CONCEPTUS INC - 10-Q Quarterly Report

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

As of April 30, 2003, 21,473,703 shares of the registrant’s Common Stock were outstanding.

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included.

The condensed consolidated balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. This financial data should be reviewed in conjunction with the audited consolidated financial statements and related notes included in the Company’s Form 10-K for the year ended December 31, 2002. The results of operations for the three months ended March 31, 2003 may not necessarily be indicative of the operating results for the full 2003 fiscal year or any other future interim periods.

Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis. The components of inventories consist of the following:

The Company offers warranties on its product and records a liability for the estimated future costs associated with warranty claims, which is based upon historical experience and the Company’s estimate of the level of future costs. Warranty costs are reflected in the statement of operations as cost of goods sold. A reconciliation of the changes in the Company’s warranty liability for the three months ended March 31, 2003 follows (in thousands):

As permitted by Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation,” (SFAS No. 123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure – an amendment of FASB Statement No. 123,” the Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based compensation plans. No stock-based employee compensation expense is included in the net loss as reported during the three months ended March 31, 2003 and 2002.

The following table provides a reconciliation of net loss to pro forma net loss as if the fair value method, pursuant to SFAS No. 123, had been applied to all awards (in thousands, except per share data):

The Company has adopted the disclosure only provisions of SFAS No. 123. The Company calculated the fair value of each option on the date of grant using the fair value method as prescribed by SFAS No. 123. The assumptions used are as follows:

To comply with pro forma reporting requirements of SFAS No. 123, compensation cost is also estimated for the fair value of Employee Stock Purchase Plan (“ESPP”) issuances, which are included in the pro forma totals above.

The fair value of the ESPP issuances is calculated at each reporting date using the following assumptions:

Stock-based compensation arrangements to non-employees are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18 (EITF 96-18), “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires that these equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Stock-based compensation expense relating to non-employees was $1,000 and $120,000 for the three months ended March 31, 2003 and 2002, respectively.

The fair value of the stock options granted to non-employees is calculated at each reporting date using the following assumptions:

The weighted-average fair value per share of options granted was $7.13 and $19.93, respectively, for the three months ended March 31, 2003 and 2002.

Basic net loss per share is computed using the weighted-average number of common shares outstanding during each period. Diluted net loss per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during each period. Under the requirements for calculating basic net loss per share, the effect of potentially dilutive securities such as stock options, common stock shares subject to repurchase, warrants and convertible securities are excluded. Basic and diluted net loss per share are equivalent for all periods presented due to the Company’s net loss position.

During all periods presented, the Company had securities outstanding, which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been antidilutive. These outstanding securities consist of options to purchase 3,449,000 and 3,540,000 shares of common stock as of March 31, 2003 and December 31, 2002, respectively.

Total comprehensive loss for the three months ended March 31, 2003 consisted of foreign currency translation losses of $13,000 and net loss of $11,025,000, as unrealized gains and losses on available-for-sale securities were immaterial. For the three months ended March 31, 2002, total

comprehensive loss consisted of foreign currency translation losses of $4,000 and net loss of $5,855,000, as unrealized gains and losses on available-for-sale securities were immaterial.

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS No. 146”) which addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the EITF has set forth in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on its financial position or on its results of operations.

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF No. 00-21 to have a material impact on its financial position or on its results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 to have a material impact on its financial position or on its results of operations.

The Company filed a lawsuit in United States District Court for the Northern District of California on April 23, 2002 against Ovion. The lawsuit seeks a declaration that Essure does not infringe Ovion’s United States Patent No. 6,096,052 and that the patent is invalid and unenforceable due to Ovion’s inequitable conduct before the PTO. The Company subsequently amended its lawsuit to include charges of false advertising, trade libel, unfair competition, unjust enrichment and constructive trust against Ovion and its principals Jeffrey Callister and William S. Tremulis. During an October 28, 2002 hearing before the court, Ovion stated that it does not intend to charge the Company with infringement of United States Patent 6,096,052. However, on August 13, 2002, Ovion has filed a separate action, in the same court, charging the Company with infringement of a related patent, United States Patent No. 6,432,116 entitled “Occluding Device and Method of Use.” The Company has denied infringement and filed a Declaratory Judgment counterclaim, seeking a declaration that United States Patent No. 6,432,116 is not infringed, invalid and unenforceable due to Ovion’s inequitable conduct before the PTO. While the Company believes that it will prevail in the above litigations, if it does not, Ovion may be able to obtain damages against the Company and/or obtain an injunction against the Essure device. If Ovion were successful, there is no guarantee that the Company could negotiate a suitable arrangement with it to acquire rights under its patents. The Company believes that the complaint is without merit and the outcome will not have a material effect on the Company’s financial position, results of operations or cash flows. No provision for any liability that may result upon the resolution of this matter has been made in the accompanying financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in Part I—Item 1 of this Quarterly Report. In addition, the following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We wish to alert readers that the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2002, as well as other factors, including those set forth in the following discussion and under “Risk Factors” below, could in the future affect, and in the past have affected, our actual results and could cause our results for future periods to differ materially from those expressed or implied in any forward-looking statements made by us.

