be priced at a premium vis-a-vis tampons. On average,
respondents indicated a willingness to purchase INSTEAD-TM- at a price which
represents a 16% premium to tampons.
CONSUMER USE TESTING
During the nine-month period of November 1991 through July 1992, INSTEAD-TM-
was use tested among a total of 300 women, ages 18-55, at seven different
geographical locations in the United States. Respondents were users of sanitary
napkins and tampons. Each woman used INSTEAD-TM- on a trial basis through three
consecutive menstrual cycles and, in total, over 13,000 units were used.
The research concluded that approximately 80% of the women were interested
in continuing to use INSTEAD-TM-, with approximately 54% of the women indicating
they would be likely to use INSTEAD-TM- as their primary method of feminine
protection in the future. The Company believes based on this research that the
remaining 26% of these women would be likely to use INSTEAD-TM- for occasional
use. Pricing was not a factor which was considered in this usage test.
The Company is not aware of any other consumer research regarding the
satisfaction of consumers with currently available feminine protection products.
CONSUMER COMMUNICATION QUALITATIVE TESTING
Commencing August 1995, consumer focus groups, consisting of 600 women
across the United States, were conducted to finalize consumer communication with
respect to advertising, packaging and user instructions. As a result of these
focus groups, the Company determined to include the twelve hour wear time usage
claim in its advertising, public relations and packaging.
PATENT STATUS AND PATENT APPLICATIONS; PROPRIETARY TECHNOLOGY
A United States patent with respect to the SoftCup Technology (for use for
feminine protection during menstruation either with or without vaginal drug
delivery) was issued on March 22, 1994. Foreign patent applications
corresponding thereto were filed by the Company in Australia, Belgium, Brazil,
Canada, Denmark, France, Germany, Italy, the Netherlands, Spain, Sweden,
Switzerland and the United Kingdom.
The Company has in the past and will continue to pursue in the future patent
protection for its technology and products that are patentable. The Company's
original patent application was filed by Ms. Contente and subsequently assigned
to the Company. The patent contains claims covering the use of the SoftCup
Technology for menstruation either with or without vaginal drug delivery. The
Company has filed a United States continuation application with additional
claims on other aspects of the SoftCup Technology. In addition, the Company has
filed provisional patent applications in the United States on the method of
manufacturing the SoftCup Technology. A provisional patent application provides
a priority filing date which may be relied on for one year by regular United
States and foreign applications. Period of pendency of the provisional
applications is not included in the twenty year United States patent term.
Ultrafem intends to follow up its provisional applications with regular
applications within such one year period. To further protect its technology, the
Company intends to file additional patent applications on inventions relating to
processing technology, specific vaginal drug delivery systems and other new
product applications.
33
<PAGE>
The Company relies on trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company requires its employees and consultants and other advisors
to execute confidentiality agreements. There can be no assurance that these
agreements will provide meaningful protection for the Company's trade secrets in
the event of unauthorized use or disclosure of such information or that others
will not independently develop substantially equivalent proprietary information
and manufacturing techniques or otherwise gain access to the Company's trade
secrets.
TRADEMARKS
The Company registered trademarks with the United States Patent and
Trademark Office for "SoftCup" and "Ultrafem" in 1992 and 1993, respectively.
The Company has also filed an application to register the trademark
"INSTEAD-TM-" in the United States, Argentina, Australia, Brazil, Canada, Chile,
India, Korea, Mexico, Pakistan, Panama, Paraguay, Philippines, Uruguay, Russia,
Switzerland, Taiwan, Venezuela and the European Community. The INSTEAD-TM- mark
was published for opposition in the United States on April 16, 1996; no
oppositions were filed during the 30 day opposition period. The Company believes
the INSTEAD-TM- mark will be registered in the United States in January 1996 or
shortly thereafter. In addition, the Company is pursuing a trademark application
in Turkey.
REGULATORY STATUS
Government regulation, both domestic and foreign, will be a significant
factor in manufacturing and marketing INSTEAD-TM-. The lengthy process of
seeking FDA and foreign government clearance and the ongoing process of
complying with applicable federal statutes and regulations require expending
substantial resources.
In 1993, the FDA cleared the Company's pre-market notification submission
under Section 510(k) of the FDCA. The FDA's clearance of this notification
enables the Company to market INSTEAD-TM- in the United States and to export it
overseas subject to the general controls provisions of the FDCA. Subsequent to
FDA clearance of this notification submission, modifications, which the Company
believes to be minor, were made to the formulation of certain materials used in
INSTEAD-TM- to improve the manufacturing process. An applicable FDA regulation
requires the filing of a new 510(k) notification when, among other things, there
is a major change or modification in the intended use of the device, or a change
or modification in material, chemical composition or manufacturing process, that
could significantly affect the device's safety or effectiveness. A device
manufacturer is responsible for making the initial determination as to whether a
proposed change to a cleared device or its intended use necessitates the filing
of a new 510(k) notification. The Company conducted a full range of
toxicological testing subsequent to the changes in materials, including
laboratory tests to determine the effect on the vaginal micro flora and on the
production of the toxin which causes TSS. The results of the studies confirmed
that these changes did not affect the safety of the product. As a result, the
Company, and its regulatory counsel, do not believe a new 510(k) notification
was necessary to make this change. The Company's rationale and support for the
change are in records as required by FDA GMP regulations and are available for
inspection by the FDA.
In April 1994, the FDA informally proposed a guidance document pursuant to
the above-described regulation (which was revised in August 1995) that would
require submission of a new 510(k) notification when certain changes are made in
medical devices such as INSTEAD-TM-, including changes in materials and
labeling. If this proposal becomes effective in its current proposed form, a
resubmission of the 510(k) notification of INSTEAD-TM- may be required. In
addition, any product with a 510(k) notification cleared by the FDA and its
manufacturer are subject to continuing regulatory review and the FDA has the
authority to, among other things, order or request restrictions on the
distribution of products or the withdrawal of products from market even after
clearance of a 510(k) submission is obtained. See "Risk Factors -- Necessity of
Regulatory Clearances to Market."
The Company has also decided to label INSTEAD-TM- with a 12 hour maximum
wear time. The labeling for INSTEAD-TM-, as cleared by the FDA in the original
510(k) notification, included an 8 hour maximum wear time. While the Company did
not believe it necessary to conduct clinical testing to
34
<PAGE>
increase the maximum wear time since the devices to which INSTEAD-TM- was found
substantially equivalent by the FDA either do not have a maximum wear time or
can be worn for at least 12 to 14 hours, if not longer, the Company conducted a
clinical study to support the safety of the 12 hour wear time. See "-- Product
Testing." The study was conducted by The Crucible Group of Atlanta, Georgia. The
investigators concluded that increasing the wear time of INSTEAD-TM- to 12 or
even 24 hours does not result in increased colonization by the etiologic agent
of TSS, does not lead to increased colonization by pathogens that cause
bacterial vaginosis, does not lead to increased colonization by E. COLI, the
most common agent causing urinary tract infections, and does preserve the normal
LACTOBACILLUS-predominant vaginal flora. Since there has not been a change in
the intended use of the product, and the Company's clinical studies have
demonstrated that the 12 hour maximum wear time is safe, and since the wear time
is similar to that for devices to which the product was found "substantially
equivalent" by the FDA, the Company does not believe a new 510(k) notification
is necessary to increase the maximum wear time to 12 hours. Prior to finalizing
the change in labeling, the Company met with the FDA on June 19, 1996. At that
meeting the results of these studies were discussed. The FDA requested that the
Company submit these results of its clinical testing, which the Company provided
on July 17, 1996. On October 25, 1996 the Company received a letter from the FDA
confirming that the Company could increase the wear time of INSTEAD-TM- to 12
hours without filing a new 510(k) notification. See "Risk Factors -- Necessity
of Regulatory Clearances to Market."
The Company's manufacturing facility in Missoula, Montana is subject to GMP
regulations which are promulgated by the FDA, international quality standards
and other regulatory requirements. The failure by the Company to comply with the
foregoing could adversely affect the Company's production and financial
condition.
The Company has obtained Canadian government acceptance to market
INSTEAD-TM- in Canada. INSTEAD-TM- may be marketed in each of Belgium, Denmark,
Finland, France, the Netherlands, Spain, Sweden, Switzerland and the United
Kingdom subject to compliance with applicable labeling laws and FDA requirements
concerning exports. Regulatory approvals or clearances are being pursued in
Argentina, Australia, Brazil, Germany, India, Italy, Mexico, Pakistan, Russia,
Saudi Arabia, Turkey, and the United Arab Emirates; however, there can be no
assurance that the Company will be able to comply with any such requirements.
The potential health care applications of the SoftCup Technology will
require FDA clearance or pre-market approval in accordance with the FDCA
applicable regulations. Although most of the potential uses do not incorporate
new chemical compounds, the Company will be required to submit applications for
each such use involving an already marketed drug, as a new form of delivery is
involved. Obtaining such approval or clearance can entail a lengthy process and
significant expense, including potential costs of clinical trials to demonstrate
safety and efficacy. See "Risk Factors -- Necessity of Regulatory Clearances to
Market."
In conjunction with developing other applications of the SoftCup Technology,
the Company has formulated a comprehensive regulatory strategy and has retained
MTC-BRI, an international contract research organization which specializes in
managing regulated health care products. MTC-BRI assists in determining that
potential products will meet applicable FDA requirements. Within MTC-BRI, the
project team for the Company is headed by Dr. David L. West who previously was
FDA Deputy Director, Office of Device Evaluation, Center for Devices and
Radiological Health.
GOVERNMENT REGULATION
Medical devices are regulated in the United States under the 1976 Medical
Device Amendments ("MDA") to the FDCA, and under pertinent implementing
regulations issued by the FDA. Every medical device in United States commercial
distribution is classified by the FDA as a Class I, II or III device. All three
classes require compliance with the general device controls of the MDA
(provisions governing establishment registration; product listing; adulteration;
misbranding; pre-market notification; notification of unreasonable risk; repair,
replacement or refund; recalls; device records and reports; and GMP
regulations). A Class II device must comply with such MDA general controls and
35
<PAGE>
any applicable performance standard or other special controls promulgated by the
FDA. A Class III device must be clinically tested for safety and effectiveness
for its intended use(s) and obtain the FDA's approval of a pre-market approval
application ("PMA") containing the results of such tests before it can be
marketed. Thereafter, such a device must comply with the conditions of approval
of the PMA and with the MDA general controls.
Each new medical device product never before commercially distributed in the
United States is automatically deemed a Class III device requiring pre-market
approval, unless it can be demonstrated that it is substantially equivalent in
intended use, design, materials and/or technological characteristics to one or
more predicate medical devices that were on the market before the MDA enactment
date of May 28, 1976, thereby establishing that the new device is as safe and
effective as the predicate device. Such substantial equivalence is demonstrated
by a manufacturer in a 510(k) pre-market notification submission, which must be
filed with the FDA at least 90 days before the product's targeted date of first
commercial distribution. Marketing of the device is not allowed until the FDA
clears the 510(k) notification submission.
FDA clearance of a supplemental 510(k) submission is required before any
significant change can be made to an already-marketed device in design,
materials, chemical composition, energy source or manufacturing process that
could affect the product's safety or effectiveness. Where a 510(k) notification
submission is based on a predicate device that has been classified by the FDA in
Class III, the 510(k) submission must also include a certification that the
submitter has conducted a reasonable search for all data and information
relevant to the predicate device and the device for which 510(k) clearance is
sought, as well as a summary of all safety and effectiveness data for both
devices. A device cleared through the 510(k) process that is substantially
equivalent to a predicate Class III device for which the FDA ultimately
establishes a PMA requirement will eventually have to receive approval of its
own PMA to remain on the market, unless it is the fifth or subsequent device of
its kind that has been commercially distributed in the United States, in which
case no PMA is required.
Menstrual cups such as INSTEAD-TM- are classified as Class II medical
devices by the FDA pursuant to applicable FDA regulations. Submission and
clearance of a 510(k) notification, through a finding of "substantial
equivalence" is required under the FDCA to market a Class II medical device in
the United States. The FDA cleared the 510(k) notification for INSTEAD-TM- on
October 5, 1993.
The FDA has promulgated regulations establishing stringent GMP requirements
for all medical devices. The FDA conducts periodic inspections of manufacturing
plants to ensure compliance with these regulations. Failure of compliance can
result in regulatory action of the kinds stated below.
The FDA has statutory authority to institute civil administrative
proceedings or court enforcement actions against medical device manufacturers or
distributors for violations of applicable requirements of the MDA and the FDA
implementing regulations. A finding of liability in an administrative proceeding
can result in the imposition of civil monetary penalties. Court enforcement
actions, involving seizure of products, injunction against continued
distribution of products or criminal prosecution, can result, respectively, in
destruction of products, orders against further distribution of products or
criminal fines if the FDA prevails. The FDA can also require the recall of an
already-marketed medical device when the agency believes that the product would
cause serious adverse health consequences or deaths if marketing were allowed to
continue.
Exports of medical devices manufactured in the United States are allowed if
the devices have satisfied applicable pre-market requirements and are not
adulterated or misbranded. Exports of medical devices manufactured in the United
States are allowed without prior FDA export approval if the product has
satisfied applicable pre-market approval or notification requirements and is not
adulterated or misbranded. An unapproved medical device manufactured in the
United States can also be exported to 23 "Tier 1" countries without prior FDA
export approval, if the device has valid marketing authorization in a "Tier 1"
country and the device complies with the laws of the importing country, subject
to notification to the FDA at the time of export. Exports of medical devices not
approved in the United States to non- "Tier 1" countries require prior FDA
approval. In addition,
36
<PAGE>
exports of unapproved medical devices manufactured in the United States for
export for clinical investigations in "Tier 1" countries or where marketing
authorization is imminent in a "Tier 1" country may be made without prior FDA
approval, provided that a notice is submitted to the FDA at the time of export.
COMPETITION
The market for feminine protection products is presently dominated by large
and well-financed companies which have substantially greater resources than the
Company. The Company believes that certain of such competitors have increased
their marketing efforts in response to the anticipated launch of INSTEAD-TM-.
Management believes INSTEAD-TM- has significant distinct benefits when compared
to other feminine protection products currently available and that, upon
introducing INSTEAD-TM-, the Company believes it will be the sole provider of
this type of feminine protection. For a discussion of certain risks related to
competition, see "Risk Factors -- Competition," "-- Risks Associated with
Potential Competitive Response," "-- Marketing Risks; Uncertainty of Consumer
Acceptance," and "-- Risks Inherent in Obtaining and Protecting Patents and
Proprietary Technology." In addition, the market for contraceptives and other
medical products is presently dominated by large and well-financed companies
which have substantially greater resources than the Company, and the ability of
the Company to compete in this area is dependent to a large extent on its
ability to successfully develop products, have such products cleared for market,
and the ability to manufacture any such products on a cost-efficient basis. See
"Risk Factors -- Risks Associated with Research and Development for Other
Applications of the SoftCup Technology."
RAW MATERIALS
INSTEAD-TM- is manufactured from a thermoplastic elastomer which is
available from a wide variety of domestic and international sources and is
currently supplied by Shell Chemical Company pursuant to a written sales
contract. Management has identified several sources of supply of raw materials
and believes such materials are readily available from such other sources. A
change in the supplier of a raw material would not require further FDA
clearance. See "--Regulatory Status" and "Risk Factors--Necessity of Regulatory
Clearances to Market."
PROPERTIES
The Company currently leases office space at 500 Fifth Avenue, Suite 3620,
New York, New York 10110 for its principal executive offices for a monthly base
rent of $5,610, and additional office space on a month to month basis for
approximately $2,000 per month. The lease expires in November 1997. The Company
has entered into a ten year lease for office space at 805 Third Avenue, New
York, New York for its principal office which provides for monthly base rent of
approximately $42,233 for the first two years, which increases to a maximum of
approximately $48,682 per month by the end of the term. The Company has entered
into a three and one-half year sublease for a portion of such space under which
pursuant to its terms the subtenant will pay approximately $13,000 per month.
Since May 1996, the Company has entered into leases on a minimum twelve month
basis for modular office space in Missoula, Montana, with rental payments of
$1,230 per month and $1,350 per month, respectively. The Company has also
entered into three year leases beginning in April 1996 and February 1996 for its
administrative office and manufacturing facility in Missoula, Montana at a
monthly rent of $2,345 and $6,500, respectively.
EMPLOYEES
As of September 30, 1996, the Company had 67 full-time employees. The
Company believes its relations with its employees are satisfactory. None of the
Company's employees are covered by a collective bargaining agreement or
represented by a collective bargaining unit.
LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company. The executive officers of the
Company are elected for a term of one year or until their successors are duly
elected and qualify; however, certain of the executive officers have employment
agreements which provide for longer terms of office. See "--Employment
Agreements and Certain Agreements with Management."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John W. Andersen 60 President; Chief Executive Officer; Director and
Chairman of the Board of Directors
Audrey Contente 53 Executive Vice President and Founder; Director
Dori M. Reap 45 Senior Vice President of Finance and Administration;
Chief Financial Officer and Secretary
Tonya G. Hinch 33 Senior Vice President, Marketing and Sales
Gary Nordmann 54 Vice President, Operations
Wendell Guthrie 46 Director of Manufacturing
Richard A. Cone 60 Director
Joy Vida Jones 46 Director
Martin Nussbaum 49 Director
Charles D. Peebler, Jr. 60 Director
Barrie Zesiger 51 Director
</TABLE>
EXECUTIVE OFFICERS AND KEY PERSONNEL
JOHN W. ANDERSEN has been the Chairman of the Board, Chief Executive Officer
and President of the Company since July 1994. He has an extensive background in
consumer product management, including food, beverage and personal products. He
has been the Chief Executive Officer of five consumer companies over the past 20
years and has substantial experience in Japan and western Europe. From June 1993
until July 1994, Mr. Andersen was self-employed. For the period of 1990 to 1993,
Mr. Andersen was President and Chief Executive Officer of Johanna Dairies, a
subsidiary of John Labatt Limited with annual sales of approximately $1 billion.
From 1983 to 1989, he was President, Chief Executive Officer and Director of
Whitbread North America, Inc., a beverage subsidiary of Whitbread PLC with
annual sales of approximately $450 million. Prior to 1983, Mr. Andersen served
as Executive Vice President of Marriott Corporation, President and Chief
Executive Officer of Sonoma Vineyards, and Vice President of Norton Simon, Inc.
AUDREY CONTENTE is the Executive Vice President and a Director of the
Company, as well as the Founder of the Company and inventor of the SoftCup
Technology. Ms. Contente is responsible for manufacturing and product
development. Ms. Contente has served as a Director of the Company since its
formation in March 1990; as an Executive Vice President since July 1996; as a
Senior Vice President from July 1993 to June 1996; and as Senior Vice President
of Manufacturing and Product Development from November 1995 to June 1996. Ms.
Contente also served as Chairman of the Board of the Company from March 1990 to
July 1993, and Chief Executive Officer of the Company from May 1992 to July
1993. She has experience in marketing and sales, business development and
biomedical instrumentation. As a result of years of research in feminine hygiene
technology which led
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to the ultimate design of the SoftCup Technology, Ms. Contente applied for a
United States patent and subsequently founded the Company. She began her career
in sales in 1976 with J.T. Baker Chemical Co. where she was responsible for
selling biomedical instrumentation and supplies. From 1980 to 1990 she was the
principal of Audrey Contente & Associates, a management consulting firm
specializing in strategic planning and market development projects. During this
10-year period, she devoted substantial and continuous effort in researching,
designing and developing the SoftCup Technology and INSTEAD-TM-.
DORI M. REAP has been the Senior Vice President of Finance and
Administration and Chief Financial Officer of the Company since August 1, 1995.
She became Secretary of the Corporation in June 1996. She has been in senior
financial positions over the past 18 years in major consumer products companies
and has significant experience in finance, business planning and analysis,
restructuring and information systems. Ms. Reap was Chief Financial Officer of
The Franklin Mint in 1994. For the period of 1990 to 1993, Ms. Reap was Vice
President and Chief Financial Officer of Johanna Dairies, a subsidiary of John
Labatt Limited, with annual sales of approximately $1 billion. From 1978 to
1989, Ms. Reap worked for Frito Lay, Inc., a subsidiary of PepsiCo, Inc., in
successively senior positions and as Finance Director from 1985 to 1989.
TONYA G. HINCH joined the Company in November 1995 as the Senior Vice
President, Marketing and Sales of the Company. She has ten years of experience
marketing women's personal care and broad-based consumer products. Ms. Hinch
worked at Neutrogena from 1991 to 1995, last serving as General Manager of
Neutrogena Haircare. From 1987 to 1991, Ms. Hinch worked at Clairol,
specializing in new product development and last serving as Senior Marketing
Manager in New Products. From 1985 to 1987, Ms. Hinch was employed at Procter &
Gamble, last serving as an Assistant Brand Manager.
GARY NORDMANN joined the Company full-time in April 1996 as the Vice
President, Operations. He also served as a consultant to the Company from May
1994 to March 1996. He has had over 20 years experience in senior management
positions in consumer product companies with manufacturing operations. Mr.
Nordmann worked at Johanna Dairies, a subsidiary of John Labatt Limited, from
1991 to 1994 as Vice President, Finance and Administration, and at Whitbread
North America, Inc., a subsidiary of Whitbread PLC, as Executive Vice President,
Finance and Administration from 1983 to 1990. Mr. Nordmann worked for Marriott
Corporation, Inc., from 1981 to 1983, Mattel, Inc. from 1977 to 1981, PepsiCo
from 1972 to 1977, and S.C. Johnson & Son, Inc. from 1970 to 1972.
WENDELL GUTHRIE has been the Director of Manufacturing since March 1996 and
prior to that served as Vice President of Manufacturing for the Company since
July 1991. He has over 20 years of experience in all phases of manufacturing and
quality assurance with medical products, from design through manufacturing
engineering. From 1968 to 1991, he worked for American Dental Manufacturing
Company ("ADM"), an FDA registered manufacturer and distributor of dental
instruments and related products, as Quality Assurance Manager and later as Vice
President and Chief Operating Officer. During that time he also developed the
products for, and served as Vice President and Chief Executive Officer of, two
subsidiaries of ADM, Omnitech and DMD, manufacturers and distributors of
chemical disinfectants and direct mail professional dental products.
DIRECTORS
RICHARD A. CONE, a Director of the Company since 1994, has been a Professor
of Biophysics and Biology at Johns Hopkins since 1973. Dr. Cone trained in
Physics at the Massachusetts Institute of Technology and at the University of
Chicago (Ph.D. 1963). In 1979 he jointly received the Cole Award from the
Biophysical Society for discovering the fluid-like nature of cell membranes.
Since 1979 he has been pursuing research to develop improved methods for
protecting against STDs and unwanted pregnancy. He is an expert on the
protective properties of mucus secretions and the mechanisms by which antibodies
protect mucus epithelia against pathogens. He is Managing Director of ReProtect,
a research and development company he co-founded in 1993 with Thomas R. Moench
and Kevin J. Whaley to develop products that protect reproductive health.
39
<PAGE>
JOY VIDA JONES, a Director of the Company since 1992, has practiced law for
the last nineteen years, having received a J.D. from New York University School
of Law (1976). She was a partner at Rogers & Wells when she left the firm in
1993 after 10 years of practice there. She has served since 1990 as a Trustee of
the Calvert Social Investment Fund, which made an investment in the Company.
Since June 1993, Ms. Jones has acted as a personal manager to musicians. She is
a Trustee of her alma mater, Sarah Lawrence College (B.A. 1971), as well as
several funds and societies.
