<PAGE>
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 March 31, 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
--------------------------------------------
(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 May 10, 1996 was
8,158,002.
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TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 1996
and December 31, 1995 3
Statements of Operations for the three months
ended March 31, 1996 and 1995 4
Statements of Cash Flows for the three months
ended March 31, 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 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
<TABLE>
<CAPTION>
March 31 December 31,
1996 1995
------------ -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:. . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 4,963,000 $ 22,330,000
Short-term investments. . . . . . . . . . . . . . . . . . . . . . 9,030,000 380,000
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . 587,000 433,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,000 1,034,000
Prepaids and other current assets . . . . . . . . . . . . . . . . 315,000 344,000
------------ -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 15,915,000 24,521,000
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,686,000 --
Property and equipment, net. . . . . . . . . . . . . . . . . . . . 1,250,000 1,205,000
Prepaid royalties. . . . . . . . . . . . . . . . . . . . . . . . . 1,940,000 1,951,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 996,000 594,000
----------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,787,000 $ 28,271,000
------------ -------------
------------ -------------
<CAPTION>
LIABILITIES
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 402,000 $ 881,000
Amount due to related party . . . . . . . . . . . . . . . . . . . 42,000 60,000
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . 387,000 294,000
Current portion of long-term debt . . . . . . . . . . . . . . . . 291,000 270,000
------------ -------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 1,122,000 1,505,000
------------ -------------
Long-term debt, net of current portion . . . . . . . . . . . . . . 364,000 458,000
------------ -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 1,486,000 1,963,000
------------ -------------
<CAPTION>
STOCKHOLDERS' EQUITY
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 8,000
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . 33,501,000 33,501,000
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . (525,000) (566,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (8,683,000) (6,635,000)
------------ -------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 24,301,000 26,308,000
------------ -------------
Total liabilities and stockholders' equity . . . . . . . . . . . . $ 25,787,000 $ 28,271,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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GYNECARE, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
---------------
1996 1995
-------------- --------------
<S> <C> <C>
Revenues $ 257,000 $ 209,000
Cost of goods sold 321,000 182,000
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Gross profit (64,000) 27,000
Operating expenses:
Research and development 1,161,000 502,000
Selling, general and administrative 1,059,000 421,000
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Total operating expenses 2,220,000 923,000
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Loss from operations (2,284,000) (896,000)
Interest income, net 236,000 53,000
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Net loss $ (2,048,000) $ (843,000)
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Net loss per share ($0.25) ($0.51)
-------------- --------------
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Shares used in computing net loss per share 8,155,000 1,658,000
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</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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GYNECARE, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
---------------
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,048,000) (843,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 72,000 56,000
Amortization of deferred compensation . . . . . . . . . . . . . . 41,000 --
Provision for doubtful accounts . . . . . . . . . . . . . . . . . 3,000 --
Changes in operating assets and liabilities: . . . . . . . . . . .
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . (157,000) (210,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 (127,000)
Prepaids and other current assets. . . . . . . . . . . . . . . . 29,000 (19,000)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (8,000) (3,000)
Accounts payable and amount due to related party . . . . . . . . (497,000) (21,000)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 93,000 (21,000)
------------- ------------
Net cash used in operating activities . . . . . . . . . . . . . (2,458,000) (1,188,000)
------------- ------------
Cash flows from investing activities:. . . . . . . . . . . . . . .
Acquisition of property and equipment . . . . . . . . . . . . . . (100,000) (39,000)
Acquisition of patent rights and
related technical information. . . . . . . . . . . . . . . . . . (400,000) --
Purchase of investments . . . . . . . . . . . . . . . . . . . . . (14,336,000) --
------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . (14,836,000) (39,000)
------------ ------------
Cash flows from financing activities:. . . . . . . . . . . . . . .
Issuance of Common Stock upon exercise of
stock options . . . . . . . . . . . . . . . . . . . . . . . . . 41,000
Payments on debt. . . . . . . . . . . . . . . . . . . . . . . . . (73,000) --
------------ ------------
Net cash used in financing activities. . . . . . . . . . . . . (73,000) 41,000
------------ ------------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . (17,367,000) (1,186,000)
Cash and cash equivalents at beginning of period . . . . . . . . . 22,330,000 4,106,000
------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . . . .$ 4,963,000 $ 2,920,000
------------- ------------
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Supplemental disclosure of noncash
investing and financing activities: . . . . . . . . . . . . . . .
Interest paid during the period . . . . . . . . . . . . . . . . . $ 18,000 --
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</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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GYNECARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 month period ended March 31, 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 March 31,
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:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Raw materials $ 117,000 $ 194,000
Work-in-process 364,000 462,000
Finished goods 539,000 378,000
------------- -------------
$1,020,000 $1,034,000
------------- ----------
------------- ----------
</TABLE>
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 increased 23% to $257,000 in the first quarter of fiscal 1996 from
$209,000 in the first quarter of fiscal 1995. The corresponding cost of goods
sold increased to $321,000 in the first quarter of fiscal 1996 from $182,000 for
the first quarter of fiscal 1995. All of the revenues to-date have been
generated from international sales of the Uterine Balloon Therapy -TM- system.
The growth in revenues over the first quarter of fiscal 1995 was the result of
the continued expansion of international sales of the Uterine Balloon Therapy
system. The corresponding increase in cost of goods sold was the result of
excess capacity incurred as the Company commenced operations in its new
manufacturing facility in Menlo Park, California and the costs 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 to $1,161,000 for
the quarter ended March 31, 1996 from $502,000 for the corresponding period in
fiscal 1995, primarily due to the initiation of the U.S. clinical trials of the
Uterine Balloon Therapy system 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 recently
licensed by the Company.
The Company's selling, general and administrative expenses increased to
$1,059,000 for the first quarter of fiscal 1996 from $421,000 for the
corresponding period 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 launch of clinical studies
in several European markets during the first quarter of fiscal 1996. Growth in
the Company's sales and marketing, accounting and administrative staff from six
employees at March 31, 1995 to eleven at March 31, 1996 further contributed to
the increase in selling, general and administrative expenses.
Interest income increased to $236,000 for the period ended March 31, 1996
from $53,000 for the period ended March 31, 1995. The increase was primarily
the result of the increased level of cash and investments held by the Company
during the first quarter of fiscal 1996 compared to the first quarter of 1995
as a result of the sale of Preferred Stock of Gynecare to investors in May 1995
and 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 $8,683,000 at
March 31, 1996. The Company has funded its
7
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operations primarily through the 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 $2,458,000 for the quarter ended
March 31, 1996 as compared to $1,188,000 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 quarter of fiscal 1996 and
for the corresponding quarter of fiscal 1995 were $100,000 and $39,000,
respectively. The increased level of capital expenditures during the first
quarter of 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
March 31, 1996, the Company had borrowed $655,000 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 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 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.
- --------------------
* 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.
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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 March 31, 1996, the Company had an
accumulated deficit of $8.7 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
9
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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
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 in November 1995 may result in
inefficiencies and delays. 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 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 commencing manufacturing
activities at the new facility may have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
expects that gross margins may decrease in the short term following the
commencement of manufacturing, due to manufacturing start-up and overhead costs
being spread over low production volumes.
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
10
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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.
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
11
<PAGE>
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. 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, 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
12
<PAGE>
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 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 6. (a) Exhibits
10.1 Supply and Manufacturing License Agreement with
Gyrus Medical, Ltd. dated July 24, 1995 as amended by
Amendment 1 dated December 13, 1995 and Amendment 2
dated March 31, 1996 *
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.
----------------------
* Confidential treatment requested as to certain
portions of this document.
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: May 13, 1996
----------------------
15
<PAGE>
EXHIBIT 10.1
OEM SUPPLY AND MANUFACTURING LICENSE AGREEMENT
THIS OEM SUPPLY AND MANUFACTURING LICENSE AGREEMENT is made and entered
into this 24th day of July, 1995 ("Effective Date"), by and between GYNECARE,
INC., a California corporation with principal offices at 125 Constitution Drive,
Menlo Park, California 94025 ("Gynecare") and Gyrus Medical, Ltd., a United
Kingdom corporation, with principal offices at St. Mellons Techbase, Fountain
Lane, St. Mellons, Cardiff CF3 0LX U.K. ("Gyrus").
