<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One:
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997 or
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission file number 0-27214
GYNECARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3197941
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
235 CONSTITUTION DRIVE, MENLO PARK, CA 94025
--------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (415) 614-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes [ X ] No [ ]
The number of shares of Common Stock outstanding as of November 7, 1997
was 8,409,069.
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TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 1997
and December 31, 1996 3
Statements of Operations for the three and nine
months ended September 30, 1997 and 1996 4
Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GYNECARE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 3,423,000 $ 3,823,000
Short-term investments . . . . . . . . . . . . . . . . . . . 2,365,000 9,248,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . 453,000 457,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 485,000 424,000
Prepaids and other current assets . . . . . . . . . . . . . . 53,000 254,000
------------ -------------
Total current assets . . . . . . . . . . . . . . . . . . . 6,779,000 14,206,000
Property and equipment, net . . . . . . . . . . . . . . . . . . 1,254,000 1,419,000
Prepaid royalties . . . . . . . . . . . . . . . . . . . . . . . 1,895,000 1,900,000
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . 856,000 873,000
------------ -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 10,784,000 $ 18,398,000
------------ -------------
------------ -------------
LIABILITIES
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . $ 1,300,000 $ 481,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 570,000 634,000
Current portion of long-term debt . . . . . . . . . . . . . . 283,000 291,000
------------ -------------
Total current liabilities . . . . . . . . . . . . . . . . . 2,153,000 1,406,000
Long-term debt, net of current portion . . . . . . . . . . . . 384,000 458,000
------------ -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 2,537,000 1,864,000
------------ -------------
STOCKHOLDERS' EQUITY
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 8,000
Additional paid-in-capital . . . . . . . . . . . . . . . . . . 34,039,000 33,748,000
Deferred compensation . . . . . . . . . . . . . . . . . . . . (155,000) (387,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (25,645,000) (16,835,000)
------------ -------------
Total stockholders' equity . . . . . . . . . . . . . . . . 8,247,000 16,534,000
------------ -------------
Total liabilities and stockholders' equity . . . . . . . $ 10,784,000 $ 18,398,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
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GYNECARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 414,000 $ 233,000 $ 986,000 $ 708,000
Cost of goods sold . . . . . . . . . . . . . . . . . . 437,000 446,000 1,244,000 1,146,000
------------- ------------- ------------- -------------
Gross profit . . . . . . . . . . . . . . . . . . . . (23,000) (213,000) (258,000) (438,000)
------------- ------------- ------------- -------------
Operating expenses:
Research and development . . . . . . . . . . . . . . 849,000 1,079,000 3,136,000 3,583,000
Selling, general and administrative . . . . . . . . 2,033,000 1,431,000 5,698,000 3,786,000
------------- ------------- ------------- -------------
Total operating expenses . . . . . . . . . . . . . 2,882,000 2,510,000 8,834,000 7,369,000
------------- ------------- ------------- -------------
Loss from operations . . . . . . . . . . . . . . . . . (2,905,000) (2,723,000) (9,092,000) (7,807,000)
Interest income, net . . . . . . . . . . . . . . . . . 70,000 185,000 282,000 615,000
------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (2,835,000) $ (2,538,000) $ (8,810,000) $ (7,192,000)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share . . . . . . . . . . . . . . . . . . $ (0.34) $ (0.31) $ (1.06) $ (0.88)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in computing net loss per share. . . . . . 8,366,000 8,239,000 8,320,000 8,185,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
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GYNECARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,810,000) $ (7,192,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 409,000 297,000
Amortization of deferred compensation. . . . . . . . . . . . . . . . 101,000 139,000
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . 42,000 61,000
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . (38,000) (63,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,000) 400,000
Prepaids and other current assets. . . . . . . . . . . . . . . . . 201,000 258,000
Prepaid royalties. . . . . . . . . . . . . . . . . . . . . . . . . (47,000) --
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 17,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 819,000 (495,000)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) 191,000
------------- -------------
Net cash used in operating activities. . . . . . . . . . . . . . (7,448,000) (6,387,000)
------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . . . . . (175,000) (488,000)
Acquisition of patent rights and related technical information . . . -- (400,000)
Purchase of investments. . . . . . . . . . . . . . . . . . . . . . . (1,958,000) (20,530,000)
Maturity of investments. . . . . . . . . . . . . . . . . . . . . . . 8,841,000 9,778,000
------------- -------------
Net cash provided by/(used in) investing activities. . . . . . . . 6,708,000 (11,640,000)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock . . . . . . . . . . . . . . . 365,000 116,000
Proceeds from issuance of Common Stock pursuant to the
1995 Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . 91,000 --
Repurchase of unvested shares upon employee termination. . . . . . . (35,000) --
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . 137,000 --
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . (218,000) (219,000)
------------- -------------
Net cash provided by/(used in) financing activities . . . . . . . 340,000 (103,000)
------------- -------------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . (400,000) (18,130,000)
Cash and cash equivalents at beginning of period . . . . . . . . . . . 3,823,000 22,330,000
------------ -------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 3,423,000 $ 4,200,000
------------- -------------
------------- -------------
Supplemental cash flow information:
Interest paid during the period. . . . . . . . . . . . . . . . . . . $ 54,000 $ 52,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
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GYNECARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements have been prepared by Gynecare in accordance with generally
accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission. All adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation have been included. The
results of operations for the nine month period ended September 30, 1997
are not necessarily indicative of the results to be expected for any
other interim period or for the entire year.
