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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 0-27596
CONCEPTUS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 97-3170244
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1021 Howard Avenue
San Carlos, CA 94070
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 802-7240
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.003 par value per share
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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 than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the closing sale price of the Registrant's Common Stock on
the Nasdaq National Market on February 28, 1999 was approximately $11,423,993 as
of such date. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
There were 9,620,205 shares of Registrant's Common Stock issued and
outstanding as of February 28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None
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The following information should be read in conjunction with the
Consolidated Financial Statements and the notes thereto. This annual report on
Form 10-K, and in particular the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. In this report, the words "believes," "anticipates," "intends,"
"expects" and words of similar import, identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
Conceptus to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking achievements. Such
factors include, among others, the following: the uncertainty of market
acceptance of the Company's products; the limited operating history of the
Company; the ability of the Company to develop and maintain proprietary aspects
of its technology; the ability of the Company to obtain the necessary
governmental clearances or approvals to market its products; intense competition
in the medical device industry; the inherent risk of exposure to product
liability claims and product recalls; and other factors referenced in this Form
10-K. Certain of these factors are discussed in more detail below. Given these
uncertainties, persons evaluating the Company and its business are cautioned not
to place undue reliance on such forward-looking statements. The Company assumes
no obligation to update these forward-looking statements to reflect actual
results or changes in factors or assumptions affecting such forward-looking
statements.
PART I
ITEM 1. BUSINESS
THE COMPANY
Conceptus, Inc. ("Conceptus" or the "Company") designs and develops
minimally invasive devices for reproductive medical applications. The Company's
current focus is on the development of a non-surgical approach to fallopian tube
sterilization, the most commonly performed contraceptive procedure worldwide.
Given the Company's Focus on the development of the STOP contraception device,
the Company is not actively marketing or manufacturing its infertility and
therapeutic hysteroscopic products.
The Company's commercially available infertility products are designed
to improve the accuracy of diagnostic procedures for infertility, and to
increase the safety of resectoscopic procedures. Conceptus has developed
proprietary micro-catheter and guidewire systems that allow physicians to
transcervically (through the cervix) access and navigate the full length of the
fallopian tubes in a non-surgical approach. The Company's catheter systems are
based on technology initially developed by Target Therapeutics, Inc. ("Target"),
and licensed exclusively to Conceptus in the field of reproductive physiology.
To date, Conceptus has received five 510(k) clearances to market applications of
its T-TAC(TM) (Transcervical Tubal Access Catheter) systems and two 510(k)
clearances for the Selective Tubal Assessment to Refine Reproductive Therapy
("STARRT") falloposcopy products for proximal tubal occlusion. The Company
commenced marketing of its catheter systems for certain applications in
September 1995.
In November 1996, the Company entered into the therapeutic hysteroscopy
market through its acquisition of Microgyn, Inc. ("Microgyn"), a privately held
medical device company. Microgyn's technology was develped to increase the
safety and performance of resectoscope procedures, including therapeutic
hysteroscopy procedures, which utilize an endoscope to guide the selective
excision of abnormal uterine tissue. The Company began marketing its ERA(TM) and
FUTURA(TM) resectoscope sleeves for gynecology and urology applications in
September 1997 upon 510(k) clearance.
In July, 1998 the Company implemented a
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restructuring plan when the Company determined that the near-term market
potential of the Company's T-TAC, STARRT, and Microgyn products did not justify
a direct, specialty salesforce. This restructuring reduced the number of
employees by approximately fifty employees from seventy-two at the beginning of
the year by eliminating all sales and marketing personnel, the manufacturing
function, and most administrative personnel. As a result of these actions the
Company reduced operating losses to $1.3 million in the fourth quarter of 1998
from $4.3 million in the fourth quarter of 1997. The Company is actively engaged
in discussions with potential marketing and manufacturing partners in order to
bring the T-TAC, STARRT, and Microgyn products to the gynecology market.
The Company is currently focused on developing its S/TOP(TM) (Selective
Tubal Occlusion Procedure) system to provide a non-surgical approach to
fallopian tube sterilization, the most common method of contraception worldwide.
The Company estimates that over 13 million female sterilization procedures are
performed annually worldwide. The S/TOP system uses the Company's transcervical
tubal access technology to deliver a proprietary micro-coil device to the lumen
of the fallopian tube. Conceptus believes that the S/TOP system will allow
physicians to perform fallopian tube sterilization in an office setting without
general anesthesia. The Company also believes that the elimination of surgery
from the procedure will increase both patient demand for the procedure and the
availability of tubal sterilization in developing countries, where surgical
facilities may be limited. The United States accounts for less than 20% of
annual worldwide fallopian tube sterilization procedures, and the Company
estimates that the United States market for such procedures exceeds $1.5 billion
annually. Conceptus has performed clinical feasibility studies in two different
patient groups and is currently engaged in a Phase II study of effectiveness.
Conceptus has an exclusive, worldwide, royalty-free license to the
reproductive applications of technology developed by Target, a manufacturer of
minimally invasive medical devices for neurovascular applications, which in 1997
became a separate business unit of Boston Scientific Corporation ("BSC"). BSC
beneficially owns approximately 15% of the Company's outstanding Common Stock.
Conceptus was formed in 1992 in response to reports by physicians of the
successful use of Target's products to access the fallopian tubes.
In November 1998, the Company announced that it has retained CIBC
Oppenheimer Corporation to evaluate strategic alternatives for the Company,
including inquiries that have been received by the Company regarding possible
business alliances. The Company intends to review opportunities in women's
health, its traditional market focus, as well as other areas of medicine.
T-TAC(TM), STARRT(TM), S/TOP(TM), VS(TM), Soft Torque(TM), Soft
Seal(TM), Minicerv(TM), Progression(TM), Robust(TM), Coaxess(TM) and
Stargate(TM) are trademarks of the Company. All other tradenames and trademarks
appearing in this report are the property of their respective holders.
HUMAN REPRODUCTION
Human reproduction has been the focus of increased scientific and
medical attention over the last twenty years. Contemporary lifestyle choices,
such as deferred childbearing, have led to an increased demand for certain
reproductive medical services, including the treatment of infertility and
improved methods of contraception. As a result, increasing numbers of OB/GYN
specialists in the United States treat infertility as well as other
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reproductive disorders, and the number of family planning/reproductive health
units in community hospitals in the United States increased sice 1985.
Contraception Overview
Despite the risks, high costs, and recovery time associated with
surgical sterilization performed under general anesthesia, surgical female
sterilization is the most widely used form of contraception in the United States
and internationally. According to a 1995 survey by the Centers for Disease
Control and Prevention, female sterilization is the most commonly used form of
contraception in the United States by women between the ages of 15 and 44. Among
women 35 years and over, 33% rely on sterilization and among all married or
divorced women over 35 years of age, 54% utilize sterilization for
contraception. The high rate of reliance on female sterilization is due in part
to concerns about the safety and reliability of those birth control methods that
are readily accepted by younger women. Consequently, despite recent favorable
clinical studies, patient concerns about the long-term effects of oral
contraceptives have limited their acceptance among women 35 and over where only
12% of these women use oral contraceptives. Use of intrauterine devices ("IUD")
in the United States has declined in women of all age groups. Due to concerns
that use of IUDs may result in increased incidence of pain and heavy menstrual
bleeding, which could mask the symptoms of serious uterine disease, use of IUDs
among women in the United States age 15 - 44 is less than 1%. For these reasons,
women are seeking new methods of permanent contraception. Increasingly, women in
the United States have turned to surgical tubal sterilization, which has become
the contraceptive method of choice. In 1995, 59% of women between 15 - 44 years
of age relied on tubal sterilization, compared with only 23% in 1973. In
developing countries where there are concerns about population growth, 23% of
all women have undergone surgical tubal sterilization. Throughout the world,
there is a need for a safe, non-surgical, and permanent contraceptive method.
Because the fallopian tubes are the organs in which conception occurs,
they serve a critical function in the reproductive process and are often the
focus of treatment whether the objective is to increase a woman's reproductive
potential, such as in the treatment of infertility, or to decrease her
reproductive potential, such as in the performance of sterilization procedures.
Surgical fallopian tube sterilization has become the fastest growing method of
contraception worldwide, especially among women over 35, because of its
reliability, and the absence of chronic side effects associated with the
procedure. Although mechanical occlusion of the fallopian tubes is a highly
effective means of achieving female sterilization, the difficulty in accessing
the fallopian tubes has made it necessary to perform surgery in order to
accomplish fallopian tube sterilization. Typically, fallopian tubes are ligated
by cutting or cauterizing the tubes, or by mechanical occlusion of the tubal
lumen using clips or rings in a surgical procedure such as a laparoscopy or
laparotomy. The requirement of surgery, however, is an obvious limitation of the
procedure. The risks associated with surgery, including the risk of general
anesthesia, infection and other complications, combined with concerns about cost
and recovery time, make the procedure less than ideal. Additionally, in many
developing countries, where the need for permanent contraception is critical,
there is a shortage of community surgical facilities. In the United States, it
is estimated that approximately 1.3 million surgical tubal sterilization
procedures are performed annually. The average cost of these procedures ranges
from approximately $2,500 to approximately $8,000, depending on the degree of
invasiveness of the surgery.
S/TOP System Procedure-Specific Product
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The Company is developing a proprietary micro-coil sterilization device
which is deployed permanently into each fallopian tube using the Company's
minimally invasive tubal access and delivery system and the Company's unique
delivery wire. The micro-coil device has been designed to effectively occlude
the lumen of the fallopian tube and be physically incorporated into the tubal
wall to prevent expulsion. The Company believes that this device and procedure
should reduce the clinical risks and costs associated with most current tubal
sterilization procedures while delivering a reliable, safe method of
sterilization.
Clinical and Regulatory Status
In 1995, the Company completed in vitro feasibility studies and a
successful animal study that demonstrated 100% pregnancy prevention in the 20
animals in which the device remained correctly placed. In September 1995,
Conceptus commenced a Phase I clinical study of the S/TOP device under an
Institutional Review Board ("IRB") approval with a non-significant risk
determination. In April 1996 this study was approved by the FDA under an
Investigational Device Exemption ("IDE"). The study involved the placement of
the S/TOP device in patients at the time of hysterectomy in order to assess the
ability to access the fallopian tube, properly place the device, and test the
acute retention of the device. As of November 1998, 68 women have been enrolled
in this study. IDE approval has been obtained for an expanded Phase I clinical
study in 20 patients who are scheduled for a hysterectomy six to 12 weeks after
hysteroscopic placement of the S/TOP device. In addition to the initial Phase I
trial objectives, this study is designed to evaluate the histology of adjacent
tissue reaction and patient recovery from the device placement procedure.
Twenty-seven patients have been enrolled in this study and have undergone the
S/TOP device placement procedure without anesthesia. The results from the first
five patients to undergo histologic evaluation of their fallopian tubes provides
early evidence of a local inflammatory tissue response to the device, as well as
damage to the tubal architecture, which is expected to be unfavorable to
conception. In addition, a hysterosalpingography performed just prior to the
hysterectomy demonstrated complete occlusion in all tubes tested to date, with
the exception of three tubes in which the device did not remain due to improper
placement.
In 1997, the Company commenced a Phase II clinical study in Australia.
In 1998, a Phase II study was initiated at two sites in the United States. The
Company also tested several different configurations of the S/TOP device in
pre-clinical studies, in an attempt to improve handling characteristics of the
device and to address issues of device migration and expulsion which were
observed in the early clinical testing. As of year-end 1998, fourteen patients
are relying on the device for contraception and are being followed in the study.
In 67 months of wearing and through 37 months of efficacy testing, there were no
pregnancies reported. A majority of the implantation procedures were performed
without general anesthesia and were tolerated by patients. The Company expects
to follow this study with an expanded Phase II study, which will likely involve
50 patients. Depending on the results of this expanded Phase II study and the
Company's on-going development efforts, the Company is in the process of
formulating a Phase III study, which will involve a larger patient population
and long-term follow up in support of a Pre-Market Approval ("PMA") application.
There can be no assurance that the Company will be able to formulate, design,
and execute a large Phase III study or that such a study will enable the Company
to obtain a PMA of the S/TOP device.
5
Infertility and the Role of the Fallopian Tubes in Reproduction
Infertility is one of the most common and emotionally traumatic of
reproductive disorders and appears to be increasing in most developed countries
due to both sociological and epidemiological factors. Studies indicate that five
to eight million couples in the United States (or up to 15% of couples of
childbearing age from 20 to 44) are clinically infertile, which has been defined
as the failure to conceive after one year of unprotected intercourse. Current
estimates of the United States market for diagnosis and treatment of infertility
are in excess of $2.0 billion annually.
Because the fallopian tubes are the organs in which conception occurs,
they serve a critical role in the reproductive process. Of the up to 8 million
couples experiencing infertility in the United States, fallopian tube
infertility may affect as many as 2.8 million. Yet, the fallopian tubes do not
lend themselves to easy study and treatment. Because of the difficulty in
accessing the fallopian tubes, current non-surgical techniques for diagnosing
fallopian tube diseases and disorders often do not adequately or accurately
delineate the nature, extent and location of tubal pathology. Therapeutic
choices for the treatment of infertility are equally constrained by the
difficulty in accessing the fallopian tubes, and therefore, most fallopian tube
therapies must be performed surgically.
The most commonly performed fallopian tube infertility diagnostic
procedure is hysterosalpingography ("HSG"), which involves the injection of an
x-ray contrast medium (or dye) transcervically into the uterus to allow the
physician to observe and evaluate the flow of dye through the fallopian tubes
under fluoroscopy (x-ray). This procedure is often painful and is also known to
be highly inaccurate, with false-positive results in as many as 40% of
HSG-diagnosed cases of proximal tubal occlusion ("PTO"). Because of its high
rate of inaccuracy, when HSG indicates an occlusion, the physician will likely
perform a surgical confirmatory procedure known as laparoscopic
chromopertubation (commonly called "lap and dye").
Because of the inability to access the fallopian tubes easily and
non-surgically in order to effect an accurate diagnosis of tubal health, it is
often difficult for physicians to select the most appropriate therapeutic option
for each patient. The difficulties in accessing the fallopian tubes also result
in current therapies for tubal infertility being far more invasive than
necessary.
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Conceptus' First Platform Technology: Transcervical Tubal Access Technology
Conceptus has developed its minimally invasive transcervical tubal
access technology to address the clinical problems and technological limitations
presented by current fallopian tube infertility and tubal sterilization
approaches. The Company believes that the ability to directly and nonsurgically
access the fallopian tubes will lead to better reproductive outcomes by:
o Improving the accuracy of conventional diagnostic procedures
performed to assess tubal patency.
o Facilitating the performance of a new endoscopic tubal
diagnostic procedure, which will permit the diagnosis of
several key aspects of tubal functionality not adequately
assessed today.
o Enabling physicians to select more appropriate tubal
therapies, thereby eliminating many unnecessary therapies.
o Allowing more tubal therapies to be performed nonsurgically,
thus avoiding the risks and costs of surgery and the potential
for further surgery-induced damage to the fallopian tubes.
o Accelerating the selection of appropriate infertility
treatment, an important consideration for women whose
infertility status has already been compromised by age.
o Providing a non-surgical approach to fallopian tube
sterilization, thereby increasing patient demand for tubal
sterilization and expanding its availability in developing
countries where surgical facilities may be limited.
Infertility Products
The Company's proprietary transcervical tubal access technology
consists of specially designed, micro-catheters and guidewires, designed to be
atraumatic, which provide non-surgical access through the cervix and uterus and
into the fallopian tubes. These components are combined with the Company's other
procedure-specific products to produce the T-TAC system and the STARRT
Falloposcopy system.
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The following table sets forth the clinical indications of each of the Company's
principal infertility products:
Product Systems Clinical Indications
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T-TAC System
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VS (Variable Softness) Catheter Diagnostic tubal
Guidewires catheterization; therapeutic
Soft Torque Uterine Catheter tubal catheterization; HSG;
Soft Seal Cervical Catheter lap and dye; and
Minicerv Cervical Catheter intrauterine insemination.
Progression Catheter
STARRT Falloposcopy System
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Stargate Catheter Operative fallopian tube
StarQuest Guidewire endoscopy; in-office
Coaxess Uterine Catheter fallopian tube endoscopy.
Falloposcope
Gyne-Flex Stabilizing Arm
Conceptus' Second Platform Technology: Resectoscopy
ERA(TM) and FUTURA(TM) are trademarks of the Company. All other
tradenames and trademarks appearing in this report are the property of their
respective holders.
Conceptus acquired Microgyn, Inc.,a privately held company, in November
1996.The technology developed at Microgyn has been incorporated into Conceptus'
ERA and FUTURA Resectoscope Sleeves, for use in therapeutic resectoscopy
procedures in gynecology and urology. In 1997, the Company acquired the
manufacturing rights for the ERA and FUTURA product lines from Medical
Scientific, Inc. The Company is in the process of identifying contract
manufacturers for the Microgyn sleeve products.
ERA Product Line
The ERA product line for gynecology focuses on products to increase the
safety and performance of resectoscope procedures, including therapeutic
hysteroscopy procedures, which utilize an endoscope to guide the selective
excision of abnormal uterine tissue. These procedures, including endometrial or
fibroid resection and endometrial ablation, are growing in clinical acceptance
because they are less invasive, non-incisional alternatives to the over 600,000
hysterectomies performed in the United States annually.
In performing uterine therapy using a hysteroscope, the uterus must be
distended and the visibility maintained by use of an optically clear fluid.
Using monopolar (RF) electrosurgical energy to cut or ablate adds a restriction
on the type of fluid that can be used: a non-conductive, hypotonic,
non-physiologic distention medium must be employed. Non-conductive fluids are
electrolyte-free (hypotonic) substances and therefore can change levels of vital
electrolytes such as sodium, potassium, and chloride in the blood stream of the
patient. Fluids such as mannitol, sorbitol and glycine are adequate for this
purpose but present a risk to the patient.
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In therapeutic hysteroscopy, both small and large blood vessels are cut
as tissue is removed. Since the hypotonic fluids must be infused into the uterus
under pressure as high as 60-80 mmHg in order to distend the uterine cavity, a
large amount of fluid can be forced into venous channels, which normally
maintain pressure of about 20 mmHg. During the procedure, fluid loss into the
patient is carefully monitored, via fluid deficit calculations, comparing fluids
used versus fluids recovered. The surgeon is kept apprised of the patient's
fluid status, because of the complications associated with the absorption of
large amounts of hypotonic solutions. These include serious heart, lung, and
brain disorders, which sometimes result in coma or death.
The Company's ERA product line consists of the following products: a
simple, disposable ERA Resectoscope Sleeve, cutting loops and coagulating roller
balls. The ERA Resectoscope Sleeve, when installed on a standard hysteroscope,
changes the flow of electrosurgical energy delivered during cutting. This
innovative approach permits the use of isotonic solutions, such as normal
saline, which are physiologically compatible with the patient. The Company
believes that the ability to effectively use isotonic solutions during
hysterscopic procedures should minimize the risk of serious electrolyte
disturbances and their associated complications. The ERA product line is easy to
use because it is designed for total mechanical compatibility with existing
hysteroscopic instrumentation and power sources.
FUTURA Product Line
There is also an important urological application for the resectoscope
sleeve. The FUTURA Resectoscope Sleeve enables the urologist to perform a
Transurethral Resection of the Prostate ("TURP") more safely. TURP is used to
treat symptomatic enlargement of the prostate, or benign prostatic hyperplasia
("BPH"). Approximately 180,000 TURP procedures were performed in the United
States in 1997.
