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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to .
Commission file number: 0-27596
CONCEPTUS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 97-3170244
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
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1021 HOWARD AVENUE
SAN CARLOS, CA 94070
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 802-7240
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.003 PAR VALUE PER SHARE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES _/X/
_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant based upon the closing sale price of the Registrant's Common Stock on
the Nasdaq National Market on February 28, 1997 was approximately $77,866.583 as
of 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 9,227,613 shares of Registrant's Common Stock issued and
outstanding as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Conceptus, Inc. ("Conceptus" or the "Company") designs, develops and markets
minimally invasive devices for reproductive medical applications. The Company's
initial focus is on improving the diagnosis and treatment of fallopian tube
diseases and disorders, primary causes of infertility, and on providing a
non-surgical approach to fallopian tube sterilization, the most commonly
performed contraceptive procedure worldwide. Conceptus has developed proprietary
micro-catheter and guidewire systems that allow physicians to transcervically
(through the cervix) access and navigate the full length of the fallopian tubes
in a nonsurgical approach. The Company believes that its fallopian tube access
systems will facilitate more rapid and accurate diagnosis of fallopian tube
diseases and disorders than conventional diagnostic methods, which are known to
be inaccurate, leading to more appropriate selection of therapies, and
ultimately, improved reproductive outcomes. The Company also believes that its
systems will allow many tubal therapies for both infertility and permanent
contraception that are currently performed surgically to be performed
transcervically, thereby reducing the cost, trauma and recovery time associated
with those therapies. The Company's systems are based on technology initially
developed by Target Therapeutics, Inc. ("Target") and licensed exclusively to
Conceptus in the field of reproductive physiology. Conceptus commenced marketing
of its catheter systems internationally for a number of applications in
September 1995 and, to date, has received six 510(k) clearances to market
applications of its T-TAC-TM- (Transcervical Tubal Access Catheter) systems, one
510(k) clearance for falloposcopy for proximal tubal occlusion ("PTO") and one
510(k) clearance for resectoscopy in the United States.
Human reproductive diseases and disorders are increasingly common medical
problems in most developed countries. Infertility is one of the most common and
emotionally traumatic of reproductive disorders. In most countries, female
infertility appears to be increasing, both because of the increase in diseases
which damage the fallopian tubes, such as sexually transmitted diseases, and
because of the increasing tendency of women to defer childbearing until later in
life, when fertility begins to decline naturally. Studies indicate that five to
eight million couples in the United States (or up to 15% of couples of
child-bearing age (20-44)) are clinically infertile, and many studies indicate
that increasing numbers of patients are seeking medical treatment for
infertility. Fallopian tube infertility disorders are estimated to affect 35% of
the couples seeking treatment. It is currently estimated that annual
expenditures in the United States for the diagnosis and treatment of infertility
exceed $2 billion.
Conceptus is developing a broad range of procedure-specific systems based on
its platform transcervical tubal access technology. The Company's T-TAC system
assists physicians in accessing and navigating the fallopian tubes and is
designed to facilitate more accurate detection, and improved treatment, of tubal
disorders. The Company received five 510(k) clearances of its T-TAC system in
1995 and commenced marketing of the system for diagnosis of PTO in the United
States. Internationally, the Company is marketing its T-TAC system for diagnosis
of PTO, and for an additional therapeutic application, tubal recanalization.
Published journal articles have shown that fallopian tube catheter
recanalization, when performed on patients previously diagnosed with PTO,
results in an average pregnancy rate that is more than twice that of a single
cycle of IN VITRO fertilization ("IVF").
The Conceptus STARRT-TM- (Selective Tubal Assessment to Refine Reproductive
Therapy) Falloposcopy system combines the Company's proprietary micro-catheter
and guidewire tubal access technology with a specialized fallopian tube
microendoscope. This system permits direct visual examination of fallopian tube
endoluminal pathology for the first time without the need for surgery. The
Company's system has been used in over 375 patients in the International
Multicenter Study of Falloposcopy ("IMSF"). In February 1997, the Company
received United States Food and Drug Administration ("FDA") clearance to market
its STARRT Falloposcopy system for diagnosis of proximal tubal occlusion.
Conceptus plans to develop a complete product line based on the STARRT
technology, including
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expanded diagnostic indications for the system and products for
endoscopically-guided tubal therapies. The Company believes that its STARRT
Falloposcopy system will allow physicians to make more informed and accurate
diagnoses of tubal functionality than current approaches, leading to the
selection of more effective courses of therapy.
Conceptus is also developing its S/TOP-TM- (Selective Tubal Occlusion
Procedure) system to provide a nonsurgical approach to fallopian tube
sterilization, the most common method of contraception worldwide. Due to the
limitations of other methods of contraception, almost half of the married women
in the United States age 35 or older have undergone a surgical fallopian tube
sterilization (tubal ligation), and, worldwide, surgical fallopian tube
sterilization is the most common contraceptive procedure among women who have
completed their families. The Company estimates that over 5,000,000 procedures
are performed annually worldwide. The S/TOP system utilizes the Company's
transcervical tubal access technology to deliver a proprietary micro-coil device
to the lumen of the fallopian tube. Conceptus believes that the
S/TOP system will allow physicians to perform fallopian tube sterilization in an
office setting without general anesthesia. The Company also believes that the
elimination of the requirement of surgery to perform the procedure will increase
both patient demand for the procedure and the availability of tubal
sterilization in developing countries, where surgical facilities may be limited.
The United States accounts for less than 20% of annual worldwide fallopian tube
sterilization procedures, and the Company estimates that the United States
market for such procedures exceeds $1.5 billion annually. Conceptus recently
successfully completed the initial part of a Phase I clinical study of its S/TOP
system and has received FDA clearance to begin the second part of the Phase I
study.
On November 26, 1996, Conceptus acquired Microgyn, Inc. ("Microgyn"), a
private medical device company, for $3 million paid upon the date of acquisition
and $1 million payable six months after the date of acquisition. The $1 million
is payable, at the option of the Company, in either cash or stock. Additional
contingent consideration (cash or stock) is payable to the shareholders of
Microgyn based upon the meeting of certain future milestones.
Microgyn is focused on developing products to increase the safety and
performance of resectoscope procedures, including therapeutic hysteroscopy
procedures, which utilize an endoscope to guide the selective excision of
abnormal uterine tissue. These procedures, including endometrial or fibroid
resection and endometrial ablation, are growing in clinical acceptance because
they are less invasive, non-incisional alternatives to the over 600,000
hysterectomies performed in the United States annually. Microgyn's first
product, the Resectosope Safety Sheath, is part of a system of products designed
to permit the use of isotonic, or physiologic, fluids during theraupeutic
hysteroscopic procedures. Currently, these procedures require the use of
hypotonic fluids, the absorption of which can lead to a number of clinical
complications, including death. Conceptus plans to file a 510(k) submission with
FDA for marketing clearance of the device in therapeutic hysteroscopy and has
received FDA clearance for urological use of the device. Conceptus plans to
pursue marketing the urology application of the Resectoscope Safety Sheath
device for use in transurethral resection through appropriate distribution
arrangements.
The Company's goal is to become a global leader in reproductive healthcare
with an initial focus on women's reproductive health. The Company is directing
its marketing efforts, both domestically and internationally, toward those
interventional gynecologists who maintain high volume practices in infertility,
pre- and peri-menopausal conditions and gynecological endoscopy. Conceptus
intends to expand its product development and marketing efforts to address new
clinical applications in reproductive physiology, such as assisted reproductive
techniques and male reproductive disorders, in which the Company's technologies
may satisfy clinical needs or achieve cost reductions. In addition, the Microgyn
products have urologic applications and the Company intends to address this
market through appropriate partnership or distribution arrangements.
Conceptus has an exclusive, worldwide, royalty-free license to the
reproductive applications of technology developed by Target Therapeutics, Inc.,
a manufacturer of minimally invasive medical devices
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for neurovascular applications. Conceptus was formed in 1992 in response to
reports by physicians of the successful use of Target's products to access the
fallopian tubes. Target owns approximately 15% of the Company's Common Stock. In
addition, Target currently has a representative on the Company's Board of
Directors, as it has since the Company's inception. Accordingly, Target may be
able to exercise influence over the business and financial affairs of the
Company. On January 20, 1997, Target and Boston Scientific Corporation ("BSC")
announced the signing of a definitive agreement to merge in a tax-free
stock-for-stock transaction. Target will become a separate business unit of BSC.
The merger is expected to close during the second calendar quarter of 1997.
HUMAN REPRODUCTION
Human reproduction has been the focus of increased scientific and medical
attention over the last twenty years. Contemporary lifestyle choices, such as
deferred childbearing, have led to an increased demand for certain reproductive
medical services, including the treatment of infertility and improved methods of
contraception. As a result, increasing numbers of OB/GYN specialists in the
United States treat infertility as well as other reproductive disorders, and the
number of family planning/reproductive health units in community hospitals in
the United States increased by over 300% between 1985 and 1991. Increasing
attention has been focused on the study of the fallopian tubes because of their
importance in the reproductive process, both in fertility and contraception. The
fallopian tubes are now recognized as not just a passive conduit between the
uterus and the ovaries, but as an essential organ in the reproductive process.
ROLE OF THE FALLOPIAN TUBES IN REPRODUCTION
The fallopian tubes are the organs in which conception occurs and thus, at
least one fallopian tube must be open to permit the passage of sperm. The
finger-like ciliated cells that line the tubal lumen must be healthy in order to
assist sperm in their migration toward the ovum, and, if conception occurs, to
reverse the direction of movement to propel the newly-fertilized ovum toward the
uterus. In addition, the tubal secretory cells must be functioning to create the
chemical environment necessary to achieve fertilization. The fallopian tubes
serve a critical function in the reproductive process and are often the focus of
treatment when the objective is either to increase a woman's reproductive
potential, such as in the treatment of infertility, or to decrease her
reproductive potential, such as in the performance of sterilization procedures.
The fallopian tubes are very narrow and tortuous, convoluted in shape, with
many folds, and are delicate and difficult to access. As a result, they do not
lend themselves to easy study and treatment. Because of the difficulty in
accessing the fallopian tubes, current non-surgical techniques for diagnosing
fallopian tube diseases and disorders often do not adequately or accurately
delineate the nature, extent and location of tubal pathology. Therapeutic
choices for the treatment of infertility are equally constrained by the
difficulty in accessing the fallopian tubes, and therefore, most fallopian tube
therapies must be performed surgically. In addition, although mechanical
occlusion of the fallopian tubes is a highly effective means of achieving female
sterilization, the difficulty in accessing the fallopian tubes has made it
necessary to perform surgery in order to accomplish fallopian tube
sterilization.
INFERTILITY OVERVIEW
Infertility is one of the most common and emotionally traumatic of
reproductive disorders. The incidence of infertility appears to be increasing in
most developed countries due to both sociological and epidemiological factors.
Women in developed countries are increasingly deferring childbearing and studies
indicate that a 35-year old woman is almost three times as likely to be
infertile as a woman of 25. Studies also indicate that five to eight million
couples in the United States (or up to 15% of couples of childbearing age
(20-44)) are clinically infertile, which has been defined as the failure to
conceive after one year of
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unprotected intercourse. Although the numbers of couples seeking treatment have
been steadily increasing, according to a study by the National Center for Health
Statistics (the "NCHS Study"), in 1988 only 1.4 million couples sought treatment
for infertility. The Company believes that the remaining couples did not seek
medical treatment due to the cost, trauma and poor outcomes associated with
current diagnostic and therapeutic infertility options. Despite the low
percentage of infertile couples who seek care, current estimates of the United
States market for diagnosis and treatment of infertility are in excess of $2
billion annually.
The cause of a couple's infertility is often very difficult to identify.
Frequently, both male and female factors exist in a couple having difficulty
conceiving. In addition, both hormonal and physical factors, such as fallopian
tube disorders or testicular abnormalities, commonly play a role. Finally, the
limitations of current diagnostic techniques often result in the underdiagnosis
and misdiagnosis of certain infertility factors. As a result, infertile couples
typically undergo a series of diagnostic evaluations to isolate the most
probable cause of their infertility.
Many factors that contribute to infertility, such as ovulatory disorders and
certain male factors, are well understood. However, fallopian tube diseases and
disorders, which are major causes of female infertility, remain poorly diagnosed
and treated today due to the difficulty in accessing the fallopian tubes in
order to perform diagnostic and therapeutic procedures. Despite both the
difficulty in diagnosing fallopian tube disorders and the limited number of
couples seeking infertility treatment, the Company estimates that over 490,000
couples each year (over one-third of those couples who seek infertility medical
care) are diagnosed with a fallopian tube factor as the sole or contributing
cause of infertility. This suggests that of the up to 8 million couples
experiencing infertility in the United States, fallopian tube infertility may
affect as many as 2.8 million. The Company believes the actual incidence of
fallopian tube infertility may be even higher than 2.8 million women, both
because the rate of diagnosis of tubal factors was established by current
diagnostic techniques, which are known to be inaccurate, and because of the
increasing incidence of diseases which can profoundly damage the fallopian
tubes, such as sexually transmitted diseases and other pelvic inflammatory
diseases.
The fallopian tubes are also very vulnerable to disease, especially to the
microorganisms that cause inflammatory diseases, such as chlamydia and
tuberculosis, which are reaching near epidemic levels in the United States.
Studies indicate that for each episode of pelvic inflammatory disease, there is
at least a 10% chance of subsequent infertility, irrespective of the type of
microorganism causing the infection. The fibrotic lesions, or scar tissue, that
can occur in the fallopian tubes as a consequence of infection, can cause
infertility by damaging several important tubal functions, including transport
of the egg and sperm and regulation of the chemical environment for conception.
These fibrotic lesions can also completely occlude the tubal lumen preventing
the passage of sperm to achieve fertilization.
Fallopian tubes are also often occluded by the natural build up of cellular
debris and mucous. This type of occlusion is often misdiagnosed as pathological
(a "false-positive" diagnosis) and may lead to inappropriate invasive
therapeutic interventions such as tubal surgery. As a result, due to the
inaccuracy of current, non-surgical tubal diagnostic methods, many physicians
have resorted to surgical approaches to diagnose tubal diseases and disorders.
CONTRACEPTION OVERVIEW
Throughout the world, there is a need for a safe, nonsurgical, permanent
contraceptive method. In the United States, approximately 46% of married women
over 35 years of age have undergone surgical fallopian tube sterilization (tubal
ligation) in part due to concerns about the safety and reliability of those
birth control methods they readily accepted at an earlier age. Consequently,
despite recent favorable clinical study data, patient concerns about the
long-term effects of oral contraceptives have limited their acceptance among
women over 40 in the United States, where only 3% of women age 40-44 use oral
contraceptives. Use of intrauterine devices ("IUD") in the United States has
declined in women of all age
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groups. Due to concerns that use of IUDs results in increased incidence of pain
and heavy menstrual bleeding which could mask the symptoms of serious uterine
disease, use of IUDs among women in the United States age 40-44 is only 4%. For
these reasons, women are seeking new methods of permanent contraception.
Increasingly, women are turning to surgical tubal sterilization, representing
the contraceptive method of choice in 51% of women age 40-44 in the United
States. In developing countries, where there are concerns about population
growth, 23% of all women have undergone surgical tubal sterilization.
LIMITATIONS OF CURRENT APPROACHES TO FALLOPIAN TUBE INFERTILITY AND TUBAL
STERILIZATION
DIAGNOSTIC APPROACHES TO TUBAL INFERTILITY
The physician attempting to diagnose female infertility will nearly always
order or perform a procedure to determine whether the fallopian tubes are patent
(open) or occluded. The current diagnostic procedure of choice is
hysterosalpingography ("HSG"), which involves the injection of an x-ray contrast
medium (or dye) transcervically into the uterus to allow the physician to
observe and evaluate the flow of dye through the fallopian tubes under
fluoroscopy (x-ray). This procedure is often painful and is also known to be
highly inaccurate, with false-positive results in as many as 40% of
HSG-diagnosed cases of proximal tubal occlusion ("PTO"). Various factors are
believed to be responsible for these false indications of tubal occlusion,
including tubal spasm (a natural function of the tubes) and a build-up in the
tube of natural cellular debris and mucous. The Company estimates that HSG is
performed 600,000 times annually in the United States, and costs approximately
$100-$300 per procedure, half of which is typically reimbursed.
Because of its high rate of inaccuracy, when HSG indicates PTO, the
physician will likely perform a surgical confirmatory procedure, laparoscopic
chromopertubation (commonly called "lap and dye"). This procedure is similar to
HSG, but involves transcervical injection of a colored dye, the flow of which
through the fallopian tubes is observed through an endoscope surgically
positioned in the abdomen. This procedure has a lower, but still unacceptably
high, rate (20-40%) of false-positive diagnosis of PTO, and also involves the
potential complications associated with the more invasive laparoscopic surgical
procedure. In any event, HSG and lap and dye are used primarily to determine
whether the tube is patent or occluded and not whether any other tubal function
is impaired. Lap and dye is performed an estimated 280,000 times annually in the
United States, and typically costs in excess of $2,000 per procedure. Most
insurers will reimburse a single diagnostic laparoscopy procedure per patient.
Because of the inability to access the fallopian tubes easily and
non-surgically in order to effect an accurate diagnosis of tubal health, it is
often difficult for physicians to select the most appropriate therapeutic option
for each patient. The difficulties in accessing the fallopian tubes also result
in current therapies for tubal infertility being far more invasive than
necessary.
THERAPEUTIC APPROACHES TO TUBAL INFERTILITY
Many patients with tubal infertility can be treated effectively with
corrective tubal surgery. However, pregnancy rates vary because of the
limitations of current tubal diagnostic techniques, which make it extremely
difficult to identify the patients for whom tubal surgery is appropriate
therapy. Thus, many patients undergo surgery whereupon either no pathology is
found or the tubes are so diffusely diseased as to preclude surgical repair.
Conversely, in many cases, other less appropriate therapies are often prescribed
for patients for whom surgery would be the optimal approach.
Because of the invasiveness of tubal surgery, which generally involves
either laparotomy, an open, abdominal surgery requiring general anesthesia and
multi-week recovery, or endoscopic surgery using a laparoscope, tubal surgery
should be restricted to those patients who can benefit from it. Both types of
surgery involve the risk of infection and the risks associated with use of
general anesthesia. In addition, the surgical procedure itself often leads to
collateral damage to the fallopian tube, usually in the form of post-surgical
adhesions, which may further decrease the patient's chances of conception. In
either an open or
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laparoscopic surgery, a direct view of the fallopian tube lumen should allow for
an accurate diagnosis of the nature, location and extent of tubal disease,
enabling the physician to choose the appropriate therapy, if treatment is
indicated. However, peer review journal articles indicate that the pregnancy
rate subsequent to tubal surgery is only 30-35% and further suggest that
outcomes could be improved substantially if better diagnostic procedures were
available to identify appropriate surgical candidates and to determine the type
and extent of surgery required. Although most insurers will reimburse a single
tubal surgical procedure for a patient, due to disappointing surgical outcomes,
the frequency of tubal surgery in the United States has declined over the last
ten years, and the Company estimates that the procedure is currently performed
20,000 times annually. A procedure typically costs between $2,000-$10,000,
depending on the degree of invasiveness.