MARTIN NUSSBAUM, a Director of the Company since 1996, has been a partner of
the law firm of Shereff, Friedman, Hoffman & Goodman, LLP since 1976. The
Company has retained Shereff, Friedman, Hoffman & Goodman, LLP in the past and
during the fiscal year. See "Certain Relationships and Related Party
Transactions" and "Legal Matters."
CHARLES D. PEEBLER, JR., a Director of the Company since 1995, is President
and Chief Executive Officer, as well as director, of Bozell, Jacobs, Kenyon &
Eckhardt, Inc. ("BJK&E"), the 14th largest marketing communications company in
the world. He also serves as Chief Executive Officer of Bozell Worldwide, Inc.,
BJK&E's major advertising agency division. Mr. Peebler joined Bozell Worldwide,
Inc. in 1958 and became President in 1965. The Company has retained Bozell
Worldwide and certain of its affiliates in the past and during the current
fiscal year. See "Certain Relationships and Related Party Transactions." Mr.
Peebler, in addition to serving on the boards of a number of non-profit
organizations, is a member of the Board of Directors of American Radio Systems.
BARRIE ZESIGER, a Director of the Company since 1993, is a Managing Director
in charge of operations for Zesiger Capital Group LLC, a New York City money
management firm. She worked as a security analyst for the Madison Fund from 1968
to 1970 and in the private practice of law from 1974 to 1984, having received
her J.D. degree from the Stanford University Law School. Having formerly served
on a number of non-profit cultural boards, she currently serves as the Vice
Chair of the Asphalt Green, Inc., an innovative non-profit sports and fitness
center in New York City with programs that promote self-improvement, personal
achievement, and lifetime health. Ms. Zesiger is also a private investor in the
Company.
SCIENTIFIC ADVISORY BOARD
The Company established a Scientific Advisory Board (the "SAB") to advise
the Company on selected scientific, technical and regulatory matters. The SAB
members have been involved since 1990 as advisors to the Company in the areas of
research and development, clinical safety testing, and have served on a
continual basis as consultants to the Company for specific scientific and
technical meetings. The SAB has provided related assistance for the SoftCup
Technology and INSTEAD-TM-. Members of the SAB have been granted stock options
and one member, Ted Cohen, M.D., has invested in the Company. See "--Options
Granted in Last Fiscal Year." From time to time the Company also requests that
certain members of the SAB participate in specific projects for which the
Company has in the past and will in the future compensate SAB members on a per
diem basis. Sharon Hillier, Ph.D. declined to accept the stock options which are
granted to SAB members from time to time due to the guidelines of the university
with which she is affiliated; consequently, in May 1996, the Company entered
into a Consulting Agreement with Dr. Hillier which provides for a one-year term,
an automatic renewal option, an initial one time payment of $10,000 and an
annual consulting fee of $10,000 per year, in addition to per diem compensation
for certain additional consulting services which Dr. Hillier may provide in the
future and reimbursement of out of pocket expenses. The current five members of
the SAB are as follows:
TED COHEN, M.D., Chairman of the SAB, has been in private practice in
obstetrics, gynecology and infertility since 1978, and is associated with St.
Barnabas Medical Center located in New Jersey, which is one of the largest
Obstetrics and Gynecology centers on the East Coast. He is President of Suburban
OB/GYN Associates in New Jersey, a private obstetric and gynecology medical
practice and is now associated with Suburban Woman's Physicians, a large private
practice in obstetrics and gynecology.
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<PAGE>
In addition to being a member of the American College of Obstetricians and
Gynecologists, he is also active in other medical societies. Dr. Cohen has
published articles in various medical journals over the past few years.
ELIZABETH B. CONNELL, M.D. has served as a Professor of Obstetrics &
Gynecology at Emory University School of Medicine, located in Atlanta, Georgia
since 1981. She has served as the Chairman of the FDA's Obstetric and Gynecology
Device Advisory Panel from 1988 to 1992; as a member of the FDA Panel on Review
of Obstetrical and Gynecological Devices from 1976 to 1979; and as a member of
the FDA Obstetrics and Gynecology Advisory Committee from 1970 to 1978.
SHARON HILLIER, PH.D., an expert in genital tract infections, is an
Associate Professor of Obstetrics & Gynecology at the University of Pittsburgh,
and Director, Reproductive Infectious Disease Research, Magee-Women's Hospital
located in Pittsburgh, Pennsylvania since 1995. Since obtaining her doctoral
degree in 1984, Dr. Hillier has been awarded eight major grants for research
studies dealing with gynecological health and diseases of the female
reproductive tract. She has published over 80 scientific papers on various
aspects of gynecological bacteriology and microbiology.
W. MARK SALTZMAN, PH.D., an expert in controlled release of substances from
polymers, with a specialty in intravaginal delivery, is currently Professor of
Chemical Engineering at Cornell University in Ithaca, New York. He received his
doctorate in Medical Engineering from Massachusetts Institute of
Technology/Harvard Medical School and was a Post-Doctoral Associate at
Massachusetts Institute of Technology. Dr. Saltzman has received numerous honors
in medical engineering, including the Allan C. Davis Medal as Maryland's
Outstanding Young Engineer, has been awarded over 15 grants for research studies
dealing with controlled release polymers and cellular interactions and has
published over 70 scientific papers on various aspects of polymer controlled
release mechanisms.
RICHARD SODERSTROM, M.D., Clinical Professor of Obstetrics & Gynecology at
University of Washington Medical School since 1974, located in the State of
Washington, is a gynecologist specializing in reproductive health. He has
received numerous distinguished service awards for his work in the field, and
has published more than 100 clinical papers on various aspects of reproductive
health. Dr. Soderstrom is active in several medical societies and currently
serves as an advisor to the FDA on devices in Obstetrics and Gynecology.
41
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EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company, as
well as certain other compensation paid or accrued for the fiscal years ended
June 30, 1996 and 1995 to the Company's President and Chief Executive Officer
and the four other most highly compensated executive officers of the Company
whose annual compensation exceeds $100,000. See also "-- Employment Agreements
and Certain Agreements with Management."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------
LONG TERM
COMPENSATION AWARDS
-------------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS (#)
- ------------------------------------------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
John W. Andersen........................... 1996 $ 250,000 $ 195,000(1) $ 56,627(2) --
President and Chief 1995 $ 20,833 -- -- 574,862
Executive Officer,
Chairman of the Board
Audrey Contente............................ 1996 $ 570,164(3) -- -- --
Executive Vice 1995 $ 74,286 -- -- --
President, Founder and Director
Dori M. Reap............................... 1996 $ 150,000 $ 75,000 $ 25,401 (4) 150,000
Senior Vice President, Finance 1995 -- -- -- --
and Administration, Chief
Financial Officer and Secretary
Tonya G. Hinch............................. 1996 $ 97,917 $ 30,000 $ 28,997 (5) 100,000
Senior Vice President, 1995 -- -- -- --
Marketing and Sales
Gary Nordmann.............................. 1996 $ 32,308 -- $ 37,775 (6) 30,000
Vice President, Operations 1995 -- -- $ 33,897 (6) --
</TABLE>
- ------------------------
(1) Mr. Andersen became entitled to a signing bonus of $195,000 upon the
execution of his employment agreement in July 1994. A portion of the signing
bonus was paid out of the proceeds of the IPO. See "Management -- Employment
Agreements and Certain Agreements with Management."
(2) Includes payment of $24,818 premium on a universal life insurance policy.
(3) Includes Ms. Contente's base salary for fiscal year 1996 of $175,000 and
$395,164 of accrued salary for fiscal years 1992, 1993 and 1994, a portion
of which was paid out of the proceeds of the IPO.
(4) Includes relocation allowance of $20,580.
(5) Includes relocation allowance of $28,791.
(6) Consists of consulting fees paid to Mr. Nordmann, who served as a consultant
to the Company prior to becoming the Vice President, Operations in March
1996.
STOCK OPTION PLAN
In October 1990, the Board of Directors approved a stock option plan (the
"1990 Stock Option Plan"), which was subsequently approved by the stockholders
of the Company. The 1990 Stock Option Plan authorized the grant of options for
up to 250,000 shares of Common Stock to employees, officers,
42
<PAGE>
directors, consultants and advisors. In May 1993, the Board of Directors
approved the number of shares authorized to be granted under the 1990 Stock
Option Plan to increase to 900,000 which was subsequently approved by the
stockholders of the Company. The 1990 Stock Option Plan is designed to provide
an incentive to the officers and certain other key employees of and consultants
to the Company by making available to them an opportunity to acquire a
proprietary interest in the Company or to increase their proprietary interest in
the Company.
The Compensation Committee of the Board of Directors administers the 1990
Stock Option Plan. The Compensation Committee has the full power and authority,
subject to the provisions of the 1990 Stock Option Plan, to designate
participants, grant options and determine the terms of all options. The
Compensation Committee has the right to make adjustments with respect to options
granted under the 1990 Stock Option Plan in order to prevent dilution of the
rights of any holder. Members of the Compensation Committee are not eligible to
receive options under the 1990 Stock Plan.
The terms of specific options are determined by the Compensation Committee.
Options granted may be non-qualified or incentive stock options. The exercise
price per share for a non-qualified option is subject to the determination of
the Compensation Committee. Incentive stock options may not be granted at less
than 100% of the fair market value at the date of grant. Each option will be
exercisable after the period or periods specified in the option agreement.
The 1990 Stock Option Plan meets the requirements of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which exempts
the acquisition of certain options under the 1990 Stock Option Plan from the
operation of Section 16(b) under the Exchange Act.
Upon the exercise of an option, the option holder shall pay to the Company
the exercise price plus the amount of the required Federal and state withholding
taxes, if any. Options may be exercised and the withholding obligation may be
paid for with cash or shares of Common Stock. Shares surrendered on exercise
will be valued at the market price for the Common Stock, generally based on
average closing prices of the Common Stock over a 30-day period prior to
exercise, less the option exercise price. The period after termination of
employment during which an option may be exercised is as determined by the
Compensation Committee.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
year ended June 30, 1996 to each of the executives named in the Summary
Compensation Table above who received options during such year:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE ----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% 10%
- --------------------- --------- --------------- ----------- ------------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dori M. Reap......... 50,000 17.5% $ 6.00 August 1, 2005 $ 188,500 $ 478,000
100,000 35.1 8.00 August 1, 2005 503,000 1,275,000
Tonya G. Hinch....... 100,000 35.1 8.00 November 6, 2005 503,000 1,275,000
Gary Nordmann........ 30,000 10.5 10.50 March 8, 2006 198,000 502,000
</TABLE>
During September 1995, each member of the SAB (other than Sharon Hillier,
Ph.D.) was granted an option under the 1990 Stock Option Plan to purchase 5,000
shares of Common Stock at an exercise price of $8.00 per share. Each option is
exercisable immediately with respect to 2,000 shares, with the balance of the
option becoming exercisable in equal increments on the first, second and third
anniversary of the date of issuance (provided the holder is still serving on the
SAB). The holder of such an option may exercise the option with respect to the
vested portion, in accordance with its terms, for a period of one year after
ceasing to be a member of the SAB for any reason. Sharon Hillier, Ph.D. declined
to accept the stock options which are granted to SAB members from time to time
due to the guidelines of the university with which she is affiliated. See
"Management -- Scientific Advisory Board."
43
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Board of Directors presently consists of seven persons. The Company's
Board of Directors is divided into three classes. Directors of each class will
be elected at the annual meeting of stockholders held in the year in which the
term for such class expires and will serve thereafter for three years. John W.
Andersen and Charles D. Peebler, Jr. serve as Class 1 Directors with their terms
expiring at the 1996 Annual Meeting of Stockholders, Audrey Contente and Joy
Vida Jones serve as Class 2 Directors with their terms expiring at the 1997
Annual Meeting of Stockholders and Richard A. Cone, Barrie Zesiger and Martin
Nussbaum serve as Class 3 Directors with their terms expiring at the 1998 Annual
Meeting of Stockholders. For further information on the effect of the classified
Board, see "Description of Capital Stock -- Certain Provisions of the
Certificate of Incorporation and By-Laws."
COMMITTEES OF THE BOARD
The Board of Directors has established a Compensation Committee, consisting
of Charles D. Peebler, Jr., Barrie Zesiger and Martin Nussbaum. The Compensation
Committee is responsible for approving (or, at the election of the Compensation
Committee, recommending to the Board) compensation arrangements for officers and
directors of the Company, reviewing benefit plans and administering the 1990
Stock Option Plan.
The Board of Directors has established an Audit Committee, consisting of
Barrie Zesiger, Charles D. Peebler, Jr. and Joy Vida Jones. The Audit Committee
is responsible for selecting (or, at the election of the Audit Committee,
recommending to the Board) the independent auditors of the Company, evaluating
the independent auditors, reviewing the scope of the annual audit with
management and the independent auditors, consulting with management and the
independent auditors as to the systems of internal accounting controls and
reviewing the non-audit services performed by the independent auditors.
1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The 1995 Stock Option Plan for Non-Employee Directors (the "1995 Stock
Option Plan"), which was approved by the Company's stockholders, provides that
upon becoming a director (and persons who were non-employee directors on the
date of adoption of the 1995 Stock Option Plan, upon the adoption date) receive
a one-time grant of a ten-year option to purchase 15,000 shares of Common Stock
at an exercise price equal to the fair market value of the Common Stock on the
date immediately preceding the date of grant. Of the aggregate number of shares
issuable under such option, 5,000 shares vest immediately and the remaining
10,000 shares vest in equal installments of 2,500 shares on each of the first
four anniversaries of the date of grant, provided that the holder is then still
serving as a director of the Company. The holder of such an option may exercise
the option with respect to the vested portion of the option, in accordance with
its terms, for a period of one year after ceasing to be a member of the Board of
Directors due to death or permanent disability. There are an aggregate of
250,000 shares reserved for issuance under the 1995 Stock Option Plan.
EMPLOYMENT AGREEMENTS AND CERTAIN AGREEMENTS WITH MANAGEMENT
Mr. Andersen is the Chairman of the Board, Chief Executive Officer and
President of the Company. Mr. Andersen entered into a five year employment
agreement with the Company, dated July 29, 1994, which, as amended, provides for
a base salary of $250,000 per annum. The base salary increases to $350,000 upon
the earlier to occur of (i) the formation of a strategic alliance or (ii) the
introduction of INSTEAD-TM- to at least five percent of the United States or
European market. His base salary will increase to $500,000 when the later of
such conditions is achieved. A "strategic alliance" is defined as the formation
of an alliance with one or more multinational pharmaceutical and/or consumer
product companies to facilitate developing and marketing the Company's product
line. Mr. Andersen will receive royalties of $.005 for each unit of INSTEAD-TM-
sold and $.01 for each unit of product based on the SoftCup Technology sold for
medical purposes. Upon the execution of his employment agreement, Mr. Andersen
received an option exercisable to purchase 10% of the number of shares of Common
Stock outstanding on a fully-diluted basis (as defined) immediately before the
IPO at an aggregate exercise price of $2.5 million. Such option is exercisable
with respect to 20% of the shares subject thereto upon the date of grant
(subject to forfeiture in limited cases) and the balance of the option
44
<PAGE>
vesting in equal installments upon the Company's attainment of each of the
following goals: (w) raising development financing of approximately $5-$10
million, (x) closing of an initial public offering, (y) distributing the
INSTEAD-TM- to the public in one half or more of the United States or Europe and
(z) achieving annual revenues of $100 million; provided, however, that in any
event the full amount shall vest upon the following: termination of the
agreement by the Company for reasons other than for cause; change of control;
termination by Mr. Andersen for good reason; or six months prior to the
expiration of the agreement. Upon the execution of the agreement Mr. Andersen
became entitled to a signing bonus of $195,000, a portion of which was paid out
of the proceeds of the IPO.
Ms. Contente is the Executive Vice President and Founder of the Company, as
well as a Director of the Company. Ms. Contente entered into a five year
employment agreement with the Company, dated July 1, 1996, which provides for a
base salary of $230,000 per annum. This base salary increases to $300,000 upon
the earlier to occur of (i) the formation of a strategic alliance or (ii) the
introduction of INSTEAD-TM- to at least five percent of the United States or
European market. Her base salary will increase to $350,000 when the later of
such conditions is achieved. A "strategic alliance" is defined as the formation
of an alliance with one or more multinational pharmaceutical and/or consumer
product companies to facilitate developing and marketing the Company's product
line. Ms. Contente will receive royalties of $.005 for each unit of product
based on the SoftCup Technology sold. Under the employment agreement, Ms.
Contente is entitled to medical, life and disability insurance coverage. In
mid-1990, as part of the organization of the Company, Ms. Contente received
526,250 shares of Common Stock in exchange for assigning to the Company all
pending patent applications, trademarks, copyrights, technology and similar
rights associated with products relating to or evolving from the patent
application filed by Ms. Contente and relating to the SoftCup Technology. In
mid-1992, Ms. Contente received options to purchase 75,000 shares of Common
Stock, which vests over a five-year period at an exercise price of $8.00 per
share; such option will vest immediately upon a change of control of the Company
(as defined therein). Upon the execution of the agreement Ms. Contente became
entitled to a signing bonus of $75,000. In connection with the execution of her
employment agreement, Ms. Contente entered into a Name, Likeness, and Voice
Release and Agreement (the "Release"). The Release provides that Ms. Contente
will serve as a spokesperson for INSTEAD-TM- in both television and print/media
campaigns for which Ms. Contente will receive $12,500 for the television
campaign, $12,500 for the print/media campaign. Ms. Contente is entitled to
receive an additional $12,500 for the television campaign and $12,500 for the
print/media campaign if such campaign is actively used by the Company to support
the rollout of INSTEAD-TM- into certain additional geographic areas. If the
Company decides to produce a new television campaign or print/media campaign
using Ms. Contente as spokesperson then Ms. Contente will receive an additional
$25,000. After the employment agreement is terminated, Ms. Contente will no
longer be required to provide further services under the Release; however, the
Company will have the ability to use her name and likeness in the campaigns for
up to a year after termination, and in connection with INSTEAD-TM- in
perpetuity.
Ms. Reap is Senior Vice President of Finance and Administration and Chief
Financial Officer of the Company. Ms. Reap entered into a five year employment
agreement dated August 1, 1995, which provides for a base salary of $150,000 per
annum. This base salary increases to $175,000 upon the earlier to occur of (i)
the formation of a strategic alliance or (ii) the introduction of INSTEAD-TM- to
at least five percent of the United States or European market. Her base salary
will increase to $200,000 when the later of such conditions is achieved. A
"strategic alliance" is defined as the formation of an alliance with one or more
multinational pharmaceutical and/or consumer product companies to facilitate
developing and marketing the Company's product line. Ms. Reap received options
to purchase 150,000 shares of the Common Stock (100,000 at an exercise price of
$8.00 per share and 50,000 at an exercise price of $6.00 per share). Such
options are exercisable with respect to 20% of the shares subject thereto upon
the date of grant; 20% upon the closing of the IPO; 20% upon the first to occur
of (a) consummation of a strategic alliance with proceeds to Ultrafem exceeding
$8 million or (b) completion by Ultrafem of a second public offering with
proceeds to the Company exceeding $20 million; 20% at such time as Ultrafem's
product becomes available for sale to the general public in one-
45
<PAGE>
half or more of the United States or European market, measured demographically;
and 20% upon the realization of the Company of EBITDA (as defined) equal to or
in excess of $20 million in any fiscal period of 12 months. Such options will
vest regardless of the achievement of such milestones no later than six months
prior to the expiration of the term of her employment agreement. In addition,
such options will vest immediately upon a change of control of the Company (as
defined therein). Upon the execution of her agreement Ms. Reap was entitled to a
signing bonus of $75,000, a portion of which was paid out of the proceeds of the
IPO.
Ms. Hinch is Senior Vice President, Marketing and Sales of the Company. Ms.
Hinch entered into a five year employment agreement dated November 6, 1995,
which provides for a base salary of $150,000 per annum. This base salary
increases to $175,000 upon the earlier to occur of (i) the formation of a
strategic alliance or (ii) the introduction of INSTEAD-TM- to at least five
percent of the United States or European market. Her base salary will increase
to $200,000 when the later of such conditions is achieved. A "strategic
alliance" is defined as the formation of an alliance with one or more
multinational pharmaceutical and/or consumer product companies to facilitate
developing and marketing the Company's product line. Ms. Hinch received an
option to purchase 100,000 shares of the Common Stock at an exercise price of
$8.00 per share. Such option is exercisable with respect to 20% of the shares
subject thereto upon the execution of her employment agreement; 20% upon the
successful introduction of INSTEAD-TM- into a minimum of 5% of the United States
or European market to be measured by the revenue and distribution targets set
forth in the option; 20% upon the consummation of a strategic alliance with
proceeds to Ultrafem exceeding $8 million; 20% at such time as Ultrafem's
product becomes available for sale to the general public in one-half or more of
the United States or European market, measured demographically; and 20% upon the
realization of Ultrafem of EBITDA (as defined) equal to or in excess of $20
million in any fiscal period of 12 months. Such option will vest regardless of
the achievement of such milestones no later than six months prior to the
expiration of the term of her employment agreement. In addition, such option
will vest immediately upon a change of control of the Company (as defined
therein). Upon the execution of her agreement Ms. Hinch was entitled to a
signing bonus of $30,000 a portion of which was paid out of the proceeds of the
IPO.
Mr. Nordmann is Vice President, Operations of the Company. Mr. Nordmann
entered into a three year employment agreement dated April 1, 1996, which
provides for a base salary of $140,000 per annum. Mr. Nordmann received an
option to purchase 30,000 shares of the Common Stock at an exercise price of
$10.50 per share, exercisable upon the occurrence of certain events. Such option
will vest regardless of the achievement of such milestones no later than six
months prior to the expiration of the term of his employment agreement. In
addition, such option may vest immediately at the discretion of the Board of
Directors upon a change of control of the Company (as defined therein).
Each of the employment agreements listed above (i) contains certain
non-competition provisions, (ii) provides that the executive may participate in
incentive bonus plans which may be adopted in the future by the Company, once
the Company has begun selling its products to the general public, and (iii) with
respect to Ms. Reap, Ms. Hinch and Mr. Nordmann, provides for the reimbursement
of certain relocation expenses. The employment agreement for each of Mr.
Andersen, Ms. Contente, Ms. Reap, Ms. Hinch and Mr. Nordmann provides that if
the agreement is terminated by the Company (which in the case of Mr. Andersen
would include a failure on its part to renew the agreement at the end of its
term) without "Due Cause" (as defined) or by the executive (other than Mr.
Nordmann) for Good Reason (as defined) or during the first year following a
Change of Control (as defined), the agreement provides for severance payments
equal to the annual salary in effect at the time of termination payable monthly
for a period of twenty-four months with respect to Mr. Andersen and Ms.
Contente, twelve months with respect to Ms. Reap and Ms. Hinch, and six months
with respect to Mr. Nordmann, or in a lump sum, and in certain cases, fringe and
other benefits. Ms. Contente's employment agreement also provides for severance
payments equal to the base salary in effect at the time of termination for a six
month period upon the non-renewal of her employment agreement.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 30, 1996
(except as otherwise noted) and as adjusted to reflect the sale by the Company
of 2,000,000 shares of Common Stock offered in the Concurrent Offering with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each named
officer of the Company listed in the Summary Compensation Table above, and (iv)
all officers and directors of the Company as a group. Unless otherwise noted,
the Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially owned
by them. Each person in the following chart is deemed to be the beneficial owner
of any shares of Common Stock that can be acquired by such person within 60 days
from September 30, 1996 upon the conversion of convertible securities or the
exercise of warrants or options.
