<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 OCTOBER 11, 1996
FILED PURSUANT TO RULE 424(A)
REGISTRATION NO. 333-11995
PROSPECTUS
3,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
ALL OF THE 3,000,000 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 OCTOBER 10, 1996, THE LAST SALE
PRICE OF THE COMMON STOCK AS REPORTED BY THE NASDAQ NATIONAL MARKET WAS $23 1/4
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 several 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
450,000 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
INTRODUCING INSTEAD A MULTI-MEDIA MARKETING CAMPAIGN AS EXCITING AS THE
PRODUCT ITSELF.
[PHOTO OF MAGAZINES]
PRINT ADVERTISEMENTS -- AN EXCITING PRINT CAMPAIGN IS NOW APPEARING IN MAJOR
WOMEN'S MAGAZINES SHOWING AUDREY CONTENTE, THE INVENTOR OF INSTEAD, ENJOYING HER
ACTIVE LIFESTYLE.
[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 AUGUST 31, 1996. EACH PROSPECTIVE INVESTOR IS URGED TO READ
THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
Ultrafem-Registered Trademark-, Inc. ("Ultrafem" or the "Company"), a
development stage 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) commence 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 plans to initiate the launch of INSTEAD-TM- 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, by the Fall of 1996. 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. The Company anticipates that INSTEAD-TM- will be available
for sale by retailers in the Pacific Northwest in the Fall of 1996, including
the major markets of San Francisco, Seattle, and Portland. In order to achieve
this timetable, the Company began shipment of INSTEAD-TM- in August 1996.
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 will be 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 the Fall of 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>
Shares of Common Stock offered by the
Company..................................... 3,000,000 shares
Shares of Common Stock to be outstanding
after the Offering.......................... 8,889,501 shares (1)
Use of proceeds.............................. For expenses relating to 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 5,047,753 shares of Common Stock issuable upon the conversion or
exercise of certain currently outstanding securities of the Company, of
which 3,227,853 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 below should be read in conjunction with the 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>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS DATA:
Total Revenue..................... -- -- -- -- --
General and Administrative
Expense.......................... $ 2,141,249 $ 1,139,339 $ 1,387,784 $ 1,568,442 $ 7,501,538
Operating Income (Loss)........... (3,827,114) (2,020,786) (1,967,208) (1,916,450) (9,643,978)
Net Income (Loss)................. (3,831,536) (2,091,903) (2,303,940) (2,381,065) (9,819,980)
Net Income (Loss) Per Share:
Primary........................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74)
Fully Diluted..................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74)
Weighted Average Common Shares and
Equivalents(1)................... 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(2)
-------------- --------------
BALANCE SHEET DATA:
Working Capital(3)............................................................... $ 17,962,533 $ 80,962,533
Total Assets..................................................................... 29,407,936 92,407,936
Long-term Debt................................................................... 700,000 700,000
Stockholders' Equity............................................................. 21,283,944 84,283,944
</TABLE>
- ------------------------
(1) The weighted average number of common shares outstanding during the first
half of fiscal year 1996, 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 3,000,000 shares of Common Stock by the
Company at an assumed offering price of $23.00 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 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.
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES
From the Company's inception in March 1990 through the date of this
Prospectus, the Company has not generated any revenue. 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 development stage companies, 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-. It is currently
anticipated that sales of INSTEAD-TM- will commence in the Fall of 1996. 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. In addition, 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." The Company has only limited experience in producing INSTEAD-TM-
and has not yet manufactured INSTEAD-TM- on a cost-efficient basis; in the
future the Company will need to reduce manufacturing costs and related marketing
expenses, as well as expand its ability to produce INSTEAD-TM- in the quantities
necessary to achieve significant commercial sales. There can be no assurance
that reliable manufacturing operations can be achieved at a reasonable cost and
without delays. If the Company encounters production difficulties, 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. There can also be no
assurance that the Company will ever generate revenue or, if revenues are
generated, that the Company will be profitable.
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
9
<PAGE>
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 limited experience in manufacturing quantities of
INSTEAD-TM- for the commercial market. There can be 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 number of units it can produce, reduce per-unit
manufacturing costs 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 experiences manufacturing problems or
delays, there would be a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Development Stage
Company; History of Losses" and "Business -- Manufacturing."
MARKETING RISKS; UNCERTAINTY OF CONSUMER ACCEPTANCE
The Company expects 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 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 and which is expected to be re-published in September
1996) 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
10
<PAGE>
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.
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. The results of these
studies were discussed during a meeting with the FDA on June 19, 1996. At that
meeting, the FDA requested that the Company submit these results of its clinical
testing, which the Company provided on July 17, 1996. The FDA has not responded
to that submission. Since the Company's clinical studies have demonstrated that
the change in the maximum wear time does not affect the safety and effectiveness
of the product, the Company and its regulatory counsel do not believe a new
510(k) notification is necessary under existing regulations. However, if a new
510(k) notification were to be required by the FDA for the labeling change
regarding maximum wear time under the above-described regulation and/or guidance
document, 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 require the
Company to use the original labeling stating a shorter maximum wear time until
the 510(k) notification was cleared.
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-
11
<PAGE>
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 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
12
<PAGE>
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 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.
