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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
COMMISSION FILE NUMBER: 0-27214
GYNECARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3197941
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
235 CONSTITUTION DRIVE, MENLO PARK, CA 94025
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(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 614-2500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 12,
1997 as reported on the Nasdaq National Market, was approximately
$19,027,000. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 12, 1997, the registrant had
outstanding 8,298,000 shares of Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part II of this
Form 10-K certain portions of its 1997 Annual Report to Stockholders (the
"Annual Report"). In addition, the Registrant has incorporated by reference
into Part III of this Form 10-K portions of its Proxy Statement for
Registrant's Annual Meeting of Stockholders to be held on May 28, 1997.
THE BUSINESS SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-K
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
REGISTRANT'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE THOSE DISCUSSED IN THE SECTION ENTITLED "BUSINESS --
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK" COMMENCING ON
PAGE 18.
THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM IS AN INVESTIGATIONAL
DEVICE AND HAS NOT BEEN APPROVED BY THE FDA FOR MARKETING IN THE UNITED
STATES. THE SYSTEM IS AVAILABLE FOR SALE IN CERTAIN MARKETS INTERNATIONALLY.
PART I
ITEM 1. BUSINESS
OVERVIEW
Gynecare, Inc. ("Gynecare" or the "Company") designs, develops and
markets minimally invasive and cost-effective medical devices for the
treatment of uterine disorders. The Company's first product, the
ThermaChoice-TM- Uterine Balloon Therapy-TM- system is used to treat women
who experience dysfunctional uterine bleeding. ThermaChoice is designed as a
minimally invasive procedure that can be performed in eight minutes in a
clinic or physician's office. The system is currently under investigation in
the U.S. and approved for marketing in Canada and in over 30 other countries.
Gynecare's second product, the VersaPoint-TM- Bipolar Electrosurgery system,
is used to treat women diagnosed with benign uterine pathologies including
fibroids, polyps, adhesions and divided septa. The VersaPoint microelectrode
vaporizes, cuts and desiccates tissue through the use of proprietary bipolar
technology. In November 1996, Gynecare received 510(k) clearance from the FDA
to market the VersaPoint system in the United States.
Based on a World Health Organization study and the Company's market
research, the Company believes that approximately 19 percent of all
menstruating women age 30 to 50 who live in the United States, Europe, Canada
and Japan perceive their menstrual bleeding to be excessive. Women who
perceive their menstrual bleeding to be excessive, including women who are
clinically diagnosed with dysfunctional or excessive menstrual bleeding
("menorrhagia"), may seek treatment if this condition interferes with their
work, family and social commitments and sexual activity. Based on Gynecare's
market research and industry sources, it is estimated that benign uterine
pathologies, such as fibroids, occur in 20 to 30 percent of women age 30 and
older. Symptoms of benign uterine pathologies include increased menstrual
bleeding, pain or pressure in the abdomen, and infertility problems.
Existing treatment options for dysfunctional uterine bleeding and fibroids
have been limited to long-term drug therapy, temporary treatment by
dilatation and curettage ("D&C") and procedures such as surgical ablation,
surgical resection or hysterectomy.
Gynecare's patented ThermaChoice Uterine Balloon Therapy system consists of
a disposable balloon catheter which is inserted vaginally into the uterus to
ablate the endometrial lining to a depth sufficient to inhibit its regrowth
during the menstrual cycle, thereby reducing or eliminating dysfunctional
uterine bleeding. The catheter is designed to be approximately 5 millimeters in
diameter, enabling insertion into the uterus through the cervix without
dilation, in most cases. This design enables physicians in many cases to treat
patients in an outpatient
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setting using local anesthesia and intravenous (IV) sedation. The system
also includes a controller that continuously monitors pressure, regulates
fluid temperature and controls therapy time. Since the procedure is not
technique-dependent, the Company believes most gynecologists will be able to
perform the procedure without specialized training. Gynecare commenced
commercial shipments of the ThermaChoice system in Europe and Canada in March
1995.
In June 1994, the Company initiated international clinical trials to
treat patients with dysfunctional uterine bleeding using the ThermaChoice
Uterine Balloon Therapy system. In October 1995, the FDA granted the Company
an Investigational Device Exemption ("IDE") to begin a multi-center,
randomized, comparative clinical trial to treat approximately 250 patients
diagnosed with menorrhagia. A twelve month follow-up with additional patient
contact after 24 and 36 months will be required on all patients. Gynecare
began its U.S. clinical trials in January 1996 and completed the patient
treatment phase in October 1996. The Company is currently collecting patient
follow-up data and plans to submit a Pre-Market Approval (PMA) application to
the FDA in 1997.*
Gynecare's proprietary VersaPoint system consists of a bipolar
electrosurgical generator and a disposable microelectrode, which is inserted
vaginally to cut, desiccate or vaporize uterine fibroids, polyps, adhesions
and divided septa. The microelectrodes are designed to be used with a 5
millimeter operative hysteroscope which can be inserted into the uterus
through the cervix without having to dilate the cervix, in most cases. This
design enables physicians in many cases to treat patients in an outpatient
setting using local anesthesia and IV sedation. Additionally, the VersaPoint
Bipolar Electrosurgery system operates in a normal saline solution, thus
reducing the risk associated with certain fluids used with conventional
monopolar electrosurgery of electrolyte imbalance in the patient's
bloodstream. In November 1996, Gynecare received 510(k) marketing clearance
from the FDA. The Company plans to begin marketing the system in the United
States during 1997.*
Gynecare's goal is to become the worldwide leader in developing and
marketing minimally invasive and cost-effective medical devices for the
treatment of uterine disorders. Gynecare initially plans to establish the
ThermaChoice Uterine Balloon Therapy system as the preferred therapy for
treating women who experience dysfunctional uterine bleeding. The Company
also plans to conduct clinical trials for new indications for the
ThermaChoice Uterine Balloon Therapy system, including treatment of women
whose menstrual bleeding adversely affects their lifestyle, treatment of
postmenopausal women who experience uterine bleeding as a side effect of
hormone replacement therapy and treatment of women who have dysfunctional
uterine bleeding caused by small submucosal uterine fibroids.* Additionally,
the Company intends to establish the VersaPoint system as the preferred
therapy for treating women with benign uterine pathologies including
fibroids, polyps, adhesions and divided septa.* During fiscal 1997, Gynecare
intends to develop the VersaPoint system for use in laparoscopic applications
for the treatment of gynecological conditions such as serosal uterine
fibroids and endometriosis, as well as general surgical indications.*
In connection with the Company's incorporation in March 1994, Origin
Medsystems, Inc. ("Origin"), a subsidiary of Guidant Corporation, assigned to
Gynecare its license to patents and technology covering the ThermaChoice
Uterine Balloon Therapy system developed through the date of assignment.
Guidant, through Origin, owned approximately 31% of the Common Stock of the
Company at December 31, 1996. In July 1995, the Company entered into an
exclusive license and OEM supply agreement with Gyrus Medical, Ltd. ("Gyrus")
of Cardiff, Wales, for the VersaPoint system for hysteroscopic applications
in gynecology. This agreement was extended to include the field of
laparoscopy during the first quarter of 1996.
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* This is a forward-looking statement reflecting current expectations of the
Company. Such forward-looking statement involves risks and uncertainties and
actual results may differ materially from those in such statement. As such,
there can be no assurance that the Company's actual future performance will
meet the Company's current expectations. Investors are strongly encouraged to
review the section entitled "Factors Affecting Operating Results and Market
Price of Stock" commencing on page 18, for a discussion of factors that could
affect future performance.
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BACKGROUND
MENSTRUATION
The normal menstrual cycle, which is controlled by the pituitary and
ovarian hormones, begins at the onset of menstruation (typically between the
ages of 11 and 14) and ends at the onset of menopause (typically between the
ages of 45 and 55). The endometrial lining of the uterus builds up each
month in preparation for pregnancy, sheds if no pregnancy occurs, and then
regenerates for another 28 day cycle. Shedding of the endometrial lining of
the uterus results in menstrual bleeding which usually lasts four to seven
days within a 28 day cycle. Normal blood loss during menstruation is
considered to be 25 to 79 milliliters per cycle.
The diagram below depicts a woman's reproductive system with a normal
uterine cavity.
[Inserted here is a diagram of a woman's uterine and reproductive anatomy.]
EXCESSIVE MENSTRUAL BLEEDING
Abnormal menstrual bleeding includes menstrual bleeding in excess of the
normal amount, prolonged bleeding beyond seven days duration at the expected
time of menstruation or bleeding more frequently than 24-day intervals.
Menstrual irregularities occur across the entire age span of menstruating
women. From the onset of menstruation to menopause, menorrhagia is most
often due to hormonal imbalances or uterine fibroids. Excessive menstrual
bleeding, or menorrhagia, is clinically defined as total blood loss exceeding
80 milliliters per cycle. Any bleeding in postmenopausal women is abnormal
and is commonly a side effect of hormone replacement therapy.
Women who perceive their menstrual bleeding to be excessive, including
women who are clinically diagnosed with menorrhagia, may seek treatment if
this condition interferes with their work, family and social commitments and
sexual activity. A World Health Organization survey of menstrual perceptions
and patterns among 5,322 women in ten countries found that approximately 19%
of women consider their menstruation to be abnormally heavy. Additionally,
based on its United States survey of 400 women over the age 30, the Company
believes that 19% of women in the United States also perceive their menstrual
bleeding to be excessive.
FIBROIDS AND OTHER BENIGN UTERINE PATHOLOGY
A fibroid is the most common benign pathology found inside a woman's
pelvis. Based on Gynecare's market research and industry sources, it is
estimated that fibroids occur in 20-30% of women age 30 and older. A fibroid
is a benign growth made up of fibrous and muscular tissue and occurs in the
wall of the uterus (intramural), on the inside wall of the uterus
(submucosal), or on the outside wall of the uterus (serosal). A polyp is a
small, benign mass of tissue that projects out of the uterine lining. An
adhesion is a band of fibrous scar tissue adhering to the endometrial lining,
which may interfere with fertility or pregnancy. A divided septate is a
uterus in which the
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septum (a thin wall) abnormally divides the uterus into two separate
cavities, thereby preventing a normal pregnancy. Benign uterine pathology
can cause increased menstrual bleeding, pain or pressure in the abdomen, and
infertility problems.
The diagram below depicts a woman's uterus with benign uterine pathology,
such as fibroids, polyps, and adhesions.
[Inserted here is a diagram of a uterus with the benign pathologies:
fibroids, adhesions and polyps.]
CURRENT THERAPIES AND THEIR LIMITATIONS
Successful treatment for dysfunctional uterine bleeding is usually
defined by gynecologists as a reduction from a condition of excessive
menstrual bleeding to normal bleeding ("eumenorrhea"), light bleeding or
spotting ("hypomenorrhea") or no bleeding at all ("amenorrhea"). Success in
the treatment of benign uterine pathology is defined as relief of the
symptoms experienced by the patient, such as menstrual bleeding, pain or
pressure in the abdomen or infertility. Current therapy for dysfunctional
uterine bleeding and fibroids typically begins with drug therapy. For
patients who do not respond to or cannot tolerate the side effects of drug
therapy, a second treatment option is frequently dilatation and curettage
("D&C"). In cases where drug therapy and D&C are not effective in reducing
menstrual flow, surgical ablation, surgical resection or hysterectomy are the
only therapeutic alternatives.
DRUG THERAPY
Drug therapy using estrogen-progesterone medications, such as oral
contraceptives, or other drugs such as GnRH agonists, is the most widely
prescribed medical treatment for dysfunctional uterine bleeding and fibroids.
Estrogen-progesterone medications are used to regulate the menstrual cycle
and to reduce bleeding. GnRH agonists shrink the size of fibroids, thereby
alleviating symptoms and reducing the amount of bleeding from fibroids.
However, drug therapy is effective only in approximately 60% of patients. In
addition, an estimated 40% of patients on drug therapy experience adverse
side effects. Drug therapy may be prescribed by any physician, is normally
reimbursable by third parties and does not result in infertility or involve
the disadvantages of a surgical procedure. Side effects from drug therapy
include nausea, bloating, weight gain, depression and mood swings. In many
instances, drug therapy must continue until the onset of menopause.
DILATATION AND CURETTAGE
Dilitation and curettage is generally used in conjunction with drug
therapy and is performed as a diagnostic or therapeutic procedure in which
the uterine contents are either scraped away by an instrument or removed
through vacuum aspiration. The 15 to 30 minute procedure is typically
performed in a hospital operating room or outpatient surgery center using a
general anesthetic or, less frequently, a local anesthetic which may be
combined with IV sedation. The patient is usually discharged from the
hospital or clinic on the day of surgery. The Company estimates that the
average third-party reimbursement for hospital and physician charges for a
D&C in the United States ranges from approximately $1,600 to $2,900. Based
on its 1995 survey of 200 gynecologists in the United States, the Company
believes that over 90% of gynecologists are trained to perform the procedure.
Based on the same survey, the Company believes that D&C is effective in
reducing bleeding in approximately 43% of cases. The
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procedure must be repeated periodically, as it is usually effective only
during the first few menstrual cycles after the procedure, and consequently
subjects the patient to the risks of uterine perforation, infection and the
complications of general anesthesia each time it is performed.
SURGICAL ABLATION AND RESECTION
Surgical ablation is a less invasive monopolar electrosurgical procedure
using a resectoscope, a video monitor, a fluid distention medium such as
glycine or sorbitol, and a surgical ablation device such as a rollerball
electrode or laser to surgically ablate the endometrial lining of the uterus.
Surgical resection is a monopolar electrosurgical procedure that involves
cutting the benign uterine tissue, such as a fibroid, with an electrode loop
and removing the pieces. Resection produces fibroid "chips," which can
obstruct the physician's field of vision. The physician must repeatedly
withdraw the resectoscope utilized in the procedure to remove the resected
tissue, which results in increased procedure time. These procedures require
approximately 30 to 60 minutes to complete in a hospital or outpatient
surgery center, typically under general anesthesia, and can result in patient
infertility. Hospitalization frequently lasts one to two days with full
patient recovery ranging from several days to several weeks. The Company
believes that in the United States average third-party reimbursement is
approximately $2,000 to $4,200 for hospital and physician charges.
Surgical ablation for dysfunctional uterine bleeding and resection for
fibroids are effective treatments in 70% to 90% of cases, with the success
rate being highly dependent upon the surgeon's skill level. Since their
introduction in the mid-1980s, these procedures have only been adopted by a
small number of highly trained surgical gynecologists. Adoption has been
limited due to the high surgeon skill level required and the risks and
complications associated with the procedure. This highly technique-dependent
procedure may require the physician to complete over 100 cases to reach
proficiency.
The rate of complications from surgical ablation and resection is
approximately 6.5%. Uterine perforation is one of the most commonly recorded
complications and is serious when it results in damage to the internal iliac
vessels, ureter, bowel or bladder. Other complications include major
hemorrhaging from uterine vessels, air embolus from gas-cooled lasers,
post-operative intrauterine or tubal infection, complications associated with
general anesthesia and fluid overload due to use of glycine and sorbitol.
Fluid overload caused by glycine and sorbitol, if allowed to build up beyond
certain levels, can cause abnormally low concentrations of sodium ions in the
blood ("hyponatremia"), inducing seizures, congestive heart failure, brain
damage, or even death.
HYSTERECTOMY
The most common surgical procedure for definitive treatment of
dysfunctional uterine bleeding or fibroids is hysterectomy, the surgical
removal of the uterus through the vagina or abdominal wall, which results in
permanent infertility. Hysterectomy is the second most commonly performed
major surgical procedure for women in the United States. Approximately 50% of
the estimated 600,000 procedures in the United States each year are performed
to treat dysfunctional uterine bleeding and fibroids. A hysterectomy
involves surgical risk, hospitalization, a lengthy recovery period and
significant expense. Minimally invasive surgery techniques, such as
laparoscopically assisted vaginal hysterectomy, are also being used in a
small percentage of cases in the United States.
A hysterectomy typically requires between 30 to 90 minutes in the
operating room under general anesthesia, three to four days of
hospitalization, and two to eight weeks of recovery time, depending on the
type of hysterectomy performed. The average third-party reimbursement for
hospital and physician charges in the United States for hysterectomy ranges
from approximately $5,100 to $10,200.
The rate of serious complications from hysterectomy is approximately 3%.
Such complications include hemorrhaging requiring blood transfusions, injury
to the bowel or bladder, intestinal obstruction, life-threatening
cardiopulmonary events and death. Other minor complications, which occur in
up to 40% of patients, include post-operative fever and infections. The
range of long-term adverse effects of hysterectomy include urinary dysfunction,
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surgically induced menopause, constipation, fatigue, changes in sexual
interest and function, depression and other psychiatric morbidity.
STRATEGY
The Company's goal is to become the worldwide leader in developing and
marketing minimally invasive and cost-effective medical devices to treat
uterine disorders. The Company initially plans to establish the ThermaChoice
Uterine Balloon Therapy system as the preferred therapy for treating women
who experience dysfunctional uterine bleeding, and the VersaPoint system as
the preferred therapy for treating women diagnosed with benign pathology
including fibroids, polyps, adhesions and divided septa. In order to achieve
this goal, the Company's marketing strategy is designed to promote the
safety, efficacy, cost-effectiveness and ease of use of its products. A key
element of this strategy is to employ patient and physician educational
programs designed to increase awareness of the Company's products in both the
female and physician population as alternatives to drug therapy and surgery.
Additionally, the Company plans to market its products initially to surgical
gynecologists who can serve as reference centers and who could publish papers
on the clinical benefits of the procedures.
The Company then plans to leverage its relationships with gynecologists
to expand the indications for the ThermaChoice Uterine Balloon Therapy system
and introduce the VersaPoint system. As part of this strategy, the Company is
evaluating new indications for the ThermaChoice Uterine Balloon Therapy
system, including treatment of women whose menstrual bleeding adversely
affects their lifestyle, treatment of postmenopausal women who experience
uterine bleeding as a side effect of hormone replacement therapy and
treatment of women who have excessive menstrual bleeding caused by small
submucosal uterine fibroids. The Company plans to conduct pilot studies
outside the United States to evaluate the safety and efficacy of the
procedure for such other indications and to determine if expanded studies,
including studies in the United States, are justified.* In addition, the
Company intends to begin development of laparoscopic applications of the
VersaPoint system for the treatment of gynecological conditions such as serosal
uterine fibroids and endometriosis, as well as general surgical indications.*
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* This is a forward-looking statement reflecting current expectations of the
Company. Such forward-looking statement involves risks and uncertainties and
actual results may differ materially from those in such statement. As such,
there can be no assurance that the Company's actual future performance will
meet the Company's current expectations. Investors are strongly encouraged
to review the section entitled "Factors Affecting Operating Results and
Market Price of Stock" commencing on page 18, for a discussion of factors
that could affect future performance.
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THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM
Gynecare's ThermaChoice Uterine Balloon Therapy system includes a
disposable balloon catheter and a controller that ablate the endometrial
lining of the uterus using a patented process known as thermal balloon
ablation. The disposable balloon catheter, which contains heating and
sensing elements, is connected to a controller that continuously monitors and
displays catheter pressure, regulates fluid temperature and controls therapy
time.
THERMACHOICE UTERINE BALLOON THERAPY SYSTEM
[Inserted here is a drawing of the Uterine Balloon Therapy system and its
components, which include the controller, catheter, balloon, cable and syringe.]
ThermaChoice Uterine Balloon Therapy is designed as an eight minute,
outpatient procedure that most gynecologists will be able to perform without
specialized training. The physician inserts the flexible, small diameter
balloon catheter vaginally, through the cervix and into the uterus without
first dilating the cervix in most cases. Next the physician inflates the
balloon with a small amount of sterile fluid from a syringe until the
pressure reaches approximately 160-170 millimeters of mercury. The elastic
balloon material is designed to enable the inflated balloon surface to
conform to the shape of each patient's uterus. Once the balloon is properly
inflated, the physician presses the start button on the controller and a
heating element inside the balloon automatically raises the temperature of
the fluid to approximately 87 degrees Celsius and maintains it at such
temperature for approximately eight minutes.
