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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A No. 2
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997, or
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-28078
FemRx, Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0389440
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1221 Innsbruck Drive Sunnyvale, CA 94089
(Address of principal executive office)
Registrant's telephone number, including area code: (408) 752-8580
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Preferred Stock, $0.001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
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 reguired
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [ X ] Yes [ ] 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 Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $7,623,000 as of March 16, 1998, based upon the
closing price on the Nasdaq National Market reported for such date. Shares of
Common Stock held by each 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.
There were 8,844,724 shares of Registrant's Common Stock issued and outstanding
as of March 16, 1998.
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Introductory Statement
Except for the historical information contained in this Annual Report on
Form 10-K, the matters discussed herein contain forward-looking statements that
are subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Factors that could cause
actual results to differ materially include, but are not limited to, the timing
of orders and shipments, the timely development of new products and market
acceptance of products, the impact of competitive products and pricing, the
Company's ability to further expand into international markets, public policy
relating to health care reform in the U.S. and other countries, approval of its
products by government agencies such as the United States Food and Drug
Administration ("FDA"), and other risks detailed below and included from time to
time in the Company's other Securities and Exchange Commission ("SEC") reports
and press releases, copies of which are available from the Company upon request.
The Company assumes no obligation to update any forward-looking statements
contained herein.
PART I
Item 1. Business
Overview
FemRx, Inc. ("FemRx" or the "Company") is developing surgical systems for
the diagnosis and treatment of gynecologic disorders. The Company's OPERA STAR
System, is designed to perform a procedure the Company has named Out-Patient
Endometrial Resection/Ablation ("0PERA"). OPERA is a less invasive alternative
to hysterectomy for patients suffering from abnormal uterine bleeding. OPERA
consists of diagnosis by a gynecologic surgeon and the use of the Company's
OPERA Specialized Tissue Aspirating Resectoscope ("STAR") under visual guidance
to collect a pathology sample, resect the endometrial lining together with any
submucosal fibroids and coagulate the entire uterine cavity. The Company has
also developed a proprietary fluid management system, called the Flo-Stat
System, for use in gynecologic procedures. In September of 1997, the Company
introduced Diva, a proprietary laparoscopic morcellator, designed to be used in
surgical procedures to assist in the removal of large tissue masses such as
fibroids.
The OPERA STAR System consists of a disposable STAR and a reusable motor
drive unit. The STAR enables a gynecologic surgeon to cut, coagulate and
aspirate tissue within the uterus performing continuous surgery with one
instrument without the frequent interruption of clearing the operative field of
tissue chips during a procedure as is necessary with other surgical procedures.
The Flo-Stat System is a microprocessor-based fluid management system that
consists of electronic scales and a dedicated computer and display unit, that is
designed to continuously monitor the fluid used during a procedure. The Flo-Stat
System allows the physician to continuously track a patient's fluid deficit. The
Company believes that combining the use of the OPERA STAR System and Flo-Stat
System will increase physician confidence when performing OPERA, reduce
operating times and enable surgeons to offer more women an alternative to
hysterectomy.
The Diva device is a disposable powered laparoscopic morcellator used with
a reusable motor drive unit. The Diva device enables a surgeon to quickly and
effectively remove large volumes of tissue, using a minimally invasive approach
that reduces patient recovery time.
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The information required by this item is incorporated by reference from the
information under Item 7 of this Form 10-K "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
The information required by this item is incorporated by reference from the
information under Item 8. of this Form 10-K "Financial Statements and
Supplementary Data".
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Background
The Female Reproductive System
The female reproductive system consists of the uterus, ovaries and
fallopian tubes. The uterus is a highly vascular, muscular organ which lies
below the abdomen in the pelvis. Although the size and shape of a normal uterus
can vary significantly, the uterus is typically a pear shaped organ about 7 to 8
cm long and 4 to 5 cm at its widest point. The uterus can grow to 11 times its
weight and many times its size during pregnancy. Within the uterus lies the
cavity where fetal development takes place during pregnancy. This cavity is
lined by a thin layer of sponge-like tissue called the endometrium or uterine
lining. The endometrium is filled with tiny blood vessels and can vary in depth
from 1 mm to over 10 mm. The thick muscular layer surrounding the endometrium is
called the myometrium. The bottom of the uterus is known as the cervix. The
cervix is richly supplied with nerves, making it the most sensitive portion of
the uterus. The cervix leads to the vagina, a muscular tube which leads to the
exterior of the body.
Extending from each side near the top of the uterus are the fallopian tubes
which lead to the two ovaries. The ovaries' primary functions are to secrete
hormones, such as estrogen, and store the female reproductive cells, or ova. The
fallopian tubes transport the ova to the uterus for fertilization as part of the
monthly menstrual cycle.
Normal menstruation is a 28-day cycle that repeats itself throughout a
woman's reproductive life. This cycle is controlled by the interaction between
pituitary and ovarian hormones and is associated with the release of an egg from
its ovary for possible fertilization. The ovaries secrete estrogen and a second
hormone, progesterone, which causes the endometrial lining to thicken, preparing
it to receive and nourish a fertilized egg. If an egg is fertilized, it implants
into the endometrium and is nourished by the rich endometrial blood supply. If
the egg is not fertilized, levels of estrogen and progesterone decrease, the
coil shaped arteries supplying the endometrium with blood constrict, and the
endometrial lining breaks down. The lining is then shed through the vagina
together with the unfertilized egg. The resulting bleeding usually lasts four to
seven days and is called menstruation. Normal blood loss during menstruation is
generally between 25 to 70 ml per menstrual cycle. Menstruation typically begins
between the ages of 11 and 14 years and ends between the ages of 45 and 55 with
the onset of menopause, when the ovaries become exhausted and can no longer
produce estrogen and progesterone. At that time, the menstrual cycle becomes
irregular and eventually ceases completely.
Uterine Disorders
Overview
The uterus is subject to a number of disorders, many of which cause
abnormal uterine bleeding. Other uterine disorders primarily cause discomfort,
pain or pressure symptoms. For example, in some women the uterus prolapses
(descends), resulting in pelvic pain. Another common cause of pain is
endometriosis, where endometrial tissue grows outside of the uterus. The uterus
can also become infected by bacteria or other micro-organisms, resulting in pain
and fever.
Abnormal uterine bleeding includes disorders of the menstrual cycle, such
as unexpected bleeding, excessive bleeding (defined as total blood loss
exceeding 80 ml per menstrual cycle), prolonged bleeding beyond seven days, or
bleeding more frequently than 21-day intervals. Abnormal bleeding is considered
a symptom of an anatomic irregularity or hormonal imbalance. This symptom can be
caused by systemic disease, although it is more commonly the result of disorders
within the uterus itself, such as fibroids and, more rarely, endometrial cancer.
Abnormal uterine bleeding can also be caused by other factors such as medication
side effects, miscarriage and retained tissue after birth. When no specific
cause for abnormal bleeding is found, the condition is termed dysfunctional
uterine bleeding or DUB.
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Fibroids
Fibroids, also known as leiomyomas or myomas, are non-cancerous growths
within the uterus that can cause pain and are often associated with abnormal
uterine bleeding. A uterus may have many fibroids and these growths, alone or in
combination, can become sizable, sometimes enlarging the uterus to many times
its normal size. Fibroid growth is stimulated by estrogen and typically subsides
after menopause when estrogen production decreases. However, many women take
estrogen replacement therapy during and after menopause to decrease bone loss,
heart disease and hot flashes. In these women, fibroids may continue to grow
even after menopause. Fibroids arise from the muscular layer of the uterus, the
myometrium. Although there are a variety of fibroids, many grow toward the inner
cavity of the uterus and are known as submucosal fibroids. Submucosal fibroids
can exert significant pressure on the endometrial lining and are often
associated with abnormal bleeding. Clinical studies have shown that fibroids are
the most common indication for hysterectomy.
Dysfunctional Uterine Bleeding
DUB is the diagnosis when no other cause for abnormal bleeding, such as
fibroids or cancer, can be found. Patients diagnosed with DUB are typically
treated with drug therapy initially and commonly proceed to surgical
intervention.
Uterine Cancer
Endometrial carcinoma is the most common uterine cancer and is often not
diagnosed until after a patient seeks treatment for abnormal uterine bleeding.
Appropriate diagnosis is critically important in detecting endometrial carcinoma
because, if found early, it can be treated before spreading outside of the
uterus.
Current Therapies for Uterine Disorders and Their Limitations
Various drug therapies and surgical approaches are available for most
uterine disorders. Treatment of abnormal uterine bleeding usually begins
conservatively with drug therapy and, if necessary, proceeds to more invasive
surgical methods. Current surgical therapies for abnormal uterine bleeding
include dilation and curettage ("D&C"), hysterectomy, myomectomy (fibroid
removal), endometrial resection (surgical removal of the endometrium) and
endometrial ablation (coagulation of the endometrium). The principal advantages
and disadvantages of these therapies are discussed below.
Drug Therapy
A variety of medications can be used to reduce menstrual bleeding but the
most effective are hormonal drugs such as oral contraceptives, progestins and,
for shorter-term therapy, gonadotropin releasing hormone agonists. Hormonal
drugs alter the normal menstrual cycle in order to reduce or eliminate monthly
bleeding. Unfortunately, symptomatic improvement generally persists only while
the patient continues drug therapy and many women experience acute side effects
such as hot flashes, nausea, weight gain, depression and mood swings. A more
significant concern is the risk of long-term side effects from hormonal drugs.
Depending upon the medication, the patient may be at increased risk for
cardiovascular disease or osteoporosis. For these reasons, many women are
reluctant to continue long-term drug therapy even if symptoms are relieved, and
therefore resort to surgical therapy.
Dilation and Curettage
D&C can be used for both the diagnosis of certain uterine disorders and as
a therapy for abnormal uterine bleeding. Retained tissue after miscarriage or
birth can usually be successfully removed with D&C. Other causes of abnormal
uterine bleeding, such as fibroids or DUB, are generally not effectively treated
since D&C can only scrape away a superficial layer of the endometrium. With this
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therapeutic approach, the endometrium typically regenerates within weeks and
symptoms such as abnormal bleeding usually return and require further
therapeutic intervention.
Hysterectomy
Hysterectomy involves the surgical removal of the uterus and, in many
cases, the ovaries. This procedure is a frequent therapy for abnormal uterine
bleeding. With the exception of cesarian section, hysterectomy is the most
common surgical procedure in the U.S.
Hysterectomy is a highly invasive procedure with a lengthy recovery period.
Acute complications of hysterectomy include fever, excessive bleeding requiring
blood transfusion and injury to the bowel or urinary tract. In addition,
potential long-term adverse effects include premature onset of menopause, an
increased risk of osteoporosis, coronary heart disease, urinary incontinence and
psycho-sexual dysfunction.
Myomectomy
Abdominal myomectomy, the surgical removal of certain types of fibroids
from the outside of the uterus, is a fertility-sparing option for some
symptomatic fibroid patients. Generally, this procedure is not used to remove
submucosal fibroids, which are accessed more readily through the cervix.
Myomectomy is performed through either a large abdominal incision or, less
invasively, through several small laparoscopic incisions in the abdomen to
access the outside of the uterus. Fibroid removal requires a deep incision into
the uterine muscle. The fibroid is dissected from the surrounding muscle tissue
using scissors and the resulting uterine wound is closed with sutures. The
extensive dissection required for fibroid removal causes considerable blood
loss. Myomectomy is a major operation which results in a significant
convalescence. Frequent complications include adhesion (scar tissue) formation
between the uterus and surrounding structures, such as the intestines, that can
cause chronic pelvic pain.
Resection of the Endometrial Lining
Hysteroscopic endometrial resection is a less traumatic treatment for
submucosal fibroids and abnormal uterine bleeding. In this procedure, the
gynecologic surgeon inserts a telescope-equipped cutting tool into the vagina
and across the cervix to look into the uterus and, depending on the diagnosis,
removes fibroids or the entire endometrial lining. Fertility may be maintained
if only a small portion of the endometrium is removed during fibroid resection.
Infertility generally results from complete removal of the endometrial lining.
The cutting tool generally used for this procedure is a modified urologic
resectoscope which is 8 to 9mm in diameter and accommodates various tip
attachments that cut or coagulate tissue when electrocautery current (70 to 140
Watts) is supplied from an attached electro-surgical unit.
Gynecologists first adopted the urologic resectoscope in the mid-1970s to
remove submucosal fibroids. This instrument was not originally designed for
gynecology, is difficult to use in the uterus and requires significant skill to
perform a gynecologic procedure. When a urologist cuts tissue inside the urethra
using the resectoscope, the resulting debris can be flushed out of the surgeon's
view into the stretchable, relatively avascular urinary bladder. When a
gynecologic surgeon cuts tissue inside the uterus using the resectoscope, the
resulting debris cannot be flushed out of the surgeon's view because the uterus
is relatively small and inflexible. To remove tissue, the surgeon must
periodically stop the operation, remove the resectoscope and evacuate tissue
debris using a curette or suction aspirator. Before surgery can resume, the
gynecologic surgeon must re-distend the uterus with fluid, clear away blood in
order to see the cavity, coagulate any bleeding vessels and re-establish proper
orientation. The repeated removal and insertion of the resectoscope may cause
additional cervical trauma and uterine bleeding.
A significant concern during endometrial resection is fluid overload. In
this procedure, irrigation fluid continuously flows in and out of the uterus
through the resectoscope, distending (stretching) the uterine cavity and
clearing away the blood. Fluid overload is caused by excessive absorption of the
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fluid used for uterine expansion into the blood vessels within the uterus.
Clinically significant overload can cause pulmonary edema (fluid in the lungs),
and if salt-free irrigation fluid is used, cerebral edema (brain swelling) and,
in isolated cases, death. The safe limit for salt-free fluid absorption is
believed to be between one and two liters for most patients, so the procedure
must be stopped if the salt-free fluid deficit (defined as the volume of fluid
inflow minus fluid outflow) amount exceeds this level. The use of slat-free
irrigation fluid calls for careful monitoring of the fluid deficit and places a
constraint on operating time, limiting the size and number of fibroids that can
be treated using a modified urologic resectoscope.