In the United States, tubal infertility patients are increasingly being
referred to assisted reproductive techniques, primarily IVF. As with tubal
surgery, IVF is optimal therapy for certain tubal infertility patients,
particularly when both fallopian tubes are severely damaged or missing, or when
a combination of infertility factors in a couple makes it impractical to attempt
to correct each cause. IVF typically involves hyperovulation induced by
fertility drugs, and the harvesting of multiple eggs by way of a needle
aspiration through the abdominal wall directly to the ovary. Semen from the male
partner is then combined with the harvested eggs in a laboratory test-tube
fertilization procedure. Generally, after up to 72 hours, several embryos are
transferred by a transcervical catheter into the uterus for implantation.
The limitations of IVF have been well documented. Recent studies question
the safety of high dosages of fertility drugs. These drugs are generally
self-administered intramuscularly, which is not only painful, but often has a
powerful impact on emotional well-being. The IVF procedure is costly, with a
single harvest and transfer (a "cycle") costing up to $10,000 in the United
States. Many patients undergo multiple cycles in a course of therapy increasing
the cost to an amount up to $50,000 for a complete course of therapy, and IVF is
rarely reimbursed. In addition to the high cost of treatment, due to the
increased incidence of multiple births and delivery complications that can
accompany IVF, the total overall cost of IVF therapy can be substantial.
Finally, the success rate of IVF is disappointing, reported to be 19% live
births per cycle in the latest survey of the Society for Assisted Reproductive
Techniques (the "SART"). As a consequence of the emotional and physical trauma,
drug risks, and the high cost associated with IVF, fewer than 35,000 procedures
were performed in the United States in 1993.
The inability to access the fallopian tubes non-surgically has also
constrained the acceptance of the gamete intrafallopian transfer ("GIFT")
procedure, another assisted reproductive technique. This procedure is more like
natural conception because fertilization occurs in the fallopian tube rather
than in a test tube as in IVF. It is generally believed that this contributes to
the higher rates of live births following GIFT procedures compared to IVF (26%
versus 16% in one SART study). However, due to the inability to non-surgically
access the fallopian tube, the GIFT procedure requires laparoscopic surgical
placement of a mixture of eggs and sperm ("gametes") in the distal tubal
segment. In addition, diagnostic inaccuracy may result in inadvertent placement
of gametes in damaged tubes, with increased risk of ectopic (tubal) pregnancy.
Since GIFT does not require an expensive laboratory fertilization process, this
procedure has the potential to be less costly than IVF, but the surgical
transfer currently required frequently increases the cost of a GIFT procedure to
approximately $11,000 per cycle. These factors contributed to the limited number
of GIFT procedures (less than 5,000) that were performed in the United States in
1993.
Another factor that can not be overlooked in the treatment of infertility is
time; therapies that are inappropriate take time to administer, and additional
time is often required to assess outcomes before another therapeutic option is
explored. For many patients with fertility status already compromised by age,
time may be the most significant cost associated with the selection of
inappropriate therapy.
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APPROACHES TO CONTRACEPTION
Surgical fallopian tube sterilization has become the fastest growing method
of contraception worldwide, especially among women over 35, because of its
reliability, and the absence of chronic side effects associated with the
procedure. Typically, fallopian tubes are ligated by cutting or cauterizing the
tubes, or by mechanical occlusion of the tubal lumen using clips or rings in a
surgical procedure such as a laparoscopy or laparotomy. The requirement of
surgery, however, is an obvious limitation of the procedure. The risks
associated with surgery, including the risk of general anesthesia, infection and
other complications, combined with concerns about cost and recovery time, make
the procedure less than ideal. In addition, in many developing countries, where
the need for permanent contraception is critical, there is a shortage of
community surgical facilities. In the United States, over 1,300,000 surgical
tubal sterilization procedures are performed annually. The average cost of these
procedures ranges from approximately $2,500 to approximately $8,000, depending
on the degree of invasiveness of the surgery.
CONCEPTUS' FIRST PLATFORM TECHNOLOGY: TRANSCERVICAL TUBAL ACCESS TECHNOLOGY
Conceptus has developed its minimally invasive transcervical tubal access
technology to address the clinical problems and technological limitations
presented by current fallopian tube infertility and tubal sterilization
approaches. The Company believes that the ability to directly and nonsurgically
access the fallopian tubes will lead to better reproductive outcomes by:
- Improving the accuracy of conventional diagnostic procedures performed to
assess tubal patency.
- Facilitating the performance of a new endoscopic tubal diagnostic
procedure, which will permit the diagnosis of several key aspects of tubal
functionality not adequately assessed today.
- Enabling physicians to select more appropriate tubal therapies, thereby
eliminating many unnecessary therapies.
- Allowing more tubal therapies to be performed nonsurgically, thus avoiding
the risks and costs of surgery and the potential for further
surgery-induced damage to the fallopian tubes.
- Accelerating the selection of appropriate infertility treatment, an
important consideration for women whose infertility status has already
been compromised by age.
- Providing a nonsurgical approach to fallopian tube sterilization, thereby
increasing patient demand for tubal sterilization and expanding its
availability in developing countries where surgical facilities may be
limited.
INFERTILITY PRODUCTS
The Company's proprietary transcervical tubal access technology consists of
specially designed, micro-catheters and guidewires, designed to be atraumatic,
that provide non-surgical access through the cervix and uterus and into the
fallopian tubes. These components are combined with the Company's other
procedure-specific products to produce the T-TAC system, the STARRT Falloposcopy
system, and the
S/TOP system, as well as certain other systems in development.
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The following table sets forth the clinical indications and regulatory
status of each of the Company's principal infertility products:
<TABLE>
<CAPTION>
PRODUCT SYSTEMS CLINICAL INDICATIONS U.S. STATUS INTERNATIONAL STATUS
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<S> <C> <C> <C>
T-TAC SYSTEM
VS (Variable Softness) Diagnostic tubal 510(k) clearance for: Marketed since 9/95 in 14
Catheter catheterization; diagnosis of PTO; HSG; lap countries.
Guidewires therapeutic tubal and dye; and intrauterine
Soft Torque Uterine catheterization; HSG; lap insemination. System
Catheter and dye; and intrauterine marketed since 8/95,
Soft Seal Cervical Catheter insemination. certain components marketed
Minicerv Cervical Catheter since 4/95.
STARRT SYSTEM
VS Catheter Operative fallopian tube 510(k) clearance for Operative system marketed
Robust Guidewire endoscopy; in- office falloposcopy for PTO; in Australia since 9/95;
Coaxess Uterine Catheter fallopian tube endoscopy. full-length falloposcopy general market introduction
Vision Falloposcope 510(k) filed 3/97. of operative system
Gyne-Flex Stabilizing Arm expected in 1997.
Access Hysteroscope Diagnostic hysteroscopy. 510(k) clearance for Marketed since 9/95 in 14
diagnostic hysteroscopy. countries.
Stargate Catheter Second generation VS 510(k) expected to be filed -
Catheter. in 1997.
S/TOP SYSTEM
Tubal Access Catheter Non-surgical tubal Successful peri- -
Intratubal Micro-Coil sterilization. hysterectomy testing.
Device Pre-hysterectomy testing
Delivery Wire began 3/97.
OTHER SYSTEMS IN
DEVELOPMENT
Transcervical GIFT Falloposcope-guided GIFT. Prototype development -
planned for 1997.
Transcervical Ectopic Catheter-based treatment of Prototype development -
Pregnancy Treatment ectopic pregnancy. planned for 1997.
</TABLE>
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T-TAC-TM-, STARRT-TM-, S/TOP-TM-, VS-TM-, Soft Torque-TM-, Soft Seal-TM-,
Minicerv-TM-, Robust-TM-, Coaxess-TM- and Stargate-TM- are trademarks of the
Company. All other tradenames and trademarks appearing in this report are the
property of their respective holders.
TRANSCERVICAL TUBAL ACCESS TECHNOLOGY
VARIABLE SOFTNESS CATHETERS. The Company's Variable Softness Catheters ("VS
Catheters") are designed to enable the physician to atraumatically negotiate the
entire length of the intricate anatomy of the fallopian tubes. The
over-the-wire, co-axial design provides a conduit for guidewires, falloposcopes,
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therapeutic devices, and fluids such as dyes, to the tubal lumen. The column
strength of the catheter gradually decreases from the relatively stiff proximal
section to a highly flexible distal portion. Its diameter tapers from 1.0 mm at
the proximal section to 0.8 mm at the distal tip. Proprietary design and blended
polymer materials are combined to create this transition in column strength that
facilitates the transmission of forward motion from the physician's hand (push),
while atraumatically negotiating (tracking) the tortuous anatomy of the tubes
more effectively than existing single-stiffness catheters. A radiopaque tip
facilitates visualization of the tip's path under fluoroscopy.
GUIDEWIRES. The Company's guidewires are soft, highly tactile devices used
for atraumatic navigation of the tortuous anatomy of the fallopian tubes. Like
the VS Catheter, these devices are characterized by a high column-strength
proximal end that gradually transitions to a highly flexible distal tip. The
guidewire is used by the physician to guide a VS Catheter to the intended site
at the ostium (the junction of the uterus and the fallopian tube) or in the
fallopian tube. The physician can then use the guidewire to recanalize (reopen)
the tube or can remove the guidewire from the catheter so that other instruments
or therapies can be delivered through the catheter to the intended site. The
guidewires offer a range of flexibility to accommodate a variety of patient
anatomies and physician preferences by utilizing variances in the tapering and
stiffness of the guidewires and other proprietary design features. The Company's
most popular guidewire, the Robust, is designed to optimize the physician's
ability to push the guidewire. Radiopaque tips permit visualization of the
guidewires' progress through the fallopian tube under fluoroscopy, and
identification of occluded sites.
T-TAC SYSTEM
The Company's T-TAC system assists physicians in accessing and navigating
the fallopian tubes and is designed to facilitate more accurate detection and
treatment of tubal disorders. This system is frequently used in selective
injection during HSG, a procedure in which dye is injected sequentially into
each fallopian tube. Compared to standard HSG, selective injection is more
accurate and may be less painful for the patient. The T-TAC system can also be
used in selective salpingography ("SSG"), an enhancement to HSG, or during
laparoscopy as an enhancement to lap and dye. In addition, the system can be
used to recanalize occluded tubes and to deliver sperm accurately to an area
near the ostium in assisted reproductive techniques.
PROCEDURE-SPECIFIC PRODUCTS. The Company's T-TAC system consists of its
proprietary VS Catheter and guidewires, the Soft Torque Uterine Catheter, and
two different cervical catheters (the Soft Seal and the Minicerv).
The Soft Torque Uterine Catheter is introduced into the uterus through the
inner lumen of the Soft Seal Cervical Catheter. This 2.0 mm outer-diameter
catheter has a curved distal end and a soft atraumatic distal tip, which is used
to facilitate accurate placement of the tip near the tubal ostium. After
placement of the distal tip of the Soft Torque Uterine Catheter near the tubal
ostium, a guidewire and a VS Catheter can then be inserted through the inner
lumen of the Soft Torque Uterine catheter to gain access to the fallopian tube.
Multiple curve options of the catheter's design accommodate a variety of patient
anatomies. The tip and shaft are radiopaque to permit visualization of the
catheter under fluoroscopy to assist in the placement of the catheter. The Soft
Torque Catheter's 1.4 mm inner-diameter facilitates the injection of contrast
dye to help diagnose fallopian tube diseases and disorders in procedures such as
HSG or to deposit sperm near the ostium to facilitate artificial insemination.
The Soft Seal Cervical Catheter is designed to provide an atraumatic
mechanism for gaining access to and manipulating the uterus, for performing
standard HSG and as a platform for performing other uterine diagnostic
procedures. This 4.5 mm catheter provides access to the uterus without cervical
dilatation while a latex balloon at the tip is used to seal the cervical canal.
The catheter is made of polymers and incorporates a unique malleable stiffening
wire to add column strength during introduction to the uterus. Its 2.3 mm inner
diameter permits easy passage of other devices, such as another catheter.
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The Minicerv Catheter is a miniature hysterosalpingography (HSG) catheter
designed for maximal patient comfort. The tiny 5 French shaft with a tip is
designed to be atraumatic and slide easily across the cervix for access to the
uterus. The shapeable mandrel provides column strength for insertion and can be
shaped to match patient anatomy. A polyurethane balloon avoids the latex
allergies which can be an issue with other hysterosalpingography catheters.
Because the polyurethane balloon material is non-compliant, it maintains its
shape once inflated and will not dislodge when manipulating the uterus.
CLINICAL AND REGULATORY STATUS. In July 1995, the Company received 510(k)
clearance for the use of the Company's T-TAC products for fallopian tube
catheterization to diagnose PTO under fluoroscopic, hysteroscopic or
laparoscopic guidance. The Company has also received 510(k) clearance for some
of the products in its T-TAC system for use during HSG, selective injection
during HSG, intrauterine insemination and in conjunction with laparoscopic
procedures.
The Company has received all regulatory approvals necessary to sell its
T-TAC system for both diagnostic and therapeutic fallopian tube catheterization
indications in Austria, France, Germany, the Netherlands, Sweden, Switzerland,
the United Kingdom, Canada, Australia and South Africa, and is seeking approval
to market these products in Italy, Spain and Israel.
STARRT FALLOPOSCOPY SYSTEM
The Company's STARRT Falloposcopy system is designed to enable the physician
to view the full length of the fallopian tube using a flexible, fiberoptic
endoscope to diagnose tubal diseases and disorders more effectively and
accurately, and thereby to prescribe more appropriate therapeutic measures. The
Company is developing two configurations of its STARRT system. The operative
system is being designed to be used to diagnose the fallopian tubes adjunctively
with a laparoscopic abdominal diagnostic evaluation. The in-office system is
being designed to facilitate the performance of falloposcopy in an office
setting by a physician working without assistance on a mildly sedated patient.
PROCEDURE-SPECIFIC PRODUCTS. The STARRT system consists of the Stargate
Catheter (a modified version of the VS Catheter), the Robust guidewire, the
Coaxess Uterine Catheter, the Vision Falloposcope, and two additional products
which may also be used independently: the Access Hysteroscope and the Gyne-Flex
stabilization system.
The Access Hysteroscope is a fiberoptic, articulating tip endoscope that
provides the physician with visual access to the uterus in diagnostic
hysteroscopy or for use in conjunction with the remainder of the system as an
integral tool in tubal catheterization and falloposcopy. The hysteroscope is
passed through the cervix into the uterus to provide the physician with a view
of the interior of the uterus. When used as a part of the falloposcopy system,
the physician aligns the distal end of the scope with the tubal ostium. The
hysteroscope's deflectable tip permits visualization of and access to the tubal
ostium. The hysteroscope's imaging fibers provide high resolution imaging, and
its working channel can accommodate the Stargate catheter as well as other
devices for tubal diagnosis, endometrial biopsy and therapeutic indications.
The Company's Gyne-Flex stabilization system can be used to affix the
hysteroscope to the examining table to facilitate precise and secure positioning
of the hysteroscope in the uterus. The Company's STARRT Falloposcopy system can
also be used with rigid operative hysteroscopes from other suppliers, since many
physicians prefer to use their existing operative hysteroscopes to evaluate the
uterus at the time that a falloposcopy procedure is performed. Conceptus has
designed the Gyne-Flex to be compatible with the most commonly used rigid
hysteroscopes. In addition, the Gyne-Flex stabilization system can also be used
by itself to provide assistance in securing instruments during laparoscopy.
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After alignment of the hysteroscope with the ostium in the uterus, the
physician advances a specially designed Stargate Catheter and a guidewire
through the working channel of the hysteroscope to catheterize the fallopian
tube. When the guidewire and catheter reach the fimbrial end of the fallopian
tube or a point of resistance, the guidewire is removed and the Vision
Falloposcope is inserted into the catheter and advanced until it is aligned with
the distal tip of the catheter. This 0.45 mm diameter flexible fiberscope has
3,000 imaging fibers to provide quality imaging. The physician is then able to
view the entire length of the lumen of the fallopian tube in a retrograde manner
by gently withdrawing the catheter and falloposcope. Special design
characteristics of the Stargate Catheter permit good irrigation around the
falloposcope resulting in tubal distension, thereby enhancing visualization of
the tubal lumen.
Conceptus believes that a unique variation of its falloposcopy system may
allow the Company to offer a system which makes in-office falloposcopy possible.
Presently, falloposcopy is performed in conjunction with laparoscopy. While this
may continue to be a preferred method for many physicians, the Company believes
that the ability to perform falloposcopy in an in-office, non-surgical procedure
without concurrent laparoscopy may appeal to physicians, especially those who do
not typically perform laparoscopy or other surgical procedures.
CLINICAL AND REGULATORY STATUS. 510(k) clearance for the STARRT system was
obtained in January 1997 for the diagnosis of PTO. This application was
supported by a United States safety and feasibility study and the International
Multicenter Study of Falloposcopy (the "IMSF"). The United States safety and
feasibility study, completed in August 1995, was conducted in five centers in
the United States and Australia under an FDA-approved Investigational Device
Exemption ("IDE"). Of fallopian tubes studied that had a prior diagnosis of PTO
from conventional diagnostic methods, 61% were found to be patent on
falloposcopic evaluation. Two cases of tubal dissection (5%) were reported with
no clinical sequelae noted in either case. The PTO cases from the IMSF were also
reviewed by FDA as part of the 510(k) filing. Of the 51 tubes diagnosed with PTO
by HSG, falloposcopic evaluation revealed patency in 37 tubes (72%). Of 47 tubes
diagnosed with PTO by lap and dye, falloposcopic evaluation revealed patency in
38 tubes (81%).
In 1994, a 21-center clinical study of the STARRT Falloposcopy system was
initiated in Europe and Australia by the core center for the IMSF at the
University of Heidelberg. Not limited to the diagnosis of PTO, over 375 patients
have been enrolled in this study which compares the diagnosis of infertility by
falloposcopy to conventional methods of diagnosis, HSG and laparoscopic
chromopertubation, or lap and dye. Study results from the first 315 patients
enrolled indicate that in approximately 64% of the cases, falloposcopy provided
diagnostic information that was unobtainable by HSG, and in approximately 58% of
the cases, fallopscopy provided diagnostic information not obtainable by lap and
dye. The catheterization success rate in this trial was 84% and the
visualization success rate was 82%. A 3.7% rate of complications has been
reported in this study, involving uterine and tubal perforation and tubal
dissections, with no serious complications.
Prior to the initiation of the IMSF, the Company's falloposcopy system was
used in a 122 patient single-center study in South Australia conducted by Dr.
John Kerin, a pioneer in falloposcopy. In the study, Dr. Kerin was able to
identify endolumenal tubal pathology, categorize patients by pathological
findings and demonstrate statistically significant differences in pregnancy
outcomes in patients.
In March 1996, the Company received 510(k) clearance for its hysteroscopy
device as a stand-alone device for the diagnosis of uterine (as opposed to
tubal) disorders.
The Company has obtained all necessary regulatory approvals for sale of its
STARRT system in certain foreign countries including Austria, France, Germany,
the Netherlands, Sweden, Switzerland, the United Kingdom, Canada, Australia and
South Africa and is seeking approvals to sell its products in Italy, Spain and
Israel. The Company may seek approvals to market its products in other
countries.
The Company's primary near-term commercial products, the T-TAC and STARRT
systems, have been developed for limited indications to date. Current
applications for those systems include accessing,
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diagnosing and treating diseases and disorders of the fallopian tubes. Expanding
the number of applications for these products will require additional
development and, in certain cases, clinical trials and regulatory approvals. The
Company would experience a material adverse effect on its business, financial
condition and results of operations if these products are not successfully
commercialized for existing or future applications.
S/TOP SYSTEM
The Company is developing a non-surgical procedure for female sterilization
using the Company's proprietary transcervical tubal access system and a unique
tubal micro-coil device and delivery wire.