THERMACHOICE UTERINE BALLOON THERAPY
[Inserted here is a drawing of the balloon catheter inserted in the
uterus with the balloon expanded to fill the uterine cavity.]
The controller continuously monitors and displays catheter pressure,
regulates fluid temperature and controls therapy time throughout the
procedure. To ensure patient safety, if any of the preset parameters are
exceeded, the device is automatically deactivated and the procedure
immediately terminated. When the controller indicates that the treatment is
complete, the physician deflates the balloon by withdrawing the fluid and
removes the disposable balloon catheter.
The Company's thermal balloon ablates the endometrial lining to a depth
sufficient to inhibit its regrowth during the menstrual cycle, thereby
reducing or eliminating excessive menstrual bleeding. Similar to a
hysterectomy or surgical ablation and surgical resection, the procedure will
likely result in infertility.
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STATUS OF THERMACHOICE UTERINE BALLOON THERAPY CLINICAL TRIALS
Since June 1994, the Company has conducted international clinical trials
at 14 clinical sites in Australia, Canada and Europe. As of December 1996,
physicians in these centers had treated over 300 patients, with no
intraoperative complications and approximately 2% of patients reporting minor
post-operative complications. In these international studies, success for
ThermaChoice Uterine Balloon Therapy has been defined in substantially the
same manner that gynecologists define success of other current therapies,
which is reducing menstrual bleeding from a condition of excessive bleeding
to normal bleeding, light bleeding or spotting or no bleeding at all. As of
December 1996, clinicians conducting the Company's clinical trials reported a
90% success rate in the 251 patients who had at least six months follow-up.
In October 1995, the Company received FDA approval to begin a
multi-center clinical trial to treat approximately 250 patients diagnosed
with menorrhagia. This trial was conducted at 12 sites in the United States
and two in Canada and will require 12 month follow-up on all patients, with
additional patient contact after 24 and 36 months. Patient treatment began
in January 1996 and was completed in October 1996. The randomized clinical
trial compared ThermaChoice Uterine Balloon Therapy to surgical ablation
using a rollerball electrode. Successful treatment is defined in the
protocol as a reduction in menstrual blood loss to somewhat less than normal
bleeding and overall improvement in lifestyle and, as such, is not the same
measure of success defined in the international studies. The Company is
currently collecting patient follow-up data and plans to submit a PMA
application to the FDA in 1997.*
THE VERSAPOINT BIPOLAR ELECTROSURGERY SYSTEM
Gynecare's VersaPoint Bipolar Electrosurgery system consists of a
bipolar electrosurgical generator and a disposable microelectrode used to
cut, desiccate or vaporize benign uterine pathologies including fibroids,
polyps, adhesions and divided septa. This disposable microelectrode is
connected to the electrosurgical generator which delivers energy to the
microelectrode, enabling it to vaporize tissue on contact. Throughout
therapy, the bipolar electrosurgical generator displays the power and
electrosurgical mode of action.
VERSAPOINT SYSTEM
[Inserted here is a drawing of the VersaPoint system with its
components, which include the generator, handpiece and microelectrode.]
The VersaPoint system is designed as a safe, minimally invasive
treatment for benign uterine pathology. The physician passes the
microelectrode through a 5 millimeter operative hysteroscope which is
inserted into the uterus through the cervix without first dilating the
cervix, in most cases. Next, the physician distends the uterus with normal
saline solution in order to form a working space in the uterine cavity.
Using the hysteroscope, the physician then visualizes the fibroid and
activates the microelectrode. Through the delivery of energy to the
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* This is a forward-looking statement reflecting current expectations of the
Company. Such forward-looking statement involves risks and uncertainties and
actual results may differ materially from those in such statement. As such,
there can be no assurance that the Company's actual future performance will
meet the Company's current expectations. Investors are strongly encouraged to
review the section entitled "Factors Affecting Operating Results and Market
Price of Stock" commencing on page 18, for a discussion of factors that could
affect future performance.
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microelectrode from the bipolar electrosurgical generator, the VersaPoint
system enables the physician to vaporize, cut or dessicate the fibroid
tissue. This process is continued until the entire fibroid is vaporized or
removed.
VERSAPOINT BIPOLAR ELECTROSURGERY
[Inserted here is a drawing of a microelectrode inserted
in the uterus to treat a fibroid.]
The VersaPoint product's bipolar technology allows the use of normal
saline, which is generally considered the optimal medium for hysteroscopic
procedures because it does not affect normal blood chemistry and reduces the
risk of developing electrolyte imbalance. Unlike monopolar electrosurgical
tools which require that a return pad be placed on the patient's thigh or
buttock in order to create an electrical path to the return electrode, the
VersaPoint system localizes energy by positioning the active and return
electrode on the same axis. This proprietary technology prevents any "stray"
current from traveling through the patient's body by drawing the electricity
back to the return electrode through saline, which acts as an electrical
conductor.
VERSAPOINT BIPOLAR ELECTRODE
[Inserted here is a drawing of an electrode and its electrical path to
illustrate how energy is delivered from the generator to the tissue
through the electrode.]
Once the fibroid has been vaporized, the physician removes the
microelectrode and withdraws the saline from the uterus. The hysteroscope is
then removed, and after a short recovery period, the patient is able to
return home the same day and can typically resume normal activity within one
or two days.
OTHER INDICATIONS
The Company has identified three additional potential indications for
the ThermaChoice Uterine Balloon Therapy system: treatment of women age 30 to
50 whose menstrual bleeding adversely affects their lifestyle, treatment of
postmenopausal women who experience uterine bleeding as a side effect of
hormone replacement therapy and treatment of women who have excessive
menstrual bleeding caused by small submucosal uterine fibroids. In 1996, the
Company completed a small study involving nine patients in Canada who were
treated with the ThermaChoice Uterine Balloon Therapy for excessive or
prolonged uterine bleeding caused by hormone replacement therapy (HRT).
There were no complications from the procedure. The Company plans to expand
this study in 1997 to include up to 30 patients.* Additionally, the Company
plans to conduct pilot international clinical studies in 1997 to explore using
ThermaChoice Uterine Balloon Therapy to treat patients for lifestyle
indications.
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* This is a forward-looking statement reflecting current expectations of the
Company. Such forward-looking statement involves risks and uncertainties and
actual results may differ materially from those in such statement. As such,
there can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to
review the section entitled "Factors Affecting Operating Results and Market
Price of Stock" commencing on page 18, for a discussion of factors that could
affect future performance.
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Clinical trials for safety and efficacy, and a premarketing approval ("PMA")
would be required before the Company could market its products for each of
these indications in the United States. There can be no assurance that the
Company will conduct the required clinical trials and receive a PMA for these
indications, or any other indications, on a particular schedule or at all.
In 1995, the Company retained an independent market research firm to
conduct surveys which questioned women and gynecologists on uterine
disorders, including these new indications. These surveys included random
telephone interviews of 400 women over age 30 throughout the United States,
approximately 300 of whom were between the ages of 30 and 50 and
approximately 100 of whom were over age 50. The Company's physician survey
included randomized telephone interviews of 200 gynecologists throughout the
United States.
MENSTRUATION ADVERSELY AFFECTING LIFESTYLE. Based on its market
research, the Company believes as many as 10% of women between the ages of 30
and 50 in the United States with normal menstrual bleeding may wish to reduce
menstrual bleeding for lifestyle reasons. There are approximately 32 million
menstruating women age 30 to 50 in the United States and approximately 65
million menstruating women age 30 to 50 in Europe, Canada and Japan. The
Company believes that women in some international markets may be motivated by
the same lifestyle considerations.
POSTMENOPAUSAL BLEEDING. Postmenopausal women may experience uterine
bleeding after cessation of menstrual function. One of the most frequently
cited causes of postmenopausal bleeding is hormone replacement therapy
prescribed for reduction of menopausal symptoms and prevention of
osteoporosis and cardiovascular disease. There are approximately 10 million
postmenopausal women in the United States receiving hormone replacement
therapy, of which approximately 2 million experience uterine bleeding. Based
on its market research, the Company believes a significant percentage of
these women may be candidates for ThermaChoice Uterine Balloon Therapy.
UTERINE BLEEDING DUE TO FIBROIDS. The Company believes that the
ThermaChoice Uterine Balloon Therapy system may also be an effective
alternative to drug therapy and surgery for the treatment of small submucosal
fibroids which can cause excessive menstrual bleeding. In addition, the
ThermaChoice Uterine Balloon Therapy system may be used in combination with
the current VersaPoint system or other surgical methods to treat excessive
menstrual bleeding in patients with large submucosal fibroids.
VERSAPOINT BIPOLAR ELECTROSURGERY SYSTEM
During the first quarter of fiscal 1996, Gynecare extended its license
and OEM supply agreement with Gyrus to include use of the VersaPoint
technology in the field of laparoscopy. Under the terms of the new
agreement, the Company intends to develop the VersaPoint system for
laparoscopic use in the treatment of gynecological conditions such as serosal
uterine fibroids and endometriosis, as well as general surgical indications.*
The Company intends to develop the VersaPoint system for laparoscopic
indications and, based on the results of this research, may submit a 510(k)
application to the FDA for clearance to market the VersaPoint system in the
United States for laparoscopic indications.*
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* This is a forward-looking statement reflecting current expectations of the
Company. Such forward-looking statement involves risks and uncertainties and
actual results may differ materially from those in such statement. As such,
there can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 18, for a discussion of factors that could affect
future performance.
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RESEARCH AND DEVELOPMENT
Gynecare's primary research and development programs involve developing
new generations of the ThermaChoice Uterine Balloon Therapy system including
new catheter configurations and new versions of the controller in order to
increase the efficacy of the procedure, increase manufacturing reliability
and reduce manufacturing costs. The Company is also engaged in the ongoing
development of the VersaPoint system, including research for laparoscopic use
in the treatment for gynecological applications, such as serosal uterine
fibroids and endometriosis, as well as general surgical indications. In
addition, the Company is exploring the use of a radio frequency ("RF")
balloon catheter to ablate endometrial tissue using a technology licensed
exclusively to the Company for such application.
MANUFACTURING
The ThermaChoice Uterine Balloon Therapy system's disposable balloon
catheter is currently manufactured in-house at the Company's facility in
Menlo Park, California. The Company believes that production of this balloon
catheter in-house may improve control of and flexibility in product supply
and cost. Although most of the components of the disposable balloon catheter
are available from more than one vendor, certain of the components used in
manufacturing the disposable balloon catheter have relatively few alternative
sources of supply and establishing additional or replacement suppliers for
such components cannot be accomplished quickly. Although the Company
maintains sufficient levels of inventory to avoid any material disruption
resulting from the scale-up of its facility and utilization of in-house
manufacturing, no assurance can be given that the Company will be able to
manufacture and supply sufficient products to meet its anticipated
demand.*
The Company's controller is currently manufactured pursuant to a supply
agreement with SeaMED Corporation ("SeaMED"). Pursuant to the agreement, the
Company issues purchase orders to SeaMED for controllers at fixed prices,
which prices are subject to review on a periodic basis. The term of the
agreement currently extends through January 1998 and can be automatically
renewed for additional one-year periods unless notice is given by either
party. The Company believes that alternative suppliers are available for the
controller and plans to qualify additional suppliers and to begin to evaluate
the benefits of manufacturing the controller at its facility as production
volumes increase.*
The Company's VersaPoint system, including the bipolar electrosurgical
generator and disposable microelectrodes, is currently manufactured pursuant
to an OEM supply and manufacturing agreement with Gyrus. Pursuant to this
agreement, Gynecare obtained an exclusive, worldwide, royalty-free license to
use and sell products with the licensed technology for hysteroscopic
applications. Subject to the terms and conditions of the agreement, Gyrus
manufactures the bipolar generator and microelectrodes of the VersaPoint
system and sells them to Gynecare at prices based on a formula set forth in
the agreement. If, at any time and subject to certain conditions, Gyrus is
unable to support Gynecare's product requirements, Gynecare may manufacture
the products under a worldwide royalty-free license. The supply and
manufacturing agreement continues until the later of the expiration date of
the last patent, whose rights Gynecare has obtained under the agreement, to
expire, or the abandonment of the last patent application included in the
patent rights obtained by Gynecare. In the first quarter of 1996, the
Company extended its license and OEM supply agreement with Gyrus to include
the field of laparoscopy. The development of laparoscopic products is a
collaborative effort with Gyrus which involves the completion of a series of
milestones. A $400,000 deposit on this OEM agreement was made in March 1996,
and additional deposits of up to $600,000 will be due over the next 12 to 24
months.
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* This is a forward-looking statement reflecting current expectations of the
Company. Such forward-looking statement involves risks and uncertainties and
actual results may differ materially from those in such statement. As such,
there can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 18, for a discussion of factors that could affect
future performance.
12
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MARKETING AND SALES
The Company commenced international sales of the ThermaChoice Uterine
Balloon Therapy system in March 1995. To date, the ThermaChoice Uterine
Balloon Therapy system has been shipped to approximately 22 countries.
Distributors in such countries then sell the system to customers. For the
year ended December 31, 1996, OY Nikomed Finland AB, Guidant Canada, TD
Medical BV, Xinya S&T Company, and Inter-Medical A/S accounted for 14%, 13%,
10%, 10% and 10%, respectively, of the Company's sales. Only limited
shipments of the VersaPoint system have been made to Canada and the UK in the
last quarter of fiscal 1996. In general, the Company has chosen to operate
through small distribution companies because of its belief that these
companies will devote greater attention to the Company's products. There are
no formal written agreements with many of such distributors. Instead, the
Company ships product to them based on purchase orders. In addition, certain
of these sales to distributors have not yet resulted in sales to customers.
Sales to distributors are made on open credit terms and may include volume
purchase discounts and extended payment terms. Therefore, distributors may
purchase several months of inventory at one time to take advantage of
discounts and extended payment terms.
During 1996, the Company began implementation of a targeted marketing
program in three European countries and Canada. In each country, Gynecare
has engaged a territory manager to work with local gynecologists and
distributors to develop the market for the ThermaChoice Uterine Balloon
Therapy system. The Company plans to begin a similar targeted marketing
program in the United States for the VersaPoint product during 1997 and has
identified five key metropolitan areas in which to focus initial sales and
marketing efforts for the VersaPoint system. Gynecare plans to hire a
territory manager in these target markets who will be responsible for
physician training, symposia and patient education. The success of these
targeted marketing efforts and the timing of FDA approval for the
ThermaChoice Uterine Balloon Therapy system in the United States will
determine how quickly the Company expands its targeted marketing efforts in
the United States and Europe.
The Company's marketing strategy is designed to promote the safety,
efficacy, cost-effectiveness and ease of use of the ThermaChoice Uterine
Balloon Therapy and VersaPoint systems. Gynecare also intends to increase
the awareness in the female population and the physician community of
ThermaChoice Uterine Balloon Therapy and VersaPoint treatment as alternatives
to drug therapy and surgery. In order to achieve these objectives, the
Company employs patient and physician educational programs including
pamphlets, brochures and video tapes, articles in physician journals, women's
magazines and the popular press, and news releases on network and local
television both in the United States and internationally.
LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY
The Company's policy is to protect its proprietary position by, among
other methods, filing United States and foreign patent applications to
protect technology, inventions and improvements that are important to the
development of its business. The Company holds one issued United States
patent and an exclusive license to three issued United States patents
covering the ThermaChoice Uterine Balloon Therapy system and has either filed
for or acquired rights under a number of patent applications for the
ThermaChoice Uterine Balloon Therapy system and other products in the United
States. Corresponding applications have been filed in certain foreign
countries. 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 ThermaChoice 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. In addition to royalty obligations, the Company paid Origin
a one-time fee of $45,000. The Company's policy is to generally file patent
applications in foreign countries where rights are available and the Company
believes it is commercially advantageous to do so. The three licensed
patents relate to the design of the Company's disposable balloon catheter and
method of thermal ablation of the endometrial lining of the uterus. In
connection with the formation of Gynecare, Origin assigned to the Company its
license to patents, applications and confidential information developed
through the assignment date relating to the ThermaChoice Uterine Balloon
Therapy system. Origin retained the exclusive right to use the assigned
technology for ablation of the gall bladder worldwide. The exclusive,
worldwide license assigned to the Company requires the Company to make
certain minimum royalty payments and to pay a royalty based on net sales of
products using ThermaChoice Uterine Balloon Therapy technology to the
original inventors of the technology. No assurance can
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be given that any patents will be issued from pending patent applications or
from any future patent applications, 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, one
of the Company's competitors filed a third party observation investigating
prior art patents as they relate to a European patent application licensed to
the Company for the ThermaChoice product. As a result, the claims were
amended and the patent will be issued. This competitor has filed a similar
action in connection with the Company's prosecution of corresponding patents
in Australia, the resolution of which is still pending. Further, the Company
believes such competitor recently filed in the U.S. Patent Trademark Office a
request for re-examination of two issued patents related to the Company's
ThermaChoice product which request for re-examination has been granted by the
Patent Trademark Office based on certain prior art references presented to
such office, certain of which were the subject of the European observation.
There can be no assurance that these patents will be held valid after the
re-examination proceeding or, that if held invalid, would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
In July 1995, Gynecare entered into an exclusive, worldwide,
royalty-free license to certain pending patent applications and a supply and
development agreement with Gyrus. The agreement requires the Company to make
certain minimum payments and to purchase quantities of products based on a
rolling forecast. Under the agreement, Gyrus retained the rights to use the
invention and associated technology for applications other than uterine
fibroid and tissue removal. During the first quarter of fiscal 1996, the
Company extended its license and OEM supply agreement with Gyrus for the
VersaPoint technology to include the field of laparoscopy.
In December 1994, Gynecare obtained an exclusive, worldwide,
royalty-bearing license from Stuart D. Edwards to certain patents relating to
a device and method of use of RF energy to perform endometrial ablation. The
license requires the Company to make certain minimum payments and to pay a
royalty based on net sales of products utilizing the licensed technology.
This license extends for the life of the patents unless terminated earlier in
the event of the Company's breach of certain covenants or agreements,
including failure to market the device within specified periods after
obtaining regulatory approval. Under the license, Mr. Edwards retained the
rights to use the invention and associated technology for use outside the
field of gynecology.
The Company believes that it is currently in compliance with the terms
of these licenses. In the event of a material breach of the Company's
license agreements, including the failure to purchase minimum quantities
under one of such agreements, the licensed rights revert back to the
licensors. The reversion of rights under the Company's license agreements
could have a material adverse effect on the Company's business and results of
operations.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through proprietary
information agreements with employees, consultants and advisors, including
members of the medical advisory board. The Company's proprietary information
agreements with its employees and consultants contain industry standard
provisions requiring such individuals to assign to the Company without
additional consideration any inventions conceived or reduced to practice by
them while employed or retained by the Company, subject to customary
exceptions. There can be no assurance that proprietary information
agreements with employees, consultants and advisors will not be breached,
that the Company will have adequate remedies for any breach or that the
Company's trade secrets will not otherwise become known to or independently
developed by competitors. See "Factors Affecting Future Results - Dependence
on Licenses, Patents and Proprietary Technology."
GOVERNMENT REGULATION
The manufacture and sale of medical devices, including the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems, are subject to extensive
regulation by numerous government authorities in the United States and other
countries. The ThermaChoice Uterine Balloon Therapy system is regulated as a
medical device and is also subject to the FDA's PMA requirements. As a
result, the Company will not be able to commence marketing and commercial
sales of the ThermaChoice Uterine Balloon Therapy system in the United States
unless and until it
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receives a PMA for marketing of such product from the FDA. The first step in
the PMA process is the submission to the FDA an IDE which includes the
results of bench tests and laboratory studies, a complete description of the
device and its components, and a detailed description of the methods,
facilities and controls used for manufacturing, including the method of
sterilization and its assurance. Upon receiving approval of the IDE, the
Company can conduct a clinical study to collect safety and efficacy data.