Ablation of the Endometrial Lining
Hysteroscopic endometrial ablation is another technique for treating
abnormal uterine bleeding which does not involve removal of the uterus. In this
procedure, a gynecologic surgeon employs either electro-coagulation using a
rollerball electrode attached to the resectoscope or photo-coagulation using the
Nd:YAG laser to coagulate, or burn the endometrial lining of the uterus under
visual guidance. Available ablation tools usually burn the endometrial lining to
a depth of approximately 3 to 5 mm. In order to improve the chances of success,
most patients are treated with hormonal drugs to thin the endometrial lining
prior to surgery.
Emerging Therapies
Several techniques are under development to address the disadvantages
associated with hysterectomy and other existing therapies. One approach is
directed at improving the tools available to gynecologic surgeons for treating
fibroids and abnormal uterine bleeding under visual guidance. Another approach
is to develop simple devices intended to permit clinicians with minimal training
to treat non-fibroid related abnormal uterine bleeding.
Among the new tools under investigation is the modified urologic
resectoscope operating at high power levels (250 Watts) for vaporization, rather
than resection, of the endometrial lining. This technique may simplify the
treatment of submucosal fibroids. However, the clinical data with respect to the
application of these devices in gynecology are limited.
Several attempts have been made to develop a simple procedure for ablating
the entire endometrial lining using radiation, steam, cryothermia, chemical
agents and radiofrequency energy. Recent approaches include using a balloon
filled with near-boiling fluid to coagulate the endometrium or using a
conductive balloon with surface electrodes to deliver coagulating amounts of
electrical energy to the endometrium. The water filled balloon has been recently
approved by the FDA, other methods are currently undergoing clinical evaluation.
The FemRx Solution
The Company believes that the optimal procedure for treating dysfunctional
uterine bleeding and abnormal uterine bleeding caused by submucosal fibroids is
an advanced surgical technique which the Company has named OPERA. OPERA is a
less invasive alternative to hysterectomy. OPERA consists of diagnosis by a
gynecologic surgeon and the use of the Company's OPERA STAR resectoscope under
visual guidance to collect a pathology sample, resect the endometrial lining
together with any submucosal fibroids and coagulate the entire uterine cavity.
FemRx has developed products designed to make the OPERA procedure simpler for
gynecologic surgeons to perform so that this procedure may be an effective
alternative to hysterectomy for more patients with abnormal uterine bleeding.
OPERA STAR System
The STAR is a proprietary instrument that the Company has designed
specifically to perform OPERA. The Company believes the OPERA STAR System offers
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several significant advantages over competing surgical devices. The Company
designed the product to build on the existing skills of surgeons trained to
perform endometrial resection and ablation. The STAR is a versatile device which
enables a gynecologic surgeon to cut, coagulate and aspirate tissue from inside
the uterus without the need to repeatedly interrupt the procedure to clear the
uterus of tissue chips.
The OPERA STAR System consists of a disposable 9mm diameter resectoscope
and a reusable motor drive unit. The resectoscope includes a detachable sheath,
a proprietary electrode that can be used for cutting and coagulating, a rotating
morcellator for tissue evacuation, a morcellator drive cable connected to the
motor drive unit and an electro-surgical cable for connection to any standard
electro-surgical power unit. The body of the STAR is made from medical grade
plastic using injection molding technology while the tissue morcellator and loop
electrode are machined from metal. The entire device is lightweight and designed
for ease of manufacture and single-use performance.
The sheath of the STAR, which is inserted across the cervix, provides for
inflow of the uterine expansion fluid and also accommodates most standard 4mm
diameter reusable telescopes. The telescope attaches to a standard camera and
light source, providing for visualization of the inside of the uterus on a video
monitor. When electrocautery current is applied, the electrode can be swept
along the uterine cavity to coagulate the endometrial lining or pressed down to
cut into the endometrium or a fibroid. The surgeon typically elects to either
cut or coagulate by selecting the electro-surgical unit foot petal that
corresponds to the desired power (70 to 300 Watts) and waveform. The electrode
cuts tissue into chips that are suctioned into the rotating morcellator, a
proprietary assembly located immediately under the electrode. The morcellator
consists of two concentric tubes, the inner one rotating to provide a slicing
action. Suctioned tissue is sliced into small fragments and transported from the
morcellator to a trap where it is collected for pathologic review.
The STAR rsectoscope is designed to work in salt-free irrigation fluids. In
September 1997, the Company introduces the OPERA STAR SL, which is designed to
be used in saline irrigation fluids.
Flo-Stat System
The Flo-Stat System is a proprietary microprocessor-based system designed to
accurately and continuously report the amount of irrigation fluid infused into
the patient, the amount recovered from the patient and the difference, or fluid
deficit. The Company believes that the Flo-Stat System is the first automatic
fluid reporting system that allows the physician to track fluid deficit
automatically without interrupting the procedure whenever changing fluid inflow
bags or outflow canisters.
During hysteroscopic procedures, nurses are responsible for ensuring that
fluid inflow bags are full and outflow canisters are emptied, thereby
maintaining the continuous fluid flow required to keep the operative field clear
of blood. Without a Flo-Stat System, manual fluid deficit calculations are
usually made by the nurse every few minutes.
The Flo-Stat System operates by weighing fluid inflow and outflow
containers using electronic scales. Weight data is transmitted to a dedicated
computer and display unit. The sensed change in weight over time is converted
into a change in volume and the cumulative amount is displayed on the front
panel. If the fluid deficit exceeds a physician-determined limit, an audible and
visual alarm is activated. A battery is provided for uninterrupted system
operation in the event of a power failure. Following a procedure, fluid deficit
data may be uploaded to a computer for research or documentation purposes.
The Flo-Stat System is designed to be operated by nursing staff with
minimal attention required. The system automatically detects fluid container
changes allowing for proper fluid management and continuous surgery.
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Diva device
The Diva device is a disposable powered laparoscopic morcellator used with
a reusable motor drive unit. The Company believes the Diva device offers several
significant advantages over competing surgical devices. The Company designed the
product to build on the existing skills of surgeons trained to perform
laparoscopic myomectomy and laparoscopic supracervical hysterectomy. The Diva
device enables a surgeon to quickly and effectively extract large volumes of
tissue, allowing a surgeon to employ a minimally invasive approach that reduces
procedure and patient recovery time.
The Diva device consists of a disposable 15mm diameter laparoscopic
morcellator and a reusable motor drive unit. The Diva device includes a unique
tissue stabilizing sheath, a blade guard to prevent damage to the cutting
mechanism during insertion and protects against inadvertent lateral cutting, and
a morcellator drive cable connected to the motor drive unit. The body of the
Diva device is made from medical grade plastic using injection molding
technology while the circular rotating blade is made of stainless steel. The
entire device is lightweight and designed for ease of manufacture and single-use
performance.
The morcellator of the Diva device, which is compatible with existing 15mm
trocar access devices is inserted into the abdomen through a trocar device. The
surgeon, using graspers, will grab a tissue mass and pull the tissue through the
circular rotating blade. This process allows for the quick and effective removal
of large tissue masses.
Manufacturing
The Company manufactures its products at its facility in Sunnyvale,
California. The Company's manufacturing operations consist of in-house assembly
facilities for the OPERA STAR System, Diva device and the Flo-Stat System. The
STAR and Diva device are assembled in a controlled environment room, and are
shipped to an outside vendor for sterilization.
Raw materials and certain sub assemblies are purchased from various
qualified vendors. Most of these components are standard commercial items, some
are manufactured to the Company's specifications. Many components, including
those manufactured to the Company's specifications, and the sterilization
services are currently purchased from single vendors. None of the Company's
vendors are legally obligated to continue to supply the Company nor is the
Company legally obligated to buy from a particular vendor. The Company has
qualified alternative vendors that could supply most of the Company's needed
components and sterilization services but also believes that for certain of
these components and for the sterilization services there are relatively few
alternative sources of supply. Any supply interruption from vendors, or failure
to establish replacement vendors, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has received U.S. Food and Drug Administration ("FDA")
clearance, ISO 9001 certification, and been issued a license by the State of
California to manufacture and sell its OPERA STAR System, Diva Device and Flo
Stat System. The Company's manufacturing facilities are subject to periodic
inspection by regulatory authorities and its operations undergo Good
Manufacturing Practices ("GMP") compliance inspections conducted by the FDA and
equivalent inspections conducted by state officials. The Company is required to
operate in conformance with GMP requirements in order to produce products for
sale in the U.S., and in compliance with ISO 9001 standards in order to produce
products for sale in Europe. Any failure by the Company to comply with GMP or
ISO 9001 standards may result in the Company being required to take corrective
actions, such as modification of its policies and procedures. In addition, the
Company may be required to cease all or part of its operations for some period
of time until it can demonstrate that appropriate steps have been taken to
comply with GMP regulations and could 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 be found in compliance with GMP or ISO 9001
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standards in future audits by regulatory authorities or that the Company will
not experience difficulties in the course of developing its manufacturing
capability.
The Company has limited experience manufacturing its products in the
volumes that will be necessary for the Company to achieve significant commercial
sales, and there can be no assurance that reliable, high-volume manufacturing
can be established or maintained at commercially reasonable costs. In addition,
the Company will need to manufacture its products in compliance with regulatory
requirements. If the Company experiences significant demand for its products,
the Company will have to expend capital resources and develop manufacturing
expertise to establish large-scale manufacturing capabilities. If the Company is
unable to develop large-scale manufacturing capabilities, or establish contract
manufacturing for its products, the Company's competitive position and financial
condition could be materially adversely affected. As the Company seeks to
increase production volumes, if required, it may experience lower than
anticipated yields or production constraints as a result of changes in its
manufacturing processes which could result in shipment delays as well as
increased manufacturing costs. These manufacturing difficulties could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Marketing and Sales
The market for the Company's products is fragmented and consists of
physicians, hospitals, surgery centers, and clinics. In order to successfully
market its products, the Company will need to convince the medical community,
principally leading gynecologic surgeons, that the OPERA STAR System is a
desirable alternative to current procedures, such as hysterectomy, and other
emerging therapies. The Company estimates that of the approximately 33,000
gynecologists in the U.S., approximately 7,000 are skilled at using
hysteroscopes to look into the body for diagnostic and therapeutic procedures.
In order to reach these gynecologic surgeons, the Company has six territory
managers who will market directly to gynecologic surgeons who perform
hysteroscopy. The Company expects to enter into alliances with distributors or
other companies with marketing and sales expertise in international markets.
There can be no assurance that establishing such a marketing staff or sales
force will be cost-effective, or that the Company's direct sales and marketing
efforts will be successful, or that its distributors or collaborative partners
will be successful in marketing, selling or gaining market acceptance for the
Company's products.
The Company intends to familiarize gynecologic surgeons with OPERA through
the sponsorship of specialized seminars and conferences. Physician-led training
using the OPERA STAR System will be conducted at regional locations by surgeons
skilled in using the OPERA STAR System. In addition, the Company will seek to
establish partnerships with leading health care payors and providers to expand
the reach of its training programs to gynecologic surgeons. The Company also
intends to educate women about OPERA as an alternative to hysterectomy through a
variety of media including advertising, magazine articles, television and video
presentations.
The Company believes that market acceptance of its products will depend, in
part, on the Company's ability to provide evidence to the medical community of
the safety, efficacy and cost-effectiveness of its products and the procedures
in which these products are intended to be used. Even though the Company
believes that an OPERA procedure performed using its products may be less costly
than a hysterectomy, the level of surgical training and skill required may be
higher. The Company's OPERA STAR System is designed for use by a gynecologic
surgeon trained in the OPERA procedure. Market acceptance of the Company's
products will require a willingness on the part of gynecologic surgeons to be
trained to perform OPERA using the Company's products. Market acceptance may be
limited because some physicians and payors, recognizing that the removal of the
uterus in a hysterectomy precludes the potential reoccurrence of uterine
disorders, will be reluctant to substitute the OPERA procedure, which allows the
patient to retain her uterus. The Company believes that most gynecologists view
hysterectomy as an appropriate therapy to treat a variety of uterine disorders.
As a result, the Company believes that recommendations and endorsements of its
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products by influential physicians will be essential for market acceptance of
its products. No assurances can be made that the Company will receive such
recommendations or endorsements.
International regulatory requirements vary by region, and compliance with
such regulations may be costly and time-consuming. Accordingly, the
distribution, pricing and marketing structure to be established by the Company
may vary from country to country. In Europe, the Company intends to establish a
network of distributors to market and distribute its OPERA STAR System. In
Japan, the Company intends to collaborate with one marketing partner to assist
with regulatory requirements and to market and distribute its OPERA STAR System.
The Company has not yet obtained international regulatory approvals and no
assurance can be given that the Company will obtain any necessary international
regulatory approvals, that the Company will establish a network of distributors
to sell the OPERA STAR System in Europe, that the Company will secure a
marketing partner to sell its OPERA STAR System in Japan or that any
international distributors or marketing partners will commit the necessary
resources to sell the OPERA STAR System in international markets. Failure of the
Company to market and sell its products into international markets could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company products have not generated significant sales to date. There
can be no assurance that any of the Company's existing or future products will
gain any significant degree of market acceptance among physicians, patients,
hospitals and healthcare payors. Failure to gain market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Patents and Proprietary Rights
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products and processes, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties. The
Company's policy is to aggressively protect its proprietary position by, among
other things, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company's strategy includes extending the patent protection of its
technology by filing procedure-specific method patents wherever possible for the
use of the Company's products in new clinical applications.
As of December 31, 1997, the Company held two issued U.S. patents and had a
number of U.S. and international patent applications pending relating to the
Company's technology. The issued U.S. patents include both method and device
claims.
The validity and breadth of claims covered in medical device technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. No assurance can be given that any patents from pending patent
applications or from any future patent applications will be issued, that the
scope of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Furthermore,
there can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around the
Company's patents. In addition, others may hold or receive patents or file
patent applications which contain claims having a scope that covers products
developed by the Company. In the event that any relevant claims of third-party
patents are upheld as valid and enforceable, the Company could be prevented from
practicing the subject matter claimed in such patents unless it obtained
licenses from the owners of each of such patents, or forced to redesign its
products or processes to avoid infringement. There can be no assurance that such
licenses would be available or, if available, would be on terms acceptable to
the Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. There can be no assurance that
competitors, many of whom have substantial resources and have made substantial
investments in competing technologies, will not seek and obtain patents that
11
<PAGE>
will prevent, limit or interfere with the Company's ability to make, use or sell
its products either in the U.S. or in international markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and many companies in
the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement litigation or an interference proceeding
declared by the U.S. Patent and Trademark Office ("USPTO") to determine the
priority of inventions. The defense and prosecution of patent suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect the Company's trade secrets or know-how or to
determine the enforceability, scope and validity of the proprietary rights of
others. Any litigation or interference proceedings involving the Company will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
a judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition to patents, the Company relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others 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.