We develop, manufacture and market Essure^™, an innovative and proprietary non-incisional permanent birth control device for women. Essure is a soft and flexible micro-insert delivered into a woman’s fallopian tubes and is designed to provide permanent birth control by causing a benign tissue in-growth that blocks the fallopian tubes. A successfully placed Essure prohibits the egg from traveling through the fallopian tubes and therefore prevents fertilization. The Essure placement procedure is typically performed as an outpatient procedure and is intended to be a less invasive and a less costly alternative to tubal ligation, the leading form of birth control in the United States and worldwide. In November 2002, we obtained approval to market Essure in the United States from the United States Food and Drug Administration, or the FDA, and have started our sales and marketing campaign in the United States. Internationally, Essure is currently being marketed in Australia, Canada, Indonesia, Morocco, Singapore and fifteen countries in Europe.

We believe that Essure represents an attractive, less invasive, alternative to tubal ligation for women seeking permanent birth control. Laparoscopic tubal ligation and tubal ligation by laparotomy typically involve abdominal incisions and/or punctures, general or regional anesthesia, four to ten days of normal recovery time and the risks associated with an incisional procedure. The Essure placement procedure does not require cutting or penetrating the abdomen, which is expected to lower the likelihood of post-operative pain due to the incisions/punctures, and is typically performed in an outpatient setting without general or regional anesthesia. In the Pivotal trial of Essure, the total procedure time averaged 35 minutes, with an average of 13 minutes of hysteroscopic time to place the Essure micro-inserts. Patients in the trial were typically discharged approximately 45 minutes after the Essure placement procedure. No overnight hospital stay is required. Furthermore, Essure is effective without drugs or hormones.

We believe Essure will also appeal to women who have completed childbearing but who are using either temporary birth control methods or no birth control method. Among women from our Phase II clinical study and Pivotal trial who have worn the micro-inserts for two years or more, 99% rated their comfort with Essure as “good” to “excellent” at the follow-up visits conducted as of October 2002. Excluding the day of the Essure placement procedure, 92% of the patients in the Pivotal trial who were employed returned to work in one day or less. Essure’s safety and recovery profile is one of the reasons that we believe it may be a preferred alternative to currently available methods of permanent birth control.

We believe that physicians will be receptive to Essure because it is a less invasive permanent birth control option to offer their patients. We also believe physicians will find Essure procedures relatively easy to perform after completing our training program. We believe hospitals will be able to

utilize their facilities more cost effectively with the Essure placement procedure compared with tubal ligation. We expect payors to experience cost reductions resulting from the elimination of overhead and procedural costs related to anesthesia and post-operative hospital stays associated with tubal ligations. In addition, payors may also benefit from the reduction of unplanned pregnancies associated with non-permanent methods of birth control used by patients who have chosen to avoid the drawbacks of currently available permanent birth control methods but who may elect to use Essure.

In November 2002, we received formal notification from the FDA that Essure had been approved for marketing in the United States. As a condition of the Pre-Market Approval, or PMA approval, we are required by the FDA to follow our clinical trial patients for a five-year period following reliance on Essure for contraception. The information from this planned long-term post-approval study will provide relevant information for our United States commercialization, as well as allow us to publish long-term data at the conclusion of the follow-up period. In addition, three months post-procedure and consistent with our pivotal trial protocol, we are required to perform a hysterosalpingogram, or HSG, which calls for contrast dye to be injected into the uterus and fallopian tubes to confirm occlusion and micro-insert location. Because an HSG can be uncomfortable for women, we are working with the FDA to approve a less-invasive alternative, such as a pelvic x-ray.

Shortly after we received FDA approval in November 2002, we made our first commercial sale of Essure in the United States. We currently have professional education field trainers and sales representatives across the United States. Our professional education effort will be entirely focused on physician training. We will monitor the length of time required for United States physicians to adopt Essure as a routine part of their gynecological practice. We will initially target large-group gynecological practices with the goal of training, inclusive of preceptorship, up to approximately 700 physicians by the end of 2003. As of May 2003, we have put more than 700 doctors through our initial training course, which does not include preceptorship, in the United States. Simultaneously, we will be setting up a United States call center to answer questions prospective patients may have regarding Essure.

On April 17, 2003, we announced the appointment of Mr. Mark Sieczkarek as our new President and Chief Executive Officer and a member of the Board of Directors. Mr. Sieczkarek comes to us with extensive experience in general management, marketing, finance and corporate development. Most recently, Mr. Sieczkarek served as President, Americas, of Bausch and Lomb, Inc. (NYSE: BOL), where he led the region to double-digit revenue and profitability growth. Steven Bacich, who served as President and Chief Executive Officer since January 2000, will assist in the transition with primary responsibility over research and development, business development and clinical and medical affairs. As part of this transition, Mr. Bacich has resigned from his position as a member of the Board of Directors.