TURP typically involves the electrosurgical removal of abnormal tissue
through a resectoscope, without the need for an incision. Conventional
electrosurgical procedures, however, require the use of hypotonic irrigation
solutions, the excessive absorption of which is associated with a potentially
catastrophic complication referred to as "TUR Syndrome." In order to reduce the
risk of TUR Syndrome, most hospitals have adopted a strict surgical protocol
limiting the TURP procedure time, which may make it difficult for physicians to
completely resect abnormal prostate tissue in a single procedure. The FUTURA
Resectoscope Sleeve, which utilizes the same patented Microgyn technology used
for the gynecological application, enables the urologist to perform
transurethral procedures using isotonic (physiologic) solutions, eliminating the
risk of TUR Syndrome, and permitting the extra procedure time that may be needed
to complete resection of the prostate.
Clinical and Regulatory Status
Both the ERA and FUTURA Resectoscope Sleeve products have received FDA
510(k) clearance for therapeutic hysteroscopy.
Research and Development
The Company's research and development activities are performed through
a combination of internal employees and external consultants. The Company
intends to continue to focus its research and development efforts on the
development of the S/TOP contraceptive product. Research and development
expenses in 1998, 1997, and 1996 were $4.3 million, $5.4 million, and $3.8
million, respectively.
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Manufacturing
The Company eliminated its manufacturing function in July 1998 as a
part of its restructuring. Prior to eliminating manufacturing, the Company was
inspected by the FDA, and was in substantial compliance with all FDA
requirements including FDA Good Manufacturing Practices ("GMP") for medical
devices. The Company has also been inspected in the past by the California
Department of Health Services ("CDHS") and is registered with the State of
California to manufacture its medical devices and drugs. The State of California
Food and Drug Branch conducted a two-day inspection of the San Carlos facility
in February 1997 and as a result of that inspection, recommended that Conceptus
be issued a drug license by the State of California Department of Health
Services. See "Risk Factors-Dependence Upon Sole Source Suppliers; Lack of
Contractual Arrangements" and - "Limited Manufacturing Experience and Third
Party Manufacturers."
Marketing and Distribution
Prior to the Company's July 1998 restructuring, the ERA resectoscope
sleeve and the STARRT products were marketed by the Company's direct sales force
in the U.S. and Europe. The T-TAC and FUTURA products were distributed by a
network of distributors in the U.S., Europe, and Australia. In 1998, the Company
did not have any shipments to its major distribution partners for the T-TAC and
FUTURA products. The absence of shipments to these distributors and the
elimination of the Company's sales force resulted in a $977,000 decrease in
sales from 1997. In 1997 and 1996, sales to major distributors as a group were
90% and 65% of total sales, respectively. Until the Company is successful in
establishing alternate distribution and marketing partners to distribute the
Microgyn, T-TAC, and STARRT products, revenues are expected to decrease from
1998 to a very low level. There can be no assurance that any of the Company's
existing or future distribution partners will successfully market the Company's
products for applications in radiology, gynecology, or urology. See "Risk
Factors-Limited Sales, Marketing and Distribution Experience; Emerging Market."
In July 1996, the Company entered into an agreement with Mallinckrodt
Group, Inc. ("Mallinckrodt"), a major supplier of radiological contrast media.
Pursuant to this agreement, Conceptus granted Mallinckrodt marketing rights for
radiology applications of the T-TAC system in North, Central and South America.
In June 1996, the Company appointed Schering Health Care, Ltd., a major supplier
of reproductive pharmaceuticals to the interventional gynecology market, as
Conceptus' exclusive distributor in the United Kingdom. In September 1997, the
Company entered into a marketing and distribution agreement with Imagyn,
formerly UroHealth, Inc., granting Imagyn an exclusive, worldwide license to
distribute products for urological applications of the resectoscope sleeve.
These distribution agreements are currently dormant. In March 1998, the Company
received notification that Schering Health Care Ltd. terminated the distribution
agreement with the Company, effective May 1999.
The Company believes that interventional gynecology is an emerging
market, thus there is no proven distribution channel in the United States.
Penetrating this emerging market is a challenge due to structural
characteristics associated with the interventional gynecology market. Unlike
many other physician specialty markets, the interventional gynecology market is
characterized by a large number of office-based physicians (7,500) who often
practice alone or with one other physician. Thus, the number of sales "call
points" is large. In addition, interventional gynecologists do not tend to
sub-specialize in a particular procedure within interventional gynecology and
thus perform a large variety of clinical
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procedures, with each individual procedure representing a relatively small
amount of the physician's total professional fees. Yet, the interventional
gynecologist requires the same level of in-servicing, training and
clinically-based selling activities that are required in other physician
specialty markets. These market dimensions: a large, diffusely- distributed
custromer base, with no real concentration of medical procedures makes
distribution to the interventional gynecologists a challenge.
Prior to its July, 1998 restructuring, Conceptus had sought to license
or acquire products that were complementary to its products in order to develop
a "critical mass" of medical devices to justify the hiring of a direct,
specialty sales force. The Company believes there are several companies with
such products which to date have been unable to establish an effective
distribution channel for them. Failing to build a line of products that would
enable cost effective, direct marketing to the interventional gynecology market,
the Company eliminated its sales and marketing and manufacuring functions,
initiated discussions with potential marketing partners and focused its
remaining internal resources on the development of its S/TOP permanent
contraception device. In conjunction with the restructuring, the Company decided
to no longer maintain compliance with CE Mark requirements, which is required
for all products to be sold in the European Community. Accordingly, effective
January 1, 1999, the Company's current products cannot be sold directly by the
Company into the European Community.
The Company generally operates under written distribution agreements
with its distributors which grant the distributor the exclusive right to sell
the Company's products within a defined territory. These distributors also
typically market other medical products, although the Company seeks to obtain
covenants from its distributors prohibiting them from marketing medical devices
that compete directly with the Company's products. The Company's distributors
typically purchase the Company's products at a discount from list price and
resell the products to hospitals, clinics and physicians. Sales to international
distributors are usually denominated in United States dollars. The end-user
price is determined by the distributor and varies from country to country. See
"Risk Factors Dependence Upon International Distributors and Sales."
Patents, Trade Secrets and Licenses
The Company's policy is to aggressively protect its proprietary
position by, among other things, filing United States and foreign patent
applications to protect technology, inventions and improvements that are
important to the development of its business. The Company's strategy includes
extending the patent protection of its in-licensed technology (from Target) by
filing procedure-specific method patents wherever possible for the use of the
Company's products in new clinical applications, as well as aggressively
pursuing patents for all its other inventions and developments.
As of February 28, 1999, Conceptus had applied for 19 United States
patents, seven of which have been issued to the Company, and has filed 25
foreign patents, two of which have been issued to the Company. The Company's
issued patents contain claims regarding guidewire manipulation, a novel
guidewire design and a delivery mechanism for a tubal occlusion device. The
pending applications cover various aspects of the Company's proprietary tubal
access platform technology, including certain claims specific to falloposcopy
products, as well as the Company's S/TOP device, allowing the use of a
physiologic solution during operative hysteroscopy and other products that are
currently, or in the future may be, used in conjunction with the Company's
product systems. Conceptus is also the licensee (from Target) for exclusive use
in the field of reproductive physiology, of substantial technology developed by
Target as described below, and has granted to Target an
11
exclusive license in certain fields of interventional medicine outside of the
field of reproductive physiology to certain Conceptus technology. Conceptus's
exclusive license of Target's technology is applicable to all technology
available to the Company as of February 1, 1996. Conceptus does not have any
preferential rights for Target technology developed following that date. As of
February 28, 1999, Target held, and Conceptus exclusively licensed from Target
within the field of reproductive physiology, 78 issued United States patents,
numerous United States patent applications and numerous foreign patents issued
and applications pending covering various aspects of its products and core
technology. Target's issued patents relate to the design of Target's
micro-catheters, the initial patent for which expires in June 2006, certain
aspects of guidewire design and other important aspects of Target's
micro-catheter, guidewire and micro-coil technologies. In the event that such
Target patents are at any time invalidated, the Company's proprietary position
in the marketplace would be severely compromised. In addition, should the Target
technology licensed to the Company be found to infringe upon a third party's
technology, the Company's sale of products based on such infringing Target
technology could be limited. Finally, in the event that the Company materially
breaches the terms of its license from Target, Target will have the right to
terminate the license. Any such termination of this license would deprive the
Company of the right to develop or sell products based on the licensed
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors
Reliance on Patents and Protection of Proprietary Technology."
Government Regulation
United States
The research, development, manufacture, labeling, distribution and
marketing of the Company's products are subject to extensive and rigorous
regulation by the FDA and, to varying degrees, by state and foreign regulatory
agencies. The Company's products are regulated in the United States as medical
devices by the FDA under the Federal Food, Drug, and Cosmetic Act (the "FDC
Act") and most require clearance or approval by the FDA prior to
commercialization. In addition, material changes or modifications to medical
devices also are subject to regulatory review and clearance or approval. Under
the FDC Act, the FDA regulates the research, clinical testing, manufacturing,
safety, labeling, storage, record keeping, advertising, distribution, sale and
promotion of medical devices in the United States. The testing for, preparation
of and subsequent review of applications by the FDA and foreign regulatory
authorities is an expensive, lengthy and uncertain process. The failure by the
Company to comply with FDA requirements could result in warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, the government's refusal to grant premarket clearance
or premarket approval for devices, and criminal prosecution. Accordingly, the
Company has invested in building an experienced team of regulatory
professionals. For example, the Company's Senior Vice President, Clinical
Research, Regulatory Affairs and Quality Assurance was appointed by the FDA to
its OB/GYN Advisory Panel.
The FDA also has the authority to require clinical testing of certain
medical devices. If clinical testing of a device is required and if the device
presents a "significant risk," an IDE application must be approved prior to
commencing clinical trials. The IDE application must be supported by data,
typically including the results of laboratory and animal testing. If the IDE
application is approved by the FDA, clinical trials may begin at a specific
number of investigational sites with a maximum number of patients, as approved
by the agency. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such costs do not exceed
recovery of the costs of manufacture, research,
12
development and handling. The clinical trials must be conducted under the
auspices of an IRB pursuant to FDA regulations.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain premarket
notification clearance under Section 510(k) of the Federal Food, Drug, and
Cosmetic Act ("510(k)") or a premarket approval ("PMA"). In addition, material
changes to medical devices are also subject to FDA review and clearance or
approval. If a medical device manufacturer or distributor can establish, among
other things, that a device is "substantially equivalent" in intended use and
technological characteristics to certain legally marketed devices, for which the
FDA has not required a PMA, the manufacturer or distributor may seek clearance
from the FDA to market the device by filing a 510(k). Though generally believed
to be a shorter, less costly regulatory path than a PMA, the 510(k) may need to
be supported by appropriate data establishing to the satisfaction of the FDA the
claim of substantial equivalence to the predicate device. In addition, the FDA
may require review by an advisory panel as a condition for 510(k) clearances,
which can further lengthen the regulatory process. In recent years, the FDA has
been requiring a more rigorous demonstration of substantial equivalence.
Following submission of the 510(k), the manufacturer or distributor may
not place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information, including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA. Such a request for additional
information or determination that the device is not substantially equivalent
would delay market introduction of the products that are the subject of the
510(k).
If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to a legally marketed device,
the manufacturer or distributor must seek premarket approval of the proposed
device through submission of a PMA. A PMA must be supported by extensive data,
including, laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device as well as extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. The PMA approval process can be lengthy, expensive and uncertain.
FDA review of a PMA generally takes approximately two years or more from the
date of filing to complete. If granted, the approval of the PMA may include
significant limitations on the indicated uses for which a product may be
marketed. The PMA process can take several years from initial filing and
requires the submission of extensive supporting data and clinical information.
There can be no assurance that any future products or applications developed by
the Company will not require approval under the more lengthy and expensive PMA
process. If the Company is required to obtain approval for any products pursuant
to the PMA procedure or, if the 510(k) process with respect to any products is
extended for a considerable length of time, the commencement of commercial sales
of the Company's products will be delayed substantially.
As of February 28, 1999, the Company has received five 510(k)
clearances for certain diagnostic and therapeutic indications of its T-TAC
system. In addition, the Company has received two 510(k) clearances for its
STARRT Falloposcopy system and its Stargate Catheter, both for the diagnosis of
PTO. Conceptus has also received two 510(k)
13
clearances for its FUTURA Sleeve in urology applications and its ERA Sleeve in
gynecology applications.
The Company is also required to register as a medical device
manufacturer with the FDA and state agencies, such as the CDHS and to list its
products with the FDA. As such, the Company will be periodically inspected by
both the FDA and CDHS for compliance with GMP and other applicable regulations.
These regulations require that the Company manufacture its products and maintain
its documents in a prescribed manner. In July 1994, the Company's San Carlos
facility was inspected by the CDHS with no observations, and the Company was
subsequently granted a California medical device manufacturing license. In
February 1997, the Company's San Carlos facility was inspected by the CDHS, and
granted a California drug manufacturing license. In March 1997, the Company was
inspected by the FDA, with no action indicated.
The Company is required to provide information to the FDA on death or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. In addition, the FDA
strictly prohibits the marketing of approved devices for uses other than those
specifically cleared for marketing by the FDA. If the FDA believes that a
company is not in compliance with the law or regulations, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the company, its
officers and its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The promotion of most products regulated by the FDA is subject to both
FDA and Federal Trade Commission jurisdictions. The Company is also subject to
regulation by the Occupational Safety and Health Administration and by other
government entities. Regulations regarding the manufacture and sale of the
Company's products are subject to change. The Company cannot predict what
impact, if any, such changes might have on its business, financial condition or
results of operations. See "Risk Factors Government Regulations."
International
Export sales of investigational PMA devices or devices not cleared for
commercial distribution in the United States to certain countries are subject to
FDA export permit requirements. In order to obtain such a permit, the Company
must provide the FDA with documentation from the medical device regulatory
authority of the country in which the purchaser is located, stating that the
sale of the device is not a violation of that country's medical device laws.
Recent regulations eliminate export approval requirements for investigational
devices subject to an approved IDE which are being imported into certain
countries.
The European Union has promulgated rules that require manufacturers of
medical products to obtain the right to affix to their products the CE Mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European Union Medical Device Directives. The ISO 9000 series of
standards for quality operations has been developed to ensure that companies
know the standards of quality to which they must adhere to receive European
Union certification. ISO 9000 certification is one of the CE mark certification
requirements. Failure to receive the right to affix the CE Mark will prohibit
the Company from selling the product in member countries of the European Union
after December 31, 1998. The Company received ISO certification in January 1998,
but since
14
eliminating its manufacturing function the Company has allowed its ISO
certification to lapse. Thus the Company is no longer able to affix a "CE Mark"
to its products.
Many countries in which the Company currently operates or intends to
operate either do not currently regulate medical devices or have minimal
registration requirements; however, these countries may develop more extensive
regulations in the future which could adversely affect the Company's ability to
market its products. In addition, significant costs and requests by regulators
for additional information may be encountered by the Company in its efforts to
obtain regulatory approvals. Any such events could substantially delay or
preclude the Company from marketing its products in the United States or
internationally. See "Risk Factors Government Regulations."
Third-Party Reimbursement
Market acceptance of the Company's products in international markets
may be dependent in part upon the availability of reimbursement within
prevailing healthcare payment systems. Reimbursement systems in international
markets vary significantly by country, and by region within some countries, and
reimbursement approvals must be obtained on a country-by-country basis. Many
international markets have government-managed health care systems that determine
reimbursement for new devices and procedures. In most markets, there are private
insurance systems as well as government-managed systems. As in the United
States, the Company expects that ERA and FUTURA products will be covered within
the hysteroscopy procedure reimbursement framework. Large-scale market
acceptance of the Company's tubal catheterization, falloposcopy, sterilization
and other products will depend on the availability and level of reimbursement in
international markets targeted by the Company. Currently, the Company has been
informed by its international distributors that the tubal catheterization system
has been approved for reimbursement in countries in which the Company markets
its products. The Company's falloposcopy system has been approved for
reimbursement only in Australia. Obtaining reimbursement approvals can require
12 to 18 months or longer. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
amount, or at all. Failure to obtain such approvals could have a material
adverse effect on market acceptance of the Company's products in the
international markets in which the Company is seeking approvals and could have a
material adverse effect on the Company's sales, business, financial condition
and results of operations.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of its products will be required to obtain
reimbursement. Availability of reimbursement will depend on the clinical
efficacy and cost of the Company's systems. There can be no assurance that
reimbursement for the Company's products will be available in the United States
or in international markets under either government or private reimbursement
systems, or that physicians will support and advocate reimbursement for use of
the Company's systems for all indications intended by the Company. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from health care payors or adverse changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors Uncertainty Relating to Third Party Reimbursement."
15
Competition
Currently, fallopian tubes are ligated by cutting or cauterizing the
tubes, or by mechanical occlusion of the tubal lumen using clips or rings in a
surgical procedure such as a laparoscopy or laparotomy. The Company is aware of
several competitors attempting to provide alternate methods of tubal
sterilization including radio frequency coagulation, intratubal cyrogenic
freezing, polymeric embolic agents, nitenol stents, silicone plugs, and
hydrogelic plugs.
In the infertility segment, the Company believes its primary current
competition to be existing methods for diagnosing and treating diseases and
disorders of the fallopian tubes. Accordingly, the Company competes with
manufacturers of products that are used in other methods for diagnosing and
treating tubal diseases and disorders, such as manufacturers of laparoscopic and
hysteroscopic devices and other products that provide more invasive access to
the fallopian tubes. The Company also competes with certain other companies that
manufacture catheters and guidewires for tubal catheterization and falloposcopic
devices. Additionally, certain smaller companies are developing alternative
catheter-based systems for the diagnosis and treatment of female reproductive
disorders which may compete directly with the Company's systems.
In the therapeutic hysteroscopy market, there are four major endoscope
companies (Karl Storz Endoscopy, Inc., Olympus, Inc., Circon Corporation and
Richard Wolf Medical Instruments Corporation) that account for the majority of
sales of the equipment and instruments used to perform these procedures.
Although the Company believes it has significant intellectual property
protection for its products, there can be no assurance that these companies or
others (e.g. electrosurgical generator manufacturers) will not develop
technology to enable electrosurgical therapeutic hysteroscopy to be performed
with isotonic solution. The major endoscope companies and others also market
cutting loops and coagulating roller balls which would be directly competitive
with those manufactured and marketed by the Company. There are also a number of
companies developing devices to perform endometrial ablation using different
energy sources.
The Company believes that its products have distinct advantages over
those of its competitors based on the Company's advanced proprietary
micro-catheter and guidewire technologies and its proprietary resectoscope
safety sheath technology. However, many of the Company's competitors have
substantially greater name recognition and financial resources than the Company
and have greater resources and expertise in research and development, obtaining
regulatory approvals, manufacturing and marketing. Certain of these companies
are developing and marketing devices for the diagnosis and treatment of
disorders of the female reproductive system and others may choose to enter this
market at a later date. See "Risk Factors-Competition; Uncertainty of
Technological Change" and "-Reliance on Patents and Protection of Proprietary
Technology."
