<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<S> <C>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
</TABLE>
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-27576
------------------------
ULTRAFEM, INC
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0435037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Fifth Avenue, Suite 3620 10110
New York, New York (Zip Code)
(Address of principal
executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 575-5740
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
(Title of Class)
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No _
------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
------------------------
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of August 31, 1996, is approximately
$132,500,000.
------------------------
The number of shares outstanding of each of the registrant's classes of
common stock, as of August 31, 1996, is as follows:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Common Stock, par value $.001 per share........................................................ 5,889,501
</TABLE>
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DOCUMENTS INCORPORATED BY REFERENCE
- --------------------------------------------------------------------------------
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<PAGE>
ULTRAFEM, INC.
INDEX
PART I
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 14
Item 3. Legal Proceedings............................................................... 14
Item 4. Submission of Matters to Vote of Security Holders............................... 14
</TABLE>
PART II
<TABLE>
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........... 15
Item 6. Selected Financial Data......................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 17
Item 8. Financial Statements and Supplementary Data..................................... 20*
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 20
</TABLE>
PART III
<TABLE>
<S> <C> <C>
Item 10. Directors and Executive Officers of The Registrant.............................. 21
Item 11. Executive Compensation.......................................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 29
Item 13. Certain Relationships and Related Party Transactions............................ 31
</TABLE>
PART IV
<TABLE>
<S> <C> <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 33
</TABLE>
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* Page F-1 follows page 40.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
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
"--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
1
<PAGE>
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. See "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.
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.
- 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
2
<PAGE>
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.
STRATEGY AND PLAN OF OPERATIONS
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. 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.
The Company intends to develop a contraceptive product and to simultaneously
develop additional applications of the combination of the SoftCup Technology
with the BufferGel Technology for treatment of vaginal infections and topical
and systemic therapies. The Company plans to begin clinical trials of a
contraceptive product upon completion of the Phase I clinical trials relating to
use of the BufferGel Technology as a vaginal microbicide for the prevention of
AIDS and other STDs. These Phase I clinical trials, which are currently
scheduled to begin in 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 " -- 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
3
<PAGE>
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.
The Company works with an array of outside marketing and sales professionals
who are supporting the launch of INSTEAD-TM-. The Company's in-house marketing
and sales professionals both supervise and coordinate the Company's use of
outside professionals. The Company currently plans to continue to outsource a
significant portion of its marketing and sales activities, since outside
professionals contribute significant and diverse skills, knowledge of trade, and
marketing and sales experience to the Company, at a cost which the Company could
not currently provide in-house.
FEMININE PROTECTION MARKET
BACKGROUND
The menstrual cycle normally begins between the ages of 12 and 13 and
continues to menopause, which generally occurs between the ages of 46 and 54.
The cycle averages 28 days, with the normal period lasting from five to six
days. The period begins with one to three days of heavy flow and then tapers to
a daily light flow over several more days.
Some women use either tampons or sanitary napkins on an exclusive basis.
Many women use both tampons and sanitary napkins because there is a general
dissatisfaction associated with the use of any single product. Management
believes that INSTEAD-TM- provides women with significant advantages over the
currently available feminine protection products and expects to attract women
that use both sanitary napkins and tampons.
4
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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
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,
5
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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.
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 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
6
<PAGE>
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.
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.
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.
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.
7
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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.
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.
The tests for toxicity and biocompatibility were conducted by the Company
through independent laboratories in compliance with good laboratory practice
("GLP") regulations. Management believes the results of these tests demonstrate
INSTEAD-TM-'s safety. Arent Fox Kintner Plotkin & Kahn, FDA regulatory counsel
to the Company, has advised the Company that such results, which have been
submitted to the FDA, satisfy current FDA safety testing requirements for this
type of product.
The microbiological testing that was conducted demonstrated that INSTEAD-TM-
did not alter the growth of bacteria normally present in the vaginal micro flora
and did not cause the production of Toxic Shock Syndrome Toxin-l. All studies
were conducted by an independent laboratory in accordance with GLP regulations.
All test results described herein were submitted to the FDA in connection with
the 510(k) notification relating to INSTEAD-TM-. See "-- Regulatory Status."