COMMON STOCK BENEFICIALLY OWNED
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENENFICAL OWNERSHIP
PRIOR TO OFFERING AFTER THE OFFERING(1)
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
NAME NUMBER PERCENT NUMBER PERCENT
- ---------------------------------------------- ----------- --------------------- ----------- ---------------------
Audrey Contente (2)(3)(4)..................... 592,500 10.0% 592,500 7.5%
Barrie Zesiger (3)(5)......................... 888,474 14.1% 888,474 10.7%
Richard A. Cone (3)(6)........................ 20,000 * 20,000 *
Joy V. Jones (3)(7)........................... 7,500 * 7,500 *
Martin Nussbaum (3)(8)........................ 10,925 * 10,925 *
Charles D. Peebler, Jr. (3)................... 14,750 * 14,750 *
John Andersen (2)(3)(9)....................... 347,167 5.6% 347,167 4.2%
Dori M. Reap (2)(10).......................... 90,000 1.5% 90,000 1.1%
Tonya G. Hinch (2)(11)........................ 40,000 * 40,000 *
Albert L. Zesiger (12)........................ 888,474 14.1% 888,474 10.7%
Mellon Bank Corporation (13).................. 840,000 14.3% 840,000 10.7%
Directors and executive officers as a group
(consists of 10 persons) (5)................. 1,975,566 29.7% 1,975,566 22.8%
</TABLE>
- ------------------------
* Less than 1%.
(1) Each beneficial owner's percentage ownership is determined by assuming that
convertible securities, options or warrants that are held by such person
(but not those held by any other person) and which are exercisable within 60
days of September 30, 1996 have been exercised.
(2) Officer.
(3) Director.
(4) Ms. Contente has granted an option to each of Jeffrey Simon and Frank Cole
to purchase 106,250 shares of Common Stock, and an option to Arthur Appleman
to purchase 12,500 shares of Common Stock, each such option at an exercise
price of $2.00 per share ("Optioned Shares") and with an expiration date of
December 1, 1998. The Optioned Shares are subject to a voting trust, to be
voted by a majority of Ms. Contente, Ms. Zesiger and Mr. Andersen, as voting
trustees. The voting trust will terminate on the earliest of (i) the
transfer of the Optioned Shares to Messrs. Cole, Simon and Appleman, (ii)
August 22, 1997, or (iii) upon the breach of certain representations
contained in the agreement.
(5) Includes 411,828 shares of Common Stock and 370,200 shares of Common Stock
issuable upon the exercise or conversion of convertible securities of the
Company, both of which are held in accounts managed by Zesiger Capital
Group, LLC, an investment advisor, for which Albert L.
47
<PAGE>
Zesiger, Ms. Zesiger's husband, is a Managing Director. Ms. Zesiger
disclaims beneficial ownership of such shares. Also includes 40,000 shares
of Common Stock and 12,500 shares of Common Stock issuable upon the exercise
or conversion of convertible securities of the Company which are owned by
Mr. Zesiger; Ms. Zesiger disclaims beneficial ownership of such shares. See
also footnote 12. Includes 16,238 shares which are issuable upon the
exercise of an outstanding option and warrant which are exercisable within
60 days of September 30, 1996. Does not include the Optioned Shares which
are subject to a voting trust of which Ms. Zesiger is a voting trustee. See
footnote 4. Information as to Ms. Zesiger is as of October 7, 1996.
(6) Does not include 400,000 shares of Common Stock issuable upon exercise of
options granted to ReProtect in the ReProtect Agreement.
(7) Includes options to purchase 7,500 shares of Common Stock which are
exercisable within 60 days of September 30, 1996; however, exercise of Ms.
Jones' options is subject to certain restrictions. Does not include 150,000
shares of Common Stock beneficially owned by the Calvert Social Investment
Fund, of which Ms. Jones is a trustee. Ms. Jones disclaims beneficial
ownership of such shares of Common Stock, except to the extent of her
beneficial ownership in the Calvert Social Investment Fund.
(8) Includes option to purchase 5,000 shares of Common Stock and warrants to
purchase 3,940 shares of Common Stock which are exercisable within 60 days
of September 30, 1996. See "Certain Relationships and Related Party
Transactions" and "Legal Matters."
(9) Includes options to purchase 344,917 shares of Common Stock and warrants to
purchase 375 shares of Common Stock which are exercisable within 60 days of
September 30, 1996 and 1,875 shares of Common Stock. Does not include
additional options to purchase 229,945 shares of Common Stock upon the
attainment of certain milestones. Does not include the Optioned Shares which
are subject to a voting trust of which Mr. Andersen is a voting trustee. See
footnote 4.
(10) Includes options to purchase 90,000 shares of Common Stock which are
exercisable within 60 days of September 30, 1996.
(11) Includes option to purchase 40,000 shares of Common Stock which is
exercisable within 60 days of September 30, 1996.
(12) Includes 411,828 shares of Common Stock and 370,200 shares of Common Stock
issuable upon the exercise or conversion of convertible securities of the
Company which are held in accounts managed for certain parties through
Zesiger Capital Group, LLC, an investment advisor, for which Mr. Zesiger is
a Managing Director. Mr. Zesiger has dispositive power with respect to such
shares but disclaims beneficial ownership of such shares. Also includes
37,708 shares of Common Stock and 16,238 shares of Common Stock issuable
upon the exercise or conversion of convertible securities of the Company
which are owned by Ms. Zesiger, Mr. Zesiger's wife; Mr. Zesiger disclaims
beneficial ownership of such shares. Includes 12,500 shares which are
issuable upon the exercise of an outstanding warrant which is exercisable
within 60 days of September 30, 1996. Information as to Mr. Zesiger is as of
October 7, 1996.
(13) The Mellon Bank Corporation, located at One Mellon Bank Center, Pittsburgh,
Pennsylvania 15258 owns such shares of Common Stock through its
subsidiaries, Mellon Bank, N.A. and The Dreyfus Corporation. Information
based on Schedule 13G filed by the Mellon Corporation and its subsidiaries
with the Securities and Exchange Commission on September 11, 1996.
48
<PAGE>
SELLING STOCKHOLDERS
This Prospectus covers the sale of the 1,073,450 shares of Common Stock held
by the Selling Stockholders and of an additional 3,227,853 shares of Common
Stock issuable upon conversion or exercise of certain outstanding securities
convertible into or exercisable for shares of Common Stock. All of the shares
offered by the Selling Shareholders may be sold in the open market, in privately
negotiated transactions or otherwise by the holders thereof. Certain holders of
such securities are subject to a contractual restriction prohibiting the offer
and/or sale of such shares of Common Stock for a period of eighteen (18) months
from the effective date of the Company's initial public offering (the "Effective
Date").
The Company has agreed to register the Common Stock held and issuable upon
the conversion and/or exercise of such securities by the Selling Stockholders
and to pay all expenses in connection therewith (other than brokerage
commissions and fees and expenses of their respective counsel).
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
---------------------- ------------------------
<S> <C> <C> <C> <C>
NAME NUMBER PERCENT (1) NUMBER (2) PERCENT (3)
- ---------------------------------------------------------------- --------- ----------- ----------- -----------
Barrie Zesiger (4).............................................. 888,474 14.1% 147,355 2.4%
Albert L. Zesiger (5)........................................... 888,474 14.1% 147,355 2.4%
BEA Associates, Inc. (6)........................................ 113,666 1.9% 0 0%
Dean Witter Foundation (7)...................................... 16,666 * 0 0%
Andrew Heiskell (7)............................................. 16,666 * 0 0%
Alfred E. Heller (7)............................................ 12,500 * 0 0%
Elizabeth Heller Mandell Trust (7).............................. 12,500 * 0 0%
Domenic J. Mizio (7)............................................ 8,333 * 0 0%
Warren Otologic Profit Sharing Trust (7)........................ 8,333 * 0 0%
Jeffrey E. Schuss............................................... 833 * 0 0%
Alice M. Moore (8).............................................. 5,833 * 0 0%
Betty Jane Schuss Trust......................................... 2,041 * 1,875 *
Deborah Doolittle Trust......................................... 1,000 * 0 0%
Jeffrey Schuss Trust............................................ 1,000 * 0 0%
Jonathan Schuss Trust........................................... 1,000 * 0 0%
Karen Sawyer Trust.............................................. 1,000 * 0 0%
Robert A. & Constantine McCabe.................................. 8,333 * 0 0%
Robert & Ellen P. Moore (8)..................................... 5,833 * 0 0%
Robert H. Bauerle............................................... 16,900 * 0 0%
Jerry J. King................................................... 8,750 * 0 0%
David Theisen................................................... 21,875 * 0 0%
P. David Edgell................................................. 17,500 * 0 0%
Charles W. Daniel............................................... 17,500 * 0 0%
Jerry D. Leitman................................................ 10,937 * 0 0%
Aubrey Dale Glasscock........................................... 8,750 * 0 0%
John Banks Robertson, Jr........................................ 4,375 * 0 0%
Kraver & Levy (9)............................................... 3,161 * 0 0%
Wien, Malkin & Bettex (10)...................................... 35,526 * 0 0%
Chapin School-Endowment Fund (7)................................ 20,375 * 0 0%
Van Lobel Sels Charitable Foundation (7)........................ 30,562 * 0 0%
Planned Parenthood of New York, Inc. (7)........................ 10,187 * 0 0%
Meehan Investment Partnership I, L.P. (7)....................... 20,375 * 0 0%
Morgan Trust Company of the Bahamas Ltd. (7).................... 20,375 * 0 0%
Wells Family, LLC (7)........................................... 31,020 * 0 0%
Mary Van Schuyler Raiser (7).................................... 10,187 * 0 0%
Mary M. Raiser (7).............................................. 20,375 * 0 0%
Helen L. Hunt (7)............................................... 10,187 * 0 0%
James and Jennifer Kuehn, Jt Ten WROS........................... 20,375 * 0 0%
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
---------------------- ------------------------
NAME NUMBER PERCENT (1) NUMBER (2) PERCENT (3)
- ---------------------------------------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stephen L. Rutherford........................................... 18,337 * 0 0%
Danny Rue....................................................... 12,225 * 0 0%
Herbert F. Boeckmann, II........................................ 120,000 1.9% 0 0%
Michael Butler.................................................. 60,000 * 0 0%
James Murtha.................................................... 90,000 1.5 0 0%
Richard Hines................................................... 30,000 * 0 0%
Bernard Gurtman................................................. 60,000 * 0 0%
John Purcell.................................................... 120,000 1.9% 0 0%
Brian Shapiro................................................... 60,000 * 0 0%
David H. Berman, MD............................................. 60,000 * 0 0%
Howard Kaplan................................................... 60,000 * 0 0%
Edward Berman................................................... 60,000 * 0 0%
Alan Finkelstein................................................ 30,000 * 0 0%
J. Kenneth Tate................................................. 10,000 * 0 0%
James D. Tate................................................... 10,000 * 0 0%
Scott Maybaum................................................... 30,000 * 0 0%
Rodan Payroll Services.......................................... 60,000 * 0 0%
Patrick J. Guarino.............................................. 10,000 * 0 0%
Calvert Social Investment Fund (11)............................. 150,000 2.5% 0 0%
Tony Bernard.................................................... 30,000 * 0 0%
Ted Lipman, MD.................................................. 30,000 * 0 0%
Brian Shea...................................................... 30,000 * 0 0%
Shlomo Marglit.................................................. 30,000 * 0 0%
Mark Nordlicht.................................................. 60,000 * 0 0%
Noam Lotan...................................................... 30,000 * 0 0%
Dr. Aharon David................................................ 30,000 * 0 0%
Rebecca Kraitenberg............................................. 15,000 * 0 0%
Joseph Hartman.................................................. 15,000 * 0 0%
Mikel Majore.................................................... 15,000 * 0 0%
Trinet International............................................ 30,000 * 0 0%
Dr. Michael Fuchs............................................... 15,000 * 0 0%
Gong Fu Lee..................................................... 15,000 * 0 0%
Temple Inland Master Trust (8).................................. 102,000 1.7% 0 0%
Arthur D. Little Employees Investment Plan (7).................. 90,000 1.5% 0 0%
Jeffrey V. Simon (12)........................................... 157,531 2.6% 36,281 *
Jay-San Associates.............................................. 30,000 * 0 0%
Walter Stump.................................................... 30,000 * 0 0%
Harvey B. Adams................................................. 60,000 * 0 0%
Guarantee & Trust Co. TTEE FBO Jay Weissbluth PSP............... 15,000 * 0 0%
Tradewind Fund I, LP............................................ 60,000 * 0 0%
Ryco and Co..................................................... 60,000 * 0 0%
David Burr...................................................... 22,500 * 0 0%
Edward and Ruth Kronick......................................... 15,000 * 0 0%
Jenifer Altman Foundation (7)................................... 15,000 * 0 0%
City of Milford Pension and Retirement Plan (7)................. 22,500 * 0 0%
Tab Products Co. Pension Plan (8)............................... 30,000 * 0 0%
American Medical International Pension Plan (7)................. 90,000 1.5% 0 0%
Alza Corporation Retirement Plan (7)............................ 22,500 * 0 0%
NFIB Employee Pension Plan (7).................................. 22,500 * 0 0%
Roanoke College (8)............................................. 30,000 * 0 0%
Brearley School General Endowment Fund (8)...................... 15,000 * 0 0%
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
---------------------- ------------------------
NAME NUMBER PERCENT (1) NUMBER (2) PERCENT (3)
- ---------------------------------------------------------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
City of Norwalk Pension and Retirement Plan (7)................. 15,000 * 0 0%
Dr. William Lippy (7)........................................... 7,500 * 0 0%
Psychology Associates (7)....................................... 3,000 * 0 0%
Crescent Capital Company, L.L.C................................. 15,000 * 0 0%
Alliance Capital Investment Corp................................ 15,000 * 0 0%
Ronald J. Adams................................................. 30,000 * 0 0%
Lauren Katz..................................................... 30,000 * 0 0%
American Stock Transfer Company................................. 30,000 * 0 0%
Irene Chang..................................................... 15,000 * 0 0%
Mathers Associates.............................................. 15,000 * 0 0%
Skippack Partners............................................... 7,500 * 0 0%
Nelson Broms (13)............................................... 150,000 2.4% 0 0%
Emanuel & Company (14).......................................... 25,000 * 0 0%
Montana Board of Science and Technology Development (15)........ 140,000 2.3% 0 0%
Audrey Contente (16)............................................ 592,500 10.0% 66,250 *
Frank Cole (17)................................................. 143,781 2.4% 18,750 *
Arthur Appleman................................................. 12,500 * 0 0%
Hampshire Securities Corporation (18)........................... 327,500 5.3% 0 0%
Andy Yurowitz (19).............................................. 17,500 * 0 0%
Orchard Close Ltd............................................... 200,000 3.3% 0 0%
Demvest Equities................................................ 20,000 * 0 0%
Arthur N. Abbey................................................. 20,000 * 0 0%
</TABLE>
- ------------------------
* Less than one percent.
(1) Assumes 2,000,000 shares of Common Stock being offered in the Concurrent
Offering are issued and outstanding.
(2) Assumes the sale by such Selling Stockholder of all shares of Common Stock
offered hereby.
(3) Assumes, with respect to any given Selling Stockholder, the conversion
and/or exercise of all securities convertible or exercisable for the Common
Stock being offered hereby and held by such Selling Stockholder; and the
subsequent sale by such Selling Stockholder of such shares of Common Stock
being offered hereby. Each percentage reflected in this column assumes that
with respect to any given Selling Stockholder, only such Selling Stockholder
has converted and or exercised his, her or its securities convertible or
exercisable for shares of Common Stock, and that no other Selling
Stockholder has done so.
(4) Includes 411,828 shares of Common Stock and 370,200 shares of Common Stock
issuable upon the exercise or conversion of convertible securities of the
Company, both of which are held in accounts managed by Zesiger Capital
Group, LLC, an investment advisor, for which Albert L. Zesiger, Ms.
Zesiger's husband, is a Managing Director. Ms Zesiger disclaims beneficial
ownership of such shares. Also includes 40,000 shares of Common Stock and
12,500 shares of Common Stock issuable upon the exercise or conversion of
convertible securities of the Company which are owned by Mr. Zesiger; Ms.
Zesiger disclaims beneficial ownership of such shares. See also footnote 5
and footnotes 5 and 12 of Principal Stockholders. Includes 16,238 shares
which are issuable upon the exercise of an outstanding option and warrant
which are exercisable within 60 days of September 30, 1996. Information as
to Ms. Zesiger is as of October 7, 1996.
(5) Includes 411,828 shares of Common Stock and 370,200 shares of Common Stock
issuable upon the exercise or conversion of convertible securities of the
Company which are held in accounts managed for certain parties through
Zesiger Capital Group, LLC, an investment advisor, for which Mr. Zesiger is
a Managing Director. Mr. Zesiger has dispositive power with respect to such
51
<PAGE>
shares but disclaims beneficial ownership of such shares. Also includes
37,708 shares of Common Stock and 16,238 shares of Common Stock issuable
upon the exercise or conversion of convertible securities of the Company
which are owned by Ms. Zesiger, Mr. Zesiger's wife; Mr. Zesiger disclaims
beneficial ownership of such shares. Includes 12,500 shares which are
issuable upon the exercise of an outstanding warrant which is exercisable
within 60 days of September 30, 1996. See also footnote 4 and footnotes 5
and 12 of Principal Stockholders. Information as to Mr. Zesiger is as of
October 7, 1996.
(6) Includes Common Stock and convertible securities currently exercisable into
102,000 shares of Common Stock in managed account for which BEA Associates,
Inc., an investment advisor, has dispositive power.
(7) Zesiger Capital Group LLC, an investment advisor to such Selling
Stockholders, has dispositive power with respect to such securities.
(8) BEA Associates, Inc., an investment advisor to such Selling Stockholder,
has dispositive power with respect to such securities.
(9) These shares of Common Stock were issued in lieu of certain amounts due
Kraver & Levy by the Company in consideration of legal services provided to
a director of the Company.
(10) These shares of Common Stock were issued in lieu of certain amounts due
Wien, Malkin & Bettex by the Company for legal services provided to the
Company.
(11) See footnote 7 of "Principal Stockholders."
(12) Mr. Simon, a former officer and director of the Company, resigned from such
positions in December 1993. Includes 106,250 shares of Common Stock which
Mr. Simon has an option to purchase from Ms. Contente. See footnote 16
below.
(13) Mr. Broms, a former officer and director of the Company, resigned in
February 1994.
(14) These shares of Common Stock are issuable upon the exercise of certain
warrants issued in connection with a 1992 private placement for which
Emanuel & Company acted as broker-dealer.
(15) Includes 140,000 shares of Common Stock issuable upon the conversion of
certain convertible debentures.
(16) Ms. Contente has granted an option to each of Jeffrey Simon and Frank Cole
to purchase 106,250 shares of Common Stock, and an option to Arthur Appleman
to purchase 12,500 shares of Common Stock, each such option at an exercise
price of $2.00 per share and with an expiration date of December 1, 1998.
The Optioned Shares are subject to a voting trust, to be voted by a majority
of Ms. Contente, Ms. Zesiger and Mr. Andersen, as voting trustees. The
voting trust will terminate on the earliest of (i) the transfer of the
Optioned Shares to Messrs. Cole, Simon and Appleman, (ii) August 22, 1997 or
(iii) upon the breach of certain representations contained in the agreement.
(17) Includes 18,781 shares of Common Stock beneficially owned by Sandra Alice
Cole, Mr. Cole's daughter, as to which shares Mr. Cole disclaims beneficial
ownership. See footnote 16.
(18) Includes 327,500 shares of Common Stock issuable upon the exercise of the
Representative's Warrants. The Representative's Warrants are not exercisable
for a period of one year from the Effective Date.
(19) Includes 12,500 shares of Common Stock issuable pursuant to a warrant which
the Company has issued to Mr. Yurowitz. The warrant was issued upon Mr.
Yurowitz's surrender for cancellation of the Class A and Class B Warrants to
purchase an aggregate of 10,000 shares of Common Stock, which warrants were
issued to him in the 1995 Unit Private Placement.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Effective October 1, 1990, the Company entered into a Termination Benefits
Agreement (the "Termination Benefits Agreement") with Ms. Contente. Both the
Termination Benefits Agreement and Ms. Contente's employment agreement provide
for payment of various severance and other benefits if Ms. Contente's employment
is terminated. Ms. Contente is also entitled to an immediate vesting of stock
options for 75,000 shares of Common Stock if her employment is terminated by
reason of a change in control of the Company resulting from certain shareholder
derivative litigation.
The Company also entered into various indemnity agreements with Ms.
Contente, dated as of October 1, 1990 as amended on April 23, 1992, and
indemnity agreements with certain former officers and directors. The indemnity
agreements provide Ms. Contente and these former officers and directors with
certain indemnities for claims against the Company and Ms. Contente and the
former officers and directors, respectively.
On March 2, 1992, Albert L. Zesiger and John S. Stafford, stockholders of
the Company, filed a derivative action against the Company, Ms. Contente and a
former director seeking damages and injunctive relief. On June 5, 1993, the
court approved a settlement agreement dated May 19, 1993 (the "Settlement
Agreement"), under which the defendants admitted no wrongdoing. The Settlement
Agreement provides, among other things, for the appointment of, in the
alternative, a seven or nine member Board, appointment of a new Chairman and
Chief Executive Officer, establishment of an Audit/Finance Committee of the
Board, issuance of warrants to purchase an aggregate of 25,000 shares of Common
Stock to the plaintiffs at an exercise price of $8.00 per share, and release of
all related claims. The Settlement Agreement provides that the limitations on
the composition and size of the Board of Directors last until the Company's 1995
Annual Meeting of Shareholders. As part of the Settlement Agreement, Ms.
Contente resigned as Chief Executive Officer and Chairman of the Board and
agreed, for a two-year period commencing the date of the Settlement Agreement,
not to serve in such capacities or be responsible for overseeing the Company's
daily management or operation.
On May 12, 1992, each of Jeffrey Simon and Frank Cole, who were Directors of
the Company, loaned $50,000 to the Company. On June 12, 1992, the principal
balance of these loans and accrued but unpaid interest were converted into
shares of Common Stock at a conversion price of $8.00 per share. Mr. Cole
simultaneously purchased an additional 6,250 shares at $8.00 per share. Messrs.
Simon and Cole made additional loans to the Company in 1992 and 1993 totaling
$226,010 (Mr. Simon -- $85,000 and Mr. Cole -- $141,010). Mr. Cole resigned as a
director of the Company in July 1993. The Company repaid each lender $10,000 in
1993. The $206,010 remaining balance bore interest at 6% per annum and was
repaid from the proceeds of a private placement in 1995.
In December 1993, January 1994 and September 1994, the Company issued
promissory notes aggregating $476,679 to certain former officers for accrued but
unpaid salaries. The notes are for terms of two to three years and bear interest
at 6% and 10% per annum. Certain of these notes in the principal amount of
$255,646 were repaid upon completion of the IPO. In January 1995, the Company
issued two promissory notes to Audrey Contente, each with a principal amount of
$156,771.56 and a maturity date of September 30, 1996. Both notes were repaid
upon the consummation of the IPO.