Product Liability and Insurance
The manufacture and sale of medical products involve an inherent risk
of exposure to product liability claims and product recalls. Although the
Company has not experienced any product liability claims to date, there can be
no assurance that the Company will be able to avoid significant product
liability claims and potential related adverse publicity. The Company currently
maintains product liability insurance with coverage limits of $5,000,000 per
occurrence and an annual aggregate maximum of $5,000,000, which the Company
believes is comparable to that maintained by other companies of similar size
serving similar markets. However, there can be no assurance that product
liability claims in connection with clinical trials or sale of the Company's
products will not exceed such insurance coverage
16
limits, which could have a material adverse effect on the Company, or that such
insurance will continue to be available on commercially reasonable terms, or at
all. In addition, the Company may require increased product liability coverage
as more of its products are commercialized. Such insurance is expensive and in
the future may not be available on acceptable terms, if at all. A successful
product liability claim or series of claims brought against the Company in
excess of its insurance coverage, or a recall of the Company's products, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors-Product Liability Risk and Recalls;
Limited Insurance Coverage."
Employees
As of February 28, 1999 the Company employed 22 individuals, 17 of whom
were engaged directly in research, development, regulatory and quality assurance
affairs. The Company is dependent upon several key management and technical
personnel. The loss of the services of one or more key employees could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's success will also depend on its ability to
attract and retain additional highly qualified management and technical
personnel. The Company faces intense competition for qualified personnel, many
of whom are often subject to competing employment offers, and there can be no
assurance that the Company will be able to attract and retain such personnel.
None of the Company's employees is covered by a collective bargaining agreement.
Conceptus believes that it maintains good relations with its employees. See
"Risk Factors-Dependence Upon Key Personnel."
Executive Officers of the Company
The executive officers of the Company, and their ages, as of February
28, 1999, are as follows:
Name Age Position
Kathryn A. Tunstall.............. 48 President, Chief Executive Officer
and Director
Steve Bacich..................... 37 Vice President, Research and
Development
Cynthia M. Domecus............... 39 Senior Vice President, Clinical
Research, Regulatory
Affairs and Quality Assurance
Ms. Tunstall joined Conceptus in July 1993 as President, Chief
Executive Officer and a director. Prior to joining Conceptus, Ms. Tunstall spent
seven years as an executive officer and in senior marketing positions of the
Edwards Less Invasive Surgery Division of Baxter International ("Baxter"), a
division engaged in the research and development, manufacturing and marketing of
cardiovascular catheters, serving as President from June 1990 to June 1993 and
serving as Vice President and Director of Worldwide Sales and Marketing from
November 1986 to June 1990. From 1980 to 1986, Ms. Tunstall held various
positions in manufacturing and marketing of McGaw Laboratories, a pharmaceutical
and medical device company, serving most recently as Vice President of
Marketing. Ms. Tunstall also serves as a director of RESOLVE, a non-profit
infertility support, education and advocacy organization. Ms. Tunstall holds a
B.A. in Economics from the University of California and has also completed
graduate level studies in Business and Healthcare Administration.
17
Mr. Bacich joined Conceptus in March 1997 as Vice President, Research
and Development. Prior to joining Conceptus, Mr. Bacich spent seven years as a
Co-founder and Director of New Product Development for Imagyn Medical, Inc., a
medical device manufacturer of gynecological products for infertility and
enodscopic procedures. From August 1987 to September 1989, Mr. Bacich held
engineering positions in research and development and serving most recently as
Senior Staff Engineer, Business Development for the Edwards Less Invasive
Surgery Division of Baxter. From 1985 to 1987, Mr. Bacich held research and
development positions at Mentor Corporation, a reconstructive surgery and
urology company. From 1983 to 1985, Mr. Bacich held research and development
positions at American Medical Optics, an ophthalmic medical device manufacturer
and Division of American Hospital Supply Corporation. Mr. Bacich holds a B.S. in
Biomedical Engineering from the University of California, San Diego.
Ms. Domecus has served as Senior Vice President, Clinical Research,
Regulatory Affairs and Quality Assurance of Conceptus since May 1994. From March
1992 to May 1994 she served as Senior Director and Director of Regulatory and
Quality Affairs for Systemix, a biotechnology firm. From 1986 to 1992, Ms.
Domecus served in varying regulatory affairs capacities with Collagen
Corporation, a biomedical device manufacturer, serving most recently as Director
of Regulatory Affairs from January 1991 to March 1992. Ms. Domecus has been
certified by the Regulatory Affairs Certification Board of the Regulatory
Affairs Professional Society. In 1995, Ms. Domecus was appointed by the FDA to
its OB/GYN Advisory Panel as the industry representative. Ms. Domecus holds a
B.A. in Psychology from the University of the Pacific.
ITEM 2. PROPERTIES
The Company is currently occupying approximately 14,000 square feet in
San Carlos, California. The facility is subject to a lease which expires in
December, 1999. The Company has leased additional space in the amount of
approximately 16,397 square feet, also in San Carlos, California which is
subject to a lease which expires in May, 2002. The larger facility has been
sub-leased at amounts greater than the Company's lease obligation through the
entire lease period. The Company believes that it will be able to lease
additional space or renew its existing leases as necessary.
ITEM 3. LEGAL PROCEEDINGS
A complaint alleging sexual harassment was filed against the Company
and certain named officers of the Company in the Superior Court of San Mateo,
California on December 17, 1997. As of March 1, 1999, the Company does not
believe that the outcome of this case will have a material effect on the
operations or financial condition of the Company. The Company from time to time
is involved in routine legal matters incident to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1998.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol CPTS since the effective date of the Company's initial
public offering on February 1, 1996. Prior to the initial public offering, no
public market existed for the Common Stock. The following table presents the
high and low closing sale prices for the Company's Common Stock as reported in
the Nasdaq National Market for the period indicated.
High Low
---- ---
January 1, 1998 through March 31, 1998 $ 5.250 $3.500
April 1, 1998 through June 30, 1998 $ 3.500 $1.250
July 1, 1998 through September 30, 1998 $ 1.750 $0.530
October 1, 1998 through December 31, 1998 $ 2.250 $0.660
January 1, 1997 thorugh March 31, 1997 $14.250 $9.375
April 1, 1997 through June 30, 1997 $12.750 $8.500
July 1, 1997 through September 30, 1997 $10.250 $6.625
October 1, 1997 through December 31, 1997 $11.000 $4.125
As of February 28, 1999, the Company had approximately 114 stockholders
of record. The Company has never paid cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. The Company
intends to retain any future earnings for reinvestment in its business. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements and such other factors as the Board
of Directors deems relevant.
In October 1998, the Company received notification from the National
Association of Securities Dealer's Inc. ("NASD") that due to the decline of the
Company's stock price, the Company was not in compliance, throughout the third
quarter of 1998, with certain listing maintenance requirements of the Nasdaq
National Market. In November 1998, the Company's Common Stock satisfied these
maintenance requirements with a closing bid price of at least $1.00 per share
for ten consecutive trading days. While these maintenance requirements were
satisfied within the required ninety-day period required by the NASD, there can
be no assurance that Company's Common Stock will stay in compliance the
maintenance requirements. If delisting were to occur, the Company expects that
trading of its Common Stock would be conducted on the OTC Bulletin Board or in
the over-the-market in what is commonly referred to as the "pink sheets". The
closing price of the Company's Common Stock on December 31, 1998 was $2.25 per
share.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company. This historical data should be read in conjunction with the attached
consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Form 10-K.
Year Ended December 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 389 $ 243 $ 664 $ 1,426 $ 449
Cost of sales 718 1,021 1,208 3,516 1,702
-------- -------- -------- -------- --------
Gross profit (loss) (329) (778) (544) (2090) (1,253)
Operating costs and expenses:
Research and development 1,778 2,589 8,509 5,429 4,317
Selling, general and admin 1,894 2,805 4,824 6,323 5,349
-------- -------- -------- -------- --------
Total operating expenses 3,672 5,394 13,333 11,752 9,666
-------- -------- -------- -------- --------
Loss from operations (4,001) (6,172) (13,877) (13,842) (10,919)
Interest & investment income, net 125 323 2,185 1,784 1,254
-------- -------- -------- -------- --------
Net loss $ (3,876) $ (5,849) $(11,692) $(12,058) $ (9,665
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (1.39) $ (1.29) $ (1.01)
======== ======== ========
Shares used in computing basic
and diluted net loss per share 8,396 9,381 9,562
======== ======== ========
Year Ended December 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ------------ ----------- ------------ -----------
Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................... $5,253 $5,082 $39,021 $27,058 $17,071
Working capital.............................. 5,089 4,407 37,078 26,608 16,500
Total assets................................. 6,221 6,092 40,093 29,480 19,031
Long-term portion of debt and capital lease
obligations............................... 264 153 34 1 -
Redeemable convertible preferred stock....... 11,453 16,624 - - -
Accumulated deficit.......................... (6,132) (11,981) (23,673) (35,731) (45,396)
Total stockholders' equity................... (6,125) (11,877) 37,595 27,504 18,014
Basic and diluted net loss per share have also been retroactively
restated to apply the requirements of Staff Accounting Bulletin No. 98, issued
by the SEC in February 1998 ("SAB 98"). Under SAB 98, certain shares of common
stock and options and warrants to purchase shares of common stock issued at
prices substantially below the per share price of shares sold in the Company's
initial public offering, previously included in the computation of shares
outstanding pursuant to Staff Accounting Bulletin Nos. 55, 62 and 83 are now
excluded from the computation as their effect is antidilutive under Financial
Accounting Standards Board Statement 128.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since its inception on September 18, 1992, the Company has been
primarily engaged in the design, development and marketing of minimally invasive
devices for reproductive medical applications. The Company's current focus is on
providing a non-surgical approach to fallopian tube sterilization, the most
commonly performed contraceptive procedure worldwide, while continuing to
support its diagnostic and therapeutic gynecology products. The Company has a
limited history of operations and has experienced significant operating losses
since inception. Operating losses are expected to continue for at least the next
several years as the Company continues to expend substantial resources to fund
clinical trials in support of regulatory and reimbursement approvals, to conduct
research and development, and to partner with appropriate marketing and sales
partners.
The Company's initial commercial products, the T-TAC and STARRT
Falloposcopy systems, have generated limited sales to date. Prior to the July
1998 restructuring, the Company had sought to license or acquire products that
were complementary to its products in order to develop a critical mass of
medical devices to justify the hiring of a direct, specialty sales force.
Failing to build a line of products that would enable cost effective, direct
marketing to the interventional gynecology market, the Company implemented a
restructuring plan in July 1998 when the Company assessed that the near-term
market potential of these products did not justify a direct, specialty
salesforce. This restructuring reduced the number of employees by approximately
fifty from seventy-two at the beginning of the year by eliminating all sales and
marketing personnel, the manufacturing function, and most administrative
personnel. As a result of these actions the Company reduced fourth quarter
operating losses to $1.3 million in the fourth quarter of 1998 from $4.3 million
in the fourth quarter of 1997.
In conjunction with the restructuring, the Company decided to no longer
maintain compliance with CE Mark requirements, which is required for all
products to be sold in the European Union. Accordingly, effective January 1,
1999, the Company's current products cannot be sold directly by the Company into
the European Union. The Company is actively engaged in discussions with
potential marketing and manufacturing partners in order to bring the T-TAC,
STARRT, and Microgyn products to the gynecology market. The failure to establish
and maintain effective distribution partnerships and channels for the Company's
products resulted in a significant decrease in revenues in 1998. Until the
Company is successful in establishing marketing and sales partners to distribute
the Microgyn, STARRT, and T-TAC products, revenues are expected to decrease from
1998 to a very low level.
Prior to the restructuring the Company sold its products to
international markets through a limited number of distributors who resell to
physicians and hospitals. Sales to distributors are made on open credit terms
and may include purchase discounts. General marketing of the T-TAC system
commenced upon the receipt of a 510(k) clearance for diagnosis of proximal tubal
occlusion in August 1995. Sales in 1996 were through a small direct sales force
and two significant distributors on open credit terms and consisted primarily of
commercial shipments of T-TAC products. Sales in 1997 and 1998 were through a
small direct sales force (which was eliminated in July, 1998) and distributors,
on open credit terms and consisted of commercial shipments of T-TAC, STARRT, ERA
and FUTURA products.
21
In the fourth quarter of 1996 the Company presented results from the
IMSF study of its STARRT Falloposcopy system. Study data showed that use of the
STARRT Falloposcopy system altered infertility diagnosis in the majority of
cases versus conventional infertility diagnosis. In February 1998, the Company
received 510(k) clearance of its second generation STARRT catheter, the Stargate
Catheter, a component of the Company's STARRT Falloposcopy System, for the
diagnosis of PTO. The Stargate Catheter is a modification of the VS Falloposcopy
Catheter, which was previously cleared for marketing in the United States by the
FDA. The Stargate Catheter is designed to improve visualization of the fallopian
tube by maintaining sufficient space between the wall of the fallopian tube and
a micro endoscope. Limited marketing of the STARRT product line occurred in 1998
to three customers in the United States and in Europe, one large customer
purchased a moderate evaluation quantity of this new Stargate catheter and
related products.
On November 26, 1996, the Company completed the acquisition of
Microgyn, a privately held medical device company developing products designed
to improve the safety and performance of resectoscope procedures, including
therapeutic hysteroscopy. The Company acquired all of the outstanding common
stock of Microgyn, Inc. in exchange for $3.0 million in cash on the acquisition
date and $1.0 million in the form of 104,708 shares of common stock issued six
months after the acquisition date, plus $752,000 due to assumption of certain
liabilities and related acquisition expenses. The acquisition was accounted for
using the purchase method and $4.8 million was written-off as in-process
research and development in 1996. Future earn-out payments in the form of cash
or stock, at the option of Conceptus, is payable to the former shareholders of
Microgyn based upon meeting certain future milestones. The Company completed
product development of the Microgyn product portfolio in 1998.
In the second half of 1997 the Company began marketing the ERA and
FUTURA Resectoscope Sleeve products from the Microgyn technology portfolio.
These products allow the use of physiologic solution when performing
hysteroscopic procedures, which increases the safety of resection procedures by
eliminating the risk of dilutional hyponatremia, a complication that can lead to
serious heart, lung, and brain disorders. The Company received 510(k) clearance
for its FUTURA Resectoscope Sleeve for urology applications in the first quarter
of 1997. In September 1997, the Company received 510(k) clearance for its ERA
Resectoscope Sleeve for gynecological procedures. Also in September 1997, the
Company entered into a marketing and distribution agreement with Imagyn,
formerly UroHealth, Inc., granting Imagyn an exclusive, worldwide license to
distribute products for urological applications of the resectoscope sleeve.
Since December 31, 1997, Imagyn has not purchased any of the Company's products.
In March 1998, Imagyn notified the Company of its intent to terminate the
distribution agreement between the parties as of June 30, 1998. Although the
Company and Imagyn are currently renegotiating the terms of their relationship,
there can be no assurance that the parties will reach an agreement on such
terms. There can be no assurance that the Company will be able to obtain a
suitable alternate distributor for its products for urological applications.
Unit sales of the Microgyn sleeve products in 1998 were significantly below the
levels required to meet agreed upon milestones. The Company is actively seeking
sales and marketing partners to distribute the ERA Resectoscope Sleeve for
gynecologic applications in the United States and internationally.
Certain of the Company's products were manufactured by original
equipment manufacturers while others were manufactured by Conceptus at its
location in San Carlos, California. In the fourth quarter of 1997, the Company
acquired the exclusive manufacturing rights from Medical Scientific, Inc., the
supplier of the Company's ERA and FUTURA Resectoscope Sleeves. The manufacturing
know-how related to the ERA and FUTURA Resectoscope Sleeves has been transferred
to the Company's facility in San Carlos.
22
If the volume of T-TAC, STARRT, ERA, and FUTURA products increases
significantly, as a result of securing marketing partners, the Company expects
to contract with original equipment manufacturers in order to maintain product
supply.
Future revenues and results of operations may fluctuate significantly
from quarter to quarter and will depend upon, among other factors, the rate at
which the Company establishes domestic and international distributors or
marketing partners, actions relating to regulatory and reimbursement matters,
the extent to which the Company's products gain market acceptance, the timing
and size of distributor purchases, the progress of clinical trials, and the
introduction of competitive products for diagnosis and treatment of the female
reproductive system. The Company believes that development of the T-TAC, STARRT,
and ERA and FUTURA products has reached a logical stage sufficient to enable
distribution to the marketplace. Therefore, the Company does not expect to
expend significant resources on further development of these products nor does
the Company plan on expending significant resources marketing these products
without a significant marketing and distribution partner. Future sales of the
T-TAC, STARRT, ERA, and FUTURA products are expected to be very low or decrease
from current levels until effective distribution partners are secured.
The Company continues to devote significant financial and human
resources on the development of the S/TOP device, a non-surgical alternative to
surgical tubal ligation, the most commonly used method of sterilization. The
system utilizes a unique micro-coil designed to be permanently implanted into
the fallopian tube in order to obtain effective sterilization. Hysterectomy
patients have participated in trials to determine the tissue response to the
implanted microcoil. In July 1997, the Company commenced a Phase II efficacy
study of the S/TOP system in Australia. The Phase II study involves device
placement in fertile women who desire permanent sterilization. Study patients
will be monitored for a minimum of two years. In 1998, the Phase II was expanded
to include an additional site in Australia and two sites in the United States.
In response to early Phase II results in which S/TOP device expulsion and
migration were noted, device and procedural modifications were implemented in
mid-1998. Since that time, there have been no reported device expulsions or
migrations. The Company has also been conducting a proof-of-principal study in
which patients scheduled for a hysterectomy in six to twelve weeks consent to
have S/TOP devices implanted and removed at hysterectomy, in order to enable
hystological evaluation of the devices in-situ in the fallopian tube. In this
study, an independent laboratory has reported findings of an acute tissue
response at the site of S/TOP device implantation, tissue in-growth into the
S/TOP device and a tubal environment that is "hostile to conception". The
Company believes that these are important components of the S/TOP device's
method of action of contraception. As of December 31, 1998, fourteen patients
with proven fertility, have been relying on the device for contraception and no
pregnancies have been reported. Based on theses preliminary findings from the
Phase II trial, the Company is in the process of developing plans to expand the
clinical testing of the S/TOP device into a Phase III clinical trial. The
Company is seeking a significant clinical partner to assist in the planning and
execution of a large clinical trial of the S/TOP device and plans to actively
seek and secure such a partner. There can be no assurance that the Company's
efforts to find an appropriate clinical partner will be successful.
In November 1998, the Company announced that it retained CIBC
Oppenheimer Corporation to evaluate strategic alternatives for the Company,
including inquiries that have been received by the Company regarding possible
business alliances. The Company intends to review opportunities in women's
health, its traditional market focus, as well as other areas of medicine.
In October 1998, the Company received notification from the National
Association of Securities Dealer's Inc. ("NASD") that due to the decline of the
Company's stock price, the
23
Company was not in compliance, throughout the third quarter of 1998, with
certain listing maintenance requirements of the Nasdaq National Market. In
November 1998, the Company's Common Stock satisfied these maintenance
requirements with a closing bid price of at least $1.00 per share for ten
consecutive trading days. While these maintenance requirements were satisfied
within the required ninety-day period required by the NASD, there can be no
assurance that Company's Common Stock will stay in compliance the maintenance
requirements. If delisting were to occur, the Company expects that trading of
its Common Stock would be conducted on the OTC Bulletin Board or in the
over-the-market in what is commonly referred to as the "pink sheets".