RECITALS
A. Gynecare wishes to purchase from Gyrus certain Products (as
hereinafter defined) based on the Specifications (as hereinafter defined).
B. Gyrus desires to become Gynecare's exclusive supplier of such Products
throughout the term of this Agreement.
C. Gyrus owns all right, title and interest in the Patent Rights (as
hereinafter defined) and Related Technical Information (as hereinafter defined).
D. Gyrus wishes to license the Patent Rights and Related Technical
Information to Gynecare, within the Field (as hereinafter defined), to make, use
and sell Products on the terms and conditions set forth below and Gynecare
wishes to obtain a license on such terms.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
set forth herein, Gynecare and Gyrus hereby agree as follows:
ARTICLE 1
DEFINITIONS
1. DEFINITIONS. As used herein the following terms shall have the
meanings set forth below.
1.1 "FIELD" means gynecological products for use in conjunction with
a hysteroscope wherein the intended purpose is the removal of uterine fibroids
or uterine tissue.
1.2 "LICENSED PRODUCT" means any product or component whose sale
would infringe a Valid Claim in the country for which such item is sold.
1.3 "PATENT RIGHTS" means all right, title and interest in and to
the patents, patent applications and invention disclosures set forth in
Exhibit A attached hereto (as amended by mutual agreement of the parties)
including (i) all corresponding patents, utility models, inventor
certificates,
<PAGE>
registrations or the like in any country of the world with respect to the
foregoing, (ii) all continuations, continuations-in-part, divisionals,
reissues, additions, reexaminations and extensions with respect to any of the
foregoing; and (iii) any patents and patent applications relating to
Improvements which are developed solely by Gyrus or jointly developed by
Gyrus and Gynecare.
1.4 "RELATED TECHNICAL INFORMATION" means any published or
unpublished research and development information, unpatented inventions,
know-how, trade secrets, copyrights, and all preclinical, clinical and other
technical data in the possession of Gyrus prior to the Effective Date, or
during the term of this Agreement, in each case which relates to the practice
of the Patent Rights.
1.5 "VALID CLAIM" shall mean a claim of an issued and unexpired
patent included within the Patent Rights which has not been held unenforceable,
unpatentable or invalid by a court or other governmental agency of competent
jurisdiction, and which has not been admitted to be invalid or unenforceable
through reissue, disclaimer or otherwise.
1.6 "IMPROVEMENTS" means improvements or derivations of the subject
matter covered by the Patent Rights which are developed by either Gyrus or
Gynecare during the term of this Agreement which would not already be included
within the Patent Rights and which are applicable to the Field.
1.7 PRODUCTS. "Products" means the products and components
identified in Exhibit B attached hereto manufactured in accordance with the
Specifications. Exhibit B may be amended to add or delete Products from time to
time by execution of a new Exhibit B by the parties.
1.8 SPECIFICATIONS. "Specifications" shall mean any mutually agreed
embodiment of the Products, including without restriction any future amendments
or variations to the Specifications proposed or implemented by either party.
1.9 NET SELLING PRICE. "Net Selling Price" means, subject to Section
5.2, the gross amount actually received by Gynecare from the sale of any
particular Product, less: (i) credits for returns; (ii) sales, excise or other
taxes; provided, however, that (a) in no event shall Net Selling Price include
any handling, insurance or transportation costs associated with a particular
product and (b) in the event that any particular Product is sold by Gynecare as
part of a bundle or kit, the Net Selling Price for that particular product shall
be determined by multiplying the net selling price of the bundle or kit by the
fraction A/A+B where A is the suggested list price for the Product sold
separately (as documented by Gynecare's records) and B is the suggested list
price for the remaining product in the bundle or kit sold separately (as
documented by Gynecare's records). In the event that Gynecare receives any
Products from Gyrus that Gynecare uses for promotion or demonstration purposes,
the Net Selling Price for such Products shall be deemed to be Gynecare's list
price for such Products.
1.10 EQUIPMENT PRODUCTS. "Equipment Products" means radio frequency
hardware and associated reusable Products.
-2-
<PAGE>
1.11 DISPOSABLE PRODUCTS "Disposable Products" means packaged,
sterile, single use disposable Products.
ARTICLE 2
GRANT OF MANUFACTURING RIGHTS
2.1 MANUFACTURING LICENSE. Subject to the limitations set forth herein,
Gyrus hereby grants to Gynecare an exclusive, worldwide, royalty-free license
under the Patent Rights and Related Technical Information to make, have made,
use and sell Licensed Products, to practice any process, method or procedure,
and to otherwise exploit the Patent Rights and Related Technical Information, in
each case solely within the Field.
2.2 DISCLOSURE OF TECHNOLOGY. Promptly after the Effective Date, and
throughout the term of this Agreement, Gyrus shall provide Gynecare, as
reasonably requested by Gynecare, with (i) copies of all patent applications
within the Patent Rights set forth in Exhibit A attached hereto, all
correspondence and written materials related thereto, and all Related Technical
Information; and (ii) all physical embodiments of the Patent Rights and Related
Technical Information, including without limitation copies of all notebooks,
drawings, diagrams, computer files, manuscripts, patent prosecution documents
and other materials created or obtained in the course of developing the Patent
Rights and/or Related Technical Information or related to their conception,
experimentation, design, fabrication, or use. Subject to Section 7 below,
Gynecare may use and disclose such information and embodiments as it deems
appropriate. Gyrus' obligations under this Section 2.2 shall in all cases be
limited to disclosure of materials that have reference to the Field.
2.3 IMPROVEMENTS.
(a) Gyrus shall, throughout the term of this Agreement, keep Gynecare
apprised of any Improvements (as defined in Section 1.6 above) that it has
developed or is in the process of developing. Gyrus further agrees to promptly
file, and to diligently prosecute, patent applications with respect to any
Improvements that might reasonably constitute patentable inventions.
(b) Gynecare shall, at its sole option, have the right to make any
Improvements developed by Gyrus part of the license granted to Gynecare pursuant
to Section 2.1 above. In the event Gynecare decides to make such Improvements
part of the license, Gyrus shall promptly deliver to Gynecare all materials
reasonably necessary for Gynecare to exercise its license with respect to such
Improvements.
(c) If any Improvements are made during the term hereof through the
joint efforts of the parties, ownership of those Improvements will vest jointly
in the parties. The parties agree to cooperate in efforts to obtain appropriate
patent protection for any such Improvements and shall equally share the costs
and expenses therefrom. Each of Gyrus and Gynecare agrees that, without the
prior written consent of the other, it shall not sublicense any such jointly-
owned Improvements or otherwise exploit such jointly-owned improvements other
than for the benefit of Gyrus or Gynecare.
-3-
<PAGE>
ARTICLE 3
OWNERSHIP
3.1 PATENTS AND TECHNOLOGY. Gyrus owns all right, title, and interest in
the Patent Rights and Related Technical Information. Gynecare shall have no
rights in the Patent Rights and Related Technical Information except as
expressly provided in this Agreement.
3.2 IMPROVEMENTS. Subject to Sections 1.3 and 3.1 above, each party shall
own all right, title, and interest in any Improvements it creates during the
term of this Agreement, including all patent, copyright, trade secret, and other
intellectual property rights therein.
ARTICLE 4
MANUFACTURE AND SALE OF PRODUCTS
4.1 OBLIGATION. Subject to the terms and conditions of this Agreement,
Gyrus shall manufacture Products and shall sell such Products to Gynecare.
4.2 EXCLUSIVE SALE TO GYNECARE. Throughout the term of this Agreement
Gyrus agrees not to manufacture for, or sell to, anyone other than Gynecare, any
products for application in the Field, without the prior written consent of
Gynecare.
4.3 GYRUS MANUFACTURING PREFERENCE. Gynecare agrees that, throughout the
term of this Agreement, it shall not manufacture Products or purchase Products
from anyone other than Gyrus. Notwithstanding the foregoing, in the event of
termination of this Agreement by Gynecare pursuant to Section 11.3 below,
Gynecare shall be permitted to manufacture any Licensed Products in any amount
which it deems appropriate.
