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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One:
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996 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 0-27214
GYNECARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3197941
-------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
235 Constitution Drive, Menlo Park, CA 94025
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (415) 614-2500
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 requirement for the past 90 days.
Yes / X / No / /
The number of shares of Common Stock outstanding as of August 7, 1996 was
8,175,638.
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TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 1996
and December 31, 1995 3
Statements of Operations for the three and six
months ended June 30, 1996 and 1995 4
Statements of Cash Flows for the six months
ended June 30, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II.Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GYNECARE, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1996 1995
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ASSETS (unaudited)
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 3,905,000 $ 22,330,000
Short-term investments . . . . . . . . . . . 13,289,000 380,000
Accounts receivable, net . . . . . . . . . . 540,000 433,000
Inventories. . . . . . . . . . . . . . . . . 864,000 1,034,000
Prepaids and other current assets. . . . . . 215,000 344,000
------------ ------------
Total current assets. . . . . . . . . . . . 18,813,000 24,521,000
Property and equipment, net. . . . . . . . . 1,430,000 1,205,000
Prepaid royalties. . . . . . . . . . . . . . 1,927,000 1,951,000
Other assets . . . . . . . . . . . . . . . . 988,000 594,000
------------ ------------
Total assets. . . . . . . . . . . . . . . . $ 23,158,000 $ 28,271,000
------------ ------------
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LIABILITIES
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 415,000 $ 941,000
Accrued expenses . . . . . . . . . . . . . . 334,000 294,000
Current portion of long-term debt. . . . . . 291,000 270,000
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Total current liabilities . . . . . . . . . 1,040,000 1,505,000
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Long-term debt, net of current portion. . . . 291,000 458,000
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Total liabilities . . . . . . . . . . . . . 1,331,000 1,963,000
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STOCKHOLDERS' EQUITY
Common Stock. . . . . . . . . . . . . . . . . 8,000 8,000
Additional paid-in-capital. . . . . . . . . . 33,580,000 33,501,000
Deferred compensation . . . . . . . . . . . . (472,000) (566,000)
Accumulated deficit . . . . . . . . . . . . . (11,289,000) (6,635,000)
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Total stockholders' equity . . . . . . . . . 21,827,000 26,308,000
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Total liabilities and stockholders' equity $ 23,158,000 $ 28,271,000
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The accompanying notes are an integral part of these condensed financial
statements.
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GYNECARE, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------- --------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . . . . $ 218,000 $ 285,000 $ 475,000 $ 494,000
Cost of goods sold . . . . . . . . . . . . . . . . . . 379,000 230,000 700,000 412,000
----------- ----------- ----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . (161,000) 55,000 (225,000) 82,000
Operating expenses:
Research and development. . . . . . . . . . . . . . . . 1,343,000 521,000 2,504,000 1,023,000
Selling, general and administrative . . . . . . . . . . 1,296,000 649,000 2,355,000 1,070,000
----------- ----------- ----------- -----------
Total operating expenses. . . . . . . . . . . . . . . . 2,639,000 1,170,000 4,859,000 2,093,000
----------- ----------- ----------- -----------
Loss from operations. . . . . . . . . . . . . . . . . . (2,800,000) (1,115,000) (5,084,000) (2,011,000)
Interest income, net. . . . . . . . . . . . . . . . . . 194,000 110,000 430,000 163,000
----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(2,606,000) $(1,005,000) $(4,654,000) $(1,848,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share. . . . . . . . . . . . . . . . . . . $ (0.32) $ (0.60) $ (0.57) $ (1.11)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing net loss per share . . . . . . 8,160,000 1,670,000 8,157,000 1,664,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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GYNECARE, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Six months
ended June 30,
1996 1995
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Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . $ (4,654,000) $ (1,848,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . 135,000 75,000
Amortization of deferred compensation. . . . . . 94,000 14,000
Provision for doubtful accounts. . . . . . . . . 32,000 --
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . (139,000) (382,000)
Inventories . . . . . . . . . . . . . . . . . . 170,000 (585,000)
Prepaids and other current assets . . . . . . . 129,000 (56,000)
Other assets. . . . . . . . . . . . . . . . . . -- 6,000
Accounts payable and amount due to related
party. . . . . . . . . . . . . . . . . . . . . (526,000) 139,000
Accrued expenses. . . . . . . . . . . . . . . . 40,000 (53,000)