Results of Operations
Years Ended December 31, 1998, 1997 and 1996
Sales decreased by $1.0 million in 1998 to $0.4 million from $1.4
million in 1997 as a result of the lack of orders from significant distribution
partners combined with the elimination, in July 1998, of all sales and marketing
personnel. Sales increased 115% to $1.4 million in 1997 from $0.7 million in
1996. This increase was due to increased commercial shipments of the Company's
T-TAC products to a significant domestic distributor, as well as commercial
shipments of the Company's FUTURA products to a new domestic distributor. Sales
to domestic customers represented 33%, 83%, and 68% of sales in 1998, 1997, and
1996, respectively. The decrease in domestic sales in 1998 is due to the
elimination of all sales and marketing personnel in July 1998.
Cost of sales decreased $1.8 million in 1998 to $1.7 million from $3.5
million in 1997 due to the absence of approximately $1.1 million of expenses
incurred in 1997 for the purchase of manufacturing rights for the Microgyn
sleeve products combined with the elimination of all manufacturing activities in
July 1998. Cost of sales increased 191% to $3.5 million in 1997 from $1.2
million in 1996. This increase was primarily due to approximately $1.1 million
associated with the purchase of exclusive manufacturing rights of the Company's
ERA and FUTURA products from MSI, combined with increased unit shipments of
T-TAC and FUTURA products.
Research and development ("R&D") expenses, which include clinical and
regulatory expenses, decreased $1.1 million to $4.3 million in 1998 from $5.4
million in 1997 due to significantly reduced development and clinical activities
associated with the Microgyn, T-TAC, and STARRT products. R&D expenses increased
to $5.4 million in 1997 from $3.8 million in 1996 (net of $4.8 million of
acquired in-process research and development). The increase of $1.6 million in
1997 was primarily attributable to the increased number of research and
development employees and related use of supplies, prototype materials and
inventory, and increased expenses associated with supporting various clinical
trials.
As discussed above, the Company expensed $4.8 million of acquired
in-process research and development in connection with the acquisition of
Microgyn in 1996.
Selling, general and administrative ("SG&A") expenses decreased by
approximately $1.0 million to $5.3 million in 1998 due to elimination of all
sales and marketing personnel and significant administrative personnel in July
1998. SG&A increased to $6.3 million in 1997 from $4.8 million in 1996. The $1.5
million increase in 1997 was primarily due to the growth in marketing expenses
associated with promoting the Company's products and growth of United States and
European sales and marketing personnel, increased administrative costs required
to support expanding operations and increased administrative costs of being a
public company,
24
Net interest and investment income were $1.3 million and $1.8 million
in 1998 and 1997, respectively. The decrease was a result of lower average cash
balances due to the utilization of cash for operations.
As a result of the items discussed above, net loss decreased to $9.7
million in 1998 from $12.1 million in 1997. Net loss was $11.7 million in 1996.
The Company's restructuring in July 1998 reduced operating loss in the
fourth quarter of 1998 to $1.3 million from $4.3 million in 1997.
At December 31, 1998 the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $38.0 million and
$13.5 million, respectively. In addition, the Company had research credit
carryforwards of approximately $600,000 as of December 31, 1998. The net
operating loss and credit carryforwards described above will expire, if not
utilized, at various dates beginning in the years 2006 through 2013. Utilization
of the net operating losses and credits may be subject to a substantial annual
limitation due to the change of ownership provisions of the Internal Revenue
Code of 1986, as amended. The annual limitation may result in the expiration of
net operating losses and credits before utilization. See "Risk Factors-Limited
Operating History; Anticipated Future Losses."
Accounting Pronouncements
Please see footnotes to financial statements.
Liquidity and Capital Resources
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $45.4 million at
December 31, 1998. At December 31, 1998, Conceptus had cash, cash equivalents
and investments of approximately $17.1 million compared with $27.1 million at
December 31, 1997. The decrease in 1998 was primarily due to $8.9 million used
in operations, to fund increasing levels of research and development of the
Company's S/TOP contraception product and expansion of the S/TOP Phase II
clinical trial.
Capital expenditures in 1998 were $0.9 million and were primarily
leasehold improvements and related furniture and fixtures for a new building. As
a result of the Company's restructuring in July 1998, the Company subleased this
new building and related funiture and fixtures, for the entire lease term, at
amounts greater than the cost of improvements and related furniture and
fixtures. Capital expenditures in 1997 were $1.0 million compared with $375,000
in 1996. This increase was primarily due to the implementation of a new computer
system, the acquisition of machinery and equipment necessary to manufacture the
ERA and FUTURA Resectoscope Sleeves and the leasehold improvements on the
Company's new facility. The Company plans to finance its capital needs
principally from its existing capital resources, and to the extent available,
bank and lease financing.
Conceptus believes that its existing capital resources will be
sufficient to fund its S/TOP research and development activities through 1999.
The Company has determined that its cash resources are greater than what is
expected to be used in 1999 for the S/TOP development and clinical efforts.
However, the Company's future liquidity and capital requirements will depend
upon numerous factors, including the progress of the Company's clinical research
and product development programs, execution and implementation of partnering
arrangements, the receipt of and the time required to obtain regulatory
clearances and approvals, and the resources devoted to developing, manufacturing
and marketing the
25
Company's products. Accordingly, there can be no assurance that the Company will
not require additional financing within this time frame and, therefore, may in
the future seek to raise additional funds through bank facilities, debt or
equity offerings or other sources of capital. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. Additional funding may not be available when
needed or on terms acceptable to the Company, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISK FACTORS
In addition to the other information in this Form 10-K, the following
factors should be considered carefully in evaluating the Company and its
business. This Form 10-K contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Form 10-K.
Early State of STOP Development - Uncertainty of Product Development
and Lack of Long Term Follow-Up Data. The Company has not yet completed
development of the STOP contraception device and expects to increase research
and development expenditures as the Company implements design changes in pursuit
of a commercially viable design. To obtain revenues from the STOP device the
Company must successfully develop, obtain regulatory approval, manufacture and
market the STOP device. The Company has not yet completed Phase II clinical
trials of the STOP device and anticipates significantly more expenditures to
complete a large Phase III pivotal clinical trial, prior to commercialization.
There can be no assurance that the Company's research and development efforts
will be successfully completed. Additionally, until the development and clinical
testing processes are complete, there can be no assurance the STOP device will
perform in the manner anticipated, or that the results observed in animal and
human clinical trials will be experienced in long-term use. The first Phase II
placement of the device was in July 1997, and as of December 31, 1998 a total of
twenty-three patients have been implanted with the device, thus the Company has
obtained limited clinical data on the safety and efficacy of the product.
Because the Company has not yet obtained any long-term safety or efficacy data
there can be no assurance that long-term safety and efficacy data when collected
will be consistent with the results obtained in early Phase II clinical trials
nor can there be any assurance that the STOP device can be successfully used by
a wide range of patients on a long-term basis as a safe and effective
contraceptive method.
Uncertainty of Market Acceptance. The Company's products have generated
limited revenue to date. There can be no assurance that any of the Company's
existing or future products will gain any significant degree of market
acceptance among physicians, patients and healthcare payors, even if
reimbursement and necessary international and United States regulatory approvals
are obtained. The Company believes that recommendations and endorsements by
physicians will be essential for market acceptance of the Company's products,
and there can be no assurance that any such recommendations or endorsements will
be obtained. The Company believes that physicians will not use the Company's
products unless they determine, based on clinical data and other factors, that
these systems are an attractive alternative to other means of diagnosing and
treating diseases and disorders of the female reproductive system and that the
products offer clinical utility in a cost-effective manner. Acceptance among
physicians will also depend upon the Company's ability to train interventional
gynecologists and other potential users of the Company's products in new
26
interventional techniques and upon the willingness of such persons to learn
these new techniques. Failure of the Company's products to achieve significant
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Sales, Marketing and Distribution Experience; Emerging Market.
The Company has only limited experience marketing and selling its products in
commercial quantities. Interventional gynecology is an emerging medical market
with widely varying practice patterns. Therefore, there is no proven
distribution channel for marketing the Company's current and future products in
the United States or internationally. While the Company is committed to
establishing an effective distribution channel for its products, there can be no
assurance that the Company will be successful in doing so. The failure to
establish and maintain an effective worldwide distribution for the Company's
current or future products, or to retain qualified sales personnel to support
commercial sales of the Company's products, would have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence Upon Transcervical Tubal Access and Catheterization
Products. The Company's initial commercial products, the T-TAC and STARRT
Falloposcopy systems, have generated limited sales to date. Current applications
for these systems include accessing, diagnosing and treating diseases and
disorders of the fallopian tubes. Expanding the number of applications for these
products will require additional development and, in certain cases, clinical
trials and regulatory approvals. The Company will experience a material adverse
effect on its business, financial condition, and results of operations if these
products are not successfully commercialized for existing or future
applications.
Limited Operating History; Anticipated Future Losses. The Company has a
limited history of operations. Since its inception in September 1992, the
Company has been engaged primarily in research and development of its T-TAC,
STARRT Falloposcopy and S/TOP systems and, since 1996, the ERA and FUTURA
product lines. The Company has generated only limited revenues and has only
limited experience in manufacturing, marketing or selling its products in
commercial quantities. The Company has experienced significant operating losses
since inception and, as of December 31, 1998, had an accumulated deficit of
$45.4 million. The Company expects its operating losses to continue for at least
the next several years as it continues to expend substantial resources in
funding clinical trials in support of regulatory and reimbursement approvals,
expansion of manufacturing, marketing and sales activities and research and
product development or acquisition. Due to the expense and unpredictable nature
of these activities, there can be no assurance that the Company will achieve or
sustain profitability in the future. Whether the Company can successfully manage
the transition to a large-scale commercial enterprise will depend upon a number
of factors, including obtaining selected regulatory and reimbursements approvals
for its existing or potential products, establishing its commercial
manufacturing capability, developing its U.S. marketing and selling capabilities
and establishing an international network. Failure to make such a transition
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.
Reliance on Patents and Protection of Proprietary Technology. The
Company's ability to compete effectively will depend substantially on its
ability to develop and maintain proprietary aspects of its technology. There can
be no assurance that the Company's seven issued patents, any future patents that
may be issued as a result of the Company's United States or foreign patent
applications, or the patents under which the Company has license rights, will
offer any degree of protection to the Company's products against competitive
products. There can be no assurance that any patents that may be issued or
licensed to the Company or any of the Company's patent applications will not be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing
27
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the United States or in international markets.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the industry have employed intellectual property litigation to gain
a competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions. The defense and
prosecution of intellectual property suits, USPTO interference proceedings and
related legal and administrative proceedings are both costly and time consuming.
Litigation may be necessary to enforce patents issued to the Company, to protect
the Company's trade secrets or know-how or to determine the enforceability,
scope and validity of the proprietary rights of others.
Any litigation or interference proceedings involving the Company will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
A patent issued to Target Therapeutics, a unit of Boston Scientific
Corporation ("BSC"), and subject to Target's license to the Company, which
contains claims relating to the design of the Company's Variable Softness
micro-catheters (the "Target patent"), has been the subject of four
reexamination proceedings in the USPTO. Following the completion of the first of
such proceedings, the USPTO issued a reexamination certificate and confirmed the
patentability. After the USPTO's review of petitions for second, third and
fourth re-examinations, Target received notice from the USPTO that it had
reaffirmed the patentability of the claims of the Target patent. In addition, in
November 1994, Target filed a lawsuit in United States District Court against
SciMed Life Systems, Inc. ("SciMed"), a subsidiary of BSC, and Cordis
Endovascular Systems, Inc. ("Cordis"), a subsidiary of Johnson & Johnson, Inc.,
alleging infringement of a Target patent relating to variable stiffness in
microcatheters, and seeking damages and preliminary and permanent injunctive
relief against sales of such companies' products believed to be infringing the
Target patent. The defendants responded by challenging the validity of the
Target patent, denying infringement and raising other defenses. In May 1996, the
District Court granted Target's motion for an injunction prohibiting the
defendants from continuing to sell the products alleged to infringe the patent.
In July 1996, the United States Court of Appeals for the Federal Circuit stayed
the injunction pending an appeal by the defendants. Upon the merger between
Target by BSC, the lawsuit has been dismissed as to SciMed. Subsequently, the
Court of Appeals vacated the preliminary injuction. The lawsuit was dismissed as
to Cordis pursuant to a settlement agreement signed in January 1998. Any
invalidation of the Target patent could have a material adverse effect on the
Company's business, financial condition and results of operations.
28
Legislation is pending in Congress that, if enacted in its present
form, would limit the ability of medical device manufacturers in the future to
obtain patents on surgical and medical procedures that are not performed by, or
as a part of, devices or compositions that are themselves patentable. While the
Company cannot predict whether the legislation will be enacted, or precisely
what limitations will result from the law if enacted, any limitation or
reduction in the patentability of medical and surgical methods and procedures
could have a material adverse effect on the Company's ability to protect its
proprietary methods and procedures.
In addition to patents, the Company relies on trade secrets and
technical know-how and continuing technological innovation to develop and
maintain its competitive position. The Company typically requires its employees,
consultants and advisors to execute appropriate confidentiality and assignment
of inventions agreements in connection with their employment, consulting or
advisory relationship with the Company. These agreements generally provide that
all confidential information developed or made known to the individual by the
Company during the course of the individual's relationship with the Company is
to be kept confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company. There can be no assurance,
however, that these agreements will not be breached or that the Company will
have adequate remedies for any breach. Furthermore, no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
proprietary technology, or that Conceptus can meaningfully protect its rights in
unpatented proprietary technology.
Government Regulation. The manufacture and sale of medical devices,
including the medical devices used in the Company's STOP, T-TAC, and STARRT and
Microgyn resectoscope sleeves, are subject to extensive regulation by numerous
government authorities, both in the United States and internationally. In the
United States, the principal regulatory authorities are the Food and Drug
Administration ("FDA") and corresponding state agencies, such as the California
Department of Health Services ("CDHS"). The process of obtaining and maintaining
required regulatory clearances is lengthy, expensive and uncertain. The FDA
requires companies that wish to market a new medical device or an existing
medical device for use for a new indication to obtain either a premarket
notification clearance under Section 510(k) of the Federal Food, Drug, and
Cosmetic Act ("510(k)") or a premarket approval ("PMA") prior to the
introduction of such product into the market. In addition, material changes to
medical devices are also subject to FDA review and clearance or approval. If a
medical device manufacturer or distributor can establish, among other things,
that a device is "substantially equivalent" in intended use and technological
characteristics to certain legally marketed devices, for which the FDA has not
required a PMA, the manufacturer or distributor may seek clearance from the FDA
to market the device by filing a 510(k). Though generally believed to be a
shorter, less costly regulatory path than a PMA, the 510(k) may need to be
supported by appropriate data establishing to the satisfaction of the FDA the
claim of substantial equivalence to the predicate device. In addition, the FDA
may require review by an advisory panel as a condition for 510(k) clearances,
which can further lengthen the regulatory process. The PMA approval process can
take several years from initial filing and requires the submission of extensive
supporting data and clinical information. There can be no assurance that any
future products or applications developed by the Company will not require
approval under the more lengthy and expensive PMA process. If the Company is
required to obtain approval for any products pursuant to the PMA procedure or,
if the 510(k) process with respect to any products is extended for a
considerable length of time, the commencement of commercial sales of the
Company's products will be delayed substantially.
29
There can be no assurance that the Company will be able to obtain
necessary 510(k) clearances or PMA or other approvals to market its products for
the intended uses on a timely basis, if at all, and delays in receipt of or
failure to receive such clearances or approvals, the loss of previously received
clearances or approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, regulatory clearances,
if granted, may include significant limitations on the indicated uses for which
a product may be marketed.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary widely from country to country.
The time required to obtain clearance required by foreign countries may be
longer or shorter than that required for FDA clearance, and requirements for
licensing may differ significantly from FDA requirements.
The European Union has promulgated rules which require manufacturers of
medical products to obtain the right to affix to their products the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European Union Medical Device Directives. The ISO 9000 series of
standards for quality operations has been developed to ensure that companies
know the standards of quality to which they must adhere to receive European
Union certification. ISO 9000 certification is one of the CE mark certification
requirements. Failure to receive the right to affix the CE mark will prohibit
the Company from selling such product in member countries of the European Union
after 1998. In conjunction with the Company's restructuring in July 1998, the
Company elected to let its ISO9000 certification lapse. Accordingly, as of
January 1, 1999, the Company cannot sell its products directly in the European
Union.
Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which the Company's products may be marketed. In
addition, in order for companies to obtain such approvals, the FDA and certain
foreign regulatory authorities impose numerous additional requirements with
which medical device manufacturers must comply. FDA enforcement policy strictly
prohibits the promotion of approved medical devices for uses other than those
specifically cleared for marketing by the FDA. The Company will be required to
adhere to applicable FDA regulations regarding Good Manufacturing Practices
("GMP") and similar regulations in other countries, which include testing,
control and documentation requirements. Ongoing compliance with GMP and other
applicable regulatory requirements will be monitored through periodic
inspections by federal and state agencies, including the FDA and the CDHS, and
by comparable agencies in other countries. Failure to comply with applicable
regulatory requirements, could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals and
criminal prosecution. Changes in existing regulations or adoption of new
government regulations or policies could prevent or delay regulatory approval of
the Company's products. The Company cannot predict the impact, if any, such
changes might have on its business, financial condition or results of
operations.
Uncertainty Relating to Third-Party Reimbursement. In the United
States, hospitals, physicians and other healthcare providers that purchase
medical devices generally rely on third-party payors, such as private health
insurance plans, to reimburse all or part of the cost associated with the
treatment of patients. Although reimbursement for catheterization and
hysteroscopy procedures has generally been available in the United States, there
can be no assurance that such reimbursement will continue to be available. If
FDA clearance or approval is received for new products, third-party
reimbursement for these products will be dependent
30
upon decisions by individual health maintenance organizations, private insurers
and other payors. However, the Company believes that procedures using its STARRT
Falloposcopy system may be reimbursed in the United States under existing
procedure codes for diagnosis and re-establishment of patency of the fallopian
tubes and, if applicable, for related interpretation of such procedures.
However, there can be no assurance that such procedure codes will remain
available or that the reimbursement under these codes will be adequate. Given
the efforts to control and decrease health care costs in recent years, there can
be no assurance that any reimbursement will be sufficient to permit the Company
to achieve or maintain profitability. The Company could also be adversely
affected by changes in reimbursement policies of government or private
healthcare payors, particularly to the extent that any such changes affect
reimbursement for therapeutic or diagnostic catheterization procedures or
hysteroscopy procedures in which the Company's products are used. Failure by
physicians, hospitals and other users of the Company's products to obtain
sufficient reimbursement from healthcare payors for procedures in which the
Company's products are used, or adverse changes in government and private
third-party payors' policies toward reimbursement for such procedures, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Market acceptance of the Company's products in international markets
may be dependent in part upon the availability of reimbursement within
prevailing healthcare payment systems. Reimbursement systems in international
markets vary significantly by country, and include both government-sponsored and
private healthcare insurance. Obtaining reimbursement approvals can require 12
to 18 months or longer. There can be no assurance that the Company will obtain
reimbursement in any country within a particular time, for a particular amount,
or at all. Failure to obtain such approvals could have a material adverse effect
on market acceptance of the Company's products in the international markets in
which the Company is seeking approvals and could have a material adverse effect
on the Company's sales, business, financial condition and results of operations.
Competition; Uncertainty of Technological Change. The medical device
industry is highly competitive. The Company expects competition for devices to
diagnose and treat female reproductive disorders to increase. Many of the
Company's competitors have substantially greater name recognition and financial
resources than the Company and have greater resources and expertise in research
and development, obtaining regulatory approvals, manufacturing and marketing.