Government Regulation
Medical devices are subject to extensive regulation by governmental
authorities in the U.S. and in foreign countries. The FDA regulates the clinical
testing, manufacture, labeling, packaging, marketing, distribution and record
keeping for medical devices, in order to ensure that medical devices distributed
in the U.S. are safe and effective for their intended use. Noncompliance with
applicable requirements can result in import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals, recall or seizure of
products, operating restrictions, refusal of the government to approve product
export applications or allow the Company to enter into supply contracts, and
criminal prosecution. Failure to obtain regulatory clearances and approvals, the
restriction, suspension or revocation of regulatory clearances and approvals, if
obtained, or any other failure to comply with regulatory requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. The Company will not be able to market future products in the U.S.
unless and until it obtains clearance or approval from the FDA. The Company and
any contract manufacturers will be required to adhere to applicable FDA
regulations regarding GMP and similar regulations in other countries, which
include testing, control, documentation, and reporting requirements. The Company
is required to register with the FDA as a device manufacturer and maintain a
manufacturing license from the State of California. The GMP regulations require
that the Company manufacture its products and maintain its documents in a
prescribed manner with respect to manufacturing, testing and quality assurance
and quality control activities. Ongoing compliance with GMP and other applicable
regulatory requirements will be monitored through periodic inspections by state
and federal agencies, including the FDA, and by comparable agencies in other
countries. The FDA also has proposed changes to the GMP regulations that would,
among other things, require design controls and maintenance of service records,
and which, if finalized, would likely increase the cost of complying with GMP
requirements.
12
<PAGE>
Labeling and promotion activities are also subject to scrutiny by the FDA
and in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses. The
Company and its products are also subject to a variety of state and local laws
and regulations in those states and localities where its products are or will be
marketed. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future or that such laws or regulations will not have a material adverse effect
upon the Company's ability to do business.
Export sales of devices that have not received marketing clearance or
approval generally are subject to FDA export requirements. In addition,
international sales of the Company's products will be subject to the regulatory
requirements of each country. The Company has not obtained any international
regulatory approvals permitting sales outside of the U.S. The regulatory review
process varies from country to country. The ISO 9000 series of standards for
quality have been developed to ensure that companies know the standards of
quality to which they must adhere to receive certification. The European Union
has promulgated rules which require that certain medical products receive by
mid-1998 the right to affix the CE mark, an international symbol of adherence to
quality assurance standards and compliance with the European Medical Device
Directive. ISO 9001 certification is one of the CE mark certification
requirements.
Third-Party Reimbursement
In the U.S., hospitals, physicians and other health care providers that
purchase medical devices generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Although reimbursement for endometrial resection and ablation
procedures has generally been available in the U.S., there can be no assurance
that this will continue to be the case or that reimbursement will be available
for procedures performed using the Company's products. Third-party payors may
deny reimbursement if they determine that a prescribed device has not received
appropriate regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or is experimental,
unnecessary or inappropriate. Third-party reimbursement will also depend upon
decisions by the Health Care Financing Administration ("HCFA") for Medicare, as
well as by individual Health Maintenance Organizations ("HMOs"), private
insurers and other payors. The Company expects to price its disposable
resectoscope at a premium over the prices currently charged for the disposable
components of competitive resectoscopes. In addition, certain health care
providers are moving toward a managed care system in which such providers
contract to provide comprehensive health care for a fixed cost per person.
Managed care providers are attempting to control the cost of health care by
authorizing fewer elective surgical procedures. The Company is unable to predict
what changes will be made in the reimbursement methods used by third-party
health care payors. Given the efforts to control and decrease health care costs
in recent years, there can be no assurance that any reimbursement will be
available or adequate.
Competition
At present, the Company considers its primary competition to be current
therapies for the treatment of excessive menstrual bleeding, including drug
therapy, D&C, surgical endometrial ablation, hot water balloon ablation and
hysterectomy. The Company will also compete against other non-surgical
techniques under development for the treatment of excessive menstrual bleeding,
including other non-surgical endometrial ablation techniques which employ radio
frequency energy or freezing techniques ("cryoablation").
The Company expects the current high levels of competition and
technological change to increase. The Company competes with providers of
modified urologic resectoscopes, electrosurgical instruments, laser instruments,
thermal systems and other manual devices. Many of these competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources than the Company. There can be no assurance that the Company
13
<PAGE>
can effectively compete against such competitors. In addition, there can be no
assurance that these or other companies will not succeed in developing
technologies and products that are more effective than the Company's or that
would render the Company's technology or products obsolete or uncompetitive.
In particular, the Company faces competition from Circon-Cabot Corp., which
markets a resectoscope used in intra-uterine surgery and a fluid management
system. Several companies including Circon-Cabot Corp., Olympus America, Inc.,
Karl Storz Instrument Co. and Richard Wolf Medical Instruments Corp., each have
a large share of the market for resectoscopes. The Company competes with Johnson
and Johnson Inc., which markets hot water ballon ablation and tissue
vaporization devices, and Conceptus, Inc., who markets a disposable resector
sheath. These companies offer broad product lines, have substantially greater
resources and name recognition than the Company and frequently offer significant
discounts and bundled products as competitive tactics. Moreover, the OPERA STAR
System is not currently compatible with all telescopes utilized in gynecologic
surgery and therefore may require surgeons using incompatible telescopes to
acquire a different telescope in order to use the OPERA STAR System. In
addition, there are a number of other companies developing devices to treat
fibroids and abnormal uterine bleeding. These include BEI Medical Systems Co.,
U.S. Surgical Corp. and several private companies. In addition to Circon-Cabot
Corp., other companies such as Aquintel, Inc. market competing fluid management
systems. The Company also faces potential competition from medical device or
pharmaceutical manufacturers that currently market or may be developing other
medical devices or drugs, such as hormonal therapies, for the treatment of
uterine disorders. 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 not competitive. Furthermore,
competitors may have, or acquire, proprietary technology that could be used to
limit the Company's ability to compete. The inability of the Company to
successfully compete could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that the primary competitive factors in the market for
endometrial resection and ablation devices are safety, efficacy, ease of use,
cost per procedure, availability of reimbursement, availability of training,
patent position, price, sales and marketing capability and reputation. There can
be no assurance that the Company's products can compete effectively or that new
instruments that perform more favorably will not be introduced.
Product Liability and Insurance
The development, manufacture and sale of medical devices entail significant
risk of product liability claims and device failure claims. The Company has
conducted only limited clinical trials and has had limited sales of the OPERA
STAR System, Diva device and Flo-Stat System and does not yet have, and will not
have for a number of years, sufficient clinical data to allow the Company to
measure the risk of such claims with respect to its products. The Company faces
an inherent business risk of financial exposure to product liability claims in
the event that the use of its products results in personal injury. The Company
also faces the possibility that defects in the design or manufacture of the
Company's products might necessitate a product recall. Although the Company has
not experienced any claims to date, there can be no assurance that the Company
will not experience losses due to product liability claims or recalls in the
future. The Company currently maintains product liability insurance with
coverage limits of $3,000,000 per occurrence and $3,000,000 in the aggregate and
there can be no assurance that the coverage limits of the Company's insurance
policies will be adequate. Such insurance is expensive, difficult to obtain and
may not be available in the future on acceptable terms, or at all. Any claims
against the Company, regardless of their merit or eventual outcome, could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
14
<PAGE>
Employees
As of March 10, 1998, the Company had 69 employees, including 14 in
research and development, 23 in manufacturing, 24 in sales and marketing and 8
in administration. The Company believes it maintains competitive compensation,
benefits, equity participation and work environment policies to assist in
attracting and retaining qualified personnel. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel. The Company believes its relationship with its
employees is good.
Executive Officers and Directors of the Registrant
The executive officers and directors of the Registrant are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C><C>
Andrew M. Thompson 34 President, Chief Executive Officer and Director
George M. Savage, M.D. 38 Senior Vice President, Research and Development
and Director
Edward W. Unkart 48 Vice President, Finance and Administration, Chief
Financial Officer and Assistant Secretary
Jeffrey J. Christian 44 Vice President, Engineering
Marshall Tsuruda 51 Vice President, Operations
Jean La Douceur 48 Vice President, Product Assurance
D. Fred Herdman 49 Vice President, Sales and Marketing
Craig E. Dauchy 49 Secretary
Gail Gaumer Schulze(2) 46 Director
Kathleen D. LaPorte (2)36 Chairman of the Board of Directors
Philip M. Young (1) 58 Director
James W. McLane (1) 58 Director
</TABLE>
______
(1) Member of Compensation Committee
(2) Member of Audit Committee
Andrew M. Thompson has served as President, Chief Executive Officer and a
director of the Company since its incorporation in November 1994. From May 1994
to November 1994, Mr. Thompson consulted in the medical device industry as a
partner of Savage-Thompson Management. From May 1991 to November 1994, he served
as Vice President, Finance of Medtronic CardioRhythm, a medical device company
focused on catheter ablation systems for electrophysiology, which he co-founded
in May 1991 and which was acquired by Medtronic, Inc. in May 1992. From June
1989 to May 1991, he consulted full-time in the medical industry as a partner of
Savage-Thompson Management. He received an M.A. in Production Engineering from
Corpus Christi College, Cambridge, an M.A. in Education and an M.B.A. from
Stanford University.
George M. Savage, M.D. has served as Senior Vice President, Research and
Development and a director of the Company since its incorporation in November
1994. From May 1994 to November 1994, Dr. Savage consulted in the medical device
industry as a partner of Savage-Thompson Management. From May 1991 to November
1994, he served as Vice President, Clinical and Regulatory Affairs of Medtronic
CardioRhythm, a medical device company focused on catheter ablation systems for
electrophysiology, which he co-founded in May 1991 and which was acquired by
Medtronic, Inc. in May 1992. From May 1991 to May 1992, Dr. Savage also served
CardioRhythm as a director. From June 1989 to May 1991, he consulted full-time
in the medical industry as a partner of Savage-Thompson Management. Dr. Savage
received a B.S. in Biomedical Engineering from Boston University, an M.D. from
Tufts University and an M.B.A. from Stanford University.
15
<PAGE>
Edward W. Unkart has served the Company as Vice President, Finance and
Administration, Chief Financial Officer and Assistant Secretary since October
1995. From June 1995 to October 1995, Mr. Unkart served as Vice President,
Finance and Administration, Chief Financial Officer and Secretary of Combinet,
Inc., a manufacturer of digital, remote network access devices for use in small
office/home office applications which was acquired by Cisco Systems, Inc. From
February 1989 to June 1995, Mr. Unkart served as Vice President, Finance and
Administration, Chief Financial Officer and Secretary of Devices For Vascular
Intervention, Inc., a manufacturer of disposable medical devices used in
treatment of cardiovascular disease, which is now part of Guidant Corporation.
He is a Certified Public Accountant and received both a B.S. in Statistics and
an M.B.A. from Stanford University.
Jeffrey J. Christian has served the Company as Vice President, Engineering
since April 1995. From August 1994 to April 1995, Mr. Christian served as an
engineering consultant for Phoenix Engineering, an engineering consulting firm.
From October 1990 to August 1994, Mr. Christian served as Vice President,
Research and Development of Unisurge, Inc., a medical device company.
Mr. Christian received a B.S. in Manufacturing Engineering and Technology from
Brigham Young University.
Marshall Tsuruda has served the Company as Vice President, Operations since
April 1996. From October 1989 to March 1996, Mr. Tsuruda served as Director of
Manufacturing of Laserscope Surgical Systems, a manufacturer of surgical laser
systems and sterile disposable devices. Mr. Tsuruda received a B.A. in Liberal
Arts from Sacramento State University.
Jean La Douceur has served the Company as Vice President, Product Assurance
since May 1997. From January 1994 to May 1997, Ms. La Douceur served as
President for Biovantage Consulting, Inc., a consulting firm for FDA regulated
industries. Ms. La Douceur received a B.S. in Biology from the University of
Wisconsin and received both a M.S. in Microbiology and an M.B.A. from Rutgers
University.
D. Fred Herdman has served the Company as Vice President, Sales and
Marketing since May 1997. From March 1995 to May 1997, Mr. Herdman served as
Executive Director of Marketing of Karl Storz Endoscopy, a manufacturer of
telescopes and endoscopic instruments. From December 1991 to March 1995, Mr.
Herdman served as Vice President of Sales and Marketing of Marlow Surgical
Technologies, Inc., a manufacturer of laparoscopic and endoscopic products. Mr.
Herdman received a B.A. in English from Muskingum College and a Master of
Education from Wright State University.
Craig E. Dauchy has served the Company as Secretary since its incorporation
in November 1994. From June 1975 to the present, Mr. Dauchy has been associated
with the law firm of Cooley Godward Castro Huddleson & Tatum and has been a
partner since January 1981. From April 1985, he has been a member of the firm's
management committee and is head of the firm's venture capital practice group.
Mr. Dauchy received a B.A. in History from Yale and a joint J.D./M.B.A. from
Stanford University.
Gail Gaumer Schulze has served the Company as a director since
October 1995. From July 1997 to the present, Ms. Schulze has been Senior
Executive Vice President of Centeon, L.L.C., a manufacturer of blood products.
From 1996 to July 1997 Ms. Schulze was Corporate Vice President of Cost
Management Service and Strategy for Allegiance Healthcare Corporation. From 1980
to 1996, Ms. Schulze held numerous marketing, product development and general
management positions with Baxter Healthcare Corporation including President,
Renal Europe, from 1991 to 1994. Ms. Gaumer received a B.S. in Psychobiology
from the University of California, Santa Cruz, a N.I.H. Fellowship in
Neurophysiology at the University of Wisconsin and an M.B.A. from Stanford
University.
Kathleen D. LaPorte has served the Company as a director since April 1995
and is currently the Chairman of the Board of Directors. From January 1993 to
the present, Ms. LaPorte has been affiliated with the Sprout Group, the venture
capital affiliate of Donaldson, Lufkin & Jenrette Inc., and has served as a
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General Partner since December 1993. From August 1987 to January 1993, Ms.
LaPorte was a principal at Asset Management Company, a venture capital firm
focused on early stage health care and technology investments. Ms. LaPorte
currently serves on the Board of Directors of Lynx Therapeutics, Inc. and Onyx
Pharmaceuticals, Inc. She holds a B.S. in Biology from Yale University and an
M.B.A. from Stanford University.