4.4 PURCHASE ORDERS. Gynecare shall order Products from Gyrus by issuing
written purchase orders to Gyrus. Orders may be submitted by telecopier with a
confirming hard-copy order within ten (10) days. Such purchase orders shall
specifically identify the Products, the quantity of Products, ship-to locations,
any special shipment instructions, and the date of delivery to Gynecare. All
such purchase orders shall be submitted at least ninety (90) days prior to the
requested delivery date. Unless Gyrus objects to the date of delivery in a
purchase order within three (3) business days of the receipt of such purchase
order, the Products shall be delivered to Gynecare on or before such date. If
Gyrus so notifies Gynecare of its objection, the parties shall mutually agree on
an alternative delivery date. Gyrus shall use its best efforts to deliver
products to Gynecare on the date specified in the purchase order. Gyrus shall
send Gynecare a formal written acknowledgment of each Gynecare purchase order
within five (5) business days after receipt thereof. All purchase orders placed
by Gynecare shall be subject to the terms and conditions of this Agreement, and
no provisions in any acknowledgment or any other of Gyrus's documents related to
the purchase orders shall in any way modify or add to such terms and conditions.
-4-
<PAGE>
4.5 FORECASTS. Beginning four (4) months prior to initial Product
release, Gynecare will provide to Gyrus, on the first day of each month, a
rolling six (6) month forecast of Gynecare's anticipated requirements for
Products. The forecast for any given month (a "Shipment Month") shall become
binding upon Gynecare, following final permitted adjustments, three (3) months
prior to the start of that Shipment Month at which time Gynecare shall be
required to submit binding purchase orders pursuant to Section 4.4 above for the
number of units forecast for such Shipment Month. Prior to that time, monthly
forecasts may be adjusted by Gynecare without penalty as follows:
Fourth month prior to Shipment 10% adjustment from
Month previous forecast for that
Shipment Month
Fifth month prior to Shipment 50% adjustment from
Month previous forecast of that
Shipment Month
Sixth or later months prior No restrictions
to Shipment Month
If Gyrus at any time believes it will not be able to satisfy Gynecare's
requirements for the Products, Gyrus shall promptly notify Gynecare, specifying
the reasons for the delay and its expected duration. In addition to the
foregoing, both Gyrus and Gynecare agree to negotiate, in good faith, a minimum
quantity Product forecast four (4) months prior to the third year after initial
Product release.
4.6 PURCHASE ORDER CHANGES. Gynecare and Gyrus may by mutual agreement
make changes to the quantity and delivery date for any purchase order up to
thirty (30) days before the delivery date; provided that (i) any changes in
quantity are no less than those provided for under Section 4.5 above and (ii)
the delivery date may not be advanced to less than thirty (30) days from the
date of the change without Gyrus's permission and (iii) the implementation of
Purchase Order Changes shall relieve Gyrus of any supply obligations may
otherwise result in termination under Section 11.
4.7 SHIPMENT. Products shall be shipped by Gyrus in suitable packing
containers F.O.B. Gyrus' manufacturing facility.
-5-
<PAGE>
ARTICLE 5
PRICE, PAYMENT AND DEPOSIT TERMS; MANUFACTURING FEE
5.1 TRANSFER PRICE FORMULA. Gyrus shall sell the Products to Gynecare at
purchase prices equal to [*] of Gynecare's average Net Selling Price for the
Products in accordance with the following: (i) the purchase price computation
for any particular Product shall be made at the time of the delivery of such
Product by Gyrus to Gynecare; (ii) the average Net Selling Price applied with
respect to the sale of a Product during any particular calendar quarter other
than the first calendar quarter in which such Product is sold shall be equal to
the average of the Net Selling Prices received by Gynecare for such Products
during the previous calendar quarter; (iii) the purchase price used for a
Product during the first calendar quarter during which such Product is sold
shall be Gynecare's published list price for such Product; and (iv) with the
exception of delivery to the United Kingdom, the purchase price determined
according to the above calculation shall be inclusive of all applicable taxes
(including without limitation any applicable sales, use or value-added taxes)
and Gynecare shall not under any circumstances be separately invoiced for any
such taxes. Within twenty (20) days following the end of each calendar quarter,
Gynecare will send Gyrus written notice setting forth the average Net Selling
Price received by Gynecare for the Products during such quarter.
Notwithstanding anything in this section 5.1 to the contrary, the price at which
Gynecare shall purchase the Disposable Products from Gyrus shall not be less
than [*]; provided, however, that Gyrus agrees to negotiate in good faith with
Gynecare to reduce such minimum price following the second anniversary of the
date of delivery of first commercial Product to Gynecare if the volume of
Product purchases by Gynecare from Gyrus exceeds twice the Minimum Purchase
Requirements as set forth on Exhibit C.
5.2 GYNECARE PAYMENT. In consideration of the licenses and rights granted
to Gynecare herein, Gynecare agrees to pay Gyrus a non-refundable purchase
deposit in the amount of [*] (the "Deposit"), payable in installments as
follows: (i) [*] on the Effective Date; (ii) [*] upon successful completion of
animal laboratory tests; (iii) [*] upon the earlier to occur of (A) completion
of Gynecare's intellectual property due diligence or (B) 60 days following the
Effective Date; (iv) [*] upon completion of first human use trial of safety and
effectiveness [*]; and (v) [*] upon preproduction first article Product approval
[*]. Notwithstanding the foregoing, Gynecare shall have no right of recovery of
payments past or due and shall have no obligation to pay Gyrus any of the
installments described above in the event that this Agreement has been
terminated for any reason, prior to the time that such installment has become
due (unless such installment has already become due and has not yet been paid by
Gynecare). The Deposit shall be applied as follows, until fully amortized,
against the purchase price which would otherwise be charged by Gyrus to Gynecare
for Product purchases: (i) for each purchase of a Disposable Product by Gynecare
from Gyrus, [*] of the Net Selling Price of such Disposable Product shall be
credited against and subtracted from the Deposit; and (ii) for each purchase of
an Equipment Product by Gynecare from Gyrus, [*] of the Net Selling Price of
such Equipment Product shall be credited against and subtracted from the
Deposit.
- ----------
* Confidential treatment requested. Confidential portion filed separately
with the Commission.
-6-
<PAGE>
5.3 PAYMENT TERMS. Upon shipment of Products to Gynecare, Gyrus shall
submit an invoice to Gynecare. Such invoice shall reflect the purchase price
for the Products computed pursuant to Section 5.1 above as well as that portion
of the Deposit, if any, to be applied against such purchase price pursuant to
Section 5.2 above. Unless otherwise agreed by the parties in writing, Gynecare
shall pay each invoice in cleared funds and in such good time for Gyrus to be
credited with such payments in its nominated U.K. clearing bank account no later
than thirty (30) days from the date thereof. All invoices shall be presented,
and payment accepted, in terms of U.S. dollars; provided such invoices shall be
adjusted in accordance with a change of greater than ten percent (10%) in the
exchange rates between the U.S. dollar and British pounds sterling as published
in the Financial Times as of the date of shipment of applicable products
compared to the rate in effect at the time of calculating the initial transfer
prices for the Products.
5.4 TAXES. As set forth in Section 5.1 above, the prices for the Products
include any and all taxes. All applicable sales, use, value-added or other
taxes shall be paid directly by Gyrus.
5.5 RESOLUTION OF DISAGREEMENTS OVER TRANSFER PRICE.
(a) In the event Gynecare and Gyrus disagree over the transfer price
determined pursuant to Section 5.1 above, Gyrus shall have the right to retain
an independent public accounting firm to review the books and records of
Gynecare (including the work papers of Gynecare's own independent auditing firm)
to determine the appropriate transfer price. If such independent public
accounting firm determines that Gyrus' transfer price calculation is higher than
the transfer price calculated by Gynecare's own auditing firm with respect to
any particular Products, the two accounting firms will then confer to resolve
their differences. If the two firms are unable to resolve their differences and
agree upon a transfer price, the two firms together shall pick a third
accounting firm whose decision as to the transfer price of the Products shall be
binding for purposes of this Agreement.