Certain of these companies are developing and marketing devices for the
diagnosis and treatment of disorders of the female reproductive system and
others may choose to enter this market at a later date. Additionally, certain
smaller companies are developing alternative catheter-based systems for the
diagnosis and treatment of female reproductive disorders that may compete
directly with the Company's systems. There can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective or less costly than those developed by the Company or
that would render the Company's products obsolete or noncompetitive.
Additionally, there can be no assurance that the Company will be able to compete
effectively against such competitors based on its abilities to manufacture,
market and sell its products.
As the Company commercializes its S/TOP system, it expects to compete
against other surgical procedures for permanent contraception, mechanical
devices and other contraceptive methods. The Company also competes with other
companies for clinical sites to conduct trials. The medical device industry is
characterized by rapid and significant technological change. The length of time
required for product development and regulatory approval plays an important role
in a company's competitive position. Consequently, the Company's success will
depend in part on its ability to respond quickly to medical and technological
changes through the development and commercialization of new products. Product
development involves a high degree of risk and there can be no assurance that
the
31
Company's research and development efforts will result in commercially
successfully products. The Company believes that it competes favorably with
respect to these factors, although there can be no assurance that it will
continue to do so and that competition will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Limited Manufacturing Experience and Reliance on Third Party
Manufacturers. The Company has limited experience in manufacturing its products
in commercial quantities. In restructuring, the Company eliminated its
manufacturing function. If the Company is successful in estabilishing alternate
distribution partners for its products the Company plans to utilize third party
manufacturers to manufacture the products. The Company has identified candidates
that it believes could adequately produce the products with the appropriate
quality and sufficient volumes. However, third party manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel. There can be no assurance that the
Company and its third party manufacturers will not encounter manufacturing
difficulties, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence Upon Sole Source Suppliers; Lack of Contractual
Arrangements. Conceptus purchases both raw materials used in its products and
finished goods from various suppliers and relies on single sources for most of
these items. The Company does not have formal supply contracts with several key
vendors and, accordingly, no assurance can be made that such firms will continue
to supply the Company with such raw materials or finished goods in sufficient
quantities, or at all. Delays associated with any future raw materials or
finished goods shortages could have a material adverse effect on the Company's
business, financial condition and results of operations, particularly as the
Company scales up its manufacturing activities in support of international
commercial sales and, to the extent that FDA approvals are received, United
States commercial sales.
Possible Future Capital Requirements. Conceptus believes that its
existing capital resources will be sufficient to fund its operations through
1999. However, the Company's future liquidity and capital requirements will
depend upon numerous factors, including the progress of the Company's clinical
research and product development programs, the receipt of and the time required
to obtain regulatory clearances and approvals, and the resources devoted to
developing, manufacturing and marketing the Company's products. The Company's
capital requirements will also depend on, among other things, the resources
required to expand manufacturing capacity and facilities requirements and the
extent to which the Company's products generate market acceptance and demand.
Accordingly, there can be no assurance that the Company will not require
additional financing within this time frame and, therefore, may in the future
seek to raise additional funds through bank facilities, debt or equity offerings
or other sources of capital. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Additional funding may not be available when needed or on
terms acceptable to the Company, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
Product Liability Risk and Recalls; Limited Insurance Coverage. The
manufacture and sale of medical products involve an inherent risk of exposure to
product liability claims and product recalls. Although the Company has not
experienced any product liability claims to date, there can be no assurance that
the Company will be able to avoid significant product liability claims and
potential related adverse publicity. The Company currently maintains product
liability insurance with coverage limits of $5,000,000 per occurrence and an
annual
32
aggregate maximum of $5,000,000, which the Company believes is comparable to
that maintained by other companies of similar size serving similar markets.
However, there can be no assurance that product liability claims in connection
with clinical trials or sale of the Company's products will not exceed such
insurance coverage limits, which could have a material adverse effect on the
Company, or that such insurance will continue to be available on commercially
reasonable terms, or at all. In addition, the Company may require increased
product liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence Upon Key Personnel. The Company is dependent upon a number
of key management and technical personnel. The loss of the services of one or
more key employees could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's success
will also depend on its ability to attract and retain additional highly
qualified management and technical personnel. The Company faces intense
competition for qualified personnel, many of whom are often subject to competing
employment offers, and there can be no assurance that the Company will be able
to attract and retain such personnel. Furthermore, the Company relies on the
services of several medical and scientific consultants, all of whom are employed
on a full-time basis by hospitals or academic or research institutions. Such
consultants are therefore not available to devote their full time or attention
to the Company's affairs.
Reliance on Target Therapeutic's License. As of February 28, 1999, BSC
beneficially owned approximately 14.34% of the Company's outstanding Common
Stock. Accordingly, BSC may be able to exercise influence over the business and
financial affairs of the Company. In April 1997, BSC completed the acquisition
of Target, by merging Target as a wholly owned subsidiary. Certain of the
Company's products are based upon patents and other intellectual property
licensed from Target, on an exclusive basis within the field of reproductive
physiology. In the event that such Target patents are at any time invalidated,
the Company's proprietary position in the marketplace would be severely
compromised and the Company's competitors could have the ability to incorporate
the Target technology in their products. In addition, should the Target
technology licensed to the Company be found to infringe upon a third party's
technology, the Company's sale of products based on such infringing Target
technology could be limited. Finally, in the event that the Company materially
breaches the terms of its license from Target, Target will have the right to
terminate the license. Any such termination of this license would deprive the
Company of the right to develop or sell products based on the licensed
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Potential Fluctuations in Future Quarterly Results. Future revenues and
results of operations may fluctuate significantly from quarter to quarter and
will depend upon, among other factors, actions relating to regulatory and
reimbursement matters, the extent to which the Company's products gain market
acceptance, progress of clinical trials and introduction of competitive
products.
Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. The Company's stock price has in
the past been, and may in the future be, subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenue or earnings from
levels expected by securities analysts could have an immediate and significant
adverse effect on the trading price of the Company's Common Stock in any given
33
period. Additionally, the Company may not learn of, or be able to confirm,
revenue or earnings variations from estimates until late in the fiscal quarter,
which could result in an even more immediate and adverse effect on the trading
price of the Company's Common Stock. Finally, the Company participates in a
highly dynamic industry, which often results in significant stock price
volatility. In October 1998, the Company received notification from the National
Association of Securities Dealer's Inc. ("NASD") that due to the decline of the
Company's stock price, the Company was not in compliance, throughout the third
quarter of 1998, with certain listing maintenance requirements of the Nasdaq
National Market. In November 1998, the Company's Common Stock satisfied these
maintenance requirements with a closing bid price of at least $1.00 per share
for ten consecutive trading days. While these maintenance requirements were
satisfied within the required ninety-day period required by the NASD, there can
be no assurance that Company's Common Stock will stay in compliance the
maintenance requirements. If delisting were to occur, the Company expects that
trading of its Common Stock would be conducted on the OTC Bulletin Board or in
the over-the-market in what is commonly referred to as the "pink sheets".
In addition, the market prices of the common stock of many publicly
held medical device companies have in the past been, and can in the future be
expected to be, especially volatile. Factors such as fluctuations in the
Company's operating results, announcements of technological innovations or new
products by the Company or its competitors, FDA and international regulatory
actions, changes in reimbursement levels, developments with respect to patents
or proprietary rights, public concern as to the safety of products developed by
the Company or others, changes in healthcare policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, its competitors or the medical device industry generally, and changes
in general market conditions may have a significant impact on the market price
of the Company's Common Stock.
Effect of Certain Charter and Bylaw Provisions; Shareholder Rights
Plan. Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders, provide for a classified board
of directors, eliminate the right of stockholders to act by written consent
without a meeting and eliminate cumulative voting in the election of directors.
In addition, the Company has adopted a stockholder rights plan. The stockholder
rights plan, and the charter and bylaw provisions described above, may make it
more difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company.
Absence of Dividends. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company intends to retain any future earnings for reinvestment in
its business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such other
factors as the Board of Directors deems relevant.
Year 2000 Compliance. "Year 2000 issue" arises because most computer
systems and programs were designed to handle only a two-digit year, not a
four-digit year. These computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly. The Company was informed by appropriate vendors that the Company's
information systems are able to process the year 2000 accurately and the Company
has completed testing of such systems. Accordingly, the
34
Company does not anticipate any Year 2000 issues from its own information
systems, databases, or programs. The costs associated with this assessment were
not material. As a result of the Company's restructuring in July 1998, the
Company has determined that its level of reliance on major distributors,
suppliers, vendors, and customers has been significantly reduced such that Year
2000 specific issues faced by these third parties should not have a material
effect on the Company's operations or financial conditions. With respect to
various financial services institutions that the Company relies on to conduct
its financial transactions, the Company has determined that all its major
financial services institutions are actively engaged in bringing their
information systems into compliance with Year 2000 issues. However, their can be
no assurance that such plans will be able to address fully, or at all, the
impact of the Year 2000 issue on the Company, which could have a material
adverse effect upon the Company's financial condition.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash balances in excess of short-term operating needs are
invested in highly liquid, short-term government securities and high quality
commercial paper. However, due to the short-term and high quality nature of
these instruments, the Company believes these financial instruments are exposed
to a low level of interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth in this Annual Report on
Form 10-K beginning on page 53.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of directors and their ages, as of February 28, 1999 and certain other
information about them are set forth below:
Director
Name Age Position Class Since
- - ---- --- -------- ----- -----
Howard D. Palefsky (1) 52 Chairman of the Board of Directors II 1997
Kathryn A. Tunstall 48 President, Chief Executive Officer & Director III 1993
Sanford Fitch 58 Director III 1994
Florence Comite 46 Director III 1997
Robert F. Kuhling (2) 50 Director I 1992
Richard D. Randall (1)(2) 47 Director I 1992
Thomas C. McConnell (2) 44 Director II 1992
- - ---------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
The Board of Directors is divided into three classes. Each class of
directors consists of two or three directors, and each class of directors serves
for a staggered three year term or until a successor is elected and qualified.
Class I Directors (terms expire 2001):
Mr. Kuhling has served as a director of the Company since December
1992. Mr. Kuhling has been a general partner of venture capital funds managed by
ONSET Ventures since 1987. Prior to 1987, he served as Director of Design
Automation Marketing at Sun Microsystems, Inc., a computer manufacturer, and
Vice President of Marketing and a division manager at General ElectricCalma, a
software and computer systems company. Mr. Kuhling currently also serves on the
Board of Directors of Euphonix, Inc. Mr. Kuhling received an M.B.A. from the
Harvard University Graduate School of Business.
Mr. Randall has served as a director of the Company since December
1992. Mr. Randall served as the Company's President and Chief Executive Officer
from December 1992 to July 1993 and Chief Financial Officer from December 1992
to January 1995. Mr. Randall has served as President, Chief Executive Officer
and Director of Innovasive Devices, Inc., a medical device manufacturer, since
January 1994. Mr. Randall served as President and Chief Executive Officer of
Target Therapeutics, Inc. ("Target") from June 1989 to May 1993. He also served
as a director of Target from June 1989 to April 1997. Prior to joining Target,
Mr. Randall served in various capacities with Trimedyne, Inc., a cardiovascular
laser company, Baxter International and the U.S.C.I. Division of C.R. Bard, Inc.
Mr. Randall holds a B.S. in Biology Education from State University of New York
College at Buffalo.
37
Class II Directors (terms expire 1999):
Mr. McConnell has served as a director of the Company since December
1992. Mr. McConnell has been with New Enterprise Associates ("NEA"), a venture
capital investment firm, since 1985 and has served as a General Partner of that
firm since 1989. Prior to joining NEA, Mr. McConnell was a Product Manager at
Apple Computer, Inc. and a consultant with the Boston Consulting Group. Mr.
McConnell is also a director of Applied Imaging Corp., Cardiothoracic Systems
and Innovasive Devices, Inc. Mr. McConnell holds an M.B.A. from the Stanford
University Graduate School of Business.
Mr. Palefsky was elected to the Company's Board of Directors in October
1997 and was appointed to serve as Chairman of the Board in November 1997. He
currently serves as a consultant to the Company pursuant to a consulting
agreement. Mr. Palefsky is a corporate director, consultant and private
investor. From 1995 to 1997, Mr. Palefsky served as Chairman of the Board and
Chief Executive Officer of Collagen Corporation. Mr. Palefsky served as
President, Chief Executive Officer and Director of Collagen Corporation from
1978 to 1995. Mr. Palefsky is also a director of Innovasive Devices, Inc. Mr.
Palefsky holds an M.B.A. from Stanford University Graduate School of Business.
Class III Directors (terms expire 2000):
Dr. Comite was elected to the Company's Board of Directors in September
1997 and also serves as a consultant to the Company pursuant to a consulting
agreement. In 1992, Dr. Comite founded Women's Health at Yale University School
of Medicine. She currently serves as Clinical Director of Women's Health at
Yale, as well as Associate Professor in Endocrinology, Departments of Internal
Medicine and Pediatrics and in Reproductive Endocrinology, Department of
Obstetrics and Gynecology at Yale University School of Medicine. From 1994 to
1997, Dr. Comite served as Deputy Medical Director of Time Life Medical/Patient
Education Media, Inc. In 1994 and 1995, Dr. Comite also served as Senior
Clinical and Research Advisor to the National Institutes of Health Offices of
Alternative Medicine and Research in Women's Health. Dr. Comite received her
M.D. from Yale University School of Medicine.
Mr. Fitch was elected to the Company's Board of Directors in December
1994, served as Vice President, Finance and Operations and Chief Financial
Officer from December 1994 to October 31, 1998, and was promoted to Senior Vice
President in February 1997. From January 1994 to December 1994, Mr. Fitch served
as Vice President, Finance and Operations and Chief Financial Officer of Voyant
Corporation, a video technology company. From December 1990 to January 1994, Mr.
Fitch served as Chief Financial Officer of SanDisk Corp., a manufacturer of
flash memory devices. From 1983 through 1989, Mr. Fitch was the Chief Financial
Officer of Komag Inc., a manufacturer of rigid media for the disk drive
industry. Mr. Fitch holds a B.S. in Chemistry and an M.B.A. from Stanford
University.
Ms. Tunstall has served as President, Chief Executive Officer and a
director of the Company since July 1993. Prior to joining the Company, Ms.
Tunstall spent seven years as an executive officer and in senior marketing
positions of the Edwards Less Invasive Surgery Division of Baxter International,
a division engaged in the research and development, manufacturing and marketing
of cardiovascular catheters, serving as President from June 1990 to June 1993
and serving as Vice President and Director of Worldwide Sales and Marketing from
November 1986 to June 1990. From 1980 to 1986, Ms. Tunstall held various
positions in manufacturing and marketing of McGaw Laboratories, a pharmaceutical
and medical device company, serving most recently as Vice President of
Marketing. Ms. Tunstall also serves as a director of RESOLVE, a non-profit
infertility support, education and
38
advocacy organization. Ms. Tunstall holds a B.A. in Economics from the
University of California and has also completed graduate level studies in
Business and Healthcare Administration.
Board Meetings and Committees
The Board of Directors has an Audit Committee and a Compensation
Committee, of which there is a Stock Option Subcommittee. The Company does not
have a nominating committee or a committee performing the functions of a
nominating committee.
The Audit Committee of the Board of Directors consists of Mr. Palefsky
and Mr. Randall. The Audit Committee recommends engagement of the Company's
independent auditors, reviews the scope of the audit, considers comments made by
the independent auditors with respect to the Company's internal control
structure, including systems, procedures and internal accounting controls and
the consideration given thereto by management, and reviews the Company's system
of internal controls, including systems, procedures and internal accounting
controls, with the Company's financial and accounting staff.
The Compensation Committee of the Board of Directors currently consists
of Messrs. Kuhling, McConnell and Randall. The Stock Option Subcommittee of the
Compensation Committee currently consists of Messrs. Kuhling and McConnell. The
Compensation Committee, or a subcommittee thereof, where necessary, administers
the Company's incentive compensation and benefit plans (including stock plans)
and, in conjunction with the Board of Directors, establishes salaries,
incentives and other forms of compensation for directors, officers and other
employees. The Stock Option Subcommittee makes recommendations and approves
option grants to employees, officers, directors and consultants pursuant to the
Company's 1993 Stock Plan.
Director Compensation
The Company paid each of Mr. Palefsky, Dr. Comite, and Mr. Randall
$1,000 for attendance at each meeting of the Board of Directors and a retainer
of $2,500 per quarter of fiscal 1998. The Company reimbursed each outside
director for out-of-pocket expenses incurred in connection with attendance at
meetings of the Board of Directors or a committee thereof. The one employee
director, Ms. Tunstall is not separately compensated for their services as
directors.
Nonemployee directors of the Company are automatically granted options
to purchase shares of the Company's Common Stock pursuant to the terms of the
Company's 1995 Directors' Stock Option Plan (the "Directors' Plan"). Under such
plan, each person who was a nonemployee director on the date of the Company's
initial public offering was granted an option to purchase 10,000 shares of
Common Stock on the date of such offering (unless such director had previously
been granted an option to purchase shares of Common Stock) and each person who
thereafter becomes a nonemployee director will be granted an option to purchase
10,000 shares of Common Stock on the date on which he or she first becomes a
non-employee director (the "First Option"). Thereafter, on the date of each
annual meeting of the Company's stockholders, each non-employee director shall
be automatically granted an additional option to purchase 3,000 shares of Common
Stock (a "Subsequent Option") if, on such date, he or she shall have served on
the Company's Board of Directors for at least six months. The Directors' Plan
provides that the First Option shall become exercisable in installments as to
1/36th of the total number of shares subject to the
39
First Option on each monthly anniversary of the date of grant of the First
Option and that each Subsequent Option shall become exercisable in installments
as to 1/12th of the total number of shares subject to the Subsequent Option on
each monthly anniversary of the date of grant of the Subsequent Option beginning
on the second anniversary of the grant date. Options granted under the
Directors' Plan have an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant, and a term of ten years.
There are no family relationships among the directors or executive
officers of the Company.
Dr. Comite provides consulting services to the Company pursuant to a
consulting agreement, dated September 10, 1997. The Company paid Dr. Comite
$84,000 in consulting fees for services rendered during the year ended December
31, 1998. In July 1998, 7,500 options that were granted to Dr. Comite in
September 1997, under the 1993 Stock Plan with an exercise price of $7.00 per
share were repriced to the closing price ($1.25) of the Common Stock on July 21,
1998.
Mr. Palefsky provides consulting services to the Company pursuant to a
consulting agreement, dated October 15, 1997. During the year ended December 31,
1998, the Company paid Mr. Palefsky $99,993.96 in consulting fees. In July 1998,
90,000 options that were granted to Mr. Palefsy in September 1997 under the 1993
Stock Plan with an exercise price of $7.00 per share were repriced to the
closing price ($1.25) of the Common Stock on July 21, 1998.