The financial statements should be read in conjunction with the
audited financial statements and notes thereto included in
Gynecare's Annual Report on Form 10-K, for the year ended
December 31, 1996, filed with the Securities and Exchange
Commission pursuant to Section 13 of the Securities Exchange Act
of 1934.
1. CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS
All highly liquid investments purchased with an original maturity
of ninety days or less are considered to be cash equivalents.
The Company accounts for investments under Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS No. 115), whereby
investments that are deemed by management to be held-to-maturity
are reported at amortized cost. All investments as of September
30, 1997 are classified as held-to-maturity and are carried at
amortized cost, which approximates fair market value.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are:
September 30, December 31,
1997 1996
------------- -------------
Raw materials $ 148,000 $ 121,000
Work-in-proces 166,000 105,000
Finished goods 171,000 198,000
---------- ----------
$ 485,000 $ 424,000
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---------- ----------
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 requires
restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 will not have a material impact on
Gynecare's financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners. SFAS 130 is
effective for fiscal years beginning after
6
<PAGE>
December 15, 1997, and a reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS 130
is not expected to have a material impact on Gynecare's financial
position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
SFAS 131 generally supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997, and restatement of comparative information for
earlier years is required. However, SFAS 131 is not required to be
applied to interim financial statements in the initial year of
application. SFAS 131 will not have a material impact on Gynecare's
financial position, results of operations or cash flows.
5. RECENT BUSINESS DEVELOPMENTS
On August 4, 1997, Gynecare executed a definitive merger agreement with
Johnson & Johnson ("Johnson & Johnson"), providing for a stock-for-stock
merger valued at approximately $79 million. Gynecare will become a wholly-
owned subsidiary of Johnson & Johnson. In the event the merger agreement
is terminated for any reason other than (a) a failure to obtain
stockholder approval at the special meeting of stockholders or (b) due to
an uncured breach a wholly-owned subsidiary of a representation,
warranty, covenant or agreement of Gynecare if Gynecare has willfully and
intentionally breached the merger agreement, Johnson & Johnson and
Gynecare have agreed to enter into a credit agreement under which
Gynecare would be able to borrow up to $5,000,000 in draw-down loans
(each a "Loan") not to exceed $1,000,000 per month. The Loans would bear
interest, payable semiannually, at a rate equal to one percent over the
prime rate reported from time to time during the term of the Loan in The
Wall Street Journal. The principal of all Loans shall be due, with all
accrued interest, on the three year anniversary of the date of the credit
agreement. The Loans may be prepaid in whole or in part at the
discretion of Gynecare, and must be prepaid under certain circumstances
where Gynecare obtains additional debt or equity financing. The Loans
will be secured by all of the assets of Gynecare, subject to the senior
secured position of Silicon Valley Bank on the fixed assets of Gynecare
under credit facilities in place as of the date of the merger agreement.
On September 19, 1997, Gynecare and Ethicon, Inc. ("Ethicon") entered into
a distribution agreement by which Ethicon will serve as a non-exclusive
distributor for Gynecare's VersaPoint and ThermaChoice products in the
United States for a period of six months. The distribution agreement was
negotiated on an arm's-length basis and may be terminated by either party
for any reason by giving the other party 30 days' notice.