5.6 CHANGE IN SPECIFICATIONS FOR PRODUCTS.
(a) GYRUS CHANGES. Gyrus shall not change the Specifications set
forth in Exhibit A for Products or make any manufacturing changes that might
affect the Products without the prior written consent of Gynecare.
(b) GYNECARE PROPOSED CHANGES. In the event Gynecare desires a
change to the Specifications set forth in Exhibit A for Products, Gynecare shall
submit such requested change in writing to Gyrus. Gyrus will advise Gynecare in
writing within thirty (30) days of receipt of the change request whether, in
Gyrus' opinion, the change is technically and economically feasible. Gyrus
agrees that it will in good faith consider making the requested change in the
Specifications, but is under no obligation to do so.
-7-
<PAGE>
ARTICLE 6
PATENT PROSECUTION AND ENFORCEMENT
6.1 PATENT PROSECUTION. Gyrus shall be obligated to direct all patent
filings, prosecution and maintenance relating to the Patent Rights in [*];
provided, however, that Gyrus and Gynecare agree, throughout the term of this
Agreement, to cooperate in (i) selection of patent counsel; (ii) formulation of
a general intellectual property strategy; (iii) foreign filings; and (iv)
determination of the content of each new application, divisional, continuation
or continuation-in-part. Each further agrees to assist the other in any
formalities relating to the foregoing and each shall use its best efforts to
ensure that the other receives copies of all relevant correspondence.
Gyrus shall assume all costs and expenses associated with the filing,
prosecution and maintenance of the Patent Rights in the following countries:
[*]. Gynecare shall have the right to obligate Gyrus at Gynecare's expense, to
file, prosecute and maintain the Patent Rights in the countries not listed
above; provided, however, that in the event Gyrus does not file, prosecute and
maintain such Patent Rights, (i) Gynecare may, at its own expense, pursue such
Patent Rights as it deems appropriate and, (ii) Gyrus agrees to fully cooperate
with Gynecare, including the execution of any documents required, in this
regard.
6.2 ENFORCEMENT OF PATENT RIGHTS. In the event that any of the Patent
Rights are infringed by a third party within the Field, Gyrus shall have the
right, but not the obligation, to institute, prosecute and control any action or
proceeding with respect to such infringement, by counsel of its choice,
including any declaratory judgment action arising from such infringement. Gyrus
shall be entitled to any and all proceeds recovered from third parties as a
result of the enforcement of the Patent Rights as set forth above.
Notwithstanding the foregoing, in the event that Gyrus declines in any instance
to enforce the Patent Rights within the Field, Gynecare shall have the right,
but not the obligation, to enforce the Patent Rights within the Field in the
manner set forth above and shall be entitled to retain any and all proceeds
recovered from third parties as a result thereof. In addition, upon termination
of this Agreement by Gynecare pursuant to Section 11.3 below, Gynecare shall
have the exclusive right to enforce the Patent Rights within the Field as set
forth above and shall have the exclusive right to any and all proceeds recovered
from third parties as a result of the enforcement of the Patent Rights within
the Field.
ARTICLE 7
CONFIDENTIALITY
7.1 NONDISCLOSURE. Except as otherwise provided in this Agreement, each
party (the "Receiving Party") shall hold in confidence and not disclose to any
third party any business or technical information that is disclosed to it by the
other party in a tangible form marked "Confidential"
- ----------
* Confidential treatment requested. Confidential portion filed separately
with the Commission.
-8-
<PAGE>
or that is so disclosed to it orally and confirmed in writing as confidential
within thirty (30) days after its initial disclosure ("Confidential
Information"). Notwithstanding the foregoing, Gynecare may disclose any
Related Technical Information that it receives from Gyrus to third parties to
the extent necessary to exercise the manufacturing license granted by Gyrus
to Gynecare pursuant to Section 2.1 above, but only if such third party is
bound in writing under a reasonable confidentiality agreement. Confidential
Information of a party shall not include:
(a) Information which at the time of disclosure is published or
otherwise generally available to the public;
(b) Information which, after disclosure by the other party, is
published or becomes generally available to the public through no fault of the
Receiving Party; or
(c) Information which the Receiving Party can document was or is in
its possession at the time of disclosure and was not acquired directly or
indirectly from such party.
7.2 EXCEPTIONS. The Receiving Party may disclose Confidential Information
of the other:
(a) In connection with the order of a court of law or in compliance
with laws or regulations relating to registrations or sale of securities, or as
is reasonably necessary in connection with the prosecution, maintenance or
enforcement of the Patent Rights or obtaining product approvals; or
(b) If such information is also rightfully acquired from a third
party who, to the best of such party's knowledge and belief, is entitled to
rightfully make such disclosure, but only to the extent such party complies with
any restrictions imposed by the third party.
7.3 RESTRICTED ACCESS. Each party shall restrict access to the other's
Confidential Information to only such authorized employees and other agents who
have a need for access to such Confidential Information in connection with their
activities as contemplated by this Agreement, and shall take all steps necessary
to ensure that such employees and agents comply with the terms hereof. Gyrus
and Gynecare shall each ensure that their respective employees and agents to
whom such Confidential Information is disclosed or made available are informed
of the terms of this Agreement and that all such employees and agents agree to
be bound by the terms of this Article 7.
7.4 RETURN. All Confidential Information and all materials and documents
containing Confidential Information shall remain the property of the disclosing
party and shall be returned to such party, together with all copies thereof,
immediately upon request (subject to Gynecare's rights to retain Confidential
Information reasonably necessary or useful for it to fully exercise its rights
granted under Article 2).
7.5 NO LICENSE. The transmission of Confidential Information from
either party to the other does not constitute the grant of a license of any
type under any patent, copyright, trademark,
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trade secret, or other intellectual property right owned, applied for or
controlled by the transmitting party.
7.6 REMEDIES. If either party breaches any of its obligations hereunder
with respect to confidentiality or unauthorized use or disclosure of
Confidential Information, the other shall be entitled to equitable relief to
protect its interests therein, including, but not limited to, injunctive relief,
as well as monetary damages.
ARTICLE 8
WARRANTIES
8.1 GYRUS WARRANTIES. Gyrus represents and warrants that:
(a) Gyrus is the owner of all of the Patent Rights and has the full
right and authority to enter into this Agreement, to disclose any and all of the
information disclosed to Gynecare hereunder, and to grant the rights and
licenses granted herein;
(b) Gyrus has not previously granted and will not grant any rights in
the Patent Rights that are inconsistent with the rights and licenses granted to
Gynecare herein;
(c) Gyrus has not previously entered into any agreements and will not
in the future enter into any agreements that are inconsistent with or conflict
with this Agreement or the rights and licenses granted to Gynecare herein;
(d) To the best of its knowledge, the Products do not and will not
infringe any patent rights, trade secret rights or other proprietary rights of
any third party;
(e) As of the Effective Date and to the best of its knowledge, there
are no existing or threatened actions, suits or claims pending against Gyrus
with respect to the Patent Rights or the right of Gyrus to enter into and
perform its obligations under this Agreement; and
(f) Appendix A includes all patents and patent applications within
the Patent Rights existing as of the Effective Date, and Gyrus does not own
rights in any other patent or patent application, the claims of which relate to
the manufacture, sale or use of a product within the Field or that would
dominate the claims of a patent or application within the Patent Rights.
(g) Products manufactured for and sold to Gynecare shall conform to
the Specifications and shall be free from defects in material and workmanship
for a period of one (1) year following delivery to Gynecare. With each shipment
of Products, Gyrus shall supply Gynecare with a certificate of compliance with
such Specifications and, upon Gynecare's reasonable written request, Gyrus shall
furnish any other information or documents forming the basis for such
certificate of compliance.