40
ITEM 11. EXECUTIVE COMPENSATION
The following table sets for the compensation in the fiscal years ended
December 31, 1998, 1997, and 1996 by (i) the Company's Chief Executive Officer
and (ii) the Company's other most highly paid executive officers who earned in
excess of $100,000 during the fiscal year ended December 31, 1998 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
------------------------------------------ ------------
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Name and Principal Position Year ($) ($) (1) $ (2) Options (#) $
- - ---------------------------------------------------------------------------------------------------------------
Kathryn A. Tunstall ........... 1998 177,685 -- 1,218 60,000
President & CEO 1997 199,992 -- 1,178 140,000 41,000 (3)
1996 173,106 36,500 690
Steven Bacich ................. 1998 158,461 -- 370 75,000 55,956 (4)
Vice President Research 1997 104,923 -- 245 75,000 89,701 (4)
and Development
Cynthia M. Domecus ............ 1998 162,152 -- 383 70,000 25,500 (5)
Senior Vice President, 1997 164,808 -- 364 40,000
Clinical Research, 1996 144,906 -- 194
Regulatory Affairs, and
Quality Assurance
Sanford Fitch ................. 1998 158,698 -- 1,776 15,000 92,430 (6)
Senior Vice President and 1997 159,994 -- 2,350 60,000
Chief Financial Officer 1996 145,350 -- 1,398
James J. Messemer ............. 1998 55,095 -- 128 10,000 117,700 (6)
Vice President, 1997 140,005 -- 294 25,000
Business Development 1996 134,400 19,800 186
Susan Schneider ............... 1998 94,235 -- -- 46,000 71,385 (6)
Vice President, Operations
andd Quality Assurance
- - -----------------------------
1. Bonuses are paid at the discretion of the Board of Directors.
2. Amounts set forth represent premiums paid by the Company for group term life insurance.
3. Amount represents compensation attributable to disqualifying dispositions of stock options.
4. Mr. Bacich was hired as Vice President, Research and Development in March 1997. Pursuant to his 1997
employment agreement with the Company, Mr. Bacich, "Other Compensation" represents payments totaling
$89,701 for relocation assistance. Other Compensation in 1998 includes a payment of $24,750 for a
retention bonus implemented in connection with the Company's restructuring in July 1998 and forgiveness
of $31,206 of the relocation loan.
5. Amount represents retention bonus earned by Ms. Domecus as a part of the restructuring implemented by the
Company in July 1998.
41
6. Figures represent amounts to be paid pursuant to severance arrangements made between the officer and the
Company. Mr. Fitch and Ms. Schneider were severed in connection with the Company's restructuring
implemented in July 1998. Termination dates for Mr. Fitch and Ms. Schneider were October 31 and December
31, 1998, respectively. Mr. Messemmer resigned from the Company effective on May 31, 1998.
Option Grants During Year Ended December 31, 1998
The following table provides certain information with respect to stock
options granted to the Named Executive Officers in the last fiscal year. In
addition, as required by Securities and Exchange Commission rules, the table
sets forth hypothetical gains that would exist for the options based on assumed
rates of annual compound stock price appreciation during the option term.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants (1)
---------------------------------------------------------
Percent
of Total
Number of Options/SARs Potential Realizable Value at
Securities Granted to Exercise Assumed Annual Rates of Stock
Underlying Employees or Base Appreciation For Option Term (2)
Options/SARs in Fiscal Price Expiration --------------------------------
Name Granted (#) Year (%) (3) ($/sh) (4) Date 5% ($) 10% ($)
- - --------------------------------------------------------------------------------------------------------------------------
Tunstall, Kathryn 60,000 8.72% 4.63 1/20/2008 174,518 442,264
Bacich, Steve 50,000 7.27% 1.25 7/21/2008 39,306 99,609
25,000 3.63% 4.63 1/20/2008 72,716 184,276
------ ------- -------
75,000 112,022 283,885
Domecus, Cindy 40,000 5.82% 1.25 7,21/2008 31,445 79,687
30,000 4.36% 4.63 1/20/2008 87,259 221,132
------ ------- -------
70,000 118,704 300,819
Fitch, Sanford (5) 15,000 2.18% 4.63 1/20/2008 43,630 110,566
Messmer, Jim (6) 10,000 1.45% 4.63 7/31/1998 1,142 2,257
Schneider, Susan (7) 40,000 5.82% 1.50 2/28/1999 3,618 7,270
6,000 0.87% 3.50 2/28/1999 1,266 2,545
------ ------- -------
46,000 4,884 9,815
- - ------------------------------------
1. No stock appreciation rights were granted to the Named Executive Officers in the last fiscal year. Options generally
vest at the rate of 1/8th of the shares on the six-month anniversary of the vesting commencement date and 1/48th of
the shares granted on each monthly anniversary of the vesting commencement date thereafter.
2. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the Securities and
Exchange Commission. There is no assurance provided to any executive officer or any other holder of the Company's
securities that the actual stock price appreciation over the ten year option term will be at the assumed 5% and 10%
levels or at any other defined level. Unless the market price of the Common Stock appreciates over the long term, no
value will be realized from the option grants made to the executive officers. Potential Realizable Value is not
calculated for options that were canceled during the fiscal year ended December 31, 1998.
3. The Company granted stock options representing 687,758 shares to employees during the fiscal year.
42
4. The exercise price may be paid in cash, in shares of Common Stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance
the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares and
the federal and state income tax liability incurred by the optionee in connection with such exercise.
5. Mr. Fitch was terminated from the Company in connection with the Company's restructuring in July 1998. Mr. Fitch
continues to serve as a director of the Company and pursuant to his severance agreement his options converted to
non-qualified options and continue to vest under the same terms of the original grant.
6. Mr. Messemmer resigned from the Company effective May 31, 1998. Pursuant to the terms of the Company's 1993 Stock
Option Plan, vested options lapse sixty days from the termination date.
7. Ms. Schneider was severed from the Company effective October 31, 1998 as a result of the Company's restructuring in
July 1998. Pursuant to the terms of the Company's 1993 Stock Option Plan, vested options lapse sixty days from the
termination date.
The following table sets forth certain information for the Named
Executive Officers with respect to the exercise of options to purchase Common
Stock during the fiscal year ended December 31, 1998.
Aggregate Option Exercises in the Year Ended
December 31, 1998 and Fiscal year-end Option Values
Number os Shares of Common Value of Unexercised
Shares Value Stock Underlying Unexercised In-the-Money Options
Acquired on Realized Options at December 31, 1998 at December 31, 1998 (1)
Name Exercise (#) ($) (2) Exercisable Unexercisable Exercisable Unexercisable
- - ------------------------------------------------------------------------------------------------------------------------------------
Kathryn Tunstall -- -- 212,055 169,444 $175,965 $118,458
Steven Bacich -- -- -- 150,000 $ -- $125,000
Cynthia Domescu -- -- 72,639 102,917 $ 79,375 $100,726
Sanford Fitch (3) -- -- 91,682 58,317 $ 73,749 $ 40,000
Jim Messemmer (4) 63,333 42,623 -- -- $ -- $ --
Susan Schnneider (5) -- -- 21,302 -- $ 3,750 $ --
- - ---------------------
1. Calculated using the difference between the closing price of the Company's Common Stock as of December 31, 1998 ($2.25) and the
exercise price of the options.
2. Calculated using the difference between the fair market value of the Company's Common Stock on the date of exercise and the
exercise price of the options.
3. Mr. Fitch was severed from the Company effective October 31, 1998 as a result of the Company's restructuring in July 1998. Mr.
Fitch continues to serve as a director of the
43
Company and pursuant to his severance agreement his options converted to non-qualified options and continue to vest under the
same terms of the original grant.
4. Mr. Messemmer resigned from the Company effective May 31, 1998. Pursuant to the terms of the Company's 1993 Stock Option Plan,
vested options lapse sixty days from the termination date.
5. Ms. Schneider was severed from the Company effective October 31, 1998 as a result of the Company's restructuring in July 1998.
Pursuant to the terms of the Company's 1993 Stock Option Plan, vested options lapse sixty days from the termination date.
Effective May 31, 1998, Mr. Messemmer resigned from the Company and the
Company entered into a termination agreement which provided for payments
totaling $112,000 which is equal to nine months of base salary to be paid over a
nine month period. The Company also paid $2,152 of medical insurance premiums
and provided $2,500 of outplacment service.
In connection with the July 1998 restructuring, Mr. Fitch was
terminated from the Company effective October 31, 1998. The Company entered into
a termination agreement which provided for severance payments totaling $88,130
which is equal to six months of base salary to be over six months. The Company
also paid $4,423 of medical insurance premiums and provided outplacement
assistance of $2,500. The agreement calls for contingent additional payments
totaling $46,277 which is equal to three months of base pay to be paid over a
three month period if Mr. Fitch has not found alternate employment by May 1,
1999. Mr. Fitch continues to serve as a director of the Company and pursuant to
his severance agreement his options converted to non-qualified options and
continue to vest under the same terms of the original grant.
In connection with the July 1998 restructuring, Ms. Schneider was
terminated from the Company effective December 31, 1998. The Company entered
into a termination agreement which provided for severance payments totaling
$27,885 which is equal to ten weeks of base pay and a lump sum payment of
$43,500 paid in January 1999.
In May 1997, the Company entered into an agreement with Ms. Tunstall
that provides, in the event of certain change-in-control transactions, for the
acceleration of options held by her whereby each such option shall become fully
vested and immediately exercisable. In the event of an involuntary termination
prior to two years after the change-in-control transaction, the agreement
provides for (i) her to be paid according to the Company's standard payroll
procedure for a period of 18 months; (ii) the continuation of health and life
insurance benefits for a period of 18 months; (iii) monthly severance payments
equal to 1/12th of the "target bonus" she would have received for the fiscal
year in which the termination occurs; and (iv) outplacement services not to
exceed a value of $15,000.
In May 1997, the Company entered into agreements with its other
executive officers including Steven Bacich and Cynthia Domecus, which provide,
in the event of certain change-in-control transactions, for the acceleration of
options held by such officers whereby in the event of a "hostile takeover" each
such option shall become fully vested and immediately exercisable; provided,
however, in the event of any other type of "change of control" each such option
shall become vested as to 50% of the option shares that have not otherwise
vested on the effective date of the change of control transaction. In the event
of an involuntary termination prior to two years after the change-in-control
transaction, the agreement provides for (i) each of the above mentioned officers
to be paid according to the Company's standard payroll procedure for a period of
12 months; (ii) the continuation of
44
health and life insurance benefits for a period of 12 months; (iii) monthly
severance payments equal to 1/12th of the "target bonus" each would have
received for the fiscal year in which the termination occurs; (iv) acceleration
of all options to become fully vested and immediately exercisable; and (iv)
outplacement services not to exceed a value of $15,000. The Company otherwise
does not have any employment agreements with any of the executive officers.
45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's Common Stock as of February 28, 1999 as to (i) each person who is
known by the Company to beneficially own more than five percent of the Company's
Common Stock, (ii) each member of the Company's Board of Directors, (iii) each
of the continuing executive officers named in the Summary Compensation Table on
page 40, and (iv) all directors and executive officers as a group.
Shares Beneficially Owned
--------------------------
Name and Address of Beneficial Owner (1) Number Percent (2)
- - -------------------------------------------------------------------------------------------
(3) Boston Scientific Corporation ............................. 1,418,856 14.34%
One Boston Scientific Place
Natick, MA 01760-1537
(4) Entities affiliated with New Enterprise Associates ........ 552,154 5.58%
2490 Sand Hill Road
Menlo Park, CA 94025
(5) Entities affiliated with St. Paul Venture Capital ......... 524,324 5.30%
385 Washington Street
St. Paul, MN 55102
(6) Floreence D. Comite, M.D. .................................. 12,500 Less than 1%
15 Spencer Place
New Haven, CT 06515
(7) Sanford Fitch ............................................. 188,591 1.91%
52 Flood Circle
Atherton, CA 94027
(8) Robert F. Kuhling, Jr ..................................... 427,709 4.32%
2490 Sand Hill Road
Menlo Park, CA 94025
(9) Thomas C. McConnell ....................................... 1,035,833 10.47%
2490 Sand Hill Road
Menlo Park, CA 94025
(10) Howard D. Palefsky ......................................... 67,084 Less than 1%
2800 Sand Hill Road, Suite 120
Menlo Park, CA 94025
(11) Richard D. Randall ......................................... 29,416 Less tnan 1%
734 Forest
Marborough, MA 01752
(12) Kathryn A. Tunstall ....................................... 395,799 4.00%
(13) Steven Bacich ............................................. 71,888 Less than 1%
(14) Cynthia M. Domecus ........................................ 127,523 1.29%
(15) All directors and officers as a group (11 Persons) ........ 2,397,393 24.10%
46
- - ---------------------------------
1. Except as otherwise indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock.
2. Percentage ownership is based on 9,869,567 share of Common Stock outstanding on
February 28, 1999. The number of shares of Common Stock beneficially owned includes the
shares issuable pursuant to stock options that are exercisable within 60 days of
February 28, 1999. Shares issuable pursuant to stock options are deemed outstanding for
computing the percentage of the person holding such options but are not outstanding for
computing the percentage of any other person.
3. Boston Scientific Corporation Acquired Target Therapeutics, Inc. on April 8, 1997.
Target Therapeutics is now a separate business unit of Boston Scientific Corporation.
4. Represents 450,980 shares held by New Enterprise Associates V, Limited Partnership, and
91,112 shares held by Chemicals and Materials Enterprise Associates, Limited
Partnership. Also includes 10,062 shares issuable upon exercise of options exercisable
by NEA Development Corp. within 60 days of February 28, 1999.
5. St. Paul Venture Capital is an affiliate of St. Paul Fire and Marine Insurance Company
("St. Paul"), which is the owner of record of these shares and includes 7,312 shares
issuable upon exercise of options exercisable by St. Paul within 60 days of February
28, 1999.
6. Represents shares issuable upon exercise of options exercisable within 60 days of
February 28, 1999.
7. Includes 130,258 shares issuable upon exercise of options exercisable
within 60 days of February 28, 1999.
8. Includes 417,647 shares held by ONSET Enterprise Associates, L.P., and 10,062 shares
issuable upon exercise of options exercisable by ONSET Venture Services Corp. within 60
days of February 28, 1999, all of which Mr. Kuhling may be deemed to benefically own by
virtue of his status as a general partner of OEA Management, L.P., a general partner of
ONSET Enterprise Associates, L.P. Mr. Kuhling disclaims beneficial ownership of the
shares held by such entity except to the extent of his proportionate partnership
interest therein.
9. Represents 450,980 shares held by New Enterprise Associates V, Limited Partnership,
91,112 shares held by Chemicals and Materials Enterprise Associates, Limited
Partnership, and 10,062 shares issuable upon exercise of options exercisable by NEA
Development Corp. within 60 days of February 28, 1999, all of which Mr. McConnell may
be deemed to benefically own by virtue of his status as a general partner of NEA
Partners V, Limited Partnership (the general partner of New Enterprise V, Limited
Partnership, a general partner of Chemicals and Materials Enterprise Associated,
Limited Partnership). Also includes 417,647 shares held by ONSET Enterprise Associates,
Limited Partnership, all of which Mr. McConnell may be deemed to beneficially own by
virtue of his status as a general partner of NEA Onset Partners, Limited Partnership, a
general partner of ONSET Enterprise Associates, Limited Partnership. Mr. McConnell
disclaims beneficial ownership of the shares held by such entity except to the extent
of his proportionate partnership interest therein.
47
10. Represents shares issuable upon exercise of options exercisable within 60 days of
February 28, 1999.
11. Includes 21,083 shares issuable upon exercise of options exercisable within 60 days of
February 28, 1999.
12. Includes 312,366 shares issuable upon exercise of options exercisable within 60 days of
February 28, 1999.
13. Represents shares issuable upon exercise of options exercisable within 60 days of
February 28, 1999.
14. Represents shares issuable upon exercise of options exercisable within 60 days of
February 28, 1999.
15. Includes 1,397,510 shares beneficially owned by entities affiliated with Mr. McConnell
and Mr. Kuhling, both of whom disclaim beneficial ownership other than to the extent of
their proportionate interest therein. Also, includes 548,791 shares issuable upon
exercise of options exercisable within 60 days of February 28, 1999.
Compensation Committee Interlocks and Insider Participation
For the year ended December 31, 1998, the following individuals served
on the Company's Compensation Committee: Robert F. Kuhling, Thomas C. McConnell
and Richard D. Randall. Messrs. McConnell and Kuhling also served on the Stock
Option Subcommittee and have never served as officers or employees of the
Company. Mr. Randall served as the Company's Chief Executive Officer and Chief
Financial Officer from December 1992 until July 1993.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1992, the Company issued to Target Therapeutics, Inc.
("Target") 666,666 shares of Series A Preferred Stock with value of $0.75 per
share along with a warrant to purchase up to 1,000,000 shares of Common Stock at
an exercise price of $1.50 per share, in exchange for the grant of an exclusive
license to technology and certain supply commitments. Target converted this
warrant into 892,857 shares of Common Stock in connection with the Company's
initial public offering. Mr. Randall served as President and Chief Executive
Officer of Target from June 1989 until May 1993 and as Chairman of the Board
from April 1993 until May 1994 and served on Target's Board of Directors until
April 1997 when Target was acquired by Boston Scientific Corporation ("BSC").
Pursuant to a license agreement between the Company and Target (the "License
Agreement"), Target granted to the Company an exclusive, worldwide, royalty-free
license, with the right to sublicense, to use any of Target's technology, and to
use, make and sell products incorporating the Target technology, in the field of
reproductive physiology (the "Conceptus field"). The Company granted back to
Target an exclusive, worldwide, royalty-free license, with the right to
sublicense, to use Conceptus technology (made up of the Company's improvements
on Target technology and the Company's own developments for use in the Conceptus
field), and to use, make and sell products incorporating the Conceptus
technology, in the fields of interventional neuroradiology, interventional
radiology, interventional cardiology and interventional electrophysiology (but
excluding the Conceptus field). These license grants apply to any technology
existing on the date of the agreement or subsequently developed through February
1, 1996. This License Agreement will terminate upon the later of December 2002
or the expiration of all patent rights in the Target technology. The License
Agreement also includes provisions preventing Target from engaging in certain
research, marketing, sales or acquisition activities in the Conceptus field
during the life of the agreement. In connection with such transaction, Target
and Conceptus also agreed that during the two year period following the
Company's initial public offering of securities, Target would not acquire
Conceptus capital stock to the extent that doing so would cause Target's
ownership interest in the Company to exceed the greater of 20% of the
outstanding voting stock prior to such acquisition or the percentage held by
Target immediately prior to the effectiveness of the registration statement
covering the Company's initial public offering.
In March 1994, Target extended to the Company a $300,000 lease line of
credit for the lease of test, production or other machinery and equipment and
computer hardware, fixtures and furniture, on a sale and leaseback basis, with
payment terms varying between three and four years depending on the type of
equipment involved. Conceptus drew down the entire amount of the lease line and
fully repaid all amounts due as of December 31, 1998. In connection with the
extension of the lease line, Target also loaned to the Company an additional
$209,000 pursuant to two promissory notes secured by certain tangible property
of the Company similar in type to that subject to the lease line. These notes
are payable over a three to four year period (depending on the nature of the
collateral involved), and bear interest at the rate of 8.5% per annum,
compounded monthly. As of December 31, 1998 both notes were repaid in full. In
connection with this lease line and secured loan transaction, the Company issued
to Target a warrant to purchase up to an additional 12,000 shares of Common
Stock at an average exercise price of $4.05 per share, which warrant was
exercised in connection with the Company's initial public offering at an
aggregate price of $48,600.
In March 1994 and May 1995, as part of the Company's third and fourth
rounds of financing, Target purchased an additional aggregate of 101,102 shares
of Preferred Stock for a total of $500,000. The Company has also reimbursed
Target for certain employee benefit expenses incurred by Target on the Company's
behalf. For the year ended December 31, 1996, approximately $177,000 was paid
and no additional payments are due to
49
Target under this arrangement. This agreement was discontinued at December 31,
1996. Upon the closing of the Company's initial public offering, each
outstanding share of Preferred Stock was converted into one share of Common
Stock.