On April 14, 1994, a majority of the stockholders, acting by written consent
in lieu of a meeting, removed certain of the directors (including Messrs. Broms
and Simon), but not Ms. Contente and Barrie Zesiger, from the Board of Directors
and appointed six members of the Board to serve until April 14, 1995 or when
their successors were elected.
During 1994, the Company borrowed a total of $135,000 from nine individuals,
including four current Directors. The loans require payment of 10% interest per
annum until maturity. Each lender was granted (i) the option of receiving, in
lieu of the repayment of interest and principal, 1,875 shares of Common Stock at
a price of $8.00 per share and (ii) warrants to purchase 375 shares of Common
Stock at an exercise price of $10.00 per share for a five-year period expiring
on June 30, 1999. As of June 30, 1995, all of the nine individuals had converted
their loans into shares of Common Stock.
53
<PAGE>
Charles D. Peebler, Jr., a member of the Board of Directors of the Company,
is the President and Chief Executive Officer, as well as a Director, of BJK&E, a
worldwide marketing and communications company. The Company has retained Bozell
Worldwide, Inc. ("Bozell"), a wholly-owned subsidiary of BJK&E, to assist in
marketing, advertising creative work and media planning for the Company. In
March 1996, the Company issued a five year warrant to purchase 50,000 shares of
Common Stock to Bozell. The warrant has an exercise price of $10.00 per share
and was issued in consideration of certain services provided in connection with
the launch of INSTEAD-TM-.
The Company had retained Bozell Sawyer Miller ("BSM"), a communications
management concern and a wholly-owned subsidiary of Bozell, to act as a
consultant for the Company's corporate communications and financial public
relations work, for which the Company has paid hourly fees and out-of-pocket
expenses; BSM is currently acting as a consultant with respect to certain public
relations matters. KRC Research and Consulting, a division of BSM, has performed
consumer research on INSTEAD-TM-. The Company believes that transactions entered
into with Bozell and its subsidiaries and divisions are on terms which are at
least as favorable as those which the Company could have obtained from an
unrelated third party.
One of the Company's directors is a partner of Shereff, Friedman, Hoffman &
Goodman, LLP, a law firm which the Company has retained since fiscal year 1995.
The total amount of fees paid to such firm by the Company in fiscal year 1996
was $647,000 and in fiscal year 1995 was $29,888. SFH&G Investors, a partnership
comprised of the partners of Shereff, Friedman, Hoffman & Goodman, LLP, holds a
warrant to purchase an aggregate of 35,000 shares of Common Stock. See "Legal
Matters."
PRIOR FINANCINGS
In January 1996, the Company raised $100,000 through a private placement to
a single investor of a $100,000 non-convertible promissory note due the earlier
of January 26, 1997 or the closing of the IPO, bearing interest at a rate of 10%
per annum and a Class C Warrant to purchase 20,000 shares of Common Stock at an
exercise price of $8.00 per share. The Class C Warrant is not exercisable until
the first anniversary of the date of issuance and has a term of five years. The
non-convertible note was repaid upon completion of the IPO.
In a 1995 private placement (the "1995 Unit Private Placement"), the Company
raised $5,950,000 through the sale of Units. Each "Unit" consisted of one
$50,000 non-convertible promissory note bearing interest of 10% per annum, one
$50,000 convertible promissory note bearing interest of 10% per annum, one Class
A Warrant to purchase 10,000 shares of Common Stock at a purchase price equal to
$5.00 per share and one Class B Warrant to purchase 10,000 shares of Common
Stock at a purchase price equal to $12.50 per share. Certain investors in a
previous private placement consummated in 1993 (the "Existing Investors") agreed
to amend and restate their promissory notes and invest the principal amount of
such notes in the amount of $1,650,000 in the 1995 Unit Private Placement. Ms.
Jones, a director of the Company, is a director of Calvert Social Investment
Fund which is one of the Existing Investors. See "Management--Directors." Other
Existing Investors were paid principal and interest aggregating $222,577 from
the proceeds of the 1995 Unit Private Placement. The non-convertible notes were
repaid upon the completion of the IPO, and the convertible notes mature in April
1997. On December 31, 1995 certain Existing Investors were issued warrants to
purchase an additional aggregate of 165,000 shares of Common Stock because the
secured notes which they held were not paid; such warrants contain the same
terms as the Class A Warrants.
In early calendar year 1995, the Company raised $670,000 through a private
placement sale of units (the "1995 Preferred Stock Private Placement"). Each
unit consisted of (i) 1,950 shares of Series A Preferred Stock, for an allocated
purchase price of $195,000, with each such share (a) being convertible, at any
time at the option of the holder, into Common Stock of the Company at a
conversion rate of 12.5 shares of Common Stock for each such share, subject to
adjustment for certain dilutive events, (b) being entitled to cumulative annual
dividends of $8.00, (c) participating with the
54
<PAGE>
Common Stock in any dividend after payment of said $8.00, (d) having a
liquidation preference of $100.00 and (e) being entitled to the number of votes
equal to the number of shares of Common Stock into which such share can be
converted, and (ii) a warrant, exercisable for a five year period, to purchase
21,250 shares of Common Stock at an exercise price of $10.00 per share, subject
to adjustment for certain dilutive events for an allocated purchase price of
$5,000. The Company sold 2.25 units to a group of investors represented by a
common advisor for $450,000 on the same terms and conditions as the 1995
Preferred Stock Private Placement, except for certain registration rights.
In March 1995, the Company issued to certain trade creditors notes in the
total principal amount of $444,237. The notes bear interest at 10% per annum and
mature in September 1996, December 1996 and February 1997. Notes in the
principal amount of $37,500 were repaid with accrued interest from the proceeds
of the 1995 Unit Private Placement, and notes in the principal amount of $42,000
were repaid upon the completion of the IPO. Subsequent to the IPO, the Company
repaid the principal amount of $364,737 and interest of $9,118 of such notes.
In 1994, the Company borrowed a total of $135,000 from nine individuals,
including four current directors. The loans bear interest at the rate of 10%
interest per annum and were to mature upon the earlier to occur of (i) the date
the Company receives $600,000 of financing or (ii) 180 days from the date of
issuance of the loan. Each lender was granted (i) the option of receiving, in
lieu of the repayment of interest and principal, 1,875 shares of Common Stock at
a conversion price of $8.00 per share and (ii) warrants to purchase 375 shares
of Common Stock at an exercise price of $10.00 per share exercisable for a five
year period expiring on June 30, 1999. As of June 30, 1995, all of the nine
individuals had converted their loans to Common Stock.
In a 1994 private placement, the Company raised $450,000 through the sale of
units, composed in the aggregate of (i) $225,000 in subordinated convertible
debentures, (ii) five year warrants to purchase 47,813 shares of Common Stock at
an exercise price of $10.00 per share, and (iii) 28,125 shares of Common Stock
at $8.00 per share. Each debenture had a face amount of $100,000 and was sold
for an allocated purchase price of $95,000. The debentures accrue interest at
the rate of 10% per annum (compounded annually), and mature on the earlier to
occur of (i) August 31, 1996, or (ii) at the option of the holder, the date the
Company successfully effects any single financing in excess of $10 million. Each
debenture is convertible into shares of Common Stock at a conversion price of
$10.00 per share, subject to adjustment upon the occurrence of certain events
such as stock dividends, stock splits and recapitalizations. Holders of shares
of Common Stock acquired upon conversion of these debentures have certain
registration rights.
In October and November 1994, the Company issued to certain trade creditors
subordinated convertible debentures for an aggregate principal amount of
$172,432. Such debentures have a two year term, bear interest at 10% per annum
and are convertible into Common Stock at a conversion price of $10.00 per share.
In a 1993 private placement, the Company issued (i) $1.85 million of secured
promissory notes and (ii) warrants to purchase 370,000 shares of Common Stock at
an initial exercise price equal to $9.00 per share. These secured promissory
notes were reinvested by certain Existing Investors in the 1995 Unit Private
Placement described above.
Between December 1991 and October 1992, the Company borrowed an aggregate of
$700,000 from the Montana Board of Science and Technology Development ("MBSTD")
evidenced by convertible debentures which bear interest at the rate of 10.5% per
annum (compounded annually), of which $350,000 was borrowed to fund expenditures
relating to the Company's manufacturing facility in Montana (the foregoing loans
are collectively referred to as the "MBSTD Loans"). The MBSTD Loans are
convertible into shares of Common Stock at a conversion price of $5.00 per
share, with accrued interest being waived upon conversion. The conversion price
is subject to adjustment if the Company issues shares of Common Stock or
convertible securities at a price less than $5.00 per share. MBSTD
55
<PAGE>
was also granted certain "piggy-back" registration rights. Principal amounts on
the MBSTD Loans are due as follows: $250,000 on December 20, 1998; $100,000 on
April 10, 1999; and $350,000 on October 19, 1999, along with related accrued
interest.
In late 1991 the Company sold an aggregate of 200,000 shares of Common Stock
for an aggregate purchase price of $1,200,000. During 1991, the Company sold an
additional 318,500 shares of Common Stock for an aggregate purchase price of
$2,548,000. In 1990 the Company issued 132,500 shares of Common Stock to certain
investors for an aggregate purchase price of $530,000.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $.001 per share, and 5,000,000 shares of Preferred
Stock, par value $.001 per share.
COMMON STOCK
As of September 30, 1996, there were 5,889,651 shares of Common Stock
outstanding held of record by 188 persons.
Holders of shares of Common Stock are entitled to one vote per share,
without cumulative voting, on all matters to be voted on by stockholders.
Therefore, the holders of more than 50% of the shares voting for the election of
directors can elect all the Directors. Subject to preferences that may be
applicable to any outstanding preferred stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a liquidation
or dissolution of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding preferred stock. Holders of shares of Common
Stock, as such, have no conversion, preemptive or other subscription rights, and
there are no redemption provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are fully paid and nonassessable. All of the
shares of Common Stock offered hereby, when issued in accordance with the proper
exercise or conversion of the outstanding securities pursuant to which they are
issuable, will be fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of the Preferred Stock,
none of which shares are outstanding as of September 30, 1996. The Board of
Directors of the Company has the authority at any time and from time to time to
establish and designate one or more series of preferred stock, to fix the number
of shares of any series (which number may vary between series) and to fix the
dividend rights and preferences, the redemption price (if any) and terms,
liquidation rights, sinking fund provisions (if any), conversion provisions (if
any) and the voting powers (if any). The Board of Directors, without stockholder
approval, could issue preferred stock with voting and conversion rights that
could adversely affect the voting power of holders of the Common Stock. Certain
companies have used the issuance of preferred stock as an anti-takeover device,
and the Board of Directors of the Company could, without stockholder approval,
issue preferred stock with certain voting, conversion and/or redemption rights
that could discourage any attempt to obtain control of the Company in a
transaction not approved by the Board of Directors. The Board of Directors has
authorized the issuance of 48,750 shares of Series A Preferred Stock and
previously issued 6,532.5 shares of Series A Preferred Stock. As of September
30, 1996 all issued and outstanding shares of Series A Preferred Stock had been
converted into Common Stock. The rights, preferences, privileges, restrictions
and other matters relating to such shares are as follows:
DIVIDENDS. Each share of Series A Preferred Stock is entitled to receive
cumulative dividends at an annual rate of $8.00 per share. Upon conversion into
Common Stock, all cumulative dividends in arrears will be forfeited. Holders of
Series A Preferred Stock are entitled to receive such cumulative annual
dividends prior to the payment of any dividend in respect of the Common Stock
(the "Series A Preferred Stock Dividend Preference"). If the Series A Preferred
Stock Dividend Preference is not either fully paid or declared, then no
distribution shall be made on any Common Stock (although the arrearage shall
accumulate) and the Company will not redeem or purchase any Common Stock or make
monies available for a sinking fund for the redemption or purchase of any Common
Stock. Holders of Series A Preferred Stock are entitled to share in any dividend
after payment of the Series A Preferred Stock Dividend Preference in the
proportion that the number of Series A Preferred Stock outstanding bears to the
total number of all shares outstanding (whether preferred stock or Common
Stock), treating such holders as if they had converted such Series A Preferred
Stock into Common Stock.
57
<PAGE>
LIQUIDATION PREFERENCE. Upon reducing the Company's capital (which results
in a distribution of assets) or upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company (collectively, a "Liquidating Event"),
the holders of the Series A Preferred Stock shall be entitled to receive, before
any distribution of assets to the holders of the Common Stock, a liquidation
preference (the "Series A Preferred Stock Liquidation Preference"). For each
outstanding share of Series A Preferred Stock, the Series A Preferred Stock
Liquidation Preference shall be equal to the sum of (i) One Hundred Dollars
($100.00) and (ii) any unpaid Series A Preferred Stock Dividend Preference. The
Series A Preferred Stock Dividend Preference shall be paid after the Series A
Preferred Stock Liquidation Preference, and the Series A Preferred Stock
Liquidation Preference shall be distributed ratably among the holders of the
Series A Preferred Stock in proportion to the number of shares owned by each
holder of such stock. After payment of the Series A Preferred Stock Liquidation
Preference, the Company's assets available for distribution shall be distributed
among the holders of Series A Preferred Stock and Common Stock PRO RATA, based
on the number of shares of stock held by each, treating such holders of Series A
Preferred Stock as if they had converted such stock into Common Stock
immediately before such distribution. If, upon any Liquidating Event, the
amounts payable with respect to the Series A Preferred Stock and any other stock
of the Company ranking as to any such distribution on a parity with the Series A
Preferred Stock are not paid in full, the holders of the Series A Preferred
Stock and such parity stock shall share ratably in any such distribution of
assets of the Company in proportion to the full preferential amounts to which
they are entitled.
VOTING. In general, the holder of each share of the Series A Preferred
Stock shall (i) be entitled to the number of votes equal to the number of shares
of Common Stock into which such share of Series A Preferred Stock could be
converted on the record date for the vote or the date of the solicitation of any
written consent of stockholders, (ii) have voting rights and powers equal to the
voting rights and powers of the Common Stock and (iii) be entitled to notice of
any stockholders' meeting in accordance with the By-Laws of the Company.
Fractional votes shall not, however, be permitted.
RIGHT TO CONVERT. Each share of Series A Preferred Stock shall be
convertible, at any time at the option of the holder, into shares of Common
Stock at a conversion rate equal to the quotient obtained by dividing One
Hundred Dollars ($100.00) by a conversion price, initially equal to $8.00 per
share (the "Conversion Price"). The Conversion Price shall be adjusted from time
to time to protect against dilution. No fractional share shall be issued upon
the conversion of any share or shares of Series A Preferred Stock. See "--
Anti-Dilution" below.
ANTI-DILUTION. If the Company issues any shares of Common Stock or
convertible preferred stock, or rights to purchase Common Stock, warrants,
options, other rights or other securities (to the extent such other rights or
securities are convertible into or exchangeable or exercisable for shares of
Common Stock) for consideration per share less than the prevailing Conversion
Price, then the Conversion Price in effect immediately before such issuance
shall be adjusted to a price equal to the consideration per share received by
the Company. If the number of shares of Common Stock outstanding is increased by
a Common Stock dividend or by subdivision or split-up of Common Stock, then the
Conversion Price shall be appropriately decreased in proportion to such increase
in outstanding shares. If the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of Common Stock, then the
Conversion Price shall be appropriately increased in proportion to such decrease
in outstanding shares.
If there is any reorganization, reclassification, consolidation or merger
(including a merger in which the Company is the surviving entity) of the
Company, then each share of Series A Preferred Stock shall (in lieu of being
exercisable for shares of Common Stock), after such reorganization,
reclassification, consolidation or merger, be exercisable into the kind and
number of shares of stock or other securities or property (including cash) of
the Company or of the corporation resulting from such consolidation or surviving
such merger to which the holder of the number of shares of Common Stock
deliverable (immediately before the time of such reorganization,
reclassification, consolidation or merger) upon conversion of such Series A
Preferred Stock would have been entitled upon such reorganization,
reclassification, consolidation or merger.
58
<PAGE>
AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall
automatically convert into shares of Common Stock immediately upon (i) the
closing of the sale of the Common Stock in a firm commitment, underwritten
public offering registered under the Securities Act (other than a registration
relating solely to a transaction under Rule 145 thereunder or to an employee
benefit plan), at a public offering price equal to or exceeding $20.00 per share
of Common Stock (appropriately adjusted for any recapitalization) and the
aggregate net proceeds to the Company (before deduction for underwriters'
commissions and expenses relating to the issuance, including without limitation
fees of the Company's counsel) of which equal or exceed $15.0 million or (ii)
receipt by the Company of the affirmative vote, at a duly noticed stockholders'
meeting or pursuant to a duly solicited written consent of approval of the
holders of at least a majority of the outstanding shares of the Series A
Preferred Stock voting together as a single class, in favor of converting all of
the Series A Preferred Stock into Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in certain business combinations with
a person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date such person became an
interested stockholder unless: (i) the transaction resulting in the acquiring
person's becoming an interested stockholder, or the business combination, is
approved by the Board of Directors of the Company before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the Company in the same transaction which makes
it an interested stockholder (excluding certain employee stock option plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the Company's board of directors and by the
holders of at least 66 2/3% of the Company's outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested stockholder.
An "interested stockholder" is defined as any person that is (x) the owner of
15% or more of the outstanding voting stock of the Company or (y) an affiliate
or associate of the Company and was the owner of 15% or more of the outstanding
voting stock of the Company at any time within the three year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder.
DIRECTORS' LIABILITY
The Company's Restated Certificate of Incorporation contains provisions to
(i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty (other than breaches of the duty
of loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
DGCL, for any transaction from which the director derived an improper personal
benefit or any act or omission occurring prior to the date when the provision
became effective) and (ii) indemnify its directors and officers to the fullest
extent permitted by Section 145 of the DGCL, including circumstances in which
indemnification is otherwise discretionary. The Company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Restated Certificate of Incorporation and Amended and Restated
By-Laws contain several provisions that may be deemed to have the effect of
making more difficult the acquisition of control of the Company by means of a
hostile tender offer, open market purchases, a proxy contest or otherwise. The
provisions of the Restated Certificate of Incorporation and the Amended and
Restated By-Laws discussed below are designed to help to ensure that holders of
Common Stock are treated fairly and equally in a multistep acquisition. In
addition, they are intended to encourage persons seeking to acquire control of
the Company to initiate such an acquisition through arm's-length negotiations
with the Company's Board of Directors.
CLASSIFIED BOARD OF DIRECTORS. The Company's Restated Certificate of
Incorporation provides that the Board of Directors shall be divided into three
classes of directors serving staggered terms.
59
<PAGE>
One class of directors will be elected at each annual meeting of stockholders
for a three-year term. See "Management -- Classified Board of Directors." Thus,
at least two annual meetings of stockholders, instead of one, generally will be
required to change the majority of the Company's Board of Directors. This may
have the effect of making it more difficult to acquire control of the Company by
means of a hostile tender offer, open market purchases, a proxy contest or
otherwise.
STOCKHOLDER MEETINGS. Subject only to the rights of holders of preferred
stock, only a majority of the Company's Board of Directors, the Chairman, the
President or Chief Executive Officer will be able to call an annual meeting of
stockholders and only a majority of the Company's Board of Directors, by
majority vote, or the Chairman, the President or the Chief Executive Officer,
will be able to call a special meeting of stockholders. In addition, subject
only to the rights of holders of preferred stock, stockholders may not take any
action by written consent.
RESTRICTIONS ON CERTAIN BUSINESS COMBINATIONS. The Company's Restated
Certificate of Incorporation provides that certain business combinations such as
mergers and stock and assets sales, with an interested stockholder (typically a
beneficial owner of more than 15% of the outstanding voting shares of the
Company's capital stock, excluding certain persons), be approved by (a) the
holders of 75% of the voting power of the then outstanding voting shares, voting
together as a single class, and (b) at least a majority of the voting power of
the then outstanding voting shares, voting as a single class, which are not
owned beneficially, directly or indirectly, by the interested stockholder,
unless the transaction is approved by a majority of certain directors or meets
certain fair price provisions.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. The Company's Restated Certificate of Incorporation establishes
advance notice procedures with regard to stockholder nominations, other than by
or at the direction of the Board of Directors, of candidates for election as
directors. The Amended and Restated By-Laws establishes advance notice
procedures with regard to stockholder proposals other than by or at the
direction of the Board of Directors of business to be brought before a meeting.
VOTE REQUIRED TO AMEND OR REPEAL CERTAIN PROVISIONS OF THE COMPANY'S
RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS. The
Company's Restated Certificate of Incorporation establishes certain super
majority voting requirements to amend or repeal certain provisions of the
Company's Restated Certificate of Incorporation and Amended and Restated
By-Laws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Concurrent Offering, the Company will have
7,889,651 shares of Common Stock outstanding (8,189,651 shares if the
Underwriters' over-allotment option is exercised in full). In addition, as of
September 30, 1996, there has been reserved 5,047,603 shares of Common Stock for
issuance upon the conversion or exercise of outstanding securities. The
2,000,000 shares of Common Stock to be sold in the Concurrent Offering
(2,300,000 shares if the Underwriters' over-allotment option is exercised in
full), other than shares which may be purchased by "affiliates" of the Company,
will be freely tradeable without restriction or further registration under the
Securities Act. In addition, the 3,910,000 shares of Common Stock sold in the
IPO, other than shares which were purchased by affiliates of the Company, are
also freely tradable without restriction under the Securities Act. In addition,
an aggregate of 1,073,600 shares of Common Stock which are outstanding and
3,227,703 shares of Common Stock which are issuable upon the conversion or
exercise of outstanding securities are registered in the Offering. The Company
intends to file a Registration Statement on Form S-8 with respect to up to
1,805,963 shares of Common Stock issuable pursuant to its stock option plans and
certain options and warrants which have been granted to employees and
consultants of the Company as soon as practicable after the date of this
Prospectus; such Registration Statement would include 1,344,157 shares of Common
Stock issuable upon conversion or exercise of outstanding securities of the
Company. Approximately 1,381,794 of the remaining shares of Common Stock
outstanding and issuable upon conversion or exercise of outstanding securities
would be "restricted securities," as that term is defined under Rule 144, and
may only be sold pursuant to a registration statement under the Securities Act
or an applicable exemption from the registration requirements of the Securities
Act, including Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least two years from the later of the date such
restricted shares were acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (111,174 shares based on the number of shares
to be outstanding immediately after the Offering, assuming all of the shares
offered hereby are issued), or the average weekly trading volume in the public
market during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. Sales under Rule 144 are also subject to
certain requirements as to the manner and notice of sale and the availability of
public information concerning the Company.
Affiliates may sell shares not constituting restricted shares in accordance
with the foregoing volume limitations and other restrictions, but without regard
to the two year holding period. Restricted shares held by affiliates of the
Company eligible for sale in the public market under Rule 144 are subject to the
foregoing volume limitations and other restrictions. Further, under Rule 144(k),
if a period of at least three years has elapsed between the later of the date
restricted shares were acquired from the Company and the date they were acquired
from an affiliate of the Company, and the person was not an affiliate for at
least three months prior to the sale, such person would be entitled to sell the
shares immediately without regard to volume limitations and the other conditions
described above. The Commission has proposed to amend the holding period of
restricted securities being sold in reliance on Rule 144 to (i) a one year
holding period rather than a two year holding period for resales of restricted
securities by affiliates or non-affiliates which comply with the volume
limitations and the other conditions described above, and (ii) a two year
holding period rather than a three year holding period for resales by
non-affiliates which, in reliance on Rule 144(k), do not comply with the volume
limitations and the other conditions described above.