Philip M. Young has served the Company as a director since April 1995. From
April 1990 to the present, Mr. Young has served as a General Partner of
U.S. Venture Partners, a venture capital firm. Mr. Young currently serves on the
Boards of Directors of CardioThoracic Systems, Inc., The Immune Response
Corporation, Penederm Inc., Vical Inc., 3Dfx Interactive Inc. and Zoran
Corporation. He received a B.M.E. from Cornell University, an M.S. from George
Washington University, and an M.B.A. from Harvard University where he was a
Baker Scholar.
James W. McLane has served the Company as a director since November 1996.
From May 1997 to the present, Mr. McLane has served as President and Chief
Operating Officer of NovaCare, Inc., a provider of healthcare services. From
February 1991 to June 1996, Mr. McLane served as Executive Vice President of
Aetna Life & Casualty Company and Chief Executive Officer of Aetna Health Plans.
Prior to that, he was a Senior Vice President and Division Executive of
Citicorp, Inc. Mr. McLane currently serves on the Board of Directors of Aliginis
Inc. He holds a B.A. in History from Yale University and an M.B.A. from Harvard
Business School.
Each officer serves at the pleasure of the Board of Directors. Each of the
Company's officers and directors, other than non-employee officers and
directors, devotes substantially his full-time to the affairs of the Company.
Non-employee officers and directors devote such time to the affairs of the
Company as is necessary to discharge their duties. There are no family
relationships among any of the directors, officers, or key employees of the
Company.
Item 2. Facilities
The Company leases approximately 13,400 square feet in Sunnyvale,
California, which comprise the Company's administrative offices and
manufacturing and warehousing space. The Company's lease for this facility
extends through June 1998. The Company uses all of the facility and believes
that its existing facilities will be sufficient for its operations through 1998.
The Company believes that it will be able to renew its lease or obtain
additional space if necessary.
Item 3. Legal Proceedings
To the best of its knowledge the Company is not currently party to any
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1997.
17
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market under
the symbol FMRX since the effective date of the Company's Registration Statement
on Form S-1 on March 25, 1996. The price per share reflected in the table below
represents the range of high and low closing sale prices for the Company's
Common stock as reported in the Nasdaq National Market for the quarters
indicated.
<TABLE>
<CAPTION>
1996: High Low
<S> <C> <C>
First Quarter ended March 31, 1996 $ 9.75 $9.375
Second Quarter ended June 30, 1996 $17.00 $ 9.00
Third Quarter ended September 30, 1996 $11.00 $ 6.50
Fourth Quarter ended December 31, 1996 $ 8.50 $ 4.00
1997: High Low
First Quarter ended March 31, 1997 $ 4.50 $ 2.00
Second Quarter ended June 30, 1997 $ 5.00 $ 1.50
Third Quarter ended September 30, 1997 $ 4.3125 $ 2.625
Fourth Quarter ended December 31, 1997 $ 3.4375 $ 2.375
</TABLE>
As of March 16, 1998, the number of common stockholders of record was 103.
Dividend Policy
The Company has not declared or paid any dividend since its inception and
does not intend to pay any dividend in the foreseeable future. Future dividends,
if any, will be determined by the Board of Directors.
Recent Sales of Unregistered Securities
None
18
<PAGE>
Item 6. Selected Consolidated Financial Data
The following table presents selected financial data of the Company. This
historical data should be read in conjuction with the attached Financial
Statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Selected financial data is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $ 1,586 $ 64 $ --- $ ---
Net loss $(12,135) $(8,780) $(3,174) $ (142)
Basic and diluted net loss per share (1) $ (1.44) $ (1.36) $ (3.97) $(4.30)
Shares used in computing basic and
diluted net loss per share 8,448 6,467 799 33
Total assets $ 11,273 $22,040 $ 4,115 ---
Long-term obligations $ 142 $ 272 $ 185 $ ---
</TABLE>
(1) See Note 1 to Financial Statements for information concerning calculation of
net loss per share.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. As a result of certain factors, including those set forth
elsewhere in this Form 10-K, the Company's actual results of operations may
differ significantly from the results discussed in the forward-looking
statements. The following discussion and analysis should be read in conjuction
with the Financial Statements of the Company and Notes there to included in this
Form 10-K.
Overview
During 1997, FemRx, Inc. ("FemRx" or the "Company") began sales of the
OPERA STAR System and related products. The OPERA STAR System is an innovative
surgical system for the diagnosis and treatment of gynecologic disorders. OPERA
stands for Out-Patient Endometrial Resection/Ablation. OPERA is a less invasive
alternative to hysterectomy for patients suffering from abnormal uterine
bleeding. OPERA consists of diagnosis by a gynecologic surgeon and the use of
the Company's OPERA STAR resectoscope under visual guidance to collect a
pathology sample, resect the endometrial lining together with any submucosal
fibroids and coagulate the entire uterine cavity. The Company has also developed
a proprietary fluid management system, called the Flo-Stat System, for use in
gynecologic procedures. In September 1997, the Company introduced Diva, a
proprietary laparoscopic morcellator, designed to be used in surgical procedures
to assist in the removal of large tissue masses such as fibroids.
The Company markets its products through its Center of Excellence and
National Providers of Excellence programs which are partnerships between FemRx
and healthcare providers aimed at increasing the awareness of the OPERA
procedure through jointly sponsored patient outreach and physician training.
These programs provide a hospital or surgical center with an OPERA STAR System
and a Flo-Stat System which allow gynecologic surgeons to perform the OPERA
procedure. As part of these programs, the hospital or surgical center purchases
an initial stocking order of disposable resectoscopes. The revenue from these
disposable resectoscopes is recognized over their estimated period of usage.
The Company commenced commercial shipments of its OPERA STAR System and
Flo-Stat System in October 1996. The Company commenced commercial shipments of
the Diva in September 1997. The Company currently sells its products in the
United States to physicians, hospitals and surgical centers. Sales in the U.S.
are currently made through a small direct sales force and are conducted on
credit terms.
Certain components of the Company's products are manufactured by contract
manufacturers. Additional manufacturing, final assembly and test is performed by
the Company at its location in Sunnyvale, California.
The Company has experienced significant operating losses since inception
and, as of December 31, 1997, had an accumulated deficit of approximately $24.4
million. The Company expects to continue to generate substantial losses due to
increased operating expenditures primarily attributed to research and
development activities, including clinical trials, commercial manufacturing,
marketing and sales activities. The Company anticipates that its research and
development expenses will increase in the future to support increased product
development activities, including clinical trials, and that its selling, general
and administrative expenses will increase due to increased marketing and sales
activities. The Company expects that its results of operations will fluctuate
significantly from quarter to quarter due to a variety of factors including the
timing of such expenditures, timing in the receipt of orders, the rate of
acceptance of the Company's products in the marketplace, introduction of new
products by competitors of the Company, pricing of competitive products and the
cost and effect of promotional discounts and marketing programs. The Company's
gross margins, if any, will be depressed for several quarters due to
20
<PAGE>
manufacturing and overhead costs allocated over low production volumes. There
can be no assurance that the Company will ever achieve significant revenue or
profitability.
Results of Operations
Years Ended December 31, 1997, 1996, and 1995.
Net Sales increased to $1,586,000 in 1997 from $64,000 in 1996. No net
sales were recorded in any prior periods. The increase in 1997 as compared to
1996 was attributable to the Company's completion of its first full year of
commercial sales.
Cost of goods sold increased to $3,096,000 in 1997 from $668,000 in 1996.
No cost of goods sold were recorded in any prior periods. The increased amounts
in 1997 were primarily attributable to the Company's first complete year of
manufacturing operations and sales.
Research and development expenses decreased to $3,369,000 in 1997 from
$4,551,000 in 1996, primarily due to costs associated with manufacturing
development costs incurred in 1996. Research and development expenses, which
include clinical, regulatory, and prior to October 1, 1996, costs related to
manufacturing development increased to $4,551,000 in 1996 from $2,409,000 in
1995. The increased amounts were primarily attributable to costs associated with
clinical trials, additional product research, prototype development, patent
preparation and filing, manufacturing facility preparation, and increase of
regulatory, research, clinical, engineering and manufacturing personnel.
Selling, general and administrative expenses, increased to $8,007,000 in
1997 from $4,577,000 in 1996 and from $936,000 in 1995. The increased amounts
were primarily attributable to the expansion of the Company's sales and
marketing personnel, and increased sales and marketing activity.
Interest income decreased to $797,000 in 1997 from $1,003,000 in 1996. The
decrease was due to the Company's lower average balances in cash, cash
equivalents and short term investments. Interest income increased to $1,003,000
in 1996 and from $194,000 in 1995. The increase was due to the Company's higher
average balances in cash, cash equivalents and short term investments from the
proceeds of the Company's initial public offering which were received in March
and April 1996.
Interest expense decreased to $46,000 in 1997 from $51,000 in 1996.
Interest expense decreased due to interest payments on lower outstanding
balances on an equipment lease line. Interest expense increased to $51,000 in
1996 from $23,000 in 1995. Interest expense increased due to interest payments
on higher outstanding balances on an equipment lease line established during
1995.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $22,000,000. The federal net operating loss
carryforwards will expire, if not utilized, at various dates beginning in 2010
through 2012. Utilization of the net operating losses may be subject to a
substantial annual limitation due to the change of ownership provisions of the
Internal Revenue Code of 1986, as amended. Accordingly, such annual limitation
may result in the expiration of net operating losses prior to utilization.
Liquidity and Capital Resources
In March and April 1996, the Company sold a total of 3,105,000 shares of
common stock at $9.00 per share through its initial public offering. The net
proceeds (after underwriting discounts and expenses) to the Company from the
initial public offering were $25,002,000. As of December 31, 1997 the Company
had cash, cash equivalents and short term investments of $8,391,000.
Cash used in the Company's operations increased to $10,819,000 in 1997 from
$7,614,000 in 1996 and from $2,264,000 in 1995. This cash was used primarily to
fund increasing levels of research and development of the Company's products,
21
<PAGE>
clinical and regulatory activities, manufacturing operations, establishment of
the Company's sales and marketing organization, and increased sales and
marketing activity.
Capital expenditures decreased to $577,000 in 1997 from $1,193,000 in 1996.
The decreased level of capital expenditures during 1997 was attributable to the
Company's decreased need for new molds and tooling required in the Company's
manufacturing processes. Capital expenditures increased to $1,193,000 in 1996
and from $638,000 in 1995. The increased level of capital expenditures during
1996 was due primarily to the Company's increased operations throughout the year
and the acquisition of molds and tooling for manufacturing of the Company's
products.
Since its incorporation in November 1994, the Company has incurred
significant cumulative losses totaling approximately $24.4 million and expects
to incur additional losses for the next several years. The Company believes that
its existing cash will be sufficient to finance its capital requirements and
operations through at least June 1998. The Company's current operating plan
shows that the Company will require substantial additional capital to fund its
operations, continue research and development programs and market its products.
To date, the Company has financed its operations with the net proceeds from
private placements and public offerings of its equity securities and capital
equipment lease financing. The Company plans to seek additional funding through
public or private financing or other arrangements with third parties. There can
be no assurance that additional funding will be available on acceptable terms,
if at all.
Impact of Year 2000
The Company has reviewed its systems for their ability to recognize the
year 2000. None of the Company's systems interact with customer or supplier
systems. None of the Company's products include software affected by dates. The
Company's accounting system is not currently Year 2000 compliant. Under the
terms of a maintenance agreement with the software vendor for this system, the
Company will receive an upgraded version of the system that is Year 2000
compliant. Based on information from the system vendor, the Company expects to
receive and install this upgrade in early 1999. The upgrade is included as part
of the maintenance agreement, at no additional cost. The cost of installation is
estimated to be less than $25,000.
Additional Factors That May Affect Future Results
Dependence on OPERA STAR System, Diva device and Flo-Stat System
The OPERA STAR System, Diva device and Flo-Stat System are currently the
Company's only products. The Company expects that the OPERA STAR System, Diva
device and the Flo-Stat System will account for substantially all of the
Company's revenues for the foreseeable future. Even though the OPERA STAR
System, Diva device and Flo-Stat System have received FDA clearance, there can
be no assurance that the Company can successfully manufacture, market, or
realize any significant revenues from these products on a timely basis. The
Company's products will require further development and regulatory clearances or
approvals before they can be marketed internationally. There can be no assurance
that the Company's development and marketing efforts will be successful or that
the OPERA STAR System, Diva device, Flo-Stat System or other potential products
developed by the Company will be capable of being manufactured in commercial
quantities at acceptable costs. Failure to manufacture in commercial quantities
at acceptable cost the OPERA STAR System, Diva device and Flo-Stat System would
have a material adverse effect on the Company's business, financial condition
and results of operations.
22
<PAGE>
Uncertainty of Market Acceptance
The Company believes that market acceptance of the Company's products will
depend, in part, on the Company's ability to provide evidence to the medical
community of the safety, efficacy and cost-effectiveness of its products and the
procedures in which these products are intended to be used. To date, the OPERA
STAR System and Diva device have been used to treat a limited number of patients
and no published reports regarding the use of the OPERA STAR System and Diva
device exist to support the Company's marketing effort. Furthermore, there is
little long-term follow-up data on patients who underwent OPERA using the OPERA
STAR System or procedures using the Diva device. If the Company is not able to
demonstrate long-term success with the OPERA STAR System or Diva device, market
acceptance would be materially adversely affected.
The Company's OPERA STAR System is designed for use by a gynecologic
surgeon trained in the OPERA procedure. Market acceptance of the Company's
products will require a willingness on the part of gynecologic surgeons to be
trained to perform OPERA using the Company's products. Furthermore, market
acceptance may be limited because some physicians and payors, recognizing that
the removal of the uterus in a hysterectomy precludes the potential reoccurrence
of uterine disorders, will be reluctant to substitute the OPERA procedure (which
allows the patient to retain her uterus) for hysterectomy. The Company believes
that most gynecologists view hysterectomy as an appropriate therapy to treat a
variety of uterine disorders. As a result, the Company believes that
recommendations and endorsements of its products by influential physicians will
be essential for market acceptance of its products. No assurances can be made
that the Company will receive such recommendations or endorsements.