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Net cash used in operating activities. . . . . (4,719,000) (2,690,000)
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Cash flows from investing activities:
Acquisition of property and equipment. . . . . . (330,000) (254,000)
Acquisition of patent rights and
related technical information . . . . . . . . . (400,000) --
Purchase of investments. . . . . . . . . . . . . (20,444,000) --
Maturity of investments. . . . . . . . . . . . . 7,535,000
Other assets . . . . . . . . . . . . . . . . . . -- (44,000)
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Net cash used in investing activities . . . . (13,639,000) (298,000)
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Cash flows from financing activities:
Proceeds from issuance of Preferred
Stock, net of issuance costs. . . . . . . . . . -- 9,353,000
Proceeds from issuance of Common Stock . . . . . 79,000 62,000
Payments on debt . . . . . . . . . . . . . . . . (146,000) --
------------- -------------
Net cash provided by/(used in) financing
activities . . . . . . . . . . . . . . . . . (67,000) 9,415,000
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Net decrease in cash and cash equivalents . . . . (18,425,000) 6,427,000
Cash and cash equivalents at beginning of period. 22,330,000 4,106,000
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Cash and cash equivalents at end of period. . . .$ 3,905,000 $ 10,533,000
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Supplemental disclosure of noncash
investing and financing activities:
Interest paid during the period . . . . . . . . $ 38,000 --
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The accompanying notes are an integral part of these condensed financial
statements.
5
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GYNECARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission. All adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation have been included. The
results of operations for the three and six month periods ended June 30,
1996 are not necessarily indicative of the results to be expected for any
other interim period or for the entire year.
The financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Gynecare's (the
Company's) Annual Report on Form 10-K, for the year ended December 31,
1995, filed with the Securities and Exchange Commission pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934.
2. CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS
All highly liquid investments purchased with an original maturity of ninety
days or less are considered to be cash equivalents. The Company accounts
for investments under Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS
No. 115), whereby investments that are deemed by management to be held-to-
maturity are reported at amortized cost. All investments as of June 30,
1996 are classified as held-to-maturity and are carried at amortized cost,
which approximates fair market value.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are:
June 30, December 31,
1996 1995
---------- ------------
Raw materials $ 112,000 $ 194,000
Work-in-process 300,000 462,000
Finished goods 452,000 378,000
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$ 864,000 $1,034,000
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6
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PART I. Continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS SECTION OF THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION ENTITLED "FACTORS
AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK" COMMENCING ON PAGE 9.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the MD&A contained in the
Company's 1995 Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
RESULTS OF OPERATIONS
Revenues decreased 24% to $218,000 in the second quarter of fiscal
1996 and 4% to $475,000 in the first half of fiscal 1996, from $285,000 and
$494,000 in the corresponding periods of fiscal 1995. All of the revenues
to date have been generated from international sales of the Uterine Balloon
Therapy-TM- system. The decrease in revenues from those of corresponding
periods of the prior year was the result of the timing and size of distributor
purchases.
Cost of goods sold increased 65% to $379,000 in the second quarter of
fiscal 1996 and 70% to $700,000 in the first half of fiscal 1996, from $230,000
and $412,000 in the corresponding periods of fiscal 1995. This increase was
primarily the result of excess capacity incurred in the Company's new
manufacturing facility in Menlo Park, California and the cost of product to
support the Company's ongoing efforts to achieve third-party reimbursement in
international markets.
The Company's research and development expenses increased 158% to
$1,343,000 and 145% to $2,504,000 for the quarter and six month period ended
June 30, 1996 from $521,000 and $1,023,000 for the corresponding periods in
fiscal 1995. This increase was principally due to the continuing costs of the
U.S. clinical trials of the Uterine Balloon Therapy system, which began in
January 1996, increased expenditures associated with the continuing development
of the Uterine Balloon Therapy system and the ongoing investigation into several
other potential products licensed by the Company including the Bipolar
Vaporization system. Growth in the Company's research and development staff from
seven employees at June 30, 1995 to seventeen at June 30, 1996 further
contributed to the increase in research and development expenses.