Subsequent to the IPO, the Company completed human clinical test studies to
determine the safety of longer wear times of INSTEAD-TM-. While the Company did
not believe it necessary to conduct clinical testing to increase the maximum
wear time of INSTEAD-TM- since the devices to which it was found substantially
equivalent by the FDA either do not have a maximum wear time or can be worn for
at least 12 to 14 hours, if not longer, the Company conducted a clinical study
to support the safety of the 12 hour wear time. The study was conducted by The
Crucible Group of Atlanta, Georgia, following review by an Institutional Review
Board, and was analyzed by MTC-BRI International, Inc. ("MTC-BRI") of Rockville,
Maryland. The study evaluated the effect of use of INSTEAD-TM- on the vaginal
micro flora in approximately 100 women for 8, 12, and 24 hours. The
investigators concluded that increasing the wear time to 12 or even 24 hours
does not result in increased colonization by the etiologic agent of TSS, does
not lead to increased colonization by pathogens that cause bacterial vaginosis,
does not lead to increased colonization by E. COLI, the most common agent
causing urinary tract infections, and does preserve the normal LACTOBACILLUS-
predominant vaginal flora. In response to the results of such testing the
Company increased the recommended wear time from 8 to 12 hours.
8
<PAGE>
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.
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
9
<PAGE>
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.
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, modifications, which the Company
believes are 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
10
<PAGE>
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, although there can be no assurance that the FDA will not require such a
510(k) notification. The Company's rationale and support for the change are in
records as required by FDA Good Manufacturing Practice ("GMP") regulations and
are available for inspection by the FDA.
In April 1994, the FDA informally proposed a guidance document pursuant to
the above-described regulation (which was revised in August 1995 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. If a new 510(k) notification were
to be required by the FDA for the changes in materials of INSTEAD-TM-, there can
be no assurance that the FDA would clear a new 510(k) notification submitted by
the Company, or that the FDA would not prohibit the Company from selling
INSTEAD-TM- until the 510(k) notification was cleared. The FDA review time for
510(k) notifications could be lengthy. The failure to obtain a new 510(k)
clearance, if required, on a timely basis, if at all, would have a material
adverse effect on the Company's business, financial condition and results of
operations. 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.
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 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. 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.
11
<PAGE>
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. 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.
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.
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 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
12
<PAGE>
distribution. Marketing of the device is not allowed until the FDA clears the
510(k) notification submission.
FDA clearance of a supplemental 510(k) submission is required before any
significant change can be made to an already-marketed device in design,
materials, chemical composition, energy source or manufacturing process that
could affect the product's safety or effectiveness. Where a 510(k) notification
submission is based on a predicate device that has been classified by the FDA in
Class III, the 510(k) submission must also include a certification that the
submitter has conducted a reasonable search for all data and information
relevant to the predicate device and the device for which 510(k) clearance is
sought, as well as a summary of all safety and effectiveness data for both
devices. A device cleared through the 510(k) process that is substantially
equivalent to a predicate Class III device for which the FDA ultimately
establishes a PMA requirement will eventually have to receive approval of its
own PMA to remain on the market, unless it is the fifth or subsequent device of
its kind that has been commercially distributed in the United States, in which
case no PMA is required.
Menstrual cups such as INSTEAD-TM- are classified as Class II medical
devices by the FDA pursuant to applicable FDA regulations. Submission and
clearance of a 510(k) notification, through a finding of "substantial
equivalence" is required under the FDCA to market a Class II medical device in
the United States. The FDA cleared the 510(k) notification for INSTEAD-TM- on
October 5, 1993.
The FDA has promulgated regulations establishing stringent GMP requirements
for all medical devices. The FDA conducts periodic inspections of manufacturing
plants to ensure compliance with these regulations. Failure of compliance can
result in regulatory action of the kinds stated below.
The FDA has statutory authority to institute civil administrative
proceedings or court enforcement actions against medical device manufacturers or
distributors for violations of applicable requirements of the MDA and FDA
implementing regulations. A finding of liability in an administrative proceeding
can result in the imposition of civil monetary penalties. Court enforcement
actions, involving seizure of products, injunction against continued
distribution of products or criminal prosecution, can result, respectively, in
destruction of products, orders against further distribution of products or
criminal fines if the FDA prevails. The FDA can also require the recall of an
already-marketed medical device when the agency believes that the product would
cause serious adverse health consequences or deaths if marketing were allowed to
continue.
Exports of medical devices manufactured in the United States are allowed if
the devices have satisfied applicable pre-market requirements and are not
adulterated or misbranded. Exports of medical devices manufactured in the United
States are allowed without prior FDA export approval if the product has
satisfied applicable pre-market approval or notification requirements and is not
adulterated or misbranded. An unapproved medical device manufactured in the
United States can also be exported to 23 "Tier 1" countries without prior FDA
export approval, if the device has valid marketing authorization in a "Tier 1"
country and the device complies with the laws of the importing country, subject
to notification to the FDA at the time of export. Exports of medical devices not
approved in the United States to non- "Tier 1" countries require prior FDA
approval. In addition, exports of unapproved medical devices manufactured in the
United States for export for clinical 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
13
<PAGE>
believes it will be the sole provider of this type of feminine protection. In
addition, the market for contraceptives and other medical products is presently
dominated by large and well-financed companies which have substantially greater
resources than the Company, and the ability of the Company to compete in this
area is dependent to a large extent on its ability to successfully develop
products, have such products cleared for market, and the ability to manufacture
any such products on a cost-efficient basis.