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8.2 DISCLAIMER. EXCEPT FOR THE EXPRESS WARRANTY SET FORTH ABOVE, GYRUS
DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PRODUCTS, INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
8.3 WARRANTY REPAIR. Gynecare shall send defective Products covered by
the foregoing warranty to Gyrus' address set forth on the cover page or to such
other address provided by Gyrus from time to time. Gynecare shall notify Gyrus
by telephone or facsimile of the defect and request authorization from Gyrus
prior to the return of each defective Product. Upon such request, Gyrus shall
provide Gynecare with a Material Return Authorization (MRA) number to be
prominently displayed on the shipping container for the defective Product.
Gynecare shall then ship such Product to the repair facility, freight collect.
Gyrus shall, at its sole expense, repair or replace defective Products, and ship
such repaired or replaced Products to Gynecare, freight prepaid and properly
insured.
ARTICLE 9
INDEMNIFICATION
9.1 GYRUS. Gyrus shall defend, indemnify and hold harmless Gynecare and
its officers, directors, shareholders and employees from any and all judgments,
liabilities, costs, and expenses, including attorney fees, in connection with
(i) any breach of Gyrus' representations and warranties sets forth in Section
8.1 and (ii) any claims, demands, and lawsuits for infringement of any
intellectual property right of which Gyrus is aware, including patent,
trademark, copyright, and trade secret, by any of the Products or by any
apparatus, method, or process used by Gyrus to manufacture Products. Gynecare
shall notify Gyrus in writing of any such claim, demand, or lawsuit. Gynecare
shall, at Gyrus's request, provide reasonable assistance in the defense of any
such claim, demand, or lawsuit.
9.2 GYNECARE. Gynecare shall defend, indemnify and hold harmless Gyrus
and its employees from any and all judgments, liabilities, costs and expenses,
including attorney fees, in connection with (i) any claims, demands or lawsuits
relating to Gynecare's promotion, sale and distribution of Products or (ii) any
claims, demands or lawsuits for infringement of any patent or trade secret by
any apparatus, method or process used by Gynecare to manufacture any Licensed
Products which apparatus, method or process is not also used by Gyrus to
manufacture Products. Gyrus shall notify Gynecare in writing of any such claim,
demand or lawsuit. Gyrus shall, at Gynecare's request provide reasonable
assistance in the defense of any such claim, demand or lawsuit.
9.3 LICENSE. If by reason of any infringement claim referenced in Section
9.1, Gynecare or its customers are prevented from or are likely to be prevented
from selling or using any Product, or if Gyrus believes such a claim is likely
to be brought, Gyrus will use its best efforts, at Gyrus's own expense, to: (i)
obtain all rights required to permit the sale or use of the Products or
apparatus, method or process to make them noninfringing or (ii) modify or
replace the Products so as to make them noninfringing, provided that any such
modified or replacement Products are acceptable to Gynecare. If Gyrus is unable
to achieve either of the foregoing alternatives within a reasonable time
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period, then Gynecare shall have the right to terminate this Agreement in
accordance with Section 11.3 and, in addition to any other remedies Gynecare
may have, Gyrus shall promptly refund to Gynecare the invoiced purchase
price, plus shipping, insurance and the like, for any Products returned to
Gyrus which Gynecare or its customers are legally prohibited from selling or
using.
9.4 LIMITATIONS. The indemnity set forth in Section 9.1 shall not apply
(i) to the extent that an alleged infringement arises from the combination of
any Product with products not supplied by Gyrus when there would be no
infringement but for such combination or (ii) to the extent that the alleged
infringement arises from modifications to the Product requested by Gynecare if
the unmodified Product would not so infringe.
ARTICLE 10
ADDITIONAL OBLIGATIONS
10.1 OF GYRUS. Gyrus agrees to perform the following additional
obligations:
(a) MANUFACTURING SET-UP COSTS. Gyrus agrees to assume and pay all
costs of tooling, equipment, fixtures, pilot production, training and set-up
costs for manufacturing of the Products. Gyrus further agrees to pay for all
costs of obtaining international registrations for the Products, including U.L.,
B.S.I., C.S.A., T.U.V. and CE marks.
(b) QUALIFICATIONS. Gyrus agrees to assume responsibility for
maintaining GMP, ISO 9000 or equivalent approved manufacturing facilities for
the Products and agrees to permit, on a periodic basis and with reasonable
notice, reasonable inspections of its manufacturing facilities by Gynecare.
10.2 OF GYNECARE. Gynecare agrees to perform the following additional
obligations:
(a) CUSTOM TOOLING COSTS. Gynecare agrees to fund the purchase of
custom tooling for Gyrus' use during the term of this Agreement, up to a maximum
purchase price of [*] (prior to application of the VAT at 17.5%, which
Gynecare will also pay). Gynecare shall provide such funding either by direct
purchases of the tooling from tooling suppliers or through reimbursement to
Gynecare of amounts expended by Gynecare to acquire such custom tooling, against
presentation by Gyrus of documentation reasonably acceptable to Gynecare with
respect to any such reimbursed tooling expenses. In either case, Gynecare shall
be the owner of such custom tooling and Gyrus agrees to execute such
documentation as may be reasonably necessary to evidence Gynecare's ownership of
such tooling.
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(b) FDA APPROVAL. Gynecare agrees to assume all costs of obtaining
United States F.D.A. approval for the Products in as timely a manner as
reasonably possible.
(c) Subject only to obtaining the necessary marketing approvals to
sell Products in a particular territory, Gynecare will use reasonable efforts to
promote and sell Products on a Worldwide basis.
(d) Throughout the term of this Agreement, Gynecare will be
responsible for maintaining a minimum of $2,000,000.00 product liability
insurance.
ARTICLE 11
TERM AND TERMINATION
11.1 TERM. The term of this Agreement shall commence on the Effective Date
and, unless earlier terminated pursuant to this Article 11, shall continue in
full force and effect until the later of (i) expiration of the last to expire
patent within the Patent Rights or (ii) the abandonment of the last patent
application within the Patent Rights.
11.2 TERMINATION BY GYRUS. Gyrus may terminate this Agreement:
(a) In the event that Gynecare defaults in the performance of any
material obligation hereunder, and such default is not cured by Gynecare within
thirty (30) days after written notice by Gyrus specifying the nature of the
default.
(b) In the event Gynecare fails (other than as a result of Gyrus's
failure to deliver Products with have been properly forecasted and ordered by
Gynecare pursuant to Sections 4.4 and 4.5 above) to purchase, during the first
two years following the date of delivery of first commercial Product by Gyrus to
Gynecare, the Minimum Purchase Requirements for Products as set forth in Exhibit
C and such failure is not cured by Gynecare within thirty (30) days after
written notice by Gyrus specifying such failure.
(c) Immediately upon the institution by Gynecare of insolvency,
receivership, bankruptcy proceedings or any other material proceedings for the
settlement of its debts, including without limitation, a reorganization, a
compromise or arrangement or assignment for the benefit of its creditors, the
institution of such proceedings against Gynecare, Gynecare making an assignment
for the benefit of creditors or Gynecare's dissolution or ceasing to do business
in the normal course.
11.3 TERMINATION BY GYNECARE. Gynecare may terminate this Agreement:
(a) In the event that Gyrus defaults in the performance of any
material obligation hereunder, and such default is not cured by Gyrus within
thirty (30) days after written notice by Gynecare specifying the nature of the
default.