The Company's Diva device is designed for use by a gynecologic surgeon in
laparoscopic procedures. Market acceptance of the Company's products will
require a willingness on the part of gynecologic surgeons to perform
laparoscopic morcellation using the Company's products. As a result, the Company
believes that recommendations and endorsements of its products by influential
physicians will be essential for market acceptance of its products. No
assurances can be made that the Company will receive such recommendations or
endorsements.
The Company further believes that the ability of health care providers to
obtain adequate reimbursement for OPERA procedures using the OPERA STAR System
will be critical to market acceptance of the Company's products. There can be no
assurance that the cost of procedures in which the OPERA STAR System is used
will be adequately reimbursed by third-party payors under existing reimbursement
policies and codes. The Company has no experience in gaining reimbursement in
the U.S. or any foreign market. The Company prices its disposable resectoscope
at a premium over the prices currently charged for the disposable components of
competitive resectoscopes. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
Limited Operating Experience
The Company has a limited history of operations. Since its incorporation in
November 1994, the Company has focused primarily on research and product
development efforts, clinical trials and seeking regulatory clearance or
approval for the OPERA STAR System, Diva device and Flo-Stat System, 1997
represented the first full year of commercial production and sales of the
Company's products, accordingly it has limited experience manufacturing in
commercial quantities, marketing or selling products. The Company has
experienced significant operating losses since inception and expects these
losses to continue for the next several years. There can be no assurance that
the Company will be successful in achieving significant sales volumes of the
OPERA STAR System, the Diva device and Flo-Stat System or any other products of
the Company. Whether the Company can successfully manage the transition to a
large-scale commercial enterprise will depend upon a number of factors,
including obtaining selected international regulatory and reimbursement
approvals for its existing or potential products, establishing its commercial
manufacturing capability, developing its U.S. marketing and selling
capabilities, and establishing a distribution network in international markets.
23
<PAGE>
Failure to make such a transition successfully would have a material adverse
effect on the Company's business, financial condition and results of operations.
Need for Additional Capital
The Company's current operating plan shows that the Company will require
substantial additional capital to fund its operations, continue research and
development programs and market its products. The Company plans to seek
additional funding through public or private financing or other arrangements
with third parties. If additional funding is not available on acceptable terms,
the Company may be required to scale back its operations, including research,
product development, and marketing and sales activities. Failure to obtain
additional capital would have a material adverse effect on the Company's
business, financial condition and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
25
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
The Board of Directors and Stockholders
FemRx, Inc.
We have audited the accompanying balance sheets of FemRx, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity (net capital deficiency), and cash flows for each of the
three years ended December 31, 1997. 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 audits 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 FemRx, Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years ended December 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. Management's plans as to these matters are described in Note 1.
The 1997 financial statement do not include adjustments that might result from
the outcome of this uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
February 9, 1998
26
<PAGE>
FemRx, Inc.
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS December 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,091 $ 2,250
Short-term investments 5,300 17,668
Accounts receivable, net of allowance for
doubtful accounts of $21 in 1997 and $1
1996 693 60
Inventories 637 340
Prepaid and other current assets 173 256
------------ -----------
Total current assets 9,894 20,574
Property and equipment, net 1,139 1,429
Other assets 240 37
------------ -----------
Total assets $ 11,273 $ 22,040
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 771 $ 583
Accrued compensation 547 696
Other accrued liabilities 504 65
Deferred revenue 579 ---
Current portion of capital lease obligations 163 141
----------- -----------
Total current liabilities 2,564 1,485
Noncurrent portion of capital lease obligations 142 272
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized shares: 5,000,000
Issued and outstanding shares: none in 1997
and 1996 --- ---
Common stock, $0.001 par value
Authorized shares: 40,000,000
Issued and outstanding shares: 8,836,679 in
1997 and 8,845,610 in 1996 33,339 33,305
Notes receivable from stockholders --- (58)
Deferred compensation (369) (696)
Accumulated deficit (24,403) (12,268)
----------- ----------
Total stockholders' equity 8,567 20,283
----------- ----------
Total liabilities and stockholders' equity $11,273 $22,040
=========== ==========
</TABLE>
See accompanying notes to financial statements
27
<PAGE>
FemRx, Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended
December 31,
---------------------------------
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Net sales $ 1,586 $ 64 $ ---
Costs and expenses:
Cost of goods sold 3,096 668 ---
Research and development 3,369 4,551 2,409
Selling, general and administrative 8,007 4,577 936
--------- -------- ---------
Total costs and expenses 14,472 9,796 3,345
Loss from operations (12,886) (9,732) (3,345)
Interest income 797 1,003 194
Interest expense (46) (51) (23)
========= ======== =========
Net loss $(12,135) $(8,780) $ (3,174)
========= ======== =========
Basic and diluted net loss per share $ (1.44) $ (1.36) $ (3.97)
========= ======== =========
Shares used in computing basic and
diluted net loss per share 8,448 6,467 799
========= ======== =========
</TABLE>
See accompanying notes to financial statements
28
<PAGE>
FemRx, Inc.
Statement of Stockholders' Equity (Net Capital Deficiency)
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Total
Stockholders'
Notes Equity
Receivable (Net
Preferred Stock Common Stock From Deferred Accumulated Capital
--------------------- -------------------
Shares Amount Shares Amount Stockholders Compensation Deficit Deficiency)
---------- --------- --------- -------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 --- $ --- 1,323,182 $ 8 $ (5) $ --- $ (314) $ (311)
Proceeds from notes receivable
from founders --- --- --- --- 5 --- --- 5
Issuance of Series A convertible
preferred stock, less issuance
cost of $27 6,154,898 6,128 --- --- --- --- --- 6,128
Issuance of common stock to
employees, consultants and
directors for cash and notes
receivable --- --- 396,263 27 (4) --- --- 23
Renegotiation of vesting in
founder stock in exchange for
forgiveness of payable to
related parties --- --- --- 242 --- --- --- 242
Deferred compensation related to
grant of stock options to
employees, consultants and
directors --- --- --- 2,293 --- (2,293) --- ---
Amortization of deferred
compensation --- --- --- --- --- 624 --- 624
Net loss --- --- --- --- --- --- (3,174) (3,174)
----------- --------- --------- ---------------------- ------------ ------------ -----------
Balances at December 31, 1995 6,154,898 6,128 1,719,445 2,570 (4) (1,669) (3,488) 3,537
Issuance of common stock under
stock option plans and employee
stock purchase plan to
employees, consultants, and
directors net of repurchases --- --- 61,858 71 4 --- --- 75
Issuance of common stock to an
employee for cash and notes
receivable --- --- 112,500 76 (58) --- --- 18
Conversion of Series A convertible
preferred stock in connection
with initial public offering (6,154,898) (6,128) 3,846,807 6,128 --- --- --- ---
Issuance of common stock in
connection with initial public
offering, net of issuance cost
of $986 --- --- 3,105,000 25,002 --- --- --- 25,002
Reversal of unearned deferred
compensation related to
employee terminations --- --- --- (542) --- 542 --- ---
Amortization of deferred
compensation --- --- --- --- --- 431 --- 431
Net loss --- --- --- --- --- --- (8,780) (8,780)
----------- --------- --------- ---------------------- ----------- ------------ -----------
Balances at December 31, 1996 --- --- 8,845,610 33,305 (58) (696) (12,268) 20,283
Issuance of common stock under
stock option plans and employee
stock purchase plan to employees,
consultants, anddirectors, net
of repurchases --- --- (8,931) 121 58 --- --- 179
Reversal of unearned deferred
compensation related to employee
terminations --- --- --- (87) --- 87 --- ---
Amortization of deferred
compensation --- --- --- --- --- 240 --- 240
Net loss --- --- --- --- --- --- (12,135) (12,135)
----------- --------- --------- ---------------------- ----------- ------------ -----------
Balances at December 31, 1997 --- $ --- 8,836,679 $ 33,339 $ --- $ (369) $ (24,403) $ 8,567
=========== ========= ========== ====================== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
29
<PAGE>
FemRx, Inc.
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------------------------
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (12,135) $ (8,780) $ (3,174)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 763 352 50
Amortization of deferred compensation 240 431 624
Net loss on disposal of fixed assets 104 --- ---
Changes in assets and liabilities:
Accounts receivable (633) (60) ---
Inventories (297) (340) ---
Prepaid and other current assets 83 (241) (15)
Accounts payable 188 434 133
Accrued compensation (149) 598 98
Deferred revenue 579 --- ---
Payable to related parties --- --- (49)
Other accrued liabilities 439 (8) 69
------------ ----------- ---------
Net cash used in operating activities: (10,818) (7,614) (2,264)
Cash flows from investing activities
Capital expenditures (577) (1,193) (638)
Other assets (203) 18 (55)
Purchases of securities available
for sale (39,902) (184,101) (25,206)
Proceeds from sales and maturities
of securities available for sale 52,270 166,433 25,206
------------ ----------- ---------
Net cash provided by (used in)
investing activities 11,588 (18,843) (693)
Cash flows from financing activities:
Proceeds from capital lease
financing --- 240 273
Payments of obligations under
capital leases (108) (85) (15)
Net proceeds from issuance of
preferred stock --- --- 6,128
Net proceeds from issuance of common
stock 179 25,095 28
------------ ----------- ---------
Net cash provided by financing
activities 71 25,250 6,414
Net increase (decrease) in cash
and cash equivalents 841 (1,207) 3,457
Cash and cash equivalents at beginning
of period 2,250 3,457 ---
------------ ----------- ---------
Cash and cash equivalents at end of
period $ 3,091 2,250 3,457
============ =========== =========
Supplemental disclosure of cash flow
information:
Interest paid $ 46 $ 51 $ 23
============ =========== =========
Supplemental schedule of noncash
investing and financing activities:
Issuance of common stock in
exchange for notes and
subscription receivable $ --- $ --- $ 80
============ =========== =========
Acceleration of vesting in founders
stock in exchange for forgiveness
of payable to related parties $ --- $ --- $ 242
============ =========== =========
</TABLE>
See accompanying notes to financial statements
30
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization
FemRx, Inc. (the "Company") was incorporated in the State of California on
November 21, 1994. The Company reincorporated in the State of Delaware on
January 16, 1996. The Company is engaged in the design development, manufacture,
and sale of unique surgical tools for less invasive treatment of gynecologic
disorders. The Company markets its products to physicians, hospitals, clinics
and surgical centers in the United States. The Company completed its first full
year of commercial sales to customers in the United States during 1997. In
preceding years the Company was in the development stage.
Basis of Presentation
Since its incorporation in November 1994, the Company has incurred
cumulative losses totaling approximately $24,400,000 and expects to incur
additional losses for next several years. The Company's current operating plan
shows that the Company will require substantial additional capital to fund its
operations, continue research and development programs, and market its products.
To date, the Company has financed its operations with the net proceeds from
private placements and public offerings of its equity securities and capital
equipment lease financing. The Company plans to seek additional funding through
public or private financing or other arrangements with third parities. There can
be no assurance that additional funding will be available on acceptable terms,
if at all. The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, and do not include any adjustments
that might result from the outcome of this uncertainty.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). The Company is required to adopt these Statements beginning in fiscal
1998. SFAS 130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. Adoption of these Statements is expected
to have no impact on the Company's financial position, results of operations or
cash flows.
Revenue Recognition
Revenue from sales of reusable products, and reorders for disposable
products is generally recognized at the time of shipment. When a customer
purchases an initial stocking order of disposable products, the revenue from
these products is recognized over their estimated period of usage as determined
based on available clinical data, generally six to twelve months. The Company's
standard sales arrangements do not provide the customer with a contractual right
of return.
31
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of marketable investments and accounts
receivable. The Company places its investments with high-credit-quality issuers
and, by policy, limits the amount of credit exposure to any one issuer. The
Company sells to a diverse customer base. No single customer accounts for a
significant portion of the Company's net sales. The Company does not require
collateral on sales with credit terms.
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented.
In accordance with SFAS 128, basic net loss per share has been computed
using the weighted average number of shares of common stock outstanding during
the period. The Company also adopted the provisions of Securities and Exchange
Commission Staff Bulletin No. 98 which resulted in the removal of certain shares
which had been included in the calculation in the periods prior to the Company's
initial public offering. Diluted net loss per share has not been presented as,
given the Company's net loss position, the result would be anti-dilutive.
32
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
Had the Company been in a net income position, diluted earnings per share
would have been presented and would have included, the shares used in
computation of basic net loss per share as well as an additional 1,871,284,
1,367,120, and 1,099,892, shares for the years ended December 31, 1997, 1996,
and 1995, respectively, relating to outstanding options and warrants (prior to
the application of the treasury stock method) and stock subject to repurchase
not included above. In addition, diluted earnings per share in 1996 and 1995
would have included 896,000 and 3,847,000 shares of convertible preferred stock,
respectively, which automatically converted to common stock upon the closing of
the Company's initial public offering. If such shares were assumed to be
converted into common stock at the date of issuance, the reported basic net loss
per share in 1996 and 1995 would have been $1.19 and $0.68, respectively.
2. Cash, Cash Equivalents, and Short-term investments
Cash and cash equivalents consist of cash deposited with banks and money
market instruments with original maturities of 90 days or less. All short-term
investments, are classified as available-for-sale, are carried at amortized
cost, which approximates fair market value, and consist of high quality debt
securities with original maturities between 90 days and two years. Fair market
values were based on quoted market prices. Realized gains and losses for the
three years ended December 31, 1997 have been immaterial.
The following table summarizes the amortized cost, which approximates the
fair market value of the Company's investments and their contractual maturities
at December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
U.S. Government agencies $ 4,628 $ 12,076
Corporate dept obligations 3,504 7,472
-------------- --------------
$ 8,132 $ 19,548
============== ==============
Included in cash and cash equivalents $ 2,832 $ 1,880
Included in short-term investments 5,300 17,668
-------------- --------------
$ 8,132 $ 19,548
============== ==============
Due within one year $ 7,619 $ 16,466
Due after one year through two years 513 3,082
-------------- --------------
$ 8,132 $ 19,548
============== ==============
</TABLE>
3. Inventories
Inventories are stated at lower of cost (first-in, first-out) or market
(net realizable value). The Company makes inventory provisions for potentially
excess inventory based on forecast demand and scheduled shipment, as well as for
potentially obsolete inventory due to product design modifications. However,
such activity may be subject to revisions, cancellations, and rescheduling.