6. LITIGATION
On September 3, 1997, Gynecare was served with a complaint filed by John
A. Aronica, a former shareholder of Origin, in the United States District
Court for the District of Connecticut. The complaint names Gynecare, Eli
Lilly & Company, Inc., Origin and a former officer and a current officer
of Origin. The complaint alleges fraud, breach of the duty of good faith
and fair dealing, breach of fiduciary duties of officers and directors of
Origin and fraudulent conveyance arising from the original formation
transactions of Origin and Gynecare and seeks unspecified damages.
Gynecare filed a motion to dismiss the complaint on October 6, 1997. While
Gynecare believes that the complaint is without merit, the litigation is
at an early stage and there can be no assurance that Gynecare will
prevail. The ultimate outcome of this action cannot be presently
determined. Accordingly, no provision for any liability or loss that may
result from adjudication or settlement thereof has been made in the
accompanying financial statements.
7
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PART I. Continued-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS SECTION OF THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION
ENTITLED "FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK"
COMMENCING ON PAGE 10.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) should be read in conjunction with the MD&A contained in
Gynecare's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
RESULTS OF OPERATIONS
Revenues increased 78% to $414,000 in the third quarter of fiscal 1997
and 39% to $986,000 in the first nine months of fiscal 1997 from $233,000 and
$708,000 in the corresponding periods of fiscal 1996. The growth in revenues
in the first nine months of 1997 over the corresponding period of fiscal 1996
was primarily the result of shipments of VersaPoint products made to Ethicon,
Inc. under the distribution agreement signed in September 1997, and direct
sales to hospitals in the United States made through Ethicon sales
representatives.
Cost of goods sold decreased 2% to $437,000 in the third quarter of
fiscal 1997 and increased 8% to $1,244,000 in the first nine months of fiscal
1997 from $446,000 and $1,146,000 in the corresponding periods of fiscal
1996. The increase in cost of goods sold during the first nine months of 1997
over the corresponding period of fiscal 1996 was primarily the result of
underutilized capacity in the Company's manufacturing facility in Menlo Park,
California, and the cost of non-revenue generating product shipped to support
the Company's efforts to achieve third-party reimbursement in international
markets. This increase was partially offset by a decrease in cost of goods
sold during the third quarter of 1997 compared to the same period of 1996.
This decrease was primarily due to a change in the mix of products sold
during the period and a decrease in the amount of non-revenue product shipped
to international distributors.
The Company's research and development expenses decreased 21% to $849,000
and 12% to $3,136,000 for the quarter and nine month period ended September
30, 1997 from $1,079,000 and $3,583,000 for the corresponding periods of
fiscal 1996. This decrease was principally due to decreased expenditures
resulting from the completion of the U.S. clinical trials of the ThermaChoice
Uterine Balloon Therapy system, which commenced in January 1996 and ended in
early October 1996, and the absence of costs associated with the clinical
studies and 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 42%
to $2,033,000 and 51% to $5,699,000 for the third quarter and first half of
fiscal 1997 from $1,431,000 and $3,786,000 for the corresponding periods of
fiscal 1996. The increase was primarily the result of Gynecare's increased
investment in sales and marketing activities including retention of direct
marketing personnel in Canada and several other European countries,
Gynecare's efforts to obtain reimbursement in international markets, and
managing the international distributor network, and the expenses incurred
related to the merger agreement signed by Gynecare and Johnson & Johnson on
August 4, 1997. Growth in Gynecare's sales and marketing, accounting and
administrative staff from ten employees at September 30, 1996, to twenty-two
at September 30, 1997, further contributed to the increase in selling,
general and administrative expenses.
Net interest income decreased to $70,000 and $282,000 for the quarter and
nine month periods ended September 30, 1997 from $185,000 and $615,000 for
the corresponding periods of fiscal 1996. The decrease is primarily the
result of the decreased level of cash and investments held by Gynecare during
the third quarter and first nine months of fiscal 1997 compared to those held
during the corresponding periods of fiscal 1996. This decreased level of
cash and investments is the result of expending such resources to fund
continuing operations.
As a result of all of the above factors, Gynecare's total net loss
increased to $2,835,000 and $8,810,000 for the quarter and nine month periods
ended September 30, 1997 from $2,538,000 and $7,192,000 for the corresponding
periods
8
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ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Gynecare's cash expenditures have significantly exceeded
its revenues, resulting in an accumulated deficit of $25,645,000 at September
30, 1997. The Company has funded its operations primarily through the
private placement of equity securities aggregating $15,361,000 during 1994
and 1995 and the completion of its initial public offering in November 1995
aggregating net proceeds of $15,223,000.