With regards to reimbursement, we have been working diligently with third-party payors to make sure they understand and embrace the benefits of Essure. To date, United States physicians and facilities using Essure have been reimbursed for the procedure under existing Current Procedural Terminology, or CPT codes. However, as is typical with any new medical procedure, the reimbursement process could be quite lengthy and difficult.

Currently, many of the nation’s leading hospitals, including Montefiore Medical Center in New York City, Hahnemann Hospital in Philadelphia, University of Pittsburgh Medical Center, Northwestern Medical Center in Chicago, Presbyterian Hospital of Dallas, and Baylor University Medical Center in Houston have physicians on their medical staffs that now offer Essure to their patients seeking permanent birth control. Additionally, Aetna United States Healthcare, the largest United States provider of health benefits, recently joined a list of leading health insurance companies who have established a coverage policy for Essure, making it widely available to women and couples seeking an alternative to tubal ligation or vasectomy in the United States. We are also working with the Planned Parenthood

Federation of America to launch a program to make the Essure procedure available through local Planned Parenthood clinics.

We are continuing our outreach at major medical conferences, including presenting Essure at the American College of Obstetricians and Gynecologists’s annual conference, which occurred in late April 2003. At this meeting, we had two presentations on Essure, and importantly, there was a Continuing Medical Education, or CME, accredited symposium with Essure as the main topic. Following this meeting, we will be stepping up our public relations campaign targeting both physicians and potential patients. We have plans for a highly targeted direct to consumer campaign toward women beginning in May.

Essure is listed with Australia’s Therapeutic Goods Administration, or the TGA, which allows us to market and sell Essure in Australia. We have a sales and marketing group in Australia and began commercial sales there in the second quarter of 2001. In February 2001, we received approval to affix the CE Mark to Essure, indicating that Essure is certified for sale throughout the European Union, subject to compliance with local regulations such as registration with health ministries and/or particular requirements regarding labeling or distribution. We currently have ongoing reimbursement studies being conducted in France and the U.K. We have established distribution partnerships in select European countries, including Austria, Belgium, Denmark, Finland, Germany, Holland, Italy, Norway, Portugal, Spain, Sweden, Switzerland, Turkey and the U.K, and made our first sales to distributors in December 2001. We initiated a direct sales program in France during 2002 and our first commercial sale was made in October 2002. We received clearance from Health Canada to market Essure in Canada in November 2001 and made our first commercial sale in Canada in January 2002.

Our future revenues and results of operations may fluctuate significantly from quarter to quarter and will depend upon, among other factors, the extent to which Essure gains market acceptance domestically and internationally, the rate of product adoption by doctors and patients, obtaining government and third-party reimbursement, the rate at which we train United States physicians, the sales and training activity of our international distributors or marketing partners, the introduction of competitive products and other factors discussed in this Form 10-Q.

We maintain a website located at www.conceptus.com. We make available free of charge on or through our website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into and does not form a part of this form 10-Q.

Net sales were $1.2 million for the three months ended March 31, 2003 as compared to $0.3 million for the three months ended March 31, 2002. The increase in net sales is due to our effort in commercializing Essure in the United States of America. We expect net sales to increase on a quarterly basis for the reminder of fiscal 2003. For the three months ended March 31, 2003, net sales to two distributors were 15% and 12% of the total consolidated net sales, respectively. Accounts receivable from three distributors were 22%, 15% and 15%, respectively, of the total net accounts receivables outstanding as of March 31, 2003. For the three months ended March 31, 2002, net sales to three distributors were 27%, 25%, and 13% of the total consolidated net sales, respectively. Accounts receivable from three distributors were 24%, 19% and 10%, respectively, of the total net accounts receivables outstanding as of March 31, 2002.

Net product sales by geographic region as a percentage of net sales is as follows:

Cost of goods sold for the three months ended March 31, 2003 were $1.2 million as compared to $0.7 million for the same period in the prior year. The increase is primarily due to higher sales volume. We have also attained positive gross margin in the first quarter of fiscal 2003. We expect to have positive gross margin for fiscal 2003 as we increase production volume. Cost of goods sold for the three months ended March 31, 2002 represented the costs of early stage product introduction and limited production volumes.

Research and development expenses, which include expenses related to product development, clinical research and regulatory affairs, decreased to $1.6 million for the three months ended March 31, 2003 from $2.0 million for the three months ended March 31, 2002. The decline reflects the downward trend of clinical research and regulatory affairs expenses now that we have received FDA approval for Essure. We expect future research and development expenses for the remaining quarters of fiscal 2003 to remain consistent with that of the first quarter of fiscal 2003.