PROCEDURE-SPECIFIC PRODUCT. The Company is developing a proprietary
micro-coil sterilization device to be deployed permanently into each fallopian
tube using the Company's minimally invasive tubal access and delivery system and
the Company's unique delivery wire. The micro-coil device has been designed to
effectively occlude the lumen of the fallopian tube and be physically
incorporated into the tubal wall to prevent expulsion. The Company believes that
this device and procedure should reduce the clinical risks and costs associated
with most current tubal sterilization procedures while delivering a reliable,
safe method of sterilization.
CLINICAL AND REGULATORY STATUS. In 1995, the Company completed IN VITRO
feasibility studies and a successful animal study that demonstrated 100%
pregnancy prevention in the 20 animals in which the device remained correctly
placed.
In September 1995, Conceptus commenced a Phase I clinical study of the S/TOP
device under an Institutional Review Board ("IRB") approval with a
non-significant risk determination. This study involved the placement of the
S/TOP device in patients at the time of hysterectomy in order to assess the
ability to access the fallopian tube and place the device properly, and the
acute retention of the device. As of February 1997, the device had been
implanted in 29 patients. IDE approval has been obtained for an expanded Phase I
clinical study in 20 patients who are scheduled for a hysterectomy 6-12 weeks
after hysteroscopic placement of the S/TOP device. This study is designed to
evaluate histologically any adjacent tissue reaction and patient recovery from
the device placement procedure, in addition to the Phase I trial objectives. Two
patients have been enrolled in this study and have undergone the S/TOP device
placement procedure in an office setting. Two additional Phase I studies are
being conducted to evaluate feasibility of placing the device under fluoroscopic
and sonographic visualization. Ten patients will be enrolled in each of the
studies. As of February 1997, four patients have been enrolled in the
fluoroscopic study and one patient has been enrolled in the sonographic study.
The Company has submitted an application to begin a Phase II clinical study
in Australia. Approval has been granted by the reviewing Ethics Committee to
commence the study. Conceptus expects this study will involve ten patients
scheduled for tubal sterilization and will assess long-term device retention,
effectiveness and safety. The Company expects to follow this study with an
expanded Phase II study, which will likely involve 50 patients. A Phase III
study, which will involve a larger patient population and long-term follow up in
support of a Pre-Market Approval ("PMA") application, will follow.
The Company is in the process of determining the final material composition
of the S/TOP device. The Company may choose to include copper as an element in
the device since it has been shown to have clinical activity as a contraceptive.
In the event copper is used in the S/TOP device, it will be evaluated by the FDA
as a drug rather than as a device, and thus the FDA's Investigational New Drug
("IND") and New Drug Application ("NDA") regulations would be applicable to the
clinical study and eventual commercialization of the device. If copper is not
incorporated, the S/TOP device will be treated as a medical device and require a
PMA. In November 1995, the Company met with the appropriate sections of both the
Office of Device Evaluation and the Office of Drug Evaluation of the FDA to
discuss their respective new product approval processes and requirements for
this device. Based upon the information obtained during these meetings, the
Company does not believe that there would be a material difference in the
regulatory
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requirements nor the product approval review cycle times between the drug and
device regulatory groups within the FDA.
OTHER APPLICATIONS OF TRANSCERVICAL TUBAL ACCESS TECHNOLOGY
The Company is also leveraging its proprietary transcervical tubal access
technology to create the following procedure-based product systems. These will
address additional diagnostic and therapeutic needs in the field of reproductive
health in which transcervical, non-surgical methods can improve clinical
outcomes or achieve cost reductions.
TRANSCERVICAL GIFT. The Company is planning to develop a
falloposcope-guided transcervical GIFT delivery system. Under current GIFT
procedures, a mixture of gametes is passed through a laparoscope into the
fallopian tube. Although the Company believes that physicians would prefer a
non-surgical transcervical approach to GIFT, to date transcervical GIFT
procedures have been limited by the inability of physicians to access the
fallopian tubes routinely and to confirm delivery and retention of the gametes
in the proper section of the tubes. The Company's transcervical GIFT system
would use the T-TAC fallopian tube access system and a falloposcope-guided
delivery system to atraumatically deliver the gametes under controlled
conditions to the ampulla of the fallopian tube. The Company believes that such
a procedure would improve the clinical efficacy of GIFT procedures and avoid the
patient health risks and cost associated with the more invasive laparoscopic
procedures currently utilized in GIFT.
The FDA has stated its intention to downgrade the classification of
catheters used in GIFT procedures from the current Class III classification,
which requires a PMA approval prior to commercialization, to a Class II or even
Class I status, which require only 510(k) clearance. The Company believes some
clinical data may still be required prior to commercialization of GIFT
catheters, even if classified as Class I or Class II devices. The Company
intends to review its regulatory approach to transcervical GIFT at the time new
FDA regulations regarding assisted reproductive techniques are published.
TRANSCERVICAL ECTOPIC PREGNANCY TREATMENT. An ectopic pregnancy occurs when
the fertilized egg fails to migrate through the fallopian tube to the uterus.
Unless properly treated, the developing embryo in the fallopian tube can be
life-threatening to the mother. This condition is currently treated through an
invasive, surgical laparotomy under general anesthesia requiring termination of
the pregnancy and surgical repair of the tube. Approximately 100,000 ectopic
pregnancies are treated annually in the United States, a procedure which
typically is reimbursed by third-party payors. The Company believes physicians
would prefer a non-surgical method of treating ectopic pregnancies and have
attempted in investigational studies to terminate ectopic pregnancies through
systemic administration of abortive drugs. Systemic delivery of abortive drugs,
however, may cause adverse side effects by exposing organs remote from the
targeted area to toxic effects of the drugs. This generally requires that
dosages be small, which limits the efficacy of the drugs. The Company believes
that use of its transcervical fallopian tube access system to provide visually
guided, site-specific delivery of abortive agents, such as methotrexate or
saline solution, should improve patient outcomes while reducing the systemic
exposure to dangerous drugs, the likelihood of tubal damage and the cost of the
procedure.
CONCEPTUS' SECOND PLATFORM TECHNOLOGY: RESECTOSCOPY
The Company's acquisition of Microgyn in November 1996 provides another
significant platform technology and product portfolio to more effectively meet
the needs of the interventional gynecologist.
Therapeutic hysteroscopy is one of the most rapidly growing procedures in
gynecology to treat uterine disorders, which may result in recurrent pregnancy
loss, dysfunctional uterine bleeding, and pelvic pain. This procedure can often
provide a less invasive alternative to hysterectomy, the removal of the uterus,
which is an invasive surgical procedure performed more than 600,000 times each
year in the United States.
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In performing uterine therapy using a hysteroscope, the uterus must be
distended and the visibility maintained by use of an optically clear fluid.
Using a continuous flow of non-viscous media into and out of the uterine cavity,
the surgeon is provided a bloodless operative field in which tissue removal or
ablation can be carefully guided under direct visualization. Using monopolar
(RF) electrosurgical energy to cut or ablate adds a restriction on the type of
fluid that can be used: a non-conductive, hypotonic, non-physiologic distention
medium must be employed. Fluids such as mannitol, sorbitol, and glycine are
adequate for this purpose but present a risk to the patient. Non-conductive
fluids are electrolyte-free (hypotonic) substances and therefore can change
levels of vital electrolytes such as sodium, potassium, and chloride in the
patient.
In therapeutic hysteroscopy, both small and large blood vessels are cut as
tissue is removed. Since the hypotonic fluids must be infused into the uterus
under pressures as high as 60-80 mmHg in order to distend the uterine cavity, a
large amount of fluid can be forced into venous channels, which normally
maintain a pressure of about 20 mmHg. During the procedure, fluid loss into the
patient is carefully monitored by a nurse, via fluid deficit calculations,
comparing fluid used versus fluid recovered. The surgeon is kept apprised of the
patient's fluid status, because there are complications associated with the
absorption of large amounts of hypotonic solutions, including serious heart,
lung, and brain disorders, sometimes leading to coma and death.
RESECTOSCOPY SYSTEM PRODUCTS
The Company's hysteroscopy system consists of the following products: a
simple, disposable Resectoscope Safety Sheath, cutting loops, coagulating roller
balls, and other devices under development. The Resectoscope Safety Sheath, when
installed on the standard hysteroscope, changes the flow of electrosurgical
energy delivered during cutting. This innovative approach permits the use of
isotonic solutions, such as normal saline, which are physiologically compatible.
The ability to effectively use isotonic solutions during hysteroscopic
procedures should eliminate the risk of serious electrolyte disturbances and
their associated complications. The system is easy to use since it is designed
for total mechanical compatibility with existing hysteroscopic instrumentation
and power sources.
The following table sets forth the clinical indications and regulatory
status of the Company's Hysteroscopy system:
<TABLE>
<CAPTION>
CLINICAL
PRODUCT SYSTEMS INDICATIONS U.S. STATUS INTERNATIONAL STATUS
- ------------------------------ ------------------ ------------------------------ ------------------------------
<S> <C> <C> <C>
Resectoscope Safety Sheath Therapeutic 510(k) clearance for urology; Product release to select
Cutting loops hysteroscopy. 510(k) for gynecology planned countries planned for 1997.
for 1997.
Coagulating roller balls Therapeutic 510(k) for gynecology planned Product release to select
hysteroscopy. for 1997. countries planned for 1997.
</TABLE>
CLINICAL AND REGULATORY STATUS. As of March 1, 1997, the Resectoscope
Safety Sheath has been clinically studied in 9 patients under a non-significant
risk trial in the United States. No device-related adverse events were reported
in these patients, and the safety sheath was reported to perform effectively. A
510(k) for transcervical resection and ablation of the uterus is planned to be
filed in 1997. In addition to its application for therapeutic hysteroscopy, this
technology has urologic applications. 510(k) clearance has been obtained for use
in transurethral resection and ablation in the urethra, prostate and bladder.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are performed internally
by its 14-person research and development staff. The Company intends to expand
utilization of its proprietary technologies in a broad range of applications to
enhance the diagnosis and treatment of reproductive disorders,
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including male reproductive disorders. Several physician-sponsored clinical
studies have been performed which the Company believes demonstrate the potential
utility of the Company's catheter, guidewire and micro-coil technologies for the
treatment of male reproductive disorders. Research and development expense for
the years ended 1996, 1995 and 1994 were $3.8 million, $2.6 million and $1.8
million, respectively.
MANUFACTURING
The Company manufactures its proprietary catheters in environmentally
controlled areas at its facility in San Carlos, California. The Company has
recently been inspected by the FDA, and is in substantial compliance with all
FDA requirements including FDA Good Manufacturing Practices ("GMP") for medical
devices. The Company has been inspected by the California Department of Health
Services ("CDHS") and is registered with the State of California to manufacture
its medical devices and drugs. The State of California Food and Drug Branch
conducted a two day inspection of the San Carlos facility in February 1997 and
as a result of that inspection, recommended that Conceptus be issued a Drug
License.
Raw materials are purchased from various qualified vendors, subjected to
stringent quality specifications and assembled by the Company into the final
products. The Company routinely conducts quality audits of suppliers and has
adopted a vendor qualification program. The Company obtains certain products
from sole source suppliers, such as endoscopes from Mitsubishi Cable America,
Inc. and cervical catheters from Applied Medical Resources and Infinity
Extrusion and Engineering, Inc. The Company does not have formal supply
contracts with several key vendors and, accordingly, no assurance can be made
that such firms will continue to supply the Company with such raw materials or
finished goods in sufficient quantities, or at all. The Company believes that
alternative suppliers are available for its raw materials and other product
components and plans to qualify additional suppliers when sales volumes warrant.
Although the Company intends to maintain sufficient levels of inventory to avoid
any material disruption resulting from the scale-up of manufacturing, there can
be no assurance that the Company will be able to manufacture and supply
sufficient products to meet potential demand. Delays associated with any future
raw materials or finished goods shortages could have a material adverse effect
on the Company's business, financial condition and results of operations,
particularly as the Company scales up its manufacturing activities in support of
international and United States commercial sales.
The Company utilizes a facility to receive imports of certain inventory
materials in order to avoid or delay the payment of duties until the product is
used in the United States, or shipped to a distributor outside of the United
States.
The Company has limited experience in manufacturing its products in
commercial quantities. The Company currently manufactures products in small
quantities for United States clinical trials, international clinical trials and
limited commercial sales. Manufacturers often encounter difficulties in scaling
up production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. There can be no assurance that the Company will not encounter
manufacturing difficulties, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
MARKETING AND DISTRIBUTION
The Company's marketing strategy is designed to promote awareness of the
clinical efficacy and cost-effectiveness of the minimally invasive
interventional gynecology procedures in which the Company's products are used.
The Company implements this strategy by providing clinical and technical
information that encourages the physician to perform procedures utilizing the
Company's products. In the infertility area, a key component of the Company's
marketing strategy is a public relations campaign designed to use the mass media
to increase patient awareness of the benefits of less invasive and more accurate
diagnosis of fallopian tube diseases and disorders and improved tubal therapies
provided by transcervical access
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procedures. The Company also intends to work closely with patient education,
support and advocacy organizations. The Company believes that it is critical to
develop and maintain close working relationships with patient organizations as
well as physicians, as infertility patients are increasingly involved in the
selection of their therapy. In the therapeutic hysteroscopy area, the Company
plans to promote the benefits of this less invasive alternative to hysterectomy
and the significant safety and cost advantages afforded by its Hysteroscopy
system products. The Company's marketing strategy will include developing
influential product champions, publishing and presenting on the safety and cost
effectiveness of its products, conducting workshops, exhibiting a strong
presence at key gynecologic endoscopy meetings, and selectively utilizing
advertising, direct mail and telemarketing.
The Company is focusing its United States marketing efforts primarily on
what it estimates to be the approximately 7,500 interventional gynecologists who
maintain a high-volume practice in gynecological endoscopy, and as a result,
primarily treat infertility and pre- and peri-menopausal symptoms. A key element
of the Company's marketing strategy is to develop relationships with prominent
physicians who are particularly active in interventional gynecology, and to
involve these physicians in the Company's clinical and product development
activities. The Company intends to continue to build these relationships through
sales efforts, workshops and meetings to discuss clinical issues and treatments.
Interventional gynecology is an emerging market for which there is no proven
distribution channel in the United States. Accordingly, during the initial phase
of commercializing the Company's products, the Company's marketing and sales
strategy involves the use of a combination of sales specialists directly
employed by the Company and contract sales representatives who have significant
experience in physician detailing of gynecological products. The role of the
sales specialists and contract sales representatives will be to demonstrate the
use of the Company's products, while educating physicians as to the intended
clinical benefits of transcervical fallopian tube access and the safety and cost
effectiveness of performing therapeutic hysteroscopy using isotonic solutions,
using detailing techniques similar to those commonly employed in the medical
device industry. The Company believes that this combination of direct sales
specialists, employed in territories with concentrated numbers of interventional
gynecologists, and contract sales representatives in other territories, will
provide the highest quality, most rapid and cost-effective means for introducing
its initial products. If the Company's product systems are successful, Conceptus
intends to expand its focused distribution channel in the United States
interventional gynecology market by increasing the number of sales
representatives that are directly employed by the Company.
The Company believes that there are a number of small firms with products
that are complementary to the Company's but which to date have been unable to
establish an effective distribution channel for such products. As part of its
distribution strategy, the Company will seek to acquire or license the rights to
market complementary products from other companies which can be marketed to the
interventional gynecologist.
There can be no assurance that the Company's sales or products available for
sale will require a sales organization of direct sales specialists and contract
sales representatives, that the Company will be able to attract and retain the
necessary qualified sales personnel, that the Company will be successful in
creating an effective distribution channel for its products or that the Company
will be able to acquire the rights to market additional products.
Although the Company is fully dedicated to meeting the needs of the
interventional gynecologist, some of its products have applications in two other
specialty areas, radiology and urology. To capitalize on the opportunities
available in these other areas, the Company's distribution strategy also
includes entering into partnerships with leading companies in both radiology and
urology, allowing the Company to focus its internal marketing and sales efforts
on interventional gynecology. In July 1996, the Company announced the signing of
an agreement with Mallinckrodt Group, Inc. ("Mallinckrodt"), a major supplier of
radiological contrast media, which grants Mallinckrodt exclusive marketing
rights for radiology applications in North, Central and South America. The
Company retained all marketing rights for its T-TAC
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system in the gynecology market segment. The Company is currently engaged in
discussions with potential distribution partners to market the Hysteroscopy
system product line for the urologic applications. There can be no assurance
that the Company will enter into a distribution arrangement for urologic
applications of its Hysteroscopy system. In addition, there can be no assurance
that any of the Company's distribution partners will successfully market the
Company's products for applications in radiology or urology. The failure to
establish and maintain effective distribution partnerships for the Company's
products for these applications would have a material adverse effect on the
Company's business financial condition and results of operations.
The Company has only limited experience marketing and selling its products,
and does not have experience marketing and selling its products in commercial
quantities. The Company intends to substantially increase its United States
marketing efforts by increasing the sales coverage throughout the United States
during 1997. Establishing marketing and sales capability sufficient to support
sales in commercial quantities will require significant resources, and there can
be no assurance that the Company will be able to recruit and retain qualified
marketing personnel, direct sales personnel or contract sales representatives or
that future sales efforts of the Company will be successful. While the Company
is committed to establishing an effective distribution channel for its products,
there can be no assurance that the Company will be successful in doing so. The
failure to establish and maintain an effective distribution channel for the
Company's products, or to retain qualified sales personnel to support commercial
sales of the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Outside of the Mallinckrodt partnership, the Company currently markets its
products internationally primarily through established distributors of specialty
gynecological products. The only exception is that in June 1996, the Company
appointed Schering Health Care, Ltd., a major supplier of reproductive
pharmaceuticals to this market, as its exclusive distributor in the United
Kingdom to the interventional gynecology market. The Company has two sales
managers located in Europe and expects to expand its international sales and
marketing organization 1997. The Company's products are currently marketed
through specialty distributors in the Netherlands, Spain, Sweden, Switzerland,
Australia, Israel and South Africa. The Company is negotiating with distributors
to cover the remaining countries in Europe, the Pacific Rim (including Japan)
and Latin America. The Company generally operates under written distribution
agreements with its distributors which grant the exclusive right to sell the
Company's products within a defined territory. These distributors also typically
market other medical products, although the Company seeks to obtain covenants
from its distributors prohibiting them from marketing medical devices that
compete directly with the Company's products. The Company's distributors
typically purchase the Company's products at a discount from list price and
resell the products to hospitals, clinics and physicians. Sales to international
distributors are usually denominated in United States dollars. The end-user
price is determined by the distributor and varies from country to country.
The Company's international sales are dependent upon the marketing efforts
of, and sales by, a limited network of distributors. The Company relies on these
distributors to assist it in obtaining product registration and reimbursement
approvals in certain international markets. The Company's current strategy is to
operate internationally through distributors with an established franchise in
the field of gynecology. If a distributor were to fail to invest adequate
capital promoting the Company's products and training physicians in the proper
techniques for utilizing the Company's products, or were to cease operations,
the Company would likely be unable to achieve significant sales in the subject
territory. In addition, because the Company has strategically replaced several
of its international distributors, it has only limited sell-through experience
with its current distributors. Furthermore, the Company does not currently have
distributors in a number of international markets that it has targeted and will
need to establish additional international distribution relationships. There can
be no assurance that the Company will engage qualified distributors in these
markets in a timely manner, if at all. The failure to engage such
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distributors would have a material adverse effect on the Company's business,
financial condition and results of operations.
A number of risks are inherent in international operations and transactions.