Upon completion of the clinical study under an IDE, the Company can submit a
PMA application to the FDA to receive approval to market the product in the
United States. After completion of the FDA's preliminary review of the PMA
submission, the submission is sent to an FDA selected scientific advisory
panel composed of physicians and scientists with expertise in the particular
field. The FDA scientific advisory panel issues a recommendation to the FDA
that includes conditions for approval of the PMA. Toward the end of the PMA
review process, the FDA will conduct an inspection of the manufacturer's
facilities to ensure that they are in compliance with the applicable GMP
requirements. If the FDA evaluation of both the PMA application and the
manufacturing facilities is favorable, the FDA will issue an approval letter,
which usually contains a number of conditions which must be met in order to
secure final approval. If those conditions have been fulfilled to the
satisfaction of the FDA, the agency will issue a PMA authorizing commercial
marketing of the device. The PMA review and approval process generally
requires more than a year to complete from the date of filing.
In 1996, the Company received an IDE from the FDA to conduct a study of
the ThermaChoice Uterine Balloon Therapy system and completed the patient
treatment phase of its U.S. clinical trials in the October 1996. The Company
is currently collecting patient follow-up data and plans to submit a PMA in
1997.* However, there can be no assurance as to whether safety and efficacy
data collected during the clinical trials will be sufficient to support a PMA
filing or whether the Company will receive a PMA for any of its products. In
addition, if approval is received, there can be no assurance that it will not
be for a more limited indication than the Company has requested, which could
limit the addressable market of the ThermaChoice Uterine Balloon Therapy
system and have a material adverse effect on the Company's business,
financial condition and results of operations. 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 a PMA is granted, subsequent modifications to the approved
device or manufacturing process may require a supplemental PMA or may require
the submission of a new PMA application, which could require substantial
additional clinical efficacy data and FDA review. Failure to obtain a PMA 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. In addition, 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.
In the United States, the VersaPoint system is also regulated as a
medical device and is subject to extensive regulation by numerous government
authorities in the United States and other countries. The Company received
notification of FDA clearance to market the system in the United States for
fibroids, polyps, adhesions and divided septa. However, if the Company
wished to propose modifications or enhancements to the VersaPoint system or
use the system for other indications such as laparoscopic indications, and
such major changes could affect the safety or effectiveness of the device, a
new 510(k) submission would be required. If the Company believes that its
modifications to the device do not require the submission of a new 510(k)
notice, there can be no assurance that the FDA will agree with any of the
Company's determinations not to submit a new 510(k) notice for any of the
changes
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* This is a forward-looking statement reflecting current expectations of the
Company. Such forward-looking statement involves risks and uncertainties and
actual results may differ materially from those in such statement. As such,
there can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 18, for a discussion of factors that could affect
future performance.
15
<PAGE>
or will not require the Company to submit a new 510(k) notice for any of the
changes made to the product. If the FDA requires the Company to submit a new
510(k) notice for any product modification, the Company may be prohibited
from marketing the modified product until the 510(k) notice is cleared by the
FDA. Such a prohibition could have a material adverse effect on the
Company's business, financial condition and results of operations.
Every company that manufactures or assembles medical devices is required
to register with the FDA and adhere to applicable FDA regulations regarding
Good Manufacturing Practices ("GMP") and similar regulations in other
countries, which include testing, control and documentation requirements.
Ongoing compliance with GMP and other regulatory requirements will be
monitored through periodic inspections by state and federal agencies,
including the FDA. The Company believes that its design, manufacturing and
quality control procedures will comply with the FDA's GMP regulations. In
addition, marketed products are subject to continuing FDA scrutiny for
compliance with the FDA's requirements relating to promotional activities.
The Company has obtained a license as a medical device manufacturer from the
Food and Drug Branch of the California Department of Health Services. State
agencies' regulations impose certain procedural and documentation
requirements upon the Company with respect to manufacturing and quality
assurance activities.
In 1995, the Company implemented policies and quality systems which
allowed the Company to receive ISO 9001 and EN 46001 certification. These
standards for certification have been developed to ensure that companies
know, on a worldwide basis, the standards of quality to which they will be
held. The European Union has promulgated rules which require that medical
products receive a CE mark by mid-1998, an international symbol of quality
and compliance with applicable European medical device directives. EN 46001
certification is one of the CE mark certification requirements. Beginning in
November 1995, the Company's quality assurance systems were audited by TUV, a
European Community-approved notified body. Upon a satisfactory review by TUV
in January 1996, the Company was awarded EN 46001, ISO 9001 and CE mark
certification for the ThermaChoice Uterine Balloon Therapy system. To retain
such certification, the Company must adequately maintain its quality
assurance systems and undergo an annual audit by TUV. In August 1996, the
Company passed a TUV surveillance inspection to extend the validity of its
ISO certificate until February 1999.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary widely from country to
country. The requirements for approval for sale internationally differ from
those required for FDA approval. In 1996, the Company obtained the CE mark
for the ThermaChoice Uterine Balloon Therapy system. The Company will need
to obtain CE mark certification for Europe in order to sell the VersaPoint
system within the European Economic Area. There can be no assurance,
however, that the Company will be able to achieve or maintain compliance
required for CE marking. Failure to do so would mean that the Company cannot
sell the VersaPoint system in the European Economic Area, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
THIRD-PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians that purchase medical devices for treatment of their patients,
generally rely on third-party payors, principally Medicare, Medicaid and
private health insurance plans, to reimburse all or part of the costs and
fees associated with the procedures performed with these devices.
The Company's success will be dependent upon, among other things, its
ability to obtain satisfactory reimbursement from health care payors for the
ThermaChoice Uterine Balloon Therapy and VersaPoint systems. The Company
does not expect that third-party reimbursement will be available, if at all,
for use of the ThermaChoice 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 ThermaChoice Uterine Balloon
Therapy system will be dependent upon decisions by the Health Care Financing
Administration ("HCFA") for Medicare, as well as by individual health
maintenance organizations, private insurers and other payors. While the
Company believes the ThermaChoice Uterine Balloon Therapy procedure may be
reimbursed in the United States under existing procedure codes for surgical
ablation and the VersaPoint procedure may be reimbursed under existing
procedure codes for surgical resection, there can be no assurance that this
will occur or that the reimbursement under these codes will be
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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
ensure 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
ThermaChoice Uterine Balloon Therapy and VersaPoint systems will depend on
the availability and level of reimbursement in international markets targeted
by the Company. Currently, neither the ThermaChoice Uterine Balloon Therapy
system nor the VersaPoint system has 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.
Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the ThermaChoice Uterine Balloon Therapy and
VersaPoint systems will be required to obtain reimbursement. Availability of
reimbursement will depend not only on the clinical efficacy and procedure
cost, but also on the duration of the relief provided by the procedure.
There can be no assurance that reimbursement for the Company's products will
be available in the United States or in international markets under either
government or private reimbursement systems, or that physicians will support
and advocate reimbursement for use of the ThermaChoice Uterine Balloon
Therapy and VersaPoint systems. Failure by physicians, hospitals and other
users of the Company's products to obtain sufficient reimbursement from
health care payors or adverse changes in government and private third-party
payors' policies toward reimbursement for procedures employing the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
At present, the Company considers its primary competition to be current
therapies for the treatment of uterine disorders, including drug therapy,
D&C, surgical ablation, surgical resection and hysterectomy. The Company
will also compete against other minimally invasive techniques under
development for the treatment of dysfunctional uterine bleeding, including
other ablation techniques which employ thermal fluid, RF energy or freezing
techniques ("cryoablation"). The ThermaChoice Uterine Balloon Therapy system
may compete with other systems manufactured and marketed by companies outside
of the United States, although such products are not currently approved by
the FDA for marketing in the United States.
There are many large companies with significantly greater financial,
manufacturing, marketing, distribution and technical resources and clinical
experience than Gynecare. Such companies are developing and marketing
devices for surgical removal of the uterus, uterine fibroids, the endometrial
lining of the uterus and other uterine tissue or non-surgical methods such as
drug therapy. Additionally, there are companies developing alternative
methods of uterine tissue ablation that compete with the Company. These
include the Valley Lab division of Pfizer, Inc., U.S. Surgical Corporation,
FemRx, Inc. and Wallsten Medical. There can be no assurance that these
companies will not succeed in developing technologies and products that are
more effective than any which have been or are being developed by the Company
or that would render the Company's technologies or products obsolete or
non-competitive. The Company also competes with such other companies for
clinical sites to conduct trials. Such competition could have a material and
adverse effect on the Company's business, financial condition and results of
operations.
As a result of the entry of large and small companies into the market,
the Company expects competition for devices and systems used to treat uterine
disorders to increase. The Company believes that the primary competitive
factors in the market for treatment of uterine disorders are safety,
efficacy, ease of use, reliability and cost-effectiveness. The Company
believes that ThermaChoice Uterine Balloon Therapy and VersaPoint systems
will be substantially less costly than highly-invasive, traditional surgical
procedures and may ultimately replace these procedures in some applications.
The Company's products may also enable the physician to perform procedures
less invasively with reduced patient trauma in a shorter period of time. As
a result, the Company believes that its
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products compete favorably with respect to these factors, although no assurance
can be given that it will be able to continue to do so.
EMPLOYEES
As of December 31, 1996, the Company employed 44 individuals, of which
18 are engaged directly in research, development and regulatory activities, 9
in manufacturing and 17 in marketing, sales and administrative positions.
The Company is dependent on its ability to attract and retain qualified
scientific, technical and key management personnel. None of the Company's
employees are covered by a collective bargaining agreement. Gynecare
believes that it maintains good relations with its employees.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims.
The Company has not experienced any product liability claims to date.
Although the Company maintains product liability insurance with coverage
limits of $3,000,000 per occurrence and an annual aggregate maximum of
$3,000,000, there can be no assurance that product liability claims will not
exceed such insurance coverage limits, which could have a material adverse
effect on the Company, or that such insurance will continue to be available
on commercially reasonable terms or at all.
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 the following:
DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS. Currently, the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems are the only products being
marketed by the Company. The Company will be required to obtain regulatory
approvals, including PMA approval from the FDA, before the ThermaChoice
Uterine Balloon Therapy system can be marketed in the United States and in
certain foreign countries, including Japan. There can be no assurance that
the Company's efforts will be successful or that the ThermaChoice Uterine
Balloon Therapy system 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.
The Company's VersaPoint system has only recently received FDA clearance for
marketing in the United States, and the Company has made limited shipments of
the system internationally. Furthermore, because the ThermaChoice Uterine
Balloon Therapy and VersaPoint systems represent the Company's principal
near-term focus, the Company could be required to cease operations if these
products are not successfully commercialized. In addition, the continuing
follow-up phase of the U.S. clinical trials of the ThermaChoice Uterine
Balloon Therapy system 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 ThermaChoice
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
ThermaChoice Uterine Balloon Therapy system does not prove to be safe and
effective in long-term follow up of 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 December 31, 1996, the Company had an
accumulated deficit of $16.8 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 ThermaChoice Uterine Balloon Therapy and
VersaPoint systems will be successfully commercialized or that the Company
will achieve significant revenues from
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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 the ThermaChoice Uterine Balloon Therapy and VersaPoint
products by the medical community as reliable, safe and cost-effective
treatments for dysfunctional uterine bleeding and benign pathology. The
Company is unable to predict how quickly, if at all, its products will be
accepted by the medical community or, if accepted, the number of procedures
that will be performed. The medical indications that can be treated with the
ThermaChoice Uterine Balloon Therapy and VersaPoint systems 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 long-term clinical data
demonstrating such advantages. There can be no assurance that any such
advantages will be clinically significant. The ThermaChoice Uterine Balloon
Therapy and VersaPoint systems are designed to be used with a local
anesthetic in a clinic or physician's office. If physicians recommend or
require that the procedures using the ThermaChoice or VersaPoint products 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 products 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 that the ThermaChoice
system may be adaptable to other uterine bleeding disorders, there can be no
assurance that the product will be clinically effective for any other
indications, that regulatory approval of the 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 ThermaChoice 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 network of distributors and direct sales personnel in the U.S. and
internationally, the timing and size of customer purchases, which may be
influenced by volume purchase discounts and extended payment terms, the
progress of the Company's PMA application to the FDA for the ThermaChoice
Uterine Balloon Therapy system, and competition.
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 ThermaChoice Uterine Balloon Therapy system and the entire VersaPoint
system. The Company expects to continue to depend on such manufacturers for
the forseeable future. The integration of the Company's operations into new
facilities, which occurred in November 1995, has resulted and may continue to
result in inefficiencies. Specifically, manufacturers often encounter
difficulties in production of new products, including problems involving
production yields, quality control and assurance, component supply and
shortages of qualified personnel. The Company may experience a shortage of
manufacturing capacity if the new facility fails to operate as planned.
Although the Company intends to maintain sufficient levels of inventory to
avoid any material disruption resulting from the continuing scale-up of the
new facility and transition to in-house manufacturing, there can be no
assurance that the Company will be able to manufacture and supply sufficient
quantities of products to meet product requirements for commercial sales.
Additionally, any delay or difficulty in continuing manufacturing activities
at the new facility, or the inability of the Company's contract manufacturers
to supply required materials and the Company subsequently not being able to
successfully find an alternative source of supply in a timely manner, may
have a material adverse effect on the Company's business, financial condition
and results of operations. For the forseeable future, the Company expects
that manufacturing start-up and overhead costs spread over low production
volumes combined with the cost of using contract manufacturers to produce the
ThermaChoice controller and VersaPoint system will continue to have an
adverse effect on gross margins.
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LIMITED INTERNATIONAL DISTRIBUTION; NO U.S. DISTRIBUTION. To date, all of the
Company's sales have been outside the United States, and the Company anticipates
that a significant portion of its revenues for the next year will continue to
be derived from international sales. The Company currently markets and sells
its products internationally through a network of distributors. The Company's
international sales are dependent upon the marketing efforts of, and sales by,
these distributors. The Company may also rely on these distributors to assist
it in obtaining reimbursement approvals from both government and private
insurers in certain international markets. In general, the Company has chosen
to operate through small distribution firms because of its belief that these
firms will devote greater attention to the Company's products. The use of small
distributors increases the risks associated with financial instability, which
includes the risk that distributors will cease operations or will be unable to
satisfy financial obligations to the Company. If a distributor were to fail to
invest adequate capital promoting the Company's products or were to cease
operations, the Company would likely be unable to achieve significant sales
in the territory. Gynecare also does not currently have any distribution in
the United States. There can be no assurance that the Company will establish
U.S. distribution networks for the ThermaChoice Uterine Balloon Therapy and
VersaPoint systems in a timely manner. The failure to establish such
distribution 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 ThermaChoice Uterine Balloon Therapy system,
VersaPoint system, or any future product in any 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 ThermaChoice
Uterine Balloon Therapy and VersaPoint systems. The Company does not expect
that third-party reimbursement will be available, if at all, for use of the
ThermaChoice Uterine Balloon Therapy system in the United States unless and
until FDA approval is received. Third-party reimbursement for the VersaPoint
system and the ThermaChoice Uterine Balloon Therapy system, once FDA approval
is received, 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 that the ThermaChoice Uterine
Balloon Therapy procedure may be reimbursed in the United States under
existing procedure codes for endometrial ablation and that the VersaPoint
procedure may be reimbursed under existing procedure codes for surgical
resection, 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 healthcare 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
ThermaChoice Uterine Balloon Therapy and VersaPoint systems will depend on
the availability and level of reimbursement in international markets targeted
by the Company. Currently, neither the ThermaChoice Uterine Balloon Therapy
system nor the VersaPoint system has 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 ThermaChoice Uterine Balloon Therapy and VersaPoint systems,
are subject to extensive regulation by numerous government authorities in the
United States and other countries. The ThermaChoice Uterine Balloon Therapy
system 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
ThermaChoice Uterine Balloon Therapy system in the United States unless and
until it receives PMA approval for marketing of such product from the FDA.
In October 1996, the Company completed the patient treatment phase of its
U.S. clinical study for the ThermaChoice Uterine Balloon Therapy system and
the
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follow-up data collected to-date has indicated overall success in patient
treatment. However, there can be no assurance as to whether long-term 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 the
ThermaChoice system. 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 ThermaChoice
Uterine Balloon Therapy system and have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will not be required to conduct additional
clinical trials for the ThermaChoice 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.
In the United States, the VersaPoint system required clearance from the
FDA under a 510(k) application. This application was filed in June 1996 and
cleared in November 1996. However, if the Company wished to propose
modifications or enhancements to the VersaPoint system or use the system for
other indications such as laparoscopic indications, and such major changes
could affect the safety or effectiveness of the device, a new 510(k)
submission would be required. In such a case, the Company may be prohibited
from marketing the modified product until the 510(k) notice is cleared by the
FDA. Such a prohibition could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company will be required to adhere to applicable FDA regulations
regarding Good Manufacturing Practices (GMP) and similar regulations in other
countries, which include testing, control and documentation requirements.
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 products 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 ThermaChoice Uterine Balloon Therapy system,
there can be no assurance that it will be able to obtain certifications for
its VersaPoint product or other future products in a timely manner, if at
all. A failure to obtain any such certifications could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY. The
Company's success depends in part on its ability to retain licenses, obtain
patent protection for products and processes, and preserve its trade secrets
and proprietary technology. The Company's one issued United States patent
was assigned to the Company by Origin pursuant to a royalty-bearing agreement
covering potential future modifications to the ThermaChoice Uterine Balloon
Therapy system. Additionally, pursuant to such agreement, the Company granted
to Origin a non-exclusive,
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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 will be issued from pending patent applications or from any future
patent applications, 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, one of the Company's
competitors filed a third party observation investigating prior art patents
as they relate to a European patent application licensed to the Company for
the ThermaChoice product. As a result, the claims were amended and the patent
will be issued. This competitor has filed a similar action in connection with
the Company's prosecution of corresponding patents in Australia, the
resolution of which is still pending. Further, the Company believes such
competitor recently filed in the U.S. Patent Trademark Office a request for
re-examination of two issued patents related to the Company's ThermaChoice
product which request for re-examination has been granted by the Patent
Trademark Office based on certain prior art references presented to such
office, certain of which were the subject of the European observation. There
can be no assurance that these patents will be held valid after the
re-examination proceeding or, that if held invalid, would not have a material
adverse effect on the Company's business, financial condition or results of
operations. Furthermore, 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.
POTENTIAL VOLATILITY OF STOCK PRICE. The securities markets have, from
time to time, experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. The
market prices of the Common Stock of many publicly-held medical device
companies have in the past been, and can in the future be expected to be,
especially volatile. Announcements of technological innovations or new
products by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, regulatory developments, the
issuance of new or changed stock market analyst reports and recommendations,
and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant
impact on the market price of the Common Stock.
FUTURE CAPITAL NEEDS. The Company's capital requirements depend on a
number of factors, including the timing of FDA approval of the ThermaChoice
Uterine Balloon Therapy system and demand for and market acceptance of the
Company's products, 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, the resources the Company devotes to
developing, manufacturing and marketing its products, 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
costs of obtaining reimbursement for use of the Company's ThermaChoice
Uterine Balloon Therapy and VersaPoint systems in new and existing markets,
and other factors. Consequently, although there can be no assurance that the
Company will not require additional financing prior to the end of 1997, the
Company believes that its cash, cash equivalents and short-term investments
together with interest thereon will
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be sufficient to fund its operations and capital requirements through
December 31, 1997. The estimate of this time period is a forward-looking
statement involving risks and uncertainties and actual results may differ
materially as a result of a number of factors including those noted above.
Should additional be required, such 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.
CONTROL BY DIRECTORS AND PRINCIPAL STOCKHOLDERS. The directors and
principal stockholders of the Company, and certain of their affiliates, own
approximately 64% of the Company's outstanding Common Stock. Accordingly,
these persons, individually and as a group, may be able to effectively
control the Company and direct its affairs and business, including any
determination with respect to the acquisition or disposition of assets by the
Company, future issuances of Common Stock or other securities by the Company,
declaration of dividends on the Common Stock and the election of directors.
Such concentration of ownership may also have the effect of delaying,
deferring or preventing a change in control of the Company.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Information concerning executive officers and directors is set forth below.