Inventory reserves, which have been included in the amounts below, amounted to
$266,000 and $130,000 at December 31, 1997 and 1996, respectively. Inventories
at December 31, consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 50 $ 46
Work-in-process 442 226
Finished goods 145 68
--- ---
Total $ 637 $ 340
===== =====
</TABLE>
33
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
4. Property and equipment
The Company records property and equipment at cost and calculates
depreciation using the straight-line method over the estimated useful lives of
the assets, ranging from one to five years, or, in the case of leasehold
improvements, over the term of the lease, if shorter. Furniture and equipment
leased under capital leases is amortized over the useful lives of the assets.
Property and equipment at December 31, consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Furniture and equipment $ 1,556 $1,231
Computer equipment 504 455
Leasehold improvements 155 145
--- ---
2,215 1,831
Less accumulated depreciation and amortization (1,076) (402)
------ ----
Total property and equipment, net $1,139 $1,429
====== ======
</TABLE>
Property and equipment at December 31, 1997 and 1996 includes assets under
capitalized leases of $513,000. Accumulated depreciation on property and
equipment under capitalized leases at December 31, 1997 and 1996 was
approximately $353,000 and $182,000 respectively.
5. Commitments
Future minimum lease obligations as of December 31, 1997 on all leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
----- ------
<S> <C> <C>
Years ending December 31:
1998 $ 173 $ 60
1999 149 6
2000 20 2
---- --- ---
Total minimum lease payments 342 $ 68
====
Amounts representing interest (37)
---
Present value of future lease payments 305
Current portion of capital lease obligations (163)
----
Noncurrent portion of capital lease obligations $ 142
====
</TABLE>
Rent expense under noncancelable operating leases, net of sublease income
of $21,000 in 1996, and $12,000 in 1995, (none in 1997) for the years ended
December 31, 1997, 1996, and 1995 was approximately $126,000, $81,000, and
$66,000, respectively.
6. Stockholders' Equity
Common Stock
In March and April 1996, the Company sold a total of 3,105,000 shares of
common stock at $9.00 per share through its initial public offering. The net
proceeds (after underwriters' discounts and expenses) totaled approximately
$25,002,000. In connection with the offering, all convertible preferred stock
was converted into 3,846,807 shares of common stock of the Company.
34
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
At December 31, 1997, there were 2,123,660 shares of common stock reserved
for current and future issuances under the 1995 Stock Option Plan, the 1996
Non-Employee Directors' Stock Option Plan, the Employee Stock Purchase Plan and
exercise of warrants.
In 1995, sales of common stock to the Company's founders as well as to
advisors and employees were executed under stock purchase agreements and enable
the Company to repurchase unvested shares at their original issuance price.
Shares are released from the repurchase option over approximately four years,
pursuant to a formula determined by the Company's Board of Directors. At
December 31, 1997, 211,575 common shares issued remained subject to repurchase
by the Company.
In 1995 the Company recorded deferred compensation expense equal to the
difference between the exercise price and the deemed fair value for financial
statement presentation purposes of the Company's common stock, as determined by
the Board of Directors, for common stock issued, common stock subscribed and
common stock options granted in 1995. Such shares and options were granted at
prices ranging from $0.006 to $0.672 per share with a deemed fair value ranging
from $0.16 to $6.56 per share. This compensation expense aggregates to
$2,293,000, which is being amortized over the corresponding vesting period of
each respective share purchase or option, generally four years. Amortization of
deferred compensation for the years ended December 31, 1997, 1996 and 1995 was
$240,000, $431,000, and $624,000 respectively. Additionally $87,000 and $542,000
of unvested deferred compensation was reversed in 1997 and 1996, respectively,
due to employee terminations.
In connection with capital lease financing, in June 1995, the Company
issued a warrant to purchase 36,328 shares of common stock at an exercise price
of $1.60 per share for $100 in cash. This warrant expires seven years from the
date of issuance. The warrant was unexercised as of December 31, 1997.
7. Stock Option Plans and Stock Purchase Plan
1995 Stock Option Plan
The 1995 Stock Option Plan ( the "Plan"), as amended, was adopted in
April 1995. The options granted under this Plan may be either incentive stock
options or nonstatutory stock options. The Company has authorized 1,955,625
shares of common stock for issuance under the Plan. Options granted under this
Plan expire no later than ten years from the date of grant. For incentive stock
options, the option price shall be at least 100% of the fair market value on the
date of grant, and no less than 85% of the fair market value for nonqualified
stock options. If, at the time the Company grants an option, the optionee
directly or by attribution owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, the option price
shall be at least 110% of the fair market value and shall not be exercisable
more than five years after the date of grant.
Options generally vest over a period of four years from the date of grant,
with one-eighth vesting after six months and the remainder vesting ratably over
the following 42 months. Subject to Board of Directors approval, options under
the plan are immediately exercisable and are subject to repurchase provisions if
exercised before being vested.
In March 1997, the board of directors authorized the Company to exchange
stock options granted under this plan to all employees, having an exercise price
greater than $4.50 for options with an exercise price of $2.56 (the fair value
of the Company's common stock on March 11, 1997, when the exchange was
effected). Under the terms of this stock option repricing, no portion of any
exchanged option
35
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
was exercisable until September 11, 1997. Options representing the right to
purchase 384,750 shares of common stock were exchanged. The vesting period of
such exchanged options was unchanged from that of the original options.
1996 Non-Employee Directors' Stock Option Plan
In January 1996, the Company adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to non-employee directors of the
Company. The Company has authorized 200,000 shares of common stock for issuance
under the plan.
Pursuant to the terms of the Directors' Plan, each person who is a director
of the Company on the date of the Company's initial public offering, or is
initially elected as a director of the Company and who is not otherwise an
employee or consultant of the Company (a "Non-Employee Director") will
automatically be granted on the date of the initial public offering or the date
of his or her election to the Board an option to purchase 20,000 shares of
common stock (the "Initial Grant"). On the date of each anniversary of the
Initial Grant (the "Anniversary"), each person who is then a Non-Employee
Director of the Company will automatically be granted an option to purchase
5,000 shares of common stock (an "Anniversary Grant").
The Initial Grant under the Directors' Plan will generally vest at the rate
of 1/48th of the shares monthly, though the vesting of such options accelerates
upon certain events such as a change of control. Anniversary Grants under the
Directors' Plan will vest entirely on, but not before, the first annual
anniversary of the Anniversary Grant. The exercise price of options granted
under the Directors' Plan must equal or exceed the fair market value of the
common stock on the date of grant. No option granted under the Directors' Plan
may be exercised after the expiration of ten years from the date it was granted.
Options granted under the Directors' Plan are generally non-transferable. The
Directors' Plan will terminate at the discretion of the Board, subject to the
limitation that no such action may adversely affect any outstanding rights to
purchase common stock.
In the event of a merger, dissolution, consolidation, certain reverse
mergers or certain acquisitions, options outstanding under the Directors' Plan
will automatically become fully vested and will terminate if not exercised prior
to such event.
36
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
Aggregate option activity under the plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------
Shares Weighted
available for Number Price per average
grant of shares share exercise price
------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares authorized 1,155,625 --- --- ---
Options granted (371,967) 371,967 $0.006-$0.672 $0.26
------------- -----------
Balance at
December 31, 1995 783,658 371,967 $0.006-$0.672 $0.26
Additional authorized 200,000 --- --- ---
Options granted (559,000) 559,000 $4.50-$14.50 $9.80
Options exercised --- (71,762) $0.16-$0.672 $0.54
Options forfeited 61,382 (61,382) $0.16-$14.50 $10.70
------------- -----------
Balance at
December 31, 1996 486,040 797,823 $0.006-$14.50 $6.11
Additional authorized 800,000 --- --- ---
Options granted (1,349,000) 1,349,000 $2.00-$4.125 $2.77
Options exercised --- (36,904) $0.006-$2.9375 $0.74
Options forfeited 101,788 (101,788) $0.16-$14.50 $4.12
Options cancelled 384,750 (384,750) $4.50-$14.50 $9.70
============= ===========
Balance at
December 31, 1997 423,578 1,623,381 $0.006-$14.50 $2.73
============= ===========
</TABLE>
The weighted average fair value of options granted was $1.60, $5.90 and
$3.21 in 1997, 1996 and 1995, respectively.
The options outstanding at December 31, 1997 have been segregated into
ranges for additional disclosure is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ---------------------------
Weighted- Options
Options average currently
outstanding remaining Weighted exercisable Weighted
Range of at contractual average at average
exercise December 31, life exercise December 31, exercise
Prices 1997 (in years) price 1997 price
- ------------ ------------ ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
$0.006-$0.67 241,772 7.71 $0.20 153,027 $0.23
$ 2.00-$2.94 1,056,776 8.62 $2.61 277,019 $2.64
$ 3.00-$4.88 245,458 9.54 $3.68 31,590 $3.78
$7.97-$14.50 79,375 7.55 $9.12 42,552 $9.02
------------ ----------
1,623,381 8.57 $2.73 504,188 $2.51
============ ==========
</TABLE>
1996 Employee Stock Purchase Plan
In January 1996, the Company adopted the 1996 Employee Stock Purchase Plan.
The Company's Employee Stock Purchase Plan is administered by the Board of
Directors, and the Company
37
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
has authorized for sale under the plan 150,000 shares of common stock. Employees
who own less than 5% of the total outstanding common stock of the Company are
eligible to participate in the plan, which provides for the option to purchase a
defined number of shares at 85% of the lower of the fair market value of the
stock at the commencement date of each offering period or the relevant purchase
date. At December 31, 1997, 109,627 shares of common stock had been issued under
this plan.
Pro Forma Information
As of December 31, 1997, the Company has three stock-based compensation
plans, which are described above. The Company has elected to follow APB 25 and
related interpretations in accounting for its employee stock options and stock
purchases because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock options and employee stock
purchase plans. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock purchase plan and employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options and purchases was estimated at the date of grant using the minimum
value method for 1995 options and purchases and a Black-Scholes options pricing
model for 1996 and 1997 options and purchases with the following
weighted-average assumptions for 1995, 1996 and 1997 respectively: risk-free
interest rate of between 5.4% and 6.8%, between 5.1% and 6.6%; and between 5.8%
and 6.7%, volatility factor of the expected market price of the Company's common
stock of .75 for 1996 and 1997 (none in 1995 as the minimum value method was
used), an expected life of the options of between 6 months and 4 years for 1995,
1996 and 1997 and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plan have characteristics significantly different from those traded
options, and because changes in the subjective input assumptions can materially
affect the value estimate, in management's opinion the existing models do not
necessarily provide a reliable single measure of the value of the Company's
employee stock options and the employee stock purchase plan.
38
<PAGE>
FemRx, Inc.
Notes to Financial Statements
December 31, 1997
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period. The
Company's historical and pro forma information follows (in thousands, except for
net per share information):
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss
As Reported $ (12,135) $ (8,780) $ (3,174)
Pro Forma $ (13,437) $ (9,253) $ (3,181)
Net loss per share
As Reported $ (1.44) $ (1.36) $ (3.97)
Pro Forma $ (1.59) $ (1.43) $ (3.98)
</TABLE>
8. Income Taxes
As of December 31, 1997, the Company had net operating loss carryforwards
of approximately $22,000,000 for federal income tax purposes. The net operating
loss carryforwards will expire at various dates beginning in 2010 through 2012,
if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits prior to utilization.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
-------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,300 $ 3,900
Research and development credits 400 100
Capitalized research and development expenses 500 100
Other, net 200 ---
-------------- ------------
Total deferred tax assets 9,400 4,100
Valuation allowance (9,400) (4,100)
-------------- ------------
Net deferred tax assets $ --- $ ---
============== ============
</TABLE>
Due to the lack of earnings history of the Company, the total net deferred
tax asset has been fully offset by a valuation allowance. The valuation
allowance increased by $3,200,000 and $900,000 for the years ended December 31,
1996 and 1995 respectively.
39
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
40
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the Company
is contained in Part I, Item 1 of this report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a)of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission (the "SEC") initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a)forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
Item 11. Executive Compensation
The following table shows for the fiscal years ended December 31, 1997,
1996, 1995, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at December 31, 1997 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Annual
Compensation
Securities
Salary Bonus Underlying
Name and Principal Position Year ($) ($) Options (1)
--------------------------- ---- --- --- -----------
<S> <C> <C> <C> <C>
Andrew M. Thompson 1997 172,464 --- 80,000
President and Chief Executive Officer 1996 150,000 16,500 ---
1995 106,714 25,000 ---
George M. Savage, M.D. 1997 172,486 --- 80,000
Senior Vice President, Research and 1996 150,000 16,500 ---
Development 1995 106,714 25,000 ---
Edward W. Unkart 1997 144,357 --- 75,000
Vice President, Finance and 1996 125,008 11,563 ---
Administration, Chief Financial 1995(2) --- --- ---
Officer and Assistant Secretary
Jeffrey J. Christian 1997 155,458 --- 75,000
Vice President, Engineering 1996 142,789 17,325 ---
1995(2) --- --- 5,000
Marshall Tsuruda 1997 124,041 --- 110,000
Vice President, Operations 1996(3) --- --- 50,000
1995 --- --- ---
</TABLE>
41
<PAGE>
(1) Repriced options treated as new grants.
(2) Messrs. Unkart and Christian were employed by the Company for less than a
full year during the fiscal year ended December 31, 1995 and for that
reason, earned less than $100,000 in compensation from the Company.
(3) Mr. Tsuruda was employed by the Company for less than a full year during
the fiscal year ended December 31, 1996 and for that reason, earned less
than $100,000 in compensation from the Company.
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1995 Stock
Option Plan (the "1995 Plan"). The 1995 Plan was adopted by the Board of
Directors in April 1995 and has been amended three times, most recently in March
1997, subject to stockholder approval. Pursuant to the 1995 Plan, the Company
may grant incentive and nonstatutory stock options to key employees, directors
of or consultants or advisors to the Company. A total of 1,955,625 shares of
Common Stock is authorized for issuance under the 1995 Plan.
At February 28, 1998, options covering an aggregate of 109,816 shares of
the Company's Common Stock had been exercised under the 1995 Plan, 1,520,911
shares were outstanding, and 324,898 shares (plus any shares that might in the
future be returned to the plan as a result of cancellations or expiration of
options) remained available for future grant under the 1995 Plan. During the
year ended December 31, 1997, under the 1995 Plan, the Company granted to all
current executive officers as a group options to purchase 420,000 shares at an
exercise prices ranging from $2.56 to $2.9375 per share and to all employees and
consultants (excluding current executive officers) as a group options to
purchase 904,000 shares at exercise prices ranging from $2.00 to $4.125 per
share.