Cash used by Gynecare's operations was $7,448,000 for the nine months
ended September 30, 1997, as compared to $6,387,000 for the corresponding
period in fiscal 1996. Cash was used during the first nine months of fiscal
1997 primarily to fund the expansion of marketing programs for the
ThermaChoice Uterine Balloon Therapy system in the U.S. and in international
markets, the costs of obtaining reimbursement in existing markets, the
ongoing development of the ThermaChoice Uterine Balloon Therapy and
VersaPoint systems, and increased general and administrative expenses to
support expanded operations. The decrease in short-term investments by
$6,883,000 from $9,248,000 on December 31, 1996 to $2,365,000 on September
30, 1997 resulted primarily from the use of cash by Gynecare's operations.
In addition, accounts payable increased by $819,000 from $481,000 on December
31, 1996 to $1,300,000 on September 30, 1997 primarily as a result of
increased purchases in support of increased levels of manufacturing and sales.
The Company's capital expenditures for the first nine months of fiscal
1997 and for the corresponding period in fiscal 1996 were $175,000 and
$488,000, respectively. The decreased level of capital expenditures during
the first nine months of fiscal 1997 compared to the corresponding period in
fiscal 1996 was due primarily to reduced capital requirements to support U.S.
clinical studies of the ThermaChoice Uterine Balloon Therapy system which
commenced in January 1996. The patient treatment phase of this study ended
in October 1996. In addition, levels of capital expenditures during the
first nine months of fiscal 1996 were higher as a result of Gynecare's
relocation to a new facility in the fourth quarter of 1995.
At September 30, 1997, Gynecare had outstanding borrowings totaling
$668,000 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
Gynecare's equipment and fixtures.
The Company believes that its cash, cash equivalents and investments
together with interest thereon will be sufficient to fund its operations and
capital requirements through 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 Gynecare's products,
the progress of Gynecare's clinical research and product development
programs, the receipt of and the time required to obtain regulatory
clearances and approvals, the resources Gynecare 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 Gynecare's ThermaChoice Uterine Balloon
Therapy and VersaPoint systems in new and existing markets, and other
factors. As such, there can be no assurance that Gynecare 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 Gynecare, which
would have a material adverse effect on Gynecare's business, financial
condition and results of operations.
On August 4, 1997, Gynecare executed a definitive merger agreement with
Johnson & Johnson ("Johnson & Johnson"), providing for a stock-for-stock
merger valued at approximately $79 million. Gynecare will become a
wholly-owned subsidiary of Johnson & Johnson. In the event the
merger agreement is terminated for any reason other than (a) a failure to
obtain Stockholder Approval at the special meeting of stockholders or (b) due
to an uncured breach of a representation, warranty, covenant or agreement of
Gynecare if Gynecare has willfully and intentionally breached the merger
agreement, Johnson & Johnson and Gynecare have agreed to enter into a credit
agreement under which Gynecare would be able to borrow up to $5,000,000 in
draw-down loans (each a "Loan") not to exceed $1,000,000
per month. The Loans would bear interest, payable semiannually, at a rate
equal to one percent over the prime rate reported from time to time during
the term of the Loan in The Wall Street Journal. The principal of all Loans
shall be due, with all accrued
9
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interest, on the three year anniversary of the date of the credit agreement.
The Loans may be prepaid in whole or in part at the discretion of Gynecare,
and must be prepaid under certain circumstances where Gynecare obtains
additional debt or equity financing. The Loans will be secured by all of the
assets of Gynecare, subject to the senior secured position of Silicon Valley
Bank on the fixed assets of Gynecare under credit facilities in place as of
the date of the merger agreement.
On September 19, 1997, Gynecare and Ethicon entered into a distribution
agreement by which Ethicon will serve as a non-exclusive distributor for
Gynecare's VersaPoint and ThermaChoice products in the United States for a
period of six months. The distribution agreement was negotiated on an
arm's-length basis and may be terminated by either party for any reason by
giving the other party 30 days' notice.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 requires
restatement of all prior-period earnings per share data presented after the
effective date. SFAS 128 will not have a material impact on Gynecare's
financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS 130 is effective for fiscal years beginning
after December 15, 1997, and reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS 130 is
not expected to have a material impact on Gynecare's financial position,
results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131
generally supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997, and restatement of comparative information for earlier years is
required. However, SFAS 131 is not required to be applied to interim
financial statements in the initial year of application. SFAS 131 will not
have a material impact on Gynecare's financial position, results of
operations or cash flows.