On April 8, 1997, Target completed a merger with BSC, pursuant to which
a wholly owned subsidiary of BSC merged with and into Target (the "Merger").
Pursuant to the Agreement and Plan of Merger Agreement, each share of common
stock of Target was converted into the right to receive 1.07 shares of common
stock of BSC. As a result of the Merger, BSC now holds all rights, preferences
and privileges to the stock, license fees and technology agreements which were
previously held by Target in connection with the Company. The Merger was a
tax-free stock-for-stock exchange for federal income tax purposes and a pooling
of interests for accounting purposes.
With the approval of a majority of the Board of Directors, on April 24,
1997, the Company loaned to Steve Bacich $100,000 pursuant to an unsecured
promissory note in connection with his relocation and hiring by the Company as
its Vice President of Research and Development. The note bears interest at a
rate of 9.5% per annum, compounded annually. In connection with the Company's
retention agreement entered into with Mr. Bacich in July 1998, all unpaid
principal and interest on the loan will be forgiven if Mr. Bacich is employed by
the Company on July 1, 1999. On March 26, 1998, the first anniversary of the
loan, $31,206 of the loan balance of $116,667 was forgiven. Under the orginal
terms of the loan, the loan was previously due in full on the earlier of March
26, 2001 or the termination of Mr. Bacich's employment with the Company. The
Company has further agreed that if Mr. Bacich's employment with the Company is
involuntarily terminated without cause in connection with a change of control of
the Company, the remaining balance of the principal, plus accrued but unpaid
interest, shall be forgiven in full by the Company on the date of such
termination. At December 31, 1998, $85,461 was outstanding and payable by Mr.
Bacich.
Dr. Comite provides consulting services to the Company pursuant to a
consulting agreement, dated September 10, 1997. The Company paid Dr. Comite
$84,000 in consulting fees for services rendered during the year ended December
31, 1998. In July 1998, 7,500 to the fair market value ($1.25) of the Common
Stock on July 21, 1998. These options were repriced when the remaining term of
the original option was nine years and two months.
Mr. Palefsky provides consulting services to the Company pursuant to a
consulting agreement, dated October 15, 1997. During the year ended December 31,
1998, the Company paid Mr. Palefsky $99,993.96 in consulting fees. In July 1998,
90,000 options granted in September 1997 with an exercise price of $7.00 per
share were repriced to the fair market value ($1.25) of the Common Stock on July
21, 1998. These options were repriced when the remaining term of the original
option was nine years and two months.
All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
The Company has entered into indemnification agreements with its
officers and directors containing provisions which may require the Company,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements and Report of Ernst & Young
LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows Years Ended December 31,
1998, 1997, and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
Exhibit
Number Description
------ -----------
3.1(1) Amended and Restated Certificate of Incorporation of
Registrant.
3.2(1) Bylaws of Registrant.
10.1(1) Form of Indemnification Agreement for directors and
officers.
10.2(2)(12) 1993 Stock Plan and forms of agreements thereunder.
10.3(1)(2) 1995 Employee Stock Purchase Plan and form of
subscription agreement.
10.4(2)(4) 1995 Directors' Stock Option Plan and form of stock
option agreement.
10.6(1)(3) Supplier Agreement dated March 29, 1995 between the
Registrant and Advanced Cardiovascular Systems, Inc.
10.7(1)(3) License Agreement dated December 28, 1992 between the
Registrant and Target Therapeutics, Inc.
10.8(1) Secured Note Purchase Agreement dated March 30, 1994
between the Registrant and Target Therapeutics, Inc.
10.9(1) Master Lease Agreement dated March 30, 1994 between the
Registrant and Target Therapeutics, Inc.
51
10.10(1) Second Amended and Restated Rights Agreement dated May
26, 1995.
10.11(1)(2) Sun Life Assurance Company of Canada Standardized 401(K)
Profit Sharing Plan and Trust, as amended.
10.12(3)(5) Distribution Agreement dated July 1, 1996 between the
Registrant and Mallinckrodt Group, Inc.
10.13(6) Lease Agreement with Dani Investment Partners.
10.14(7) Agreement and Plan of Reorganization dated October 29,
1996 between the Registrant, Microgyn, Inc. and CPTS
Acquisition Corporation (a wholly-owned subsidiary of
the Registrant), as amended November 7, 1996.
10.15(8) Preferred Shares Rights Agreement, dated as of February
27, 1997, between the Registrant and ChaseMellon
Shareholder Services, L.L.C., including the Certificate
of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock, the form of
Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively.
10.16(9) Third Addendum to Lease Agreement with Dani Investment
Partners.
10.17(9) Lease Agreement with Three Sisters Ranch Enterprises
dated April 15, 1997
10.18(10) Change of Control Agreement dated as of May 13, 1997 by
and between Registrant and Kathryn A. Tunstall.
10.19(10) Change of Control Agreement dated as of May 13, 1997 by
and between Registrant and Sanford Fitch.
10.20(10) Form of Senior Management Change of Control Agreement
10.21(11) Marketing and Distribution Agreement, dated as of
September 16, 1997, between the Registrant and Imagyn
Medical Technologies.
10.22(13) Loan Agreement with Steve Bacich dated April 24, 1997.
10.23(13) Promissory Note with Steve Bacich dated April 24, 1997.
10.24(2) Master Consulting Agreement with Florence Comite dated
September 10, 1997.
10.25(13) Manufacturing Transition Agreement with Medical
Scientific, Inc. dated October 1, 1997.
10.26(13) Royalty Agreement with Medical Scientific, Inc. dated
October 1, 1997.
10.27(2) Master Consulting Agreement with Howard Palefsky dated
October 15, 1997.
10.28 Sublease Agreement with Avio Digital, Inc. dated October
1, 1998.
10.29(2) Severance Agreement dated May 29, 1998 between the
Registrant and James Messemer.
10.30(2) Severance Agreement dated October 21, 1998 between the
Registrant and Sanford Fitch.
11.1(1) Statement of computation of net loss per share.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See Page 75 of this Report).
27.1 Financial Data Schedule.
----------------
52
(1) Incorporated by reference to identically numbered exhibits filed
in response to Item 16(a),"Exhibits," of the Registrant's
Registration Statement on Form SB-2, as amended (File No
33-99890-LA), which became effective on February 1, 1996.
(2) Management contract or compensatory plan or arrangement.
(3) Confidential treatment has been granted with respect to certain
portions of this Exhibit by order from the Securities and Exchange
Commission or requested.
(4) Incorporated by reference to an identically numbered exhibit filed
in response to Item 14(a) of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
(5) Incorporated by reference to an identically numbered exhibit filed
in response to Item 6(a) of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996.
(6) Incorporated by reference to an identically numbered exhibit filed
in response to Item 6(a) of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
(7) Incorporated by reference to Exhibit 2.1 filed in response to Item
7(c) of the Registrant's Report on Form 8-K filed on December 10,
1996.
(8) Incorporated by reference to Exhibit 1 filed in response to Item 2
of the Registrant's Form 8-A filed on February 28, 1997.
(9) Incorporated by reference to an identically numbered exhibit filed
in response to Item 6(a) of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1997.
(10) Incorporated by reference to an identically numbered exhibit filed
in response to Item 6(a) of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
(11) Incorporated by reference to Exhibit 10.16 filed in response to
Item 6(a) of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.
(12) Incorporated by reference to an identically numbered exhibit filed
in response to item 14(a) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996.
(13) Incorporated by reference to an identically numbered exhibit filed
in response to item 14(a) of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
53
CONCEPTUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ............................................. 55
Audited Financial Statements
Consolidated Balance Sheets ................................................ 56
Consolidated Statement of Operations ....................................... 57
Consolidated Statement of Stockholders' Equity ............................. 58
Consolidated Statements of Cash Flows ...................................... 59
Consolidated Notes to Financial Statements ................................. 60
54
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conceptus, Inc.
We have audited the accompanying consolidated balance sheets of
Conceptus, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
years in the period ended December 31, 1998. 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, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Conceptus, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Ernst & Young, LLP
Palo Alto, California
January 16, 1999
55
Conceptus, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31, 1998 December 31, 1997
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 11,503 $ $ 9,250
Short-term investments 5,568 17,808
Accounts receivable, net of allowance for doubtful accounts
of $661 and $577 at December 31, 1998 and 1997, respectively 139 540
Inventories -- 355
Other current assets 65 290
----------------- ----------------
Total current assets 17,275 28,243
Property and equipment, net 1,391 1,090
Other assets 365 147
----------------- ----------------
$ 19,031 $ 29,480
================ ================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 165 $ 699
Accrued compensation 421 670
Other accrued liabilities 92 135
Current portion of deferred revenue 97 97
Current portion of debt and capital lease obligations -- 34
----------------- ----------------
Total current liabilities 775 1,635
Long-term portion of debt and capital lease obligations -- 1
Long-term portion of deferred revenue 242 340
Commitments
Stockholders' equity:
Common stock, $0.003 par value, 30,000,000 shares authorized,
9,620,205 and 9,495,053 shares issued and outstanding at
December 31, 1998 and 1997, respectively 63,570 63,505
Stockholder notes receivable (54) (54)
Deferred compensation (106) (216)
Accumulated deficit (45,396) (35,731)
----------------- ----------------
Total stockholders' equity 18,014 27,504
----------------- ----------------
$ 19,031 $ 29,480
================ ================
See accompanying notes.
56
Conceptus, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
-------- -------- ---------
Net sales $ 449 $ 1,426 $ 664
Cost of sales 1,702 3,516 1,208
-------- -------- --------
Gross profit (loss) (1,253) (2,090) (544)
Operating expenses:
Research and development 4,317 5,429 3,757
Selling, general and administrative 5,349 6,323 4,824
Acquired in-process research and development -- -- 4,752
-------- -------- --------
Total operating expenses 9,666 11,752 13,333
-------- -------- --------
Operating loss (10,919) (13,842) (13,877)
Interest and investment income, net 1,259 1,797 2,211
Interest expense (5) (13) (26)
-------- -------- --------
Net loss $ (9,665) $(12,058) $(11,692)
======== ======== ========
Basic and diluted net loss per share $ (1.01) $ (1.29) $ (1.39)
======== ======== ========
Shares used in computing basic
and diluted net loss per share 9,562 9,381 8,396
======== ======== ========
See accompanying notes.
57
Conceptus, Inc.
Statement of Stockholders' Equity
(In thousands, except share and per share amounts)
Stockholders' Equity
------------------------------------------
Redeemable Series A
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
----------------------- ------------------ -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ------ ---------- ------------
Balances at December 31, 1995 3,853,957 $ 16,624 666,666 $-- 196,248 $ 931
Conversion of redeemable preferred stock exercised to common
stock (3,853,957) (16,624) -- -- 3,853,957 16,624
Series A convertible preferred stock converted to common stock -- -- (666,666) -- 666,666 --
Initial Public Offering common stock shares issued in
February at $14.00 per share, net of issuance costs of $4.3
million -- -- -- -- 3,450,000 43,992
Issuance of common stock for cash in 1996 at $0.30 to $9.15
per share, pursuant to exercise of options -- -- -- -- 116,543 98
Issuance of common stock for cash in 1996 at $8.7125 to $11.90
pursuant to the employee stock purchase plan -- -- -- -- 18,524 182
Issuance of common stock for cash in 1996 at $3.00 and $4.80
per share, pursuant to exercisable warrants -- -- -- -- 12,000 49
Net exercise of warrants -- -- -- -- 892,857 --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ----- ---------- ----------
Balances at December 31, 1996 -- $ -- -- $-- 9,206,795 $ 61,876
Issuance of common stock for cash in 1997 at $0.30 to $10.50
per share, pursuant to exercise of options -- -- -- -- 158,265 172
Issuance of common stock for cash in 1997 at $4.25 to $7.86
per share, pursuant to employee stock purchase plan -- -- -- -- 25,285 140
Issuance of common stock to former shareholders of
Microgyn Inc. -- -- -- -- 104,708 1,000
Extension of stockholder note receivable -- -- -- -- -- --
Amortization of deferred compensation, net of reversal of
forfeited shares -- -- -- -- -- 317
Net loss -- -- -- -- -- --
---------- ---------- ---------- ----- ---------- ----------
Balances at December 31, 1997 -- $ -- -- $-- 9,495,053 $ 63,505
Issuance of common stock for cash at $0.30 - $.075
per share, pursuant to exercise of options -- -- -- -- 95,785 44
Issuance of common stock for cash at $1.22 - $1.381
per share, pursuant to the employee stock purchase plan -- -- -- -- 29,367 37
Amortization of deferred compensation, net of reversal of
forreited shares -- -- -- -- -- (16)
Net loss -- -- -- -- -- --
========== ========== ========== ===== ========== ==========
Balances at December 31, 1998 -- $ -- -- $-- 9,620,205 $ 63,570
========== ========== ========== ===== ========== ==========
Stockholder's Equity
-----------------------------------------------------
Deficit Total
Accumulated Stockholders'
Stockholder During the Equit (Net
Note Deferred Development Capital
Receivable Compensation Stage Deficiency)
----------- ------------ ----------- ------------
Balances at December 31, 1995 ($ 49) ($ 778) ($11,981) ($11,877)
Conversion of redeemable preferred stock exercised to common
stock -- -- -- 16,624
Series A convertible preferred stock converted to common stock --------
Initial Public Offering common stock shares issued in
February at $14.00 per share, net of issuance costs of $4.3 million -- -- -- 43,992
Issuance of common stock for cash in 1996 at $0.30 to $9.15
per share, pursuant to exercise of options -- -- -- 98
Issuance of common stock for cash in 1996 at $8.7125 to $11.90
pursuant to the employee stock purchase plan -- -- -- 182
Issuance of common stock for cash in 1996 at $3.00 an d$4.80
per share, pursuant to exercisable warrants -- -- -- 49
Net exercise of warrants
Amortization of deferred compensation -- 219 -- 219
Net loss -- -- (11,692) (11,692)
-------- -------- -------- --------
Balances at December 31, 1996 ($ 49) ($ 559) ($23,673) $ 37,595
Issuance of common stock for cash in 1997 at $0.30 to $10.50
per share, pursuant to exercise of options -- -- -- 172
Issuance of common stock for cash in 1997 at $4.25 to $7.86
per share, pursuant to employee stock purchase plan -- -- -- 140
Issuance of common stock to former shareholders of
Microgyn Inc. -- -- -- 1,000
Extension of stockholder note receivable (5) -- -- (5)
Amortization of deferred compensation, net of reversal of
forfeited shares -- 343 -- 660
Net loss -- -- (12,058) (12,058)
-------- -------- -------- --------
Balances at December 31, 1997 ($ 54) ($ 216) ($35,731) $ 27,504
Issuance of common stock for cash at $0.30 - $.075 --------
per share, pursuant to exercise of options -- -- -- 44
Issuance of common stock for cash at $1.22 - $1.381
per share, pursuant to the employee stock purchase plan -- -- -- 37
Amortization of deferred compensation, net of reversal of
forreited shares -- 110 -- 94
Net loss -- -- (9,665) (9,665)
======== ======== ======== ========
Balances at December 31, 1998 ($ 54) ($ 106) ($45,396) $ 18,014
======== ======== ======== ========
See accompanying notes.
58
Conceptus, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Years Ended December 31,
1998 1997 1996
-------- -------- --------
Cash flows used in operating activities
Net loss $ (9,665) $(12,058) $(11,692)
Adjustments to reconcile net loss to net
cash used in operating activities:
Charge for in-process research and development -- -- 4,752
Depreciation and amortization 599 498 305
Allowance for doubtful accounts 444 39 136
Amortization of deferred compensation 94 523 219
Recognition of deferred revenue (98) (48) --
Changes in operating assets and liabilities
Accounts receivable (43) (474) (228)
Inventories 355 (173) (128)
Other current assets 225 (56) 216
Account payable (534) 111 (397)
Accrued compensation (249) 215 154
Other accrued liabilities (43) (30) 1,150
-------- -------- --------
Net cash used in operating activities (8,915) (11,453) (5,513)
-------- -------- --------
Cash flows used in investing activities
Purchase of investments (4,555) (61,785) (34,469)
Maturities of investments 16,795 64,078 14,621
Sales of investments -- 1,981 --
Purchase of Microgyn net of cash acquired -- -- (4,343)
Capital expenditures (875) (1,030) (375)
Investment in Advanced Reproductive (256) -- --
Change in other assets 13 (154) 12
-------- -------- --------
Net cash provided by (used in) investing activities 11,122 3,090 (24,554)
-------- -------- --------
Cash flows provided by financing activities
Proceeds from distributor agreement -- 485 --
Proceeds from issuance of common stock 81 312 44,321
Increase in stockholders notes -- (5) --
Principal payments on debt and capital lease obligations (35) (118) (163)
-------- -------- --------
Net cash provided by financing activities 46 674 44,158
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 2,253 (7,689) 14,091
Cash and cash equivalents at beginning of year 9,250 16,939 2,848
-------- -------- --------
Cash and cash equivalents at end of year $ 11,503 $ 9,250 $ 16,939
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 5 $ 13 $ 26
======== ======== ========
Supplemental schedule of noncash financing activities
Issuance of common stock to Microgyn shareholders $ -- $ 1,000 $ --
======== ======== ========
See accompanying notes
59
Conceptus, Inc.
Notes to Financial Statements
December 31, 1998
1. Summary of Significant Accounting Policies
Organization, Ownership and Business
Conceptus, Inc. ("Conceptus" or the "Company") was incorporated in the State of
Delaware on September 18, 1992 to design, develop and market minimally invasive
devices for reproductive medical applications. The Company's focus is to provide
a non-surgical approach to fallopian tube sterilization, the most commonly
performed contraceptive procedure worldwide. The Company has developed
proprietary micro-catheter and guidewire systems that allow physicians to
transcervically (through the cervix) access and navigate the full length of the
fallopian tubes in a nonsurgical approach. The Company's catheter systems are
based on technology initially developed and used by Target Therapeutics, Inc.
("Target"), a business unit of Boston Scientific Corporation ("BSC"), and
licensed exclusively to Conceptus in the field of reproductive physiology.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Microgyn, Inc. ("Microgyn"). All intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue at the time products are shipped. In 1998, 1997
and 1996, net sales include direct sales within the United States, as well as
through international and domestic distributors. These customers have no
contractual right of return or stock rotation privileges.
60
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding. Common equivalent shares from stock options
and warrants are excluded in the net loss per share calculation because their
inclusion would be antidilutive.
Stock-Based Compensation
The Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), provides an alternative to
Accounting Principles Board's Opinion No. 25 ("APB 25") "Accounting for Stock
Issued to Employees", in accounting for stock-based compensation issued to
employees. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB 25 and related
Interpretations. Accordingly, compensation costs for stock options granted to
employees and directors is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity from date of
purchase of three months or less to be cash equivalents. The Company maintains
deposits with a financial institution in the U.S. and invests its excess cash in
U.S. government obligations and U.S. corporate notes, which bear minimal risk.
Management considers all their investments as available-for-sale.
Available-for-sale securities are carried at estimated fair value, with the
unrealized gains and losses reported in stockholders' equity. The fair values
for marketable debt securities are based on quoted market prices. At December
31, 1998 and 1997, the fair value of investments approximates cost. Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest and investment income.
The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in interest and investment income.
61
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
Concentration of Credit Risk
The Company invests cash that is not required for immediate operating needs
principally in a diversified portfolio of financial instruments issued by
institutions with strong credit ratings. By policy, the amount of credit
exposure to any one institution, with the exception of U.S. government backed
securities, is limited.