International sales and operations may be limited or disrupted by the imposition
of government controls, changes in regulatory requirements or interpretations
thereof, export license requirements, political instability, trade restrictions,
changes in tariffs, and difficulties in staffing, coordinating and managing
international operations. Additionally, the Company's business, financial
condition and results of operations may be adversely affected by fluctuations in
international currency exchange rates as well as constraints on the Company's
ability to maintain or increase prices. There can be no assurance that the
Company will be able to successfully commercialize its current or future
products in any international market.
A substantial portion of the Company's revenues to date have been derived
from products sold for use in clinical studies. Of the Company's sales for the
fiscal year ended December 31, 1996, 68% were derived from domestic sales and
32% were derived from international sales. Sales to the Company's distributor in
the Americas (Mallinckrodt Group, Inc.), the Company's distributor in the United
Kingdom (Schering Health Care, Ltd.) and a domestic customer (Gleicher &
Associates, M.D.) accounted for approximately 46%, 19% and 11%, respectively, of
total sales for the year ended December 31, 1996.
The Company's products have generated limited revenue 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 and
healthcare payors, even if reimbursement and necessary international and United
States regulatory approvals are obtained. The Company believes that
recommendations and endorsements by physicians will be essential for market
acceptance of the Company's products, and there can be no assurance that any
such recommendations or endorsements will be obtained. The Company believes that
physicians will not use the Company's products unless they determine, based on
clinical data and other factors, that these systems are an attractive
alternative to other means of diagnosing and treating diseases and disorders of
the female reproductive system, and that the products offer clinical utility in
a cost-effective manner. Acceptance among physicians will also depend upon the
Company's ability to train interventional gynecologists and other potential
users of the Company's products in new interventional techniques, and the
willingness of such users to learn these new techniques. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
PATENTS, TRADE SECRETS AND LICENSES
Conceptus's policy is to aggressively protect its proprietary position by,
among other things, filing United States 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 in-licensed technology (from Target) by filing
procedure-specific method patents wherever possible for the use of the Company's
products in new clinical applications, as well as aggressively pursuing patents
for all its other inventions and developments.
As of March 1, 1997, Conceptus had applied for 15 United States patents,
three of which have been issued to the Company, and has filed 10 foreign
patents. The Company's issued patents contain claims regarding guidewire
manipulation, a novel guidewire design and a delivery mechanism for a tubal
occlusion device. The pending applications cover various aspects of the
Company's proprietary tubal access platform technology, including certain claims
specific to falloposcopy, as well as the Company's S/TOP device, products
allowing the use of physiologic solution during operative hysteroscopy and other
products that are currently, or in the future may be, used in conjunction with
the Company's product systems. Conceptus is also the licensee (from Target) for
exclusive use in the field of reproductive physiology, of substantial technology
developed by Target as described below, and has granted to Target an exclusive
license in certain fields of interventional medicine outside of the field of
reproductive physiology to certain
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Conceptus technology. Conceptus's exclusive license of Target's technology is
applicable to all technology available as of February 1, 1996. Conceptus does
not have any preferential rights for Target technology developed following that
date. As of March 1, 1997, Target held, and Conceptus exclusively licensed from
Target within the field of reproductive physiology, 44 issued United States
patents, 76 United States patent applications and numerous foreign patents
issued and applications pending covering various aspects of its products and
core technology. Target's issued patents relate to the design of Target's
micro-catheters, the initial patent for which expires in June 2006, certain
aspects of guidewire design and other important aspects of Target's
micro-catheter, guidewire and micro-coil technologies. In the event that such
Target patents are at any time invalidated, the Company's proprietary position
in the marketplace would be severely compromised. In addition, should the Target
technology licensed to the Company be found to infringe upon a third party's
technology, the Company's sale of products based on such infringing Target
technology could be limited. Finally, in the event that the Company materially
breaches the terms of its license from Target, Target will have the right to
terminate the license. Any such termination of this license would deprive the
Company of the right to develop or sell products based on the licensed
technology, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's ability to compete effectively will depend substantially on
its ability to develop and maintain proprietary aspects of its technology. There
can be no assurance that the Company's three issued patents, any future patents
that may be issued as a result of the Company's United States or foreign patent
applications, or the patents under which the Company has license rights, will
offer any degree of protection to the Company's products against competitive
products. There can be no assurance that any patents that may be issued or
licensed to the Company or any of the Company's patent applications will not be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
industry have employed intellectual property litigation to gain a competitive
advantage. There can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings declared by the United States Patent and Trademark Office ("USPTO")
to determine the priority of inventions. The defense and prosecution of
intellectual property 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
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations 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.
A patent issued to Target and subject to Target's license to the Company,
which contains claims relating to the design of the Company's Variable Softness
Catheters (the "Target patent"), has been the subject of four reexamination
proceedings in the United States Patent and Trademark Office ("USPTO").
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Following the completion of the first such proceeding, the USPTO issued a
reexamination certificate and confirmed the patentability of the patent claims
set forth in the certificate. Requests for second, third and fourth
reexaminations of the patent were initiated by one of Target's competitors,
SciMed Life Systems, Inc. ("SciMed"), a subsidiary of BSC, and after the USPTO's
review of such petitions Target received notice from the USPTO that it had
reaffirmed the patentability of the claims of the Target patent. Notwithstanding
this result, no assurance can be given that SciMed will not mount a legal
challenge to the validity of the Target patent or that Target would prevail in
any such action. In November 1994, Target filed a lawsuit in United States
District Court against SciMed and Cordis Endovascular Systems, Inc. ("Cordis"),
a subsidiary of Johnson & Johnson Inc., alleging infringement of a Target patent
relating to variable stiffness in microcatheters, and seeking damages and
preliminary and permanent injunctive relief. The defendants responded,
challenging the validity of the patent, denying infringement, and raising other
defenses. In May 1996, the District Court granted Target's motion for an
injunction prohibiting the defendants from continuing to sell the products
alleged to infringe the patent. In July 1996, the United States Court of Appeals
for the Federal Circuit stayed the injunction pending an appeal by the
defendants, and the Court of Appeals heard oral argument on the appeal in
January 1997. Any invalidation of the Target patent could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On January 20, 1997, Target and BSC announced the signing of a definitive
agreement to merge in a tax-free stock-for-stock transaction. As a result of the
merger, which is expected to close during the second calendar quarter of 1997,
Target will become a separate business unit of BSC. Following the consummation
of the merger, it is anticipated that Target will continue the litigation of
Cordis.
Conceptus also relies upon trade secrets and technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute appropriate confidentiality and assignment of inventions agreements
in connection with their employment, consulting or advisory relationship with
the Company. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company. There can be no assurance,
however, that these agreements will not be breached or that Conceptus will have
adequate remedies for any such breach. Furthermore, no assurance can be given
that competitors will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
proprietary technology, or that Conceptus can meaningfully protect its rights in
unpatented proprietary technology.
GOVERNMENT REGULATION
UNITED STATES
The research, development, manufacture, labeling, distribution and marketing
of the Company's products are subject to extensive and rigorous regulation by
the FDA and, to varying degrees, by state and foreign regulatory agencies. The
Company's products are regulated in the United States as medical devices
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by the FDA under the Federal Food, Drug, and Cosmetic Act (the "FDC Act") and
most require clearance or approval by the FDA prior to commercialization. In
addition, material changes or modifications to medical devices also are subject
to regulatory review and clearance or approval. Under the FDC Act, the FDA
regulates the research, clinical testing, manufacturing, safety, labeling,
storage, record keeping, advertising, distribution, sale and promotion of
medical devices in the United States. The testing for, preparation of and
subsequent review of applications by the FDA and foreign regulatory authorities
is expensive, lengthy and uncertain. The failure by the Company to comply with
FDA requirements could result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, the government's refusal to grant premarket clearance or premarket
approval for devices, and criminal prosecution. Accordingly, the Company has
invested in building an experienced team of regulatory professionals. For
example, the Company's Senior Vice President, Clinical Research, Regulatory
Affairs and Quality Assurance was appointed by the FDA to its OB/GYN Advisory
Panel.
The FDA also has the authority to require clinical testing of certain
medical devices. If clinical testing of a device is required and if the device
presents a "significant risk," an IDE application must be approved prior to
commencing clinical trials. The IDE application must be supported by data,
typically including the results of laboratory and animal testing. If the IDE
application is approved by the FDA, clinical trials may begin at a specific
number of investigational sites with a maximum number of patients, as approved
by the agency. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such costs do not exceed
recovery of the costs of manufacture, research, development and handling. The
clinical trials must be conducted under the auspices of an IRB pursuant to FDA
regulations.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain premarket
notification clearance under Section 510(k) of the Federal Food, Drug, and
Cosmetic Act ("510(k)") or a premarket approval ("PMA"). In addition, material
changes to medical devices are also subject to FDA review and clearance or
approval. If a medical device manufacturer or distributor can establish, among
other things, that a device is "substantially equivalent" in intended use and
technological characteristics to certain legally marketed devices, for which the
FDA has not required a PMA, the manufacturer or distributor may seek clearance
from the FDA to market the device by filing a 510(k). Though generally believed
to be a shorter, less costly regulatory path than a PMA, the 510(k) may need to
be supported by appropriate data establishing to the satisfaction of the FDA the
claim of substantial equivalence to the predicate device. In addition, the FDA
may require review by an advisory panel as a condition for 510(k) clearances,
which can further lengthen the regulatory process. In recent years, the FDA has
been requiring a more rigorous demonstration of substantial equivalence.
Following submission of the 510(k), the manufacturer or distributor may not
place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information, including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA. Such a request for additional
information or determination that the device is not substantially equivalent
would delay market introduction of the products that are the subject of the
510(k).
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA. A PMA must be supported by extensive data,
including, laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device as well as extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. The PMA approval process can be lengthy, expensive and uncertain.
FDA review of a PMA generally takes approximately two years or more from the
date of filing to complete. If granted, the
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approval of the PMA may include significant limitations on the indicated uses
for which a product may be marketed. The PMA process can take several years from
initial filing and requires the submission of extensive supporting data and
clinical information. No assurance can be given that any future products or
applications developed by the Company will not require approval under the more
lengthy and expensive PMA process. If the Company is required to obtain approval
for any products pursuant to the PMA procedure or, if the 510(k) process with
respect to any products is extended for a considerable length of time, the
commencement of commercial sales of the Company's products will be delayed
substantially.
To date, the Company has received five 510(k) clearances for certain
diagnostic and therapeutic indications of its T-TAC system. In addition, the
Company received 510(k) clearance in January 1997 for its STARRT Falloposcopy
system, for diagnosis of PTO. The Company received 510(k) clearance in March
1996 for its hysteroscopy device as a stand-alone device for the diagnosis of
uterine (as opposed to tubal) disorders. In February 1997, Conceptus received
510(k) clearance for its Resectoscope Safety Sheath in urology applications.
The Company is in the process of finalizing the material composition of its
S/TOP device. The use of certain materials may require that the device be
evaluated as a drug rather than as a device, and thus the FDA's IND and NDA
regulations would be applicable to the clinical study and commercialization of
the product. Otherwise the product will be treated as a medical device and
require an IDE and a PMA. The steps required before a drug may be marketed in
the United States include preclinical and laboratory tests, the submission to
the FDA of an application for an IND which must become effective before clinical
trials may commence, adequate and well controlled clinical trials to establish
the safety and efficacy of the drug, the submission to the FDA of an NDA, and
FDA approval of the NDA prior to any commercial sale or shipment of the product.
In November 1995, the Company met with the appropriate sections of both the
Office of Device Evaluation and the Office of Drug Evaluation of the FDA to
discuss their respective new product approval requirements. Based upon the
information obtained during these meetings, the Company does not believe that
there would be a material difference in the regulatory requirements nor the
product approval review cycle times between the drug and device regulatory
groups within the FDA.
There can be no assurance that the Company will be able to obtain necessary
510(k) clearances or PMA or NDA approvals to market its products for the
intended uses on a timely basis, if at all, and delays in receipt of or failure
to receive such clearances or approvals, the loss of previously received
clearances or approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, regulatory clearances,
if granted, may include significant limitations on the indicated uses for which
a product may be marketed.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the CDHS and to list its products with
the FDA. As such, the Company will be periodically inspected by both the FDA and
CDHS for compliance with GMP and other applicable regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner. In July 1994, the Company's San Carlos facility was
inspected by the CDHS with no observations, and the Company was subsequently
granted a California medical device manufacturing license. In February 1997, the
Company's San Carlos facility was inspected by the CDHS with only one
observation, and has been recommended for a California drug manufacturing
license. In March 1997, the Company was inspected by the FDA, and is in
substantial compliance with all FDA requirements including FDA GMP for medical
devices.
The Company is required to provide information to the FDA on death or
serious injuries that its medical devices have allegedly caused or contributed
to, as well as product malfunctions that would likely cause or contribute to
death or serious injury if the malfunction were to recur. In addition, the FDA
strictly prohibits the marketing of approved devices for uses other than those
specifically cleared for marketing by the FDA. If the FDA believes that a
company is not in compliance with the law or regulations, it can
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institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the company, its
officers and its employees. Failure to comply with the regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The promotion of most products regulated by the FDA is subject to both FDA
and Federal Trade Commission jurisdiction. The Company is also subject to
regulation by the Occupational Safety and Health Administration and by other
government entities.
Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business, financial condition or results of operations.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the Company's products may be marketed. In addition, in
order for companies to obtain such approvals, the FDA and certain foreign
regulatory authorities impose numerous additional requirements with which
medical device manufacturers must comply. FDA enforcement policy strictly
prohibits the promotion of approved medical devices for uses other than those
specifically cleared for marketing by the FDA. The Company will be required to
adhere to applicable FDA regulations regarding GMP and similar regulations in
other countries, which include testing, control, and documentation requirements.
Ongoing compliance with GMP and other applicable regulatory requirements will be
monitored through periodic inspections by federal and state agencies, including
the FDA and the CDHS, and by comparable agencies in other countries. Failure to
comply with applicable regulatory requirements, could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of approvals and criminal prosecution. Changes in existing
regulations or adoption of new government regulations or policies could prevent
or delay regulatory approval of the Company's products.
INTERNATIONAL
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ significantly from FDA requirements. Some countries have historically
permitted human studies earlier in the product development cycle than
regulations in the United States permit. Other countries, such as Japan, have
requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in others.
The European Union has promulgated rules which require that 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 applicable European
Union Medical Device Directives. The ISO 9000 series of standards for quality
operations have been developed to ensure that companies know the standards of
quality to which they must adhere to receive European Union certification. ISO
9000 certification is one of the CE mark certification requirements. Failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in member countries of the European Union after mid-1998. The
Company is in the process of developing and implementing policies and procedures
that are intended to allow the Company to receive ISO 9000 qualification of its
processes in 1997. There can be no assurance that the Company will be successful
in meeting certification requirements. Many countries in which the Company
currently operates or intends to operate either do not currently regulate
medical devices or have minimal registration requirements; however, these
countries may develop more extensive regulations in the future that could
adversely affect the Company's ability to market its products. In addition,
significant costs and requests by regulators for additional information may be
encountered by the Company in its
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efforts to obtain regulatory approvals. Any such events could substantially
delay or preclude the Company from marketing its products in the United States
or internationally.
Export sales of investigational PMA devices or devices not cleared for
commercial distribution in the United States to certain countries are subject to
FDA export permit requirements. In order to obtain such a permit, the Company
must provide the FDA with documentation from the medical device regulatory
authority of the country in which the purchaser is located, stating that the
sale of the device is not a violation of that country's medical device laws.
Recent regulations eliminate export approval requirements for investigational
devices subject to an approved IDE which are being imported into certain
countries.
THIRD-PARTY REIMBURSEMENT
In the United States, hospitals, physicians and other healthcare providers
that purchase medical devices generally rely on third-party payors, such as
private health insurance plans, to reimburse all or part of the costs associated
with the treatment of patients.
The Company's success will depend upon, among other things, its ability to
obtain satisfactory reimbursement from healthcare payors for its products. It is
also anticipated that the Company's Hysteroscopy system products will be covered
within the hysteroscopy procedure reimbursement codes. Reimbursement in the
United States for the Company's tubal catheterization products is currently
available from most third-party payors, including most major private health care
insurance plans and Medicaid, under existing procedure codes. Although
reimbursement for catheterization procedures has generally been available in the
United States, there can be no assurance that this will continue to be the case.
The Company does not expect that third-party reimbursement in the United States
will be available for use of its other products unless and until FDA clearance
or approval is received. There can be no assurance, even if the Company's
products are cleared by the FDA for new clinical applications, that full
reimbursement will be available for such procedures. If FDA clearance or
approval is received, third-party reimbursement for these products will be
dependent upon decisions by individual health maintenance organizations, private
insurers and other payors. However, the Company believes that procedures using
its STARRT system may be reimbursed in the United States under existing
procedure codes for diagnosis and re-establishment of patency of the fallopian
tubes and, if applicable, for related interpretation of such procedures.
However, there can be no assurance that such procedure codes will remain
available or that the reimbursement under these codes will be adequate. Given
the efforts to control and decrease health care costs in recent years, there can
be no assurance that any reimbursement will be sufficient to permit the Company
to achieve or maintain profitability. The Company could also be adversely
affected by changes in reimbursement policies of government or private
healthcare payors, particularly to the extent that any such changes affect
reimbursement for therapeutic or diagnostic catheterization procedures in which
the Company's products are used. Failure by physicians, hospitals and other
users of the Company's products to obtain sufficient reimbursement from
healthcare payors for procedures in which the Company's products are used, or
adverse changes in government and private third party payors' policies toward
reimbursement for such procedures, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Market acceptance of the Company's products in international markets may be
dependent in part upon the availability of reimbursement within prevailing
healthcare payment systems. Reimbursement systems in international markets vary
significantly by country, and by region within some countries, and reimbursement
approvals must be obtained on a country-by-country basis. Many international
markets have government managed health care systems that govern reimbursement
for new devices and procedures. In most markets, there are private insurance
systems as well as government-managed systems. As in the United States, the
Company expects that Hysteroscopy system products will be covered within the
hysteroscopy procedure reimbursement framework. Large-scale market acceptance of
the Company's tubal catheterization, falloposcopy, sterilization and other
products will depend on the availability and level of reimbursement in
international markets targeted by the Company. Currently, the Company has been
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informed by its international distributors that the tubal catheterization system
has been approved for reimbursement in countries in which the Company markets
its products. The Company's falloposcopy system has been approved for
reimbursement only in Australia. Obtaining reimbursement approvals can require
12 to 18 months or longer. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
amount, or at all. Failure to obtain such approvals could have a material
adverse effect on market acceptance of the Company's products in the
international markets in which the Company is seeking approvals and could have a
material adverse effect on the Company's sales, business, financial condition
and results of operations.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of its products will be required to obtain reimbursement.
Availability of reimbursement will depend on the clinical efficacy and cost of
the Company's systems. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either government or private reimbursement systems, or that
physicians will support and advocate reimbursement for use of the Company's
systems for all indications intended by the Company. Failure by physicians,
hospitals and other users of the Company's products to obtain sufficient
reimbursement from health care payors or adverse changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
In the infertility area, the Company believes its primary current
competition to be existing methods for diagnosing and treating diseases and
disorders of the fallopian tubes. Accordingly, the Company competes with
manufacturers of products that are used in other methods for diagnosing and
treating tubal diseases and disorders, such as manufacturers of laparoscopic and
hysteroscopic devices and other products that provide more invasive access to
the fallopian tubes. The Company also competes with certain other companies that
manufacture catheters and guidewires for tubal catheterization, and
falloposcopic devices. Additionally, certain smaller companies are developing
alternative catheter-based systems for the diagnosis and treatment of female
reproductive disorders that may compete directly with the Company's systems.