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.
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.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of fiscal year 1996.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 (through September 25th)..................................... 25 3/4 14
</TABLE>
On September 25, 1996, the last sale price of the Common Stock was $21.75 as
reported on the Nasdaq National Market. At August 31, 1996, there were 183
stockholders of record of the Common Stock.
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.
15
<PAGE>
ITEM 6. 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."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
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 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) Includes current portion of long-term debt.
16
<PAGE>
ITEM 7. 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.
17
<PAGE>
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 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."
18
<PAGE>
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.
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.
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.
On September 13, 1996, the Company filed a registration statement with
respect to an offering of up to 3,000,000 shares of Common Stock (3,450,000
shares if the underwriters' over-allotment option is exercised in full). The
registration statement relating to the 3,000,000 shares of Common Stock has not
yet become effective. These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes effective. This
Annual Report on Form 10-K 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
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<PAGE>
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements are included herein commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
20
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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................................................ 45 Senior Vice President of Finance and Administration; Chief
Financial Officer and Secretary
Tonya G. Hinch.............................................. 33 Senior Vice President, Marketing and Sales
Gary Nordmann............................................... 54 Vice President, Operations
Wendell Guthrie............................................. 46 Director of Manufacturing
Richard A. Cone............................................. 60 Director
Joy Vida Jones.............................................. 46 Director
Martin Nussbaum............................................. 49 Director
Charles D. Peebler, Jr...................................... 60 Director
Barrie Zesiger.............................................. 51 Director
</TABLE>
EXECUTIVE OFFICERS AND KEY PERSONNEL
JOHN W. ANDERSEN has been the Chairman of the Board, Chief Executive Officer
and President of the Company since July 1994. He has an extensive background in
consumer product management, including food, beverage and personal products. He
has been the Chief Executive Officer of five consumer companies over the past 20
years and has substantial experience in Japan and western Europe. From June 1993
until July 1994, Mr. Andersen was self-employed. For the period of 1990 to 1993,
Mr. Andersen was President and Chief Executive Officer of Johanna Dairies, a
subsidiary of John Labatt Limited with annual sales of approximately $1 billion.
From 1983 to 1989, he was President, Chief Executive Officer and Director of
Whitbread North America, Inc., a beverage subsidiary of Whitbread PLC with
annual sales of approximately $450 million. Prior to 1983, Mr. Andersen served
as Executive Vice President of Marriott Corporation, President and Chief
Executive Officer of Sonoma Vineyards, and Vice President of Norton Simon, Inc.
AUDREY CONTENTE is the Executive Vice President and a Director of the
Company, as well as the Founder of the Company and inventor of the SoftCup
Technology. Ms. Contente is responsible for manufacturing and product
development. Ms. Contente has served as a Director of the Company since its
formation in March 1990; as an Executive Vice President since July 1996; as a
Senior Vice President from
21
<PAGE>
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
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
22
<PAGE>
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.
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."
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.
23
<PAGE>
ITEM 11. 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
24
<PAGE>
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 shares authorized to be granted under the
1990 Stock Option Plan to increase to 900,000 which was subsequently approved by
the stockholders of the Company. The 1990 Stock Option Plan is designed to
provide an incentive to the officers and certain other key employees of and
consultants to the Company by making available to them an opportunity to acquire
a proprietary interest in the Company or to increase their proprietary interest
in the Company.
The Compensation Committee of the Board of Directors administers the 1990
Stock Option Plan. The Compensation Committee has the full power and authority,
subject to the provisions of the 1990 Stock Option Plan, to designate
participants, grant options and determine the terms of all options. The
Compensation Committee has the right to make adjustments with respect to options
granted under the 1990 Stock Option Plan in order to prevent dilution of the
rights of any holder. Members of the Compensation Committee are not eligible to
receive options under the 1990 Stock Plan.
The terms of specific options are determined by the Compensation Committee.
Options granted may be non-qualified or incentive stock options. The exercise
price per share for a non-qualified option is subject to the determination of
the Compensation Committee. Incentive stock options may not be granted at less
than 100% of the fair market value at the date of grant. Each option will be
exercisable after the period or periods specified in the option agreement.
The 1990 Stock Option Plan meets the requirements of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which exempts
the acquisition of certain options under the 1990 Stock Option Plan from the
operation of Section 16(b) under the Exchange Act.