Name Age Position
A. Lad Burgin, Ph.D. 51 President, Chief Executive Officer and
Director
Steve Adams 49 Vice President of International Sales
Malcolm M. Farnsworth, Jr. 45 Vice President, Chief Financial Officer
and Secretary
Augustine Y. Lien 52 Vice President of Operations
Milton B. McColl, M.D. 37 Vice President and Medical Director
Vahid Saadat 35 Vice President of Research and
Development
Elizabeth B. Connell, M.D. 71 Director
David L. Douglass 44 Director
A. Grant Heidrich 44 Director
Alan Levy, Ph.D. 59 Director
Mary Lake Polan, M.D., Ph.D. 53 Director
F. Thomas Watkins, III 44 Director
DR. BURGIN was engaged by the Company as a consultant in January 1996,
became President and Chief Executive Officer in July 1996 and a director of
the Company in March 1997. Dr. Burgin has twenty-seven years of experience
as a business executive and consultant. Since September 1988, Dr. Burgin
served as President and Chief Executive Officer of HRMG, Inc., a management
consulting firm specializing in assisting clients to achieve competitive
advantage by building and sustaining high performance organizations. Prior
to joining HRMG, Dr. Burgin served for ten years with Transamerica Life
Companies and Vice President of Human Resources with Transamerica
Corporation. Dr. Burgin is a graduate of Ohio State University from which he
holds B.S., MBA and Ph.D. degrees.
MR. ADAMS joined the Company in July 1995 as Vice President of
International Sales and has over 20 years of international sales experience
in the medical device industry. Prior to joining the Company, he was
Director, International, from 1984 to 1991 and Vice President, International
Operations, from 1992 to 1995 with Advanced
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Cardiovascular Systems, Inc., a leading supplier of balloon angioplasty
systems. Mr. Adams holds a B.S. degree in General Studies from the
University of Iowa.
MR. FARNSWORTH has served as Vice President, Chief Financial Officer and
Secretary of the Company since its inception in March 1994. From December
1991 to December 1994, he was Vice President and Chief Financial Officer of
Origin, a manufacturer of minimally invasive surgical devices. From March
1994 to December 1994, he served as an officer of both Gynecare and Origin.
From August 1990 to December 1991, Mr. Farnsworth was a consultant to several
medical device companies including Cardiac Pathways, Inc., Cardiometrics,
Inc., and Origin. Mr. Farnsworth, a certified public accountant, holds an
M.B.A. degree from the University of California at Berkeley.
MR. LIEN joined the Company in March 1995 as Vice President of
Operations. From 1989 until joining the Company, he was Vice President of
Operations for Menlo Care, Inc., a manufacturer of critical care catheters.
From 1985 to 1989, Mr. Lien was employed as Director of Operations of
Nellcor, Inc., a manufacturer of high performance electronic patient
monitoring systems. Mr. Lien holds an M.S. degree in Operations Research
from Stanford University and an M.B.A. degree from the University of Santa
Clara.
DR. MCCOLL joined the Company in April 1994 as Vice President and
Medical Director. From 1989 until joining the Company, he served as Director
of Marketing for Origin. From 1981 to 1988, Dr. McColl was a member of the
National Football League's San Francisco 49ers. Dr. McColl holds an M.D.
from Stanford University Medical School and three issued U.S. patents in the
medical device field.
MR. SAADAT joined the Company in July 1995 as Vice President of Research
and Development. From 1987 until joining the Company, Mr. Saadat served in
various engineering and management positions at Trimedyne, Inc., a
manufacturer of surgical laser systems, most recently as Senior Vice
President of R & D and Manufacturing. He holds an M.S. degree in Biomedical
Engineering from the University of Texas at Austin. Mr. Saadat holds five
issued and three pending U.S. patents in the field of medical laser and
related catheter systems.
DR. CONNELL has been a Director of the Company since December 1994 and
has been a professor of Gynecology and Obstetrics at Emory University School
of Medicine since 1981. She has served as a Chairperson of the FDA
Obstetrics and Gynecology Devices Panel from 1988 to 1992; as a member of the
FDA Panel on Review of Obstetrical and Gynecological Devices from 1976 to
1979; and as a member of the FDA Obstetrics and Gynecology Advisory Committee
from 1970 to 1978. Dr. Connell is a director of UroMed Corp., a medical
device company. Dr. Connell received her M.D. from the University of
Pennsylvania.
MR. DOUGLASS has been a Director of the Company since March 1994. Mr.
Douglass has been a general partner of Delphi Ventures, a venture capital
fund, since 1990 and has been a general partner of Matrix Partners II, L.P.,
a venture capital fund, since 1986. Mr. Douglass serves as a director of
VidaMed, Inc., a medical device company. He holds an M.A. in Administration
and Policy Analysis and an M.B.A. from Stanford University.
MR. HEIDRICH has been a Director of the Company since March 1994 and has
been a general partner of Mayfield Fund, a venture capital firm, since 1983.
Mr. Heidrich is a director of Vivus, Inc., which produces therapeutic
products for the treatment of human disease. He received an M.B.A. from
Columbia University, and a B.A. from Stanford University.
DR. LEVY has been a Director of the Company since March 1995. Since
November 1993, Dr. Levy has been President, Chief Executive Officer and a
director of Heartstream, Inc., a company that develops, manufacturers and
markets devices for performing external cardiac defibrillation. From 1989 to
1993, he was President of Heart Technology, Inc., a manufacturer of
atherosclerosis treatment devices. Before joining Heart Technology, Dr. Levy
was Vice President of Research and New Product Development and a member of
the board of the Ethicon division of Johnson & Johnson. Dr. Levy received
his Ph.D. in Organic Chemistry from Purdue University.
DR. POLAN has been a Director of the Company since June 1995 and was a
member of the Company's Medical Advisory Board from May 1994 to June 1995.
She is Chairperson of the Department of Gynecology and
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Obstetrics at Stanford University School of Medicine, which she joined in
1990. In 1991, Dr. Polan served as Co-chair of the Task Force on
Opportunities for Women's Health of the National Institutes of Health. She
has been a member of the Board of Health Sciences Policy of the Institute of
Medicine, a unit of the National Academy of Sciences, since 1992. Dr. Polan
is also a director of Quidel Corporation, American Home Products Corporation
and Metra Biosystems, Inc. Dr. Polan received her M.D. from Yale University
School of Medicine, where she also received a doctorate degree in biophysics
and biochemistry.
MR. WATKINS has been a Director of the Company since August 1995. Since
May 1995, he has served as a Vice President of Guidant Corporation and
President of its subsidiary, Origin. Mr. Watkins served as President of
another Guidant subsidiary, Heart Rhythm Technologies, from May 1995 through
September 1995. From July 1989 to May 1995, Mr. Watkins held various senior
management positions with Origin. Prior to that, he served in management
positions in several start-up companies, including Microgenics Corporation,
and was a consultant with the international consulting firm of McKinsey &
Company, Inc. He received an M.B.A. degree from Harvard University.
MEDICAL ADVISORY BOARD
The Company has established a seven-member Medical Advisory Board,
consisting of experts in the field of gynecology. Each member is reimbursed
for expenses in connection with serving on the advisory board. Each member,
except for Dr. London and Dr. Wood, has received nonstatutory stock options
to purchase 2,632 shares of Common Stock of the Company, which options vest
over a four-year period and have a ten-year term. The members of the
Company's Medical Advisory Board are as follows:
BERNARD BLANC, MD is a professor of Obstetrics and Gynecology at the
University of Marseilles, France. Dr. Blanc has been treating patients with
the ThermaChoice Uterine Balloon Therapy system since the fourth quarter of
1994 and serves as one of the Company's clinical investigators in France.
ALAN DECHERNEY, MD is a professor and the Chairman of the Department of
Obstetrics and Gynecology at the University of California at Los Angeles.
Dr. DeCherney is one of the pioneers in hysteroscopic surgery in the United
States and has published numerous papers on treatment of uterine disorders
and other gynecological issues.
FRANKLIN LOFFER, MD is in the private practice of gynecology, holds a
teaching appointment at the Maricopa Medical Center in Phoenix, Arizona and
is one of the first gynecologists in the world to perform endometrial
ablation using a laser. Dr. Loffer serves as one of the Company's clinical
investigators in the United States. Dr. Loffer has published numerous papers
on treatment of uterine disorders and other gynecological issues.
ROBERT LONDON, MD is the Senior Medical Director of NYLcare/Health Plus,
New York Life's managed care subsidiary for the mid-Atlantic states. Prior
to that, he was the Regional Manager of Women's Health Care and Special
Projects at Mid-Atlantic Kaiser Permanente, one of the leading health
maintenance organizations in the United States.
ROBERT NEUWIRTH, MD is the Babcock Professor in the Department of
Obstetrics and Gynecology, Columbia University College of Physicians and
Surgeons, and Director Emeritus at St. Luke's-Roosevelt Hospital Center in
New York City. He is one of the inventors of the ThermaChoice Uterine
Balloon Therapy system and will receive royalty payments from Gynecare from
sales of the ThermaChoice Uterine Balloon Therapy system. Dr. Neuwirth
serves as one of the investigators for the Company's current clinical trial
in the United States. He has published numerous papers on uterine disorders,
including two investigative papers on the ThermaChoice Uterine Balloon
Therapy system.
GEORGE VILOS, MD is a practicing physician in London, Ontario, Canada
and has conducted clinical trials in Canada. Dr. Vilos has treated over 60
patients with the ThermaChoice Uterine Balloon Therapy system without
complication since June 1994.
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CARL WOOD, MD, Professor of Gynecology at Monarch University, is in
private practice in Australia and is conducting clinical trials at a clinical
site in Australia. Dr. Wood and his associate, Peter Maher, M.D., began
treating patients with the ThermaChoice Uterine Balloon Therapy system in
March 1995.
ITEM 2. PROPERTIES
The Company leases a facility consisting of approximately 24,000 square
feet in Menlo Park, California. This facility is expected to accommodate the
Company's planned growth for several years. The Company has obtained a
manufacturing license from the State of California in order to manufacture
its products and has registered this facility with the FDA in order to
commence commercial product sales of the VersaPoint system within the United
States.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market
under the NASDAQ symbol GYNE. The following table sets forth the range of
the high and low prices by quarter as reported by the NASDAQ National Market
System since November 22, 1995, the date the Common Stock commenced trading.
High Low
---- ----
1995: Fourth Quarter 10.25 6.25
(from November 22, 1995)
1996: First Quarter 11.25 7.63
1996: Second Quarter 10.25 7.75
1996: Third Quarter 7.50 3.50
1996: Fourth Quarter 9.06 5.38
1997: First Quarter 8.12 6.69
(through March 12, 1997)
As of March 12, 1997, the number of common stockholders of record was 94.
The Company has not paid any dividends since its inception and does not intend
to pay any cash dividends in the foreseeable future. Future cash dividends,
if any, shall be determined by the Board of Directors. Additionally, the
Company's secured credit facility contains covenants restricting the payment of
dividends.
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ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from the Annual Report under the caption
"Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated herein by reference from the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated by reference herein from
Part IV Item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") no later than 120 days after the end
of the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
Certain information regarding the directors and officers of the Company
is contained herein under Item 1, "Executive Officers and Directors of the
Company."
Information regarding directors appearing under the caption "Election of
Directors -- Directors and Nominees for Director" in the Proxy Statement is
hereby incorporated by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors -- Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference from the Proxy Statement under the captions "Election of Directors --
Directors and Nominees for Director," "Election of Directors -- Director
Compensation," "Election of Directors -- Compensation Committee Interlocks
and Insider Participation" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference from the Proxy Statement under the caption "Election of Directors --
Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference from the Proxy Statement under the caption "Election of Directors --
Compensation Committee Interlocks and Insider Participation," "Election of
Directors -- Certain Transactions" and "Executive Officer Compensation."
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report or incorporated
herein by reference:
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Gynecare, Inc. required to
be filed as part of this Report, are incorporated herein by reference from the
Annual Report under the caption "Financial Overview."
The following financial statements of Uterine Balloon Therapy
Business Operations of Origin Medsystems, Inc. are filed as part of this
Report:
INDEX TO FINANCIAL STATEMENTS OF UTERINE BALLOON THERAPY
BUSINESS OPERATIONS OF ORIGIN MEDSYSTEMS, INC.
Page
Report of Independent Accountants of the Uterine Balloon Therapy
Operations of Origin Medsystems, Inc. (UBTO) F-1
Balance Sheet of UBTO at December 31, 1993 F-2
Statement of Operations of UBTO for the period from
January 1, 1994 to March 7, 1994 and for the year ended December 31, 1993 F-3
Statement of Cash Flows of UBTO for the period from January 1, 1994 to
March 7, 1994 and for the year ended December 31, 1993 F-4
Notes to Financial Statements of UBTO F-5
2. FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts S-1
3. EXHIBITS
The exhibits listed under Item 14(c) hereof are filed as part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K filed in the fourth quarter of 1996.
None.
30
<PAGE>
(c) Exhibits.
EXHIBIT
NUMBER TITLE
--------- -----------------------------------------------------------------
3.1* Restated Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
4.1* Form of Common Stock certificate.
+10.1* 1994 Stock Option Plan and form of option agreement thereunder.
+10.2* 1995 Directors' Stock Option Plan and form of option agreement
thereunder.
+10.3* 1995 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4* Form of Indemnification Agreement entered into between Registrant
and its directors and officers.
10.5* Second Amended and Restated Shareholder Rights Agreement dated
May 5, 1995 between Registrant and certain holders of Common
Stock and Preferred Stock.
10.6* Business Park Lease dated July 14, 1995 between Registrant and
David D. Bohannan Organization, relating to facility located at
235 Constitution Drive, Menlo Park, California.
*10.7** Supply Agreement between the Registrant and Origin Medsystems,
Inc., dated January 1, 1995.
10.8* Management Services Agreement between the Registrant and Origin
Medsystems, Inc. dated March 8, 1994.
*10.9** License Agreement dated January 1993, by and among Origin,
Gynelab Products, Inc., Dr. Robert S. Neuwirth and Lee R. Bolduc.
10.10* License Assignment Agreement between Origin Medsystems, Inc. and
the Registrant dated March 8, 1994.
*10.11** Supply Agreement between the Registrant and SeaMED Corporation,
dated July 1, 1994.
*10.12** Distribution Agreement between the Registrant and Origin Canada
dated June 9, 1995.
10.13* License Assignment Agreement between Origin Medsystems, Inc. and
the Registrant dated October 9, 1995.
*10.14** Assembly Agreement dated February 1, 1995 between the Registrant
and Lewicki Microelectronic GmbH.
10.15* Distribution Agreement between the Registrant and T.D. Medical,
a Dutch Corporation dated March 1, 1995.
*10.16** Distribution Agreement between the Registrant and
J. Anklin A. G., a Swiss Corporation, dated February 21, 1995
++10.17** Supply and Manufacturing License Agreement between Gyrus Medical,
Ltd. and the Registrant dated July 24, 1995
++10.18** Second Amendment to Supply and Manufacturing License Agreement
between Gyrus Medical, Ltd. and the Registrant dated March 31,
1996
11.1 Statement Regarding Computation of Net Loss Per Share.
13.1 1996 Annual Report to Stockholders
23.1 Consent of Coopers & Lybrand, L.L.P, Independent Auditors
24.1 Power of Attorney (See page 33)
27.1 Financial Data Schedule
31
<PAGE>
- --------------
* Previously filed as exhibits to Registration Statement on Form SB-2 (File
No. 33-97910-LA), declared effective by the Securities and Exchange
Commission on November 21, 1995.
** Confidential treatment granted with respect to certain portions.
+ Denotes a compensation plan in which an executive officer or director
participates.
++ Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on
May 15, 1996.
(d) Financial Statement Schedules.
See Item 14(a)(2) above.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997 GYNECARE, INC.
By: /s/ A. Lad Burgin, Ph.D.
------------------------
A. Lad Burgin, Ph.D.
President and
Chief Executive Officer
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints A. Lad Burgin, Ph.D., and Malcolm M.
Farnsworth, Jr., jointly and severally, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirement of the Securities Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------- -------------------------------------- --------------
<S> <C> <C>
/s/ A. LAD BURGIN, PH.D. President, Chief Executive Officer March 28, 1997
- -------------------------------- (Principal Executive Officer)
A. Lad Burgin, Ph.D.
/s/ MALCOLM M. FARNSWORTH, JR. Vice President, Finance and Chief March 28, 1997
- -------------------------------- Financial Officer (Principal Financial
Malcolm M. Farnsworth, Jr. and Accounting Officer)
/s/ ELIZABETH B. CONNELL, M.D. Director March 28, 1997
- --------------------------------
Elizabeth B. Connell, M.D.
/s/ DAVID L. DOUGLASS Director March 28, 1997
- --------------------------------
David L. Douglass
/s/ A. GRANT HEIDRICH Director March 28, 1997
- --------------------------------
A. Grant Heidrich
/s/ ALAN LEVY, PH.D. Director March 28, 1997
- --------------------------------
Alan Levy, Ph.D.
/s/ MARY LAKE POLAN, M.D., PH.D. Director March 28, 1997
- --------------------------------
Mary Lake Polan, M.D., Ph.D.
/s/ F. THOMAS WATKINS, III Director March 28, 1997
- --------------------------------
F. Thomas Watkins, III
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Origin Medsystems, Inc.:
We have audited the accompanying balance sheet of the Uterine Balloon
Therapy Business Operations of Origin Medsystems, Inc. as of December 31,
1993 and the related statements of operations, and cash flows for the period
from January 1, 1994 to March 7, 1994 and for the year ended December 31,
1993. These financial statements are the responsibility of the management of
the Uterine Balloon Therapy Business Operations of Origin Medsystems, Inc.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
Certain costs and expenses presented in the financial statements
represent allocations and management's estimates of the cost of services
provided to the Uterine Balloon Therapy Business Operations of Origin
Medsystems, Inc. As a result, the financial statements presented may not be
indicative of the financial position or results of operations that would have
been achieved had the Uterine Balloon Therapy Business Operations of Origin
Medsystems, Inc. operated as a non-affiliated entity.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Uterine
Balloon Therapy Business Operations of Origin Medsystems, Inc. as of
December 31, 1993 and the results of its operations and its cash flows for
the period from January 1, 1994 to March 7, 1994 and for the year ended
December 31, 1993, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
November 9, 1995
F-1
<PAGE>
UTERINE BALLOON THERAPY BUSINESS OPERATIONS
OF ORIGIN MEDSYSTEMS, INC.
BALANCE SHEET
DECEMBER 31,
1993
------------
ASSETS
Prepaid royalties............................................... $2,000,000
----------
Total assets.............................................. $2,000,000
----------
----------
LIABILITIES AND NET INVESTMENT
Accounts payable................................................ $ 89,000
----------
Total current liabilities................................. 89,000
----------
Origin's net investment in the Uterine Balloon Therapy
Business Operations........................................... 1,911,000
----------
Total liabilities and net investment...................... $2,000,000
----------
----------
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
UTERINE BALLOON THERAPY BUSINESS OPERATIONS
OF ORIGIN MEDSYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1, 1994 TO FOR THE YEAR ENDED
MARCH 7, 1994 DECEMBER 31, 1993
----------------------- ------------------
<S> <C> <C>
Operating Expenses:
Research and development............... $ 122,000 $ 883,000
Selling, general and administrative.... 7,000 97,000
--------- ---------
Total operating expenses......... 129,000 980,000
Loss from operations..................... (129,000) (980,000)
--------- ---------
Net loss................................. $(129,000) $(980,000)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
UTERINE BALLOON THERAPY BUSINESS OPERATIONS
OF ORIGIN MEDSYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1, 1994 TO FOR THE YEAR ENDED
MARCH 7, 1994 DECEMBER 31, 1993
----------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(129,000) $ (980,000)
Changes in operating assets and liabilities:
Prepaid royalties............................ -- (2,000,000)
Accounts payable............................. (81,000) 89,000
Accrued expenses............................. 1,000 --
--------- -----------
Net cash used in operating activities...... (209,000) (2,891,000)
--------- -----------
Cash flows from financing activities:
Origin's investment in the Uterine Balloon
Therapy Business Operations.................. 209,000 2,891,000
--------- -----------
Net cash provided by financing activities.. 209,000 2,891,000
--------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... -- --
Cash and cash equivalents at beginning of period. -- --
Cash and cash equivalents at end of period....... -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
UTERINE BALLOON THERAPY BUSINESS OPERATIONS OF
ORIGIN MEDSYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Origin Medsystems, Inc. ("Origin") competes in the market defined by a
broad range of disposal surgical devices and equipment used in a multitude of
applications in minimally invasive surgery. The Uterine Balloon Therapy
system is used to treat women experiencing excessive uterine bleeding.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements of the Uterine Balloon Therapy Business
Operations of Origin Medsystems, Inc. (the "Business") include all necessary
personnel costs and pro rata allocations of overhead from Origin to the
Business on a basis which management believes represents a reasonable
allocation of such costs. These charges, along with amounts expended in
transactions related to the royalty and license fee agreement (See Note 3),
comprise Origin's net investment in the Business.