The Company's revenues to date consist of product revenues from distributors
located in Europe, Australia and the United States, and direct sales within the
United States. The Company does not require collateral and provides for
estimated credit losses based on a customer credit assessment. During the years
ended December 31, 1998, 1997, and 1996, the Company added approximately
$444,000, $39,000 and $136,000 to its bad debt reserves respectively. During the
same periods, write-off of uncollectible accounts totaled $18,000, $4,000, and
$3,000, respectively.
Customers comprising more than 10% of net sales at December 31 are as follows:
Percentage of Net Sales
---------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
Customer 1 18% -- --
Customer 2 11% -- 11%
Customer 3 -- 63% 46%
Customer 4 -- 27% --
Customer 5 -- -- 19%
Export sales were $147,000, $239,000 and $188,000 during the years ended
December 31, 1998, 1997 and 1996, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is based on actual
costs computed on a first-in, first-out basis.
62
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation which is
calculated using the straight-line method over the estimated useful lives of the
respective assets, generally three to five years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful lives of the
related assets.
Reporting Comprehensive Income (Loss)
Conceptus adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income,"("Statement 130) in the year ended December 31,
1998. Statement 130 establishes new rules for the reporting and display of
comprehensive income (loss) and its components; however, the adoption of
Statement 130 had no impact on the Company's net income (loss) or stockholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available for-sale securities, which prior to adoption were reported separately
in the stockholders' equity, to be included in other comprehensive income
(loss).
Segment Information
The Company adopted FAS 131, "Disclosure about Segments of an Enterprise and
Related Information," at December 31, 1998. FAS 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Under FAS 131, the Company's operations are treated as one operating segment as
it only reports profit and loss information on an aggregate basis to chief
operating decision makers of the Company.
2. Acquisition
On November 26, 1996, the Company completed the acquisition of Microgyn, a
privately held medical device company developing products designed to improve
the safety and performance of resectoscope procedures, including therapeutic
hysteroscopy. The Company acquired all of the outstanding common stock of
Microgyn in exchange for $3.0 million in cash on the acquisition date and $1.0
million in cash or stock (at the option of Conceptus) payable six months after
the acquisition date, plus $752,000 due to assumption of certain liabilities and
related acquisition expenses. In May 1997, the Company satisfied the $1.0
million accrued acquisition
63
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
cost by issuing 104,708 shares of the Company's Common Stock. Additional
contingent consideration in cash or stock, at the option of Conceptus, is
payable to the former shareholders of Microgyn based upon meeting certain future
milestones. No additional consideration has been paid subsequent to the May 1997
stock issuance.
The acquisition was accounted for using the purchase method. Under the purchase
method, the results of operations of acquired companies are included
prospectively from the date of acquisition, and the aggregate acquisition cost
is allocated to the acquiree's assets, liabilities, and intangibles, if any,
based upon the fair market values on the date of acquisition. An independent
valuation, utilizing accepted valuation techniques, was obtained which allocated
the $4,572,000 aggregate acquisition cost as purchase of in-process research and
development. Consequently, the $4,572,000 was charged to research and
development expense in the month of acquisition. Based on the valuation, the
Company concluded that technological feasibility has not been reached and there
was no alternative use of the technology.
The following unaudited pro forma financial summary is presented as if the
operations of the Company and Microgyn were combined as of January 1, 1996. The
unaudited pro forma combined results are not necessarily indicative of the
actual results that would have occurred had the acquisition been consummated at
that date, or of the future operations of the combined entities. Nonrecurring
charges, such as the write-off of approximately $4.8 million of acquired
in-process research and development, are not reflected in the following pro
forma financial summary.
Unaudited Pro Forma Financial Summary
Year ended December 31, 1996
----------------------------
(In thousands, except per share amounts)
Net sales $ 623
Net loss (7,794)
Basic and diluted net loss per share $ (0.93)
In October 1997, the Company purchased the exclusive manufacturing rights to the
Microgyn product line from the Company's supplier, Medical Scientific, Inc. The
manufacturing know-how related to the Microgyn product line has been transferred
to the Company's facility as of the end of the first quarter of 1998. The
purchase and transfer of these manufacturing rights resulted in additional cost
of goods expenditures approximating $1.1 million.
64
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
3. Related Party Transactions
Financing Arrangement
In March 1994, the Company entered into an equipment lease line (see Note 6) and
secured loan agreement with Target, which allows for borrowings of $300,000 and
$209,000, respectively. The borrowings are secured by capital equipment and bear
interest at 8.5% per year. The notes are payable over a 36-month and 48-month
period. As of December 31, 1998 both notes were paid in full. As of December 31,
1997 $40,000 was payable on one note. In connection with these secured loan
agreements, Target was issued a warrant to purchase 12,000 shares of the
Company's Common Stock. The exercise price for 5,000 of these shares was $3.00
per share and the remaining 7,000 shares had an exercise price of $4.80 per
share. As a result of the Company's initial public offering, Target exercised
its warrant at an aggregate price of $48,600.
Operations and Facilities
In December 1992, the Company entered into a supply agreement with Target
whereby Target agreed to supply to and/or manufacture products and components
necessary for the Company to proceed with its research and development activity
under the license agreement described above. In 1998, 1997 and 1996, no amounts
were paid to Target under this supply agreement.
In addition, the Company paid to Target certain employee benefits incurred by
Target on the Company's behalf. In 1998 and 1997, no amounts were paid due to
the discontinuance of the agreement as of December 31, 1996. In 1996, $177,000
was paid, under this agreement.
65
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
4. Balance Sheet Information
December 31,
-----------------------------------------------
1998 1997
-----------------------------------------------
(In thousands)
Inventories:
Raw materials $ 160 $ 89
Finished goods and work-in-process 673 266
Reserves (833) --
-----------------------------------------------
$ -- $ 355
===============================================
Property and equipment:
Machinery and equipment $ 719 $ 643
Office equipment and furniture and fixtures 1,591 1,319
Leasehold improvements - construction in
progress 625 98
-----------------------------------------------
2,935 2,060
Less accumulated depreciation and (1,544) (970)
amortization
-----------------------------------------------
Property and equipment, net $1,391 $1,090
===============================================
66
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
5. Investments
The following is a summary of available-for-sale securities as of:
Estimated Fair Value
---------------------------------------------
December 31,
1998 1997
---------------------------------------------
(In thousands)
Cash $ 491 $ 395
Cash equivalents:
Money market funds 10,008 882
Commercial paper -- 3,492
Corporate notes 1,004 2,086
U.S. government obligations -- 2,395
---------------------------------------------
$ 11,503 $ 9,250
=============================================
Short-term investments:
U.S. government obligations $ -- $ 8,353
Corporate notes 5,568 8,443
Certificates of deposit -- 1,012
---------------------------------------------
$ 5,568 $17,808
=============================================
6. Commitments
The Company leases its current facility under an operating lease which expires
in December 1999. The Company has also leased an additional facility under an
operating lease, effective May 1997, which expires May 2002. The total minimum
annual rental commitments under the leases as of December 31, 1998 are as
follows:
(In thousands)
Year ending December 31,
1999 $499
2000 232
2001 242
2002 102
2003 --
--------------------------
Total minimum rental commitment $1,075
==========================
67
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
As of October 15, 1998 the Company entered into a sublease agreement for its
additional facility which expires May 2002. The total minimum annual rental
commitments will be offset by the following sublease rental income in the
following years:
(In thousands)
Year ending December 31,
1999 $ 398
2000 418
2001 438
2002 189
2003 --
--------------------------
Total minimum sublease commitment $1,443
==========================
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $515,000,
$347,000, and $129,000, respectively.
At December 31, 1998 and 1997, assets acquired under noncancelable capital
leases with Target consist of office equipment with an aggregate cost of
$322,000 at both 1998 and 1997. The accumulated amortization at the end of 1997
was $284,000. The assets were fully depreciated in 1998.
7. Stockholder's Equity
1993 Stock Plan
The 1993 Stock Plan ("1993 Plan") was adopted in July 1993 and allows the
granting of options and restricted stock purchases for up to 1,575,000 shares of
Common Stock to employees, distributors, consultants and directors. Effective
May 1997, the shares of Common Stock reserved for issuance were increased by
1,000,000 shares to 2,575,000 shares. The Company has reserved 2,033,158 shares
of its Common Stock which may be issued with respect to outstanding options at
December 31, 1998 under the 1993 Plan.
Stock options granted under the 1993 Plan may be either incentive stock options
or nonqualified stock options. Incentive stock options may be granted to
employees with exercise prices of no less than the fair market value of the
Common Stock on the date
68
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
of grant and nonqualified options may be granted at exercise prices of no less
than 85% of the fair market value of the Common Stock on the date of grant. The
options expire no more than 10 years after the date of grant. Options may be
granted with different vesting terms from time to time but generally provide for
vesting of at least 25% of the total number of shares per year. The options may
include provisions permitting exercise of the option prior to full vesting. Any
unvested shares so purchased shall be subject to repurchase by the Company at
the original exercise price of the option. Such repurchase rights generally
lapse at a minimum rate of 25% per year from the date the option was granted.
Activity under the 1993 Plan is as follows:
Options Options Outstanding
-------------------------------------------
Available Number of Price
for Grant Shares Per Share
---------------------------------------------------------------
Balance at December 31, 1995 497,185 906,566 $0.30-$9.15
Options granted (439,707) 439,707 $9.25-$19.75
Options exercised -- (116,543) $0.30-$9.15
Options cancelled 165,315 (165,315) $0.30-$10.50
---------------------------------------------------------------
Balance at December 31, 1996 222,793 1,064,415 $0.30-$19.75
Additional authorized 1,000,000 -- --
Options granted (755,000) 755,000 $7.00-$13.625
Options exercised -- (158,265) $0.30-$10.50
Options canceled 172,388 (172,388) $0.30-$19.75
---------------------------------------------------------------
Balance at December 31, 1997 640,181 1,488,762 $0.30-$19.75
Options granted (1,228,082) 1,228,082 $1.25-$4.63
Options exercised -- (95,785) $0.30-$10.50
Options canceled 1,207,777 (1,207,777) $0.30-$19.75
---------------------------------------------------------------
Balance at December 31, 1998 619,876 1,413,282 $0.30-$19.75
===============================================================
At December 31, 1998, 1997 and 1996, options to purchase 576,736, 652,982 and
447,953 common shares, respectively, were exercisable. There were no restricted
stock issuances for 1998, 1997 and 1996. At December 31, 1998, there were no
common shares subject to repurchase by the Company (12,500 shares subject to
repurchase at December 31, 1997). There were no common shares subject to
repurchase in 1996.
On July 21, 1998, all employee grants of stock options under the 1993 Stock Plan
issued were repriced (a total of 486,932 options) to reflect an exercise price
of $1.25.
69
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
Any option holder who elected to reprice an option was not permitted to exercise
the repriced option, even if vested, for one year. The repriced options are
reflected as both granted and forfeited options in the 1993 Plan table.
On April 7, 1998, employee grants of stock options under the 1993 Stock Plan
issued were repriced (a total of 63,300 options) to reflect an exercise price of
$3.50. The repriced options are reflected as both granted and forfeited options
in the 1993 Plan table.
On August 1, 1996, all non-officer employee grants of stock options under the
1993 Stock Plan issued between the date of the public offering (February 1,
1996) and June 3, 1996 were repriced (a total of 93,666 options) to reflect an
exercise price of $10.50. Any option holder who elected to reprice an option was
not permitted to exercise the repriced option, even if vested, for 90 days. The
repriced options are reflected as both granted and forfeited options in the 1993
Plan table.
1995 Directors Stock Option Plan
On November 29, 1995, the board approved the 1995 Director's Stock Option Plan
("Directors' Plan"), which allows the granting of options for up to 100,000
shares of Common Stock to outside directors. Stock options may be granted to
outside directors with exercise prices of no less than fair market value. The
options expire no more than 10 years after the date of grant. Options granted
under the Directors' Plan will vest over one or three years. The options are
only exercisable while the outside director remains a director. During 1998,
1997 and 1996, 7,500, 32,000 and 12,000 options, respectively, were granted.
1995 Employee Stock Purchase Plan
On November 29, 1995, the board approved the 1995 Employee Stock Purchase Plan
("ESPP"), under which employees may purchase shares of the Company's Common
Stock, subject to certain limitations, at no less than 85% of the lower of the
fair market value at the beginning or end of a six-month purchase period. Under
the terms of the ESPP, employees can choose each year to have up to 10% of their
annual base earnings withheld to purchase the Company's Common Stock. During
1998, 1997 and 1996, 29,367 25,285 and 18,524 shares, respectively, were issued.
The Company has reserved 200,000 shares of Common Stock for issuance under the
ESPP.
70
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
Pro Forma Valuation of Options
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans (see Note 1). Accordingly, no compensation cost has been
recognized for its fixed stock option plans and its stock purchase plan.
Pro forma information regarding net loss and net loss per share is required by
Statement 123 and has been determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of Statement 123. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for option grants in 1998, 1997 and
1996: dividend yield of zero, expected volatility factor of .6, risk-free
interest rate of 6% and an expected life of 4 years. In 1997 and 1996, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for option grants: dividend yield of zero, expected volatility
factor of .6, risk-free interest rate of 6% and an expected life of 5 years.
Compensation cost is recognized for the fair value of the employees' purchase
rights, which was estimated using the Black-Scholes model with the following
assumptions for 1998: dividend yield of zero, an expected life of four years,
expected volatility factor of .4 and risk-free interest rate of 6%. In 1997 and
1996, compensation cost is recognized for the fair value of the employees'
purchase rights, which was estimated using the Black-Scholes model with the
following assumptions: dividend yield of zero, an expected life of one year,
expected volatility factor of .4 and risk-free interest rate of 5%. The weighted
average fair values of those purchase rights granted in 1998, 1997 and 1996 were
$0.87, $3.09 and $4.32, respectively. The effects of applying FAS 123 for
recognizing compensation expense and providing pro forma disclosures in 1998,
1997 and 1996 are not likely to be representative of the effects on reported net
income in future years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value
71
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
estimate, in management's opinion, the existing model does not necessarily
provide a reliable single measure of the fair value of its employee stock
options. For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information follows (in thousands except for the net loss per share
information):
1998 1997 1996
---- ---- ----
Proforma net loss $(10,229) $(12,908) $(12,463)
Proforma basic and diluted net loss per share $(1.06) $(1.38) $(1.48)
A summary of the activity of the Company's 1993 Plan and the Directors' Plan for
the years ended December 31, are as follows:
1998 1997
--------------------------- ----------------------
- - ----
Weighted-Avg Weighted-Avg
Fixed Options Shares Exercise Price Shares Exercise Price
- - ------------- ------ -------------- ------ --------------
Outstanding at beginning of year 1,532,796 $ 7.96 1,076,415 $ 5.72
Granted 685,850 $ 2.15 787,000 $ 9.29
Exercised (95,785) $ 0.46 (158,265) $ 1.09
Forfeited (442,657) $ 8.93 (172,388) $ 6.93
------------ ---------
Outstanding at end of year 1,680,200 $ 3.22 1,532,792 $ 7.96
Options exercisable at year-end 576,736 652,982
Weighted-average fair value of option
granted during the year $ 5.01 $ 4.96
72
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
Weighted-Avg.
Number Remaining Weighted-Avg. Number
Range of Exercise Outstanding at Contractual Exercise Exercisable Weighted-Avg.
Prices 12/31/98 Life (years) Price at 12/31/98 Exercise Price
- - ------------------------ ---------------- --------------- --------------- -------------- ----------------
$0.300-$0.510 230,747 5.61 $ 0.43 223,437 $ 0.43
$1.250-$1.250 925,296 8.71 $ 1.25 6,999 $ 1.25
$1.313-$4.625 201,229 9.39 $ 2.76 138,056 $ 2.76
$7.000-$9.150 27,601 8.34 $ 8.11 20,859 $ 8.11
$9.625-$9.625 188,882 8.36 $ 9.63 105,737 $ 9.63
$9.630-$11.130 70,496 7.59 $ 10.20 50,909 $ 10.20
$11.625-$11.625 10,332 7.85 $ 11.63 10,302 $ 12.75
$12.750-$12.750 200 8.17 $ 12.75 87 $ 12.75
$19.250-$19.250 20,408 7.35 $ 19.25 15,350 $ 19.25
$19.750-$19.750 5,009 7.16 $ 19.75 5,000 $ 19.75
---------------- ----------------
$0.300-$19.750 1,680,200 7.85 $ 5.010 576,736 $ 5.010
8. Income Taxes
As of December 31, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $38,000,000 and
$13,500,000, respectively. In addition, at December 31, 1998, the Company had
research credit carryforwards of approximately $900,000. The net operating loss
and credit carryforwards described above will expire at various dates beginning
in the years 2006 through 2013, if not utilized. Utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to the ownership change provisions of the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
Deferred income taxes reflect the net effects of tax carryforwards and temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
73
Conceptus, Inc.
Notes to Financial Statements (continued)
December 31, 1998
Significant components of the Company's deferred tax assets as of December 31
are as follows:
1998 1997
---------------------------------------------
(In thousands)
Net operating loss carryforwards $ 13,800 $ 10,700
Research credits (expiring 2006-2013) 900 700
Capitalized R&D 900 800
Other - net -- 700
---------------------------------------------
Total deferred tax assets 15,600 12,900
Valuation allowance for deferred tax assets (15,600) (12,900)
---------------------------------------------
Net deferred tax assets $ -- $ --
=============================================
Because of the Company's lack of earnings history, the deferred tax assets have
been fully offset by a valuation allowance. The increase in the valuation
allowance was approximately $5,335,00 during 1997.
9. Restructuring Accrual
In July 1998, the Company announced a restructuring to significantly reduced
spending levels through the elimination of all sales and marketing,
manufacturing, and most administrative personnel. The Company has eliminated
fifty-three positions worldwide since January 1, 1998, through natural attrition
and employee layoffs. At December 31, 1998, $46,000 remains related primarily to
severance and cobra payments. This restructuring resulted in an additional
charge to operating expense of $920,000 comprised of $725, 000 related to the
reduction in workforce and $195,000 to fully reserve all remaining inventory.
10. Litigation
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity of
the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
74
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 in the City of San
Carlos, California on this 30th day of March 1999.
CONCEPTUS, INC.
By:__________________________________________________
Kathryn A. Tunstall,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kathryn A. Tunstall, his or her
attorney-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes may do or cause to be
done by virtue hereof. Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the following persons in the
capacities and on the dates indicated
Signature Title Date
--------- ----- ----
/s/ Kathryn A. Tunstall President, Chief Executive Officer and
- - ---------------------------- Director (Principal Excutive Officer)
(Kathryn A. Tunstall) March 30, 1999
/s/ Oliver Brouse Director Finance, (Principal Financial
- - ---------------------------- and Accounting Employee)
(Oliver Brouse) March 30, 1999
/s/ Florence Comite
- - ----------------------------
(Florence Comite) Director March 30, 1999
/s/ Sanford Fitch
- - ----------------------------
(Sanford Fitch) Director March 30, 1999
/s/ Robert F. Kuhling
- - ----------------------------
(Robert F. Kuhling) Director March 30, 1999
/s/ Thomas C. McConnell
- - ----------------------------
(Thomas C. McConnell) Director March 30, 1999
/s/ Howard D. Palefsky
- - ----------------------------
(Howard D. Palefsky) Director March 30, 1999
/s/ Richard D. Randall
- - ----------------------------
(Richard D. Randall) Director March 30, 1999