The Company's selling, general and administrative expenses increased
100% to $1,296,000 and 120% to $2,355,000 for the second quarter and first half
of fiscal 1996 from $649,000 and $1,070,000 for the corresponding periods in
fiscal 1995. The increase was primarily the result of Gynecare's investment in
sales and marketing activities focused on obtaining reimbursement in
international markets and managing the international distributor network. These
activities included the ongoing support of reimbursement studies in several
European markets. Growth in the Company's sales and marketing, accounting and
administrative staff from nine employees at June 30, 1995 to sixteen at June 30,
1996 further contributed to the increase in selling, general and administrative
expenses.
Interest income increased to $194,000 and $430,000 for the quarter and
six month period ended June 30, 1996 from $110,000 and $163,000 for the
corresponding periods ended June 30, 1995. The increase was primarily the
result of the increased level of cash and investments held by the Company during
fiscal 1996 compared to that held during fiscal 1995 as a result of the
completion of the Company's initial public offering in November 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its revenues, resulting in an accumulated deficit of $11,289,000 at
June 30, 1996. The Company has funded its operations primarily through the
7
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private placement of equity securities aggregating $15,361,000 and the
completion of its initial public offering in November 1995 aggregating net
proceeds of $15,223,000.
Cash used by the Company's operations was $4,719,000 for the six
months ended June 30, 1996 as compared to $2,690,000 for the corresponding
period of fiscal 1995. This cash was used primarily to fund the launch of the
U.S. clinical trials, which began in January 1996, the expansion of marketing
programs for the Uterine Balloon Therapy system in international markets, the
costs of obtaining reimbursement in existing markets, the increasing levels of
research and development of the Uterine Balloon Therapy system and increased
general and administrative expenses to support increased operations.
The Company's capital expenditures for the first six months of fiscal
1996 and for the corresponding period in fiscal 1995 were $330,000 and $254,000,
respectively. The increased level of capital expenditures during fiscal 1996
was due primarily to the Company's increased operations and its relocation to a
new facility during the fourth quarter of 1995. The Company plans to finance
its capital needs for the immediate future principally from the net proceeds of
its initial public offering and interest thereon, its other capital resources,
and, to the extent available, from bank and lease financing.
During the first quarter of fiscal 1996, the Company exercised its
option to extend its license and OEM supply agreement with Gyrus Medical, Inc.
("Gyrus") for an innovative electro-vaporization technology to include the field
of laparoscopy. Under the terms of the new arrangement, this technology,
initially targeted by Gynecare for hysteroscopic applications, will be adapted
for laparoscopic use in the treatment of gynecological conditions, such as
serosal uterine fibroids and endometriosis, as well as general surgical
indications. A $400,000 deposit on this OEM supply agreement was made in March
1996. Additional deposits of up to $600,000 will be due over the next 12 to 24
months.
In July 1995, the Company obtained a $750,000 secured credit facility.
At June 30, 1996, the Company had borrowed $582,000 under this facility, net of
repayments. Borrowings bear interest at the bank's prime rate plus 1.5% per
annum, are required to be repaid in monthly installments over 30 months, and are
secured by a pledge of all of the Company's equipment and fixtures. In February
1996, the Company obtained an additional $500,000 under the secured credit
facility. As under the original facility, borrowings bear interest at the
bank's prime rate plus 1.5% per annum.
The Company believes that its cash, cash equivalents and investments
together with interest thereon will be sufficient to fund its operations and
capital requirements through mid-1997. (*) However, Gynecare'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 the Company devotes to developing, manufacturing
and marketing its products. The Company's capital requirements also depend on
the resources required to hire and develop a direct sales force in the United
States, the resources required to expand manufacturing capacity and facilities
requirements, the extent to which the Company's products generate market
acceptance and demand, and other factors. As such, 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. 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.
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," (Statement 121) which requires the Company
to review for the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. Statement 121 is effective for the
Company's fiscal year 1996. The Company has studied the
_______________________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual
future performance will meet the Company's current expectations.