Selling, general and administrative expenses increased to $9.6 million for the three months ended March 31, 2003 from $3.2 million for the same period in the prior year. The $6.4 million increase is mainly attributable to the increase in headcount in our U.S. sales and marketing group ($1.5 million), expenses related to U.S. physician training whereby an accelerated number of courses were held due to higher than anticipated physician demand ($2.3 million), expenses related to advertising and public relations ($1.6 million), U.S. strategic reimbursement expenditures ($0.3 million), and increases in general and administrative expenses mainly to support commercialization activities in the U.S. ($0.7 million). We are continuing to market Essure outside of the U.S., although we will focus most of our resources in developing the U.S. market. We expect domestic sales and marketing expenditures for the remaining quarters of fiscal 2003 to be consistent with or lower than that of the first quarter of fiscal 2003, as much of the upfront advertising, promotional, and public relations expenses have been incurred.

Net interest and other income was $0.2 million for the three months ended March 31, 2003 which represented interest earned on excess cash invested. Net interest and other expense was $0.2 million for the same period in the prior year which included a one-time settlement charge in connection with a 1997 distribution agreement related to our discontinued product and foreign currency loss.

We have experienced significant operating losses since inception and, as of March 31, 2003, had an accumulated deficit of $128.8 million. We expect our operating losses to continue at least through 2003 as we continue to expend substantial resources in the selling and marketing of Essure in the United States of America and the international markets. Due to the unpredictable nature of these activities, we do not know whether we will achieve or sustain profitability in the future.

At March 31, 2003, cash and cash equivalents were $52.2 million, compared with $59.7 million at December 31, 2002. The decrease is due to $11.1 million of cash used in operating activities and $3.6 million of net cash provided by maturity of investments, and $0.1 million of received from the exercise of stock options, partly offset by capital expenditures of $0.1 million.

Net cash used in operating activities was $11.1 million in the first three months of fiscal 2003, primarily as a result of our operating loss which were mostly contributed by our sales, marketing and physician training efforts related to the commercialization of Essure in the United States. Net cash used in operating activities for the same period in the prior year was $7.3 million, primarily related to commercialization of Essure in Australia and Europe; payments related to our clinical trials; and scale up of our manufacturing and quality operations in order to transition from pilot to commercial manufacturing.

Net cash provided by investing activities was $3.5 million in the first three months of fiscal 2003, primarily consisted of net maturities of short-term investments of $3.6 million, partly offset by purchases of capital equipment of $0.1 million. Net cash used in investing activities was $6.3 million for the same period in the prior year, primarily due to purchases of short-term investments and purchases of capital equipment to expand our manufacturing operations and fund leasehold improvements.

Net cash provided by financing activities was $0.1 million in the first three months of fiscal 2003, primarily from exercise of stock options. Net cash provided by financing activities was $0.3 million for the same period prior year, primarily from exercise of stock options.

We expect to have negative cash flows from operations into at least 2004 and we estimate that our existing capital resources will be sufficient to meet our cash requirements into 2004. The successful achievement of our business objectives may require additional financing and therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. 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 us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our sales and marketing activities. Our future liquidity and capital requirements will depend upon many factors, including, among others:

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146, “Accounting for Exit or Disposal Activities” (“SFAS No. 146”) which addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the EITF has set forth in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS

No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our financial position or on our results of operations.

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We do not expect the adoption of EITF 00-21 to have a material impact on our financial position or on our results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We do not expect the adoption of this FIN 46 to have a material impact on our financial position or on our results of operations.

In addition to the other information in this Form 10-Q, the following factors should be considered carefully in evaluating Conceptus and our business. This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our 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-Q.

We have a limited history of operation with Essure and have incurred significant operating losses since our inception. We expect to incur significant operating losses for the foreseeable future and we may never achieve or maintain profitability.

We have a limited history of operation with Essure and have incurred significant operating losses since our inception in 1992, including operating losses of $11.2 million in the three months ended March 31, 2003, $33.1 million in fiscal 2002, $18.8 million in fiscal 2001, and $15.8 million in 2000. We expect to continue to incur significant operating expenses and net losses as we begin to expand sales and marketing efforts in the United States. Our net losses may continue to increase until sufficient revenues can be generated to offset these expenses. We may not be able to generate these revenues, and we may never achieve profitability. Our failure to achieve and sustain profitability would negatively impact the market price of our common stock.

We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well established among physicians and patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of our product. We do not know whether physicians and patients will accept our product or whether we will be able to obtain their recommendations or endorsements. We

believe that physicians will not use a product unless they determine, based on clinical data and other factors, that it is an attractive alternative to other means of contraception and that it offers clinical utility in a cost-effective manner. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks. If Essure does not achieve significant market acceptance among physicians, patients and healthcare payors, even if reimbursement and necessary international and United States regulatory approvals are obtained, we may never achieve significant revenues or profitability.

Government or third party reimbursement for Essure may not be available or may be inadequate, which would limit our future product revenues and delay or prevent our profitability.

Market acceptance of Essure in the United States and in international markets will depend in part upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement systems in international markets vary significantly by country and sometimes by region, 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. Regardless of the type of reimbursement system, we believe that physician advocacy of our product will be required to obtain reimbursement. Availability of reimbursement will depend, at least in part, on the clinical and cost effectiveness of our product. We do not know whether reimbursement for our product will be available in the United States or in international markets under either government or private reimbursement systems, or whether physicians will support and advocate reimbursement for use of our product for all indications intended by us. Large-scale market acceptance of Essure will depend on the availability and level of reimbursement in the United States and targeted international markets. We may be unable to obtain or maintain reimbursement in any country within a particular time frame, for a particular amount, or at all, which would limit our future product revenues and delay or prevent our profitability.