In addition, as of September 30, 1996 the Company had outstanding securities
which are exercisable for or convertible into an aggregate of 5,047,603 shares
of Common Stock at a weighted average exercise/conversion price of $7.99. Of
such shares, 4,194,425 are subject to lock-up agreements.
61
<PAGE>
All officers, directors and certain security holders, agreed with Hampshire
in connection with the IPO not to, directly or indirectly, offer, sell, contract
to sell or otherwise dispose of their shares of Common Stock or other securities
of the Company, without the prior written consent of Hampshire prior to August
22, 1997. Hampshire has agreed with Jefferies not to release any of such
securityholders from the contractual restriction without the prior written
consent of Jefferies. The Company has, subject to certain exceptions, agreed not
to offer, issue or sell any shares of Common Stock or securities exercisable for
or convertible into shares of Common Stock for a 180 day period after the date
of this Prospectus without the prior written consent of Jefferies. No
predictions can be made as to the effect, if any, that market sales of shares of
existing stockholders or the availability of such shares for future sale will
have on the market price of shares of Common Stock prevailing from time to time.
The prevailing market price of Common Stock after the Concurrent Offering could
be adversely affected by future sales of substantial amounts of Common Stock by
existing stockholders.
PLAN OF DISTRIBUTION
Any or all of the Securities may be sold from time to time to purchasers
directly by the Selling Stockholders. Alternatively, the Selling Stockholders
may from time to time offer the Securities through underwriters, dealers or
agents who may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of the Securities for whom they may act as agents. The Selling Stockholders and
any such underwriters, dealers or agents that participate in the distribution of
the Securities may be deemed to be underwriters under the Securities Act, and
any profit on the sale of the Securities by them and any discounts, commissions
or concessions received by them may be deemed to be underwriting discounts and
commissions under the Securities Act. The Securities may be sold from time to
time in one or more transactions at a fixed offering price, which may be
changed, or at varying prices determined at the time of sale or at negotiated
prices. The distribution of the Securities by the Selling Stockholders may be
effected in one or more transactions that may take place on Nasdaq National
Market, including ordinary brokers' transactions, privately-negotiated
transactions or through sales to one or more broker-dealers for resale of such
shares as principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Usual and
customary or specifically negotiated brokerage fees, discounts and commissions
may be paid by the Selling Stockholders in connection with such sales of
securities.
At the time a particular offer of the Securities is made, to the extent
required, a supplement to this Prospectus will be distributed (or, if required,
a post-effective amendment to the Registration Statement of which this
Prospectus is a part will be filed) which will identify the specific Securities
being offered and set forth the aggregate amount of Securities being offered,
the purchase price and the terms of the offering, including the name or names of
the Selling Stockholders and of any underwriters, dealers or agents, the
purchase price paid by any underwriter for Securities purchased from the Selling
Stockholder, any discounts, commissions and other items constituting
compensation from the Selling Stockholders and/or the Company and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, including
the proposed selling price to the public. In addition, an underwritten offering
will require clearance by the National Association of Securities Dealers, Inc.
of the underwriter's compensation arrangements. The Company will not receive any
of the proceeds from the sale by the Selling Stockholders of the Securities
offered hereby. All of the filing fees and other expenses of this Registration
Statement will be borne in full by the Company, other than any underwriting
fees, discounts and commissions relating to this offering.
Pursuant to certain agreements granting registration rights to certain
Selling Stockholders, which were executed in connection with the 1995 Unit
Private Placement, the Company will use its best efforts to keep the
Registration Statement, of which this Prospectus forms a part, effective under
the Securities Act for a period of five and one half years after the Effective
Date and the Company will pay substantially all of the expenses incident to the
offering and sale of the Securities to the public, other than underwriting fees,
discounts and commissions. Most of the agreements which provide for
62
<PAGE>
registration rights to the Selling Stockholders provide for
cross-indemnification of the Selling Stockholders and the Company, to the extent
permitted by law, for losses, claims, damages, liabilities and expenses arising,
under certain circumstances, out of any registration of the Securities. The
registration rights agreements also provide that in connection with an
underwritten offering, the Company will indemnify the underwriters thereof,
their officers and directors and each person who controls such underwriters
(within the meaning of the Securities Act) to the same extent as provided with
respect to the indemnification of the Selling Stockholders signatory to such
agreement, except with respect to information provided by such underwriters
specifically for inclusion within the appropriate registration statement.
In order to comply with certain states securities laws, if applicable, the
Securities will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In certain states the Securities may not be sold
unless the Securities have been registered or qualified for sale in such state,
or unless an exemption from registration or qualification is available and is
obtained.
The Class A and Class B Warrants and the convertible notes originally issued
by the Company in the 1995 Unit Private Placement contained legends as to their
restricted transferability. In addition, the certificates for Common Stock
issuable upon conversion of the convertible notes and upon exercise of the
Warrants would contain legends as to their restricted transferability. Upon the
effectiveness of the Registration Statement of which this Prospectus forms a
part and the transfer of the Securities pursuant thereto, these legends will no
longer be necessary, and accordingly, new certificates representing such shares
of Common Stock will be issued to the transferee without any such legends unless
otherwise required by law.
In addition to sales pursuant to the Registration Statement of which this
Prospectus forms a part, the Securities may be sold in accordance with Rule 144.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Shereff,
Friedman, Hoffman & Goodman, LLP, New York, New York. Certain regulatory legal
matters will be passed upon for the Company by Arent Fox Kintner Plotkin & Kahn,
Washington, D.C. Mr. Nussbaum, a Director of the Company, is a member of
Shereff, Friedman, Hoffman & Goodman, LLP, New York, New York. See "Principal
Stockholders" and "Certain Relationships and Related Party Transactions."
EXPERTS
The financial statements included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Washington, DC 20549, or at the Commission's regional offices:
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 19948.
The Common Stock is traded on the Nasdaq National Market.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to such
63
<PAGE>
Registration Statement and exhibits. A copy of the Registration Statement on
file with the Commission may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
Copies of the Registration Statement may be obtained from the Commission at
its principal office upon payment of prescribed fees. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed as
an exhibit to the Registration Statement, each such statement is qualified in
all respects by reference to the applicable document filed with the Commission.
The Registration Statement of which this Prospectus forms a part has been filed
electronically through the Commission's Electronic Data Gathering Analysis and
Retrieval System and may be obtained through the Commission's website on the
Internet (http://www.sec.gov).
64
<PAGE>
ULTRAFEM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' (Deficiency) Equity............................................................ F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of
Ultrafem, Inc.:
We have audited the accompanying balance sheets of Ultrafem, Inc. (the
"Company") as of June 30, 1996 and 1995, and the related statements of
operations, stockholders' (deficiency) equity, and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended June 30, 1996, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
August 12, 1996 (August 27, 1996 as to Note 7)
F-2
<PAGE>
ULTRAFEM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
-------------------------------- ---------------
1995 1996 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 73,390 $ 24,510,071 $ 16,663,098
Accounts receivable......................................... -- -- 157,806
Inventory................................................... -- 266,951 1,176,443
Prepaid marketing and other current assets.................. 10,714 609,503 1,568,333
--------------- --------------- ---------------
Total Current Assets.................................... 84,104 25,386,525 19,565,680
Property and equipment -- net................................. 302,719 2,875,153 5,704,695
Other assets -- net........................................... 380,136 1,146,258 1,496,257
--------------- --------------- ---------------
Total Assets............................................ $ 766,959 $ 29,407,936 $ 26,766,632
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Short-term debt............................................. $ 530,549 $ -- $ --
Current portion -- long-term debt........................... 293,389 3,442,013 3,208,888
Accounts payable............................................ 327,881 893,548 1,710,811
Accrued interest............................................ 638,315 724,932 762,541
Accrued salaries............................................ 391,534 1,426,093 1,662,363
Other accrued liabilities................................... 564,578 937,406 1,848,967
--------------- --------------- ---------------
Total Current Liabilities............................... 2,746,246 7,423,992 9,193,570
Long-term debt................................................ 4,032,493 700,000 700,000
--------------- --------------- ---------------
Total Liabilities....................................... 6,778,739 8,123,992 9,893,570
--------------- --------------- ---------------
Stockholders' (Deficiency) Equity:
Preferred stock, $.001 par value -- authorized, 5,000,000
shares $8 cumulative Convertible Series A: issued and
outstanding 6,532.5 and 1,121.25 shares stated at
liquidation preference of $653,250 and $112,125,
respectively.............................................. 653,250 112,125 --
Common Stock, $.001 par value -- authorized 20,000,000
shares; outstanding 1,389,412, 5,737,241 and 5,889,651
shares, respectively (stated at).......................... 5,558 9,905 10,058
Additional paid-in capital.................................. 4,555,215 42,207,697 43,366,219
Deficit..................................................... (11,225,803) (21,045,783) (26,503,215)
--------------- --------------- ---------------
Total Stockholders' (Deficiency) Equity................. (6,011,780) 21,283,944 16,873,062
--------------- --------------- ---------------
Total Liabilities and Stockholders' (Deficiency)
Equity................................................. $ 766,959 $ 29,407,936 $ 26,766,632
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................. $ -- $ -- $ -- $ -- $ 192,540
Cost and Expenses:
Cost of sales (exclusive of
depreciation)...................... -- -- -- -- 358,377
Marketing, sales and distribution... -- 123,531 2,406,277 345,416 2,921,392
Research and development............ 452,552 181,475 1,403,557 70,616 394,778
General and administrative.......... 1,387,784 1,444,911 5,095,261 597,529 1,924,557
Depreciation and amortization....... 126,872 166,533 738,883 78,182 213,355
------------- ------------- ------------- ------------- -------------
Loss from operations.................. 1,967,208 1,916,450 9,643,978 1,091,743 5,619,919
Interest income....................... -- -- (489,379) (2,820) (285,345)
Interest expense...................... 336,732 464,615 665,381 168,160 122,858
------------- ------------- ------------- ------------- -------------
Net loss.............................. $ 2,303,940 $ 2,381,065 $ 9,819,980 $ 1,257,083 $ 5,457,432
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net loss per share.................... $ 0.87 $ 0.87 $ 2.74 $ 0.49 $ 0.94
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average number of common
shares and equivalents outstanding... 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL
CONVERTIBLE --------------------- PAID-IN
SERIES A SHARES AMOUNT CAPITAL (DEFICIT)
----------- ---------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993.................................... 1,312,812 $ 5,251 $ 3,961,752 $ (6,540,798)
Issuance of stock for consulting services (valued at
$8.00 per share)....................................... 1,500 6 11,994 --
Issuance of options and warrants (valued at $0.23529 per
option and warrant).................................... -- -- 132,021 --
Net loss................................................ -- -- -- (2,303,940)
----------- ---------- --------- ------------- --------------
BALANCE, JUNE 30, 1994.................................... 1,314,312 5,257 4,105,767 (8,844,738)
Sales of stock ($8.00 per share) net of costs of
$74,720................................................ 28,125 113 150,167 --
Issuance of stock warrants ($0.23529 per warrant)....... -- -- 28,000 --
Issuance of stock for consulting and other services
(valued at $8.00 to $15.66 per share).................. 30,100 120 221,660 --
Conversion of convertible debt.......................... 16,875 68 134,932 --
Sales of Series A Preferred Stock ($100 per share) net
of costs of $100,505................................... $ 653,250 -- -- (100,505) --
Issuance of options and warrants (valued at $0.23529 per
option and warrant).................................... -- -- -- 15,194 --
Net loss................................................ -- -- -- -- (2,381,065)
----------- ---------- --------- ------------- --------------
BALANCE, JUNE 30, 1995.................................... 653,250 1,389,412 5,558 4,555,215 (11,225,803)
Sales of stock ($10.00 per share) net of costs of
$5,014,389............................................. -- 3,910,000 3,910 34,081,701 --
Exercise of stock options and warrants.................. -- 298,104 298 1,869,224 --
Sale of warrants........................................ -- -- -- 527 --
Issuance of options and warrants........................ -- -- -- 945,044 --
Conversion of preferred stock to common stock ($5.00 per
share)................................................. (541,125) 108,225 108 541,017 --
Conversion of convertible debt ($5.00 to $10.00 per
share)................................................. -- 31,500 31 214,969 --
Net loss................................................ -- -- -- -- (9,819,980)
----------- ---------- --------- ------------- --------------
BALANCE, JUNE 30, 1996.................................... 112,125 5,737,241 9,905 42,207,697 (21,045,783)
Exercise of stock options and warrants.................. -- 116,960 118 578,432 --
Issuance of warrants ($10.00 per share)................. -- -- -- 337,500 --
Issuance of stock....................................... -- 25 -- 500 --
Conversion of preferred stock to common stock
($5.00 per share)...................................... (112,125) 22,425 22 112,103 --
Conversion of convertible debt
($10.00 per share)..................................... -- 13,000 13 129,987
Net loss................................................ (5,457,432)
----------- ---------- --------- ------------- --------------
BALANCE, SEPTEMBER 30, 1996
(unaudited).............................................. $ -- 5,889,651 $ 10,058 $ 43,366,219 $ (26,503,215)
----------- ---------- --------- ------------- --------------
----------- ---------- --------- ------------- --------------
<CAPTION>
TOTAL
-------------
<S> <C>
BALANCE, JUNE 30, 1993.................................... $ (2,573,795)
Issuance of stock for consulting services (valued at
$8.00 per share)....................................... 12,000
Issuance of options and warrants (valued at $0.23529 per
option and warrant).................................... 132,021
Net loss................................................ (2,303,940)
-------------
BALANCE, JUNE 30, 1994.................................... (4,733,714)
Sales of stock ($8.00 per share) net of costs of
$74,720................................................ 150,280
Issuance of stock warrants ($0.23529 per warrant)....... 28,000
Issuance of stock for consulting and other services
(valued at $8.00 to $15.66 per share).................. 221,780
Conversion of convertible debt.......................... 135,000
Sales of Series A Preferred Stock ($100 per share) net
of costs of $100,505................................... 552,745
Issuance of options and warrants (valued at $0.23529 per
option and warrant).................................... 15,194
Net loss................................................ (2,381,065)
-------------
BALANCE, JUNE 30, 1995.................................... (6,011,780)
Sales of stock ($10.00 per share) net of costs of
$5,014,389............................................. 34,085,611
Exercise of stock options and warrants.................. 1,869,522
Sale of warrants........................................ 527
Issuance of options and warrants........................ 945,044
Conversion of preferred stock to common stock ($5.00 per
share)................................................. --
Conversion of convertible debt ($5.00 to $10.00 per
share)................................................. 215,000
Net loss................................................ (9,819,980)
-------------
BALANCE, JUNE 30, 1996.................................... 21,283,944
Exercise of stock options and warrants.................. 578,550
Issuance of warrants ($10.00 per share)................. 337,500
Issuance of stock....................................... 500
Conversion of preferred stock to common stock
($5.00 per share)...................................... --
Conversion of convertible debt
($10.00 per share)..................................... 130,000
Net loss................................................ (5,457,432)
-------------
BALANCE, SEPTEMBER 30, 1996
(unaudited).............................................. $ 16,873,062
-------------
-------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------ ----------------------------
1994 1995 1996 1995 1996
------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss..................................... $ (2,303,940) $ (2,381,065) $ (9,819,980) $ (1,257,083) $ (5,457,432)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................. 61,542 62,996 79,184 15,847 109,284
Amortization of debt issuance,
consulting, licensing and
patent costs............................ 65,320 103,535 659,699 62,335 104,071
Amortization of debt discount............ 43,578 43,480 -- -- --
Loss on disposal of equipment............ -- -- -- -- 7,724
Non-cash officers compensation........... -- -- 1,411,871 38,463 192,970
Non-employee stock based compensation.... 12,000 221,780 385,044 -- --
Non-employee stock based claim
settlement.............................. -- -- -- -- 338,000
Other non-cash items..................... 44,964 15,194 -- -- --
Changes in operating assets and
liabilities............................. 311,993 1,103,808 (291,271) (185,745) (745,925)
------------ ------------ -------------- ------------ --------------
Net Cash Used in Operating
Activities............................ (1,764,543) (830,272) (7,575,453) (1,326,183) (5,451,308)
------------ ------------ -------------- ------------ --------------
Cash flows from investing activities:
Purchase of and deposits on property and
equipment................................... (23,667) (3,028) (2,651,618) -- (2,946,550)
------------ ------------ -------------- ------------ --------------
Net Cash Used in Investing
Activities............................ (23,667) (3,028) (2,651,618) -- (2,946,550)
------------ ------------ -------------- ------------ --------------
Cash flows from financing activities:
Proceeds from secured notes.................. 1,850,000 -- -- -- --
Proceeds from issuance of subordinated
convertible debentures...................... -- 225,000 -- -- --
Proceeds from sale of convertible
debentures.................................. -- -- 2,125,000 2,125,000 --
Proceeds from notes payable.................. -- 135,000 2,227,870 2,127,870 --
Proceeds from sale of preferred stock (net of
related expenses)........................... -- 552,745 -- -- --
Proceeds from sale of common stock (net of
related expenses)........................... -- 150,280 34,085,611 -- --
Proceeds from sale of options and warrants... -- 28,000 527 -- --
Proceeds from exercise of stock options and
warrants.................................... -- -- 1,794,054 -- 654,010
Repayment of borrowings...................... (30,000) (84,800) (4,852,287) (614,155) (103,125)
Debt issue costs............................. (31,500) (110,025) (717,023) (719,662) --
------------ ------------ -------------- ------------ --------------
Net Cash Provided by Financing
Activities............................ 1,788,500 896,200 34,663,752 2,919,053 550,885
------------ ------------ -------------- ------------ --------------
Net increase (decrease) in cash.............. 290 62,900 24,436,681 1,592,870 (7,846,973)
------------ ------------ -------------- ------------ --------------
Cash and cash equivalents, beginning of
period...................................... 10,200 10,490 73,390 73,390 24,510,071
------------ ------------ -------------- ------------ --------------
Cash and cash equivalents, end of period..... $ 10,490 $ 73,390 $ 24,510,071 $ 1,666,260 $ 16,663,098
------------ ------------ -------------- ------------ --------------
------------ ------------ -------------- ------------ --------------
</TABLE>
(Continued on next page)
See notes to financial statements.
F-6
<PAGE>
ULTRAFEM, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------ ----------------------------
1994 1995 1996 1995 1996
------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Changes in operating assets and liabilities
consist of:
(Increase) in accounts receivable..... $ -- $ -- $ -- $ -- $ (157,806)
(Increase) in inventory............... -- -- (266,951) -- (909,492)
(Increase) decrease in prepaid
marketing and other current assets... 51,696 (2,841) (523,322) (71,133) (1,034,290)
(Increase) in other assets............ (56,379) (151,272) (233,798) (112,461) (454,070)
Increase in accounts payable.......... 97,388 937,594 650,667 92,221 817,263
Increase (decrease) in accrued
liabilities.......................... 219,288 320,327 82,133 (94,372) 992,470
------------ ------------ ------------- ---------- ------------
$ 311,993 $ 1,103,808 $ (291,271) $ (185,745) $ (745,925)
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Supplementary Information:
Cash paid during the year for:
Interest............................ $ 178,170 $ 955 $ 578,764 $ 250,415 $ 77,754
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Taxes............................... $ 1,348 $ 1,271 $ 4,094 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Non-cash financing activities:
Conversion of accounts payable and
accrued liabilities to long-term
debt................................. $ 373,555 $ 1,586,666 $ -- $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of notes payable to common
stock................................ $ -- $ 135,000 $ -- $ -- $ 130,000
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Issuance of warrants in connection
with debt offering................... $ 87,057 $ -- $ -- $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of secured notes and notes
payable to convertible debentures.... $ -- $ -- $ 850,000 $ 850,000 $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of secured notes to notes
payable.............................. $ -- $ -- $ 850,000 $ 850,000 $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of convertible debt to
common stock......................... $ -- $ -- $ 215,000 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of accounts payable to
warrants............................. $ -- $ -- $ 85,000 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Issuance of below market value options
and warrants in connection with
professional services, licensing and
consulting agreements................ $ -- $ -- $ 860,044 $ -- $ 338,000
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Conversion of preferred stock to
common stock......................... $ -- $ -- $ 541,125 $ -- $ 112,125
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
Amounts receivable from the issuance
of common stock...................... $ -- $ -- $ 75,467 $ -- $ --
------------ ------------ ------------- ---------- ------------
------------ ------------ ------------- ---------- ------------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Ultrafem, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on March 22, 1990 and is engaged in the
manufacturing and sale of its proprietary feminine protection product. At June
30, 1996, principal operations had commenced and during August 1996 the Company
began selling its product INSTEAD-TM-; accordingly, the Company is no longer
considered a development stage enterprise as it was through June 30, 1996. There
is no assurance that commercially successful products will be developed nor that
the Company will achieve a profitable level of operations.
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts of assets and
liabilities and 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.
CASH AND CASH EQUIVALENTS -- Cash equivalents include short-term investments
principally in commercial paper with an original maturity of three months or
less when purchased.
CONCENTRATION OF CREDIT RISK -- The Company places its temporary cash
investments and investments with high credit quality financial institutions and
by policy, limits the amount of credit exposure with any one financial
institution.
INVENTORY -- Inventories are stated at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost less
accumulated depreciation. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets which are between 3 and 10
years.
LICENSING COSTS -- Licensing costs are amortized over the life of the
license, which is ten years, using the straight-line method. Royalties based on
units sold will be expensed as incurred.
DEBT ISSUANCE COSTS -- Debt issuance costs in connection with various debt
agreements are amortized over the lives of the promissory notes issued in
connection with such agreements.
DEBT DISCOUNT -- Debt discount in connection with the issuance of debt with
stock purchase warrants are amortized over the life of the related obligation
and is included in interest expense in the accompanying statements of
operations.
PATENT COSTS -- Patent costs are stated at cost less accumulated
amortization. Patent costs are amortized using the straight-line method over the
17-year life of the patent when obtained, or expensed if not obtained. The
carrying value of intangible assets are periodically reviewed by the Company to
ensure that impairments are recognized when the future operating cash flows
expected to be derived from such intangible assets are less than their carrying
value.
STOCK OFFERING COSTS -- Costs incurred in connection with the sale of the
Company's equity securities are recorded as a reduction of the proceeds when
received. Costs incurred prior to the receipt of proceeds from the sale of the
Company's equity securities are capitalized until the proceeds are received or
expensed if such sale is not consummated.
RESEARCH AND DEVELOPMENT COSTS -- Research and development costs are
expensed as incurred.
MARKETING COSTS -- Marketing costs are expensed the first time the
advertisement or promotion takes place.
F-8
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION -- Revenue is recognized upon shipment of merchandise.
REVERSE STOCK SPLIT -- Effective July 28, 1995, the stockholders of the
Company approved a one-for-four reverse split of its common stock. All
references in the accompanying financial statements to the number of shares and
per share amounts have been retroactively restated to reflect this transaction.
LONG-LIVED ASSETS -- The Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," which is effective for fiscal years
beginning after December 15, 1995. The Company does not expect the effect on its
financial condition and results of operations from the adoption of this
statement to be material.
RECENTLY ISSUED ACCOUNTING STANDARD -- In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which is effective for the Company beginning July 1, 1996. The
standard encourages, but does not require, companies to recognize compensation
expense of grants for stock, stock options and other equity instruments to
employees based on fair value accounting rules. SFAS No. 123 requires companies
that choose not to adopt the new fair value accounting rules to disclose pro
forma net income and earnings per share under the new method. The Company will
continue to apply APB opinion No. 25 to its stock based compensation awards to
employees and will disclose the required pro forma effect on net income and
earnings per share in its annual financial statements.