Upon the exercise of an option, the option holder shall pay to the Company
the exercise price plus the amount of the required Federal and state withholding
taxes, if any. Options may be exercised and the withholding obligation may be
paid for with cash or shares of Common Stock. Shares surrendered on exercise
will be valued at the market price for the Common Stock, generally based on
average closing prices of the Common Stock over a 30-day period prior to
exercise, less the option exercise price. The period after termination of
employment during which an option may be exercised is as determined by the
Compensation Committee.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
year ended June 30, 1996 to each of the executives named in the Summary
Compensation Table above who received options during such year:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
PERCENTAGE OF OF STOCK PRICE
TOTAL OPTIONS APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE ------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% 10%
- ----------------------------- --------- ------------- ------------- -------------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dori M. Reap................. 50,000 17.5% 6.00 August 1, 2005 $ 188,500 $ 478,000
100,000 35.1% 8.00 August 1, 2005 $ 503,000 $ 1,275,000
Tonya G. Hinch............... 100,000 35.1% 8.00 November 6, 2005 $ 503,000 $ 1,275,000
Gary Nordmann................ 30,000 10.5% 10.50 March 8, 2006 $ 198,000 $ 502,500
</TABLE>
During September 1995, each member of the Scientific Advisory Board (the
"SAB") (other than as described below) 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
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<PAGE>
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. One member of the SAB 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.
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 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
26
<PAGE>
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
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 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
27
<PAGE>
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.
28
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of August 31, 1996
(except as otherwise noted) 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
PRIOR TO OFFERING
---------------------------
<S> <C> <C>
NAME NUMBER PERCENT
- --------------------------------------------------------------------------------------- ---------- ---------------
Audrey Contente (2)(3)(4).............................................................. 591,250 9.9%
Barrie Zesiger (3)(5).................................................................. 994,414 14.8%
Richard A. Cone (3)(6)................................................................. 20,000 *
Joy V. Jones (3)(7).................................................................... 7,500 *
Martin Nussbaum (3)(8)................................................................. 10,925 *
Charles D. Peebler, Jr. (3)............................................................ 14,750 *
John Andersen (2)(3)(9)................................................................ 347,167 5.6%
Albert L. Zesiger (10)................................................................. 994,414 14.8%
Mellon Bank Corporation (11)........................................................... 840,000 14.3%
Directors and executive officers as a group
(consists of 10 persons) (5).......................................................... 2,132,756 29.2%
</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 933,643 shares of Common Stock beneficially owned by Albert L.
Zesiger, Ms. Zesiger's husband, as to which Ms. Zesiger disclaims beneficial
ownership. See also footnote 10. In January of 1995, Ms. Zesiger acquired
2,250 shares of Common Stock by converting a short-term loan. Does not
include the Optioned Shares which are subject to a voting trust of which Ms.
Zesiger is a voting trustee. See footnote 4.
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<PAGE>
(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."
(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 60,771 shares of Common Stock beneficially owned by Barrie
Zesiger, Mr. Zesiger's wife, as to which shares Mr. Zesiger disclaims
beneficial ownership. As long as Ms. Zesiger is a member of the Board of
Directors, Mr. Zesiger has agreed not to vote 95,833 shares of Common Stock
over which he otherwise has a power of attorney and as to which he disclaims
beneficial ownership. Includes convertible securities currently exercisable
into 363,000 shares of Common Stock held in managed accounts for which Mr.
Zesiger has dispositive power as a Managing Director for Zesiger Capital
Group LLC, an investment advisor.
(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 Corporation and its subsidiaries
with the Securities and Exchange Commission on September 11, 1996.
30
<PAGE>
ITEM 13. 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
March 1996, the Company issued a five year warrant to purchase 50,000 shares of
Common Stock to Bozell. The
31
<PAGE>
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.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
The following financial statements of the Company are filed on the pages
listed below, as part of Part II, Item 8 of this report:
<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>
2. FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted because they are inapplicable, or not
required, or the information is included in the financial statements or notes
thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
3.2 By-Laws (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (File No.
33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
3.3 Form of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to Amendment No. 1
to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
3.4 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.4 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November
17, 1995).
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on January 16, 1996).
9.1 Voting Trust Agreement, dated as of August 8, 1994 among Audrey Contente, John Andersen, Barrie Zesiger
and Ultrafem, Inc. (incorporated by reference to Exhibit 9.1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on October 10, 1995).
9.2 Amendment, dated August 8, 1994 to Voting Trust Agreement, dated as of August 8, 1994 among Audrey
Contente, John Andersen, Barrie Zesiger and Ultrafem, Inc. (incorporated by reference to Exhibit 9.2 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on October 10, 1995).