In the therapeutic hysteroscopy area, there are four major endoscope
companies (Storz, Olympus, Circon, and Wolf) that account for the majority of
sales of the equipment and instruments used to perform these procedures.
Although the Company has what it believes to be significant intellectual
property protection for its products, there can be no assurance that these
companies or others (e.g. electrosurgical generator manufacturers) will not
develop technology to enable electrosurgical therapeutic hysteroscopy to be
performed with isotonic solution. The major endoscope companies and others also
market cutting loops and coagulating roller balls which would be directly
competitive with those manufactured and marketed by the Company. There are also
a number of companies developing devices to perform endometrial ablation using
different energy sources. There are also a number of companies developing and
selling devices to perform fibroid resections using a variety of energy sources,
which would be competitive with the Company's morcellator device.
The Company believes that its products have distinct advantages over those
of its competitors based on the Company's advanced proprietary micro-catheter
and guidewire technologies and its proprietary resectoscope safety sheath
technology. However, many of the Company's competitors have substantially
greater name recognition and financial resources than the Company and have
greater resources and expertise in research and development, obtaining
regulatory approvals, manufacturing and marketing. Certain of these companies
are developing and marketing devices for the diagnosis and treatment of
disorders of the female reproductive system and others may choose to enter this
market at a later date.
26
<PAGE>
There can be no assurance that the Company's competitors will not succeed in
developing technologies and products that are more effective or less costly than
those developed by the Company or that would render the Company's products
obsolete or noncompetitive. Additionally, there can be no assurance that the
Company will be able to compete effectively against such competitors based on
its abilities to manufacture, market and sell its products.
The Company expects competition to increase in the emerging market for
devices designed to diagnose and treat reproductive disorders. As the Company
commercializes its S/TOP system, it expects to compete against surgical
procedures for permanent contraception, mechanical devices and other
contraceptive methods. The Company also competes with other companies for
clinical sites to conduct trials. The Company believes that the primary
competitive factors in the market for tubal catheterization, falloposcopy and
hysteroscopy products are safety, efficacy, ease of use, reliability,
cost-effectiveness, degree of invasiveness, patient recovery time, absence of
significant side effects, availability of third-party reimbursement, and
physician and public awareness of the existence and efficacy of products. The
medical device industry is characterized by rapid and significant technological
change. The length of time required for product development and regulatory
approval plays an important role in a company's competitive position.
Consequently, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development and
commercialization of new products. Product development involves a high degree of
risk and there can be no assurance that the Company's research and development
efforts will result in commercially successful products. The Company believes
that it competes favorably with respect to these factors, although there can be
no assurance that it will continue to do so and that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves an inherent risk of exposure to product
liability claims and product recalls. Although the Company has not experienced
any product liability claims to date, there can be no assurance that the Company
will be able to avoid significant product liability claims and potential related
adverse publicity. The Company currently maintains product liability insurance
with coverage limits of $4,000,000 per occurrence and an annual aggregate
maximum of $4,000,000, which the Company believes is comparable to that
maintained by other companies of similar size serving similar markets. However,
there can be no assurance that product liability claims in connection with
clinical trials or sale of the Company's products will not exceed such insurance
coverage limits, which could have a material adverse effect on the Company, or
that such insurance will continue to be available on commercially reasonable
terms, or at all. In addition, the Company may require increased product
liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of March 1, 1997, the Company employed 62 individuals, 24 of whom were
engaged directly in research, development, regulatory and quality assurance
affairs, 9 in manufacturing and 29 in marketing, sales and administrative
positions. The Company also contracts with outside consultants. None of the
Company's employees is covered by a collective bargaining agreement. Conceptus
believes that it maintains good relations with its employees. The Company is
dependent upon a number of key management and technical personnel. The loss of
the services of one or more key employees could have a material adverse effect
on the Company's business financial condition and results of operations. The
Company's success will also depend on its ability to attract and retain
additional highly qualified management and technical personnel. The Company
faces intense competition for qualified personnel, many of whom are
27
<PAGE>
often subject to competing employment offers, and there can be no assurance that
the Company will be able to attract and retain such personnel. Furthermore, the
Company relies on the services of several medical and scientific consultants,
all of whom are employed on a full-time basis by hospitals or academic or
research institutions. Such consultants are therefore not available to devote
their full time or attention to the Company's affairs.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of February 28,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Kathryn A. Tunstall............................. 46 President, Chief Executive Officer and Director
Lee A. Blumenfeld, M.D. ........................ 36 Vice President, Worldwide Sales and Marketing
Cynthia M. Domecus.............................. 37 Senior Vice President, Clinical Research,
Regulatory Affairs and Quality Assurance
Sanford Fitch................................... 56 Senior Vice President, Chief Financial Officer
and Director
James J. Messemer............................... 38 Vice President, Business Development
Julian N. Nikolchev............................. 42 Chief Technology Officer
</TABLE>
MS. TUNSTALL joined Conceptus in July 1993 as President, Chief Executive
Officer and a director. Prior to joining Conceptus, Ms. Tunstall spent seven
years as an executive officer and in senior marketing positions of the Edwards
Less Invasive Surgery Division of Baxter International ("Baxter"), a division
engaged in the research and development, manufacturing, and marketing of
cardiovascular catheters, serving as President from June 1990 to June 1993 and
serving as Vice President and Director of Worldwide Sales and Marketing from
November 1986 to June 1990. From 1980 to 1986, Ms. Tunstall held various
positions in manufacturing and marketing of McGaw Laboratories, a pharmaceutical
and medical device company, serving most recently as Vice President of
Marketing. Ms. Tunstall holds a B.A. in Economics from the University of
California and has also completed graduate level studies in Business and
Healthcare Administration. She serves as a director of RESOLVE, a non-profit
infertility support, education and advocacy organization.
DR. BLUMENFELD joined Conceptus in September 1995 as Vice President,
Worldwide Marketing and Marketing Development. In November 1996 Dr. Blumenfeld
was promoted to Vice President, Worldwide Sales and Marketing. From November
1994 to September 1995, he served as Director of Marketing for Baxter's Vascular
Graft Business Unit. From July 1993 to November 1994, Dr. Blumenfeld served as
Director of Marketing for all of Baxter's cardiovascular businesses in Japan.
From October 1992 to July 1993 he served as Director of Market and Business
Development for the Edwards Critical-Care Division of Baxter, and from August
1990 to October 1992, as Manager of Business Development. Dr. Blumenfeld holds
an M.B.A. from the Stanford University Graduate School of Business. He received
his M.D. from University of Illinois at Chicago and completed a two-year
residency in OB/GYN.
MS. DOMECUS served as Vice President, Clinical Research, Regulatory Affairs
and Quality Assurance of Conceptus from May 1994 until November 1996, when she
was promoted to Senior Vice President. From March 1992 to May 1994 she served as
Senior Director and Director of Regulatory and Quality Affairs for Systemix, a
biotechnology firm. From 1986 to 1992, Ms. Domecus served in varying regulatory
affairs capacities with Collagen Corporation, a biomedical device manufacturer,
serving most recently as Director of Regulatory Affairs from January 1991 to
March 1992. Ms. Domecus has been certified by the
28
<PAGE>
Regulatory Affairs Certification Board of the Regulatory Affairs Professional
Society. In 1995, Ms. Domecus was appointed by the FDA to its OB/GYN Advisory
Panel as the industry representative. Ms. Domecus holds a B.A. in Psychology
from the University of the Pacific.
MR. FITCH joined Conceptus as Vice President, Finance and Operations, Chief
Financial Officer and a director in December 1994 and was promoted to Senior
Vice President in February 1997. From January 1994 to December 1994, Mr. Fitch
served as Vice President, Finance and Operations and Chief Financial Officer of
Voyant Corporation, a video technology company. From December 1990 to January
1994, Mr. Fitch served as Chief Financial Officer of SanDisk Corp., a
manufacturer of flash memory devices. From November 1989 to August 1990, Mr.
Fitch served as Vice President, Finance and Operations and Chief Financial
Officer of Personics Corporation, an audio consumer products company. From 1983
through 1989, Mr. Fitch was the Chief Financial Officer of Komag Inc., a
manufacturer of rigid media for the disk drive industry. Mr. Fitch holds an
M.B.A. from the Stanford University Graduate School of Business.
MR. MESSEMER served as Vice President, Sales of Conceptus since joining the
Company in February 1993 until November 1996, when he was promoted to Vice
President, Business Development. From 1987 to February 1993, Mr. Messemer held a
variety of sales and sales management positions with SciMed Life Systems, a
medical device manufacturer and distributor, serving most recently as Area Sales
Director for the Northeast and Canada from January 1990 to January 1993. From
1984 to 1987, Mr. Messemer worked in sales in the Coronary Angioplasty and
Extracorporeal divisions of C.R. Bard, Inc. ("Bard"), a medical products
company. Prior to joining Bard, Mr. Messemer served as a sales representative
for Ciba Pharmaceutical Company, a pharmaceutical manufacturer. Mr. Messemer
holds a B.S. in Business Administration and Pre-Law from Texas Tech University.
MR. NIKOLCHEV, a founder of Conceptus, served as Vice President, Research
and Development and Business Development from December 1992 to November 1996,
when he was promoted to Chief Technology Officer. Mr. Nikolchev also served as a
director of the Company from December 1992 to January 1995. Prior to joining
Conceptus, he served as Manager of the New Ventures Group at Target from October
1991 to December 1992. From 1986 to 1992, Mr. Nikolchev served as Engineering
Manager and Vice President, Market and Business Development of MicroBionics, a
venture funded company he co-founded to develop silicon-based blood gas sensors
for critical care patient monitoring. From 1982 to 1986, he was Manager of the
Technology Management Program at SRI International. Mr. Nikolchev holds an M.S.
in Mechanical Engineering from Stanford University and an M.S. in Management of
Technology from the Massachusetts Institute of Technology.
FACTORS AFFECTING STOCK PRICE
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market prices of
the common stock of many publicly held medical device companies have in the past
been, and can in the future be expected to be, especially volatile. Factors such
as fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors, FDA
and international regulatory actions, changes in reimbursement levels,
developments with respect to patents or proprietary rights, public concern as to
the safety of products developed by the Company or others, changes in healthcare
policy in the United States and internationally, changes in stock market analyst
recommendations regarding the Company, its competitors or the medical device
industry generally, and changes in general market conditions may have a
significant impact on the market price of the Company's Common Stock.
Sales of substantial amounts of Common Stock of the Company (including
shares issued upon the exercise of outstanding options) in the public market
could materially adversely affect the market price of
29
<PAGE>
the Common Stock. Such sales also might make it more difficult for the Company
to sell equity securities or equity-related securities in the future at a time
and price that the Company deems appropriate.
In addition, certain holders of shares of Common Stock have the right, under
certain conditions, to participate in future Company registrations of the
Company's Common Stock. These registrations could prevent or limit the ability
of the Company to sell shares for its own account, could adversely affect the
market price of the Common Stock and could require the Company to incur
significant expenses.
ITEM 2. PROPERTIES
The Company occupies approximately 14,000 square feet in San Carlos,
California. The facility is subject to a lease which expires in August 1997. The
Company is in the process of negotiating for additional leased space and
believes that it will be able to lease additional space or renew its existing
lease as necessary. The current monthly rent is approximately $14,000. The
Company believes its current space is adequate for its immediate needs, but
anticipates doubling the leased square footage in 1997.
ITEM 3. LEGAL PROCEEDINGS
There is no material legal proceeding to which the Company is a party or to
which any of its properties are subject. No material legal proceedings were
terminated in the year ended December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders of the Company during
the fourth quarter of the fiscal year ended December 31, 1996.
30
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol CPTS since the effective date of the Company's initial public
offering on February 1, 1996. Prior to the initial public offering, no public
market existed for the Common Stock. The following table presents the high and
low closing sale prices for the Company's Common Stock as reported in the Nasdaq
National Market for the period indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Period from February 1, 1996 through March 31, 1996.................................. $ 22.25 $ 19.25
Period from April 1, 1996 through June 30, 1996...................................... $ 22.75 $ 16.50
Period from July 1, 1996 through September 30, 1996.................................. $ 16.75 $ 8.25
Period from October 1, 1996 through December 31, 1996................................ $ 13.50 $ 9.00
</TABLE>
As of February 28, 1997, the Company had approximately 148 stockholders of
record and approximately 900 beneficial owners of its Common Stock. The
Company's stock price may be subject to significant volatility, particularly on
a quarterly basis. Any shortfall in reveneue or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's Common Stock in any given period.
Additionally, the Company may not learn of, or be able to confirm, revenue or
earnings variations from estimates until late in the fiscal quarter, which could
result in an even more immediate and adverse effect on the trading price of the
Company's Common Stock. Finally, the Company participates in a highly dynamic
industry, which often results in significant stock price volatility.
The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. The Company intends
to retain future savings for reinvestment in its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant.
31
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company. This historical data should be read in conjunction with the attached
consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Form 10-K.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 18,
1992) TO YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $ - $ 389 $ 243 $ 664
Cost of sales......................................... - 718 1,021 1,208
------- ------------ ------------ ------------
Gross profit.......................................... - (329) (778) (544)
Operating costs and expenses:
Research & development.............................. 1,237 1,778 2,589 8,509
Selling, general & administrative................... 1,081 1,894 2,805 4,824
------- ------------ ------------ ------------
Total operating expenses.......................... 2,318 3,672 5,394 13,333
------- ------------ ------------ ------------
Loss from operations.................................. (2,318) (4,001) (6,172) (13,877)
Interest and investment income, net................... 62 125 323 2,185
------- ------------ ------------ ------------
Net loss.......................................... $ (2,256) $ (3,876) $ (5,849) $ (11,692)
------- ------------ ------------ ------------
------- ------------ ------------ ------------
Net loss per share.................................... $ (1.39)
------------
------------
Shares used in computing net loss per share........... 8,396
------------
------------
Pro forma net loss per share (1)...................... (1.15)
------------
------------
Shares used in computing pro forma net loss per share
(1)................................................. 5,091
------------
------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C> <C>
1993 1994 1995 1996
--------- --------- ---------- ----------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................... $ 1,260 $ 5,253 $ 5,082 $ 35,225
Working capital...................................................... 976 5,089 4,407 33,282
Total assets......................................................... 1,610 6,221 6,092 40,093
Long-term portion of debt and capital lease obligations.............. 22 264 153 34
Redeemable convertible preferred stock............................... 3,465 11,453 16,624 -
Deficit accumulated during development stage......................... (2,256) (6,132) (11,981) (23,673)
Total stockholders' equity (net capital deficiency).................. (2,254) (6,125) (11,877) 37,595
</TABLE>
- ------------------------
(1) See Note 1 to Notes to Consolidated Financial Statements for information
concerning calculation of pro forma net loss per share
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception on September 18, 1992, Conceptus has been primarily
engaged in the design, development and marketing of minimally invasive devices
for reproductive medical applications. The Company has a limited history of
operations and has experienced significant operating losses since inception.
Operating losses are expected to continue for at least the next several years as
the Company continues to expend substantial resources to fund clinical trials in
support of regulatory and reimbursement approvals, conduct research and
development, and expand marketing and sales activities.
The Company's primary near-term commercial products, the T-TAC and STARRT
Falloposcopy systems have generated limited sales to date. The Company commenced
commercial shipments of an earlier version of its STARRT Falloposcopy system in
March 1994 in order to begin a multicenter clinical study of the system in
Europe and Australia. Substantially all of the revenues in 1994 were derived
from the centers involved in this clinical study. The Company currently sells
its products to international markets through a limited number of distributors
who resell to physicians and hospitals. Sales to distributors are made on open
credit terms and may include purchase discounts. In 1995 and 1996, the Company
made adjustments to the profile of its distributors, resulting in replacement
and addition of new distributors in domestic and international markets. Although
the Company began marketing components of its T-TAC system in April 1995,
general marketing of the system commenced upon the receipt of a 510(k) clearance
for diagnosis of proximal tubal occlusion in August 1995. Sales in 1996 were
through a small direct sales force and two new significant distributors on open
credit terms and consisted primarily of commercial shipments of T-TAC products.
In the fourth quarter of 1996 the Company presented results from the IMSF
study of its STARRT Falloposcopy system. Study data showed that use of the
STARRT system altered infertility diagnosis in the majority of cases versus
conventional infertility diagnosis. The Company is developing a second
generation STARRT catheter designed to improve the ergonomics and performance of
the STARRT system. The Company is currently formulating its regulatory strategy
to obtain clearance or approval of this second generation catheter.
On November 26, 1996, the Company completed the acquisition of Microgyn, a
privately held medical device company developing products designed to improve
the safety and performance of resectoscope procedures, including therapeutic
hysteroscopy. The Company acquired all of the outstanding common stock of
Microgyn in exchange for $3.0 million in cash on the acquisition date and $1.0
million in cash or stock (at the option of Conceptus) payable six months after
the acquisition date, plus $752,000 due to assumption of certain liabilities and
related acquisition expenses. Additional contingent consideration in cash or
stock, at the option of Conceptus, is payable to the former shareholders of
Microgyn based upon meeting certain future milestones.
The acquisition was accounted for using the purchase method. Under the
purchase method, the results of operations of acquired companies are included
prospectively from the date of acquisition, and the aggregate acquisition cost
is allocated to the acquiree's assets, liabilities, and intangibles, if any,
based upon the fair market values on the date of acquisition. An independent
valuation, utilizing accepted valuation techniques, was obtained which allocated
the $4,752,000 aggregate acquisition cost as purchase of in-process research and
development. Consequently, the $4,752,000 was charged to research and
development expense in the month of acquisition. Based on the valuation, the
Company concluded that technological feasibility has not been reached and there
was no alternative use of the technology.
Certain of the Company's products are currently manufactured by certain
original equipment manufacturers while others are manufactured by Conceptus at
its location in San Carlos, California. If the
33
<PAGE>
T-TAC, STARRT, and Hysteroscopy products are successful, the Company expects to
increase its manufacturing operations in order to better control product costs
and increase gross margin. Future revenues and results of operations may
fluctuate significantly from quarter to quarter and will depend upon, among
other factors, actions relating to regulatory and reimbursement matters, the
extent to which the Company's products gain market acceptance, the rate at which
the Company establishes its domestic and international distributor network, the
timing and size of distributor purchases, the progress of clinical trials, and
the introduction of competitive products for diagnosis and treatment of the
female reproductive system.
This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
of operations could differ materially from those projected in the
forward-looking statements as a result of various factors including those noted
below, elsewhere in this report and in the Company's prospectus dated February
1, 1996 under the heading "Risk Factors."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Sales increased 173% to $664,000 in 1996 from $243,000 in 1995. This
increase was due to increased commercial shipments of the Company's T-TAC
products to a significant domestic distributor and increased sales to
international distributors. Sales decreased 38% in 1995 to $243,000 from
$389,000 in 1994. This decrease was primarily the result of sales to
distributors in 1994 for commencement of clinical trials by the Company in
Europe and Australia, which were not repeated in 1995. Sales to clinical trial
customers in 1996 were not significant. In 1995 and 1994, the Company estimated
that the proportion of sales for use in clinical trials were approximately 16%
and 81%, respectively. Sales to domestic customers represented 68% of sales in
1996 and 48% of sales in 1995. All of the Company's sales in 1994 were to
international customers.