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 is in the
process of obtaining 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 $13.41 per share in net tangible book value per share as of June 30,
1996 (assuming an offering price of $23.00 per share). See "Dilution" and
"Underwriting."
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
13
<PAGE>
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 development stage companies have experienced wide
fluctuations not necessarily related to the operating performance of such
companies. The Company believes that factors such as legislative, regulatory and
technological developments and quarterly variations in financial results 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. 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 8,889,501 shares of
Common Stock outstanding (9,339,501 shares if the Underwriters' over-allotment
option is exercised in full). In addition, as of August 31, 1996, there has been
reserved 5,047,753 shares of Common Stock for issuance upon the conversion or
exercise of outstanding securities. The 3,000,000 shares of Common Stock to be
sold in the Offering (3,450,000 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 1,073,450 shares of Common Stock which are
outstanding and 3,227,853 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
14
<PAGE>
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 not yet generated revenues 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 3,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$63.0 million (approximately $72.0 million 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 $23.00 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 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 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.
16
<PAGE>
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 October 10th)..................................... 26 1/4 22 1/4
</TABLE>
On October 10, 1996, the last sale price of the Common Stock was $23 1/4 as
reported on the Nasdaq National Market. At August 31, 1996, there were 183
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 June 30, 1996 and as adjusted to give
effect to the sale of the 3,000,000 shares of Common Stock offered hereby, at an
assumed public offering price of $23.00 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>
JUNE 30, 1996
--------------------------
AS
ACTUAL ADJUSTED(1)
----------- -------------
<S> <C> <C>
Current Maturities of Long-term Debt:
Unsecured Convertible Notes................................. $ 2,875,000 $ --
Unsecured Notes to Former Officers.......................... 221,033 221,033(2)
Unsecured Notes to Trade and Other Creditors................ 63,548 3,751(2)
Subordinated Convertible Debentures......................... 282,432 282,432(2)
----------- -------------
Total Current Maturities of Long-term Debt................ 3,442,013 507,216(2)
Long-term Debt:
Convertible Debentures...................................... 700,000 700,000
Stockholders' Equity:
Preferred Stock, $.001 par value -- authorized 5,000,000
shares, $8 cumulative Convertible Series A: issued and
outstanding 1,121.25 shares stated at liquidation
preference of $112,125..................................... 112,125 --
Common Stock, $.001 par value -- authorized 20,000,000
shares: issued and outstanding 5,737,241 and 8,759,666
shares as adjusted (3)..................................... 9,905 12,927
Additional Paid-In-Capital.................................. 42,207,697 105,316,800
Deficit..................................................... (21,045,783) (21,045,783)
----------- -------------
Total Stockholders' Equity................................ 21,283,944 84,283,944
----------- -------------
Total Capitalization...................................... $25,425,957 $ 85,491,160
----------- -------------
----------- -------------
</TABLE>
- ------------------------
(1) Gives effect to the conversion of all 1,121.25 outstanding shares of Series
A Convertible Preferred Stock, par value $.001 per share, of the Company
(the "Series A Preferred Stock") into Common Stock after June 30, 1996.
(2) This debt which becomes due on various dates between September and December
1996 will be repaid with a portion of the proceeds from the IPO.
(3) Does not include (i) 5,169,988 shares of Common Stock issuable upon the
exercise of options, warrants and other securities outstanding as of June
30, 1996 (including 22,425 shares of Common Stock issuable upon the
conversion of the Series A Preferred Stock), (ii) 461,806 shares reserved
for issuance pursuant to options under the Company's stock option plans, and
(iii) 30,000 shares of Common Stock issuable upon the exercise of warrants
issued subsequent to June 30, 1996. See "Prior Financings."
18
<PAGE>
DILUTION
The net tangible book value of the Common Stock at June 30, 1996 was
$20,905,867 or $3.64 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, preferred stock, and
total liabilities) by the number of shares of Common Stock outstanding. Without
taking into account any changes in net tangible book value after June 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 $23.00 per share), the conversion
of the Series A Preferred Stock into 22,425 shares of Common Stock, 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 June 30,
1996 would have been $84,017,992, or $9.59 per share. This represents an
immediate increase in net tangible book value of $5.95 per share to existing
stockholders and an immediate dilution of net tangible book value of $13.41 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..................................... $ 23.00
Net tangible book value per share as of June 30, 1996..................... $ 3.64
Increase in net tangible book value per share attributable to the
Offering................................................................. 5.95
---------
Pro forma net tangible book value per share after the Offering.............. 9.59
---------
Dilution per share to new investors......................................... $ 13.41
---------
---------
</TABLE>
The following table sets forth as of June 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 $23.00 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............. 5,737,241 65.50% $ 46,731,990 40.34% $ 8.15
New Investors..................... 3,000,000 34.24% 69,000,000 59.56% $ 23.00
Conversion of Series A Preferred
Stock............................ 22,425 .26% 112,125 .10% $ 5.00
--------- --------- ------------- ---------
Total......................... 8,759,666 100.00% $ 115,844,115 100.00%
--------- --------- ------------- ---------
--------- --------- ------------- ---------
</TABLE>
The foregoing table assumes no exercise or conversion of currently
outstanding securities which are convertible into or exercisable for Common
Stock, other than the Series A Preferred Stock. At June 30, 1996, there were
outstanding securities which are convertible into or exercisable for 5,169,988