If the effectiveness and safety of our product are not supported by long-term data, we may not achieve market acceptance and we could be subject to liability.

The Pivotal trial of Essure was designed to support a PMA application and to have five years of post-market follow-up. In addition, patients in the Phase II study will be followed to five years. The long-term results of using Essure will not be available for several years. If long-term patient studies, patient use or clinical experience indicate that Essure is less effective or less safe than our current data suggest, we may not achieve or sustain market acceptance and/or we could be subject to significant liability.

We may not maintain regulatory approvals for Essure, our only product, which would delay or prevent us from generating product revenues, and would harm our business and force us to curtail or cease operations.

Numerous government authorities, both in the United States and internationally, regulate the manufacture and sale of medical devices, including Essure. In the United States, the principal regulatory authorities are the FDA and corresponding state agencies, such as the California Department of Health Services. The process of obtaining and maintaining required regulatory clearances is lengthy, expensive and uncertain.

We have received FDA approval to market Essure in the United States, the loss of which or our failure to comply with existing or future regulatory requirements, could delay or prevent us from generating product revenues.

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. Some countries in which we currently market or intend to market Essure 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 delay or prevent us from marketing Essure in these countries.

The FDA and certain foreign regulatory authorities impose numerous requirements with which medical device manufacturers must comply in order to maintain regulatory approvals. FDA enforcement policy strictly prohibits the promotion of approved medical devices for uses other than those for which the device is specifically approved by the FDA. We will be required to adhere to applicable FDA regulations, such as the Quality System Regulation, and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with the Quality System Regulation and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including the FDA and the California Department of Health Services, and by comparable agencies in other countries. If we fail to comply with applicable regulatory requirements, we may be subject to, 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 pre-market clearance or pre-market approval for devices, withdrawal of approvals and criminal prosecution, any of which could negatively impact our business.

Our intellectual property rights may not provide meaningful commercial protection for our product, which could enable third parties to use our technology, or very similar technology, and could impair our ability to compete in the market.

We rely on patent, copyright, trade secret and trademark laws to limit the ability of others to compete with us using the same or similar technology in the United States and other countries. However, as described below, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to sustain any competitive advantage we may have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights abroad. These problems can be caused by the absence of rules and methods for defending intellectual property rights.

We will be able to protect our technology from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of companies developing medical devices, including our patent position, generally are uncertain and involve complex legal and factual questions concerning the enforceability of such patents against alleged infringement. Recent judicial decisions have established new case law and a reinterpretation of previous patent case law, and consequently, we cannot assure you that historical legal standards surrounding the questions of infringement and validity will be applied in future cases. In addition, legislation may be pending in Congress that, if enacted in its present form, may 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. Our ability to protect our proprietary methods and procedures may be compromised by the enactment of this legislation or any other limitation or reduction in the patentability of medical and surgical methods and procedures. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may therefore diminish the value of our intellectual property.

We own, or control through licenses, a variety of issued patents and pending patent applications. However, the patents on which we rely may be challenged and invalidated, and our patent applications

may not result in issued patents. Moreover, our patents and patent applications may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative technologies or design around our patented technologies.

We have taken security measures to protect our proprietary information, especially proprietary information that is not covered by patents or patent applications. These measures, however, may not provide adequate protection of our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants could still disclose our proprietary information and we may not be able to protect our trade secrets in a meaningful way. If we lose any employees we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees despite the existence of a nondisclosure and confidentiality agreement and other contractual restrictions designed or intended to protect our proprietary technology. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.

Our ability to compete effectively will depend substantially on our ability to develop and maintain proprietary aspects of our technology. Our issued patents, any future patents that may be issued as a result of our United States or foreign patent applications, or the patents under which we have license rights may not offer any degree of protection against competitive products. Any patents that may be issued or licensed to us or any of our patent applications could be challenged, invalidated or circumvented in the future.

If we cannot operate our business without infringing third-party intellectual property rights, our prospects will suffer.

Our success will also depend on our ability to operate without infringing or misappropriating the proprietary rights of others. We may be exposed to future litigation by third parties based on claims that our product infringes the intellectual property rights of others. There are numerous issued patents in the medical device industry and, as described in the next risk factor, the validity and breadth of medical device patents involve complex legal and factual questions for which important legal principles remain unresolved. Our competitors may assert that our product and the methods we employ may be covered by United States or foreign patents held by them. In addition, because patent applications can take many years to issue, there may be currently pending patent applications of which we are unaware that may later result in issued patents that our product may infringe. There could also be existing patents of which we are unaware that our product may inadvertently infringe. If we lose a patent infringement lawsuit, we could be prevented from selling our product unless we can obtain a license to use technology or ideas covered by that patent or are able to redesign the product to avoid infringement. A license may not be available to us on terms acceptable to us, or at all, and we may not be able to redesign our product to avoid any infringement. If we are not successful in obtaining a license or redesigning our product, we may be unable to sell our product and our business would suffer.