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 Gynecare's control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:
RISKS OF INTERNATIONAL SALES. To date, substantially all of Gynecare's
sales have been outside the United States, and Gynecare anticipates that a
significant portion of its revenues for the next year may continue to be
derived from international sales. Gynecare currently markets and sells its
products internationally through a network of distributors. Gynecare's
international sales are dependent upon the marketing efforts of, and sales
by, these distributors. Gynecare may also rely on these distributors to
assist it in obtaining reimbursement approvals from both government and
private insurers in certain international markets. Gynecare's 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 Gynecare. If a distributor were to fail
to invest adequate capital promoting Gynecare's products or were to cease
operations, Gynecare would likely be unable to achieve significant sales in
the territory. To market its products in the United States, Gynecare will
need to establish a distribution network which may consist of direct sales
representatives, independent sales representatives, independent distributors,
or a combination of these. There can be no assurance that
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Gynecare 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 Gynecare'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 Gynecare will be able to
successfully commercialize the ThermaChoice Uterine Balloon Therapy system,
VersaPoint system, or any future product in any market.
DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY. Gynecare'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. Gynecare'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 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 Gynecare, that any of Gynecare'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 Gynecare.
For example, one of Gynecare's competitors filed a third party observation
investigating prior art patents as they relate to a European patent
application licensed to Gynecare for the ThermaChoice product. As a result,
the claims were amended and the patent was issued. This competitor has filed
a similar action in connection with Gynecare's prosecution of corresponding
patents in Australia. As a result, the claims have been amended and a patent
will be issued. Further, Gynecare believes such competitor recently filed in
the U.S. Patent Trademark Office a request for re-examination of two issued
patents related to Gynecare'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. The United States Patent and
Trademark Office recently issued a Notice of Intent to Issue Re-examination
Certificate for one of these patents in which the claims had been amended.
Subsequently, the same party filed a second request for re-examination for
both patents citing an additional reference. The U.S. Patent and Trademark
Office granted each of the second requests for re-examination. There can be
no assurance that these patents will be held valid after the re-examination
proceedings or, that if held invalid, such invalidity would not have a
material adverse effect on Gynecare's business, financial condition or
results of operations.
Gynecare believes that it is currently in compliance with the terms of
its license agreements. In the event of a material breach of Gynecare'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 Gynecare's license agreements could
have a material adverse effect on Gynecare's business and results of
operations.
In addition to patents, Gynecare 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 Gynecare without additional
consideration any inventions conceived or reduced to practice by them while
employed or retained by Gynecare, subject to customary exceptions. There can
be no assurance that proprietary information agreements with employees,
consultants and advisors will not be breached, that Gynecare will have
adequate remedies for any breach or that Gynecare's trade secrets will not
otherwise become known to or independently developed by competitors.
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
Gynecare, may be necessary to enforce patents issued or licensed to Gynecare,
protect trade secrets or know-how owned by Gynecare, defend Gynecare against
claimed infringement of the rights of others or determine the ownership,
scope or validity of the proprietary rights of Gynecare and others. An
adverse determination in any such litigation could subject Gynecare to
significant liabilities to
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third parties, require Gynecare to seek licenses from third parties and
prevent Gynecare from manufacturing, selling or using its products, any of
which could have a material adverse effect on Gynecare'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 Gynecare, or at all.
EFFECTS OF 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, Gynecare 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 a
PMA for marketing of such product from the FDA.