Cost of sales increased 18% to $1.2 million in 1996 from $1.0 million in
1995. This increase was primarily due to increased unit shipments of T-TAC
products. In 1995, cost of sales increased 42%, or $303,000, from $718,000 in
1994 due to costs associated with increased personnel required to manufacture
the Company's products.
Research and development ("R&D") expenses, which include clinical and
regulatory expenses, increased to $3.8 million in 1996 from $2.6 million in 1995
and $1.8 million in 1994. The increase of $1.2 million in 1996 and the prior
year increases were primarily attributable to the increased number of R&D
employees and related use of supplies, prototype materials and inventory, and
increased expenses associated with supporting various clinical trials.
As discussed in the "Overview", the Company expensed $4.8 million of
acquired in-processes research and development in connection with the
acquisition of Microgyn.
Selling, general and administrative ("SG&A") expenses increased to $4.8
million in 1996 from $2.8 million in 1995 and $1.9 million in 1994. The $2.0
million increase in 1996 was primarily due to the growth in the number of United
States and European sales and marketing personnel, marketing expenses associated
with promoting the Company's products, increased administrative costs required
to support expanding operations, and increased administrative costs of being a
public company. The $900,000 increase in 1995 was primarily due to the growth in
the number of sales and marketing personnel and related expenses in Europe.
Net interest and investment income increased to $2.2 million in 1996 from
$323,000 in 1995 and $125,000 in 1994. The increases in 1996 and 1995 were due
to higher average cash balances from proceeds of the initial public offering in
February 1996 and a private placement of common stock in 1995. Proceeds from
these financing activities were invested in high grade short-term investments.
Interest expense for all periods was insignificant.
34
<PAGE>
As a result of the items discussed above, net loss increased to $11.7
million in 1996 from $5.8 million in 1995 and $3.9 million in 1994.
At December 31, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $18.6 million and $7.5
million, respectively. In addition, at December 31, 1996, the Company had
research credit carryforwards of approximately $375,000. The net operating loss
and credit carryforwards described above will expire, if not utilized, at
various dates beginning in the years 1998 through 2011. Utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to the change of ownership provisions of the Internal Revenue Code of 1986,
as amended. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
The Company has a limited history of operations. Since its inception in
September 1992, the Company has been engaged primarily in research and
development of its T-TAC, STARRT and S/TOP systems. The Company has generated
only limited revenues, primarily from sales in international markets for
clinical trials, and does not have experience in manufacturing, marketing or
selling its products in commercial quantities. The Company has experienced
significant operating losses since inception and, as of December 31, 1996, had
an accumulated deficit of $23.7 million. The Company expects its operating
losses to continue for at least the next several years as it continues to expend
substantial resources in funding clinical trials in support of regulatory and
reimbursement approvals, expansion of manufacturing, marketing and sales
activities and research and product development or acquisition. Due to the
expense and unpredictable nature of these activities, there can be no assurance
that the Company will achieve or sustain profitability in the future.
ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
provides an alternative to APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, in accounting for stock-based compensation issued to employees. SFAS
123 allows for a fair value-based method of accounting for employee stock
options and similar equity instruments. However, for companies that continue to
account for stock-based compensation arrangements under APB Opinion No. 25, SFAS
123 requires disclosure of the pro forma effect on net income and earnings per
share of its fair value-based accounting for those arrangements. These
disclosure requirements are effective for fiscal years beginning after December
15, 1995, or upon initial adoption of SFAS 123, if earlier. It is the Company's
intention to continue to account for employee stock options in accordance with
APB Opinion No. 25 and to adopt the "disclosure only" alternative described in
SFAS No. 123. As a result, impact on the Company's financial position and
operations in 1995 and 1996 was not material.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly exceeded
its sales, resulting in an accumulated deficit of $23.7 million at December 31,
1996. On February 1, 1996, the Company completed an initial public offering of
3,450,000 shares of the Company's common stock at $14.00 per share for net
proceeds of $44.1 million. Prior to the initial public offering, the Company
funded its operations since incorporation primarily through the private
placement of equity securities, as well as through interest income, equipment
financing and secured loan arrangements. Through December 31, 1995, the Company
raised approximately $16.6 million from the private placement of equity
securities.
At December 31, 1996, Conceptus had cash, cash equivalents, and investments
of $39.0 million compared with $5.1 million at December 31, 1995. The increase
in 1996 was due to $44.3 million of proceeds from the Company's initial public
offering and other stock issuances offset by $10.4 million used in 1996
operations. Of the $10.4 million used in 1996, approximately $3.8 million was
related to the
35
<PAGE>
acquisition of Microgyn. The remainder of the $6.6 million used in 1996 and $5.4
million used in 1995 was primarily to fund increasing levels of research and
development of the Company's products, international clinical trials, the
initial marketing of the Company's falloposcopy products internationally and in
the United States, and general and administrative expenses to support increased
operations.
Capital expenditures during 1996 were $375,000 compared with $170,000 in
1995. This increase was primarily to support increased headcount, acquire
equipment and tooling necessary to conduct research and development, and
increase the Company's manufacturing capacity. The Company plans to finance its
capital needs principally from its existing capital resources, and to the extent
available, bank and lease financing.
Conceptus believes that its existing capital resources will be sufficient to
fund its operations through 1998. However, the Company's future liquidity and
capital requirements will depend upon numerous factors, including the progress
of the Company's clinical research and product development programs, the receipt
of and the time required to obtain regulatory clearances and approvals, and the
resources the Company devotes to developing, manufacturing and marketing it
products. The Company's capital requirements will also depend on, among other
things, the resources required to hire and develop a direct sales force in the
United States and internationally, the resources required to expand
manufacturing capacity and facilities requirements and the extent to which the
Company's products generate market acceptance and demand. Accordingly, there can
be no assurance that the Company will not require additional financing within
this time frame and, therefore, may in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
Additional funding may not be available when needed or on terms acceptable to
the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are set forth in this Annual Report on
Form 10-K beginning on page 39.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
Certain information required by Part III is incorporated by reference from
the Company's definitive proxy statement (the "Proxy Statement") for its annual
meeting of stockholders to be held May 13, 1997, which Proxy Statement will be
filed within 120 days after the end of its fiscal year pursuant to Regulation
14A, and the information included therein is incorporated herein by reference to
the extent detailed below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the Company's executive officers
is set forth in "Item 1-- Business--Executive Officers of the Company" in this
Form 10-K. The information required by this item as to the Company's directors
is incorporated by reference from the information under the caption "Proposal
No.1 Election of Directors" in the Proxy Statement. The information required by
this item as to compliance with Section 16 of the Securities Exchange Act of
1934 is incorporated by reference from the information under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
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) Consolidated Financial Statements and Report of Ernst & Young LLP,
Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations Years Ended December 31, 1996,
1995 and 1994 and for the period from inception (September 18, 1992) to
December 31, 1996
Consolidated Statement of Changes in Redeemable Convertible Preferred
Stock and Shareholders' Equity (Net Capital Deficiency) for the period
from inception (September 18, 1992) to December 31, 1996
Consolidated Statements of Cash Flows Years Ended December 31, 1996,
1995, and 1994 and for the period from inception (September 18, 1992) to
December 31, 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules 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
- --------------- ----------------------------------------------------------------------------------------------------
<C> <S>
3.1(1) Amended and Restated Certificate of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
10.1(1) Form of Indemnification Agreement for directors and officers.
10.2(2) 1993 Stock Plan and forms of agreements thereunder.
10.3(1)(2) 1995 Employee Stock Purchase Plan and form of subscription agreement.
10.4(2)(4) 1995 Directors' Stock Option Plan and form of stock option agreement.
10.6(1)(3) Supplier Agreement dated March 29, 1995 between the Registrant and Advanced Cardiovascular Systems,
Inc.
10.7(1)(3) License Agreement dated December 28, 1992 between the Registrant and Target Therapeutics, Inc.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------------
<C> <S>
10.8(1) Secured Note Purchase Agreement dated March 30, 1994 between the Registrant and Target Therapeutics,
Inc.
10.9(1) Master Lease Agreement dated March 30, 1994 between the Registrant and Target Therapeutics, Inc.
10.10(1) Second Amended and Restated Rights Agreement dated May 26, 1995.
10.11(1)(2) Sun Life Assurance Company of Canada Standardized 401(K) Profit Sharing Plan and Trust, as amended.
10.12(3)(5) Distribution Agreement dated July 1, 1996 between the Registrant and Mallinckrodt Group, Inc.
10.13(6) Lease Agreement with Dani Investment Partners.
10.14(7) Agreement and Plan of Reorganization dated October 29, 1996 between the Registrant, Microgyn, Inc.
and CPTS Acquisition Corporation (a wholly-owned subsidiary of the Registrant), as amended
November 7, 1996.
10.15(8) Preferred Shares Rights Agreement, dated as of February 27, 1997, between the Registrant and
ChaseMellon Shareholder Services, L.L.C., including the Certificate of Designation of Rights,
Preferences and Privileges of Series A Participating Preferred Stock, the form of Rights
Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
11.1 Statement of computation of net loss per share.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (See Page 58 of this Report).
27.1 Financial Data Schedule.
</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 SB-2, as amended (File No 33-99890-LA), which became effective on
February 1, 1996.
(2) Management contract or compensatory plan or arrangement.
(3) Confidential treatment has been granted with respect to certain portions of
this Exhibit by order from the Securities and Exchange Commission or
requested.
(4) Incorporated by reference to an identically numbered exhibit filed in
response to Item 14(a) of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
(5) Incorporated by reference to an identically numbered exhibit filed in
response to Item 6(a) of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.
(6) Incorporated by reference to an identically numbered exhibit filed in
response to Item 6(a) of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.
(7) Incorporated by reference to Exhibit 2.1 filed in response to Item 7(c) of
the Registrant's Report on Form 8-K filed on December 10, 1996.
(8) Incorporated by reference to Exhibit 1 filed in response to Item 2 of the
Registrant's Form 8-A filed on February 28, 1997.
(b) REPORTS ON FORM 8-K
One Report on Form 8-K was filed on December 10, 1996 reporting the
acquisition of Microgyn, Inc. under Item 2 of Form 8-K. A Form 8-K/A was filed
on February 7, 1997 to file under Item 7 the financial statements of Microgyn
and the pro forma financial statements of Conceptus.
38
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................................................... 40
Audited Financial Statements
Consolidated Balance Sheets.................................................................................. 41
Consolidated Statements of Operations........................................................................ 42
Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Net
Capital Deficiency)........................................................................................ 43
Consolidated Statements of Cash Flows........................................................................ 45
Notes to Consolidated Financial Statements................................................................... 46
</TABLE>
39
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conceptus, Inc.
We have audited the accompanying consolidated balance sheets of Conceptus, Inc.
(a development stage company) as of December 31, 1996 and 1995, and the related
consolidated statements of operations, consolidated changes in redeemable
convertible preferred stock and stockholders' equity (net capital deficiency),
and consolidated cash flows for the years ended December 31, 1996, 1995 and
1994, and the period from inception (September 18, 1992) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Conceptus, Inc. (a
development stage company) at December 31, 1996 and 1995, and the consolidated
results of its operations and its consolidated cash flows for the years ended
December 31, 1996, 1995 and 1994, and the period from inception (September 18,
1992) to December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
February 3, 1997
40
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 16,939 $ 2,848
Short-term investments.................................................................. 18,286 2,234
Accounts receivable, net of allowance for doubtful accounts of $178 and $42 at December
31, 1996 and 1995, respectively....................................................... 105 13
Inventories............................................................................. 182 54
Other current assets.................................................................... 234 450
---------- ----------
Total current assets...................................................................... 35,746 5,599
Property and equipment, net............................................................... 543 468
Long-term investments..................................................................... 3,796 --
Other assets.............................................................................. 8 25
---------- ----------
$ 40,093 $ 6,092
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable........................................................................ $ 588 $ 576
Accrued compensation.................................................................... 455 301
Accrued acquisition costs............................................................... 1,000 --
Other accrued liabilities............................................................... 302 152
Current portion of debt and capital lease obligations................................... 119 163
---------- ----------
Total current liabilities................................................................. 2,464 1,192
Long-term portion of debt and capital lease obligations................................... 34 153
Commitments
Redeemable convertible preferred stock at amount paid in 3,853,957 shares issued and
outstanding at December 31, 1995, aggregate liquidation preference of $16,704 at
December 31, 1995....................................................................... -- 16,624
Stockholders' equity (net capital deficiency):
Preferred stock, $0.003 par value, 3,000,000 shares authorized, issuable in series -
Series B, Series C and Series D represent redeemable convertible preferred stock shown
above:
Series A, 666,666 convertible shares authorized, issued and outstanding; aggregate
liquidation preference of $500 at December 31, 1995................................. -- --
Common stock, $0.003 par value, 30,000,000 shares authorized; 9,206,795 and 196,248
shares issued and outstanding at December 31, 1996 and 1995, respectively............. 61,876 931
Stockholder notes receivable............................................................ (49) (49)
Deferred compensation................................................................... (559) (778)
Deficit accumulated during the development stage........................................ (23,673) (11,981)
---------- ----------
Total stockholders' equity (net capital deficiency)....................................... 37,595 (11,877)
---------- ----------
$ 40,093 $ 6,092
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
41
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 18,
YEARS ENDED DECEMBER 31, 1992) TO
-------------------------------- DECEMBER 31,
1996 1995 1994 1996
---------- --------- --------- --------------
<S> <C> <C> <C> <C>
Net sales........................................................ $ 664 $ 243 $ 389 $ 1,296
Cost of sales.................................................... 1,208 1,021 718 2,947
---------- --------- --------- --------------
Gross profit..................................................... (544) (778) (329) (1,651)
Operating expenses:
Research and development....................................... 3,757 2,589 1,778 9,361
Selling, general and administrative............................ 4,824 2,805 1,894 10,604
Acquired in-process research and development................... 4,752 - - 4,752
---------- --------- --------- --------------
Total operating costs and expenses............................... 13,333 5,394 3,672 24,717
---------- --------- --------- --------------
Operating loss................................................... (13,877) (6,172) (4,001) (26,368)
Interest and investment income, net.............................. 2,211 361 153 2,788
Interest expense................................................. (26) (38) (28) (93)
---------- --------- --------- --------------
Net loss......................................................... $ (11,692) $ (5,849) $ (3,876) $ (23,673)
---------- --------- --------- --------------
---------- --------- --------- --------------
Net loss per share............................................... $ (1.39)
----------
----------
Shares used in computing net loss per share...................... 8,396
----------
----------
Pro forma net loss per share..................................... $ (1.15)
---------
---------
Shares used in computing pro forma net loss per share............ 5,091
---------
---------
</TABLE>
See accompanying notes.
42
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ------------- --------- -----------
Issuance of common stock to founder at $0.09 per share
in December 1992 for cash............................ - $ - - $ - 25,000 $ 2
Issuance of Series A convertible preferred stock in
December 1992 for technology......................... - - 666,666 - - -
Issuance of Series B redeemable convertible preferred
stock at $3.00 per share in December 1992 for cash,
net of issuance costs of $35......................... 1,166,663 3,465 - - - -
Net loss from inception (September 18, 1992) to
December 31, 1993.................................... - - - - - -
--
--------- ----------- --------- --------- ---
Balances at December 31, 1993.......................... 1,166,663 3,465 666,666 - 25,000 2
Issuance of Series C redeemable preferred stock at
$4.80 per share in March and June 1994 for cash, net
of issuance costs of $33............................. 1,671,037 7,988 - - - -
Issuance of common stock at $0.30-$0.48 per share in
August and December 1994, pursuant to option
activity............................................. - - - - 2,723 1
Issuance of common stock at $0.30-$0.48 per share in
March and November 1994, pursuant to restricted stock
purchase plan........................................ - - - - 11,416 4
Issuance of common stock for $0.30 per share in March
1994, in exchange for note receivable................ - - - - 83,333 25
Net loss............................................... - - - - - -
--
--------- ----------- --------- --------- ---
Balances at December 31, 1994 (carried forward)........ 2,837,700 $ 11,453 666,666 $ - 122,472 $ 32
<CAPTION>
<S> <C> <C> <C> <C>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
STOCKHOLDER DURING THE EQUITY (NET
NOTE DEFERRED DEVELOPMENT CAPITAL
RECEIVABLE COMPENSATION STAGE DEFICIENCY)
--------------- ------------------- ------------- -------------
Issuance of common stock to founder at $0.09 per share
in December 1992 for cash............................ $ - $ - $ - $ 2
Issuance of Series A convertible preferred stock in
December 1992 for technology......................... - - - -
Issuance of Series B redeemable convertible preferred
stock at $3.00 per share in December 1992 for cash,
net of issuance costs of $35......................... - - - -
Net loss from inception (September 18, 1992) to
December 31, 1993.................................... - - (2,256) (2,256)
--
--- ------------- -------------
Balances at December 31, 1993.......................... - - (2,256) (2,254)
Issuance of Series C redeemable preferred stock at
$4.80 per share in March and June 1994 for cash, net
of issuance costs of $33............................. - - -
Issuance of common stock at $0.30-$0.48 per share in
August and December 1994, pursuant to option
activity............................................. - - 1
Issuance of common stock at $0.30-$0.48 per share in
March and November 1994, pursuant to restricted stock
purchase plan........................................ - - 4
Issuance of common stock for $0.30 per share in March
1994, in exchange for note receivable................ (25) - -
Net loss............................................... - - (3,876) (3,876)
--
--- ------------- -------------
Balances at December 31, 1994 (carried forward)........ $ (25) $ - $ (6,132) $ (6,125)
</TABLE>
See accompanying notes.