We are currently and may in the future be a party to patent litigation, which could be expensive and divert our management’s attention.

The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent infringement claims and litigation or interference proceedings declared by the United States Patent and Trademark Office, or PTO, to determine the priority of inventions. The defense and prosecution of these matters are both costly and

time consuming. We may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel.

A third party, Ovion, Inc., has brought to our attention two patents and certain claims from a pending patent application owned by it. Ovion has indicated it believes that the claims of its patent and application cover Essure and its use. Because we believe that some or all of Ovion’s claims should be included within our own patents, we have requested that the PTO to declare at least one interference. An interference is a proceeding within the PTO to determine which party was the first to invent, and which party is thereby entitled to ownership of, the claims. We believe that we filed our patent applications for our product before Ovion filed the application that issued as its patent, and that we are entitled to any patentable claims now appearing in Ovion’s patent that cover Essure. We do not know whether the PTO will declare an interference, whether we invented our product prior to Ovion’s date of invention, or whether we will prevail in an interference proceeding if it is declared by the PTO. If the PTO refuses to declare an interference, or if Ovion’s claims are upheld in the interference proceeding, Ovion may be able to assert its patent successfully against us.

We filed a lawsuit in United States District Court for the Northern District of California on April 23, 2002 against Ovion. The lawsuit seeks a declaration that Essure does not infringe Ovion’s United States Patent No. 6,096,052 and that the patent is invalid and unenforceable due to Ovion’s inequitable conduct before the PTO. We subsequently amended our lawsuit to include charges of false advertising, trade libel, unfair competition, unjust enrichment and constructive trust against Ovion and its principals Jeffrey Callister and William S. Tremulis. During an October 28, 2002 hearing before the court, Ovion stated that it does not intend to charge us with infringement of United States Patent 6,096,052. However, on August 13, 2002, Ovion has filed a separate action, in the same court, charging us with infringement of a related patent, United States Patent No. 6,432,116 entitled “Occluding Device and Method of Use.” We have denied infringement and filed a Declaratory Judgment counterclaim, seeking a declaration that United States Patent No. 6,432,116 is not infringed, invalid and unenforceable due to Ovion’s inequitable conduct before the PTO. While we believe that we will prevail in the above litigations, if we do not, Ovion may be able to obtain damages against us and/or obtain an injunction against the Essure device. If Ovion were successful, there is no guarantee that we could negotiate a suitable arrangement with it to acquire rights under its patents.

An adverse determination in litigation or interference proceedings to which we are or may become a party could subject us to significant liabilities to third parties or require us 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. We may be unable to obtain necessary licenses on satisfactory terms, if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling Essure.

One of the patents included in our license from Target Therapeutics, a division of Boston Scientific Corporation, has been the subject of reexamination proceedings in the PTO and an infringement lawsuit by Target Therapeutics. The patent is directed to variable stiffness catheters for use with guidewires, as might be used in our future products. Although the PTO reaffirmed the patent with amended claims and the lawsuit was settled, the patent could be challenged or invalidated in the future. If this patent is invalidated, our ability to prevent others from using this proprietary technology would be compromised.

We have limited sales and marketing experience and minimal distribution capabilities, and if we are unable to develop our sales and marketing capabilities or enter into appropriate distribution agreements, we may be unsuccessful in commercializing Essure.

In order to market, sell and distribute Essure, we will need to continue to develop a sales force and marketing group with relevant experience and enter into additional arrangements with third parties to distribute Essure. Developing a marketing and sales force is expensive and time consuming and could delay our product launch. If we fail to establish adequate marketing and sales capabilities or enter into successful distribution arrangements with third parties, we may be unable to commercialize Essure successfully.

Our number of employees has increased to 181 on March 31, 2003 from 119 on March 31, 2002. The growth that we have experienced, and in the future may experience, provides challenges to our organization. Although we have no current plans to do so, we may in the future acquire one or more technologies, products or companies that complement our business. We may not be able to effectively integrate these into our business. If we fail to manage our growth and expansion, our business could be impaired.

We have limited experience in manufacturing Essure in commercial quantities.

If we are successful in marketing Essure, we plan to transition internal manufacturing operations to that of third-party manufacturers to manufacture certain processes and assemblies of the product. We have identified various candidates that we believe could adequately produce Essure with the appropriate quality level and in 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, and compliance with FDA or other health authority requirements. We and/or our future third-party manufacturers may encounter manufacturing difficulties, which could negatively impact or delay commercialization of Essure.

We depend upon sole source suppliers and have no contractual arrangements.