shares of Common Stock (including 22,425 shares of Common Stock issuable upon
conversion of the Series A Preferred Stock), at a weighted average
conversion/exercise price of $7.90 per share. Since June 30, 1996, the Company
has issued 13,000 shares of Common Stock upon the conversion of $130,000 of
convertible debt, 116,810 shares of Common Stock upon the exercise of options
and warrants for an aggregate exercise price of $4.95 per share, 22,425 shares
of Common Stock upon conversion of 1,121.25 shares of Series A Preferred Stock,
and warrants to purchase 30,000 shares of Common Stock at an exercise price of
$10.00 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 5 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 below should be read in conjunction with the 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>
YEAR ENDED JUNE 30,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Revenue.............. -- -- -- -- --
General and Administrative
Expense................... $ 2,141,249 $ 1,139,339 $ 1,387,784 $ 1,568,442 $ 7,501,538
Research & Development
Expense................... 1,668,752 830,761 452,552 181,475 1,403,557
Interest Expense........... 4,422 71,117 336,732 464,615 665,381
Interest Income............ -- -- -- -- (489,379)
Depreciation and
Amortization.............. 17,113 50,686 126,872 166,533 738,883
----------- ----------- ----------- ----------- -----------
Net Income (Loss).......... $(3,831,536) $(2,091,903) $(2,303,940) $(2,381,065) $(9,819,980)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net Income (Loss) Per
Share..................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted Average of Common
Shares and Equivalents
(1)....................... 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (2)...... $ (901,394) $(2,386,815) $(2,438,701) $(2,662,142) $17,962,533
Total Assets............. 489,340 670,147 603,424 766,959 29,407,936
Long-term Debt........... 350,000 787,358 2,880,075 4,032,493 700,000
Stockholders'
(Deficiency) Equity..... (960,666) (2,573,795) (4,733,714) (6,011,780) 21,283,944
</TABLE>
- ------------------------
(1) The weighted average number of common shares outstanding during the first
half of fiscal year 1996, 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.
(2) 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 were focused on
the launch of INSTEAD-TM-, currently scheduled to commence 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, 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. Manufacturing space was leased and
remodeling began. The Company placed equipment orders to complete the first
manufacturing line. 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.
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 the Fall of 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>
JUNE 30, 1995 JUNE 30, 1996
COMPARED WITH COMPARED WITH
JUNE 30, 1994 JUNE 30, 1995
--------------- -------------
General and Administrative Expense.............................. 13.0% 378.3%
Research and Development Expense................................ (59.9) 673.4
Interest Expense................................................ 38.0 43.2
Depreciation and Amortization................................... 31.3 343.7
Net Loss........................................................ 3.3 312.4
</TABLE>
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 378.3% to $7,501,538 during the
year ended June 30, 1996 from $1,568,442 for the year ended June 30, 1995. The
increase was primarily due to expenses related to the launch of INSTEAD-TM-,
including market research, development of trade promotion plans and package
design, as well as non-cash charges resulting from the issuance of options to
purchase Common Stock to officers and a director of the Company.
Plans for the lead market geography were developed and the Company has
retained Morgan & Sampson Pacific to gain widespread distribution and
merchandising support of INSTEAD-TM- to retailers in the lead market. Staffing
additions to facilitate product launch and operations included a Vice President
of Operations at the Montana facility, Senior Marketing Product Manager and a
Corporate Controller.
General and administrative expense increased 13.0% to $1,568,442 in 1995
from $1,387,784 in 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 newly hired officers of the Company, who are
21
<PAGE>
principally engaged in the development of the Company's business plan and equity
financing activities, marketing expenses related to INSTEAD-TM-, 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 during the
year ended June 30, 1996 from $181,475 for the year ended June 30, 1995. The
increase was primarily attributable to research expenses paid to ReProtect under
the terms of the Company's research and development agreement, research and
testing expenses related to INSTEAD-TM-, increased travel expenses and raw
material costs in connection with production startup expenses, as well as legal
expenses.
Production startup 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 Fall 1996 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 the Fall of 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 in 1995 from
$452,552 in 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 in 1995 and $126,872 in 1994. The
31.3% increase in 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 in 1995 and $336,732 in 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.
22
<PAGE>
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 has funded these needs through private placements of its equity and debt
securities. The Company has received net proceeds in excess of approximately
$12,300,000 through private sales of these securities from inception through
June 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. As of June 30, 1996, the Company's cash position
increased by $24.4 million, principally reflecting the net proceeds from the IPO
and $6.1 million in net proceeds from the sale of convertible and nonconvertible
promissory notes and exercise of stock options and warrants. This increase was
offset by repayment of debt and payment of debt issuance costs of $5.6 million,
$7.6 million used in operating activities and $2.6 million used for construction
in progress 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 June 30, 1996 the Company had capital commitments in the amount of
approximately $5,374,005, of which $4,377,957 was unpaid, for the purchase of
manufacturing equipment and improvements to the manufacturing facility to
support startup production and leasehold improvements to the new New York office
space. 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.
The Company's stockholders' equity increased by $27.3 million from June 30,
1995 to June 30, 1996 reflecting the net proceeds from the IPO of $34.1 million,
proceeds from the exercise of stock options and warrants of $1.9 million,
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 $9.8
million.