In 1996, Gynecare 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 October 1996. Gynecare's PMA
application for the ThermaChoice system has been filed by the FDA. On
October 6, 1997, the Ob/Gyn Devices Advisory Panel of the FDA recommended to
the FDA that it approve Gynecare's PMA application, subject to certain
conditions. The FDA will consider the Advisory Panel's recommendation in the
final review of Gynecare's PMA application. These conditions include:
completion of one-year follow-up data on all patients treated in the U.S.
clinical trial; revision of professional and patient labeling; resolution of
certain software and minor engineering issues; monitoring of patients treated
with ThermaChoice for two years after premarket approval; and collaboration
with the FDA to resolve certain physician training issues. The ThermaChoice
system is not approved for marketing in the United States and the Advisory
Panel's recommendation does not imply that a decision about the approvability
of the application has been made by the FDA. There can be no assurance as to
whether Gynecare 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 Gynecare has requested, which could limit the
addressable market of the ThermaChoice Uterine Balloon Therapy system and
have a material adverse effect on Gynecare's business, financial condition
and results of operations. There can be no assurance that Gynecare will not
be required to conduct additional clinical trials for the ThermaChoice
Uterine Balloon Therapy system which may result in substantial cost and
delays. In addition, changes in existing regulations or adoption of new
government regulations or policies could prevent or delay regulatory approval
of Gynecare'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 Gynecare'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 Gynecare'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. Gynecare received
notification of FDA clearance to market the system in the United States for
fibroids, polyps, adhesions and divided septa. However, if Gynecare 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 Gynecare 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 Gynecare's determinations
not to submit a new 510(k) notice for any of the changes. If the FDA
requires Gynecare to submit a new 510(k) notice for any product modification,
Gynecare 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 Gynecare'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,
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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. Gynecare 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. Gynecare 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 Gynecare with respect
to manufacturing and quality assurance activities. In 1995, Gynecare
implemented policies and quality systems which allowed Gynecare 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, Gynecare's
quality assurance systems were audited by TUV, a European Community-approved
notified body. Upon a satisfactory review by TUV in January 1996, Gynecare
was awarded EN 46001, ISO 9001 and CE mark certification for the ThermaChoice
Uterine Balloon Therapy system. To retain such certification, Gynecare must
adequately maintain its quality assurance systems and undergo an annual audit
by TUV. In August 1996, Gynecare passed a TUV surveillance inspection to
extend the validity of its ISO certificate until February 1999. Gynecare'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 Gynecare'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 Gynecare'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 widely from country to
country. The requirements for approval for sale internationally differ from
those required for FDA approval. In 1996, Gynecare obtained the CE mark for
the ThermaChoice Uterine Balloon Therapy system. In 1997, Gynecare obtained
the CE mark for the VersaPoint system. There can be no assurance, however,
that Gynecare will be able to maintain compliance required for CE marking.
Failure to do so would mean that Gynecare could not sell its products in the
European Economic Area, which could have a material adverse effect upon
Gynecare's business, financial condition and results of operations.
UNCERTAINTY RELATING TO 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.
Gynecare'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. Gynecare 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 Gynecare 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
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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 Gynecare. Only recently has Gynecare's ThermaChoice Uterine Balloon
Therapy system obtained reimbursement for a small number of cases in several
countries internationally. The VersaPoint system has not yet 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 Gynecare will obtain reimbursement in any other countries within a
particular time, for a particular amount, or at all.
Regardless of the type of reimbursement system, Gynecare 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 Gynecare'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 Gynecare'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 Gynecare's products
would have a material adverse effect on Gynecare's business, financial
condition and results of operations.
RISKS OF COMPETITION. At present, Gynecare 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 Gynecare. 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 Gynecare or that
would render Gynecare'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
Gynecare's business, financial condition and results of operations.
As a result of the entry of large and small companies into the market,
Gynecare 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, Gynecare believes that its products compete favorably with respect
to these factors, although no assurance can be given that it will be able to
continue to do so.
DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS. Currently, the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems are the only products being
marketed by Gynecare. The Company will be required to obtain regulatory
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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. Gynecare's PMA application for
the ThermaChoice system has been filed by the FDA. On October 6, 1997, the
Ob/Gyn Devices Advisory Panel of the FDA recommended to the FDA that it
approve Gynecare's PMA application, subject to certain conditions. The FDA
will consider the Advisory Panel's recommendation in its final review of
Gynecare's PMA application. These conditions include: completion of one-year
follow-up data on all patients treated in the U.S. clinical trial; revision
of professional and patient labeling; resolution of certain software and
minor engineering issues; monitoring of patients treated with ThermaChoice
for two years after premarket approval; and collaboration with the FDA to
resolve certain physician training issues. The ThermaChoice system is not
approved for marketing in the United States and the Advisory Panel's
recommendation does not imply that a decision about the approvability of the
application has been made by the FDA. There can be no assurance that
Gynecare'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 received FDA clearance for marketing in
the United States, and Gynecare has made limited shipments of the system.