INCOME TAXES
The Business' operations have historically been included in the
consolidated income tax returns filed by Eli Lilly and Company. Income taxes
in the accompanying financial statements have been computed based on the
stand alone operations of the Business as if such operations had filed
separate income tax returns. Any net operating carryforwards generated from
the Business would not be available for use by the Business for federal or
state income tax purposes.
PREPAID ROYALTIES
Prepaid royalties are generally expensed as a percentage of the related
net licensed product sales as determined by specific calculations included in
the royalty agreement.
3. ROYALTY AND LICENSE FEE COMMITMENTS:
In January 1993, Origin entered into a license agreement with the
original inventors of the Uterine Balloon Therapy system. Under the license
agreement, which was assigned to Gynecare on March 8, 1994, Origin was
required to pay a royalty percentage of net sales for all licensed products.
Royalties were payable each year for the ten years following written FDA
approval with respect to certain products. With respect to other products,
royalties were payable until certain rights expire. Royalties were
calculated based on a formula defined in the license agreement, subject to
minimum amounts, and were first applied to the prepaid royalties of
$2,000,000. Minimum royalties of $50,000, $100,000 and $150,000 were
required in January 1996, 1997, and 1998, respectively, and $200,000 was
required each January thereafter. Additional royalty payments were not due
and payable until aggregate royalty payments exceed $2,000,000. The
agreement was to remain in effect in perpetuity unless Origin defaults on its
obligations or provides the original inventors with a notice of termination.
4. SALE OF TECHNOLOGY:
On March 8, 1994, Origin received 3,289,000 shares of Series A Preferred
Stock from Gynecare in exchange for all rights and patents and confidential
information relating to the Business. Additionally, Origin assigned to
Gynecare certain prepaid royalties that were paid to the original inventors
of the Uterine Balloon Therapy system.
F-5
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Balance at Additions Deductions Balance
Beginning of Charged to from at end
Periods Costs & Expenses Reserves of Period
------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
(In thousands)
YEAR ENDED DECEMBER 31, 1996
Accounts receivable allowances 90 185 124 151
YEAR ENDED DECEMBER 31, 1995
Accounts receivable allowances -- 90 -- 90
YEAR ENDED DECEMBER 31, 1994
Accounts receivable allowances -- -- -- --
</TABLE>
S-1
<PAGE>
EXHIBIT 11.1
GYNECARE, INC.
COMPUTATION OF NET LOSS PER SHARE (1)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE FOR THE MARCH 8, 1994
YEAR ENDED YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- ----------------------
<S> <C> <C> <C>
Primary and Fully Diluted:
Weighted average common shares
outstanding for the period 8,209,000 2,438,000 --
Common Equivalent Shares pursuant
to Staff Accounting Bulletin No. 83 -- -- 1,658,000
------------ ----------- -----------
Shares used in computing net loss per
share 8,209,000 2,438,000 1,658,000
------------ ----------- -----------
------------ ----------- -----------
Net loss $(10,200,000) $(4,566,000) $(2,069,000)
------------ ----------- -----------
------------ ----------- -----------
Net loss per share $ (1.24) $ (1.87) $ (1.25)
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
- --------------
(1) Primary and fully diluted calculations are substantially the same.
<PAGE>
GYNECARE 96
MINIMALLY INVASIVE OPTIONS IN WOMEN'S HEALTHCARE GYNECARE
<PAGE>
GYNECARE
- ------------------
GLOSSARY
ABLATION The medical term for the surgical destruction of tissue through
heating or freezing, electrosurgical or laser energy.
ANEMIA A condition in which the blood is deficient in red blood cells,
hemoglobin or in the total volume of packed red blood cells. This occurs when
the equilibrium between blood loss (through bleeding or obstruction) and blood
production is disturbed. Excessive menstrual bleeding is a leading cause of
anemia.
D & C Dilation of the cervix and curettage (surgical scraping) of the uterus.
This procedure is sometimes used to treat menorrhagia but its effects are often
temporary.
ENDOMETRIUM The lining of the uterus which builds up each month in preparation
for pregnancy and sheds if no pregnancy occurs, resulting in menstrual
bleeding.
FIBROID A benign growth made up of fibrous and muscular tissue that occurs in
the wall of the uterus, inside the uterus or on the wall of the uterus. Fibroids
can cause pain, pressure, bleeding or all three.
HORMONE REPLACEMENT THERAPY Medical therapy which uses the female hormones
estrogen & progesterone to supplement decreased hormone production at menopause
(cessation of ovulation and monthly menstruation).
HYSTERECTOMY A major surgical procedure in which the uterus is removed,
performed either through the abdominal wall or through the vagina. It is
estimated that half of all hysterectomies are performed due to dysfunctional
uterine bleeding or fibroids.
MENORRHAGIA The medical term for abnormally excessive menstrual bleeding.
MYOMA The medical term for a fibroid, derived from MYO (muscle) and OMA
(abnormal tissue growth).
MYOMECTOMY Surgical removal of a fibroid, leaving the uterus intact.
RESECTOSCOPE An instrument with a telescope and an electrosurgical wire loop
or rollerball that is used in gynecology to remove the endometrial lining of the
uterus and uterine fibroids.
UTERINE DISORDERS Disorders that pertain to the uterus, such as menorrhagia
and fibroids.
<PAGE>
GYNECARE
- -----------------------------
MISSION STATEMENT
Gynecare, in partnership with the medical community, is dedicated to fulfilling
unmet needs in women's healthcare by developing safe, minimally invasive and
cost-effective solutions that innovatively treat female disorders while
considering the physiological and psychological impact on women.
<PAGE>
GYNECARE
- ------------------
INTRODUCTION
UTERINE DISORDERS AFFECT MILLIONS OF WOMEN WORLDWIDE. ALTHOUGH WOMEN HAVE
EXPERIENCED THESE PROBLEMS FOR DECADES, THERE HAS BEEN LITTLE CHANGE IN
TREATMENTS FOR THESE CONDITIONS IN THE LAST 20 YEARS. HISTORICALLY, TREATMENT
FOR UTERINE DISORDERS HAS BEEN INVASIVE AND EVEN RADICAL, WHERE THE ENTIRE
UTERUS IS REMOVED IN A HYSTERECTOMY. TREATMENT FOR EXCESSIVE BLEEDING OFTEN
ESCALATES FROM DRUG THERAPY TO DILATION AND CURETTAGE (D&C), INVASIVE SURGICAL
ABLATION AND FREQUENTLY HYSTERECTOMY. HYSTERECTOMY STILL REMAINS THE TREATMENT
OF CHOICE FOR MANY PHYSICIANS, SINCE DRUG THERAPY IS NOT ALWAYS EFFECTIVE AND
REQUIRES LONG TERM TREATMENT, D&C TYPICALLY PROVIDES ONLY SHORT TERM RELIEF, AND
CURRENT SURGICAL ABLATION TECHNIQUES ARE HIGHLY SKILL DEPENDENT. DYSFUNCTIONAL
UTERINE BLEEDING AND UTERINE FIBROIDS ACCOUNT FOR ABOUT HALF OF THE
APPROXIMATELY 600,000 HYSTERECTOMIES PERFORMED ANNUALLY IN THE U.S. AFTER
UTERINE REMOVAL, PATIENTS MAY EXPERIENCE EMOTIONAL, PHYSICAL AND PSYCHOLOGICAL
CHANGES. HYSTERECTOMY ALSO HAS A SIGNIFICANT ECONOMIC IMPACT, TYPICALLY
REQUIRING A 3-4 DAY HOSPITAL STAY, AND A 2-8 WEEK RECOVERY PERIOD, AND COSTING
THE U.S. HEALTHCARE SYSTEM AN ESTIMATED $3 TO $5 BILLION ANNUALLY.
"HYSTERECTOMY HAS BEEN THE TRADITIONAL TREATMENT FOR EXCESSIVE MENSTRUAL
BLEEDING FOR LACK OF AN ALTERNATIVE. THE OTHER TREATMENTS SUCH AS HORMONAL
TREATMENT AND D&C, HAVE NOT BEEN VERY EFFECTIVE, SO PHYSICIANS RESORT TO
HYSTERECTOMY TO ELIMINATE THE PROBLEM."
-- BRIAN WALSH, M.D., CHIEF OF SURGICAL GYNECOLOGY,
BRIGHAM & WOMEN'S HOSPITAL, BOSTON, MASSACHUSETTS,
GYNECARE U.S. CLINICAL INVESTIGATOR
[Inserted here is a photograph of Dr. Brian Walsh, Chief of Surgical
Gynecology at Brigham & Women's Hospital, and a Gynecare U.S. Clinical
Investigator.]
[Inserted here is a drawing of three women figures in which two are shaded
and one is not to illustrate that one-third of all women will have had a
hysterectomy by age 60.]
ONE THIRD OF ALL WOMEN
WILL HAVE HAD A
HYSTERECTOMY BY THE
AGE OF 60
2
<PAGE>
ALTHOUGH THE DESIRE FOR ALTERNATIVE THERAPIES IS INCREASING, HYSTERECTOMIES ARE
FREQUENTLY PERFORMED FOR DYSFUNCTIONAL UTERINE BLEEDING AND FIBROIDS. GYNECARE'S
GOAL, THEREFORE, IS TO RAISE THE LEVEL OF WOMEN'S AWARENESS ASSOCIATED WITH
UTERINE DISORDERS. IN PARTNERSHIP WITH THE MEDICAL COMMUNITY AND ITS PATIENTS,
GYNECARE IS WORKING TO SIMPLIFY AND IMPROVE TREATMENT FOR DYSFUNCTIONAL UTERINE
BLEEDING AND FIBROIDS THAT OFTEN INTERFERE WITH WORK, FAMILY AND SOCIAL
COMMITMENTS.
GYNECARE'S FIRST TWO PRODUCTS, THE THERMACHOICE-TM- UTERINE BALLOON THERAPY-TM-
SYSTEM AND THE VERSAPOINT-TM- BIPOLAR ELECTROSURGERY SYSTEM, HAVE BEEN DESIGNED
TO PROVIDE BOTH THE PHYSICIAN AND THE PATIENT WITH MINIMALLY INVASIVE TREATMENTS
THAT CAN BE PERFORMED UNDER LOCAL ANESTHESIA WITH INTRAVENOUS SEDATION IN AN
OUTPATIENT SETTING. THESE THERAPEUTIC OPTIONS CAN OFFER COST-EFFECTIVE BENEFITS
TO PATIENTS, PHYSICIANS AND PAYORS.
GYNECARE REMAINS COMMITTED TO UNDERSTANDING THE PHYSIOLOGICAL AND
PSYCHOLOGICAL ASPECTS OF WOMEN'S UTERINE DISORDERS, AND HAS UNDERTAKEN EDUCATION
EFFORTS THROUGH PATIENT-ORIENTED SYMPOSIA AND LITERATURE.
THROUGH THESE INITIATIVES, THE COMPANY BELIEVES THAT IT CAN INCREASE
PHYSICIANS' AWARENESS OF SIMPLER, SAFER ALTERNATIVE THERAPIES, WHILE
ASSURING PATIENTS THAT THEY ARE NOT ALONE, AND INFORMING THEM ABOUT NEW
TREATMENT OPTIONS.
[Inserted here is a drawing of two women figures in which one is shaded and
one is not to illustrate that nearly one-half of hysterectomies performed
annually are due to dysfunctional uterine bleeding and fibroids.]
NEARLY 1/2 OF THE
HYSTERECTOMIES PERFORMED ANNUALLY ARE DUE TO
DYSFUNCTIONAL UTERINE BLEEDING AND FIBROIDS
3
<PAGE>
TO OUR
- -------------------
SHAREHOLDERS
I am pleased to report to you that in 1996 Gynecare achieved the goals we
outlined in last year's 1995 annual report. In particular, we completed the
treatment phase of our U.S. clinical trials for ThermaChoice and received U.S.
Food and Drug Administration (FDA) clearance to market VersaPoint in the United
States.
Throughout 1996, we focused on recruiting and hiring highly talented people. We
developed an outstanding leadership team with a proven capability to execute
plans and achieve objectives. We are now
well-positioned to move forward to commercialize our products and
to establish new minimally invasive therapeutic options for uterine
disorders.
The ThermaChoice Uterine Balloon Therapy system was designed as a minimally
invasive treatment for patients who experience dysfunctional uterine bleeding.
In October 1996, we completed the patient treatment phase of our U.S. clinical
trials earlier than anticipated, treating more than 250 patients. We are
preparing a Pre-Market Approval application and plan to submit to the FDA during
1997.
The ThermaChoice system is approved for marketing in Canada and over 30 other
countries. Clinical trials in Europe and Canada have generated valuable
follow-up data. The Company has completed an economic study which
demonstrated the cost-effectiveness of the system, and is pursuing
reimbursement in certain countries.
In November 1996, five months after filing the 510(k) application, we obtained
FDA clearance to market our second product, VersaPoint, a bipolar electrosurgery
system for fibroid removal. Currently, we are in the process of scaling up
manufacturing in anticipation of launching that product during 1997.
4
<PAGE>
In 1996, Gynecare established a targeted marketing strategy in order to more
effectively commercialize the ThermaChoice Uterine Balloon Therapy system
internationally, and to support pre-launch efforts for VersaPoint in the United
States. Specifically, we have developed relationships with physician opinion
leaders who will assist in physician training, procedure endorsement and patient
education. We believe that education programs targeting physicians and patients
will increase demand for both ThermaChoice and VersaPoint.
In 1996, we had revenues of $962,000 compared with revenues of $849,000 in 1995,
an increase of 13%. We reported a net loss for fiscal 1996 of $10.2 million,
compared with a net loss of $4.6 million in 1995. We completed 1996 with cash
and investments of $13.1 million.
Looking ahead to 1997, we believe that it will be a year for building momentum.
The Company has established the following goals for 1997:
- - SUBMIT A PMA FOR THERMACHOICE;
- - COMMENCE MARKETING OF VERSAPOINT IN THE UNITED STATES;
- - SEEK CE MARK APPROVAL FOR VERSAPOINT IN EUROPE;
- - DEVELOP LAPAROSCOPIC USE OF VERSAPOINT;
- - CONTINUE TO BUILD GLOBAL MARKETING AND SALES INFRASTRUCTURE.
In closing, I would like to thank all of Gynecare's employees for their
dedication and commitment to our corporate mission. Our employees are critical
to Gynecare's overall success and, as a relative newcomer to the Company, I am
impressed by the talent and perseverance of our employees. We appreciate your
interest in Gynecare and look forward to reporting our progress to you in fiscal
1997.
Sincerely,
/s/ A. Lad Burgin, Ph.D.
A. Lad Burgin, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
[Inserted here is a photograph of A. Lad Burgin, Ph.D., President and Chief
Executive Officer of Gynecare, Inc.]
5
<PAGE>
[This page consists of a picture of the ThermaChoice Uterine Balloon Therapy
system, including the controller and disposable balloon catheter.]
6
<PAGE>
"WHEN YOU'VE ALWAYS HAD HEAVY PERIODS, YOU JUST THINK THAT'S NORMAL. BEFORE I
HAD THE PROCEDURE, MY PERIODS WERE SEVEN TO NINE DAYS LONG AND THEY WERE
EXTREMELY HEAVY. MY CRAMPING WAS SO BAD THAT I WOULD LOSE ABOUT ONE DAY A MONTH
WHERE I JUST STAYED IN BED. THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM
CHANGED MY LIFE. I HAVE MUCH MORE ENERGY, AND I DON'T HAVE CRAMPS ANYMORE."
- ROBIN KATSAROS, A THERMACHOICE PATIENT
[Inserted here are three photographs at three different angles, of Robin
Katsaros, a ThermaChoice patient.]
MORE THAN 19 PERCENT OF THE HYSTERECTOMIES PERFORMED ANNUALLY IN THE UNITED
STATES ARE FOR TREATMENT OF DYSFUNCTIONAL UTERINE BLEEDING. EXCESSIVE BLEEDING
IS AN EMBARRASSING AND OFTEN INCAPACITATING CONDITION THAT AFFECTS A WOMAN'S
QUALITY OF LIFE BY COMPROMISING HER PHYSICAL, EMOTIONAL AND PSYCHOLOGICAL
WELL-BEING. IN EXTREME CASES, CONTINUOUS UNCONTROLLED BLOOD LOSS CAN LEAD TO
ANEMIA. IN ORDER TO PROVIDE WOMEN WITH AN ALTERNATIVE TREATMENT, GYNECARE
DEVELOPED THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM. THIS SYSTEM IS A
MINIMALLY INVASIVE, EIGHT-MINUTE, OUTPATIENT PROCEDURE WHICH USES HEAT TO ABLATE
THE ENDOMETRIAL LINING OF THE UTERUS, THE SOURCE OF MENSTRUAL BLEEDING.
THERMACHOICE IS INDICATED FOR WOMEN WITHOUT FIBROIDS AND WHO NO LONGER WISH TO
BECOME PREGNANT.
THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM IS APPROVED FOR MARKETING IN
CANADA AND OVER 30 OTHER COUNTRIES. IN THE UNITED STATES, GYNECARE
HAS COMPLETED THE PATIENT TREATMENT PHASE OF ITS U.S. CLINICAL TRIALS AND PLANS
TO SUBMIT A PRE-MARKET APPROVAL (PMA) APPLICATION TO THE FDA
DURING 1997.
THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM IS AN INVESTIGATIONAL DEVICE AND
HAS NOT BEEN APPROVED BY THE FDA FOR MARKETING IN THE UNITED STATES. THE SYSTEM
IS AVAILABLE FOR SALE IN CERTAIN MARKETS INTERNATIONALLY.
7
<PAGE>
"THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM AS A TREATMENT IS AN EXAMPLE OF
HOW THE PRACTICE OF GYNECOLOGY HAS CHANGED RECENTLY. HISTORICALLY, HYSTERECTOMY
WAS THE SOLUTION TO VIRTUALLY EVERY PROBLEM. WITH NEW PRODUCTS BEING DEVELOPED,
PHYSICIANS CAN MAKE MORE SPECIFIC DIAGNOSES AND PRESCRIBE ALTERNATIVE
TREATMENTS.
THERMACHOICE UTERINE BALLOON THERAPY HAS THE POTENTIAL TO BE A MUCH BETTER
ALTERNATIVE TO HYSTERECTOMY FOR TREATING EXCESSIVE MENSTRUAL BLEEDING.
HYSTERECTOMY CORRECTS THE PROBLEM BUT AT CONSIDERABLE FINANCIAL AND EMOTIONAL
COSTS."
- Tanya Spirtos, M.D. - Clinical Instructor, Dept. of OB/GYN,
Stanford University School of Medicine,
Gynecare U.S. Clinical Investigator
[Inserted here is a photograph of Dr. Tanya Spirtos, Clinical Instructor at
the Department of OB/GYN at Stanford University School of Medicine, and a
Gynecare U.S. Clinical Investigator.]
THERMACHOICE KEY MILESTONES
BASIC SCIENCE
1989
Lab/In-Vitro Hysterectomy Studies
1991
Initial Clinical Study
1993
Pilot Studies in Canada
1995
US IDE Hysterectomy Studies
LARGE SCALE CLINICAL STUDIES
1995
300+ Cases: International Multicenter Study
1996
250 Cases: US IDE Multicenter Study
GOAL FOR 1997
1997
Submit PMA
8
<PAGE>
TRADITIONAL TREATMENTS
The typical treatment regimen for dysfunctional uterine bleeding involves a
progression from drug therapy to D&C and frequently hysterectomy. If drug
therapy, which is widely prescribed as a first line of treatment, fails,
physicians typically recommend a D&C. In many instances, a D&C does not provide
long-term relief, and physicians may recommend a hysterectomy. Alternatively,
some highly specialized surgeons will perform surgical ablation using an
electrosurgical rollerball or loop electrode to destroy the endometrial lining.