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. See "Risk Factors -- Need for Additional
Financing for Unforeseen Risks."
23
<PAGE>
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." 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 standard is effective for fiscal
years beginning after December 15, 1995. The Company has not yet determined if
it will adopt the accounting provisions of SFAS No. 123 or only the disclosure
provision. The Company has not determined the effect, if any, that adoption of
SFAS No. 123 will have on its results of operations.
24
<PAGE>
BUSINESS
GENERAL
Ultrafem, Inc., a development stage company, 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 plans to initiate the launch of INSTEAD-TM- 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, by the Fall of 1996. 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
25
<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 the Fall of 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) commence 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. Management expects
to commence initial regional distribution of INSTEAD-TM- in the United States by
the Fall of 1996; this initial introduction will begin in the Pacific Northwest,
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
26
<PAGE>
Phase I clinical trials, which are currently scheduled to begin in the Fall of
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 will market INSTEAD-TM- as an innovative alternative to existing
feminine protection products, including tampons and sanitary napkins. The
marketing campaign 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 intends to implement 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 will also be
utilized.
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. 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. Management believes that Morgan & Sampson Pacific is capable of being
the broker representing Ultrafem in as much as 25% of the United States market.
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."
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.
27
<PAGE>
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-.
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
28
<PAGE>
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 startup 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" and "-- Development Stage Company; History of Losses."
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 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.
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
29
<PAGE>
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 the
Fall of 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. 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.
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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 a Senior Vice President and
General Manager of Medical Products, to coordinate and advance medical product
development. The Company is conducting a search for such executive and has
identified several candidates. The Company is currently discussing a potential
employment agreement with one such candidate.
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). 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."
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<PAGE>
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.
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.
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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. 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 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 September 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.
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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 Good Manufacturing Practice 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 and which is
expected to be re-published in September 1996) 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. 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. The results of these studies were discussed
during a meeting with the FDA on June 19, 1996. At that meeting, the FDA
requested that the Company submit these results of its clinical testing, which
the Company provided on July 17, 1996. The FDA has not responded to that
submission. The Company and its regulatory counsel do not believe a new 510(k)
notification is necessary under existing regulations. See "Risk Factors --
Necessity of Regulatory Clearances to Market."
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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 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
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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 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
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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. Management believes the production
of thermoplastic elastomers to the tolerances required for manufacturing
INSTEAD-TM- to be a key technology developed by the Company. Management has
identified several sources of supply of raw materials.
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 $31,500 for the first two years, which increases to a maximum of
approximately $36,000 per month by the end of the term. 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 August 31, 1996, the Company had 42 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..................................... 59 President; Chief Executive Officer; Director and
Chairman of the Board of Directors
Audrey Contente...................................... 53 Executive Vice President and Founder; Director
Dori M. Reap......................................... 44 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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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.
40
<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
<PAGE>
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
42
<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."
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. 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 vesting in equal installments upon the Company's
attainment of each of the following goals: (w) raising development
44
<PAGE>
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. 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. 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), exercisable upon the occurrence of certain events. 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
45
<PAGE>
conditions is achieved. Ms. Hinch received an option to purchase 100,000 shares
of the Common Stock at an exercise price of $8.00 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 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 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 August 31, 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 August 31, 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)................................ 591,250 9.9% 591,250 6.6%
Barrie Zesiger (3)(5).................................... 888,474 14.1% 888,474 9.6%
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 3.8%
Albert L. Zesiger (10)................................... 888,474 14.1% 888,474 9.6%
Mellon Bank Corporation (11)............................. 840,000 14.3% 840,000 9.5%
Directors and executive officers as a group
(consists of 10 persons) (5)............................ 1,974,316 29.7% 1,974,316 20.5%
</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 August 31, 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. 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
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owned by Mr. Zesiger; Ms. Zesiger disclaims beneficial ownership of such
shares. See also footnote 10. Includes 16,238 shares which are issuable upon
the exercise of an outstanding option and warrant which are exercisable
within 60 days of August 31, 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 August 31, 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 August 31 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
August 31, 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 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 August 31, 1996. Information as to Mr. Zesiger is as of
October 7, 1996.
(11) 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.
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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 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). 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 1993, the Company and Ms. Contente and a former officer and director
settled a derivative action brought by certain stockholders. The settlement
agreement, dated May 19, 1993 ("Settlement Agreement"), imposed certain
limitations on the composition and size of the Board of Directors until the 1995
Annual Meeting of Stockholders. 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.
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 Mr. Broms),
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.
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
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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 has 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 will pay hourly fees and out-of-pocket
expenses. 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. 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 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.
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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 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.
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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 August 31, 1996, there were 5,889,501 shares of Common Stock
outstanding held of record by 183 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 August 31, 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 August 31,
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.
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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.
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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.
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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.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 8,889,501 shares of
Common Stock outstanding (9,339,501 shares if the Underwriters' over-allotment
option is exercised in full). In addition, as of August 31, 1996, there has been
reserved 5,047,753 shares of Common Stock for issuance upon the conversion or
exercise of outstanding securities. The 3,000,000 shares of Common Stock to be
sold in the Offering (3,450,000 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 1,073,450 shares of Common Stock which are
outstanding and 3,227,853 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 (88,895 shares based on the number of shares
to be outstanding immediately after the Offering or 121,174 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 Securities and
Exchange Commission (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 August 31, 1996 the Company had outstanding securities
which are exercisable for or convertible into an aggregate of 5,047,753 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.