43
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REDEEMABLE SERIES A CONVERTIBLE
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- ------------------------ --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ------------- --------- ---------
Balances at December 31, 1994 (brought forward).... 2,837,700 $ 11,453 666,666 $ - 122,472 $ 32
Issuance of Series D redeemable preferred stock at
$5.10 per share in May and June 1995 for cash,
net of issuance costs of $12..................... 1,016,257 5,171 - - - -
Issuance of common stock for $0.48 per share in
January 1995, in exchange for note receivable.... - - - - 50,000 24
Issuance of common stock for cash in February
through November 1995 at $0.48 to $0.51 per
share............................................ - - - - 23,776 7
Deferred compensation related to grant of stock
options.......................................... - - - - - 868
Amortization of deferred compensation.............. - - - - - -
Net loss........................................... - - - - - -
--
--------- --------- --------- --------- ---------
Balances at December 31, 1995...................... 3,853,957 16,624 666,666 - 196,248 931
Conversion of redeemable preferred stock exercised
to common stock.................................. (3,853,957) (16,624) - - 3,853,957 16,624
Series A convertible preferred stock converted to
common stock..................................... - - (666,666) - 666,666 -
Initial Public Offering common stock shares issued
in February at $14.00 per share, net of issuance
costs of $4.3 million............................ - - - - 3,450,000 43,992
Issuance of common stock for cash in 1996 at $0.30
to $9.15 per share............................... - - - - 116,543 98
Issuance of common stock for cash in 1996 at
$8.7125 and $11.90 per share, pursuant to the
employee stock purchase plan..................... - - - - 18,524 182
Issuance of common stock for cash in 1996 at $3.00
and $4.80 per share, pursuant to exercisable
warrants......................................... - - - - 12,000 49
Net exercise of warrants........................... - - - - 892,857 -
Amortization of deferred compensation.............. - - - - - -
Net loss........................................... - - - - - -
--
--------- --------- --------- --------- ---------
Balances at December 31, 1996...................... - $ - - $ - 9,206,795 $ 61,876
--
--
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C> <C> <C>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
STOCKHOLDER DURING THE EQUITY (NET
NOTE DEFERRED DEVELOPMENT CAPITAL
RECEIVABLE COMPENSATION STAGE DEFICIENCY)
--------------- --------------- ------------ -------------
Balances at December 31, 1994 (brought forward).... $ (25) $ - $ (6,132) $ (6,125)
Issuance of Series D redeemable preferred stock at
$5.10 per share in May and June 1995 for cash,
net of issuance costs of $12..................... - - - -
Issuance of common stock for $0.48 per share in
January 1995, in exchange for note receivable.... (24) - - -
Issuance of common stock for cash in February
through November 1995 at $0.48 to $0.51 per
share............................................ - - - 7
Deferred compensation related to grant of stock
options.......................................... - (868) - -
Amortization of deferred compensation.............. - 90 - 90
Net loss........................................... - - (5,849) (5,849)
--- ----- ------------ -------------
Balances at December 31, 1995...................... (49) (778) (11,981) (11,877)
Conversion of redeemable preferred stock exercised
to common stock.................................. - - - 16,624
Series A convertible preferred stock converted to
common stock..................................... - - - -
Initial Public Offering common stock shares issued
in February at $14.00 per share, net of issuance
costs of $4.3 million............................ - - - 43,992
Issuance of common stock for cash in 1996 at $0.30
to $9.15 per share............................... - - - 98
Issuance of common stock for cash in 1996 at
$8.7125 and $11.90 per share, pursuant to the
employee stock purchase plan..................... - - - 182
Issuance of common stock for cash in 1996 at $3.00
and $4.80 per share, pursuant to exercisable
warrants......................................... - - - 49
Net exercise of warrants........................... - - - -
Amortization of deferred compensation.............. - 219 - 219
Net loss........................................... - - (11,692) (11,692)
--- ----- ------------ -------------
Balances at December 31, 1996...................... ($ 49) ($ 559) ($ 23,673) $ 37,595
--- ----- ------------ -------------
--- ----- ------------ -------------
</TABLE>
See accompanying notes.
44
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 18,
YEARS ENDED DECEMBER 31, 1992) TO
------------------------------- DECEMBER 31,
1996 1995 1994 1996
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss........................................................... $ (11,692) $ (5,849) $ (3,876) $ (23,673)
Adjustments to reconcile net loss to net cash used in operating
activities:
Charge for acquired in-process research and development.......... 4,752 -- -- 4,752
Depreciation and amortization.................................... 305 240 167 741
Amortization of deferred compensation............................ 219 90 - 309
Changes in operating assets and liabilities:
Accounts receivable............................................ (92) 113 (126) (105)
Inventories.................................................... (128) 170 (224) (182)
Other current assets........................................... 216 (335) (22) (234)
Accounts payable............................................... (397) 364 (24) 179
Accrued compensation........................................... 154 100 74 455
Other accrued liabilities...................................... 1,150 66 74 1,302
--------- --------- --------- --------------
Net cash used in operating activities.............................. (5,513) (5,041) (3,957) (16,456)
--------- --------- --------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of investments............................................ (34,469) (8,731) (5,091) (48,291)
Maturities of investments.......................................... 14,621 7,759 867 23,247
Sales of investments............................................... - 1,495 1,467 2,962
Purchase of Microgyn net of cash acquired.......................... (4,343) -- -- (4,343)
Capital expenditures............................................... (375) (170) (172) (938)
Increase in other assets........................................... 12 9 (8) (28)
--------- --------- --------- --------------
Net cash provided by (used in) investing activities................ (24,554) 362 (2,937) (27,391)
--------- --------- --------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock...................... - 5,171 7,988 16,624
Proceeds from issuance of common stock............................. 44,321 7 5 44,335
Proceeds from issuance of debt..................................... - - 209 209
Principal payments on debt and capital lease obligations........... (163) (147) (72) (382)
--------- --------- --------- --------------
Net cash provided by financing activities.......................... 44,158 5,031 8,130 60,786
--------- --------- --------- --------------
Net increase in cash and cash equivalents.......................... 14,091 352 1,236 16,939
Cash and cash equivalents at beginning of period................... 2,848 2,496 1,260 -
--------- --------- --------- --------------
Cash and cash equivalents at end of period......................... $ 16,939 $ 2,848 $ 2,496 $ 16,939
--------- --------- --------- --------------
--------- --------- --------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................................. $ 26 $ 38 $ 28 $ 93
--------- --------- --------- --------------
--------- --------- --------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Equipment acquired under capital lease obligations................. $ - $ 69 $ 233 $ 327
--------- --------- --------- --------------
--------- --------- --------- --------------
Issuance of common stock in exchange for note receivable........... $ - $ 24 $ 25 $ 49
--------- --------- --------- --------------
--------- --------- --------- --------------
</TABLE>
See accompanying notes.
45
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OWNERSHIP AND BUSINESS
Conceptus, Inc. ("Conceptus" or the "Company") was incorporated in the State
of Delaware on September 18, 1992 to design, develop, manufacture and market
innovative medical devices that provide minimally invasive access to the female
reproductive system. The Company's core technology, a line of catheters, coils,
and guide wires, is licensed for use in reproductive health applications from
Target Therapeutics, Inc. ("Target"). The technology was initially developed and
used by Target and is being modified and enhanced by Conceptus to develop
products for use in providing minimally invasive access to the female
reproductive system. Conceptus will market its products in the United States and
internationally.
The Company's activities since incorporation have primarily consisted of
establishing its facilities, recruiting personnel, conducting research and
development, applying for various regulatory approvals, performing clinical and
marketing studies, developing business and financial planning, raising capital
and commencement of minimal initial sales of products. Accordingly, the Company
is considered to be in the development stage.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Microgyn, Inc ("Microgyn"). All intercompany
accounts and transactions have been eliminated.
PUBLIC OFFERING
On February 1, 1996, the Company completed an offering of 3,000,000 shares
of its common stock at $14.00 per share for net proceeds of $38,260,000.
Subsequently, the underwriters exercised their overallotment of 450,000 shares
of common stock for net proceeds of $5,859,000. In connection with the offering,
all of the currently outstanding preferred stock converted to 4,520,623 shares
of common stock. In addition, Target exercised its option to net exercise its
1,000,000 share warrant, resulting in the net issuance of 892,857 shares of
common stock. Target also exercised its warrant for the purchase of 12,000
shares of common stock at an aggregate price of $48,600.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue at the time products are shipped. In 1996 and
1995, net sales include direct sales within the United States, as well as
through international and domestic distributors. In 1994, all of the Company's
net sales were to various distributors. These customers have no contractual
right of return or stock rotation privileges.
46
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options and preferred
stock) issued during the 12-month period prior to the public offering at prices
below the assumed public offering price have been included in the calculation as
if they were outstanding for all periods presented (using the treasury stock
method for stock options).
Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC staff policy, to common equivalent shares from
convertible preferred shares issued more than 12 months from the initial public
offering that will automatically convert upon completion of the Company's
initial public offering (using the if-converted method) from the original date
of issuance.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which provides an alternative to Accounting
Principles Board's Opinion No. 25 ("APB 25") "Accounting for Stock Issued to
Employees", in accounting for stock-based compensation issued to employees. SFAS
123 allows for a fair value-based method of accounting for employee stock
options and similar equity instruments. However, for companies that continue to
account for stock-based compensation arrangements under APB 25, SFAS 123
requires disclosure of the pro forma effect on net income and earnings per share
of its fair value-based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 31, 1995,
or upon initial adoption of SFAS 123, if earlier. It is the Company's intention
to continue to account for employee stock options in accordance with APB 25 and
to adopt the "disclosure only" alternative described in SFAS 123. As a result,
there was no impact on the Company's financial position upon adoption.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. The Company
maintains deposits with a financial institution in the U.S. and invests its
excess cash in U.S. government obligations and U.S. corporate notes which bear
minimal risk.
Management determines the appropriate classification of debt securities in
accordance with Statement 115 at the time of purchase. At December 31, 1996 and
1995, all debt securities are designated as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in stockholders' equity. The fair values for
marketable debt securities are based on quoted market prices. At December 31,
1996 and 1995, the fair value of investments approximates cost. The amortized
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
and
47
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest and investment income.
CONCENTRATION OF CREDIT RISK
The Company invests cash which is not required for immediate operating needs
principally in a diversified portfolio of financial instruments issued by
institutions with strong credit ratings. By policy, the amount of credit
exposure to any one institution, with the exception of U.S. government backed
securities, is limited. These investments are not collateralized and mature
within two years. The Company has not experienced significant losses on these
investments.
The Company's revenues to date consist of product revenues from distributors
located in Europe, Australia and the United States, and direct sales within the
United States. The Company does not require collateral and provides for
estimated credit losses at the time of sale. Such losses have not been
significant to date. One customer accounted for 11% and 26% of revenues, and 3%
and 9% of the accounts receivable balance at December 31, 1996 and 1995,
respectively. During 1996, two additional customers accounted for 46%, and 19%
of revenues, and 75% and 13% of the accounts receivable balance, respectively.
One additional customer accounted for 23% of revenues, and 13% of accounts
receivable during 1995. Export sales were $188,000 and $126,000 during the years
ended December 31, 1996 and 1995, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is based on
actual costs computed on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation,
which is calculated using the straight-line method over the estimated useful
lives of the respective assets, generally three to five years. Leasehold
improvements are amortized over the lesser of the lease term or the estimated
useful lives of the related assets.
2. ACQUISITIONS
On November 26, 1996, the Company completed the acquisition of Microgyn, a
privately held medical device company developing products designed to improve
the safety and performance of resectoscope procedures, including therapeutic
hysteroscopy. The Company acquired all of the outstanding common stock of
Microgyn in exchange for $3.0 million in cash on the acquisition date and $1.0
million in cash or stock (at the option of Conceptus) payable six months after
the acquisition date, plus $752,000 due to assumption of certain liabilities and
related acquisition expenses. Additional contingent consideration in cash or
stock, at the option of Conceptus, is payable to the former shareholders of
Microgyn based upon meeting certain future milestones.
The acquisition was accounted for using the purchase method. Under the
purchase method, the results of operations of acquired companies are included
prospectively from the date of acquisition, and
48
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
the aggregate acquisition cost is allocated to the acquiree's assets,
liabilities, and intangibles, if any, based upon the fair market values on the
date of acquisition. An independent valuation, utilizing accepted valuation
techniques, was obtained which allocated the $4,752,000 aggregate acquisition
cost as purchase of in-process research and development. Consequently, the
$4,752,000 was charged to research and development expense in the month of
acquisition. Based on the valuation, the Company concluded that technological
feasibility has not been reached and there was no alternative use of the
technology.
The following unaudited pro forma financial summary is presented as if the
operations of the Company and Microgyn were combined as of January 1, 1996. The
unaudited pro forma combined results are not necessarily indicative of the
actual results that would have occurred had the acquisition been consummated at
that date, or of the future operations of the combined entities. Nonrecurring
charges, such as the write-off of approximately $4.8 million of acquired
in-process research and development, are not reflected in the following pro
forma financial summary.
UNAUDITED PRO FORMA FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
---------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Net sales............................................................................ $ 623
Net loss............................................................................. (7,794)
Net loss per share................................................................... $ (0.93)
</TABLE>
3. RELATED PARTY TRANSACTIONS
LICENSE AGREEMENT
In December 1992, the Company entered into an agreement with Target under
which the Company received an exclusive, royalty-free license to use Target's
technology in the reproductive health applications field to make, use and sell
or otherwise distribute the Company's products, provided the Company's products
represent a substantial improvement, as defined in the agreement. As part of the
same agreement, the Company granted to Target an exclusive, royalty-free license
to use the Company's technology in a defined field of use. In exchange for the
Target license, the Company issued 666,666 shares of Series A preferred stock
and warrants to purchase 1,000,000 shares of common stock to Target at an
exercise price of $1.50 per share. The warrants expire on the earlier of
December 1996, an underwritten public offering of the Company's common stock in
which the aggregate proceeds are at least $7,500,000 and the price per share is
at least $5.00 per share, or the sale of substantially all the Company's assets.
In connection with the Company's initial public offering, Target exercised its
option to net exercise its 1,000,000 share warrant, resulting in the net
issuance of 892,857 shares of common stock.
FINANCING ARRANGEMENT
In March 1994, the Company entered into an equipment lease line (see Note 6)
and secured loan agreement with Target, which allows for borrowings of $300,000
and $209,000, respectively. The borrowings are secured by capital equipment and
bear interest at 8.5% per year. At December 31, 1996 and 1995,
49
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
the Company had two notes payable for a total of $40,000 and $106,000,
respectively, outstanding under the secured loan agreement. The notes are
payable over a 36-month and 48-month period. The annual amounts payable,
including interest, in 1997 to 1998 are $36,000 and $6,000, respectively. In
connection with these agreements, Target was issued a warrant to purchase 12,000
shares of the Company's common stock. The exercise price for 5,000 of these
shares is $3.00 per share and the remaining 7,000 shares have an exercise price
of $4.80 per share. As a result of the Company's initial public offering, Target
exercised its warrant at an aggregate price of $48,600.
OPERATIONS AND FACILITIES
In December 1992, the Company entered into a supply agreement with Target
whereby Target agreed to supply to and/or manufacture products and components
necessary for the Company to proceed with its research and development activity
under the license agreement described above. In 1996, 1995 and 1994, $15,000,
$49,000 and $123,000, respectively, was paid to Target under this supply
agreement. There were no amounts payable under this agreement at December 31,
1996 and 1995.
In addition, the Company pays certain employee benefits incurred by Target
on the Company's behalf. In 1996, approximately $177,000 ($237,000 and $256,000
in 1995 and 1994, respectively) was paid and at December 31, 1996 there were no
amounts payable ($35,000 at December 31, 1995). This agreement was discontinued
at December 31, 1996.
SERIES C FINANCING
In May 1994, Target purchased 52,083 shares of the Company's Series C
preferred stock at $4.80 per share. In connection with the Company's initial
public offering on February 1, 1996, the Series C preferred stock was converted
to common stock at a 1:1 ratio.
SERIES D FINANCING
In May 1995, Target purchased 49,019 shares of the Company's Series D
preferred stock at $5.10 per share. In connection with the Company's initial
public offering on February 1, 1996, the Series D preferred stock was converted
to common stock at a 1:1 ratio.
50
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials....................................................................... $ 134 $ 32
Finished goods and work-in-process.................................................. 48 22
--------- ---------
$ 182 $ 54
--------- ---------
--------- ---------
Property and equipment, net:
Machinery and equipment $ 356 $ 268
Office equipment and furniture and fixtures......................................... 855 568
Leasehold improvements.............................................................. 54 54
--------- ---------
1,265 890
Less accumulated depreciation and amortization...................................... (722) (422)
--------- ---------
Property and equipment, net......................................................... $ 543 $ 468
--------- ---------
--------- ---------
</TABLE>
5. INVESTMENTS
The following is a summary of cash and available-for-sale securities as of:
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
--------------------
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash......................................................................................... $ 95 $ 6
Cash equivalents:
Money market funds......................................................................... 7,847 58
Commercial paper........................................................................... 2,020 --
Certificates of deposit.................................................................... -- --
U.S. government obligations................................................................ 6,977 2,784
--------- ---------
$ 16,939 $ 2,848
--------- ---------
--------- ---------
Short-term investments:
U.S. government obligations................................................................ $ 11,033 $ 2,234
Corporate notes............................................................................ 7,253 --
--------- ---------
$ 18,286 $ 2,234
--------- ---------
--------- ---------
Long-term investments:
Corporate notes.............................................................................. $ 3,796 $ --
--------- ---------
--------- ---------
</TABLE>
51
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
The contractual maturities of the investments are as follows:
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
--------------------
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less...................................................................... $ 35,225 $ 5,082
Due after one year through two years......................................................... 3,796 --
--------- ---------
$ 39,021 $ 5,082
--------- ---------
--------- ---------
</TABLE>
6. COMMITMENTS
The Company leases its facility under an operating lease which expires in
August 1997. The total minimum annual rental commitment under the lease is
$112,000 in 1997. Rent expense for the years ended December 31, 1996, 1995 and
1994 and the period from inception (September 18, 1992) to December 31, 1996 was
$129,000, $110,000, $107,000 and $435,000, respectively.
At December 31, 1996 and 1995, assets acquired under noncancelable capital
leases with Target consist of office equipment with an aggregate cost of
$327,000, and accumulated amortization of $229,000 and $143,000, respectively.
Minimum future lease payments under the capital lease obligations with
Target as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31,
1997............................................................................................ $ 94
1998............................................................................................ 30
1999............................................................................................ 1
-----
Total minimum lease payments...................................................................... 125
Less amount representing interest................................................................. (11)
-----
Present value of net minimum lease payments....................................................... 114
Less current portion.............................................................................. (85)
-----
Long-term portion................................................................................. $ 29
-----
-----
</TABLE>
7. STOCKHOLDERS' EQUITY
1993 STOCK PLAN
The 1993 Stock Plan ("1993 Plan") was adopted in July 1993 and allows the
granting of options and restricted stock purchases for up to 1,575,000 shares of
common stock to employees, distributors,
52
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
consultants and directors. The Company has reserved 1,064,415 shares of its
common stock which may be issued with respect to outstanding options at December
31, 1996 under the 1993 Plan.
Stock options granted under the 1993 Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options may be granted to
employees with exercise prices of no less than the fair market value and
nonqualified options may be granted at exercise prices of no less than 85% of
the fair market value of the common stock on the date of grant, as determined by
the board of directors. The options expire no more than 10 years after the date
of grant. Options may be granted with different vesting terms from time to time
but generally provide for vesting of at least 25% of the total number of shares
per year. The options may include provisions permitting exercise of the option
prior to full vesting. Any unvested shares so purchased shall be subject to
repurchase by the Company at the original exercise price of the option. Such
repurchase rights generally lapse at a minimum rate of 25% per year from the
date the option was granted.
Activity under the plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS --------------------------
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Balance at inception (September 18, 1992)...................... -- -- --
Authorized..................................................... 475,000 -- --
Options granted................................................ (223,995) 223,995 $ 0.30
---------- ---------- --------------
Balance at December 31, 1993................................... 251,005 223,995 $ 0.30
Additional authorized.......................................... 333,333 -- --
Options granted................................................ (280,358) 280,358 $ 0.30-$0.48
Options exercised.............................................. -- (97,472) $ 0.30-$0.48
Options forfeited.............................................. 4,653 (4,653) $ 0.30-$0.48
---------- ---------- --------------
Balance at December 31, 1994................................... 308,633 402,228 $ 0.30-$0.48
Additional authorized.......................................... 766,667 -- --
Options granted................................................ (617,794) 617,794 $ 0.48-$9.15
Options exercised.............................................. -- (73,777) $ 0.30-$0.51
Options forfeited.............................................. 39,679 (39,679) $ 0.30-$9.15
---------- ---------- --------------
Balance at December 31, 1995................................... 497,185 906,566 $ 0.30-$9.15
Options granted................................................ (453,338) 453,338 $ 9.25-$19.75
Options exercised.............................................. -- (116,543) $ 0.30-$9.15
Options forfeited.............................................. 166,946 (166,946) $ 0.30-$10.50
---------- ---------- --------------
Balance at December 31, 1996................................... 210,793 1,076,415 $ 0.30-$19.75
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
53
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY
At December 31, 1996 and 1995, options to purchase 447,953 and 265,583
common shares, respectively, were exercisable. Included in the options granted
and exercised in 1995 are 50,000 shares of restricted common stock issued under
the 1993 Plan for cash and notes to directors, officers, and consultants. There
were no restricted stock issuances in 1996. At December 31, 1996, 37,153 common
shares are subject to repurchase by the Company (70,468 shares subject to
repurchase at December 31, 1995).