LOSS PER COMMON AND COMMON EQUIVALENT SHARE -- Loss per common and common
equivalent share for the years ended June 30, 1996, 1995 and 1994 and for the
three months ended September 30, 1996 and 1995 was computed using the weighted
average number of common shares outstanding during each period. The weighted
average number of common shares outstanding during the first half of fiscal year
1996 (including the three months ended September 30, 1995), and during fiscal
years 1995 and 1994 includes incremental shares for the common stock, warrants
and other potentially dilutive securities issued and options granted to purchase
common stock which were issued within one year prior to the effective date of
the Company's initial public offering (the "Incremental Shares"). Such
Incremental Shares were determined utilizing the treasury stock method. The
effect of the assumed exercise of stock options which were issued in periods
prior to the one-year period previously mentioned and the effect of the assumed
conversion of the convertible preferred stock are not included for 1995 and 1994
because their effect is antidilutive. Loss per common share assuming full
dilution is not presented because such calculation is antidilutive.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior year
balances in order to conform with the current year presentation.
UNAUDITED QUARTERLY FINANCIAL INFORMATION -- In the opinion of management,
the Company's unaudited financial statements contain all adjustments (consisting
of normal and recurring adjustments), necessary for a fair presentaion of the
Company's financial position and results of operations at such dates and for
such periods.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 1996, the fair values of cash, cash equivalents,
non-convertible short-term debt and current portion of long-term debt, accounts
payable, accrued interest, accrued salaries and other accrued liabilities
approximated their carrying values because of the short-term nature of these
instruments. The estimated fair values of the convertible debt subject to fair
value disclosures was
F-9
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
2. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
determined by reference to the quoted market price of the Company's Common Stock
at September 30, 1996, multiplied by the number of common shares the debt is
convertible into, and the related carrying amounts at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
------------- --------------
<S> <C> <C> <C>
Convertible Debt............................... $ 3,727,432 $ 16,886,869
------------- --------------
------------- --------------
</TABLE>
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Raw materials.................................... $ -- $ 258,919 $ 499,014
Work-in-process.................................. -- -- 40,985
Finished goods................................... -- 8,032 636,444
------------- ------------- -------------
$ -- $ 266,951 $ 1,176,443
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Machinery and equipment.......................... $ 392,049 $ 1,480,205 $ 1,516,896
Office furniture and equipment................... 52,082 105,096 138,551
Laboratory equipment............................. 49,766 49,766 48,691
Leasehold improvements........................... 762 439,172 472,521
Computer equipment............................... -- 267,970 309,994
Construction in progress......................... -- 804,068 3,583,278
------------- ------------- -------------
494,659 3,146,277 6,069,931
Less accumulated depreciation and amortization... (191,940) (271,124) (365,236)
------------- ------------- -------------
$ 302,719 $ 2,875,153 $ 5,704,695
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-10
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Patent and trademark costs....................... $ 164,632 $ 222,493 $ 259,846
Debt issuance costs.............................. 232,817 971,490 971,490
Deferred debt and warrant offering costs......... 137,273 -- --
Deferred second offering costs................... -- 70,000 458,744
Consulting agreement............................. -- 275,000 275,000
Licensing agreements............................. -- 400,000 400,000
Security deposits................................ 14,270 35,830 63,803
------------- ------------- -------------
548,992 1,974,813 2,428,883
Less accumulated amortization.................... (168,856) (828,555) (932,626)
------------- ------------- -------------
$ 380,136 $ 1,146,258 $ 1,496,257
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
6. DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER
JUNE 30, 30,
---------------------- -----------
1995 1996 1996
---------- ---------- -----------
Unsecured demand notes to former
officers, interest at 6% per year
(b)................................... $ 206,010 $ -- $ --
<S> <C> <C> <C>
Unsecured note to Johns Hopkins
University, due March, 1995, interest
at 7.5% per year (c).................. 324,539 -- --
---------- ---------- -----------
$ 530,549 $ -- $ --
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-11
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
6. DEBT (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------- -------------
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Unsecured notes, due June, 1995, interest at 10%
per year (a).................................... $ 1,850,000 $ -- $ --
Unsecured convertible notes, due April, 1997
interest at 10% per
year (a)........................................ -- 2,875,000 2,875,000
Convertible debentures, due December, 1998 to
October, 1999, interest compounded annually at
10.5% per year (f).............................. 700,000 700,000 700,000
Unsecured notes to former officers, due December,
1995 to December, 1996, interest at 6% or 10%
per year (b).................................... 476,680 221,033 117,908
Unsecured notes to officer/shareholder, due
September, 1996, interest at 10% per year (b)... 313,543 -- --
Unsecured notes to trade and other creditors, due
October, 1996 to March, 1997, interest at 9% or
10% per year (d)................................ 588,227 63,548 63,548
Subordinated convertible debentures, due on
demand or due August, 1996 to November, 1996,
interest at 10% per year (e).................... 397,432 282,432 152,432
------------- ------------- -------------
4,325,882 4,142,013 3,908,888
Less current maturities.......................... (293,389) (3,442,013) (3,208,888)
------------- ------------- -------------
$ 4,032,493 $ 700,000 $ 700,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Annual maturities on long-term debt as of June 30, 1996 during the next five
years are:
<TABLE>
<CAPTION>
PERIOD
ENDED
JUNE 30,
-------------
<S> <C>
1997........................................................................... $ 3,442,013
1998........................................................................... --
1999........................................................................... 350,000
2000........................................................................... 350,000
2001........................................................................... --
-------------
$ 4,142,013
-------------
-------------
</TABLE>
- ------------------------
(a) During June, 1995, the Company entered into an Agreement with an investment
banking firm, Hampshire Securities Corporation ("Hampshire") for the private
placement of securities, which closed during July, 1995 and September, 1995
(the "1995 Unit Private Placement"), in which the Company raised $5,950,000
through the sale of Units. Each "Unit" consisted of one $50,000 non-
convertible promissory note bearing interest at 10% per annum (the
"Non-Convertible Notes"),
F-12
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
6. DEBT (CONTINUED)
one $50,000 convertible promissory note bearing interest at 10% per annum
and which is convertible into shares of Common Stock at a conversion price
per share equal to $5.00 (the "Convertible Notes"), one Class A Warrant to
purchase 10,000 shares of Common Stock at a purchase price per share equal
to $5.00 and one Class B Warrant to purchase 10,000 shares of Common Stock
at a purchase price per share equal to $12.50. Both Class A and Class B
Warrants expire five years from the date of issuance. In June, 1996 a
Convertible Note in the principal amount of $100,000 was converted into
20,000 shares of Common Stock. Certain holders of the Secured Notes which
were issued in a 1993 private placement agreed to amend and restate their
promissory notes and invest the principal amount of such notes in the amount
of $1,650,000 in the 1995 Unit Private Placement. On July 28, 1995, the
other Existing Investors were paid their principal and interest of $200,000
and $22,557, respectively, from the proceeds of the 1995 Unit Private
Placement. In addition, through June 30, 1996, interest of $186,281 was paid
related to the $1,650,000 Secured Notes. The Non-Convertible Notes in the
amount of $2,975,000 plus interest in the amount of $162,319 was paid on
February 27, 1996.
Under the terms of the 1995 Unit Private Placement, because the holders of
the $1,650,000 Secured Notes were not paid by December 31, 1995, they were
issued additional warrants to purchase a maximum of 165,000 shares of Common
Stock at an exercise price per share equal to $5.00. Holders of 350,000
existing warrants issued under the 1993 private placement, which are
exercisable at an exercise price equal to $9 per share were extended for
three years, as the holders of the warrants agreed not to dispose of the
warrants or the underlying Common Stock prior to August 22, 1997. Hampshire
was paid $539,482 in connection with the 1995 Unit Private Placement through
September 25, 1995.
(b) Unsecured notes to former officers and an officer/stockholder of the Company
represent loans made to the Company and accrued salaries which were
converted to promissory notes. Of such unsecured notes, principal in the
amount of $725,199 plus interest in the amount of $116,039 was paid through
June 30, 1996.
(c) As of June 30, 1995, the unsecured note was owed to The Johns Hopkins
University ("Johns Hopkins") by the Company under the terms of a research
and development agreement which expired June 30, 1993. $200,000 was paid on
September 7, 1995 and $124,539 plus interest of $58,999 was paid on April
19, 1996.
(d) During October, 1994 and March, 1995, the Company issued to certain trade
and other creditors unsecured notes in the principal amount of $588,227. Of
such unsecured notes, principal in the amount of $524,679 plus interest in
the amount of $24,260 was paid through September 30, 1996. As of June 30,
1996, June 30, 1995 and September 30, 1996 the Company owed a member of the
Board of Directors and a principal of ReProtect, LLC ("ReProtect") $15,099,
$30,198 and $15,099, respectively. During 1996, $15,099 of principal and
$1,415 of interest was paid to this director. Additionally, two other
principals of ReProtect were owed $44,698, $89,396 and $44,698 at June 30,
1996, June 30, 1995 and September 30, 1996, respectively. During 1996,
$44,698 of principal and $4,188 of interest was paid to these two
individuals.
(e) During October, 1994, the Company raised $450,000 through a private
placement of units composed in the aggregate of (i) $225,000 in subordinated
convertible debentures which accrues interest at 10% annually, maturing on
August 31, 1996 and convertible into 22,500 shares of Common Stock at $10.00
per share, (ii) warrants, exercisable for a five-year period, to purchase
47,813 shares of Common Stock at $10.00 per share, and (iii) 28,125 shares
of Common Stock at
F-13
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
6. DEBT (CONTINUED)
$8.00 per share. These shares of Common Stock, including those issuable upon
the conversion of the debentures or the exercise of the warrants, were
registered in a concurrent offering with the initial public offering. During
June, 1996 through August, 1996 subordinated convertible debentures in the
principal amount of $225,000 were converted into 22,500 shares of Common
Stock.
In October and November, 1994, the Company issued to certain trade creditors
subordinated convertible debentures for a total principal amount of
$172,432. Each such debenture has a two-year term, bears interest at 10% per
annum and is convertible into Common Stock at $10.00 per share. During June,
1996, $20,000 was converted into 2,000 shares of Common Stock.
During 1994, the Company borrowed a total of $135,000 from nine individuals,
including four current Directors. The loans required payment of 10% interest
per annum until maturity. Each lender was granted (i) the option of
receiving, in lieu of the repayment of interest and principal, 1,875 shares
of Common Stock at a price of $8.00 per share and (ii) warrants to purchase
375 shares of Common Stock at $10.00 per share for a five-year period
expiring on June 30, 1999. As of June 30, 1995, all of the nine individuals
have converted their loans into Common Stock.
(f) Between December, 1991 and October, 1992, the Company borrowed an aggregate
of $700,000 from the Montana Board of Science and Technology Development
evidenced by convertible debentures, of which $350,000 was borrowed to fund
expenditures relating to the Company's facility in Montana. The convertible
debentures are convertible into shares of Common Stock at $5.00 per share,
with accrued interest being waived upon conversion.
In January, 1996, the Company raised an additional $100,000 through a private
placement to a single investor of a $100,000 non-convertible promissory note
due the earlier of January 26, 1997 or the closing of the initial public
offering, bearing interest at a rate of 10% per annum and a Class C Warrant
to purchase 20,000 shares of Common Stock at an exercise price of $8.00 per
share. The Class C Warrant is not exercisable until the first anniversary of
the date of issuance and has a term of five years. The Company paid the
entire principal amount of $100,000 plus interest of $877 on February 27,
1996.
7. STOCK OPTIONS AND WARRANTS
In October, 1990, the Board of Directors authorized the 1990 Stock Option
Plan (the "1990 Plan") under which options to purchase up to 250,000 shares of
the Common Stock may be granted to employees, officers, directors, consultants
and advisors. In May, 1993, the number of shares covered was increased to
900,000 shares by resolution of the Board of Directors. The Board of Directors
is authorized to set the exercise period, the number of shares subject to each
option, the grantees receiving the options, and the exercise price at their best
determination of fair market value.
Options granted generally become exercisable over five years and expire ten
years from the date of grant. The Plan also provides for the granting of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1954, as amended.
On September 28, 1995, the Company adopted the 1995 Stock Option Plan for
Non-Employee Directors, a non-qualified stock option plan (the "1995 Plan"). The
1995 Plan reserves for the issuance of up to 250,000 shares of the Common Stock
pursuant to stock options to be granted to the Company's non-employee directors.
Over a period of six months, each of the five non-employee directors was granted
an option to purchase 15,000 shares of the Common Stock at fair market value
($8.00 and $14.50 per share). Such options become immediately exercisable with
respect to one-third
F-14
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
of the shares of Common Stock (5,000 shares), the remaining 10,000 shares of
Common Stock vest in equal annual installments over the next four years
following the anniversary date of the initial grant. The options expire ten
years from date of grant.
The following summarizes the stock option transactions under the 1990 Plan
for the years ended June 30, 1996, 1995, 1994 and the three months ended
September 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF PER SHARE
SHARES OPTION PRICE
---------- ------------------
<S> <C> <C>
Outstanding at June 30, 1993................................. 432,000 $4.00 -- $ 8.00
Granted.................................................... 4,500 $8.00
Canceled................................................... (107,500) $8.00
Outstanding at June 30, 1994................................. 329,000 $4.00 -- $ 8.00
Granted.................................................... 3,750 $4.00
Canceled................................................... (24,556) $8.00
Outstanding at June 30, 1995................................. 308,194 $4.00 -- $ 8.00
Granted.................................................... 310,000 $6.00 -- $10.50
Canceled................................................... (5,000) $8.00
Exercised.................................................. (8,591) $8.00
Outstanding at June 30, 1996................................. 604,603 $4.00 -- $10.50
Exercised.................................................. (6,250) $4.00
Outstanding at September 30, 1996............................ 598,353 $4.00 -- $10.50
Available for future grant September 30, 1996................ 286,806
Exercisable at September 30, 1996............................ 417,000 $4.00 -- $10.50
</TABLE>
A director and officers of the Company were issued options to purchase
624,862 shares of the Common Stock at $4.35 and $6.00 per share, resulting in
compensation expenses of approximately $3,348,000 which are amortized over the
remaining lives of their respective contracts. The expense for the year ended
June 30, 1996 and for the three months ended September 30, 1996 and 1995 was
$1,411,871, $192,970 and $38,463, respectively; accrued salaries as at June 30,
1996 and September 30, 1996 includes $1,411,871 and $1,604,841, respectively. Of
these options, options to purchase 574,862 shares of Common Stock are not
pursuant to either the 1990 Plan or the 1995 Plan. As of September 30, 1996,
options to purchase 344,917 shares of Common Stock are exercisable by the
officer/director of the Company.
As of June 30, 1996, the Board of Directors authorized and granted options
to purchase 479,125 shares of Common Stock at exercise prices of $4.00 to $8.00
per share, which vest over ten years. These options are not included in the 1990
Plan or the 1995 Plan. As of June 30, 1996, and September 30, 1996 options to
purchase 76,625 and 6,250 shares of Common Stock, respectively, have been
exercised respectively. Of these options, options to purchase 100,000 shares of
Common Stock were issued at $6.00 per share resulting in capitalized licensing
costs of $200,000 which will be amortized over the life of the research
agreement which is ten years.
The Company has warrants outstanding to purchase 2,665,187 shares of the
Common Stock at exercise prices varying from $0.004 per share to $16.50 per
share which generally vest over a three to five year period. Through September
30, 1996, warrants to purchase 343,806 shares of Common Stock with exercise
prices ranging from $0.004 to $10.00 per share were exercised. On August 1,
1995, warrants to purchase 26,625 shares of Common Stock at exercise prices of
$4.00 and $6.00 per share were exchanged for stock options. In April, 1996, the
Company issued a five-year warrant to purchase
F-15
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
200,000 shares of Common Stock at an exercise price of $11.00 per share (which
was below fair market value) in connection with the execution of a consulting
agreement. This resulted in an additional $275,000 consulting expense which will
be amortized over the three year term of the agreement. In June, 1996, the
Company issued five year warrants to purchase 20,000 shares of Common Stock at
an exercise price of $10.00 (which was below fair market value) in connection
with legal services provided to the Company. This resulted in an additional
$235,000 legal expense during the year ended June 30, 1996. On August 27, 1996
the Company issued five year warrants to purchase 30,000 shares of Common Stock
at an exercise price of $10.00 per share (which was below fair market value) in
connection with the settlement of a claim with certain individuals. This
resulted in an additional expense of $337,500 during the three months ended
September 30, 1996. The expenses referred to above were calculated as the excess
of fair market value over the grant price.
8. INCOME TAXES
The Company has a net operating loss ("NOL") carryforward of approximately
$26,503,000 for financial reporting purposes and approximately $12,500,000 for
tax purposes with research and development credit carryforward of approximately
$116,000 expiring in the years 2006 through 2010. The Company has not reflected
any benefit of such net operating loss carryforward in the accompanying
financial statements in accordance with Financial Accounting Standards Board
Statement No. 109 as the realization of this deferred tax benefit is not more
than likely. The NOL carryforward for tax purposes expires in the years 2006
through 2010. The difference between financial reporting and tax purposes
results from the temporary difference caused by the capitalization of start-up
expenditures for tax purposes as required by Internal Revenue Code Section 195.
The Tax Reform Act of 1986 provided for a limitation on the use of NOL
carryforwards, following certain ownership changes. As a result of transactions
in the Company's stock during 1993 through 1996, a change of ownership of
greater than 50%, as defined, may have occurred. Under such circumstances, the
potential benefits from utilization of tax carryforward may be substantially
limited or reduced on an annual basis.
9. OTHER RELATED PARTY TRANSACTIONS AND AGREEMENTS
During 1990, as part of the organization of the Company, the founder of the
Company and a Senior Vice-President and Director received 526,250 shares of the
Common Stock in exchange for assigning to the Company all pending patent
applications, trademarks, copyrights, technology and similar rights associated
with products relating to or evolving from the patent application filed by the
Senior Vice-President and Director. In addition, under the terms of an
employment agreement dated May 15, 1992, a royalty of $0.005 for each device
sold, as defined, will be paid. At September 30, 1996, $3,754 has been accrued
under this agreement.
On July 29, 1994 and as amended August 1, 1995, the Company entered into an
employment agreement with the President and Chief Executive Officer of the
Company. Among other matters he will receive a royalty of $0.005 for each unit
of feminine protection product sold and $0.01 for each unit sold for medical
purposes. At September 30, 1996, $3,754 has been accrued under this agreement
for the sale of units for feminine protection.
A director and stockholder of the Company is the Chairman of the Executive
Committee of an advertising agency used by the Company which was paid
approximately $1,077,000, $1,758,000 and $60,000 during the year ended June 30,
1996 and during the three months ended September 30, 1996 and 1995,
respectively. In addition, $560,000, $121,875 and $1,529,000 owed to such agency
are included in accrued liabilities and accounts payable at June 30, 1996, June
30, 1995 and September 30,
F-16
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
9. OTHER RELATED PARTY TRANSACTIONS AND AGREEMENTS (CONTINUED)
1996, respectively. In March, 1996, the Company issued a five year warrant to
purchase 50,000 shares of Common Stock at an exercise price of $10.00 per share
in repayment of $50,000 of fees owed to such agency, which were incurred in
connection with the launch of INSTEAD-TM-. This resulted in an additional
advertising expense of $118,500.
In March, 1996, the Company issued a five year warrant to purchase 35,000
shares of Common Stock to an entity formed by the partners of Shereff, Friedman,
Hoffman & Goodman, LLP, a law firm which provided legal services in connection
with the Company's initial public offering. The warrant has an exercise price of
$10.00 per share and was issued in repayment of $35,000 of legal fees which were
incurred in connection with the initial public offering. This resulted in an
additional legal expense of approximately $27,000 and a charge to additional
paid-in capital of $56,000. A partner of the law firm was appointed to the
Company's Board of Directors in April, 1996 and was issued five-year warrants to
purchase 15,000 shares of Common Stock at $14.50 per share. The total amount of
fees paid by the Company to such law firm was approximately $647,000, $30,000,
$222,000 and $157,000 for the years ended June 30, 1996 and June 30, 1995 and
for the three months ended September 30, 1996 and 1995, respectively. In
addition, $95,000, $50,000 and $179,000 owed to the law firm is included in
accrued liabilities at June 30, 1996, June 30, 1995 and September 30, 1996,
respectively.
The Company entered into a Research Agreement with Johns Hopkins commencing
July 1, 1991, which expired June 30, 1993. The Company reached an agreement (the
"ReProtect Agreement") with a company, ReProtect, formed by scientists
(including a current director) who previously conducted research for the Company
under this expired Research Agreement, to conduct research for the Company. The
ReProtect Agreement is for a ten year term and provides that the Company will
provide ReProtect $1 million annually for research after the IPO. The ReProtect
Agreement provides the Company with an exclusive license for the use of the
BufferGel Technology coupled with the SoftCup Technology, for which ReProtect
received a one time payment of $100,000, a ten year option to purchase 225,000
shares of Common Stock, exercisable upon the attainment of certain milestones
and will receive a royalty of $.01 per unit of the product sold. In addition,
ReProtect granted the Company a ten year license for vaginal use of the
BufferGel Technology without the SoftCup Technology, for which ReProtect
received a one time payment of $100,000, options to purchase 175,000 shares of
Common Stock, exercisable upon the attainment of certain milestones, and a
royalty of either 5% or 3% (depending on whether a patent has been issued) of
net sales of the BufferGel Technology (without the SoftCup Technology). The
ReProtect Agreement contains the parties' agreement to negotiate in good faith
to extend the term, as well as other customary provisions in agreements of this
type, including provisions relating to early termination of the agreement under
certain circumstances. Research and development expenditures pursuant to the
above agreements amounted to approximately $626,500, $60,230, $356,000 and
$250,000 for each of the years ended June 30, 1996, 1995, 1994, and for the
three months ended September 30, 1996, respectively. Included in prepaid
marketing and other current assets at June 30, 1996 and September 30, 1996 is
$83,300 of prepaid research and development expenditures paid to ReProtect.
10. PREFERRED STOCK
In 1995, the Company raised $670,000 through a private placement sale of
units. Each unit consisted of (1) 1,950 shares of Series A Preferred Stock, for
an allocated purchase price of $195,000, and (2) a warrant, exercisable for a
five-year period, to purchase 21,250 shares of Common Stock at $10.00 per share,
subject to adjustment for certain dilutive events for an allocated purchase
price of $5,000.
F-17
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
10. PREFERRED STOCK (CONTINUED)
Each share of Series A Preferred Stock is initially (a) convertible, at any
time at the option of the Holder, into Common Stock at a conversion rate of 12.5
shares of Common Stock for each such share, subject to adjustment for certain
dilutive events, (b) entitled to cumulative annual dividends of $8.00, (c)
participating with the Common Stock in any dividend after payment of said $8.00,
(d) has a liquidation preference of $100.00 and (e) entitled to the number of
votes equal to the number of shares of Common Stock into which such share can be
converted.
During the year ended June 30, 1996 and the three months ended September 30,
1996, 5,411.25 shares and 1,121.25 shares of Series A Preferred Stock were
converted into 108,225 shares and 22,425 shares, respectively, of Common Stock.
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES
The Company leases office and manufacturing facilities. Certain of these
leases require the Company to pay certain executory costs (such as insurance and
maintenance). In July, 1996, the Company signed a ten year lease for new office
space in New York, New York. The Company obtained a one year renewable standby
letter of credit, expiring in July, 1997, in the amount of approximately
$439,000 as rent security for the above premises collateralized by certain
marketable securities.