56
<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
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.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell an aggregate of 3,000,000 shares of Common Stock
to the Underwriters named below (the "Underwriters"), for whom Jefferies &
Company, Inc. and Hampshire Securities Corporation are acting as the
representatives (the "Representatives"), 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>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Jefferies & Company, Inc...................................................
Hampshire Securities Corporation...........................................
-----------------
Total.................................................................. 3,000,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Common Stock is subject to certain conditions. The
Underwriters are committed to purchase all of the shares of the Common Stock
(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 Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 450,000 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
58
<PAGE>
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 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. 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.
59
<PAGE>
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 and reports, proxy
statements and other information concerning the Company may be inspected at the
offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006.
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).
60
<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. (A
Development Stage Company) (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 and for the
period March 22, 1990 (Date of Formation) through 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 and for the period March 22, 1990 (Date of
Formation) through 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 12)
F-2
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
<S> <C> <C>
1995 1996
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 73,390 $ 24,510,071
Inventory.................................................................... -- 266,951
Prepaid expenses and other current assets.................................... 10,714 609,503
--------------- ---------------
Total Current Assets..................................................... 84,104 25,386,525
Property and equipment -- net.................................................. 302,719 2,875,153
Other assets -- net............................................................ 380,136 1,146,258
--------------- ---------------
Total Assets............................................................. $ 766,959 $ 29,407,936
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Short-term debt.............................................................. $ 530,549 $ --
Current portion -- long-term debt............................................ 293,389 3,442,013
Accounts payable............................................................. 327,881 893,548
Accrued interest............................................................. 638,315 724,932
Accrued salaries............................................................. 391,534 1,426,093
Other accrued liabilities.................................................... 564,578 937,406
--------------- ---------------
Total Current Liabilities................................................ 2,746,246 7,423,992
Long-term debt................................................................. 4,032,493 700,000
--------------- ---------------
Total Liabilities........................................................ 6,778,739 8,123,992
--------------- ---------------
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............ 653,250 112,125
Common Stock, $.001 par value -- authorized 20,000,000 shares; outstanding
1,389,412, and 5,737,241 shares, respectively............................... 5,558 9,905
Additional paid-in capital................................................... 4,555,215 42,207,697
Deficit accumulated during development stage................................. (11,225,803) (21,045,783)
--------------- ---------------
Total Stockholders' (Deficiency) Equity.................................. (6,011,780) 21,283,944
--------------- ---------------
Total Liabilities and Stockholders' (Deficiency) Equity.................. $ 766,959 $ 29,407,936
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD MARCH 22,
YEAR ENDED JUNE 30, 1990 (DATE OF
------------------------------------------- FORMATION) THROUGH
1994 1995 1996 JUNE 30, 1996
------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C>
General and administrative expense............ $ 1,387,784 $ 1,568,442 $ 7,501,538 $ 14,187,693
Research and development...................... 452,552 181,475 1,403,557 4,703,885
Interest expense.............................. 336,732 464,615 665,381 1,542,267
Interest income............................... -- -- (489,379) (489,379)
Depreciation and amortization................. 126,872 166,533 738,883 1,101,317
------------- ------------- ------------- --------------------
Net loss...................................... $ 2,303,940 $ 2,381,065 $ 9,819,980 $ 21,045,783
------------- ------------- ------------- --------------------
------------- ------------- ------------- --------------------
Net loss per share............................ $ 0.87 $ 0.87 $ 2.74 --
------------- ------------- ------------- --------------------
------------- ------------- ------------- --------------------
Weighted average number of common shares and
equivalents outstanding 2,658,214 2,698,152 3,529,494 --
------------- ------------- ------------- --------------------
------------- ------------- ------------- --------------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
DEFICIT
PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DURING THE
CONVERTIBLE ----------------------- PAID-IN DEVELOPMENT
SERIES A SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ------------ --------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Original Capitalization:
Initial issuance of stock ($0.228 to
$1.776 per share)...................... 98,750 $ 395 $ 39,605 $ -- $ 40,000
Issuance of stock for technology (valued
at $0.00).............................. 526,250 2,105 (2,105) -- --
Sales of stock (from $3.00 to $4.00 per
share)................................. 142,500 570 559,430 -- 560,000
Net loss from date of formation (March
22, 1990) to June 30, 1991............. -- -- -- (617,359) (617,359)
----------- ------------ --------- ------------- -------------- -------------
BALANCE, JUNE 30, 1991.................... 767,500 3,070 596,930 (617,359) (17,359)