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(b) Immediately upon Gyrus' failure, during any three (3) consecutive
months following the period ending six (6) months after the date of first
commercial sale of the Product by Gynecare, to deliver at least ninety percent
(90%) of Gynecare's requirements for the Products which have been properly
forecasted and ordered by Gynecare pursuant to Sections 4.4 and 4.5 above; or
(c) Immediately upon the institution by Gyrus of insolvency,
receivership or bankruptcy proceedings or any other material proceedings for the
settlement of its debts, including without limitation, a reorganization, a
compromise or arrangement or assignment for the benefit of its creditors; the
institution of such proceedings against Gyrus; Gyrus making an assignment for
the benefit of creditors; or Gyrus's dissolution or ceasing to do business in
the normal course; or
11.4 EFFECT OF TERMINATION.
(a) Any expiration of this Agreement pursuant to Section 11.1 or
termination by Gynecare pursuant to Section 11.3 shall not relieve Gyrus of any
obligation to Gynecare for purchase orders submitted by Gynecare prior to the
effective date of termination. Notwithstanding the foregoing, at Gynecare's
option, and in the event of termination of this Agreement by Gynecare pursuant
to Section 11.3 above, Gynecare may, in addition to any other rights or remedies
it may have, require Gyrus to cease all manufacturing of the Products
manufactured for Gynecare pursuant to this Agreement. Upon the written request
of Gynecare following the expiration of this Agreement pursuant to Section 11.1
or termination of this Agreement by Gynecare pursuant to Section 11.3, Gyrus
shall transfer and deliver to Gynecare, as directed by Gynecare, all completed
Products not yet delivered and any partially completed Products and parts that
Gyrus has produced or acquired specifically for the performance of this
Agreement. Each party shall also promptly return to the other all Confidential
Information and all materials and documents containing Confidential Information,
as well as any copies thereof (except that Gynecare may retain any Confidential
Information necessary to enable Gynecare to fully exercise its license rights
under Section 2, unless such license rights terminate).
(b) Upon any termination of this Agreement by Gyrus pursuant to
Section 11.2, all rights granted to Gynecare by Gyrus pursuant to Article 2
under the Patent Rights, Related Technical Information and Improvements shall
revert to Gyrus.
11.5 SURVIVAL. Sections 3, 7, 8.1(g), 8.2, 8.3, 9. 10.2 (as it relates to
ownership of the tooling), 11, 12 and 13 shall survive the termination or
expiration of this Agreement for any reason. In addition, Section 2 and 6.2
shall survive any termination of this Agreement by Gynecare pursuant to Section
11.3.
11.6 NO WAIVER. The exercise of either party of any right of termination
shall not constitute a waiver of any other rights or remedies available to such
party for violation of the terms of this Agreement or under applicable law.
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ARTICLE 12
LIMITATION OF LIABILITY
12.1 LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE TO
THE OTHER PARTY FOR CONSEQUENTIAL, SPECIAL, INDIRECT OR INCIDENTAL DAMAGES
ARISING OUT OF THIS AGREEMENT.
ARTICLE 13
13.1 ASSIGNMENT OF AGREEMENT. Neither party may assign this Agreement
without the prior written consent of the other, which consent will not be
unreasonably withheld.
13.2 SEVERABILITY. The provisions of this Agreement shall be severable,
and if any provision of this Agreement shall be held or declared to be illegal,
invalid, or unenforceable, such illegal, invalid or unenforceable provision
shall be severed from this Agreement and the remainder of the Agreement shall
remain in full force and effect, and the parties shall negotiate a substitute,
legal, valid and enforceable provision that most nearly reflects the parties'
intent in entering into this Agreement.
13.3 NOTICES.
(a) Any notice provided for herein may be given to Gynecare addressed
to:
Gynecare, Inc.
125 Constitution Drive
Menlo Park, California 94025
Attn: Malcolm Farnsworth
With a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Robert T. Clarkson, Esq.
(b) Any notice provided for herein may be given to Gyrus addressed
to:
Gyrus Medical, Ltd.
St. Mellons Techbase, Fountain Lane,
St. Mellons, Cardiff CF3 0LX U.K.
Attn: Mark Goble
(c) Any payment, notice, or other communication required or
contemplated by this Agreement shall be sufficiently made or given on the
date of receipt if sent by certified or registered
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mail, postage prepaid, or by special courier, addressed as set forth above,
or such other address as shall be designated by written notice given to the
other party.
13.4 WAIVER. No provision of this Agreement shall be deemed waived, unless
such waiver shall be in writing and signed by the party against which the waiver
is sought to be enforced. The waiver by either of the parties hereto of any
breach of any provision hereof by the other party shall not be construed to be
either a waiver of any succeeding breach of any such provision or a waiver of
the provision itself.
13.5 ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes and cancels all previous written or oral understandings, agreements,
negotiations, commitments, or any other writings or communications with respect
to such subject matter.
13.6 MODIFICATION. This Agreement may not be changed or modified in any
manner except by any instrument in writing signed by each of the parties.
13.7 GOVERNING LAW. This Agreement shall be in all respects interpreted
and construed in accordance with and be governed by the laws of the State of
California, without reference to its conflicts of laws principles. In the event
litigation is commenced by Gyrus, the litigation shall take place in San Mateo
County or Santa Clara County, California; in the event litigation is initiated
by Gynecare, litigation shall take place in Wales, United Kingdom.
13.8 CONFIDENTIALITY OF AGREEMENT. Both Gynecare and Gyrus agree that the
terms and conditions of this Agreement shall be treated as confidential
information and that no reference to the terms and conditions of this Agreement
or to activities pertaining thereto can be made in any form without the prior
written consent of the other party; provided, however, that the general
existence of this Agreement shall not be treated as confidential information and
that either party may disclose the terms and conditions of this Agreement:
(a) as required by any court or other governmental body;
(b) as otherwise required by law;
(c) to legal counsel of the parties;
(d) in confidence, to accountants, banks, proposed investors, and
financing sources and their advisors;
(e) in confidence, in connection with the enforcement of this
Agreement or rights under this Agreement; or
(f) in confidence, in connection with a merger or acquisition or
proposed merger or acquisition, or the like.
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13.9 INDEPENDENT CONTRACTORS. The relationship of the parties hereto is
that of independent contractors. Neither party hereto is an agent, partner or
joint venturer of the other for any purpose.
13.10 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and both together shall be
deemed to be one and the same agreement.
13.11 Force Majeure. Nonperformance of either party shall be excused
to the extent that performance is rendered impossible by strike, fire, flood,
governmental acts or orders or restrictions, failure of suppliers, or any other
reason where failure to perform is beyond the reasonable control of and is not
caused by the negligence of the nonperforming party.
IN WITNESS WHEREOF, Gynecare and Gyrus have executed this Agreement, in
duplicate originals, as of the Effective Date.
GYNECARE, INC. GYRUS MEDICAL, LTD.
By: /s/ Malcolm M. Farnsworth, Jr. By: /s/ Mark Goble
Title: Chief Financial Officer Title: Managing Director
Date: July 21, 1995 Date: July 24, 1995
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EXHIBIT A
PATENT RIGHTS
Atty File Number Title of Application
<PAGE>
EXHIBIT B
PRODUCTS
<PAGE>
EXHIBIT C
MINIMUM PURCHASE REQUIREMENTS
PERIOD MINIMUMS
First year following date of [*] Controllers
delivery of first commercial [*] Disposable Electrodes
Product to Gynecare
Second year Following date [*] Controllers
of delivery of first [*] Disposable Electrodes
commercial Product to Gynecare
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<PAGE>
AMENDMENT TO OEM SUPPLY AND MANUFACTURING
LICENSE AGREEMENT
THIS AMENDMENT, entered into as of December 13, 1995, by and between
Gynecare, Inc., a California corporation with principal offices at 235
Constitution Drive, Menlo Park, California 94025 ("Gynecare") and Gyrus Medical,
Ltd., a United Kingdom corporation, with principal office at Fountain Lane, St.
Mellons, Cardiff CF3 0LX ("Gyrus") amends that certain OEM Supply and
Manufacturing License Agreement (the "Agreement") dated July 24, 1995 by and
between Gynecare and Gyrus. This Amendment, among other things, (i) provides
for a prepayment of certain amounts by Gynecare to Gyrus in exchange for Gyrus'
firm commitment to meet certain development milestones by certain specified
dates; and (ii) provides Gynecare with an option to extend the rights granted by
Gyrus to Gynecare pursuant to the Agreement to include the field of laparoscopy
(as hereinafter defined).
Pursuant to the Amendment, the Agreement is hereby amended as follows:
1. Pursuant to Section 5.2 of the Agreement, Gynecare has already paid
Gyrus a total sum of [*]. Such payment has been made in three separate
installments of [*], corresponding to installments (i), (ii) and (iii) required
by Section 5.2. Although payments by Gynecare with respect to installments (iv)
and (v) of Section 5.2 have not yet become due, Gynecare hereby agrees, on or
before the effective date of this Amendment, to prepay Gyrus the amount of [*].