Future minimum lease payments for operating leases, including the new office
lease, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 337,027
1998........................................................................... 362,743
1999........................................................................... 451,571
2000........................................................................... 386,438
2001........................................................................... 386,438
Thereafter..................................................................... 2,244,198
-------------
$ 4,168,415
-------------
-------------
</TABLE>
Rental expense was approximately $123,000, $108,000, $223,000, $126,629 and
$11,787 and for the years ended June 30, 1996, 1995 and 1994 and for the three
months ended September 30, 1996 and 1995, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with four officers, two of
whom are directors of the Company.
The agreements all provide for the following: base salaries increasing upon
achievement of certain conditions, incentive bonus plans, severance benefits and
non-compete agreements. Certain of the agreements also include a five-year term,
signing bonuses, stock options upon attainment of specified goals, and royalties
on sales of the product.
F-18
<PAGE>
ULTRAFEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(INFORMATION FOR SEPTEMBER 30, 1996 AND 1995 IS UNAUDITED)
11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
MANUFACTURING EQUIPMENT AND IMPROVEMENTS
The Company has commitments in the amount of approximately $6,955,000 of
which approximately $3,635,000 was unpaid at September 30, 1996, for the
purchase of manufacturing equipment, improvements to the manufacturing facility
to support start-up production and leasehold improvements to the new New York
office space. The total commitments include approximately $693,800 and
approximately $149,000 of estimated costs to be incurred for improvements to the
New York office space, at June 30, 1996 and September 30, 1996, respectively.
12. INITIAL PUBLIC OFFERING
On February 27, 1996, the Company successfully completed its initial public
offering of Common Stock. The initial public offering was consummated with the
sale of 3,910,000 shares of its Common Stock at $10.00 per share with proceeds
of $34,085,611, net of related expenses of $5,014,389.
F-19
<PAGE>
[inside back cover]
[PHOTO OF MANUFACTURING PLANT]
INSTEAD IS MANUFACTURED ON CUSTOM-DESIGNED, STATE-OF-THE-ART EQUIPMENT AT
THE ULTRAFEM MONTANA FACILITY.
[PHOTO OF PRODUCT]
INSTEAD IS A DISPOSABLE, PATENTED PRODUCT THAT COLLECTS RATHER THAN ABSORBS
MENSTRUAL FLUID. ITS FLEXIBILITY MAKES IT EASY TO INSERT AND REMOVE.
A CUP-LIKE DEVICE THAT IS INSERTED INTO THE UPPER VAGINAL CANAL UNDER A
WOMAN'S CERVIX, INSTEAD GIVES UP TO TWELVE HOURS OF SAFE, COMFORTABLE
PROTECTION.
THE SOFT, INERT MATERIAL CONFORMS TO A WOMAN'S ANATOMY TO HELP FIT
COMFORTABLY AND SECURELY.
[PHOTO OF PRODUCT DISPLAY]
SALES CALLS IN THE PACIFIC NORTHWEST TO DATE HAVE RESULTED IN COMMITMENTS
FROM RETAILERS WHICH ACCOUNT FOR MORE THAN 75% OF ACV (ALL COMMODITY VOLUME) IN
THE FOOD AND DRUG CLASSES OF TRADE.
ULTRAFEM HAS OBTAINED FDA CLEARANCE TO MARKET INSTEAD IN THE UNITED STATES
AND FDA CLEARANCE FOR EXPORT OVERSEAS.
CONSUMERS OUTSIDE THE ORIGINAL LEAD MARKET CAN PURCHASE INSTEAD BY MAIL
THROUGH A SPECIAL TOLL FREE (888-367-9636) NUMBER.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Concurrent Public Offering..................... 8
Risk Factors................................... 9
Use of Proceeds................................ 16
Price Range of Common Stock.................... 16
Dividend Policy................................ 16
Capitalization................................. 17
Dilution....................................... 18
Selected Financial Data........................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 20
Business....................................... 24
Management..................................... 37
Principal Stockholders......................... 46
Selling Stockholders........................... 48
Certain Relationships and Related Party
Transactions.................................. 52
Description of Capital Stock................... 56
Shares Eligible for Future Sale................ 60
Plan of Distribution........................... 61
Legal Matters.................................. 62
Experts........................................ 62
Available Information.......................... 62
Index to Financial Statements.................. F-1
</TABLE>
------------------------
4,301,303 SHARES
ULTRAFEM, INC. LOGO
COMMON STOCK
PROSPECTUS
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses incurred by the Company in connection with the Offering are:
<TABLE>
<S> <C>
SEC Registration fee......................................... $ 29,583.62
NASD fee..................................................... 9,079.25
Nasdaq National Market listing fee........................... 17,500.00
Accounting fees and expenses*................................ 200,000.00
Legal fees and expenses*..................................... 450,000.00
Printing costs*.............................................. 250,000.00
Blue sky fees and expenses*.................................. 13,837.13
Miscellaneous*............................................... 200,000.00
-------------
Total........................................................ $1,170,000.00
-------------
</TABLE>
- ------------------------
* Estimated
The Company will pay all expenses of the Company relating to the Offering.
The Company will pay all expenses of the Company and the Selling
Stockholders relating to the Concurrent Offering.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The indemnification of officers and directors of the Company is governed by
Section 145 of the General Corporation Law of the State of Delaware (the "DGCL")
and the Restated Certificate of Incorporation. Among other things, the DGCL
permits indemnification of a director, officer, employee or agent in civil,
criminal, administrative or investigative actions, suits or proceedings (other
than an action by or in the right of the corporation) to which such person is a
party or is threatened to be made a party by reason of the fact of such
relationship with the corporation or the fact that such person is or was serving
in a similar capacity with another entity at the request of the corporation
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him if such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
No indemnification may be made in any such suit to any person adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which the action was brought determines that,
despite the adjudication of liability, such person is under all circumstances,
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper. Under the DGCL, to the extent that a director, officer,
employee or agent is successful, on the merits or otherwise, in the defense of
any action, suit or proceeding or any claim, issue or matter therein (whether or
not the suit is brought by or in the right of the corporation), he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him. In all cases in which indemnification is permitted (unless
ordered by a court), it may be made by the corporation only as authorized in the
specific case upon a determination that the applicable standard of conduct has
been met by the party to be indemnified. The determination must be made by a
majority vote of the directors who were not parties to the action, even though
less than a quorum, or, if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or by the
stockholders. The statute authorizes the corporation to pay expenses incurred by
an officer or director in advance of a final disposition of a proceeding upon
receipt of an undertaking by or on behalf of the person to whom the advance will
be made, to repay the advances if it shall ultimately be determined that he was
not entitled to indemnification. The DGCL provides that indemnification and
advances of expenses
II-1
<PAGE>
permitted thereunder are not to be exclusive of any rights to which those
seeking indemnification or advancement of expenses may be entitled under any
By-Law, agreement, vote of stockholders or disinterested directors, or
otherwise. The DGCL also authorizes the corporation to purchase and maintain
liability insurance on behalf of its directors, officers, employees and agents
regardless of whether the corporation would have the statutory power to
indemnify such persons against the liabilities insured.
The Restated Certificate of Incorporation of the Company (the "Certificate")
provides that no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for paying a dividend or approving a stock repurchase in violation of
Section 174 of the DGCL, (iv) for any transaction from which the director
derived an improper personal benefit or (v) for any act or omission occurring
prior to the date when the provision became effective.
The Certificate provides that directors, officers and others shall be
indemnified to the fullest extent authorized by the DGCL, as in effect (or, to
the extent indemnification is broadened, as it may be amended), against any and
all judgments, fines and amounts paid in settling or otherwise disposing of
threatened, pending or completed actions, suits or proceedings, whether civil,
criminal, administrative or investigative and expenses incurred by such person
in connection therewith. The Certificate further provides that, to the extent
permitted by law, expenses so incurred by any such person in defending a civil
or criminal action or proceeding shall, at his request, be paid by the Company
in advance of the final disposition of such action or proceeding.
The Certificate provides that the right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition shall not be exclusive of any other right which any person may have
or acquire under any statute, provision of the Certificate or Amended and
Restated By-Laws of the Company (the "By-Laws") or otherwise.
Pursuant to employment agreements with certain of its executive officers,
the Company has agreed to indemnify such executive officers (including their
respective heirs, executors and administrators) to the fullest extent permitted
by the DGCL against all expenses and liabilities reasonably incurred in
connection with or arising out of any action, suit or proceeding in which such
executive officer may be involved by reason of having been a director or officer
of the Company or any subsidiary thereof.
The Company has obtained directors and officers liability and company
reimbursement insurance which, among other things, (i) provides for payment on
behalf of its officers and directors against loss as defined in the policy
stemming from acts committed by directors and officers as such and (ii) provides
for reimbursement to the Company for such loss but only when the Company shall
be required or permitted to indemnify directors or officers for loss pursuant to
statutory or common law or pursuant to duly effective certificate of
incorporation or By-Law provisions. Coverage is afforded to the directors and
officers, the Company for reimbursement of the directors and officers and the
Company directly for securities related claims.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Between December 1991 and October 1992, the Company borrowed an aggregate of
$700,000 from the Montana Board of Science and Technology Development ("MBSTD")
evidenced by convertible debentures which bear interest at the rate of 10.5% per
annum (compounded annually), of which $350,000 was borrowed to fund expenditures
relating to the Company's manufacturing facility in Montana (the foregoing loans
are collectively referred to as the "MBSTD Loans"). The MBSTD Loans are
convertible into shares of Common Stock at a conversion price of $5.00 per
share, with accrued interest being waived upon conversion. The conversion price
is subject to adjustment if the Company issues shares of Common Stock or
convertible securities at a price less than $5.00 per share. MBSTD
II-2
<PAGE>
was also granted certain "piggy-back" registration rights. Under certain
circumstances, the MBSTD and its affiliates were entitled to receive additional
warrants, and a ten-year warrant for 6,250 shares of Common Stock at an exercise
price of $32.00 per share was subsequently issued and expired on February 22,
1996. Principal amounts on the MBSTD loans are due as follows: $250,000 on
December 20, 1998; $100,000 on April 10, 1999; and $350,000 on October 19, 1999,
along with related accrued interest.
Between September 10, 1992 and September 10, 1995, the Company issued 71,225
shares of Common Stock to a number of investors (37,375), a consultant (3,750),
a prior marketing firm for services (7,750) and to other providers of services
(22,350), all at a purchase price of $8.00 per share.
Since January 1993, the Company issued options to purchase an aggregate of
350,250 shares of Common Stock pursuant to the 1990 Stock Option Plan of which
5,250 shares were canceled and 286,806 shares are reserved for future grants.
Such options were issued to employees, officers, directors, consultants and
advisors at exercise prices ranging between $4.00 and $10.50 per share.
In 1993, the Company issued warrants to purchase 25,000 shares of Common
Stock at an exercise price of $8.00 per share to two individuals as part of a
settlement.
In a 1993 private placement to accredited investors, the Company issued (i)
$1.85 million of secured promissory notes and (ii) warrants to purchase 370,000
shares of Common Stock at an initial exercise price equal to $9.00 per share.
The aggregate purchase price for such securities was $1.85 million. Warrants to
purchase 150,000 shares of Common Stock were also authorized for issuance to a
former officer of the Company to serve as Chairman of the Board.
In a 1994 private placement to accredited investors, the Company raised
$450,000 through the sale of units, composed in the aggregate of (i) $225,000 in
subordinated convertible debentures which accrue interest at 10% annually,
mature on the earlier to occur of (x) August 31, 1996, or (y) at the option of
the holder, the date the Company successfully effects any single financing in
excess of $10 million, and are convertible into 22,500 shares of Common Stock,
(ii) five-year warrants to purchase 47,813 shares of Common Stock at an exercise
price of $10.00 per share, and (iii) 28,125 shares of Common Stock at $8.00 per
share. Warrants to purchase 6,469 shares of Common Stock were also issued to a
placement agent in connection with the 1994 private placement.
In 1994, the Company borrowed a total of $135,000 from nine individuals,
including four current Directors. The loans bear interest at the rate of 10%
interest per annum and were to mature upon the earlier to occur of (i) the date
the Company receives $600,000 of financing and (ii) 180 days from the date of
issuance of the loan. Each lender was granted (i) the option of receiving, in
lieu of the repayment of interest and principal, 1,875 shares of Common Stock at
a conversion price of $8.00 per share and (ii) warrants to purchase 375 shares
of Common Stock at an exercise price of $10.00 per share exercisable for a
five-year period expiring on June 30, 1999. As of June 30, 1995, all of the nine
individuals had converted their loans to Common Stock.
In October and November 1994, the Company issued to certain trade creditors
subordinated convertible debentures for a total principal amount of $172,432.
Such debentures have a two-year term, bear interest at 10% per annum and are
convertible into Common Stock at a conversion price of $10.00 per share.
In 1994, the Company issued options to purchase 574,862 shares of Common
Stock (subject to adjustment prior to the Company's initial public offering
("IPO") and certain dilutive events) to John Andersen for an aggregate purchase
price of $2.5 million as part of his employment agreement.
In early calendar year 1995, the Company raised $670,000 through a private
placement of units (the "1995 Preferred Stock Private Placement") to accredited
investors of units. Each unit consisted of (i) 1,950 shares of Series A
Preferred Stock, for an allocated purchase price of $195,000, with each such
share (a) being convertible, at any time at the option of the holder, into
Common Stock of the Company at a conversion rate of 12.5 shares of Common Stock
for each such share, subject to
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adjustment for certain dilutive events, (b) being entitled to cumulative annual
dividends of $8.00, (c) participating with the Common Stock in any dividend
after payment of said $8.00, (d) having a liquidation preference of $100.00 and
(e) being entitled to the number of votes equal to the number of shares of
Common Stock into which such share can be converted, and (ii) a warrant,
exercisable for a five-year period, to purchase 21,250 shares of Common Stock at
an exercise price of $10.00 per share, subject to adjustment for certain
dilutive events for an allocated purchase price of $5,000. In February 1995, the
Company sold 2.25 units to a group of accredited investors represented by a
common advisor for $450,000 on the same terms and conditions as the 1995
Preferred Stock Private Placement, except for certain registration rights.
Warrants to purchase 1,078 shares of Common Stock were also issued to a
placement agent in connection with the 1995 Preferred Stock Private Placement.
In 1995, warrants to purchase 39,950 shares of Common Stock at an exercise
price of $10.00 per share and 16,552 shares of Common Stock (subject to
adjustment for certain dilutive events) at an exercise price of $10.00 per share
were issued to two law firms for services provided.
In 1995, the Company issued options to purchase 76,625 shares of Common
Stock to C. Austin Burrell, in settlement of certain outstanding claims against
the Company at exercise prices ranging from $4.00 to $8.00 per share.
In a second 1995 private placement (the "1995 Unit Private Placement"), the
Company raised $5,950,000 through the sale of Units. Each "Unit" consisted of
one $50,000 non-convertible promissory note bearing interest of 10% per annum,
one $50,000 convertible promissory note bearing interest of 10% per annum, one
Class A Warrant to purchase 10,000 shares of Common Stock at a purchase price
per share equal to $5.00 and one Class B Warrant to purchase 10,000 shares of
Common Stock at a purchase price per share equal to $12.50. The Notes are
secured with the Company's patent and patent applications pursuant to an Amended
and Restated Patent Assignment and Security Agreement dated July 28, 1995.
Certain investors in a previous private placement (the "Existing Investors")
agreed to amend and restate their promissory notes and invest the principal
amount of such notes in the amount of $1,650,000 in this private placement.
Other Existing Investors were paid their principal and interest in the amount
aggregating $222,557 from the proceeds of the 1995 Unit Private Placement. The
non-convertible promissory notes were paid upon completion of the IPO and the
patents were released; the convertible notes mature in April 1997. On December
31, 1995 certain holders of Non-Convertible Notes were issued warrants to
purchase an additional aggregate of 165,000 shares of Common Stock; such
warrants contain the same terms as the Class A Warrants.
In September 1995, the Company adopted the 1995 Ultrafem, Inc. Stock Option
Plan for Non-Employee Directors, under which options to purchase 75,000 shares
of Common Stock at exercise prices ranging from $8.00 to $14.50 have since been
granted.
In January 1996, the Company raised $100,000 through a private placement to
a single investor of a $100,000 non-convertible promissory note due the earlier
of January 26, 1997 or the closing of the IPO, bearing interest at a rate of 10%
per annum and a warrant to purchase 20,000 shares of Common Stock at an exercise
price of $8.00 per share. The Class C Warrant is not exercisable until the first
anniversary of the date of issuance and has a term of five years.
The Company has an agreement with ReProtect, which has been formed by the
scientists previously affiliated with the research project at Johns Hopkins for
investigating the uses of the SoftCup Technology. ReProtect expects to conduct
research at Johns Hopkins in accordance with an agreement between the Company
and ReProtect (the "ReProtect Agreement"). The ReProtect Agreement is for a ten
year term and under the agreement the Company will provide $1 million annually
to ReProtect for research. The ReProtect Agreement will provide the Company with
an exclusive license for the use of the BufferGel Technology, developed by two
of the scientists who formed ReProtect, coupled with the SoftCup Technology, for
which ReProtect will receive a one time payment of $100,000, a royalty of $.01
per unit of the product sold, and ten and one-half year options to purchase
225,000 shares of Common Stock, exercisable upon the attainment of certain
milestones. In addition, ReProtect will grant the Company a ten year license for
vaginal use of the BufferGel Technology
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without the SoftCup Technology, for which ReProtect will receive a one time
payment of $100,000, a ten and one-half year option to purchase 175,000 shares
of Common Stock, exercisable upon the attainment of certain milestones, and a
royalty of either 5% or 3% (depending on whether a patent has been issued) of
net sales of the BufferGel Technology (without the SoftCup Technology).
In February 1996, the Company issued warrants to purchase 327,500 shares of
Common Stock to Hampshire Securities Corporation at an exercise price of $16.50
per share in connection with its IPO.
In March 1996, the Company issued a five year warrant to purchase 35,000
shares of Common Stock to an entity formed by the partners of Shereff Friedman
Hoffman & Goodman LLP, a law firm which provided legal services in connection
with the IPO. The warrant has an exercise price of $10.00 per share and was
issued in consideration of certain legal services.
In March 1996, the Company issued a five year warrant to purchase 50,000
shares of Common Stock to Bozell Worldwide, Inc., an advertising concern which
provided services in connection with the launch of INSTEAD-TM-. The warrant has
an exercise price of $10.00 per share and was issued in consideration of certain
services.
In March 1996, the Company issued a five year warrant to purchase 20,000
shares of Common Stock at an exercise price of $10.00 per share in settlement of
certain claims, and in connection therewith executed a Settlement Agreement and
General Release.
In April 1996, the Company entered into a three year consulting agreement
for certain services related to investor relations in Europe with Orchard Close,
Ltd. In consideration for such consulting services the Company issued a four
year warrant to purchase 200,000 shares of Common Stock at an exercise price of
$11.00 per share.
In June 1996, the Board of Directors approved the issuance of one share of
Common Stock to the employees of various service providers of the Company, up to
an aggregate of 115 shares of Common Stock, in recognition of such employees
past service to the Corporation.
In August 1996, the Company settled a claim with certain individuals
pursuant to which the Company issued five year warrants to purchase an aggregate
of 30,000 shares of Common Stock at an exercise price of $10.00 per share.
The transactions listed above were made in reliance upon the exemption from
the registration provisions under the Securities Act of 1933, as amended,
contained in Section 4(2) thereof, or Rule 701 promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
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1.1+ Form of Underwriting Agreement.
3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
3.2 By-Laws (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
3.3 Form of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to Amendment No.
1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
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3.4 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.4 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November
17, 1995).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on January 16, 1996).
5+++ Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
9.1 Voting Trust Agreement, dated as of August 8, 1994 among Audrey Contente, John Andersen, Barrie Zesiger
and Ultrafem, Inc. (incorporated by reference to Exhibit 9.1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
9.2 Amendment, dated August 8, 1994 to Voting Trust Agreement, dated as of August 8, 1994 among Audrey
Contente, John Andersen, Barrie Zesiger and Ultrafem, Inc. (incorporated by reference to Exhibit 9.2 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on October 10, 1995).
9.3+ Amendment to Voting Trust Agreement, dated as of August 8, 1995 among Audrey Contente, John Andersen and
Barrie Zesiger.
10.1 Form of Ultrafem, Inc. Secured Convertible Promissory Note (1995 Unit Private Placement) (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.2 Form of Ultrafem, Inc. Secured Non-Convertible Promissory Note (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.3 Form of Ultrafem, Inc. Class A Warrant to purchase Common Stock (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.3 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.4 Form of Ultrafem, Inc. Class B Warrant to purchase Common Stock (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.4 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.5 Form of Ultrafem, Inc. Registration Rights Agreement relating to Class A Warrant to purchase Common
Stock, Class B Warrant to purchase Common Stock, and Secured Convertible Promissory Note (incorporated by
reference to Exhibit 10.5 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.6 Settlement Agreement and Mutual General Release, dated August 1, 1995, between Ultrafem, Inc. and C.
Austin Burrell (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registration Statement on
Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.7 Letter Agreement, dated August 10, 1995 between Meridian Consulting Group and Ultrafem, Inc.
(incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on October 10, 1995).
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10.8 Letter Agreement, dated July 12, 1995, between Ultrafem, Inc. and The Elliot Company (incorporated by
reference to Exhibit 10.8 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.9 Agreement of Lease, made as of October 15, 1991, between Broadway Management Co., Inc. and Ultrafem, Inc.
(incorporated by reference to Exhibit 10.9 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.10 Substitution of Space Agreement, dated June 23, 1992 by and between Broadway Management Co., Inc., as
Agent for 500 Fifth Avenue Associates, and Ultrafem, Inc. (incorporated by reference to Exhibit 10.10 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.11+ Employment Agreement, dated as of July 1, 1996 by and between Ultrafem, Inc. and Audrey Contente.
10.12+ Name, Likeness, and Voice Release and Agreement, dated as of July 1, 1996 by and between Ultrafem, Inc.
and Audrey Contente.
10.13+ Termination Benefits Agreement, dated as of October 1, 1990 by and between Ultrafem, Inc. and Audrey
Contente.
10.14 Restated Modification Agreement, dated July 29, 1993 by and between Ultrafem, Inc. and Audrey Contente
(incorporated by reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.15 Amendment to Employment Agreement, dated August 1, 1995, between the Company and Audrey Contente
(incorporated by reference to Exhibit 10.13 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.16 Employment Agreement, dated July 29, 1994 between Ultrafem, Inc. and John W. Andersen (incorporated by
reference to Exhibit 10.14 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.17 Amendment to Employment Agreement, dated August 1, 1995 between Ultrafem, Inc. and John Andersen
(incorporated by reference to Exhibit 10.15 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.18 Employment Agreement, dated August 1, 1995 between Ultrafem, Inc. and Dori M. Reap (incorporated by
reference to Exhibit 10.16 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.19 Letter Agreement, dated July 13, 1995 between Ultrafem, Inc. and The Sage Group (incorporated by
reference to Exhibit 10.17 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.20 Employment Agreement, dated November 6, 1995 between Ultrafem, Inc. and Tonya G. Hinch (incorporated by
reference to Exhibit 10.18 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on January 16, 1996).