The 1995 Plan is administered by the Board of Directors and the
Compensation Committee. No vesting is required under the 1995 Plan, although it
may be imposed by the Board of Directors. The maximum term of a stock option
under the 1995 Plan is 10 years, but if the optionee at the time of grant has
voting power over more than 10% of the Company's outstanding capital stock, the
maximum term of an incentive stock option is five years. The exercise price of
stock options granted under the 1995 Plan is determined by the Board of
Directors. Options granted under the 1995 Plan are generally non-transferable.
The exercise price may be paid in cash or any other form of consideration that
may be acceptable to the Board of Directors.
Options generally terminate three months after termination of the
optionee's employment or relationship as a consultant or director unless such
termination is caused by the permanent disability or death of the optionee. The
1995 Plan may be amended at any time by the Board of Directors, although certain
amendments would require stockholder approval. The 1995 Plan will terminate in
April 2005, unless earlier terminated by the Board of Directors.
The following tables show for the fiscal year ended December 31, 1997,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
42
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants (4) Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Securities Options Stock Price
Underlying Granted to Exercise or Appreciation for
Option Employees in Base Price Expiration Option Term ($)(3)
Name Granted (#) Fiscal Year(1) ($/Sh)(2) Date 5% ($) 10% ($)
- ---- ----------- -------------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Andrew M. Thompson 80,000 6.04% $2.9375 03/02/07 147,790 374,530
George M. Savage, M.D. 80,000 6.04% $2.9375 03/02/07 147,790 374,530
Edward W. Unkart 75,000 5.66% $2.9375 03/02/07 138,553 351,122
Jeffrey J. Christian 75,000 5.66% $2.9375 03/02/07 138,553 351,122
Marshall Tsuruda 60,000 4.53% $2.9375 03/02/07 110,843 280,897
50,000(5) 3.78% $2.5675 03/26/06 75,487 196,093
</TABLE>
(1) Based on an aggregate of 1,324,000 options, including 384,750 repriced
options, granted to employees and directors of the Company in fiscal 1997,
including the Named Executive Officers set forth in the "Summary
Compensation Table" above and directors.
(2) The exercise price is equal to the closing price as reported on the Nasdaq
National Market on the last market trading day preceding the date of grant.
(3) The potential realizable value is calculated based on the term of the
option at the time of grant (ten years or nine years in the case of options
repriced on March 11, 1997). Stock price appreciation of five percent and
ten percent is assumed pursuant to rules promulgated by the Commission and
does not represent the Company's prediction of its stock price performance.
The potential realizable value at 5% and 10% appreciation is calculated by
assuming that the exercise price appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price.
(4) Each of the options listed in the table was granted under the 1995 Plan and
was immediately exercisable. The shares purchasable thereunder are subject
to repurchase by the Company at the original exercise price paid per share
upon the optionee's cessation of service prior to vesting in such shares.
The repurchase right lapses and the optionee vests in the shares subject
to, or issued upon exercise of, the options as to 1/8th of the shares on
the sixth month anniversary of the date of grant and in monthly
installments thereafter for 42 months.
(5) Option repriced on March 11, 1997.
43
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 1997, and Fiscal Year-End Option Values
Number of Securities
Underlying
Unexercised Value of Unexercised
Options at In-the-Money
Shares December 31, 1997 Options at
Acquired Value (#) December 31, 1997 ($)
On Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable(1)
- ---- --- --- ------------- ----------------
<S> <C> <C> <C> <C>
Andrew M. Thompson --- --- 18,333/61,667 $0/$0
George M. Savage, M.D. --- --- 18,333/61,667 $0/$0
Edward W. Unkart --- --- 17,187/57,813 $0/$0
Jeffrey J. Christian --- --- 22,187/57,813 $9,453/$0
Marshall Tsuruda --- --- 34,583/75,417 $0/$0
</TABLE>
(1) Based on the closing price as reported on the Nasdaq National Market as of
December 31, 1997 ($2.5625), minus the exercise price, multiplied by the
number of shares underlying the option.
Employee Stock Purchase Plan
In January 1996, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 150,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board of
Directors may authorize participation by eligible employees, including officers,
in periodic offerings following the adoption of the Purchase Plan. The offering
period for any offering will be no more than 27 months.
Employees are generally not eligible to participate unless they are
employed by the Company or an affiliate of the Company for at least 20 hours per
week and are employed by the Company or a subsidiary of the Company designated
by the Board for at least five months per calendar year. Employees who
participate in an offering can have up to 15% of their earnings withheld and
applied to the purchase of Common Stock on specified dates determined by the
Board of Directors. The price of Common Stock purchased under the Purchase Plan
will be equal to 85% of the lower of the fair market value of the Common Stock
on the commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company.
In the event of a merger, dissolution, consolidation, certain reverse
mergers or certain acquisitions, the Board of Directors has discretion to
provide that each right to purchase Common Stock will be assumed or an
equivalent right substituted by the successor corporation, or the Board may
shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to such
transaction. The Purchase Plan will terminate at the Board's discretion, subject
to the limitation that no such action may adversely affect any outstanding
rights to purchase Common Stock.
44
<PAGE>
401(k) Plan
In December 1995, the Company adopted an employee savings plan (the "401(k)
Plan") covering the Company's employees who have not elected out of 401(k) Plan
participation. Pursuant to the 401(k) Plan, eligible employees may elect to
reduce their current compensation by up to the lesser of 20% of their annual
compensation or the statutorily prescribed annual limit ($9,500 in 1997) and
have the amount of such reduction contributed to the 401(k) Plan. In addition,
eligible employees may make roll-over contributions to the 401(k) Plan from a
tax-qualified retirement plan. The 401(k) Plan is intended to qualify under
Section 401 of the Code so that contributions by employees or by the Company to
the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. The trustee under the 401(k) Plan, at the direction of each participant,
invests the 401(k) Plan employee salary deferrals in selected investment
options.
Compensation of Directors
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
eligible for reimbursement for their expenses incurred in connection with
attendance at Board and Committee meetings in accordance with Company policy.
Each non-employee director of the Company also receives stock option grants
under the 1996 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only non-employee directors of the Company are eligible to receive
options under the Directors' Plan. Options granted under the Directors' Plan are
intended by the Company not to qualify as incentive stock options under the
Code.
Option grants under the Directors' Plan are non-discretionary. Pursuant to
the terms of the Directors' Plan, each non-employee director who was serving on
the date of the Company's initial public offering was granted on such date an
option to purchase 20,000 shares of Common Stock. In addition, each non-employee
director subsequently elected to the Board will automatically be granted on the
date of his or her election to the Board an option to purchase 20,000 shares of
Common Stock (the "Initial Grant"). On the one year anniversary date of the
Company's initial public offering, or the anniversary date of a non-employee
directors' election to the Board, if such non-employee director was not serving
in such capacity as of the date of the Company's initial public offering, and
each one-year anniversary thereafter, each member of the Company's Board of
Directors who is not an employee of the Company and has served as a non-employee
director for at least the full six month period prior, is automatically granted
an option to purchase 5,000 shares of Common Stock of the Company (the "Annual
Grant"). No other options may be granted at any time under the Directors' Plan.
The exercise price of options granted under the Directors' Plan is 100% of the
fair market value of the Common Stock subject to the option on the date of the
option grant. The Initial Grant under the Directors' Plan will generally vest at
the rate of 1/48th of the shares monthly. Annual Grants under the Directors'
Plan will vest entirely on, but not before, the first annual anniversary of the
Annual Grant. The term of options granted under the Directors' Plan is ten
years. In the event of a merger, dissolution, consolidation, certain reverse
mergers or certain acquisitions, options outstanding under the Directors' Plan
will automatically become fully vested and will terminate if not exercised prior
to the consummation of the transaction.
At February 28, 1998, there were 200,000 shares of the Company's Common
Stock authorized for issuance under the Directors' Plan. During the last fiscal
year, the Company granted options covering an aggregate of 25,000 shares to the
non-employee directors of the Company, at exercise prices ranging from $2.6875
to $3.00 per share. The fair market value of such Common Stock on the date of
grants was $2.6875 and $3.00 per share (based on the closing price as reported
on the Nasdaq National Market for the day preceding the date of grant). As of
February 28, 1998, no options had been exercised under the Directors' Plan.
45
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION(1)
The Compensation Committee of the Board of Directors ("Committee") is composed
of Messrs. McLane and Young, none of whom are currently officers or employees of
the Company. The Committee is responsible for establishing the Company's
compensation programs for all employees, including executives. For executive
officers, the Committee evaluates performance and determines compensation
policies and levels.
Compensation Philosophy
The goals of the compensation program are to align compensation with
business objectives and performance and to enable the Company to attract, retain
and reward executive officers and other key employees who contribute to the
long-term success of the Company and to motivate them to enhance long-term
stockholder value. Key elements of this philosophy are:
The Company pays competitively with leading medical device companies with
which the Company competes for talent. To ensure that pay is competitive,
the Company regularly compares its pay practices with these companies and
sets it pay parameters based on this review.
The Company maintains the FemRx Annual Bonus Plan to provide motivation to
achieve specific operating goals and to generate rewards that bring total
compensation to competitive levels.
The Company provides significant equity-based incentives for executives and
other key employees to ensure that they are motivated over the long-term to
respond to the Company's business challenges and opportunities as owners
and not just as employees.
Base Salary. The Committee annually reviews each executive officer's base
salary. When reviewing base salaries, the Committee considers individual and
corporate performance, levels of responsibility, prior experience, breadth of
knowledge and competitive pay practices.
Annual Incentive. The FemRx Annual Bonus Plan, an annual incentive award
plan, is the variable pay program for officers and other senior managers of the
Company to earn additional annual compensation. The actual incentive award
earned depends on the extent to which Company and individual performance
objectives are achieved. At the start of each year, the Committee and the full
Board of Directors review and approve the annual performance objectives for the
Company and individual officers. The Company objectives consist of operating,
strategic and financial goals that are considered to be critical to the
Company's fundamental long-term goal building stockholder value.
After the end of the year, the Committee evaluates the degree to which the
Company has met its goals and establishes a total incentive award pool under the
FemRx Annual Bonus Plan. Individual awards are determined by evaluating each
participant's performance against objectives and allocating a portion of the
award pool based on the participant's contributions during the year. Awards are
paid in cash and distributions are made in the February following the
performance year.
Long-Term Incentives. The Company's long-term incentive program consists of
the 1995 Plan and the Purchase Plan. The option program utilizes vesting periods
(generally four years) to encourage key employees to continue in the employ of
the Company. Through option grants, executives receive significant equity
incentives to build long-term stockholder value. Grants are made at 100% of fair
market value on the date of grant. Executives receive value from these grants
only if the Company's Common Stock appreciates over the long-term. The size of
option grants is determined based on competitive practices at leading companies
in the medical device industry and the Company's philosophy of significantly
linking executive compensation with stockholder interests. In March 1997, the
Board granted options to purchase an aggregate of 370,000 shares of Common Stock
of the Company to the Named Executive Officers at an exercise price of $2.9375,
the fair market value of the Common Stock on the date of grant.
46
<PAGE>
The Company established the Purchase Plan both to encourage employees to
continue in the employ of the Company and to motivate employees through
ownership interest in the Company. Under the Purchase Plan, employees, including
officers, may have up to 15% of their earnings withheld for purchases of Common
Stock on certain dates specified by the Board. The price of Common Stock
purchased will not be less than the lesser of an amount equal to 85% of the
lower of the fair market value of the Common Stock on the commencement date of
the offering or the relevant purchase date.
Corporate Performance and Chief Executive Officer Compensation
Mr. Thompson's base salary during 1997 as President and Chief Executive
Officer was $175,000. Following the Committee's review of compensation paid by
leading medical device companies, the Committee set Mr. Thompson's base annual
salary through 1998 at $175,000. This amount, in addition to the annual
incentive provided by the FemRx Annual Bonus Plan, was estimated to provide an
annual cash compensation level at the average as compared to a selected group of
leading medical device companies. In setting this amount, the Committee took
into account (i) its belief that Mr. Thompson is one of the CEOs of leading
medical device companies who has significant and broad-based experience in the
medical device industry, (ii) the scope of Mr. Thompson's responsibility, and
(iii) the Board's confidence in Mr. Thompson to lead the Company's continued
development.
Federal Tax Consideration
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million of compensation paid to certain
Named Executive Officers in a taxable year. Compensation above $1 million may be
deducted if it is "performance-based compensation" within the meaning of the
Code.
The 500,000 shares per person limitation in the 1995 Plan is intended to
comply with the provisions of Section 162(m) of the Code. The Compensation
Committee intends to continue to evaluate the effects of the statute and the
Treasury regulations and to comply with Code Section 162(m) in the future to the
extent consistent with the best interests of the Company.
Option Repricing Information
On March 3, 1997, the Compensation Committee approved an offer to employees
of the Company to reprice outstanding options granted between January 30, 1996
and December 17, 1996 (the "Repricing Program"). Under the Repricing Program, as
of March 11, 1997, 384,750 options were converted into repriced options with an
exercise price of $2.5625 (based on the closing price as reported on the Nasdaq
National Market on the last market trading day preceding the day of grant). As
consideration for the grant of repriced options, optionees were prohibited from
exercising the repriced options for a period of six months after the date such
repriced options were granted.
The following table sets forth, as to all executive officers of the
Company, certain information concerning the repricing of all officers' options
since the Company's inception.
<TABLE>
<CAPTION>
Option Repricing Since Inception
Length of
Number of Market Original
Securities Price of Exercise Option Term
Underlying Stock at Price at New Remaining at
Options Time of Time of Exercise Date of
Name Date Repriced Repricing Repricing Price Repricing
---- ---- -------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Marshall Tsuruda 03/11/97 50,000 $2.5625 $9.00 $2.5625 9 years
</TABLE>
47
<PAGE>
CONCLUSION
Through the plans described above, a significant portion of the Company's
compensation program and Mr. Thompson's compensation are contingent on Company
performance, and realization of benefits is closely linked to increases in
long-term stockholder value. The Company remains committed to this philosophy of
pay for performance, recognizing that the competitive market for talented
executives and the volatility of the Company's business may result in highly
variable compensation for a particular time period.