Stock warrants exercised ($.004 per
share)................................. 18,750 75 -- -- 75
Sales of stock (from $3.00 to $8.00 per
share) net of costs of $416,346........ 462,562 1,850 2,882,304 -- 2,884,154
Issuances of stock for consulting
services (valued at $4.00 per share)... 500 2 3,998 -- 4,000
Net loss................................ -- -- -- (3,831,536) (3,831,536)
----------- ------------ --------- ------------- -------------- -------------
BALANCE, JUNE 30, 1992.................... 1,249,312 4,997 3,483,232 (4,448,895) (960,666)
Sales of stock ($8.00 per share) net of
costs of $29,226....................... 56,000 224 418,550 -- 418,774
Issuance of stock for consulting
services (valued at $8.00 per share)... 7,500 30 59,970 -- 60,000
Net loss................................ -- -- -- (2,091,903) (2,091,903)
----------- ------------ --------- ------------- -------------- -------------
BALANCE, JUNE 30, 1993.................... 1,312,812 5,251 3,961,752 (6,540,798) (2,573,795)
Issuance of stock for consulting
services (valued at $8.00 per share)... 1,500 6 11,994 -- 12,000
Issuance of options and warrants (valued
at $.23529 per option and warrant)..... -- -- 132,021 -- 132,021
Net loss................................ -- -- -- (2,303,940) (2,303,940)
----------- ------------ --------- ------------- -------------- -------------
BALANCE, JUNE 30, 1994.................... 1,314,312 5,257 4,105,767 (8,844,738) (4,733,714)
Sales of stock ($8.00 per share) net of
costs of $74,720....................... 28,125 113 150,167 -- 150,280
Issuance of stock warrants ($.23529 per
warrant)............................... -- -- 28,000 -- 28,000
Issuance of stock for consulting and
other services (valued at $8.00 to
$15.66 per share)...................... 30,100 120 221,660 -- 221,780
Conversion of convertible debt.......... 16,875 68 134,932 -- 135,000
Sales of Series A Preferred Stock ($100
per share) net of costs of $100,505.... $ 653,250 -- -- (100,505) -- 552,745
Issuance of options and warrants (valued
at $.23529 per option and warrant)..... -- -- -- 15,194 -- 15,194
Net loss................................ -- -- -- -- (2,381,065) (2,381,065)
----------- ------------ --------- ------------- -------------- -------------
BALANCE, JUNE 30, 1995.................... 653,250 1,389,412 5,558 4,555,215 (11,225,803) (6,011,780)
Sales of stock ($10.00 per share) net of
costs of $5,014,389.................... -- 3,910,000 3,910 34,081,701 -- 34,085,611
Exercise of stock options and
warrants............................... -- 298,104 298 1,869,224 -- 1,869,522
Sale of warrants........................ -- -- -- 527 -- 527
Issuance of options and warrants........ -- -- -- 945,044 -- 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 to
$10 per share)......................... 31,500 31 214,969 215,000
Net loss................................ -- -- -- -- (9,819,980) (9,819,980)
----------- ------------ --------- ------------- -------------- -------------
BALANCE, JUNE 30, 1996.................... $ 112,125 5,737,241 $ 9,905 $ 42,207,697 $ (21,045,783) $ 21,283,944
----------- ------------ --------- ------------- -------------- -------------
----------- ------------ --------- ------------- -------------- -------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD MARCH 22,
1990
YEAR ENDED JUNE 30, (DATE OF FORMATION)
------------------------------------------ THROUGH
1994 1995 1996 JUNE 30, 1996
------------ ------------ -------------- --------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (2,303,940) $ (2,381,065) $ (9,819,980) $ (21,045,783)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................... 61,542 62,996 79,184 272,751
Amortization principally of debt issuance costs
and patent costs.............................. 65,320 103,535 659,699 828,554
Amortization of debt discount.................. 43,578 43,480 -- 87,058
Loss on disposal of equipment.................. -- -- -- 5,598
Non-cash officers compensation................. -- -- 1,411,871 1,411,871
Non-employee stock based compensation.......... 12,000 221,780 385,044 682,824
Other non-cash items........................... 44,964 15,194 -- 60,158
Changes in operating assets and liabilities.... 311,993 1,103,808 (291,271) 3,176,577
------------ ------------ -------------- --------------------
Net Cash Used in Operating Activities........ (1,764,543) (830,272) (7,575,453) (14,520,392)
------------ ------------ -------------- --------------------
Cash flows from investing activities:
Purchase of and deposits on manufacturing equipment
and leasehold improvements........................ (23,667) (3,028) (2,651,618) (3,155,602)
Proceeds from sale of equipment.................... -- -- -- 2,100
------------ ------------ -------------- --------------------
Net Cash Used in Investing Activities........ (23,667) (3,028) (2,651,618) (3,153,502)
------------ ------------ -------------- --------------------
Cash flows from financing activities:
Proceeds from secured notes........................ 1,850,000 -- -- 1,850,000
Proceeds from issuance of subordinated convertible
debentures........................................ -- 225,000 -- 225,000
Proceeds from sale of convertible debentures....... -- -- 2,125,000 2,825,000
Proceeds from notes payable........................ -- 135,000 2,227,870 2,598,880
Proceeds from sale of preferred stock (net of
related expenses)................................. -- 552,745 -- 552,745
Proceeds from sale of common stock (net of related
expenses)......................................... -- 150,280 34,085,611 38,138,894
Proceeds from sale of options and warrants......... -- 28,000 527 28,527
Proceeds from exercise of stock options and
warrants.......................................... -- -- 1,794,054 1,794,054
Repayment of borrowings............................ (30,000) (84,800) (4,852,287) (4,967,087)
Debt Issue Costs................................... (31,500) (110,025) (717,023) (862,048)
------------ ------------ -------------- --------------------
Net Cash Provided by Financing Activities.... 1,788,500 896,200 34,663,752 42,183,965
------------ ------------ -------------- --------------------
Net Increase in Cash............................... 290 62,900 24,436,681 24,510,071
------------ ------------ -------------- --------------------
Cash and cash equivalents, beginning of period..... 10,200 10,490 73,390 --
------------ ------------ -------------- --------------------
Cash and cash equivalents, end of period........... $ 10,490 $ 73,390 $ 24,510,071 $ 24,510,071
------------ ------------ -------------- --------------------
------------ ------------ -------------- --------------------
</TABLE>
(Continued on next page)
See notes to financial statements.