We purchase both raw materials used in our product and finished goods from various suppliers, and we rely on single sources for some items, including the delivery catheter tubing and polyester fiber. We do not have formal supply contracts with several key vendors and, accordingly, these firms may not continue to supply us with raw materials or finished goods in sufficient quantities, or at all. Delays associated with any future raw materials or finished goods shortages could delay commercialization of Essure, particularly as we scale up our manufacturing activities in support of United States and international commercial sales of Essure.

The levels of revenue and profitability of medical device companies may be affected by the efforts of government and third party payors to contain or reduce the costs of health care through various means. In the United States, there have been, and we expect that there will continue to be, a number of federal, state and private proposals to control health care costs. These proposals may contain measures intended to control public and private spending on health care as well as to provide universal public access to the health care system. If enacted, these proposals may result in a substantial restructuring of the health care delivery system. Significant changes in the United States health care system are likely to

have a substantial impact over time on the manner in which we conduct our business and could have a material adverse effect on our business, financial condition and results of operations.

We may be exposed to product liability claims, and we have only limited insurance coverage.

The manufacture and sale of medical products involve an inherent risk of exposure to product liability claims and product recalls. Although we have not experienced any product liability claims to date, we cannot assure you that we will be able to avoid significant product liability claims and potential related adverse publicity. We currently maintain product liability insurance with coverage limits of $10 million per occurrence and an annual aggregate maximum of $10 million, which we believe is comparable to that maintained by other companies of similar size serving similar markets. However, we cannot assure you that product liability claims in connection with clinical trials or commercial sales of Essure will not exceed such insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, or at all. 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 us in excess of our insurance coverage, or a recall of our product, could cause our stock price to fall.

We may not be able to attract and retain additional key management, sales and marketing and technical personnel or we may lose existing key management, sales and marketing or technical personnel, which may delay our development and marketing efforts.

We depend on a number of key management, sales and marketing and technical personnel. The loss of the services of one or more key employees could delay the achievement of our development and marketing objectives. Our success will also depend on our ability to attract and retain additional highly qualified management, sales and marketing and technical personnel to meet our growth goals. We face intense competition for qualified personnel, many of whom are often subject to competing employment offers, and we do not know whether we will be able to attract and retain such personnel.

We face intense competition, and if we are unable to compete effectively, demand for Essure may be reduced.

The medical device industry is highly competitive and 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. As we commercialize Essure, we expect to compete with:

We are aware of companies that are in the early stages of development of non-incisional permanent contraception devices, and other companies may develop products that could compete with Essure. We also compete with other companies for clinical sites at which to conduct trials. Competitive factors may render Essure obsolete or noncompetitive or reduce demand for Essure.

If we experience difficulties in our sales and operations, our financial condition will be harmed.

Our financial condition is highly dependent on the sale of Essure in United States, Australia, Europe and other countries. If we experience difficulties in our domestic and international sales and operations, our business will suffer and our financial condition will be harmed. Our domestic and/or international operations and sales are subject to a number of risks, including:

As we commercialize Essure on a wide-scale basis, we may require additional financing and therefore may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. 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 us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our selling and marketing activities. We expect to have negative cash flows from operations into at least 2004. Our future liquidity and capital requirements will depend upon many factors, including, among others:

Our future revenues and results of operations may fluctuate significantly from quarter to quarter and will depend upon, among other factors:

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.

Interest Rate Risk: We have been exposed to interest rate risk as it applies to interest earned on holdings of short-term marketable securities. Interest rates that may affect these items in the future will depend on market conditions and may differ from the rates we have experienced in the past. A 10% change in interest rates would not be material to our results of operations. We reduce the sensitivity of our results of operations to these risks by maintaining an investment portfolio, which is primarily comprised of highly rated, short-term investments. We do not hold or issue derivative, commodity instruments or other financial instruments for trading purposes.

Foreign Currency Exchange Risk: Our expenses, except for those related to Europe and Australia, were denominated in United States dollars. Our revenues, 35% and 100% of which were in foreign currencies in the three months ended March 31, 2003 and 2002, respectively, were immaterial in relation to our overall financial position. As a result, we have relatively little exposure for currency exchange risks and foreign exchange losses have been minimal to date. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if we feel our foreign currency exposure has increased, we may consider entering into hedging transactions to help mitigate that risk. As of March 31, 2003, a fluctuation in exchange rates of 10% in the foreign currencies to which we are exposed would not have a material impact on our results of operations or financial condition.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

From time to time, we are involved in legal proceedings arising in the ordinary course of business. We believe there is no other litigation pending that could have, individually or in the aggregate, a material adverse effect on its financial position, result of operations or cash flow.

On January 14, 2003, the Company filed a current report on Form 8-K under Item 5 (“Other events”) reporting that it had issued a press release to update on the launch of Essure into the United States market.

On February 26, 2003, the Company filed a current report on Form 8-K under Item 5 (“Other Events”) reporting that it had issued a press release announcing financial results for the three and twelve months ended December 31, 2002.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CONCEPTUS, INC.