Furthermore, because the ThermaChoice Uterine Balloon Therapy and VersaPoint
systems represent Gynecare's principal near-term focus, Gynecare 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 the long-term follow up of
clinical trials, there would be a material adverse effect on Gynecare'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 September 30, 1997, Gynecare had an
accumulated deficit of $25.6 million. The Company expects its operating
losses to continue for at least the next several years. In addition,
Gynecare expects that it will continue to expend substantial resources to
fund 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 Gynecare will
achieve significant revenues from either international or domestic sales. In
addition, there can be no assurance that Gynecare 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 Gynecare
believes that its products have certain advantages over competing products
and technologies, Gynecare 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 systems 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 Gynecare's business, financial condition and
results of operations. Although Gynecare 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 Gynecare 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.
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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 Gynecare's control. These factors include actions relating to
regulatory and reimbursement matters, the extent to which Gynecare's products
gain market acceptance, the rate at which Gynecare 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, and competition.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON SINGLE CONTRACT
MANUFACTURERS AND SOLE SOURCE SUPPLIERS; SCALE-UP RISK. Gynecare currently
manufactures 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. Gynecare
expects to continue to depend on such manufacturers for the foreseeable
future. The integration of Gynecare'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. Gynecare may experience a shortage of manufacturing capacity if
the new facility fails to operate as planned. Although Gynecare intends to
maintain sufficient levels of inventory to avoid any material disruption
resulting from the continuing scale-up of Gynecare's facility, there can be
no assurance that Gynecare 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 its facility, or the inability of Gynecare's contract manufacturers to
supply required materials and Gynecare subsequently not being able to
successfully find an alternative source of supply in a timely manner, may
have a material adverse effect on Gynecare's business, financial condition
and results of operations. For the foreseeable future, Gynecare 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.
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 Gynecare 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
Gynecare's financial results, have had and may continue to have in the future
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
Gynecare's products, the progress of Gynecare's clinical research and product
development programs, the receipt of and the time required to obtain
regulatory clearances and approvals, the resources Gynecare 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 Gynecare's ThermaChoice Uterine
Balloon Therapy and VersaPoint systems in new and existing markets, and other
factors. While Gynecare 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, there
can be no assurance that Gynecare will not require additional financing prior
to the end of 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 funding be required, such funding may not be available when
needed or on terms acceptable to Gynecare, which would have a material
adverse effect on Gynecare's business, financial condition and results of
operations.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS. The directors and executive
officers of Gynecare, and certain of their affiliates, own approximately 51%
of Gynecare's outstanding Common Stock. Accordingly, these persons,
individually and as a group, may be able to effectively control Gynecare and
direct its affairs and business, including any determination with respect to
the acquisition or disposition of assets by Gynecare, future issuances of
Common Stock or other securities by Gynecare, 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 Gynecare.
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PART II. OTHER INFORMATION
None.
Item 6. (a) Exhibits
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on
September 25, 1997 in order to report its proposed
merger transaction with Johnson & Johnson.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GYNECARE, INC.
By: /s/ MALCOLM M. FARNSWORTH, JR.
-----------------------------------
Malcolm M. Farnsworth, Jr.
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer), Secretary
Date: November 13, 1997
---------------------------------
18
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET LOSS
PER SHARE (1)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary and Fully Diluted:
Weighted average common shares outstanding for the period . . 8,366,000 8,239,000 8,320,000 8,185,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,835,000) $(2,538,000) $(8,810,000) $(7,192,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share . . . . . . . . . . . . . . . . . . . . . ($0.34) ($0.31) ($1.06) ($0.88)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(1) Primary and fully diluted calculations are substantially the same.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE
COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,423
<SECURITIES> 2,365
<RECEIVABLES> 453
<ALLOWANCES> 0
<INVENTORY> 485
<CURRENT-ASSETS> 6,779
<PP&E> 1,254
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,784
<CURRENT-LIABILITIES> 2,153
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 8,239
<TOTAL-LIABILITY-AND-EQUITY> 10,784
<SALES> 986
<TOTAL-REVENUES> 986
<CGS> 1,244
<TOTAL-COSTS> 1,244
<OTHER-EXPENSES> 3,136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,810)
<EPS-PRIMARY> ($1.06)
<EPS-DILUTED> ($1.06)
</TABLE>