THE THERMACHOICE UTERINE BALLOON THERAPY SYSTEM
The ThermaChoice Uterine Balloon Therapy system is designed as a minimally
invasive, cost-effective alternative to drug therapy, D&C, surgical ablation
using a resectoscope, and surgery. "ThermaChoice as a treatment is an example of
how the practice of gynecology has changed recently. Historically, hysterectomy
was the solution to virtually every problem. With new products being developed,
physicians can make more specific diagnoses and prescribe alternative
treatments," says Tanya Spirtos, M.D., Clinical Instructor, OB/GYN Department,
Stanford University School of Medicine.
In Gynecare's international multi-center study, involving over 300 patients,
clinicians reported a success rate consistently in the 90% range at 6 and 12
months follow-up, where success has been defined as normal bleeding or less.
In October 1996, Gynecare completed the patient treatment phase of its U.S.
clinical trials involving over 250 patients at 12 investigative sites in the
U.S. and two in Canada. Follow up data from this study is currently being
collected for submission of a PMA to the FDA.
Patients have indicated that they returned to an active lifestyle shortly after
treatment. "The ThermaChoice procedure was very simple and straightforward,"
said Robin Katsaros, a ThermaChoice patient. "It only took about 10 minutes and
I didn't hurt afterwards. I was on a plane the next day. It dramatically
improved the quality of my life." As a procedure that has been performed under
local anesthesia in an outpatient setting, ThermaChoice is designed to fit
within the U.S. managed care system, which is striving to reduce costs and
provide patients with minimally invasive options.
[Inserted here is a drawing of a balloon catheter being inserted into the
uterus.]
1. INSERTION AND INFLATION
THE BALLOON CATHETER IS INSERTED VAGINALLY, THROUGH THE CERVIX, INTO THE UTERUS.
INFLATION OCCURS WHEN THE CATHETER IS FILLED WITH A STERILE FLUID SOLUTION.
[Inserted here is a drawing of the inflated balloon catheter in the uterus.]
2. ABLATION AND MONITORING
A HEATING ELEMENT INSIDE THE BALLOON RAISES THE TEMPERATURE TO ABOUT 87 DEG. C
AND MAINTAINS IT FOR APPROXIMATELY EIGHT MINUTES. THE CONTROLLER CONTINUOUSLY
MONITORS AND DISPLAYS PRESSURE, TEMPERATURE AND THERAPY TIME.
[Inserted here is a drawing of the uterus in which the balloon catheter is
deflated and the catheter is being withdrawn.]
3. DEFLATION AND REMOVAL
AFTER THE EIGHT MINUTE TREATMENT, THE
BALLOON IS DEFLATED AND THE CATHETER IS WITHDRAWN AND DISCARDED.
9
<PAGE>
[This page consists of a picture of the VersaPoint system showing the
generator and two microelectrodes.]
10
<PAGE>
"I AM A BUSINESS CONSULTANT AND HAD TO CANCEL SPEAKING ENGAGEMENTS BECAUSE I
NEEDED TO USE THE WASHROOM EVERY 30 MINUTES AND THERE WAS NO ACCESS. I COULD
NEVER PREDICT WHETHER I WOULD BE AVAILABLE OR NOT. AFTER THE PROCEDURE, I FELT
FINE. THIS HAS MADE MY LIFE EASIER, I AM NOT FLOODING ANYMORE."
-- JUDY BENNETT, A CANADIAN VERSAPOINT PATIENT
[Inserted here are three photographs at three different angles of a Canadian
VersaPoint patient.]
A FIBROID IS THE MOST COMMON BENIGN PATHOLOGY FOUND INSIDE A WOMAN'S PELVIS. IT
IS ESTIMATED THAT FIBROIDS OCCUR IN 20-30 PERCENT OF WOMEN AGE 30 AND OLDER.
SYMPTOMS MAY INCLUDE INCREASED MENSTRUAL BLEEDING, PAIN OR PRESSURE IN THE
ABDOMEN, AND INFERTILITY PROBLEMS. CURRENT ELECTROSURGICAL TECHNIQUES FOR THE
REMOVAL OF FIBROIDS HAVE NOT MET WIDE ACCEPTANCE. THEREFORE, PHYSICIANS MAY
RECOMMEND TOTAL HYSTERECTOMY TO TREAT SYMPTOMATIC FIBROIDS. IN 1995, GYNECARE
BEGAN AGGRESSIVE DEVELOPMENT OF VERSAPOINT, A BIPOLAR ELECTROSURGERY SYSTEM, TO
TREAT FIBROIDS INSIDE THE UTERUS. THIS DEVICE VAPORIZES, CUTS AND DESICCATES
TISSUE THROUGH THE USE OF MINIMALLY INVASIVE BIPOLAR TECHNOLOGY IN A NORMAL
SALINE SOLUTION.
IN NOVEMBER 1996, GYNECARE RECEIVED 510(k) CLEARANCE FROM THE FDA TO MARKET
VERSAPOINT IN THE UNITED STATES. THE COMPANY PLANS TO BEGIN MARKETING VERSAPOINT
IN THE UNITED STATES DURING 1997.
11
<PAGE>
"THE VERSAPOINT ELECTRODE IS VERY SMALL AND CAN BE USED WITH EXISTING
HYSTEROSCOPES WHICH MEASURE AS SMALL AS 5 MILLIMETERS IN DIAMETER. THEREFORE,
YOU DO NOT HAVE TO DILATE THE CERVIX, WHICH SUBSTANTIALLY REDUCES PAIN AND
MINIMIZES CERVICAL TRAUMA. THOUGH THE ELECTRODE IS SMALL, IT IS INCREDIBLY
POWERFUL. VERSAPOINT COMBINES THE SAFETY OF A BIPOLAR MACHINE, WHICH REGULATES
VOLTAGE AND ELIMINATES STRAY ELECTRICITY, WITH THE POWER OF MONOPOLAR.
VERSAPOINT COULD BE USED IN THE OFFICE, OR IN AN OUTPATIENT SETTING, WITH SIMPLY
AN IV SEDATION AND LOCAL ANESTHESIA FOR THE PATIENT."
-- ROSE KUNG, M.D. -- ASSISTANT PROFESSOR, DEPT. OF OB/GYN,
UNIVERSITY OF TORONTO, GYNECARE CANADIAN
CLINICAL INVESTIGATOR
[Inserted here is a photograph of Dr. Rose Kung, Assistant Professor in the
Department of OB/GYN at the University of Toronto, and a Gynecare Canadian
Clinical Investigator.]
VERSAPOINT KEY MILESTONES
BASIC SCIENCE
1995
Acquired Technology
1995-6
Initial Clinical Study
1996 Q2
510(k) Submission
1996 Q4
510(k) Clearance
GOALS FOR 1997
US Marketing Hysteroscopic Use
Seek CE Mark
Develop Laparoscopic Use
12
<PAGE>
CONVENTIONAL ELECTROSURGICAL TECHNOLOGY
Currently available electrosurgical techniques use monopolar technology to
cut a fibroid by using a high voltage device in an irrigation solution such
as sorbitol or glycine. These solutions must be carefully monitored to avoid
over-absorption into the patient's bloodstream. Over-absorption disrupts the
blood's electrolyte, or normal sodium balance, which can result in coma,
brain damage and even death.
THE VERSAPOINT BIPOLAR ELECTROSURGICAL SYSTEM
VersaPoint is a bipolar electrosurgery system designed as a minimally invasive
treatment for fibroids. The system consists of an electrosurgical generator and
a single-use microelectrode, which is inserted vaginally to cut, desiccate or
vaporize a fibroid. "The VersaPoint is very small and can be used with existing
hysteroscopes which measure as small as 5 millimeters in diameter," says Rose
Kung, M.D., Assistant Professor, Department of OB/GYN, University of Toronto.
"Therefore, you do not have to dilate the cervix, which substantially reduces
pain and minimizes cervical trauma. VersaPoint could be used in the office, or
in an outpatient setting, with simply an IV sedation and local anesthesia."
VersaPoint was designed to combine the effectiveness of electrosurgery with the
safety of bipolar technology. The low voltage microelectrodes operate in a
saline environment, potentially reducing the risk of developing electrolyte
imbalance. When in contact with tissue, these electrodes achieve instantaneous
vaporization, enabling physicians to continue the procedure without having to
clear the uterine cavity of fibroid chips. Unlike monopolar electrosurgical
tools which require that a large pad be placed on the patient's thigh or buttock
in order to create an electrical path to the return electrode, VersaPoint
localizes energy by positioning the active and return electrode on the same
axis. This proprietary technology prevents any "stray" current from traveling
through the patient's body by drawing the current back to the return electrode
through saline, which acts as an electrical conductor.
Patients and physicians who have experience with the procedure agree that
reduced recovery time over hysterectomy is a key advantage of the VersaPoint
system. "I was in recovery for 2-3 hours," said Judy Bennett, a VersaPoint
patient. "I was up and about that afternoon, I watered my plants, talked to
friends and made dinner."
[Inserted here is a drawing of the uterus in which a microelectrode is
inserted into the uterus and the uterine cavity is filled with sterile saline.]
1. INSERTION AND VAPORIZATION
THE MICROELECTRODE IS INSERTED VAGINALLY, THROUGH THE CERVIX, INTO THE UTERUS
USING A HYSTEROSCOPE. THE UTERINE CAVITY IS FILLED WITH STERILE SALINE.
VAPORIZATION OCCURS WHEN THE MICROELECTRODE IS ACTIVATED.
[Inserted here is a drawing of the vaporization process in which energy is
delivered from the generator to the fibroid through the microelectrode.]
2. VAPORIZATION
ENERGY IS DELIVERED FROM THE GENERATOR TO THE FIBROID THROUGH THE
MICROELECTRODE. IN THE VAPORIZATION MODE, THE GENERATOR CONTROLS THE CREATION OF
A "VAPOR POCKET" OR BUBBLE, WHICH, UPON CONTACT WITH THE TISSUE, CAUSES
VAPORIZATION OF THE FIBROID.
13
<PAGE>
PRODUCTS FOR
- ------------------------------------------------
TODAY'S HEALTHCARE ENVIRONMENT
Today's managed care environment is based on a system of incentives which
rewards lower cost, minimally invasive, safe alternative choices for patient
treatment. "Managed care is a means of healthcare delivery which optimizes
outcomes and the use of resources," says Robert London, M.D., Vice President
for Clinical Affairs and Acting Chief Medical Officer, NYLcare. "Managed care
is here to stay. It is an evolving form of healthcare delivery in the U.S.
and is having a major impact in the way physicians practice as well as the
quality of medicine."
In reviewing the treatment regimen for uterine disorders, hysterectomy stands
out as a major challenge to reducing the overall cost of treatment. In fact, as
the second most common major surgical procedure for women in the United States,
hysterectomy cost the healthcare system an estimated $3 billion to $5 billion
annually.
While physicians are seeking alternative therapies to recommend to their
patients, patients are seeking alternatives to hysterectomy. The VersaPoint
and ThermaChoice systems have been designed to provide women and physicians
with minimally invasive cost-effective options.
[Inserted here is a photograph of Dr. Robert London, Vice President for
Clinical Affairs and Acting Chief Medical Officer at NYLcare, and a Gynecare
Medical Advisory Board Member.]
"MANAGED CARE IS AFFECTING EVERY ASPECT OF HOW OB/GYNS PRACTICE. ALL MEDICAL
CARE PLANS ARE CLOSELY MONITORING WHAT INTERVENTIONS THE PHYSICIANS PERFORM,
ESPECIALLY IN TERMS OF CESAREAN SECTION AND HYSTERECTOMY. IN TERMS OF
GYNECOLOGICAL SURGERY, UP TO ONE-THIRD OF ALL HYSTERECTOMIES PERFORMED FOR
DYSFUNCTIONAL UTERINE BLEEDING CAN BE AVOIDED BY THE USE OF ENDOMETRIAL ABLATION
WITH A UTERINE BALLOON THERAPY SYSTEM."
-- DR. ROBERT LONDON -- VICE PRESIDENT FOR CLINICAL AFFAIRS AND
ACTING CHIEF MEDICAL OFFICER AT NYLCARE,
GYNECARE MEDICAL ADVISORY BOARD MEMBER
14
<PAGE>
FINANCIAL OVERVIEW
<PAGE>
SELECTED
- ---------------------------
FINANCIAL DATA
<TABLE>
<CAPTION>
FULL YEAR 1994
--------------------------------------------------------
UTERINE BALLOON THERAPY
BUSINESS OPERATIONS OF
COMPANY ORIGIN MEDSYSTEMS, INC.
----------------- ---------------------------------
MAR. 8, 1994
YEAR ENDED YEAR ENDED (DATE OF INCEPTION) JAN. 1 1994 TO YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995 TO DEC. 31, 1994(1) MAR. 7, 1994(1) DEC. 31, 1993(1)
------------- ------------ -------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 962,000 $ 849,000 $ -- $ -- $ --
Cost of goods sold 1,657,000 799,000 -- -- --
------------- ------------ -------------------- --------------- -----------------
Gross profit/(loss) (695,000) 50,000 -- -- --
------------- ------------ -------------------- --------------- -----------------
Operating expenses:
Research and development $ 5,025,000 $ 2,415,000 $ 1,354,000 $ 122,000 $ 883,000
Selling, general and
administrative 5,244,000 2,655,000 880,000 7,000 97,000
------------- ------------ -------------------- --------------- -----------------
Total operating
expenses 10,269,000 5,070,000 2,234,000 129,000 980,000
------------- ------------ -------------------- --------------- -----------------
Loss from operations (10,964,000) (5,020,000) (2,234,000) (129,000) (980,000)
Interest income, net 764,000 454,000 165,000 -- --
------------- ------------ -------------------- --------------- -----------------
Net loss $(10,200,000) $(4,566,000) $(2,069,000) $ (129,000) (980,000)
------------- ------------ -------------------- --------------- -----------------
Net loss per share $ (1.24) $ (1.87) $ (1.25) $ -- $ --
------------- ------------ -------------------- --------------- -----------------
Shares used in computing
net loss per share 8,209,000 2,438,000 1,658,000 -- --
<CAPTION>
UTERINE BALLOON THERAPY
BUSINESS OPERATIONS OF
ORIGIN MEDSYSTEMS, INC.
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993
------------- ------------- -------------- -------------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 13,071,000 $22,710,000 $4,106,000 $ --
Working capital 12,800,000 23,016,000 3,648,000 (89,000)
Total assets 18,398,000 28,271,000 6,495,000 2,000,000
Long-term debt 458,000 458,000 -- --
Accumulated deficit (16,835,000) (6,635,000) (2,069,000) --
Total stockholders' equity $ 16,534,000 $26,308,000 $5,900,000 --
Origin's net investment -- -- -- 1,911,000
</TABLE>
- --------------
(1) The periods beginning March 8, 1994 reflect data of Gynecare, Inc. The
periods prior to and including March 7, 1994 reflect data of the Uterine Balloon
Therapy Business Operations of Origin, all of the assets of which were acquired
by Gynecare on March 8, 1994.
16
<PAGE>
MANAGEMENT'S
- ---------------------------------------------------------
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section and other parts of this Annual Report contain 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 Company's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1996, filed with the Securities and Exchange
Commission.
OVERVIEW
Gynecare, Inc. ("Gynecare" or the "Company") was incorporated and commenced
business operations on March 8, 1994. The Company designs, develops,
manufactures and markets minimally invasive medical devices for the treatment
of uterine disorders. Gynecare's first product, the ThermaChoice Uterine
Balloon Therapy system, is used to treat women who experience dysfunctional
uterine bleeding, or menorrhagia. All rights to certain patents and
confidential information developed by the original inventors of ThermaChoice
were acquired by Gynecare from Origin Medsystems, Inc. ("Origin") on March 8,
1994 (the Company's date of inception). The ThermaChoice system is currently
an investigational device in the United States and is approved for marketing
in Canada and over 30 other countries worldwide. In October 1996, Gynecare
completed the patient treatment phase of its U.S. clinical trials and is
preparing to file a Pre-Market Approval ("PMA") application with the FDA in
1997.
Gynecare's second product, the VersaPoint Bipolar Electrosurgery system, was
obtained in July 1995 through a license and OEM supply agreement with Gyrus
Medical, Ltd. ("Gyrus"). The VersaPoint system is designed to treat women who
have been diagnosed with benign uterine pathology such as fibroids, polyps,
adhesions and divided septa. In November 1996, Gynecare received notification
of 510(k) clearance from the FDA to market the VersaPoint system in the United
States. The Company plans to begin marketing the system in the United States
during 1997.
The Company has a limited history of operations and has experienced significant
operating losses since inception. Operating losses are expected to continue for
at least the next several years as the Company continues to expend substantial
resources to fund clinical trials in support of regulatory and reimbursement
approvals, research and development and expansion of marketing and sales
activities.
The Company commenced commercial shipments of its ThermaChoice Uterine Balloon
Therapy system in international markets in March 1995 and since then has sold
this product primarily through a limited number of international distributors
who resell to physicians and hospitals. Sales to distributors are made on open
credit terms and may include volume purchase discounts and extended payment
terms. Therefore, distributors may purchase several months of inventory at
one time to take advantage of discounts and extended payment terms, which
may result in a decrease of revenues recognized from sales to such distributors
in future periods as such distributors sell inventory acquired in
prior periods.
Future revenues and results of operations are expected to fluctuate
significantly from quarter to quarter and will depend upon, among other
factors, actions relating to regulatory and reimbursement matters, the extent
to which the Company's products gain market acceptance, the rate at which the
Company establishes its network of distributors and direct sales personnel in
the U.S. and internationally, the timing and size of customer purchases, the
progress of the Company's PMA application to the FDA for the ThermaChoice
Uterine Balloon Therapy system, and competition.
17
<PAGE>
OPERATING DATA
The following table combines 1994 data for the Uterine Balloon Therapy Business
Operations of Origin (for the period from January 1, 1994 to March 7, 1994) and
the Company (for the period from March 8, 1994 to December 31, 1994) in order to
facilitate management's discussion of financial results. Certain costs and
expenses presented in the statements of operations of the Uterine Balloon
Therapy Business Operations of Origin represent allocations and management
estimates. As a result, the statements of operations presented for periods prior
to March 8, 1994 are not strictly comparable to those of subsequent periods and
may not be indicative of the results of operations that would have been achieved
had the Uterine Balloon Therapy Business Operations of Origin operated as a
non-affiliated entity during such period.
COMPANY COMPANY COMBINED
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
------------- ------------- -------------
Revenues $ 962,000 $ 849,000 $ --
Cost of goods sold 1,657,000 799,000 --
------------- ------------- -------------
Gross profit/(loss) (695,000) 50,000 --
------------- ------------- -------------
Operating expenses:
Research and development 5,025,000 2,415,000 1,476,000
Selling, general and administrative 5,244,000 2,655,000 887,000
------------- ------------- -------------
Total operating expenses 10,269,000 5,070,000 2,363,000
------------- ------------- -------------
Loss from operations (10,964,000) (5,020,000) (2,363,000)
Interest income, net 764,000 454,000 165,000
------------- ------------- -------------
Net loss $(10,200,000) $ (4,566,000) $ (2,198,000)
------------- ------------- -------------
------------- ------------- -------------
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenues for the year ended December 31, 1996 increased 13% to $962,000 from
$849,000 in fiscal 1995. Substantially all of the revenues to-date have been
generated from international sales of the ThermaChoice Uterine Balloon
Therapy system. The increase in revenues from those in fiscal 1995 was
primarily the result of the continued expansion of international sales of the
ThermaChoice Uterine Balloon Therapy system.
Cost of goods sold increased 107% from $799,000 in fiscal 1995 to $1,657,000
in fiscal 1996. This increase was primarily the result of excess capacity
incurred in the Company's new manufacturing facility in Menlo Park,
California and the cost of non-revenue generating product shipped to support
the Company's ongoing efforts to achieve third-party reimbursement in
international markets.