F-6
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
PERIOD MARCH 22,
1990
YEAR ENDED JUNE 30, (DATE OF FORMATION)
------------------------------------------ THROUGH
1994 1995 1996 JUNE 30, 1996
------------ ------------ -------------- --------------------
<S> <C> <C> <C> <C>
Changes in operating assets and liabilities consist
of:
(Increase) decrease in prepaid expenses.. $ 51,696 $ (2,841) $ (523,322) $ (542,011)
Increase in inventory.................... -- -- (266,951) (266,951)
Increase in other assets................. (56,379) (151,272) (233,798) (629,790)
Increase in accounts payable............. 97,388 937,594 650,667 3,114,111
Increase in accrued liabilities.......... 219,288 320,327 82,133 1,501,218
------------ ------------ ------------- ------------------
$ 311,993 $ 1,103,808 $ (291,271) $ 3,176,577
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Supplementary Information:
Cash paid during the year for:
Interest............................... $ 178,170 $ 955 $ 578,764 $ 757,889
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Taxes.................................. $ 1,348 $ 1,271 $ 4,094 $ 9,383
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Non-cash financing activities:
Conversion of accounts payable and
accrued liabilities to long-term debt... $ 373,555 $ 1,586,666 $ -- $ 1,960,221
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Conversion of notes payable to common
stock................................... $ -- $ 135,000 $ -- $ 135,000
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Issuance of warrants in connection with
debt offering........................... $ 87,057 $ -- $ -- $ 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 $ 215,000
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Conversion of accounts payable to
warrants................................ $ -- $ -- $ 85,000 $ 85,000
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Issuance of below market value options
and warrants in connection with
professional services, licensing and
consulting agreements................... $ -- $ -- $ 860,044 $ 860,044
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Conversion of preferred stock to common
stock................................... $ -- $ -- $ 541,125 $ 541,125
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
Amounts receivable from the issuance of
common stock............................ $ -- $ -- $ 75,467 $ 75,467
------------ ------------ ------------- ------------------
------------ ------------ ------------- ------------------
</TABLE>
See notes to financial statements.
F-7
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
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 will be engaged in the
manufacturing and sale of its proprietary feminine protection product. At June
30, 1996, principal operations had commenced, however, no revenue has been
derived therefrom; accordingly, the Company is considered a development stage
enterprise. 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 and consists principally of raw materials and work in
process.
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, ten years, using the straight-line method.
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.
F-8
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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." 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 standard is effective for fiscal years beginning after December 15,
1995. The Company has not yet determined if it will adopt the accounting
provisions of SFAS No. 123 or only the disclosure provision. The Company has not
determined the effect, if any, that adoption of SFAS No. 123 will have on its
results of operations. Stock-based compensation which has been issued to
non-employees has been reflected at fair value.
LOSS PER COMMON AND COMMON EQUIVALENT SHARE -- Loss per common and common
equivalent share for the years ended June 30, 1996, 1995 and 1994 was computed
using the weighted average number of common shares outstanding during each year.
The weighted average number of common shares outstanding during the first half
of fiscal year 1996, 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.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 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.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
2. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
determined by reference to the quoted market price of the Company's Common Stock
at June 30, 1996, multiplied by the number of common shares the debt is
convertible into, and the related carrying amounts at June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
------------- --------------
<S> <C> <C>
Convertible Debt............................................... $ 3,857,432 $ 14,679,049
------------- --------------
------------- --------------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
Machinery and equipment........................... $ 392,049 $ 1,480,205
Office furniture and equipment.................... 52,082 105,096
Laboratory equipment.............................. 49,766 49,766
Leasehold improvements............................ 762 439,172
Computer equipment................................ -- 267,970
Construction in progress.......................... -- 804,068
---------- -----------
494,659 3,146,277
Less accumulated depreciation and amortization.... (191,940) (271,124)
---------- -----------
$ 302,719 $ 2,875,153
---------- -----------
---------- -----------
</TABLE>
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
Patent and trademark costs........................ $ 164,632 $ 222,493
Debt issuance costs............................... 232,817 971,490
Deferred debt and warrant offering costs.......... 137,273 --
Deferred second offering costs.................... -- 70,000
Consulting agreement.............................. -- 275,000
Licensing agreements.............................. -- 400,000
Security deposits................................. 14,270 35,830
---------- -----------
548,992 1,974,813
Less accumulated amortization..................... (168,856) (828,555)
---------- -----------
$ 380,136 $ 1,146,258
---------- -----------
---------- -----------
</TABLE>
F-10
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
5. DEBT
Short-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Unsecured demand notes to former officers, interest
at 6% per year (b)................................ $ 206,010 $ --
Unsecured note to Johns Hopkins University, due
March, 1995, interest at 7.5% per year (c)........ 324,539 --
---------- ----------
$ 530,549 $ --
---------- ----------
---------- ----------
</TABLE>
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
<S> <C> <C>
1995 1996
------------- -------------
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
Convertible debentures, due December, 1998 to October, 1999,
interest compounded annually at 10.5% per year (f)............. 700,000 700,000
Unsecured notes to former officers, due December, 1995 to
January, 1997, interest at 6% or 10% per year (b).............. 476,680 221,033
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
Subordinated convertible debentures, due on demand or due
August, 1996 to November, 1996, interest at 10% per year (e)... 397,432 282,432
------------- -------------
4,325,882 4,142,013
Less current maturities......................................... (293,389) (3,442,013)
------------- -------------
$ 4,032,493 $ 700,000
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
5. DEBT (CONTINUED)
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"), 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.