By:		/s/ GLEN K. FURUTA
		Glen K. Furuta Vice President, Finance and Administration and Chief Financial Officer

1. I have reviewed this quarterly report on Form 10-Q of Conceptus, Inc., a Delaware corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Mark M. Sieczkarek

Mark M. Sieczkarek

Chief Executive Officer

1. I have reviewed this quarterly report on Form 10-Q of Conceptus, Inc., a Delaware corporation;

/s/ Glen K. Furuta

Glen K. Furuta

Chief Financial Officer

		Page
Part I.	Financial Information

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	a) Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002	3

	b) Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2003 and 2002	4

	c) Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2003 and 2002	5

	d) Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

Part II.	Other Information	24

Item 1.	Legal Proceedings	24

Item 2.	Changes in Securities and Use of Proceeds	24

Item 3.	Defaults upon Senior Securities	24

Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 5.	Other Information	25

Item 6.	Exhibits and Reports on Form 8-K	25

	Signature	26

	Certifications	27

	March 31, 2003			December 31, 2002
Assets
Current assets:
Cash and cash equivalents	$	52,171		$	59,673
Short-term investments		7,354			10,992
Restricted cash		69			69
Accounts receivable, net		824			581
Inventories, net		2,235			2,524
Other current assets		1,254			797

Total current assets		63,907			74,636
Property and equipment, net		2,309			2,474
Other assets		162			185

Total assets	$	66,378		$	77,295

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,883		$	3,148
Clinical trial liabilities		84			182
Accrued compensation		2,003			2,614
Other accrued liabilities		1,382			420

Total current liabilities		6,352			6,364
Long-term clinical trial liabilities		262			217

Total liabilities		6,614			6,581


Contingencies (Note 8)

Stockholders’ equity:
Common stock and additional paid-in capital		188,523			188,435
Accumulated other comprehensive income (loss)		(2	)		11
Accumulated deficit		(128,757	)		(117,732	)

Total stockholders’ equity		59,764			70,714

Total liabilities and stockholders’ equity	$	66,378		$	77,295

	Three Months Ended March 31,
	2003			2002
Net sales	$	1,154		$	276
Cost of goods sold		1,150			746

Gross profit (loss)		4			(470	)
Operating expenses:
Research and development		1,611			1,982
Selling, general and administrative		9,618			3,214

Total operating expenses		11,229			5,196

Operating loss		(11,225	)		(5,666	)
Interest and other income (expense), net		200			(189	)

Net loss	$	(11,025	)	$	(5,855	)

Basic and diluted net loss per share	$	(0.52	)	$	(0.36	)

Weighted-average shares used in computing basic and diluted net loss per share		21,383			16,471

	Three Months Ended March 31,
	2003			2002
Cash flows from operating activities
Net loss	$	(11,025	)	$	(5,855	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		284			315
Stock compensation expense		1			120
Allowance for doubtful accounts		105			—
Provision for inventories		—			71
Changes in operating assets and liabilities:
Accounts receivable		(348	)		(57	)
Inventories		289			(379	)
Other current assets		(465	)		(240	)
Other assets		23			24
Accounts payable		(282	)		(283	)
Other accrued liabilities		338			(985	)
Clinical trial liabilities		(54	)		—

Net cash used in operating activities		(11,134	)		(7,269	)

Cash flows from investing activities
Purchase of investments		(5,979	)		(5,944	)
Maturities of investments		9,617			—
Capital expenditures		(119	)		(400	)

Net cash provided by (used in) investing activities		3,519			(6,344	)

Cash flows from financing activities
Proceeds from issuance of common stock, net		88			339

Net cash provided by financing activities		88			339

Effect of exchange rate changes on cash		25			23

Net decrease in cash and cash equivalents		(7,502	)		(13,251	)
Cash and cash equivalents at beginning of period		59,673			33,734

Cash and cash equivalents at end of period	$	52,171		$	20,483

(in thousands)	March 31, 2003		December 31, 2002
Raw materials	$	683	$	867
Work-in-process		491		442
Finished goods		1,061		1,215

Total	$	2,235	$	2,524

March 31,

Asia and Canada

United States of America

	2003
Warranty accrual at the beginning of the period	$	28
Accruals for warranties issued during the period		57
Settlements made in kind during the period		(8	)

Warranty accrual at the end of the period	$	77

Exhibit Number		Description

10.1		Letter Agreement by and between the Company and Mark Sieczkarek, dated April 15, 2003.

10.2		Amended and Restated Executive Agreement by and between the Company and Steven Bacich, dated April 21, 2003.

	Three Months Ended March 31,
	2003		2002
Risk-free interest rate	2.4	%	3.5	%
Expected life (in years)	4		4
Expected volatility factor	0.92		1.0
Dividend Yield	—		—

	Three Months Ended March 31,
	2003		2002
Risk-free interest rate	1.24	%	4.0	%
Expected life (in years)	1		1
Expected volatility factor	0.53		0.51
Dividend yield	—		—

	Three Months Ended March 31,
	2003		2002
Risk-free interest rate	3.8	%	4.6	%
Expected life (in years)	10		10
Expected volatility factor	1.41		1.43
Dividend yield	—		—