In consideration of such prepayment by Gynecare to Gyrus, Gyrus hereby firmly
commits to meet each of the following milestones by the dates specified:
a. Complete first human use of clinical safety and efficacy and
supply applicable information for the submission of the 510(k) to the FDA, in
each case on or before [*]; and
b. Preproduction first article Product (as defined in the Agreement)
approval obtained on or before [*]; and
c. First commercial Product release on or before [*].
Gyrus' failure to meet any of the above milestones by the dates specified
shall be deemed defaults by Gyrus in material obligations under the Agreement.
In any such event, Gynecare, at its sole option, shall be entitled to terminate
the Agreement pursuant to Section 11.3(a) for the Agreement, with any such
termination resulting in the effects provided pursuant to Section 11.4(a) of the
Agreement.
Except as modified by this Paragraph 1, Section 5.2 of the Agreement shall
remain in force in all respects.
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<PAGE>
2. Notwithstanding the consequences of Gyrus' failure to meet the
milestones specified in Clause 1 and hereafter in Clause 4(b), such failure to
meet the milestones shall not be deemed a failure should the failure occur as a
result of material changes to the milestones as may either be imposed by
Gynecare or by such third parties under the control of Gynecare as may be
required to complete the milestones. Material changes may comprise but are not
limited to changes in product specification, clinical protocols and third party
approvals.
3. Pursuant to Section 10.2(a) of Agreement, Gynecare agrees to pay
Gyrus, upon the effective date of this Amendment, the sum of [*] (less any
amounts that have already been paid by Gynecare to Gyrus pursuant to Section
10.2 of the Agreement). Any custom tooling expenses in excess of [*] shall be
subject to prior review and approval by Gynecare.
4. Gyrus hereby grants Gynecare an option to extend the field (as defined
in Section 1.1 of the Agreement) for which rights have been granted by Gyrus to
Gynecare in accordance with the following:
a. Gynecare will have the option to extend the Field to include the
field of laparoscopy. In the event that Gynecare chooses to exercise this
option, (i) Gynecare shall make a nonrefundable payment to Gyrus in the amount
of [*] and (ii) Section 1.1 of the Agreement shall be amended to include the
following new sentence:
"Field shall also include all applications for Products as modified by
the inclusion of [*] but for the avoidance of doubt, excluding any
Product applications in the fields of [*]."
b. Gynecare shall have ninety (90) days following the effective date
of this Amendment to exercise its option to extend the Field in accordance with
this Amendment; provided; however, that if Gyrus has not satisfied milestone (a)
provided in paragraph 1 above within such 90-day period, the period to exercise
Gynecare's option shall be extended until thirty (30) days following the date
that Gyrus completes milestone (a).
c. In the event that Gynecare exercises its option to extend the
Field, Gynecare and Gyrus agree to negotiate appropriate Product Development
Milestones, similar to those contained in Section 5.2 of the Agreement (as
amended pursuant to this Amendment). Such development milestones shall be firm
commitments of Gyrus which, if not met by Gyrus, shall result in Gyrus' default
of material obligations pursuant to Section 11.3(a) of the Agreement.
5. Except as specifically modified and amended by this Amendment, the
Agreement is ratified and affirmed by the parties hereto. This Amendment is
incorporated into and made a part of the certain OEM Supply and Manufacturing
License Agreement between Gynecare and Gyrus.
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GYNECARE, INC. GYRUS MEDICAL, LTD.
By: /s/ William M. Hunter By: /s/ Mark Goble
Title: President & CEO Title: Managing Director
Date: January 17, 1996 Date: December 21, 1995
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SECOND AMENDMENT TO OEM SUPPLY AND MANUFACTURING
LICENSE AGREEMENT
THIS SECOND AMENDMENT ("Second Amendment"), entered into as of March 31,
1996, by and between Gynecare, Inc., a California corporation with principal
offices at 125 Constitution Drive, Menlo Park, California 94025 ("Gynecare") and
Gyrus Medical, Ltd., a United Kingdom corporation, with principal offices at St.
Mellons Techbase, Fountain Lane, St. Mellons, Cardiff CF3 0LX U.K. ("Gyrus")
amends that certain OEM Supply and Manufacturing License Agreement dated July
24, 1995, by and between Gynecare and Gyrus, as amended by the Amendment to OEM
Supply and Manufacturing License Agreement dated December 13, 1995, by and
between Gynecare and Gyrus (both referred to hereafter as the "Agreement").
This Second Amendment, among other things, (i) extends the rights Granted by
Gyrus to Gynecare pursuant to the Agreement to include the field of laparoscopy;
and (ii) and provides for payment and other terms for the extension of such
field.
Pursuant to this Amendment, the Agreement is hereby amended as follows:
1. SECTION 1.1. The following shall be added to the end of Section 1.1
of the Agreement:
"Field shall also include all applications for Products as modified by
the inclusion of [*] but for the avoidance of doubt, excluding any
Product applications in the fields of [*]. The Field shall also
include a non-exclusive right for the use of technology in procedures
of [*]."
2. SECTION 2.2. Promptly after the effective date of this Second
Amendment, Gyrus shall deliver all materials required under Section 2.2 of the
Agreement concerning the Field which have not previously been delivered, to
Gynecare.
3. SECTION 5.1(a). The following new Section 5.1(a) shall be added to
the Agreement:
"For the purposes of this Section 5.1(a), Section 5.2(a) and Exhibit
C, Products in the extended portion of the Field as set forth in
Section 1 of the Second Amendment shall be referred to as "Laparoscopy
Products." Such Laparoscopy Products may be Equipment Products
("Equipment Laparoscopy Products") or Disposable Products ("Disposable
Laparoscopy Product"). Gyrus shall sell the Laparoscopy Products to
Gynecare at purchase prices equal to [*] (after the Laparoscopy
Deposit, as defined in Section 5.2(a) below, has been fully amortized,
this percentage will be [*] of Gynecare's Average Net Selling Price
for the Laparoscopy Products in accordance with the following: (i)
the purchase price computation for any particular Laparoscopy Product
shall be made at the time of the delivery of such Laparoscopy Product
by
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Gyrus to Gynecare; (ii) the average Net Selling Price applied with
respect to the sale of a Laparoscopy Product during any particular
calendar quarter other than the first calendar quarter in which such
Laparoscopy Product is sold shall be equal to the average of the Net
Selling Prices received by Gynecare for such Laparoscopy Products
during the previous calendar quarter; (iii) the purchase price used
for a Laparoscopy Product during the first calendar quarter during
which such Laparoscopy Product is sold shall be Gynecare's published
list price for such Laparoscopy Product; and (iv) with the exception
of delivery to the United Kingdom, the purchase price determined
according to the above calculation shall be inclusive of all
applicable taxes (including without limitation any applicable sales,
use or value-added taxes) and Gynecare shall not under any
circumstances be separately invoiced for any such taxes. Within
twenty (20) days following the end of each calendar quarter, Gynecare
will send Gyrus written notice setting forth the average Net Selling
Price received by Gynecare for the Laparoscopy Products during such
quarter. Notwithstanding anything in this Section 5.1(a) to the
contrary, the price at which Gynecare shall purchase the Disposable
Laparoscopy Products from Gyrus shall not be less than [*]; provided,
however, that Gyrus agrees to negotiate in good faith with Gynecare to
reduce such minimum price following the second anniversary of the date
of delivery of first commercial Laparoscopy Product to Gynecare if the
volume of Laparoscopy Product purchases by Gynecare from Gyrus exceeds
twice the Minimum Purchase Requirements as set forth on Exhibit C."