Stockholders are strongly encouraged to review the section entitled
"Factors Affecting Operating Results and Market Price of Stock"
commencing on page 9, for a discussion of factors that could affect
future performance.
8
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implications of the statement and, based on its initial evaluation, does not
expect it to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for stock-based
compensation plans. The Company is currently following the requirements of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company plans
to adopt SFAS No. 123 during fiscal 1996 utilizing the disclosure alternative.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
Gynecare operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:
DEPENDENCE ON UTERINE BALLOON THERAPY SYSTEM; EARLY STAGE OF
CLINICAL TESTING. Currently, the Uterine Balloon Therapy system is the only
product being marketed by the Company. The Company will be required to
perform additional clinical trials and obtain regulatory approvals, including
PMA approval from the FDA, before the product can be marketed in the United
States and in certain foreign countries, including Japan. To date, the
Company has had only limited international sales of the product. There can
be no assurance that the Company's efforts will be successful or that the
Uterine Balloon Therapy system or any other product developed by the Company
will be safe or effective, capable of being manufactured in commercial
quantities at acceptable costs, approved by appropriate regulatory or
reimbursement authorities or successfully marketed. Furthermore, because the
Uterine Balloon Therapy system represents the Company's principal near-term
focus, the Company could be required to cease operations if the Uterine
Balloon Therapy system is not successfully commercialized. In addition, the
clinical trials may identify significant technical or other obstacles to be
overcome prior to obtaining necessary regulatory or reimbursement approvals.
Although there has been a significant success rate in the patients treated
to date under the current protocol for the Uterine Balloon Therapy system,
there is only limited follow-up data for such patients. As a result, there
can be no assurance that the success rate of the procedure will be
sustainable or will not decrease over time. If the Uterine Balloon Therapy
system does not prove to be safe and effective in clinical trials, there
would be a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED OPERATING HISTORY AND REVENUES; ANTICIPATED FUTURE LOSSES.
The Company has generated only limited revenues to date and has experienced
net losses since its inception. As of June 30, 1996, the Company had an
accumulated deficit of $11.3 million. The Company expects its operating
losses to continue for at least the next several years. In addition, the
Company expects that it will continue to expend substantial resources in
funding clinical trials in support of regulatory and reimbursement approvals,
expansion of marketing and sales activities and research and development.
There can be no assurance that the Uterine Balloon Therapy system will be
successfully commercialized or that the Company will achieve significant
revenues from either international or domestic sales. In addition, there can
be no assurance that the Company will achieve or sustain profitability in the
future.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success is dependent
upon acceptance of Uterine Balloon Therapy by the medical community as a
reliable, safe and cost-effective treatment for excessive menstrual bleeding.
The Company is unable to predict how quickly, if at all, its products will be
accepted by the medical community or, if accepted, the number of procedures that
will be performed. The medical indications that can be treated with Uterine
Balloon Therapy can also be treated by surgery, drugs or other medical devices.
Although the Company believes that its products have certain advantages over
competing products and technologies, the Company does not have sufficient
clinical data demonstrating such advantages. There can be no assurance that any
such advantages will be clinically significant. The Uterine Balloon Therapy
system is designed to be used with a local anesthetic in a clinic or physician's
office. If physicians recommend or require that Uterine Balloon Therapy be
performed under general anesthesia in a hospital or outpatient surgery center
instead of under local anesthesia in a clinic or physician's office, market
acceptance of the Uterine Balloon Therapy system would be adversely affected,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company believes its product
may be adaptable to other uterine bleeding disorders, there can be no assurance
that the Company's product will be clinically effective for any other
indications, that regulatory approval of the Company's product for such other
indications could be obtained, that
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treatment of such conditions would be commercially feasible or that additional
markets for any such indications will develop. Obtaining FDA approval to market
the Uterine Balloon Therapy system for other indications is likely to require a
long period of time and considerable expense. Patient population estimates are
subject to inherent uncertainties, and the Company is unable to determine with
any degree of certainty the number of patients for any indication or the number
of patients who are suitable for treatment.