COMPENSATION COMMITTEE
James W. McLane
Philip M. Young
Compensation Committee Interlocks and Insider Participation
As stated above, the Compensation Committee consists of Messrs. McLane and
Young. The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's stock option plans and otherwise determines compensation levels
and performs such other functions regarding compensation as the Board may
delegate.
(1) Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including this form 10-K/A, in whole or in part, the following
report and Performance Graph shall not be incorporated by reference into
any such filings. The Committee's objective is to set executive
compensation at the market average when compared to leading companies in
the medical device industry. The primary components of executive
compensation are base salary, annual incentives and long-term equity
incentives.
48
<PAGE>
Performance Measurement Comparison(1)
The following graph shows the total stockholder return of an investment of $100
in cash on March 27, 1996 for (i) the Company's Common Stock, (ii) the Nasdaq
Stock Market (U.S.) Index and (iii) the Standard & Poor's Health Care (Medical
Products and Supplies) Index. All values assume reinvestment of the full amount
of all dividends and are calculated as of the end of each month:
COMPARISON OF CUMULATIVE TOTAL RETURN ON INVESTMENT
EDGAR Representation of Data Points used in Printed Graphic
S&P Health Care
Nasdaq Stock (Medical Products
FemRx, Inc. Market - US and Supplies)
3/27/96 $100 $100 $100
3/96 108 100 99
6/96 120 109 98
9/96 92 112 109
12/96 50 118 110
3/97 30 112 109
6/97 42 132 130
9/97 29 154 135
12/97 28 145 137
___________
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended whether made before or after the date hereof and irrespective
of any general incorporation language in any such filing.
49
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of February 28, 1998 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table employed by the Company in that capacity on February 28,
1998; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent of its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
------------------------------
Number of Percent of
Beneficial Owner Shares Total
---------------- ------ -----
<S> <C> <C>
Sprout Group (2) .............................. 2,222,184 25.03%
3000 Sand Hill Road
Building 3, Suite 170
Menlo Park, CA 94025
U.S. Venture Partners (3) ..................... 1,093,748 12.37%
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Andrew M. Thompson (4) ........................ 483,128 5.45%
George M. Savage, M.D. (5) .................... 483,128 5.45%
Arnold J. Kresch, M.D. (6) .................... 461,001 5.21%
Gail Gaumer Schulze (7) ....................... 31,040 *
Kathleen D. LaPorte (8) ....................... 2,222,184 25.03%
James W. McLane (9) ........................... 22,083 *
Philip M. Young (10) .......................... 1,124,788 12.67%
Jeffrey J. Christian (11) ..................... 199,008 2.24%
Edward W. Unkart (12) ......................... 108,819 1.23%
Marshall Tsuruda (13).......................... 53,863 *
All executive officers and directors as
a group (12 persons)(14) ...................... 4,469,469 52.19%
</TABLE>
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "Commission"). Unless otherwise indicated in
the footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
8,844,464 shares outstanding on February 28, 1998, adjusted as required by
rules promulgated by the Commission.
(2) Represents 1,359,618 shares held by Sprout Capital VII, L.P. ("SVII"),
714,700 shares held by Sprout Capital VI, L.P. ("SVI") and 113,181 shares
held by DLJ Capital Corporation ("DLJ"). Also includes 34,685 shares
issuable pursuant to option exercisable within 60 days of February 28, 1997
by DLJ. DLJ is the Managing General Partner of both SVI and SVII.
Ms. LaPorte, a director of the Company, is a general partner of DLJ
Associates VI, L.P. and DLJ Associates VII, L.P., the general partners of
SVI and SVII, respectively. Ms. LaPorte disclaims beneficial ownership of
the shares held by such entities, except to the extent of her pecuniary
interest therein. Ms. LaPorte may be deemed to exercise voting and
investment power over the shares held by affiliates of Sprout Group.
50
<PAGE>
(3) Represents 946,093 shares held by U.S. Venture Partners IV, L.P. ("USVP
IV"), 114,843 shares held by Second Ventures II, L.P. ("SVLP II") and
32,812 shares held by USVP Entrepreneur Partners II, L.P. ("USVEP II").
Mr. Young, a director of the Company, is a general partner of Presidio
Management Group IV, L.P., the general partner of each of USVP IV, SVLP II
and USVEP II. Mr. Young disclaims beneficial ownership of the shares held
by such entities, except to the extent of his pecuniary interest therein.
Mr. Young may be deemed to exercise voting and investment power over the
shares held by affiliates of U.S. Venture Partners.
(4) Represents 448,128 shares held by The Thompson Family Trust, of which
Mr. Thompson and his wife are trustees, and 10,000 shares held by
Savage-Thompson Management, of which Mr. Thompson is a partner. Also
includes 25,000 shares issuable pursuant to options exercisable within 60
days of February 28, 1998.
(5) Represents 448,128 shares held by The George and Nancy Savage Living Trust,
of which Dr. Savage and his wife are trustees, and 10,000 shares held by
Savage-Thompson Management, of which Dr. Savage is a partner. Also includes
25,000 shares issuable pursuant to options exercisable within 60 days of
February 28, 1998.
(6) Represents 451,626 shares held by Kresch Medical Research, LLC. Also
includes 9,375 shares issuable pursuant to options exercisable within 60
days of February 28, 1998 by Dr. Kresch. Dr. Kresch is an owner and the
sole manager of Kresch Medical Research, LLC and may be deemed to exercise
voting and investment power over the shares held by such entity.
(7) Represents 31,040 shares issuable pursuant to options exercisable within 60
days of February 28, 1998.
(8) Includes 2,187,499 shares held by entities affiliated with Sprout Group.
Also includes 34,685 shares issuable pursuant to options exercisable within
60 days of February 28, 1998 to DLJ. Ms. LaPorte, a director of the
Company, disclaims beneficial ownership of the shares held by such
entities, except to the extent of her pecuniary interest therein.
(9) Includes 17,083 shares issuable pursuant to options exercisable within 60
days of February 28, 1998.
(10) Includes 1,093,748 shares held by entities affiliated with U.S. Venture
Partners. Mr. Young, a director of the Company, disclaims beneficial
ownership of the shares held by such entities, except to the extent of his
pecuniary interest therein. Also includes 31,040 shares issuable pursuant
to options exercisable within 60 days of February 28, 1998.
(11) Includes 1,721 shares held by Mr. Christian's son. Also includes 28,437
shares issuable pursuant to options exercisable within 60 days of
February 28, 1998.
(12) Includes 78,125 shares held by Takei Unkart Family Trust, of which
Mr. Unkart and his wife are trustees. Also includes 23,437 shares issuable
pursuant to options exercisable within 60 days of February 28, 1998.
(13) Includes 43,750 shares issuable pursuant to options exercisable within 60
days of February 28, 1998.
(14) Includes 306,450 shares issuable pursuant to options exercisable within 60
days of February 28, 1998 by the officers and directors as a group.
12
<PAGE>
Item 13. Certain Relationships and Related Transactions
The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party by
reason of his position as a director, officer or other agent of the Company, and
otherwise to the full extent permitted under Delaware law and the Company's
By-laws.
51
<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:
(1) Financial Statements and Report of Ernst & Young LLP, Independent
Auditors
Balance Sheets at December 31, 1997 and 1996
Statements of Operations Years ended December 31, 1997, 1996, and 1995
Statements of Stockholders' Equity (Net Capital Deficiency) Years
ended December 31, 1997, 1996, and 1995
Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995
Notes to Financial Statements
(2) Financial Statement Schedules
Schedule II Valuation and Allowance Accounts. (See page 45 of this
report)
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 (1) Form of Agreement and Plan of Merger between FemRx, a California
Corporation ("FemRx California") and FemRx Merger Corporation, a
Delaware corporation ("FemRx Delaware").
3.1.1 (1) Amended and Restated Articles of Incorporation of FemRx California.
3.1.2 (1) Bylaws of FemRx California.
3.2.1 (1) Form of Certificate of Incorporation of FemRx Delaware, to be
effective upon the completion of the offering.
3.2.2 (1) Form of Bylaws of FemRx Delaware, to be effective upon completion
of the offering.
4.1 (1) Reference is made to Exhibits 3.1 through 3.2.
4.2 (1) Specimen stock certificate.
10.1 (1) Form of Indemnity Agreement to be entered into between the
Registrant and each of its directors and officers.
10.2 (1) The Registrant's 1995 Stock Option Plan (the "1995 plan").
10.3 (1) Form of the Registrant's Incentive Stock Option under the 1995 Plan.
10.4 (1) Form of the Registrant's Nonstatutory Stock Option under the 1995
Plan
10.5 (1) Form of the Registrant's 1996 Non-Employee Directors' Stock Option
Plan (the "Directors' Plan").
10.6 (1) Form of the Registrant's Nonstatutory Stock Option under the
Directors' Plan.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.7 (1) Form of the Registrant's 1996 Employee Stock Purchase Plan.
10.8 (1) Form of the Registrant's Employee Stock Purchase Plan Offering
Document.
10.9 (1) Master Equipment Lease Agreement between the Registrant and
Lighthouse Capital Partners.
L.P. dated June 30, 1995.
10.10 (1) Sublease Agreement between the Registrant and OCE - USA, Inc. dated
March 22, 1995 and related Standard Industrial Lease - Multi-Tenant
between Daniel Sloan and OCE-Bruning, Inc. dated December 7, 1992.
10.11 (1) Investors' Rights Agreement dated April 12, 1995 between the
Registrant and certain of its stockholders.
13.0 (2) Annual Report to Stockholders.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 (1) Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made
to Exhibit 5.1.
24.1.1 Power of Attorney
27.1 Financial Data Schedule December 31, 1997.
27.2 Restated Financial Data Schedule December 31, 1996.
</TABLE>
________
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-1080), which became
effective on March 25, 1996.
(2) To be filed when complete.
(b) Reports on Form 8-K
No Form 8-K's were filed on behalf on the Company.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Sunnyvale, State of
California, on the 25th day of March, 1998.
FemRx, Inc.
By: /s/ Andrew M. Thompson
----------------------
Andrew M. Thompson
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Andrew M. Thompson, Edward W. Unkart and
George M. Savage jointly and severally, his or her attorney-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this 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 requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<C> <S> <C>
/s/Andrew M. Thompson President and Chief Executive Officer July 14, 1998
------------------ and Director (Principal Executive Officer)
Andrew M. Thompson
/s/Edward W. Unkart Vice President,Finance and Administration, July 14, 1998
---------------- Chief Financial Officer and Assistant
Edward W. Unkart Secretary(Principal Financial and
Accounting Officer)
/s/George M. Savage Senior Vice President, Research and July 14, 1998
---------------- Development and Director
George M. Savage, M.D.
/s/Gail Gaumer Schulze Director July 14, 1998
-------------------
Gail Gaumer Schulze
/s/Kathleen D. LaPorte Director July 14, 1998
-------------------
Kathleen D. LaPorte
/s/Philip M. Young Director July 14, 1998
---------------
Philip M. Young
/s/James W. McLane Director July 14, 1998
---------------
James W. McLane
</TABLE>
54
<PAGE>
Schedule II
FemRx, Inc.
Valuation and Qualifying Accounts
(in thousands)
December 31, 1997
<TABLE>
<CAPTION>
Balance at Costs Balance at
Beginning of and Deductions End of
Description Period Expenses Write-Offs Period
- ----------- ------ -------- ---------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Allowance for Doubtful accounts $ --- $ --- $ --- $ ---
Year Ended December 31, 1996
Allowance for Doubtful accounts $ --- $ 1 $ --- $ 1
Year Ended December 31, 1997
Allowance for Doubtful accounts $ 1 $ 20 $ --- $ 21
Year Ended December 31, 1995
Reserve for excess/obsolete inventory $ --- $ --- $ --- $ ---
Year Ended December 31, 1996
Reserve for excess/obsolete inventory $ --- $ 229 $ 99 $ 130
Year Ended December 31, 1997
Reserve for excess/obsolete inventory $ 130 $ 512 $ 376 $ 266
</TABLE>
55
<PAGE>
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration Statements
(Forms S-8, Nos. 33-48833, 333-33497) pertaining to the 1995 Stock Option Plan,
1996 Employee Stock Purchase Plan, and 1996 Non-Employee Directors' Stock Option
Plan of our report dated February 9, 1998, with respect to the financial
statements, included in this Annual Report (Form 10-K/A No. 2) for the year
ended December 31, 1997.
ERNST & YOUNG LLP
Palo Alto, California
July 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEETS
AND STATEMENTS OF OPERATIONS OF THE COMPANY'S FORM 10-K FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,091
<SECURITIES> 5,300
<RECEIVABLES> 693<F1>
<ALLOWANCES> 0
<INVENTORY> 637<F1>
<CURRENT-ASSETS> 9,894
<PP&E> 1,139<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,273
<CURRENT-LIABILITIES> 2,564
<BONDS> 0
0
0
<COMMON> 33,339
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,273
<SALES> 1,586
<TOTAL-REVENUES> 1,586
<CGS> 3,096
<TOTAL-COSTS> 3,096
<OTHER-EXPENSES> 3,369<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> (12,135)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,135)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,135)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCES, CONSISTENT WITH THE BALANCE
SHEET PRESENTATION.
<F2>ITEM SHOWN NET OF DEPRECIATION, CONSISTENT WITH THE BALANCE
SHEET PRESENTATION.
<F3>ITEM CONSISTS OF RESEARCH AND DEVELOPMENT.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE BALANCE SHEETS AND
STATEMENTS OF OPERATIONS OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1997, RESTATED FINANCIAL INFORMATION FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,250
<SECURITIES> 17,668
<RECEIVABLES> 60<F1>
<ALLOWANCES> 0
<INVENTORY> 340<F1>
<CURRENT-ASSETS> 20,574
<PP&E> 1,429<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,040
<CURRENT-LIABILITIES> 1,485
<BONDS> 0
0
0
<COMMON> 33,305
<OTHER-SE> (58)
<TOTAL-LIABILITY-AND-EQUITY> 22,040
<SALES> 64
<TOTAL-REVENUES> 64
<CGS> 668
<TOTAL-COSTS> 668
<OTHER-EXPENSES> 4,551<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> (8,780)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,780)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCES, CONSISTENT WITH THE BALANCE
SHEET PRESENTATION.
<F2>ITEM SHOWN NET OF DEPRECIATION, CONSISTENT WITH THE BALANCE
SHEET PRESENTATION.
<F3>ITEM CONSISTS OF RESEARCH AND DEVELOPMENT.
</FN>
</TABLE>