On August 1, 1996, all non-employee officer grants of stock options under
the 1993 Plan issued between the date of the public offering (February 1, 1996)
and June 3, 1996 were repriced (a total of 93,666 options) to reflect an
exercise price of $10.50. Any option holder who elected to reprice an option was
not permitted to exercise the repriced option, even if vested, for 90 days. The
repriced options are reflected as both granted and forfeited options in the 1993
Plan table.
At December 31, 1996 and 1995, the Company recorded deferred compensation
expense of $219,000 and $90,000, respectively, for the difference between the
exercise price and the deemed value for fair value for financial statement
presentation purposes of the Company's common stock, as determined by the board
of directors, for options granted in 1995. Such options were granted at prices
ranging from $0.48 to $9.15 per share with a deemed fair value ranging from
$0.48 to $9.15 per share. This compensation expense aggregates to a maximum of
$868,000, which will be amortized over the vesting period of the options,
generally four years.
1995 DIRECTORS' STOCK OPTION PLAN
On November 29, 1995, the board approved the 1995 Directors' Stock Option
Plan, ("Directors' Plan") which allows the granting of options for up to 100,000
shares of common stock to outside directors. Stock options may be granted to
outside directors with exercise prices of no less than fair market value. The
options expire no more than 10 years after the date of grant. Options granted
under the Directors' Plan will vest over one or three years. The options are
only exercisable while the outside director remains a director. During 1996,
12,000 options were granted under the Directors' Plan. No options were granted
in 1995.
PRO FORMA VALUATION OF OPTIONS
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans (See Note 1). Accordingly, no compensation cost has
been recognized for its fixed stock option plans and its stock purchase plan.
Pro forma information regarding net loss and net less per share is required
by Statement 123 and has been determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996: dividend yield
of zero, expected volatility of 60%, risk-free interest rate of 6% and an
expected life of 5 years. The effects of applying FAS 123 for recognizing
compensation expense and providing pro forma disclosures in 1996 and 1995 are
not likely to be representative of the effects on reported net income in future
years.
54
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
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 have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information follows (in thousands except for the earnings per share
information):
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Pro forma net loss...................................................... $ (12,396)
Pro forma net loss per share............................................ $ (1.48)
</TABLE>
The effect upon 1995 is immaterial for financial statement purposes.
A summary of the status of the Company's two stock option plans as of
December 31, 1996 and changes during the year is presented below:
<TABLE>
<CAPTION>
1996
-------------------------
WEIGHTED-AVG
EXERCISE
FIXED OPTIONS SHARES PRICE
- ------------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Outstanding at beginning of year.................................. 906,566 $ 2.46
Granted........................................................... 453,338 $ 15.06
Exercised......................................................... (116,543) $ 0.84
Forfeited......................................................... (166,946) $ 12.83
---------- ------
Outstanding at end of year........................................ 1,076,415 $ 5.72
Options exercisable at year-end................................... 447,953
Weighted-average fair value of options
granted during 1996............................................. $ 5.99
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
55
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
WEIGHTED-
AVG. WEIGHTED- WEIGHTED-
NUMBER REMAINING AVG. NUMBER AVG.
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE (YEARS) PRICE AT 12/31/96 PRICE
- --------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.30-$0.48 354,730 7.07 $ 0.39 253,866 $ 0.37
$0.51-$9.15 385,069 8.70 $ 4.72 127,720 $ 4.19
$9.25-$10.50 216,434 8.44 $ 10.26 40,453 $ 10.37
$11.13-$19.25 85,183 9.59 $ 15.13 8,520 $ 19.25
$19.75-$19.75 34,999 9.16 $ 19.75 17,394 $ 19.75
----------- -----------
$0.30-$19.75 1,076,415 8.20 $ 5.72 447,953 $ 3.47
</TABLE>
1995 EMPLOYEE STOCK PURCHASE PLAN
On November 29, 1995, the board approved the 1995 Employee Stock Purchase
Plan ("Plan"), under which employees may purchase shares, subject to certain
limitations, at no less than 85% of the lower of the fair market value at the
beginning or end of a six-month purchase period. Under the terms of the Plan,
employees can choose each year to have up to 10% of their annual base earnings
withheld to purchase the Company's common stock. Approximately 65 to 70% of
eligible employees have participated in the Plan since February 1996. During
1996, 18,524 shares were issued. The Company has reserved 200,000 shares for
issuance under the Plan. (During 1995, no shares were issued).
Compensation cost is recognized for the fair value of the employees'
purchase rights, which was estimated using the Black-Scholes model with the
following assumptions for 1996: dividend yield of zero, an expected life of one
year, expected volatility of 40% and risk-free interest rate of 5%. The weighted
average fair value of those purchase rights granted in 1996 was $4.32.
8. INCOME TAXES
As of December 31, 1996, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $18,600,000 and
$7,500,000, respectively. In addition, the Company had research credit
carryforwards of approximately $375,000. The net operating loss and credit
carryforwards described above will expire at various dates beginning in the
years 1998 through 2011, if not utilized. Utilization of the net operating
losses and credits may be subject to a substantial annual limitation due to the
ownership change provisions of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net effects of tax carryforwards and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amount used for income tax purposes.
56
<PAGE>
CONCEPTUS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets as of December
31, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards......................................... $ 6,700 $ 4,000
Research credits (expiring 2006-2011).................................... 375 300
Capitalized R&D.......................................................... 250 200
Other - net.............................................................. 240 200
--------- ---------
Total deferred tax assets................................................ 7,565 4,700
Valuation allowance for deferred tax assets.............................. (7,565) (4,700)
--------- ---------
Net deferred tax assets.................................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The increase in the valuation
allowance was approximately $2,200,000 during 1995.
9. SUBSEQUENT EVENTS
In February 1997, the Board of Directors of the Company adopted a Preferred
Shares Purchase Rights Plan, providing for the distribution of a preferred stock
purchase right (a "Right") as a dividend for each share of the Company's common
stock held of record at the close of business on March 26, 1997. The Preferred
Shares Purchase Rights Plan is designed to deter coercive or unfair takeover
tactics and to prevent an acquiring entity from gaining control of the Company
without offering a fair price to all of the Company's stockholders. The Rights
may entitle stockholders to purchase stock in the Company or in an acquirer of
the Company. The Rights have no voting privileges and expire in February 2007.
In addition, the Board of Directors authorized, subject to stockholder
approval, an additional 1,000,000 shares of common stock to be issued pursuant
to the 1993 Stock Plan.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Carlos, California on this 27th day of March 1997.
CONCEPTUS, INC
By: /s/ KATHRYN A. TUNSTALL
-----------------------------------------
Kathryn A. Tunstall
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kathryn A. Tunstall and Sanford Fitch, jointly
and severally, his or her attorneys-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.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ Kathryn A. Tunstall Officer and Director
- ------------------------------ (Principal Executive March 27, 1997
(Kathryn A. Tunstall) Officer)
Senior Vice President,
/s/ Sanford Fitch Chief Financial Officer,
- ------------------------------ and Director (Principal March 27, 1997
(Sanford Fitch) Financial and Accounting
Officer)
/s/ Robert F. Kuhling
- ------------------------------ Director March 27, 1997
(Robert F. Kuhling)
/s/ Thomas C. McConnell
- ------------------------------ Director March 27, 1997
(Thomas C. McConnell)
/s/ Nancy S. Olson
- ------------------------------ Director March 27, 1997
(Nancy S. Olson)
/s/ Richard D. Randall
- ------------------------------ Director March 27, 1997
(Richard D. Randall)
58
<PAGE>
CONCEPTUS, INC.
1993 STOCK PLAN
(AMENDED AND RESTATED FEBRUARY 18, 1997)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Conceptus, Inc., a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Employee shall not be considered
interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any
other leave of absence approved by the Administrator, provided that such leave
is for a period of not more than ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or
(iv) in the case of transfers between locations of the Company or between the
Company, its Subsidiaries or its successor.
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For purposes of this Plan, a change in status from Employee to a
Consultant or from a Consultant to an Employee will not constitute an
interruption of Continuous Status as an Employee or Consultant.
(i) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be
the closing sales price for such stock as quoted on such system on the date
of determination (or the closing bid, if no sales were reported, as quoted on
such exchange or system on that day) as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(m) "NAMED EXECUTIVE" shall mean any individual who, on the last day
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(n) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(o) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act.
(p) "OPTION" means a stock option granted pursuant to the Plan.
(q) "OPTIONED STOCK" means the Common Stock subject to an Option or
a Stock Purchase Right.
(r) "OPTIONEE" means an Employee or Consultant who receives an
Option or Stock Purchase Right.
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(s) "PARENT" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(t) "PLAN" means this 1993 Stock Plan.
(u) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(v) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act
as the same may be amended from time to time, or any successor provision.
(w) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 below.
(x) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock
pursuant to Section 11 below.
(y) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 2,575,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF ADMINISTRATOR.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3, and by the legal requirements relating to the administration of
incentive stock option plans, if any, of applicable securities laws and the
Code (collectively, the "APPLICABLE LAWS"), grants under the Plan may (but
need not) be made by different administrative bodies with respect to
Directors, Officers who are not directors and Employees who are neither
Directors nor Officers.
(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS.
With respect to grants of Options or Stock Purchase Rights to Employees who
are also officers or directors of the Company, the Plan shall be administered
by (A) the Board if the Board may administer the Plan in compliance with Rule
16b-3 and Section 162(m) of the Code as it applies so as to qualify grants of
Options or Stock Purchase Rights to Named Executives as performance-based
compensation, or (B) a Committee designated by the Board to make grants under
the Plan, which Committee shall be constituted in such a manner as to permit
grants under the Plan to comply with Rule 16b-3 to qualify grants of Options
and Stock Purchase Rights as
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performance-based compensation under Section 162(m) of the Code and otherwise
so as to satisfy the Applicable Laws.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are neither directors nor officers of the Company,
the Plan shall be administered by (A) the Board or (B) a Committee designated by
the Board, which Committee shall be constituted in such a manner as to satisfy
the Applicable Laws.
(iv) GENERAL. If a Committee has been appointed pursuant to
subsection (ii) or (iii) of this Section 4(a), such Committee shall continue
to serve in its designated capacity until otherwise directed by the Board.
From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies (however
caused) and remove all members of a Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws and,
in the case of a Committee appointed under subsection (ii) to the extent
permitted by Rule 16b-3 and to the extent required under Section 162(m) of
the Code to qualify grants of Options or Stock Purchase Rights to Named
Executives as performance-based compensation.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any stock exchange upon
which the Common Stock is listed, the Administrator shall have the authority,
in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common Stock;
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(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted; and
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options or Stock
Purchase Rights.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option
or Stock Purchase Right may, if he is otherwise eligible, be granted
additional Options or Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair
Market Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship
at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated
under Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than
ten (10) years from the date of grant thereof. However, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
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8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as
provided in this Plan, the maximum number of Shares which may be subject to
options granted to any one Employee under this Plan for any fiscal year of
the Company shall be 800,000.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option.
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company, the per
Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the
date of the grant.
(B) granted to any person other than a Named Executive,
the per Share exercise price shall be no less than 85% of the Fair Market
Value per Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option either have been owned by the Optionee
for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as
to which said Option shall be exercised, (5) authorization from the Company
to retain from the total number of Shares as to which the Option is exercised
that number of Shares having a Fair Market Value on the date of exercise
equal to the exercise price for the total number of Shares as to which the
Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker,
if applicable, shall require to effect an exercise of the Option and delivery
to the Company of the sale or loan proceeds required to pay the exercise
price, (7) by delivering an irrevocable subscription agreement for the Shares
which irrevocably obligates the option holder to take and pay for the Shares
not more than twelve months after the date of delivery of the
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subscription agreement, (8) any combination of the foregoing methods of
payment, (9) or such other consideration and method of payment for the
issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to accept, the Board shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
10. Exercise of Option.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms
of the Option by the person entitled to exercise the Option and full payment
for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section
9(b) of the Plan. Until the issuance (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as to
which the Option is exercised.
(b) TERMINATION OF EMPLOYMENT. In the event of termination of an
Optionee's consulting relationship or Continuous Status as an Employee with
the Company, such Optionee may, but only within such period of time as is
determined by the Board, with such determination in the case of an Incentive
Stock Option being made at the time of grant of the Option and not exceeding
three (3) months after the date of such termination (but in no event later
than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his Option to the extent that Optionee was
entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
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<PAGE>
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding the provisions of Section 10(b) above, in
the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his or her total and
permanent disability (within the meaning of Section 22(e)(3) of the Code),
Optionee may, but only within twelve (12) months from the date of such
termination (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), exercise the Option to the
extent otherwise entitled to exercise it at the date of such termination. To
the extent that Optionee was not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of a disability
which does not fall within the meaning of total and permanent disability (as
set forth in Section 22(e)(3) of the Code), Optionee may, but only within six
(6) months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise
it at the date of such termination. However, to the extent that such
Optionee fails to exercise an Option which is an Incentive Stock Option
("ISO") (within the meaning of Section 422 of the Code) within three (3)
months of the date of termination, the Option will not qualify for ISO
treatment under the Code. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not
exercise such Option to the extent so entitled within six months (6) from the
date of termination, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee,
the Option may be exercised, at any time within twelve (12) months following
the date of death (but in no event later than the expiration date of the term
of such Option as set forth in the Option Agreement), by the Optionee's
estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent the Optionee was entitled to
exercise the Option at the date of death. To the extent that Optionee was
not entitled to exercise the Option at the date of termination, or if
Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(e) RULE 16b-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of
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descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
12. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall
be entitled to purchase, the price to be paid (which price shall not be less
than 85% of the Fair Market Value of the Shares as of the date of the offer),
and the time within which such person must accept such offer, which shall in
no event exceed thirty (30) days from the date upon which the Administrator
made the determination to grant the Stock Purchase Right. The offer shall be
accepted by execution of a Restricted Stock purchase agreement in the form
determined by the Administrator. Shares purchased pursuant to the grant of a
Stock Purchase Right shall be referred to herein as "Restricted Stock."
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's employment with the Company for any reason (including
death or Disability). The purchase price for Shares repurchased pursuant to
the Restricted Stock purchase agreement shall be the original price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as
the Administrator may determine, but at a minimum rate of 20% per year.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion. In addition, the provisions of Restricted Stock purchase
agreements need not be the same with respect to each purchaser.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 14 of the Plan.
13. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding
obligations as provided in this paragraph. When an Optionee incurs tax
liability in connection with an Option or Stock Purchase Right, which tax
liability is subject to tax withholding under applicable tax laws, and the
Optionee is obligated to pay the Company an amount required to be withheld
under applicable tax laws, the Optionee may satisfy the withholding tax
obligation by electing to have the Company withhold from the Shares to be
issued upon exercise of the Option, or the Shares to be issued in connection
with the Stock Purchase Right, if any, that number of Shares having a Fair
Market Value equal to
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the amount required to be withheld. The Fair Market Value of the Shares to
be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this
purpose shall be made in writing in a form acceptable to the Administrator
and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the
election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, and the number of shares
of Common Stock which have been authorized for issuance under the Plan but as
to which no Options or Stock Purchase Rights have yet been granted or which
have been returned to the Plan upon cancellation or expiration of an Option
or Stock Purchase Right, the maximum number of shares of Common Stock for
which options may be granted to any employee under Section 8 of the Plan, as
well as the price per share of Common Stock covered by each such outstanding
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an Option or Stock Purchase Right.
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(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the
extent it has not been previously exercised, the Option or Stock Purchase
Right will terminate immediately prior to the consummation of such proposed
action.
(c) MERGER OR SALE OF ASSETS. In the event of a merger of the
Company with or into another corporation or the sale of all or substantially
all of the assets of the Company, the Option or Stock Purchase Right shall be
assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor
corporation. In the event the Option or Stock Purchase Right is not assumed
or substituted, the Optionee or Stock Purchase Right holder shall have the
right to exercise the Option or Stock Purchase Right as to all of the Optioned
Stock or Restricted Stock, including Shares as to which the Option would not
otherwise be exercisable, and any Restricted Stock held by a purchaser shall
be released from the Company's repurchase option.
15. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the
date on which the Administrator makes the determination granting such Option
or Stock Purchase Right, or such other date as is determined by the Board.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent.
In addition, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act or with Section 162(m) and 422 of the Code (or any
other applicable law or regulation, including the requirements of the NASD or
an established stock exchange), the Company shall obtain shareholder approval
of any Plan amendment in such a manner and to such a degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute
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such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions
of law.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue
or sell such Shares as to which such requisite authority shall not have been
obtained.
19. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Board shall approve from time to time.
20. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before
or after the date the Plan is adopted. Such shareholder approval shall be
obtained in the degree and manner required under applicable state and federal
law and the rules of any stock exchange upon which the Common Stock is
listed.
21. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide,
to each Optionee and to each individual who acquired Shares pursuant to the
Plan, during the period such Optionee or purchaser has one or more Options or
Stock Purchase Rights outstanding, and, in the case of an individual who
acquired Shares pursuant to the Plan, during the period such individual owns
such Shares, copies of all annual reports. The Company shall not be required
to provide such information if the issuance of Options or Stock Purchase
Rights under the Plan is limited to key employees whose duties in connection
with the Company assure their access to equivalent information.
-12-
<PAGE>
EXHIBIT 11.1
CONCEPTUS, INC.
STATEMENT RE COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Net loss.......................................................................... $ (11,692) $ (5,849)
---------- ---------
---------- ---------
Shares used in computing historical net loss per share:
Weighted average shares of common stock outstanding............................... 8,396 183
Shares related to Staff Accounting Bulletin Topic 4D.............................. -- 1,403
---------- ---------
Total shares used in computing historical net loss per share...................... 8,396 1,586
---------- ---------
---------- ---------
Historical net loss per share..................................................... $ (1.39) $ (3.69)
---------- ---------
---------- ---------
Shares used in computing supplemental net loss per share:
Weighted average shares of common stock outstanding............................... 8,396 183
Weighted average shares of the assumed conversion of redeemable convertible
preferred stock.................................................................. 377 3045
---------- ---------
Total shares used in computing supplemental net loss per share.................... 8,773 3,228
---------- ---------
---------- ---------
Supplemental net loss per share................................................... $ (1.33) $ (1.81)
---------- ---------
---------- ---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-4186) pertaining to the Conceptus, Inc. 1995 Directors' Stock
Option Plan, 1995 Employee Stock Purchase Plan, 1993 Stock Plan of our report
dated February 3, 1997, with respect to the consolidated financial statements of
Conceptus, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
Palo Alto, California
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,939
<SECURITIES> 18,286
<RECEIVABLES> 283
<ALLOWANCES> 178
<INVENTORY> 182
<CURRENT-ASSETS> 35,746
<PP&E> 1,265
<DEPRECIATION> 722
<TOTAL-ASSETS> 40,093
<CURRENT-LIABILITIES> 2,464
<BONDS> 0
0
0
<COMMON> 61,876
<OTHER-SE> (24,281)
<TOTAL-LIABILITY-AND-EQUITY> 40,093
<SALES> 664
<TOTAL-REVENUES> 664
<CGS> 1,208
<TOTAL-COSTS> 1,208
<OTHER-EXPENSES> 13,333
<LOSS-PROVISION> 136
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> (11,692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,692)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.33)
</TABLE>