POTENTIAL FLUCTUATIONS IN FUTURE QUARTERLY RESULTS. The Company
expects that its operating results will fluctuate significantly from quarter to
quarter in the future and will depend on a number of factors, many of which are
outside the Company's control. These factors include actions relating to
regulatory and reimbursement matters, the extent to which the Company's products
gain market acceptance, the rate at which the Company establishes its
international distributor network, the timing and size of distributor purchases,
the progress of clinical trials and the introduction of alternative means for
treating excessive menstrual bleeding.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON SINGLE CONTRACT
MANUFACTURERS AND SOLE SOURCE SUPPLIERS; SCALE-UP RISK. The Company only
recently commenced manufacture of certain components of its products and depends
on contract manufacturers for the production of certain components of the
Uterine Balloon Therapy system. The Company expects to continue to depend on
such manufacturers for the foreseeable future. The integration of the
Company's operations into new facilities which occurred in November 1995 has
resulted and may continue to result in inefficiencies. Specifically,
manufacturers often encounter difficulties in production of new products,
including problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel. The Company may
experience a shortage of manufacturing capacity if the new facility fails to
operate as planned. Although the Company intends to maintain sufficient levels
of inventory to avoid any material disruption resulting from the continuing
scale-up of the new facility and transition to in-house manufacturing, there can
be no assurance that the Company will be able to manufacture and supply
sufficient quantities of products to meet product requirements for United States
and international clinical trials and commercial sales. Additionally, any delay
or difficulty in continuing manufacturing activities at the new facility may
have a material adverse effect on the Company's business, financial condition
and results of operations. As a result of commencing manufacturing in the new
facility, gross margins decreased during the second quarter, due to
manufacturing start-up and overhead costs being spread over low production
volumes. Gross margins may continue to be impacted in future periods as a
result of manufacturing in the new facility.
DEPENDENCE UPON INTERNATIONAL DISTRIBUTORS AND SALES. To date, all of
the Company's sales of the Uterine Balloon Therapy system have been outside the
United States, and the Company anticipates that all of its revenues for the next
several years will continue to be derived from international sales. The Company
markets and sells its products internationally through a network of
distributors. The Company's international sales are dependent upon the
marketing efforts of, and sales by, these distributors. The Company may also
rely on these distributors to assist it in obtaining reimbursement approvals
from both government and private insurers in certain international markets. In
general, the Company has chosen to operate through small distribution firms
because of its belief that these firms will devote greater attention to the
Company's products. The use of small distributors increases the risks associated
with financial instability, which includes the risk that distributors will cease
operations or will be unable to satisfy financial obligations to the Company. If
a distributor were to fail to invest adequate capital promoting the Company's
products or were to cease operations, the Company would likely be unable to
achieve significant sales in the territory. In addition, because the Company has
only recently commenced international sales, it has only limited sell-through
experience with many of its distributors. Gynecare also does not currently have
distributors in a number of significant international markets that it has
targeted and will need to establish additional international distribution
relationships. There can be no assurance that the Company will engage qualified
distributors in a timely manner. The failure to engage such distributors would
have a material adverse effect on the Company's business, financial condition
and results of operations.
A number of other risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in managing
international operations and fluctuations in foreign currency exchange rates.
There can be no assurance that the Company will be able to successfully
commercialize the Uterine Balloon Therapy system or any future product in any
international market.
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UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. The Company's
success will be dependent upon, among other things, its ability to obtain
satisfactory reimbursement from health care payors for the Uterine Balloon
Therapy system. The Company does not expect that third-party reimbursement will
be available, if at all, for use of the Uterine Balloon Therapy system in the
United States unless and until FDA approval is received. If FDA approval is
received, third-party reimbursement for the Uterine Balloon Therapy system would
be dependent upon decisions by the HCFA for Medicare, as well as by individual
health maintenance organizations, private insurers and other payors. While the
Company believes the Uterine Balloon Therapy procedure may be reimbursed in the
United States under existing procedure codes for endometrial ablation, there can
be no assurance that this will occur 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 assure profitability.
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 govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government managed systems. Large scale market acceptance of the Uterine Balloon
Therapy system will depend on the availability and level of reimbursement in
international markets targeted by the Company. Currently, the Uterine Balloon
Therapy system has not been approved for reimbursement in any international
market. 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.