4. SECTION 5.2(a). The following new Section 5.2(a) shall be added to
the Agreement:
"The sum of [*], shall be, for the purposes of Section 5.1(a) and this
Section 5.2(a) the "Laparoscopy Deposit." Said amount shall be
payable to Gyrus in installments as follows: (i) [*]; (ii) [*]
submission of a [*] (Gyrus shall complete this on or before [*]); (iii)
[*] upon successful completion of animal laboratory tests and defining
product specification (Gyrus shall complete this on or before [*]);
(iv) [*] upon supply of information by Gyrus to Gynecare necessary to
complete a 510(k) submission to the FDA (Gyrus shall complete this on
or before [*]); (v) [*] upon completion of first human use trial of
safety and effectiveness (Gyrus shall complete this on or before [*]);
and (vi) [*] upon the first Laparoscopy Product release on or before
[*]. Notwithstanding the foregoing, Gynecare shall have no right of
recovery of payments past or due and shall have no obligation to pay
Gyrus any of the installments described above in the event that this
Agreement has been terminated for any reason, prior to the time that
such installment has become due (unless such installment has already
become due and has not yet been paid by Gynecare). The Laparoscopy
Deposit shall be applied as follows, until fully amortized, against
the purchase price which would otherwise be charged by Gyrus to
Gynecare for Laparoscopy Product purchases: (x) for each
- ----------
* Confidential treatment requested. Confidential portion filed separately
with the Commission.
-2-
<PAGE>
purchase of a Disposable Laparoscopy Product by Gynecare from Gyrus,
[*] of the Net Selling Price of such Disposable Laparoscopy Product
shall be credited against and subtracted from the Laparoscopy Deposit;
and (y) for each purchase of an Equipment Laparoscopy Product by
Gynecare from Gyrus, [*] of the Net Selling Price of such Equipment
Laparoscopy Product shall be credited against and subtracted from the
Laparoscopy Deposit.
Installments (ii), (iii), (iv), (v) and (vi) shall be paid by
Gynecare to Gyrus in cash or in shares of Gynecare common stock in
accordance with the following procedures:
a. By April 15, 1996, Gynecare will notify Gyrus whether: (x) Gyrus
will receive the payments in cash; or (y) Gyrus will have the
option to choose whether it will receive cash or Gynecare common
stock. If Gynecare does not notify Gyrus, the payments will be
in cash.
b. If Gyrus receives the option to receive either Gynecare stock or
cash, as set forth in a.(y) above, Gyrus will notify Gynecare of
its choice by April 30, 1996. If Gyrus does not notify Gynecare,
the payments will be in cash.
c. If Gyrus elects to receive stock, the number of shares of
Gynecare stock delivered by Gyrus shall be equal to the
installment payment due divided by the price of [*] per share.
d. At the time of Gyrus' election to receive stock, Gyrus shall
elect whether it would like delivery of the stock for
installments due before November 23, 1996 deferred until after
November 23, 1996. If Gyrus does not notify Gynecare of such
election, Gynecare will defer deliver of stock for installments
due before November 23, 1996 until after November 23, 1996.
e. If delivery of stock is deferred until after November 23, 1996,
Gynecare shall deliver such stock by December 23, 1996.
f. All stock delivered to Gyrus hereunder shall be subject to the
restrictions set forth on Exhibit D attached to the Second
Amendment.
Gyrus' failure to meet any of the milestones set forth in (ii), (iii),
(iv), (v) or (vi) above by the dates specified shall be deemed
defaults by Gyrus in material obligations under this Agreement. In
any such event, Gynecare, at its sole option, shall be entitled to
terminate this Agreement pursuant to Section 11.3(a) of this
Agreement, with any such termination resulting in the effects provided
pursuant to Section 11.4 of this Agreement.
- ----------
* Confidential treatment requested. Confidential portion filed separately
with the Commission.
-3-
<PAGE>
Notwithstanding the
consequences of Gyrus' failure to meet the milestones specified in
this Section, such failure to meet the milestones shall not be deemed
a failure should the failure occur as a result of material changes to
the milestones as may be imposed by Gynecare or by third parties under
the control of Gynecare as may be required to complete the milestones.
Material changes may comprise, but are not limited to changes in
product specification, clinical protocols and third party approvals."
5. SECTION 5.3. The phrase "or Laparoscopy Deposit" shall be added after
the word "Deposit" in the fourth line of Section 5.3 of the Agreement.
6. SUBLICENSE. All licenses granted to Gynecare under the Agreement
concerning the extended portion of the Field as set forth in Section 1 of the
Second Amendment shall be sublicensable by Gynecare, subject to Gyrus' approval,
which approval shall not be unreasonably withheld.
7. EXHIBIT A. Exhibit A of the Agreement shall be replaced with Exhibit
A attached to this Second Amendment.
8. EXHIBIT B. The text of Exhibit B of this Second Amendment shall be
added to Exhibit B of the Agreement.
9. EXHIBIT C. Exhibit C of the Agreement shall be replaced with Exhibit
C attached to this Second Amendment.
10. RATIFICATION. Except as specifically modified and amended by this
Second Amendment, the Agreement is ratified and affirmed by the parties hereto.
This Second Amendment is incorporated into and made a part of the Agreement.
GYNECARE, INC. GYRUS MEDICAL, LTD.
By: /s/ William M. Hunter By: /s/ Mark Goble
Title: President & CEO Title: Managing Director
Date: March 29, 1996 Date: March 29, 1996
-4-
<PAGE>
INTELLECTUAL PROPERTY
[*]
EXHIBIT A
<TABLE>
No. Title: Short Title (OLD TITLE) Application No. Status Filing Date Priority Date
<S> <C> <C> <C> <C> <C>
1 Variable Frequency Resonant Electrosurgery 5099840 USA - granted/full 01/23/89 01/20/88
(applicable to [*]) 0325456 EPO - granted/full 07/26/89 01/20/88
2 [*]
3 [*]
4 [*]
5 [*]
6 [*]
7 [*]
8 [*]
9 [*]
10 [*]
</TABLE>
[*]
- ----------
* Confidential treatment requested. Confidential portion filed separately
with the Commission.
<PAGE>
EXHIBIT B
PRODUCTS
The Products for the extended portion of the Field as set forth in section 1 of
the Second Amendment shall be determined and specified upon completion of
milestone (iii) as set forth in section 4 of the Second Amendment.
<PAGE>
EXHIBIT C
MINIMUM PURCHASE REQUIREMENTS
PERIOD MINIMUMS
First year following date of [*] Controllers
delivery of first commercial [*] Disposable Electrodes
Product to Gynecare
Second year following date [*] Controllers
of delivery of first commercial [*] Disposable Electrodes
Product to Gynecare
MINIMUM PURCHASE REQUIREMENTS FOR LAPAROSCOPY PRODUCTS
PERIOD MINIMUMS
First year following date of [*] Controllers
delivery of first commercial [*] Disposable Electrodes
Laparoscopy Product to Gynecare
Second year following date [*] Controllers
of delivery of first commercial [*] Disposable Electrodes
Laparoscopy Product to Gynecare
- ----------
* Confidential treatment requested. Confidential portion filed separately
with the Commission.
<PAGE>
EXHIBIT D
SECURITIES RESTRICTIONS
These restrictions will be provided by Gynecare to Gyrus by April 15, 1995.
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET LOSS
PER SHARE (1)
<TABLE>
<CAPTION>
Three months
ended March 31,
1996 1995
------------- -------------
<S> <C> <C>
Primary and Full Diluted:
Weighted average common shares outstanding for the period. . . . 8,155,000 --
Common Equivalent Shares pursuant to Staff Accounting
Bulletin No. 83 . . . . . . . . . . . . . . . . . . . . . . . . -- 1,658,000
------------- -------------
Shares used in computing net loss per share. . . . . . . . . . . 8,155,000 1,658,000
------------- -------------
------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,048,000) $ (843,000)
------------- -------------
------------- -------------
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . ($0.25) ($0.51)
------ ------
------ ------
</TABLE>
(1) Primary and fully diluted calculations are substantially the same.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,963
<SECURITIES> 9,030
<RECEIVABLES> 587
<ALLOWANCES> 0
<INVENTORY> 1,020
<CURRENT-ASSETS> 15,915
<PP&E> 1,250
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,787
<CURRENT-LIABILITIES> 1,122
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 24,293
<TOTAL-LIABILITY-AND-EQUITY> 25,787
<SALES> 257
<TOTAL-REVENUES> 257
<CGS> 321
<TOTAL-COSTS> 321
<OTHER-EXPENSES> 1,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,048)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