The ThermaChoice controller and the VersaPoint system, including the
generator and microelectrodes, are manufactured by contract manufacturers
under OEM supply agreements. Gynecare currently manufactures the disposable
balloon catheter component of the ThermaChoice Uterine Balloon Therapy system
at its headquarters in Menlo Park, California. For the forseeable future, the
Company expects that manufacturing start-up and overhead costs spread over
low production volumes combined with the cost of using contract manufacturers
to produce the ThermaChoice controller and VersaPoint system will continue to
have an adverse effect on gross margins.
18
<PAGE>
The Company's research and development expenses increased 108% from
$2,415,000 in fiscal 1995 to $5,025,000 in fiscal 1996. This increase was
principally due to the costs of the U.S. clinical trials of the ThermaChoice
Uterine Balloon Therapy system, which began in January 1996, increased
expenditures associated with the continuing development of the ThermaChoice
Uterine Balloon Therapy system and the ongoing development of the VersaPoint
system, including the costs of clinical studies and the submission for FDA
clearance to market VersaPoint in the U.S. Such FDA clearance was received in
November 1996.
The Company's selling, general and administrative expenses increased 98% from
$2,655,000 in fiscal 1995 to $5,244,000 in fiscal 1996. This increase was
primarily the result of Gynecare's increased investment in sales and
marketing activities in 1996 focused on obtaining reimbursement in
international markets and managing the international distributor network for
its ThermaChoice Uterine Balloon Therapy system. Growth in the Company's
sales and marketing, accounting and administrative staff from ten employees
at December 31, 1995 to seventeen at December 31, 1996 further contributed to
the increase in selling, general and administrative expenses. Selling,
general and administrative expenses are expected to continue to increase in
1997. The time period during which these expenses are expected to continue to
increase is a forward-looking statement involving risks and uncertainties,
including the rate at which the Company establishes its sales and
distribution network and the rate at which sales increase.
Net interest income increased 68% to $764,000 in fiscal 1996, from $454,000
in fiscal 1995. This increase was primarily the result of the increased level
of cash and investments held by the Company compared to that held during
fiscal 1995 as a result of the completion of the Company's initial public
offering in November 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO COMBINED YEAR ENDED DECEMBER 31, 1994
Revenues for the year ended December 31, 1995 were $849,000. No revenues were
recorded for the combined year ended December 31, 1994. All of the revenues
during fiscal 1995 were generated from sales of the ThermaChoice Uterine
Balloon Therapy system. For the year ended December 31, 1995, cost of goods
sold was $799,000, resulting in gross profit of $50,000 and gross profit as a
percentage of revenue of 6%.
The Company's research and development expenses increased to $2,415,000 for the
year ended December 31, 1995 from $1,476,000 for the combined year ended
December 31, 1994, primarily due to an increase in the research and development
staff, an increase in expenditures associated with the continuing development of
the ThermaChoice Uterine Balloon Therapy system, investigation into several
other potential products licensed by the Company and increased cost of clinical
trials.
The Company's selling, general and administrative expenses increased to
$2,655,000 for the year ended December 31, 1995 from $887,000 for the combined
period ended December 31, 1994. The increase was primarily the result of
increases in sales and marketing, accounting and administrative staff, and
increased marketing and sales activities associated with the international sales
of the ThermaChoice Uterine Balloon Therapy system which commenced in March
1995.
Interest income increased to $454,000 for the year ended December 31, 1995 from
$165,000 for the combined period ended December 31, 1994. The increase was
primarily the result of the increased level of cash, cash equivalents and
short-term investments held by the Company during 1995 compared to 1994 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.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly exceeded its
revenues, resulting in an accumulated deficit of $16,835,000 at December 31,
1996. The Company has funded its operations primarily through the private
placements of equity securities aggregating $15,361,000 during 1994 and 1995,
and the completion of its initial public offering in November 1995 which
resulted in net proceeds of $15,223,000.
At December 31, 1996, the Company had cash, cash equivalents and short-term
investments of $13,071,000. Cash used by the Company's operations was
$8,994,000 and $5,738,000 for the years ended December 31, 1996 and 1995,
respectively. Cash used in operations during fiscal 1996 was used primarily
to fund the U.S. clinical trials, which began in January 1996, the expansion
of marketing programs for the ThermaChoice Uterine Balloon Therapy system in
international markets, the costs of clinical studies for obtaining
reimbursement in international markets, the increasing levels of research and
development of the ThermaChoice Uterine Balloon Therapy system, the costs
related to the ongoing development, funding of clinical studies and obtaining
FDA clearance for the VersaPoint system, and increased general and
administrative expenses to support increased operations.
The Company's capital expenditures for the years ended December 31, 1996 and
1995 were $474,000 and $1,219,000, respectively. The decreased level of capital
expenditures during 1996 was due primarily to the Company's establishment in a
new facility in 1995 in which substantial resources were expended that year to
prepare the facility for manufacturing activity.
During the first quarter of fiscal 1996, the Company exercised its option to
extend its license and OEM supply agreement with Gyrus Medical, Ltd. for the
VersaPoint technology to include the field of laparoscopy. A $400,000 deposit on
this OEM supply agreement was made by the Company in March 1996. Additional
deposits of up to $600,000 in the aggregate will be due over the next 12 to 24
months.
At December 31, 1996, the Company had outstanding borrowings totaling $749,000
under two secured credit facilities. Borrowings bear interest at the bank's
prime rate plus 1.25%-1.50% 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.
The Company believes that its cash, cash equivalents and short-term
investments together with interest thereon will be sufficient to fund its
operations and capital requirements through December 31, 1997. The estimate
of this time period is a forward-looking statement involving risks and
uncertainties, including the timing of FDA approval of the ThermaChoice
Uterine Balloon Therapy system and demand for and market acceptance of the
Company's products, 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, the resources the Company devotes to
developing, manufacturing and marketing its products, 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
costs of obtaining reimbursement for use of the Company's ThermaChoice
Uterine Balloon Therapy and VersaPoint systems in new and existing markets,
and other factors. As such, there can be no assurance that the Company will
not require additional financing prior to the end of 1997 and, therefore, may
be required to seek to raise additional funds through bank facilities, debt
or equity offerings or other sources of capital prior to such time.
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.
20
<PAGE>
REPORT OF
- -----------------------------------------
INDEPENDENT ACCOUNTANTS
To the Board of Directors
Gynecare, Inc.
We have audited the accompanying balance sheets of Gynecare, Inc. as of December
31, 1996 and 1995, and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1996 and 1995 and the
period from March 8, 1994 (Date of Inception) through December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gynecare, Inc. as of
December 31, 1996 and 1995, and the results of operations and its cash flows
for the years ended December 31, 1996 and 1995 and the period from March 8,
1994 (Date of Inception) through December 31, 1994, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 22, 1997
21
<PAGE>
GYNECARE, INC.
- --------------------------------------
BALANCE SHEETS
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,823,000 $22,330,000
Short-term investments 9,248,000 380,000
Accounts receivable, net of allowance
for doubtful accounts of
$151,000 and $90,000 at
December 31, 1996 and 1995, respectively 457,000 433,000
Inventories 424,000 1,034,000
Prepaids and other current assets 254,000 344,000
----------------- -----------------
Total current assets 14,206,000 24,521,000
Property and equipment, net 1,419,000 1,205,000
Prepaid royalties 1,900,000 1,951,000
Other assets, net 873,000 594,000
----------------- -----------------
Total assets $ 18,398,000 $28,271,000
----------------- -----------------
LIABILITIES
Current liabilities:
Accounts payable $ 481,000 $ 881,000
Amount due to related party -- 60,000
Accrued expenses 634,000 294,000
Current portion of long-term debt 291,000 270,000
----------------- -----------------
Total current liabilities 1,406,000 1,505,000
Long-term debt, net of current portion 458,000 458,000
----------------- -----------------
Total liabilities 1,864,000 1,963,000
----------------- -----------------
Commitments (Notes 6, 7 and 8)
STOCKHOLDER'S EQUITY
Common stock, $0.001 par value
Authorized: 30,000,000 at December 31,
1996 and 1995; Issued and outstanding:
8,297,000 and 8,154,000 at December 31,
1996 and 1995, respectively 8,000 8,000
Additional paid-in-capital 33,748,000 33,501,000
Deferred compensation (387,000) (566,000)
Accumulated deficit (16,835,000) (6,635,000)
----------------- -----------------
Total stockholders' equity 16,534,000 26,308,000
----------------- -----------------
Total liabilities and
stockholders' equity $18,398,000 $28,271,000
----------------- -----------------
----------------- -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
22
<PAGE>
GYNECARE, INC.
- ----------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MAR. 8, 1994
YEAR ENDED YEAR ENDED (DATE OF INCEPTION)
DEC. 31, 1996 DEC. 31, 1995 TO DEC. 31, 1994
------------- ------------- ------------------
<S> <C> <C> <C>
Revenues $ 962,000 $ 849,000 $ --
Cost of goods sold 1,657,000 799,000 --
------------- ------------- ------------------
Gross profit/(loss) (695,000) 50,000 --
------------- ------------- ------------------
Operating expenses:
Research and development 5,025,000 2,415,000 1,354,000
Selling, general and administrative 5,244,000 2,655,000 880,000
------------- ------------- ------------------
Total operating expenses 10,269,000 5,070,000 2,234,000
------------- ------------- ------------------
Loss from operations (10,964,000) (5,020,000) (2,234,000)
Interest income, net 764,000 454,000 165,000
------------- ------------- ------------------
Net loss $(10,200,000) $(4,566,000) $(2,069,000)
------------- ------------- ------------------
Net loss per share $ (1.24) $ (1.87) $ (1.25)
------------- ------------- ------------------
Shares used in computing net
loss per share 8,209,000 2,438,000 1,658,000
------------- ------------- ------------------
------------- ------------- ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
23
<PAGE>
GYNECARE, INC.
- -------------------------------------------------
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series A Convertible
Preferred Stock during March 1994
in exchange for prepaid royalties 3,289,000 $ 2,000,000 -- -- -- --
Issuance of Series B Convertible
Preferred Stock during March 1994,
net of issuance costs of $31,000 -- -- 1,579,000 $5,969,000 -- --
Net loss -- -- -- -- -- --
----------- ----------- --------- ----------- ---------- ----------
Balances, December 31, 1994 3,289,000 2,000,000 1,579,000 5,969,000 -- --
Issuance of Series C Convertible
Preferred Stock during May and
August 1995, net of issuance
costs of $31,000 -- -- -- -- 1,184,000 $9,392,000
Issuance of Common Stock upon
exercise of stock options -- -- -- -- -- --
Conversion of Series A, Series B and
Series C Convertible Preferred Stock to
Common Stock in initial public offering (3,289,000) (2,000,000) (1,579,000) (5,969,000) (1,184,000) (9,392,000)
Issuance of Common Stock in initial
public offering, net of issuance
costs of $589,000 -- -- -- -- -- --
Deferred compensation related
to grants of stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- --------- ----------- ---------- ----------
Balances, December 31, 1995 -- -- -- -- -- --
Issuance of Common Stock
upon exercise of stock options -- -- -- -- -- --
Issuance of Common Stock
under Employee Stock Purchase Plan -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Cancellation of deferred compensation -- -- -- -- -- --
Repurchase of common stock -- -- -- -- -- --
Stock-based compensation expense -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- --------- ----------- ---------- ----------
Balances, December 31, 1996 -- -- -- -- -- --
----------- ----------- --------- ----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
24
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
SHARES AMOUNT ADDITIONAL PAID-IN CAPITAL DEFERRED COMPENSATION ACCUMULATED DEFICIT TOTAL
--------- ---------- ------------------------- --------------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
-- -- -- -- -- $ 2,000,000
-- -- -- -- -- 5,969,000
-- -- -- -- $(2,069,000) (2,069,000)
--------- ---------- ------------------------- --------------------- ------------------- -------------
-- -- -- -- (2,069,000) 5,900,000
-- -- -- -- -- 9,392,000
402,000 -- $ 263,000 -- -- 263,000
6,052,000 $6,000 17,355,000 -- -- --
1,700,000 2,000 15,221,000 -- -- 15,223,000
-- -- 662,000 $ (662,000) -- --
-- -- -- 96,000 -- 96,000
-- -- -- -- (4,566,000) (4,566,000)
--------- ---------- ------------------------- --------------------- ------------------- -------------
8,154,000 8,000 33,501,000 (566,000) (6,635,000) 26,308,000
137,000 -- 54,000 -- -- 54,000
27,000 -- 162,000 -- -- 162,000
-- -- -- 162,000 -- 162,000
-- -- (17,000) 17,000 -- --
(21,000) -- (8,000) -- -- (8,000)
-- -- 56,000 -- -- 56,000
-- -- -- -- (10,200,000) (10,200,000)
--------- ---------- ------------------------- --------------------- ------------------- -------------
8,297,000 $8,000 $33,748,000 $ (387,000) $(16,835,000) $ 16,534,000
--------- ---------- ------------------------- --------------------- ------------------- -------------
</TABLE>
25
<PAGE>
GYNECARE, INC.
- ----------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
YEAR ENDED DECEMBER 31, MAR. 8, 1994
------------------------------ (DATE OF INCEPTION) TO
1996 1995 DEC. 31, 1994
------------- ------------- ----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,200,000) $ (4,566,000) $ (2,069,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 466,000 182,000 19,000
Amortization of deferred compensation 162,000 96,000 --
Compensation expense for issuance of stock options
to outside consultants 56,000 -- --
Provision for doubtful accounts 61,000 90,000 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (85,000) (523,000) --
Inventories 559,000 (974,000) (60,000)
Prepaids and other current assets 90,000 (34,000) (77,000)
Other assets 17,000 (649,000) (6,000)
Accounts payable (460,000) 641,000 300,000
Accrued expenses 340,000 (1,000) 294,000
------------- ------------- ----------------------
Net cash used in operating activities (8,994,000) (5,738,000) (1,599,000)
------------- ------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (474,000) (1,219,000) (64,000)
Acquisition of patent rights and related
technical information -- (45,000) (200,000)
Deposit on OEM supply agreement (400,000) -- --
Purchases of short-term investments (20,575,000) (380,000) --
Maturities of short-term investments 11,707,000 -- --
------------- ------------- ----------------------
Net cash used in investing activities (9,742,000) (1,644,000) (264,000)
------------- ------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Preferred Stock,
net of issuance costs -- 9,392,000 5,969,000
Proceeds from issuance of Common Stock in
initial public offering, net of issuance costs -- 15,223,000 --
Proceeds from issuance of Common Stock upon exercise
of stock options and pursuant to the 1995
Employee Stock Purchase Plan 216,000 263,000 --
Repurchase of unvested shares upon employee termination (8,000) -- --
Proceeds from issuance of debt 312,000 728,000 --
Payments on debt (291,000) -- --
------------- ------------- ----------------------
Net cash provided by financing activities 229,000 25,606,000 5,969,000
------------- ------------- ----------------------
Increase (decrease) in cash and cash
equivalents (18,507,000) 18,224,000 4,106,000
Cash and cash equivalents at beginning of period 22,330,000 4,106,000 --
------------- ------------- ----------------------
Cash and cash equivalents at end of period $ 3,823,000 $ 22,330,000 $ 4,106,000
------------- ------------- ----------------------
------------- ------------- ----------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Issuance of Preferred Stock in exchange for
assignment of prepaid royalties -- -- $ 2,000,000
------------- ------------- ----------------------
Interest paid during the period $ 75,000 $ 26,000 --
------------- ------------- ----------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
26
<PAGE>
GYNECARE, INC.
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Gynecare, Inc. ("Gynecare" or the "Company") was incorporated in California
and commenced business operations on March 8, 1994. The Company designs,
develops, manufactures and markets minimally invasive medical devices for the
treatment of uterine disorders. Gynecare's first product, the ThermaChoice
Uterine Balloon Therapy system, is used to treat women experiencing
dysfunctional uterine bleeding, ("menorrhagia"). The Company began shipping
this product to customers in March 1995, at which time it emerged from the
development stage. Gynecare's second product, the VersaPoint Bipolar
Electrosurgery system for the removal of fibroids growing within the uterus,
was cleared for marketing in the United States in November 1996. The Company
plans to begin marketing the VersaPoint system in the United States in 1997.
The Company's disposable balloon catheter is currently manufactured in-house at
the Company's facility in Menlo Park, California. Although most of the
components of the disposable balloon catheter are available from more than one
vendor, certain of the components used in manufacturing the disposable balloon
catheter have relatively few alternative sources of supply and establishing
additional or replacement suppliers for such components cannot be accomplished
quickly.
Effective November 20, 1995, the Company was reincorporated in Delaware and each
share of each class and series of stock of the predecessor Company was exchanged
for one share of each identical class and series of stock of the Delaware
successor Company having a par value of $0.001 per share for both Common Stock
and Preferred Stock.
Effective November 22, 1995, the Company completed an initial public offering of
1,700,000 shares of Common Stock at a price of $10.00 per share, raising net
proceeds of $15,223,000. Each share of the Company's outstanding Convertible
Preferred Stock was converted to a share of Common Stock during the initial
public offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
STOCK SPLIT:
On October 6, 1995, in connection with the Company's initial public offering,
the Company effected a 1-for-1.9 reverse Common Stock split and a corresponding
change in the Preferred Stock conversion ratios. All Common Stock data in the
accompanying financial statements has been retroactively adjusted to reflect the
reverse stock split.
CASH, CASH EQUIVALENTS AND SHORT-TERM 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 December
31, 1996, which consist entirely of U.S. Treasury notes, are classified as
held-to-maturity and are carried at amortized cost, which approximates fair
market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash, cash equivalents, accounts receivable, accounts payable and other accrued
liabilities approximate fair value due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar terms,
the carrying value of debt obligations approximates fair value.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments and operations in one industry segment. Substantially all
cash, cash equivalents and short-term investments are maintained with one
financial institution in the United States. Deposits in this bank may exceed the
amount of insurance provided on such deposits. Generally, these investments may
be redeemed upon demand and, therefore, bear minimal risk. The Company has not
experienced any losses on its deposits of cash and cash equivalents.
The Company has no operations outside of the United States and operates in one
industry segment. Two customers accounted for approximately 14% and 13% of sales
and three customers each accounted for 10% of sales in 1996. Four customers
accounted for 12%, 11%, 11% and 10% of sales in 1995. The Company currently
markets and sells all of its product internationally to distributors in 22
countries. The Company performs ongoing credit evaluations of its customers and
provides an allowance for expected losses, but has not experienced significant
losses to date.
27
<PAGE>
PREPAID ROYALTIES:
Prepaid royalties are generally expensed as a percentage of the related net
licensed product sales as determined by specific calculations included in the
royalty agreement.
INVENTORY:
Inventory is valued at the lower of cost (determined on a first in, first out
basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost and is depreciated on a straight-line
basis over estimated lives of 18 to 60 months. Amortization of leasehold
improvements is computed using the shorter of the remaining term of the
Company's facilities lease or the estimated useful lives of the
improvements. Maintenance and repairs are charged to operations as incurred.
REVENUE RECOGNITION:
Revenue is generally recognized upon shipment of product to the customer, net of
allowances for discounts and estimated returns which are also provided at the
time of shipment.
NET LOSS PER SHARE:
Net loss per share is computed using the weighted average number of shares of
Common Stock outstanding during the year. Common equivalent shares include
Common Stock issuable upon conversion of the Company's Series A, B and C
Convertible Preferred Stock using the as-if-converted method and the exercise
of stock options using the treasury stock method unless
anti-dilutive. Pursuant to the requirements of the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common and common equivalent
shares issued at prices below the public offering price during the twelve
months immediately preceding the initial filing date have been included in
the calculation as if they were outstanding for all periods prior to the
initial filing date (using the treasury stock method and the anticipated
initial public offering price).
INCOME TAXES:
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1995 financial statements to
conform to the December 31, 1996 presentation. Such reclassifications had no
effect on the results of operations or accumulated deficit.