GOVERNMENT REGULATION. The manufacture and sale of medical devices,
including the Uterine Balloon Therapy system, are subject to extensive
regulation by numerous government authorities in the United States and other
countries. In the United States, the Uterine Balloon Therapy system is regulated
as a medical device and is subject to the FDA's PMA requirements. As a result,
the Company will not be able to commence marketing and commercial sales of the
Uterine Balloon Therapy system in the United States unless and until it receives
PMA approval for marketing of such product from the FDA. The Uterine Balloon
Therapy system is in the early stages of human clinical investigation and will
require completion of the clinical study prior to any filing for regulatory
approval. There can be no assurance as to whether or when the Company will
complete the required clinical trials, whether safety and efficacy data
collected during clinical trials will be sufficient to support a PMA filing or
whether the Company will receive PMA approval for any of its products. In
addition, if approval is received, there can be no assurance that it would not
be for a more limited indication than the Company has requested, which could
limit the addressable market of the Uterine Balloon Therapy system and have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to conduct additional clinical trials for the Uterine Balloon Therapy
system which may result in substantial costs and delays. In addition, changes
in existing regulations or adoption of new government regulations or policies
could prevent or delay regulatory approval of the Company's products.
Furthermore, if PMA approval is granted, subsequent modifications to the
approved device or manufacturing process may require a PMA supplement or may
require the submission of a new PMA, which could require substantial additional
clinical efficacy data and FDA review. Failure to obtain PMA approval or to
obtain such approval on a timely basis would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's future product plans call for the introduction of a
uterine fibroid removal system which is currently under development using the
technology licensed from Gyrus. In the United States, the Company intends to
seek clearance to market the uterine fibroid removal system through a 510(k)
premarket notification, which was filed in June 1996. A 510(k) premarket
notification must be supported by appropriate data establishing, to the
satisfaction of the FDA, that a newly developed device is "substantially
equivalent" to a device that was legally marketed prior to May 1976, or to a
device that the FDA has found to be substantially equivalent to a legally
marketed pre-1976 device. Commercial distribution of a device for which a
510(k) premarket notification is required can begin only after the FDA issues an
order finding the device to be substantially equivalent to a predicate device.
The FDA has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past. There can be no assurance that the FDA will act
favorably or quickly on the Company's 510(k) submission, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling the
uterine fibroid removal system in the United States. Furthermore, there can be
no assurance that the FDA will not request additional data, require that the
Company conduct further clinical studies or require the Company to seek
premarket approval through the submission of a PMA. In addition, there can be
no assurance that the FDA will not impose strict labeling requirements,
12
<PAGE>
onerous operator training requirements or other requirements as a condition of
its 510(k) clearance, any of which could limit the Company's ability to market
the uterine fibroid removal system.
The Company will be required to adhere to applicable FDA regulations
regarding GMP and similar regulations in other countries, which include testing,
control and documentation requirements. The Company's success will depend in
part on its ability to manufacture its products in compliance with GMP and EN
46001 and other regulatory requirements, in sufficient quantities and in a
timely manner, while maintaining product quality and acceptable manufacturing
costs. Failure to increase production volumes in a timely or cost-effective
manner or to maintain compliance with GMP and EN 46001 and other regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which the product may be marketed. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Failure to comply with applicable regulatory requirements,
including marketing products for unapproved uses, could result in, among other
things, FDA 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, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
requirements for approval for sale internationally may differ from those
required for FDA approval. In Europe, the Company will be required to obtain
the certifications necessary to enable the CE mark to be affixed to the
Company's products by mid-calendar 1998 in order to continue commercial sales in
member countries of the European Union. Although the Company has obtained all
such certifications for its Uterine Balloon Therapy system, there can be no
assurance that it will be able to obtain certifications for its future products
in a timely manner, if at all. A failure to obtain any such certifications could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY. The
Company's success depends in part on its ability to retain licenses, obtain
patent protection for products and processes, and preserve its trade secrets and
proprietary technology. The Company's one issued United States patent was
assigned to the Company by Origin pursuant to a royalty-bearing agreement
covering potential future modifications to the Uterine Balloon Therapy system.