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10.21 Agreement, dated June, 1995, by and between Audrey Contente, Jeffrey Simon, Frank Cole, Arthur Appleman
and Ultrafem, Inc. (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November
17, 1995).
10.22 Indemnity Agreement dated as of October 1, 1990 between Ultrafem, Inc. and Audrey Contente (incorporated
by reference to Exhibit 10.20 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.23 Amendment to Indemnity Agreement dated April 23, 1992 between Ultrafem, Inc. and Audrey Contente
(incorporated by reference to Exhibit 10.21 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.24 Amended and Restated Patent Assignment and Security Agreement dated as of July 28, 1995 between Ultrafem,
Inc. and Edward M. Berman, as Agent (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on November 17, 1995).
10.25 United States Patent No. 5,295,984, issued March 22, 1994 (incorporated by reference to Exhibit 10.23 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.26 Settlement Agreement, dated as of May 19, 1993 by and between Ultrafem, Inc., Audrey Contente, Frank
Martin, Albert L. Zesiger, and John S. Stafford (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
10.27 Form of Ultrafem, Inc. Convertible Debenture issued to the Montana Board of Science and Technology
(incorporated by reference to Exhibit 10.25 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.28 Form of Common Stock purchase Warrant issued to the Montana Board of Science and Technology (incorporated
by reference to Exhibit 10.26 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.29 Memorandum Agreement, dated September 15, 1992, relating to registration rights of Ultrafem, Inc.
Convertible Debenture issued to the Montana Board of Science and Technology (incorporated by reference to
Exhibit 10.27 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.30 Letter Agreement dated June 23, 1995 between Ultrafem, Inc. and Pro-Active International, as amended
(incorporated by reference to Exhibit 10.28 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.31 Letter Agreement dated July 24, 1995 between Ultrafem, Inc. and Bozell Worldwide, Inc. (incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
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10.32 Letter Agreement dated October 9, 1995 between Ultrafem, Inc. and Robinson Lerer Sawyer Miller
(incorporated by reference to Exhibit 10.30 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.33 Agreement effective July 17, 1990 between Ultrafem, Inc. and Audrey Contente (incorporated by reference
to Exhibit 10.31 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with
the Securities and Exchange Commission on November 17, 1995).
10.34+ Restated Technology Transfer Agreement, dated as of May 17, 1993 by and between Ultrafem, Inc. and Audrey
Contente.
10.35 Amendment to Restated Technology Transfer Agreement dated August 1, 1995 between Ultrafem, Inc. and
Audrey Contente (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to Registration Statement
on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.36 1990 Stock Option Plan of Ultrafem, Inc. (incorporated by reference to Exhibit 10.33 to Amendment No. 1
to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
10.37 1995 Ultrafem, Inc. Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit
10.34 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.38 Form of Option Certificate and Agreement for 1990 Stock Option Plan of Ultrafem, Inc. (incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.39 Form of Option Certificate and Agreement for 1995 Ultrafem, Inc. Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.36 to Amendment No. 2 to Registration Statement on
Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.40 Form of Ultrafem, Inc. Option Certificate and agreement to C. Austin Burrell (incorporated by reference
to Exhibit 10.37 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with
the Securities and Exchange Commission on November 17, 1995).
10.41 Option Certificate and Agreement, dated November 6, 1995, Re: 100,000 shares to Tonya G. Hinch
(incorporated by reference to Exhibit 10.38 to Amendment No. 2 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.42 Option Certificate and Agreement, dated August 1, 1995, Re: 100,000 shares to Dori M. Reap (incorporated
by reference to Exhibit 10.39 to Amendment No. 2 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.43 Amendment No. 1 to Option Certificate and Agreement, dated August 1, 1995, Re: 100,000 shares to Dori M.
Reap (incorporated by reference to Exhibit 10.40 to Amendment No. 2 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
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10.44 Option Certificate and Agreement, dated August 1, 1995, Re: 50,000 shares to Dori M. Reap (incorporated
by reference to Exhibit 10.41 to Amendment No. 2 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.45 Amendment No. 1 to Option Certificate and Agreement, dated August 1, 1995, Re: 50,000 shares to Dori M.
Reap (incorporated by reference to Exhibit 10.42 to Amendment No. 2 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.46 Amended and Restated Option Certificate and Agreement, dated August 1, 1995, Re: 105,970 shares (or 2% of
shares) to John W. Andersen (incorporated by reference to Exhibit 10.43 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on November 17, 1995).
10.47 Amended and Restated Option Certificate and Agreement, dated August 1, 1995, Re: 423,879 shares (or 8% of
shares) to John W. Andersen (incorporated by reference to Exhibit 10.44 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on November 17, 1995).
10.48 Option Agreement and Certificate, dated June 1, 1992, to Audrey Contente (incorporated by reference to
Exhibit 10.45 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.49 Option Agreement and Certificate, dated August 9, 1991, to Wendell Guthrie (incorporated by reference to
Exhibit 10.46 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.50 Form of Warrant to purchase Common Stock (1993 Private Placement) (incorporated by reference to Exhibit
10.48 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.51 Form of Warrant to purchase Common Stock (1995 Preferred Stock Private Placement) (incorporated by
reference to Exhibit 10.49 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.52 Form of Warrant to purchase Common Stock (1994 Private Placement) (incorporated by reference to Exhibit
10.50 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.53 Form of Convertible Debentures (1994 Private Placement) (incorporated by reference to Exhibit 10.51 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.54 Form of Representative's Warrant (incorporated by reference to Exhibit 10.52 to Amendment No. 2 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on January 16, 1996).
10.55 Form of Non-Convertible Promissory Note issued January 1996 (incorporated by reference to Exhibit 10.53
to Amendment No. 3 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities
and Exchange Commission on February 16, 1996).
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10.56 Form of Class C Warrant issued January 1996 (incorporated by reference to Exhibit 10.54 to Amendment No.
3 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on February 16, 1996).
10.57 License, Research and Product Development Agreement by and between Ultrafem, Inc. and ReProtect, LLC as
of February 8, 1996 (incorporated by reference to Exhibit 10.55 to Amendment No. 4 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on February
22, 1996).
10.58 Equipment Agreement, dated October 17, 1995 between Ultrafem, Inc. and Remmele Engineering (incorporated
by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File
No. 0-27576) filed May 15, 1996).
10.59 Sales Contract, dated January 1, 1996 between Ultrafem, Inc. and Shell Chemical Company (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No.
0-27576) filed May 15, 1996).
10.60 Lease Agreement dated January 28, 1996 between Ultrafem, Inc. and Dennis R. Washington d/b/a Western
Trade Center (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the period
ended March 31, 1996 (File No. 0-27576) filed May 15, 1996).
10.61 Letter Agreement, dated March 14, 1996, between Ultrafem, Inc. and The Elliot Company (incorporated by
reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No.
0-27576) filed May 15, 1996).
10.62 Letter Agreement, dated April 11, 1996, between Ultrafem, Inc. and Meridian Consulting Group
(incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the period ended March
31, 1996 (File No. 0-27576) filed May 15, 1996).
10.63 Employment Agreement, dated April 1, 1996, between Ultrafem, Inc. and Gary Nordmann (incorporated by
reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No.
0-27576) filed May 15, 1996).
10.64 Option Agreement, dated March 8, 1996, between Ultrafem, Inc. and Gary Nordmann (incorporated by
reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No.
0-27576) filed May 15, 1996).
10.65+ Broker Representation Agreement, dated April 29, 1996, between Ultrafem, Inc. and Morgan & Sampson
Pacific.
10.66+ Distribution Service Agreement, dated June 1, 1996, between Ultrafem, Inc. and Morgan & Sampson Pacific.
11+++ Computation of Earnings Per Share.
23.1 Consent of Deloitte & Touche LLP.
23.2+++ Consent of Shereff, Friedman, Hoffman & Goodman, LLP (contained in Exhibit 5).
23.3++ Consent of Arent Fox Kintner Plotkin & Kahn.
24.1+ Power of Attorney.
27+++ Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules.
None.
- ------------------------
+ Filed with Registration Statement on Form S-1 (File No. 333-11995) and
Post-Effective Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 33-97960) filed with the Securities and Exchange Commission on
September 13, 1996.
++ Filed with Amendment No. 1 to Registration Statement on Form S-1 (File No.
333-11995) and Post-Effective Amendment No. 2 to Registration Statement on Form
S-1 (Registration No. 33-97960) filed with the Securities and Exchange
Commission on October 21, 1996.
+++ Filed with Amendment No. 2 to Registration Statement on Form S-1 (File No.
333-11995) and Post-Effective Amendment No. 3 to Registration Statement on Form
S-1 (Registration No. 33-97960) filed with the Securities and Exchange
Commission on November 8, 1996.
II-11
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A under the Securities Act and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
II-12
<PAGE>
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 3 to
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on this 13th day of November, 1996.
ULTRAFEM, INC.
By: /s/ JOHN W. ANDERSEN
-----------------------------------
John W. Andersen
President, Chief Executive
Officer and Chairman of the Board
of Directors
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLES DATE
- ------------------------------------------ -------------------------------------------- -----------------------
/s/ JOHN W. ANDERSEN President, Chief Executive Officer and
- --------------------------------- Chairman of the Board of Directors November 13, 1996
John W. Andersen (Principal Executive Officer)
Senior Vice President, Finance and
/s/ DORI M. REAP Administration, Secretary and Chief
- --------------------------------- Financial Officer (Principal Financial & November 13, 1996
Dori M. Reap Accounting Officer)
*
- --------------------------------- Executive Vice President, Founder and November 13, 1996
Audrey Contente Director
*
- --------------------------------- Director November 13, 1996
Richard Cone
*
- --------------------------------- Director November 13, 1996
Joy Vida Jones
*
- --------------------------------- Director November 13, 1996
Martin Nussbaum
*
- --------------------------------- Director November 13, 1996
Charles D. Peebler, Jr.
*
- --------------------------------- Director November 13, 1996
Barrie Zesiger
*By: /s/ JOHN W. ANDERSEN
---------------------------------
John W. Andersen
ATTORNEY-IN-FACT
</TABLE>
II-14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
1.1+ Form of Underwriting Agreement.
3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement
on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on October 10,
1995).
3.2 By-Laws (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
3.3 Form of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
3.4 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.4 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2
to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on January 16, 1996).
5+++ Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
9.1 Voting Trust Agreement, dated as of August 8, 1994 among Audrey Contente, John Andersen, Barrie
Zesiger and Ultrafem, Inc. (incorporated by reference to Exhibit 9.1 to Registration Statement
on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on October 10,
1995).
9.2 Amendment, dated August 8, 1994 to Voting Trust Agreement, dated as of August 8, 1994 among
Audrey Contente, John Andersen, Barrie Zesiger and Ultrafem, Inc. (incorporated by reference to
Exhibit 9.2 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities
and Exchange Commission on October 10, 1995).
9.3+ Amendment to Voting Trust Agreement, dated as of August 8, 1995 among Audrey Contente, John
Andersen and Barrie Zesiger.
10.1 Form of Ultrafem, Inc. Secured Convertible Promissory Note (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.1 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.2 Form of Ultrafem, Inc. Secured Non-Convertible Promissory Note (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.3 Form of Ultrafem, Inc. Class A Warrant to purchase Common Stock (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.3 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
10.4 Form of Ultrafem, Inc. Class B Warrant to purchase Common Stock (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.4 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.5 Form of Ultrafem, Inc. Registration Rights Agreement relating to Class A Warrant to purchase
Common Stock, Class B Warrant to purchase Common Stock, and Secured Convertible Promissory Note
(incorporated by reference to Exhibit 10.5 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.6 Settlement Agreement and Mutual General Release, dated August 1, 1995, between Ultrafem, Inc.
and C. Austin Burrell (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
10.7 Letter Agreement, dated August 10, 1995 between Meridian Consulting Group and Ultrafem, Inc.
(incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
10.8 Letter Agreement, dated July 12, 1995, between Ultrafem, Inc. and The Elliot Company
(incorporated by reference to Exhibit 10.8 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.9 Agreement of Lease, made as of October 15, 1991, between Broadway Management Co., Inc. and
Ultrafem, Inc. (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on
November 17, 1995).
10.10 Substitution of Space Agreement, dated June 23, 1992 by and between Broadway Management Co.,
Inc., as Agent for 500 Fifth Avenue Associates, and Ultrafem, Inc. (incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed
with the Securities and Exchange Commission on November 17, 1995).
10.11+ Employment Agreement, dated as of July 1, 1996 by and between Ultrafem, Inc. and Audrey
Contente.
10.12+ Name, Likeness, and Voice Release and Agreement, dated as of July 1, 1996 by and between
Ultrafem, Inc. and Audrey Contente.
10.13+ Termination Benefits Agreement, dated as of October 1, 1990 by and between Ultrafem, Inc. and
Audrey Contente.
10.14 Restated Modification Agreement, dated July 29, 1993 by and between Ultrafem, Inc. and Audrey
Contente (incorporated by reference to Exhibit 10.12 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on
November 17, 1995).
10.15 Amendment to Employment Agreement, dated August 1, 1995, between the Company and Audrey Contente
(incorporated by reference to Exhibit 10.13 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
10.16 Employment Agreement, dated July 29, 1994 between Ultrafem, Inc. and John W. Andersen
(incorporated by reference to Exhibit 10.14 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.17 Amendment to Employment Agreement, dated August 1, 1995 between Ultrafem, Inc. and John Andersen
(incorporated by reference to Exhibit 10.15 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.18 Employment Agreement, dated August 1, 1995 between Ultrafem, Inc. and Dori M. Reap (incorporated
by reference to Exhibit 10.16 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.19 Letter Agreement, dated July 13, 1995 between Ultrafem, Inc. and The Sage Group (incorporated by
reference to Exhibit 10.17 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.20 Employment Agreement, dated November 6, 1995 between Ultrafem, Inc. and Tonya G. Hinch
(incorporated by reference to Exhibit 10.18 to Amendment No. 2 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.21 Agreement, dated June, 1995, by and between Audrey Contente, Jeffrey Simon, Frank Cole, Arthur
Appleman and Ultrafem, Inc. (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
10.22 Indemnity Agreement dated as of October 1, 1990 between Ultrafem, Inc. and Audrey Contente
(incorporated by reference to Exhibit 10.20 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.23 Amendment to Indemnity Agreement dated April 23, 1992 between Ultrafem, Inc. and Audrey Contente
(incorporated by reference to Exhibit 10.21 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.24 Amended and Restated Patent Assignment and Security Agreement dated as of July 28, 1995 between
Ultrafem, Inc. and Edward M. Berman, as Agent (incorporated by reference to Exhibit 10.22 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.25 United States Patent No. 5,295,984, issued March 22, 1994 (incorporated by reference to Exhibit
10.23 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with
the Securities and Exchange Commission on November 17, 1995).
10.26 Settlement Agreement, dated as of May 19, 1993 by and between Ultrafem, Inc., Audrey Contente,
Frank Martin, Albert L. Zesiger, and John S. Stafford (incorporated by reference to Exhibit
10.24 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with
the Securities and Exchange Commission on November 17, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
10.27 Form of Ultrafem, Inc. Convertible Debenture issued to the Montana Board of Science and
Technology (incorporated by reference to Exhibit 10.25 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on
November 17, 1995).
10.28 Form of Common Stock purchase Warrant issued to the Montana Board of Science and Technology
(incorporated by reference to Exhibit 10.26 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.29 Memorandum Agreement, dated September 15, 1992, relating to registration rights of Ultrafem,
Inc. Convertible Debenture issued to the Montana Board of Science and Technology (incorporated
by reference to Exhibit 10.27 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.30 Letter Agreement dated June 23, 1995 between Ultrafem, Inc. and Pro-Active International, as
amended (incorporated by reference to Exhibit 10.28 to Amendment No. 1 to Registration Statement
on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November
17, 1995).
10.31 Letter Agreement dated July 24, 1995 between Ultrafem, Inc. and Bozell Worldwide, Inc.
(incorporated by reference to Exhibit 10.29 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.32 Letter Agreement dated October 9, 1995 between Ultrafem, Inc. and Robinson Lerer Sawyer Miller
(incorporated by reference to Exhibit 10.30 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.33 Agreement effective July 17, 1990 between Ultrafem, Inc. and Audrey Contente (incorporated by
reference to Exhibit 10.31 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.34+ Restated Technology Transfer Agreement, dated as of May 17, 1993 by and between Ultrafem, Inc.
and Audrey Contente.
10.35 Amendment to Restated Technology Transfer Agreement dated August 1, 1995 between Ultrafem, Inc.
and Audrey Contente (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
10.36 1990 Stock Option Plan of Ultrafem, Inc. (incorporated by reference to Exhibit 10.33 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.37 1995 Ultrafem, Inc. Stock Option Plan for Non-Employee Directors (incorporated by reference to
Exhibit 10.34 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed
with the Securities and Exchange Commission on November 17, 1995).
10.38 Form of Option Certificate and Agreement for 1990 Stock Option Plan of Ultrafem, Inc.
(incorporated by reference to Exhibit 10.35 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
10.39 Form of Option Certificate and Agreement for 1995 Ultrafem, Inc. Stock Option Plan for
Non-Employee Directors (incorporated by reference to Exhibit 10.36 to Amendment No. 2 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on January 16, 1996).
10.40 Form of Ultrafem, Inc. Option Certificate and agreement to C. Austin Burrell (incorporated by
reference to Exhibit 10.37 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.41 Option Certificate and Agreement, dated November 6, 1995, Re: 100,000 shares to Tonya G. Hinch
(incorporated by reference to Exhibit 10.38 to Amendment No. 2 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.42 Option Certificate and Agreement, dated August 1, 1995, Re: 100,000 shares to Dori M. Reap
(incorporated by reference to Exhibit 10.39 to Amendment No. 2 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.43 Amendment No. 1 to Option Certificate and Agreement, dated August 1, 1995, Re: 100,000 shares to
Dori M. Reap (incorporated by reference to Exhibit 10.40 to Amendment No. 2 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on
January 16, 1996).
10.44 Option Certificate and Agreement, dated August 1, 1995, Re: 50,000 shares to Dori M. Reap
(incorporated by reference to Exhibit 10.41 to Amendment No. 2 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.45 Amendment No. 1 to Option Certificate and Agreement, dated August 1, 1995, Re: 50,000 shares to
Dori M. Reap (incorporated by reference to Exhibit 10.42 to Amendment No. 2 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on
January 16, 1996).
10.46 Amended and Restated Option Certificate and Agreement, dated August 1, 1995, Re: 105,970 shares
(or 2% of shares) to John W. Andersen (incorporated by reference to Exhibit 10.43 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.47 Amended and Restated Option Certificate and Agreement, dated August 1, 1995, Re: 423,879 shares
(or 8% of shares) to John W. Andersen (incorporated by reference to Exhibit 10.44 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.48 Option Agreement and Certificate, dated June 1, 1992, to Audrey Contente (incorporated by
reference to Exhibit 10.45 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.49 Option Agreement and Certificate, dated August 9, 1991, to Wendell Guthrie (incorporated by
reference to Exhibit 10.46 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
10.50 Form of Warrant to purchase Common Stock (1993 Private Placement) (incorporated by reference to
Exhibit 10.48 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed
with the Securities and Exchange Commission on November 17, 1995).
10.51 Form of Warrant to purchase Common Stock (1995 Preferred Stock Private Placement) (incorporated
by reference to Exhibit 10.49 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.52 Form of Warrant to purchase Common Stock (1994 Private Placement) (incorporated by reference to
Exhibit 10.50 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed
with the Securities and Exchange Commission on November 17, 1995).
10.53 Form of Convertible Debentures (1994 Private Placement) (incorporated by reference to Exhibit
10.51 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with
the Securities and Exchange Commission on November 17, 1995).
10.54 Form of Representative's Warrant (incorporated by reference to Exhibit 10.52 to Amendment No. 2
to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on January 16, 1996).
10.55 Form of Non-Convertible Promissory Note issued January 1996 (incorporated by reference to
Exhibit 10.53 to Amendment No. 3 to Registration Statement on Form S-1 (File No. 33-97960) filed
with the Securities and Exchange Commission on February 16, 1996).
10.56 Form of Class C Warrant issued January 1996 (incorporated by reference to Exhibit 10.54 to
Amendment No. 3 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on February 16, 1996).
10.57 License, Research and Product Development Agreement by and between Ultrafem, Inc. and ReProtect,
LLC as of February 8, 1996 (incorporated by reference to Exhibit 10.55 to Amendment No. 4 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on February 22, 1996).
10.58 Equipment Agreement, dated October 17, 1995 between Ultrafem, Inc. and Remmele Engineering
(incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the period ended
March 31, 1996 (File No. 0-27576) filed May 15, 1996).
10.59 Sales Contract, dated January 1, 1996 between Ultrafem, Inc. and Shell Chemical Company
(incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the period ended
March 31, 1996 (File No. 0-27576) filed May 15, 1996).
10.60 Lease Agreement dated January 28, 1996 between Ultrafem, Inc. and Dennis R. Washington d/b/a
Western Trade Center (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q
for the period ended March 31, 1996 (File No. 0-27576) filed May 15, 1996).
10.61 Letter Agreement, dated March 14, 1996, between Ultrafem, Inc. and The Elliot Company
(incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the period ended
March 31, 1996 (File No. 0-27576) filed May 15, 1996).
10.62 Letter Agreement, dated April 11, 1996, between Ultrafem, Inc. and Meridian Consulting Group
(incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the period ended
March 31, 1996 (File No. 0-27576) filed May 15, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
10.63 Employment Agreement, dated April 1, 1996, between Ultrafem, Inc. and Gary Nordmann
(incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the period ended
March 31, 1996 (File No. 0-27576) filed May 15, 1996).
10.64 Option Agreement, dated March 8, 1996, between Ultrafem, Inc. and Gary Nordmann (incorporated by
reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the period ended March 31, 1996
(File No. 0-27576) filed May 15, 1996).
10.65+ Broker Representation Agreement, dated April 29, 1996, between Ultrafem, Inc. and Morgan &
Sampson Pacific.
10.66+ Distribution Service Agreement, dated June 1, 1996, between Ultrafem, Inc. and Morgan & Sampson
Pacific.
11+++ Computation of Earnings Per Share.
23.1 Consent of Deloitte & Touche LLP.
23.2+++ Consent of Shereff, Friedman, Hoffman & Goodman, LLP (contained in Exhibit 5).
23.3++ Consent of Arent Fox Kintner Plotkin & Kahn.
24.1+ Power of Attorney.
27+++ Financial Data Schedule.
</TABLE>
- ------------------------
+ Filed with Registration Statement on Form S-1 (File No. 333-11995) and
Post-Effective Amendment No. 1 to Registration Statement on Form S-1
(Registration No. 33-97960) filed with the Securities and Exchange Commission on
September 13, 1996.
++ Filed with Amendment No. 1 to Registration Statement on Form S-1 (File No.
333-11995) and Post-Effective Amendment No. 2 to Registration Statement on Form
S-1 (Registration No. 33-97960) filed with the Securities and Exchange
Commission on October 21, 1996.
+++ Filed with Amendment No. 2 to Registration Statement on Form S-1 (File No.
333-11995) and Post-Effective Amendment No. 3 to Registration Statement on Form
S-1 (Registration No. 33-97960) filed with the Securities and Exchange
Commission on November 8, 1996.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 3 to Registration Statement of
Ultrafem, Inc. on Form S-1 (File No. 333-11995) of our report dated August 12,
1996 (August 27, 1996 as to Note 7), appearing in the Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
November 13, 1996