</TABLE>
33
<PAGE>
<TABLE>
<C> <S>
9.3 Amendment to Voting Trust Agreement, dated as of August 8, 1995 among Audrey Contente, John Andersen and
Barrie Zesiger.
10.1 Form of Ultrafem, Inc. Secured Convertible Promissory Note (1995 Unit Private Placement) (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.2 Form of Ultrafem, Inc. Secured Non-Convertible Promissory Note (1995 Unit Private Placement) (incorporated
by reference to Exhibit 10.2 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.3 Form of Ultrafem, Inc. Class A Warrant to purchase Common Stock (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.3 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.4 Form of Ultrafem, Inc. Class B Warrant to purchase Common Stock (1995 Unit Private Placement)
(incorporated by reference to Exhibit 10.4 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.5 Form of Ultrafem, Inc. Registration Rights Agreement relating to Class A Warrant to purchase Common Stock,
Class B Warrant to purchase Common Stock, and Secured Convertible Promissory Note (incorporated by
reference to Exhibit 10.5 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.6 Settlement Agreement and Mutual General Release, dated August 1, 1995, between Ultrafem, Inc. and C.
Austin Burrell (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registration Statement on
Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.7 Letter Agreement, dated August 10, 1995 between Meridian Consulting Group and Ultrafem, Inc. (incorporated
by reference to Exhibit 10.7 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on October 10, 1995).
10.8 Letter Agreement, dated July 12, 1995, between Ultrafem, Inc. and The Elliot Company (incorporated by
reference to Exhibit 10.8 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.9 Agreement of Lease, made as of October 15, 1991, between Broadway Management Co., Inc. and Ultrafem, Inc.
(incorporated by reference to Exhibit 10.9 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.10 Substitution of Space Agreement, dated June 23, 1992 by and between Broadway Management Co., Inc., as
Agent for 500 Fifth Avenue Associates, and Ultrafem, Inc. (incorporated by reference to Exhibit 10.10 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.11 Employment Agreement, dated as of July 1, 1996 by and between Ultrafem, Inc. and Audrey Contente
(incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-1 (File No. 333-11995)
filed with the Securities and Exchange Commission on September 13, 1996).
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
10.12 Name, Likeness, and Voice Release and Agreement, dated as of July 1, 1996 by and between Ultrafem, Inc.
and Audrey Contente (incorporated by reference to Exhibit 10.12 to Registration Statement on Form S-1
(File No. 333-11995) filed with the Securities and Exchange Commission on September 13, 1996).
10.13 Termination Benefits Agreement, dated as of October 1, 1990 by and between Ultrafem, Inc. and Audrey
Contente (incorporated by reference to Exhibit 10.13 to Registration Statement on Form S-1 (File No.
333-11995) filed with the Securities and Exchange Commission on September 13, 1996).
10.14 Restated Modification Agreement, dated July 29, 1993 by and between Ultrafem, Inc. and Audrey Contente
(incorporated by reference to Exhibit 10.12 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.15 Amendment to Employment Agreement, dated August 1, 1995, between the Company and Audrey Contente
(incorporated by reference to Exhibit 10.13 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.16 Employment Agreement, dated July 29, 1994 between Ultrafem, Inc. and John W. Andersen (incorporated by
reference to Exhibit 10.14 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.17 Amendment to Employment Agreement, dated August 1, 1995 between Ultrafem, Inc. and John Andersen
(incorporated by reference to Exhibit 10.15 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.18 Employment Agreement, dated August 1, 1995 between Ultrafem, Inc. and Dori M. Reap (incorporated by
reference to Exhibit 10.16 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.19 Letter Agreement, dated July 13, 1995 between Ultrafem, Inc. and The Sage Group (incorporated by reference
to Exhibit 10.17 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with
the Securities and Exchange Commission on November 17, 1995).
10.20 Employment Agreement, dated November 6, 1995 between Ultrafem, Inc. and Tonya G. Hinch (incorporated by
reference to Exhibit 10.18 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on January 16, 1996).
10.21 Agreement, dated June, 1995, by and between Audrey Contente, Jeffrey Simon, Frank Cole, Arthur Appleman
and Ultrafem, Inc. (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November
17, 1995).
10.22 Indemnity Agreement dated as of October 1, 1990 between Ultrafem, Inc. and Audrey Contente (incorporated
by reference to Exhibit 10.20 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
10.23 Amendment to Indemnity Agreement dated April 23, 1992 between Ultrafem, Inc. and Audrey Contente
(incorporated by reference to Exhibit 10.21 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.24 Amended and Restated Patent Assignment and Security Agreement dated as of July 28, 1995 between Ultrafem,
Inc. and Edward M. Berman, as Agent (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on November 17, 1995).