3. INVENTORIES:
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Inventories comprise:
Raw materials $121,000 $ 194,000
Work-in-process 105,000 462,000
Finished goods 198,000 378,000
----------------- -----------------
$424,000 $1,034,000
----------------- -----------------
----------------- -----------------
28
<PAGE>
4. PROPERTY AND EQUIPMENT:
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Property and equipment comprise:
Furniture, fixtures and office equipment $ 632,000 $ 295,000
Computer equipment 415,000 335,000
Production equipment 140,000 105,000
Leasehold improvements 640,000 547,000
----------------- -----------------
1,827,000 1,282,000
----------------- -----------------
Less accumulated depreciation (408,000) (77,000)
----------------- -----------------
$ 1,419,000 $1,205,000
----------------- -----------------
----------------- -----------------
5. ACCRUED EXPENSES:
Accrued expenses comprise:
Accrued payroll and related benefits $ 96,000 $ 132,000
Accrued legal fees 47,000 97,000
Accrued royalties 175,000 --
Deferred insurance 165,000 --
Other accrued expenses 151,000 65,000
----------------- -----------------
$ 634,000 $ 294,000
----------------- -----------------
----------------- -----------------
6. NOTES PAYABLE:
In July 1995, the Company obtained a $750,000 secured credit facility under a
note payable. At December 31, 1996, the Company had borrowings outstanding of
$437,000 under this facility. Borrowings bear interest at the bank's prime
rate plus 1.5% per annum (9.75% at December 31, 1996).
In December 1996, the Company obtained another secured credit facility under a
$600,000 note payable. At December 31, 1996, borrowings outstanding under this
facility total $312,000 and bear interest at the bank's prime rate plus 1.25%
per annum (9.5% at December 31, 1996). The amount of unused line of credit of
$288,000 is available for drawdowns through December 1997.
Borrowings under both credit facilities are collateralized by all of the
Company's equipment and fixtures and are required to be repaid in
monthly installments over 30 months. The facilities require the Company to
maintain certain financial ratios and covenants including maintenance of minimum
working capital, limitations on changes in capital structure and the restriction
of dividend payments. At December 31, 1996, the Company was in compliance with
all covenants.
AT DECEMBER 31, 1996, PRINCIPAL PAYMENTS DUE UNDER BOTH FACILITIES ARE AS
FOLLOWS:
FISCAL YEAR:
1997 $291,000
1998 235,000
1999 89,000
2000 89,000
2001 45,000
--------
Total payments $749,000
--------
--------
7. ROYALTY AND LICENSE FEE COMMITMENTS:
On March 8, 1994, 3,289,000 shares of the Company's Series A Preferred Stock
were issued to Origin Medsystems, Inc. ("Origin"), a subsidiary of Guidant
Corporation ("Guidant"). In exchange for these shares, Origin assigned rights to
a license agreement relating to the ThermaChoice Uterine Balloon Therapy system,
assigned rights to prepaid royalties of $2,000,000 and contributed certain
assets which were assigned no value. As part of the agreement, Gynecare also
assumed approximately $285,000 in purchase order commitments which were paid in
full by December 31, 1994.
29
<PAGE>
Under the license agreement acquired from Origin, the Company will be required
to pay a royalty percentage of net sales for all licensed products to the
original inventors of the technology. Royalties are payable each year for the
ten years following written FDA approval with respect to certain products. With
respect to other products, royalties are payable until certain rights
expire. Royalties are calculated based on a formula defined in the license
agreement, subject to minimum amounts and are first applied to the prepaid
royalties of $2,000,000. At December 31, 1996, approximately $100,000 has been
applied against the prepaid royalty. Minimum royalties of $100,000 and $150,000
are required in January 1997 and 1998, respectively, and $200,000 is required
each January thereafter. Additional royalty payments will not be due and payable
until aggregate royalty payments exceed $2,000,000. The agreement will remain in
effect in perpetuity unless the Company defaults on its obligations or provides
the original inventors with a notice of termination.
In December 1994, the Company entered into a license agreement with an unrelated
party to acquire certain patent rights and related technical information. The
agreement requires the Company to pay license fees of up to $500,000 and a
royalty on all sales of products containing patented technology. An initial
payment of $200,000 was made upon signing of the agreement. An additional
$175,000 was paid in January 1997. The balance will be due only upon successful
completion of several milestones as defined in the agreement. All payments made
to-date constitute prepayment of royalties under the agreement.
Additionally, in July 1995, the Company entered into an exclusive royalty-free
license for certain pending patent applications and a supply and development
agreement. The agreement requires the Company to make a non-refundable purchase
deposit of approximately $400,000 payable in installments upon the completion of
certain milestones. The Company paid all of the non-refundable purchase deposit
in 1995. The agreement also requires the Company to purchase quantities of
products based upon a rolling forecast.
In October 1995, the Company entered into an agreement with Origin to acquire
all rights, title and interest in a related U.S. patent. The agreement requires
the Company to pay a royalty on all sales of products containing the patented
technology. An initial payment of $45,000 was made upon signing of the
agreement.
In March 1996, the Company entered into an agreement to extend the license
acquired in July 1995 to include the field of laparoscopy. The agreement
required the Company to make a non-refundable purchase deposit of $400,000 in
March 1996. Additional deposits of up to an aggregate of $600,000 will be due
over the next 12 to 24 months.
8. COMMITMENTS:
LEASE COMMITMENT:
The Company leases its facilities under an operating lease with a seven-year
term. Under the terms of the lease, the Company is also responsible for taxes,
insurance and utilities and must maintain a letter of credit for $380,000, which
is collateralized by a certificate of deposit. The Company has an option to
extend the lease for an additional three-year term.
THE MINIMUM FUTURE ANNUAL RENTAL PAYMENTS AS OF DECEMBER 31, 1996 UNDER THE
LEASE ARE AS FOLLOWS:
FISCAL YEAR:
1997 $ 241,000
1998 246,000
1999 252,000
2000 258,000
2001 264,000
Thereafter 224,000
----------
Total minimum lease payments $1,485,000
----------
----------
Rent expense was $242,000, $139,000 and $17,000 for the years ended December 31,
1996 and 1995, and for the period from March 8, 1994 (Date of Inception) to
December 31, 1994, respectively.
30
<PAGE>
9. STOCKHOLDERS' EQUITY:
FIXED STOCK OPTION PLANS
The Company has two fixed option plans. Under the 1994 Stock Plan (the Plan),
the Company may grant both incentive stock options ("ISOs") and nonqualified
stock options ("NSOs") to employees and consultants. All NSOs allow for the
purchase of Common Stock at prices not less than 85% of the fair market value
as determined by the Board of Directors on the date of grant. ISOs allow for
the purchase of Common Stock at prices not less than 100% of the fair market
value as determined by the Board of Directors on the date of grant. If, at
the time the Company grants an option, the optionee owns more than 10% of the
total combined voting power of all the classes of stock of the Company, the
option price shall be at least 110% of the fair value and the term of the
option shall be five years from the date of grant. All options granted before
December 1995 are exercisable immediately. During December 1995, the Company
amended its option agreement such that only vested options are exercisable.
All options must be exercised within ten years from the date of grant.
Options vest as determined by the Board of Directors, generally over four
years. In the event options are exercised prior to vesting upon termination
of service, the Company has the right to repurchase the unvested shares of
Common Stock at the original issuance price. Shares are released from this
repurchase restriction over periods consistent with the original options'
vesting period. At December 31, 1996, 181,446 shares were subject to
repurchase.
Under the 1995 Director Option Plan (the Director Plan), the Company
automatically grants to non-employee directors non-statutory stock options to
purchase Common Stock at the fair market value on the date of grant, which is
the first business day of January each fiscal year except for the first grant to
any newly elected director. Each current director receives an option for 2,500
shares annually. Each newly elected director receives an initial option on the
date of his or her appointment or election for 10,000 shares. The initial grant
will vest on a cumulative monthly basis over a three-year period, and each
subsequent grant will vest on a cumulative monthly basis over one year. The
options expire ten years after the date of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995:
Risk-free Interest Rates 6.20%
Expected Life 2.42 years
Volatility 51.8%
Dividend Yield --
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1996, 1995 and 1994 and changes during the periods ending on those
dates are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- -------- ---------------- -------- ----------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 415,032 $ 0.821 373,953 $ 0.380 -- --
Granted 183,700 $ 7.786 444,395 $ 1.044 373,953 $ 0.380
Exercised (137,210) $ 0.394 (402,000) $ 1.069 -- --
Forfeited (102,144) $ 1.210 (1,316) $ 0.380 --
- -------------- -------- ---------------- -------- ----------------- -------- ----------------
Outstanding at end of year 359,378 $ 4.435 415,032 $ 0.821 373,953 $ 0.380
Options exercisable at year-end 200,646 $ 2.318 401,954 $ 0.610 373,953 $ 0.380
Weighted-average fair value
of options granted during the year $ 2.877 $0.379
Shares available for grant 285,623 367,179 152,363
</TABLE>
31
<PAGE>
THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT FIXED STOCK OPTIONS OUTSTANDING
AT DECEMBER 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- -------------------
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ---------------- ---------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
$0.380 - $ 1.900 173,264 8.28 years $ 0.891 173,264 $ 0.891
$5.375 - $ 7.375 99,614 9.70 years $ 6.018 13,113 $ 6.012
$8.500 - $10.125 86,500 9.22 years $ 9.709 28,677 $ 9.250
- --------------- ----------- ---------------- ---------------- ----------- ------------------
$0.380 - $10.125 359,378 8.90 years $ 4.435 215,054 $ 2.318
</TABLE>
Through December 31, 1995, stock options were issued to certain employees and
consultants at prices below fair market value. Deferred compensation,
representing the difference between the exercise price and fair market value of
the Company's Common Stock at the date of grant of the stock options, totaled
$662,000 at December 31, 1995 and was recorded as deferred compensation and a
component of stockholders' equity. Of this amount, $162,000 and $96,000 has been
amortized and recognized as expense during fiscal 1996 and 1995,
respectively. The remaining amount of $387,000 will be amortized as the shares
and options vest, generally over a four-year period.
1995 EMPLOYEE STOCK PURCHASE PLAN:
The Company has authorized 150,000 shares of Common Stock for issuance under the
1995 Employee Stock Purchase Plan (the Purchase Plan). Qualified employees may
elect to have a certain percentage (not to exceed 15%) of their salary withheld
pursuant to the Purchase Plan. The salary withheld is then used to purchase
shares of the Company's Common Stock at a price equal to 85% of the market value
of the stock at the beginning or ending of a six-month offering period,
whichever is lower. Under this plan, 27,000 shares were issued during fiscal
1996, representing approximately $162,000 in employee contributions.
Fair value for the purchase rights issued under the Company's Employee Stock
Purchase Plan is determined under the Black-Scholes valuation model using the
following assumptions for 1996:
Risk-free Interest Rates 5.46%
Expected Life 6 months
Volatility 51.8%
Dividend Yield --
The weighted average fair value of those purchase rights granted in 1996 was
$2.036.
The Company has adopted the disclosure only provisions of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation." Accordingly, no compensation cost has been recognized for the
Company's Stock Plans. Had compensation cost for the Stock Plans been determined
based on the fair value at the grant date for awards in 1996 and 1995,
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per share for the years ended December 31, 1996 and 1995 would have
increased as follows:
1996 1995
----------- ----------
Net loss-as reported $10,200,000 $4,566,000
----------- ----------
Net loss-pro forma $10,392,000 $4,577,000
----------- ----------
Net loss per share-as reported $ 1.24 $ 1.87
----------- ----------
Net loss per share-pro forma $ 1.27 $ 1.88
----------- ----------
32
<PAGE>
At December 31, 1996, the Company has reserved the following shares of
authorized but unissued Common Stock:
1994 Stock Plan 645,001
1995 Employee Stock Purchase Plan 123,427
1995 Director Option Plan 100,000
-------
868,428
-------
-------
The above pro forma effects on income may not be representative of the
effects on net income for future years as option grants typically vest over
several years and additional options are generally granted each year.
11. EMPLOYEE BENEFIT PLAN:
During 1994, the Company established a Retirement Savings and Investment Plan
(the Plan) under which employees may defer a portion of their salary up to the
maximum allowed under IRS rules. The Company has the discretion to make
contributions to the Plan. To date, no Company contributions have been made to
the Plan.
12. INCOME TAXES:
At December 31, 1996 and 1995, the Company had federal and state net operating
loss carryforwards of approximately $14,930,000 and $4,694,000, respectively,
available to offset future regular and alternative minimum taxable income. The
Company's federal and state net operating loss carryforwards begin to expire in
2009 and 2002, respectively, if not utilized. The Company's research and
development tax credit carryforwards begin to expire in 2009 if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.
The tax effects of temporary differences which give rise to deferred tax assets
are as follows:
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
Capitalized start-up costs $ 339,000 $ 843,000
Research and development credit 223,000 98,000
Net operating loss carryforwards 5,993,000 1,884,000
Allowances and reserves 196,000 88,000
Purchased technology 87,000 83,000
Other 43,000 159,000
------------ ------------
Total deferred tax assets 6,881,000 3,155,000
Less valuation allowance (6,881,000) (3,155,000)
------------ ------------
Net deferred tax asset $ -- $ --
------------ ------------
------------ ------------
13. RELATED PARTY TRANSACTIONS:
During the period from March 8, 1994 (Date of Inception) through December 31,
1994, the Company, acting with the approval of the Board of Directors, entered
into a management services agreement with Origin. Under this agreement,
management and administrative services and office and research and development
space were provided by Origin. For the years ended December 31, 1996 and 1995
and the period from March 8, 1994 (Date of Inception) to December 31, 1994, the
Company remitted approximately $76,000, $1,089,000 and $1,122,000, respectively,
to Origin. The balance owed by the Company to Origin at December 31, 1996, 1995
and 1994 was none, $60,000 and $245,000, respectively. On January 1, 1995,
Origin and Gynecare entered together into a Supply Agreement under which Origin
manufactured the Company's disposable balloon catheter. For the year ended
December 31, 1995, the Company paid Origin approximately $410,000 for the
product supplied under the agreement. This agreement was terminated in December
1995 as the Company began manufacturing its disposable balloon catheter in its
new facility. In addition, in June 1995 the Company and Origin Canada entered
into an agreement whereby Origin Canada obtained exclusive rights to market
Gynecare's products in Canada. Sales under this agreement for the years ended
December 31, 1996 and 1995 were $119,000 and $90,000, respectively, with a
corresponding related party receivable of $39,000 and $7,000 included in
accounts receivable at December 31, 1996 and 1995, respectively.
33
<PAGE>
CORPORATE
- ----------------------------
DIRECTORY
BOARD OF DIRECTORS
Elizabeth B. Connell, M.D.
PROFESSOR, GYNECOLOGY AND OBSTETRICS
EMORY UNIVERSITY SCHOOL OF MEDICINE
David L Douglass
GENERAL PARTNER
DELPHI VENTURES
A. Grant Heidrich
GENERAL PARTNER
MAYFIELD FUND
Alan Levy, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HEARTSTREAM, INC.
Mary Lake Polan, M.D., Ph.D.
CHAIRPERSON, DEPARTMENT OF
GYNECOLOGY AND OBSTETRICS
STANFORD UNIVERSITY SCHOOL OF MEDICINE
F. Thomas Watkins, III
VICE PRESIDENT, GUIDANT CORPORATION
PRESIDENT, MINIMALLY INVASIVE SYSTEMS GROUP
OFFICERS
A. Lad Burgin, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Steve Adams
VICE PRESIDENT OF SALES
Malcolm M. Farnsworth, Jr.
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Augustine Y. Lien
VICE PRESIDENT OF OPERATIONS
Milton B. McColl, M.D.
VICE PRESIDENT AND MEDICAL DIRECTOR
Vahid Saadat
VICE PRESIDENT OF RESEARCH AND DEVELOPMENT
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of the high and low prices by quarter
as reported by the NASDAQ National Market System since November 22, 1995, the
date the Common Stock commenced trading.
HIGH LOW
- ------------------------------------------------------------------
1995: Fourth Quarter (from November 22, 1995) $ 10.25 $ 6.25
1996: First Quarter 11.25 7.63
1996: Second Quarter 10.25 7.75
1996: Third Quarter 7.50 3.50
1996: Fourth Quarter 9.06 5.38
1997: First Quarter (through March 12, 1997) 8.12 6.69
- ------------------------------------------------------------------
CORPORATE HEADQUARTERS
Gynecare, Inc.
235 Constitution Drive
Menlo Park, CA 94025
(415) 614-2500
www.gynecare.com
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
INDEPENDENT PUBLIC
ACCOUNTANTS
Coopers & Lybrand LLP
Ten Almaden Boulevard, Suite 1600
San Jose, CA 95113
TRANSFER AGENT & REGISTRAR
Bank of Boston
c/o Boston EquiServe, LP
PO Box 8040
Boston, MA 02266-8040
ANNUAL MEETING
The annual meeting of stockholders will be held on May 28, 1997 at 9:30 a.m. at
the Company's corporate headquarters.
STOCK LISTING
The Company's common stock is traded on The Nasdaq National Stock Market under
the symbol GYNE.
SHAREHOLDERS OF RECORD
As of March 12, 1997, there were 94
shareholders of record of the Company's common stock.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, is available
upon request without charge.
Please contact:
INVESTOR RELATIONS
Gynecare, Inc.
235 Constitution Drive
Menlo Park, CA 94025
(415) 614-2500
DESIGNED AND PRODUCED BY ARTEMIS-REG-, PALO ALTO, CALIFORNIA PHOTOGRAPHY BY
HENRIK KAM PHOTOGRAPHY, INC. 1997 GYNECARE, INC.
34
<PAGE>
WE ARE EXCITED BY THE CHALLENGE AND RESPONSIBILITY THAT OUR EFFORTS WILL HELP
POTENTIALLY MILLIONS OF WOMEN TO HAVE AN ALTERNATIVE TO HYSTERECTOMIES TO
RESOLVE THEIR EXCESSIVE MENSTRUAL BLEEDING AND FIBROIDS. IT IS A WONDERFUL THING
TO BE PART OF A TEAM OF SUCH KNOWLEDGEABLE AND CREATIVE PEOPLE, ALL PULLING
TOGETHER TO HELP WOMEN EVERYWHERE TO LEAD MORE PRODUCTIVE, PAIN-FREE LIVES
WITHOUT THE PHYSICAL AND EMOTIONAL TRAUMA OF GOING THROUGH MAJOR SURGERY."
-- THE GYNECARE LEADERSHIP TEAM
[Inserted here is a photograph of Gynecare's leadership team.]
GYNECARE'S LEADERSHIP TEAM. (FROM LEFT TO RIGHT) GLENN FOY,
CHRISTINE KAELIN, MAC FARNSWORTH, ZIA YASSINZADEH, SETH STABINSKY, MD,
JAN SELBY, JIM KERMODE, VAHID SAADAT, GAIL STEVENS, DAVE TELLES, AUGIE LIEN,
YI CHEN, SUSAN ALOYAN, NETTIE PINEDA, LAD BURGIN, ANGEL RUIZ, MILT MCCOLL, MD,
STEVE ADAMS, NORMA ZIPPIN, ABHAY PANGREKAR, DAILENE BRAY (NOT PICTURED: ROBIN
CLOSE, LAURA PENDLEY, PAUL STURROCK, AND ROBERT WARNER)
1441-10K-97
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Gynecare, Inc. on Form S-8 (File No. 333-05161) of our report dated January
22, 1997, on our audits of the consolidated financial statements and
financial statement schedule of Gynecare, Inc. as of December 31, 1996 and
1995, and for the years ended December 31, 1996 and 1995, and for the period
from March 8, 1994 (Date of Inception) to December 31, 1994, and our report
dated November 9, 1995 on our audit of the Uterine Balloon Therapy Business
Operations of Origin Medsystems, Inc. as of December 31, 1993 and for the
period from January 1, 1994 to March 7, 1994, which reports are incorporated
by reference in this Annual Report on Form 10-K.
COOPERS AND LYBRAND L.L.P.
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,823
<SECURITIES> 9,248
<RECEIVABLES> 457
<ALLOWANCES> 0
<INVENTORY> 424
<CURRENT-ASSETS> 14,206
<PP&E> 1,419
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,398
<CURRENT-LIABILITIES> 1,406
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 16,526
<TOTAL-LIABILITY-AND-EQUITY> 18,398
<SALES> 962
<TOTAL-REVENUES> 962
<CGS> 1,657
<TOTAL-COSTS> 1,657
<OTHER-EXPENSES> 5,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,200)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
