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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, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from to .
Commission file number: 0-27596
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 Identification No.)
or organization)
1021 HOWARD AVENUE
SAN CARLOS, CA 94070
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 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, 1998 was approximately $26,179,741 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 9,506,928 shares of Registrant's Common Stock issued and
outstanding as of February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
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THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO. THIS ANNUAL REPORT ON
FORM 10-K, AND IN PARTICULAR THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. IN THIS REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS" AND WORDS OF SIMILAR IMPORT, IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
CONCEPTUS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING ACHIEVEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: THE UNCERTAINTY OF MARKET
ACCEPTANCE OF THE COMPANY'S PRODUCTS; THE LIMITED OPERATING HISTORY OF THE
COMPANY; THE ABILITY OF THE COMPANY TO DEVELOP AND MAINTAIN PROPRIETARY ASPECTS
OF ITS TECHNOLOGY; THE ABILITY OF THE COMPANY TO OBTAIN THE NECESSARY
GOVERNMENTAL CLEARANCES OR APPROVALS TO MARKET ITS PRODUCTS; INTENSE COMPETITION
IN THE MEDICAL DEVICE INDUSTRY; THE INHERENT RISK OF EXPOSURE TO PRODUCT
LIABILITY CLAIMS AND PRODUCT RECALLS; AND OTHER FACTORS REFERENCED IN THIS FORM
10-K. CERTAIN OF THESE FACTORS ARE DISCUSSED IN MORE DETAIL BELOW. GIVEN THESE
UNCERTAINTIES, PERSONS EVALUATING THE COMPANY AND ITS BUSINESS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY ASSUMES
NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL
RESULTS OR CHANGES IN FACTORS OR ASSUMPTIONS AFFECTING SUCH FORWARD-LOOKING
STATEMENTS.
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
current focus is to improve several diagnostic and therapeutic procedures in
gynecology. Conceptus's products are designed to improve the accuracy of
diagnostic procedures for infertility, to increase the safety of resectoscopic
procedures and to provide 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 which are currently
performed surgically to be performed transcervically, thereby reducing the cost,
trauma and recovery time associated with those therapies. The Company's catheter
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. Its ERA-TM- and
FUTURA-TM- resectoscope sleeves were introduced to the market in September 1997.
To date, Conceptus has received five 510(k) clearances to market applications of
its T-TAC-TM- (Transcervical Tubal Access Catheter) systems, two 510(k)
clearances for falloposcopy for proximal tubal occlusion ("PTO") and two 510(k)
clearances 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
that 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
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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 $2.0 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 as well as for an additional therapeutic application, tubal
recanalization. Published medical 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. Since
1994, 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") 510(k)
clearance to market the initial configuration of its STARRT Falloposcopy system
for diagnosis of proximal tubal occlusion. The second falloposcopy system, which
the Company intends to market, received 510(k) clearance in February 1998.
Conceptus plans to develop a complete product line based on the STARRT
technology, including pursuing additional diagnostic indications for the system
and an expanded product line 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 13,000,000 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 has
performed clinical feasibility studies in two different patient groups and is
currently engaged in a Phase II study of effectiveness.
In November 1996, Conceptus acquired Microgyn, Inc. ("Microgyn"), a private
medical device company, for $4.0 million paid in a combination of cash and
Common Stock of the Company. 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. The ERA Resectoscope
Sleeve is part of a system of products designed to permit the use
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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 has received both a 510(k) clearance from the FDA for marketing
of the device in therapeutic hysteroscopy as well as a 510(k) clearance for
urologic use of the device. In October 1997, the Company purchased the exclusive
manufacturing rights to the ERA and FUTURA product line from Medical Scientific,
Inc.
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 Company
is expanding its marketing efforts for the FUTURA products to include their
urologic applications.
Conceptus has an exclusive, worldwide, royalty-free license to the
reproductive applications of technology developed by Target, a manufacturer of
minimally invasive medical devices for neurovascular applications, which in 1997
became a separate business unit of Boston Scientific Corporation ("BSC"). BSC
beneficially owns approximately 15% of the Company's outstanding Common Stock.
See "Risk Factors--Influence of Boston Scientific Corporation." Conceptus was
formed in 1992 in response to reports by physicians of the successful use of
Target's products to access the fallopian tubes.
T-TAC-TM-, STARRT-TM-, S/TOP-TM-, VS-REGISTERED TRADEMARK-, SOFT
TORQUE-REGISTERED TRADEMARK-, SOFT SEAL-TM-, MINICERV-TM-,
ROBUST-REGISTERED TRADEMARK-, COAXESS-TM-, STARGATE-TM-, ERA-TM- AND FUTURA-TM-
ARE TRADEMARKS OF THE COMPANY. ALL OTHER TRADENAMES AND TRADEMARKS APPEARING IN
THIS FORM 10-K ARE THE PROPERTY OF THEIR RESPECTIVE HOLDERS.
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. As a result, the
fallopian tubes serve a critical function in the reproductive process and are
often the focus of treatment whether the objective is 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.