10.25 United States Patent No. 5,295,984, issued March 22, 1994 (incorporated by reference to Exhibit 10.23 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.26 Settlement Agreement, dated as of May 19, 1993 by and between Ultrafem, Inc., Audrey Contente, Frank
Martin, Albert L. Zesiger, and John S. Stafford (incorporated by reference to Exhibit 10.24 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on November 17, 1995).
10.27 Form of Ultrafem, Inc. Convertible Debenture issued to the Montana Board of Science and Technology
(incorporated by reference to Exhibit 10.25 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.28 Form of Common Stock purchase Warrant issued to the Montana Board of Science and Technology (incorporated
by reference to Exhibit 10.26 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.29 Memorandum Agreement, dated September 15, 1992, relating to registration rights of Ultrafem, Inc.
(incorporated by reference to Exhibit 10.27 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995). Convertible
Debenture issued to the Montana Board of Science and Technology.
10.30 Letter Agreement dated June 23, 1995 between Ultrafem, Inc. and Pro-Active International, as amended
(incorporated by reference to Exhibit 10.28 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.31 Letter Agreement dated July 24, 1995 between Ultrafem, Inc. and Bozell Worldwide, Inc. (incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.32 Letter Agreement dated October 9, 1995 between Ultrafem, Inc. and Robinson Lerer Sawyer Miller
(incorporated by reference to Exhibit 10.30 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.33 Agreement effective July 17, 1990 between Ultrafem, Inc. and Audrey Contente (incorporated by reference to
Exhibit 10.31 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
10.34 Restated Technology Transfer Agreement, dated as of May 17, 1993 by and between Ultrafem, Inc. and Audrey
Contente (incorporated by reference to Exhibit 10.34 to Registration Statement on Form S-1 (File No.
333-11995) filed with the Securities and Exchange Commission on September 13, 1996).
10.35 Amendment to Restated Technology Transfer Agreement dated August 1, 1995 between Ultrafem, Inc. and Audrey
Contente (incorporated by reference to Exhibit 10.32 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November 17, 1995).
10.36 1990 Stock Option Plan of Ultrafem, Inc. (incorporated by reference to Exhibit 10.33 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on November 17, 1995).
10.37 1995 Ultrafem, Inc. Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit
10.34 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.38 Form of Option Certificate and Agreement for 1990 Stock Option Plan of Ultrafem, Inc. (incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.39 Form of Option Certificate and Agreement for 1995 Ultrafem, Inc. Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10.36 to Amendment No. 2 to Registration Statement on Form
S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.40 Form of Ultrafem, Inc. Option Certificate and agreement to C. Austin Burrell (incorporated by reference to
Exhibit 10.37 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.41 Option Certificate and Agreement, dated November 6, 1995, Re: 100,000 shares to Tonya G. Hinch
(incorporated by reference to Exhibit 10.38 to Amendment No. 2 to Registration Statement on Form S-1 (File
No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.42 Option Certificate and Agreement, dated August 1, 1995, Re: 100,000 shares to Dori M. Reap (incorporated
by reference to Exhibit 10.39 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on January 16, 1996).
10.43 Amendment No. 1 to Option Certificate and Agreement, dated August 1, 1995, Re: 100,000 shares to Dori M.
Reap (incorporated by reference to Exhibit 10.40 to Amendment No. 2 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
10.44 Option Certificate and Agreement, dated August 1, 1995, Re: 50,000 shares to Dori M. Reap (incorporated by
reference to Exhibit 10.41 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on January 16, 1996).
10.45 Amendment No. 1 to Option Certificate and Agreement, dated August 1, 1995, Re: 50,000 shares to Dori M.
Reap (incorporated by reference to Exhibit 10.42 to Amendment No. 2 to Registration Statement on Form S-1
(File No. 33-97960) filed with the Securities and Exchange Commission on January 16, 1996).
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
10.46 Amended and Restated Option Certificate and Agreement, dated August 1, 1995, Re: 105,970 shares (or 2% of
shares) to John W. Andersen (incorporated by reference to Exhibit 10.43 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November
17, 1995).
10.47 Amended and Restated Option Certificate and Agreement, dated August 1, 1995, Re: 423,879 shares (or 8% of
shares) to John W. Andersen (incorporated by reference to Exhibit 10.44 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on November
17, 1995).