Additionally, pursuant to such agreement, the Company granted to Origin a
non-exclusive, royalty-free license under such patent for use in fields other
than gynecology. The validity and breadth of claims covered in medical device
technology patents involve complex legal and factual questions and, therefore,
may be highly uncertain. No assurance can be given that any patents from pending
patent applications or from any future patent applications will be issued, that
the scope of any patent protection will exclude competitors or provide
competitive advantages to the Company, that any of the Company's patents will be
held valid if subsequently challenged or that others will not claim rights in or
ownership of the patents and other proprietary rights held by the Company. For
example, a third party has challenged the issuance of certain claims in a patent
application filed in Australia. Additionally, certain of the Company's licenses
provide that the license rights revert back to the licensors in the event of
material breach of the license agreements, including failure to pay minimum
royalty amounts or milestone payments when due, or failure to purchase certain
quantities of product from the licensor. To the extent license rights are
involved, the Company is dependent upon technology licensors to prosecute their
patents in the United States and in foreign countries. The reversion of rights
under the Company's license agreements or failure of the licensors to fully
prosecute patents would have a material adverse effect on the Company's
business, financial condition and results of operations.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
could result in substantial cost to and diversion of effort by the Company, may
be necessary to enforce patents issued or licensed to the Company, protect trade
secrets or know-how owned by the Company, defend the Company against claimed
infringement of the rights of others or determine the ownership, scope or
validity of the proprietary rights of the Company and others. An adverse
determination in any such litigation could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties and prevent the Company from manufacturing, selling or using its
products, any of which could have a material adverse effect on the Company's
12
<PAGE>
business, financial condition and results of operations. In the event of such an
adverse determination, there can be no assurance whether a license would be
offered on terms acceptable to the Company, or at all.
13
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held
on May 28, 1996 (the "Meeting").
(b) The following directors were elected at the Meeting:
Alan Levy, Ph.D.
Elizabeth B. Connell, M.D.
Mary Lake Polan, Ph.D.
(c) The results of the vote on the matters voted upon at the
meeting are:
(i) Election of Directors For Withheld
--------------------- --------- --------
Alan Levy, Ph.D. 7,319,398 2,500
Elizabeth B. Connell, M.D. 7,317,998 3,900
Mary Lake Polan, Ph.D. 7,319,598 2,300
(ii) Ratification of Coopers & Lybrand, L.L.P. as
independent auditors for the Company for fiscal
year 1996:
For Against Abstained No Vote
--- ------- --------- -------
7,320,748 200 950 0
The foregoing matters are described in more detail in the
Company's definitive proxy statement dated April 26, 1996.
Item 6. (a) Exhibits
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter.
14
<PAGE>
SIGNATURES
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.
GYNECARE, INC.
By: /s/ MALCOLM M. FARNSWORTH, JR.
------------------------------
Malcolm M. Farnsworth, Jr.
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer), Secretary
Date: August 13, 1996
15
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET LOSS
PER SHARE (1)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Primary and Fully Diluted
Weighted average common shares outstanding for the period . . 8,160,000 -- 8,157,000 --
Common Equivalent Shares pursuant to Staff Accounting
Bulletin No. 83 . . . . . . . . . . . . . . . . . . . . . . -- 1,670,000 -- 1,664,000
------------- ------------- ------------- -------------
Shares used in computing net loss per share . . . . . . . . . 8,160,000 1,670,000 8,157,000 1,664,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . .$ (2,606,000) $ (1,005,000) $ (4,654,000) $ (1,848,000)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share. . . . . . . . . . . . . . . . . . . . . . ($0.32) ($0.60) ($0.57) ($1.11)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
(1) Primary and fully diluted calculations are substantially the same.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF
THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,905
<SECURITIES> 13,289
<RECEIVABLES> 540
<ALLOWANCES> 0
<INVENTORY> 864
<CURRENT-ASSETS> 18,813
<PP&E> 1,430
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,158
<CURRENT-LIABILITIES> 1,040
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 21,819
<TOTAL-LIABILITY-AND-EQUITY> 23,158
<SALES> 475
<TOTAL-REVENUES> 475
<CGS> 700
<TOTAL-COSTS> 700
<OTHER-EXPENSES> 2,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,654)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