F-12
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
5. DEBT (CONTINUED)
(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 June 30, 1996. As of June 30, 1996
and 1995 the Company owed a member of the Board of Directors and a principal
of ReProtect, LLC ("ReProtect") $15,099 and $30,198, 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 and
$89,396 at June 30, 1996 and 1995. 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 $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 subordinated convertible debentures in the
principal amount of $95,000 were converted into 9,500 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.
F-13
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
5. DEBT (CONTINUED)
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.
6. 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 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 and 1994:
<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
Available for future grant June 30, 1996..................... 286,806
Exercisable at June 30, 1996................................. 367,145 $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 per share, resulting in
compensation expenses of approximately $3,348,000 which are amortized over the
remaining lives of their contracts. The expense for the year
F-14
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
ended June 30, 1996 and for the period March 22, 1990 (Date of Formation)
through June 30, 1996 was $1,411,871; accrued salaries as at June 30, 1996
includes $1,411,871. 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
June 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, options to purchase 76,625 shares of
Common Stock have been exercised. 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 2,747,355 shares of the
Common Stock at exercise prices varying from $.004 per share to $16.50 per share
which generally vest over a three to five year period. Through June 30, 1996,
warrants to purchase 231,638 shares of Common Stock with exercise prices ranging
from $.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 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. The expenses referred to above were calculated as the excess of fair
market value over the grant price.
7. INCOME TAXES
The Company has a net operating loss ("NOL") carryforward of approximately
$21,046,000 for financial reporting purposes and approximately $6,200,000 for
tax purposes with research and development credit carryforward of approximately
$116,000 expiring in the years 2006 through 2009. 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.
F-15
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
8. 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 $.005 for each device
sold, as defined, will be paid. To date, there have been no payments made 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 $.005 for each unit of
feminine protection product sold and $.01 for each unit sold for medical
purposes.
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 during the year ended June 30, 1996 and for the period
March 22, 1990 (Date of Formation) through June 30, 1996. In addition, $560,000
and $121,875 owed to such agency are included in accrued expenses and accounts
payable at June 30, 1996 and 1995, 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 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
and $677,000 for the years ended June 30, 1996, 1995 and for the period March
22, 1990 (Date of Formation) through June 30, 1996, respectively. In addition,
$95,000 and $50,000 owed to the law firm is included in accrued expenses at June
30, 1996 and 1995, 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
F-16
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
8. OTHER RELATED PARTY TRANSACTIONS AND AGREEMENTS (CONTINUED)
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 and $356,000 for
each of the years ended June 30, 1996, 1995 and 1994, respectively, and
approximately $1,330,500 for the period March 22, 1990 (Date of Formation)
through June 30, 1996.
9. 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.
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, 5,411.25 shares of Series A Preferred
Stock were converted into 108,225 shares of Common Stock.
10. 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 $325,000 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>
F-17
<PAGE>
ULTRAFEM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1995, 1994, AND PERIOD MARCH 22, 1990
(DATE OF FORMATION) THROUGH JUNE 30, 1996
10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
Rental expense was approximately $123,000, $108,000, $223,000, and $622,000
and for the years ended June 30, 1996, 1995, 1994, and from March 20, 1990 (Date
of Formation) through June 30, 1996, 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.
MANUFACTURING EQUIPMENT AND IMPROVEMENTS
The Company has commitments in the amount of $5,374,005 of which $4,377,957
was unpaid, for the purchase of manufacturing equipment, improvements to the
manufacturing facility to support startup production and leasehold improvements
to the new New York office space. Included in accounts payable and accrued
expenses at June 30, 1996 was $62,307. The total commitments include
approximately $693,800 of estimated costs to be incurred for improvements to the
New York office space.
11. 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.
12. SUBSEQUENT EVENTS
On August 27, 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. This
will result in an additional expense of approximately $340,000 for the first
quarter of fiscal year 1997.
F-18
<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....................................... 25
Management..................................... 38
Principal Stockholders......................... 47
Certain Relationships and Related Party
Transactions.................................. 49
Prior Financings............................... 50
Description of Capital Stock................... 52
Shares Eligible for Future Sale................ 56
Underwriting................................... 58
Legal Matters.................................. 59
Experts........................................ 59
Available Information.......................... 60
Index to Financial Statements.................. F-1
</TABLE>
3,000,000 SHARES
[LOGO]
COMMON STOCK
PROSPECTUS
JEFFERIES & COMPANY, INC.
HAMPSHIRE SECURITIES CORPORATION
, 1996