10.48 Option Agreement and Certificate, dated June 1, 1992, to Audrey Contente (incorporated by reference to
Exhibit 10.45 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.49 Option Agreement and Certificate, dated August 9, 1991, to Wendell Guthrie (incorporated by reference to
Exhibit 10.46 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.50 Form of Warrant to purchase Common Stock (1993 Private Placement) (incorporated by reference to Exhibit
10.48 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.51 Form of Warrant to purchase Common Stock (1995 Preferred Stock Private Placement) (incorporated by
reference to Exhibit 10.49 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960)
filed with the Securities and Exchange Commission on November 17, 1995).
10.52 Form of Warrant to purchase Common Stock (1994 Private Placement) (incorporated by reference to Exhibit
10.50 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the
Securities and Exchange Commission on November 17, 1995).
10.53 Form of Convertible Debentures (1994 Private Placement) (incorporated by reference to Exhibit 10.51 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on November 17, 1995).
10.54 Form of Representative's Warrant (incorporated by reference to Exhibit 10.52 to Amendment No. 2 to
Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission
on January 16, 1996).
10.55 Form of Non-Convertible Promissory Note issued January 1996 (incorporated by reference to Exhibit 10.53 to
Amendment No. 3 to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and
Exchange Commission on February 16, 1996).
10.56 Form of Class C Warrant issued January 1996 (incorporated by reference to Exhibit 10.54 to Amendment No. 3
to Registration Statement on Form S-1 (File No. 33-97960) filed with the Securities and Exchange
Commission on February 16, 1996).
10.57 License, Research and Product Development Agreement by and between Ultrafem, Inc. and ReProtect, LLC as of
February 8, 1996 (incorporated by reference to Exhibit 10.55 to Amendment No. 4 to Registration Statement
on Form S-1 (File No. 33-97960) filed with the Securities and Exchange Commission on February 22, 1996).
10.58 Equipment Agreement, dated October 17, 1995 between Ultrafem, Inc. and Remmele Engineering (incorporated
by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File
No. 0-27576) filed May 15, 1996)
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
10.59 Sales Contract, dated January 1, 1996 between Ultrafem, Inc. and Shell Chemical Company (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No.
0-27576) filed May 15, 1996)
10.60 Lease Agreement dated January 28, 1996 between Ultrafem, Inc. and Dennis R. Washington d/b/a Western Trade
Center (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the period ended
March 31, 1996 (File No. 0-27576) filed May 15, 1996)
10.61 Letter Agreement, dated March 14, 1996, between Ultrafem, Inc. and The Elliot Company (incorporated by
reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No.
0-27576) filed May 15, 1996)
10.62 Letter Agreement, dated April 11, 1996, between Ultrafem, Inc. and Meridian Consulting Group (incorporated
by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File
No. 0-27576) filed May 15, 1996)
10.63 Employment Agreement, dated April 1, 1996, between Ultrafem, Inc. and Gary Nordmann (incorporated by
reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No.
0-27576) filed May 15, 1996)
10.64 Option Agreement, dated March 8, 1996, between Ultrafem, Inc. and Gary Nordmann (incorporated by reference
to Exhibit 10.7 to Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No. 0-27576)
filed May 15, 1996)
10.65 Broker Representation Agreement, dated April 29, 1996, between Ultrafem, Inc. and Morgan & Sampson Pacific
(incorporated by reference to Exhibit 10.65 to Registration Statement on Form S-1 (File No. 333-11995)
filed with the Securities and Exchange Commission on September 13, 1996).
10.66 Distribution Service Agreement, dated June 1, 1996, between Ultrafem, Inc. and Morgan & Sampson Pacific
(incorporated by reference to Exhibit 10.66 to Registration Statement on Form S-1 (File No. 333-11995)
filed with the Securities and Exchange Commission on September 13, 1996).
11* Computation of Earnings Per Share.
27* Financial Data Schedule.
</TABLE>
- ------------------------
(b) REPORTS ON FORM 8-K
N/A
(c) EXHIBITS FILED HEREWITH ARE DENOTED BY AN (*).
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<C> <S>
ULTRAFEM, INC.
By: /s/ JOHN W. ANDERSEN
Dated: September 26, 1996 --------------------------------------------
John W. Andersen
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ JOHN W. ANDERSEN President, Chief Executive
------------------------------------------- Officer and Director (Principal September 26, 1996
John W. Andersen Executive Officer)
Senior Vice President, Finance
/s/ DORI M. REAP and Administration, Secretary
------------------------------------------- and Chief Financial Officer September 26, 1996
Dori M. Reap (Principal Financial &
Accounting Officer)
/s/ AUDREY CONTENTE
------------------------------------------- Executive Vice President and September 26, 1996
Audrey Contente Founder
/s/ RICHARD CONE
------------------------------------------- Director September 26, 1996
Richard Cone
/s/ JOY VIDA JONES
------------------------------------------- Director September 26, 1996
Joy Vida Jones
/s/ MARTIN NUSSBAUM
------------------------------------------- Director September 26, 1996
Martin Nussbaum
/s/ CHARLES D. PEEBLER, JR.
------------------------------------------- Director September 26, 1996
Charles D. Peebler, Jr.
/s/ BARRIE ZESIGER
------------------------------------------- Director September 26, 1996
Barrie Zesiger
</TABLE>
40
<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.
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)
RESEARCH AND DEVELOPMENT COSTS -- Research and development costs are
expensed as incurred.
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 determined by reference to the quoted market price of the Company's Common
Stock at June 30, 1996, multiplied by the number of
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)
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
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)
notes, principal in the amount of $725,199 plus interest in the amount of
$116,039 was paid through June 30, 1996.
(c) As of June 30, 1995, the unsecured note was owed to The Johns Hopkins
University ("Johns Hopkins") by the Company under the terms of a research
and development agreement which expired June 30, 1993. $200,000 was paid on
September 7, 1995 and $124,539 plus interest of $58,999 was paid on April
19, 1996.
(d) During October, 1994 and March, 1995, the Company issued to certain trade
and other creditors unsecured notes in the principal amount of $588,227. Of
such unsecured notes, principal in the amount of $524,679 plus interest in
the amount of $24,260 was paid through 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.
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)
In January, 1996, the Company raised an additional $100,000 through a private
placement to a single investor of a $100,000 non-convertible promissory note
due the earlier of January 26, 1997 or the closing of the initial public
offering, bearing interest at a rate of 10% per annum and a Class C Warrant
to purchase 20,000 shares of Common Stock at an exercise price of $8.00 per
share. The Class C Warrant is not exercisable until the first anniversary of
the date of issuance and has a term of five years. The Company paid the
entire principal amount of $100,000 plus interest of $877 on February 27,
1996.
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.
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)
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 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
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
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
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.
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
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)
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
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.
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
9. PREFERRED STOCK (CONTINUED)
Each share of Series A Preferred Stock is initially (a) convertible, at any
time at the option of the Holder, into Common Stock at a conversion rate of 12.5
shares of Common Stock for each such share, subject to adjustment for certain
dilutive events, (b) entitled to cumulative annual dividends of $8.00, (c)
participating with the Common Stock in any dividend after payment of said $8.00,
(d) has a liquidation preference of $100.00 and (e) entitled to the number of
votes equal to the number of shares of Common Stock into which such share can be
converted.
During the year ended June 30, 1996, 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>
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.
F-18
<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)
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-19
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS
PER SHARE
<TABLE>
<CAPTION>
JUNE 1993 JUNE 1994 JUNE 1995 JUNE 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss................................................... 2,091,903 2,303,940 2,381,065 9,819,980
Plus: Interest attributable to convertible debt............ 27,646 131,532
----------- ----------- ----------- -----------
Adjusted Net Loss.......................................... 2,091,903 2,303,940 2,353,419 9,688,448
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted Average Shares.................................... 1,295,910 1,313,737 1,353,675 2,185,017
Plus: Incremental shares (1)............................... 1,344,477 1,344,477 1,344,477 1,344,477
----------- ----------- ----------- -----------
Weighted average common shares outstanding (2)............. 2,640,387 2,658,214 2,698,152 3,529,494
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Loss per common share...................................... .79 .87 .87 2.74
</TABLE>
- ------------------------
(1) Represents the incremental shares for options, warrants and other
potentially dilutive securities granted to purchase Common Stock at an
exercise price below the initial public offering price of $10 per share
within one year prior to the effective date of the initial public offering.
(2) The effect of the assumed exercise of stock options, warrants and other
potentially dilutive securities which were issued in periods prior to the
one-year period prior to the effective date of the initial public offering
is not included in the weighted average number of shares of Common Stock
outstanding because the effect is anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRAFEM,
INC. FINANCIAL STATEMENTS AT JUNE 30, 1996 AND THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 24,510,071
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 266,951
<CURRENT-ASSETS> 25,386,525
<PP&E> 3,146,277
<DEPRECIATION> 271,124
<TOTAL-ASSETS> 29,407,936
<CURRENT-LIABILITIES> 7,423,992
<BONDS> 0
0
112,125
<COMMON> 9,905
<OTHER-SE> 21,161,914
<TOTAL-LIABILITY-AND-EQUITY> 29,407,936
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 9,643,978
<OTHER-EXPENSES> (489,379)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 665,381
<INCOME-PRETAX> (9,819,980)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,819,980)
<EPS-PRIMARY> (2.74)
<EPS-DILUTED> 0
</TABLE>