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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 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 $2.0 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 inadequately 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 estimate further 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 that 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.
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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 groups. Due to concerns that use of IUDs results in
increased incidence of pain and heavy menstrual bleeding that 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 to $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 known as
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.
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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 a laparotomy or laparoscopy, 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 1995 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.
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,
which 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:
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<CAPTION>
PRODUCT SYSTEMS CLINICAL INDICATIONS U.S. STATUS INTERNATIONAL STATUS
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T-TAC SYSTEM
VS (Variable Softness) Diagnostic tubal 510(k) clearance for: Marketed since September
Catheter Guidewires catheterization; therapeutic diagnosis of PTO; HSG; lap 1995, currently in 11
Soft Torque Uterine tubal catheterization; HSG; and dye; and intrauterine countries.
Catheter lap and dye; and insemination. System
Soft Seal Cervical intrauterine insemination. marketed since August 1995.
Catheter
Minicerv Cervical
Catheter
Progression Catheter
STARRT FALLOPOSCOPY SYSTEM
Stargate Catheter Operative fallopian tube 510(k) clearance for Operative system marketed in
Robust Guidewire endoscopy; in-office falloposcopy for PTO. Australia since September
Coaxess Uterine fallopian tube endoscopy. 1995.
Catheter
Vision Falloposcope
Gyne-Flex Stabilization
System
S/TOP SYSTEM
Tubal Access Catheter Non-surgical tubal Pre-hysterectomy testing in Efficacy trials commenced.
Intratubal Micro-Coil sterilization. progress.
Device
Delivery Wire
</TABLE>
- ------------------------
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,
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. 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. Radiopaque
tips permit
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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.
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 the CE Mark for its T-TAC system and all regulatory
approvals necessary to sell its T-TAC system for both diagnostic and therapeutic
fallopian tube catheterization indications in Switzerland, Canada, Australia and
South Africa, and is seeking approval to market these products in Israel.
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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 Falloposcopy system: an
operative system and an in-office 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 Falloposcopy system consists of the
Stargate Catheter (a modified version of the VS Catheter), the Robust guidewire,
the Coaxess Uterine Catheter, the Vision Falloposcope and the Gyne-Flex
stabilization system, which may be used independently of the STARRT Falloposcopy
system.
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. To address many physicians' preference of
using their existing operative hysteroscopes to evaluate a patient's uterus at
the time that a falloposcopy procedure is performed, the Company's STARRT
Falloposcopy system can also be used with rigid operative hysteroscopes from
other suppliers. 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.
After alignment of the hysteroscope with the ostium in the uterus, the
physician advances a specially designed Stargate Catheter and any 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 STARRT Falloposcopy system
can be developed which may allow the Company to offer a system which makes
in-office falloposcopy possible. Presently, falloposcopy is performed in
conjunction with laparoscopy. While this practice 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 initial
configuration of the STARRT Falloposcopy 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%).
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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 to date 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, falloposcopy 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 reported to date.
Prior to the initiation of the IMSF, the Company's STARRT 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.
The Company has obtained the CE Mark for its STARRT Falloposcopy system and
all necessary regulatory approvals for sale of the system in certain foreign
countries including Switzerland, Canada, Australia and South Africa, and is
seeking approvals to sell the system in Israel. The Company may seek approvals
to market its STARRT Falloposcopy system products in other countries. See "Risk
Factors-- Dependence Upon T-TAC and Catheterization Products."
S/TOP SYSTEM
The Company is developing a non-incisional 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 1998, 42 women have been enrolled
in this study. IDE approval has been obtained for an expanded Phase I clinical
study in 20 patients who are scheduled for a hysterectomy six to 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 initial Phase I trial objectives.
Eighteen patients have been enrolled in this study and have undergone the S/TOP
device placement procedure in an office setting. The results from the first five
patients to undergo histologic evaluation of their fallopian tubes provides
early evidence of a local inflammatory tissue response to the device, as well as
damage to the tubal architecture, which is expected to be unfavorable to
conception. In addition, the HSG performed just prior to the hysterectomy
demonstrated complete occlusion in all tubes tested to date, with the exception
of the two tubes in which the device did not remain in the tube. An additional
Phase I study will be conducted to evaluate feasibility of placing the device
under fluoroscopic
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and sonographic visualization. Ten patients will be enrolled in this study
anticipated to begin during the second quarter of 1998.
In 1997, the Company commenced a Phase II clinical study in Australia. Eight
patients scheduled for tubal sterilization have been enrolled to date. The study
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.
CONCEPTUS' SECOND PLATFORM TECHNOLOGY: RESECTOSCOPY
With the acquisition of Microgyn, a privately held company, in November
1996, the Company can more effectively meet the needs of the interventional
gynecologist by using Microgyn's significant platform technology along with a
product portfolio based on the ERA and FUTURA-TM- Resectoscope Sleeves. In 1997,
the Company acquired the manufacturing rights for the ERA and FUTURA-TM- product
lines from Medical Scientific, Inc. The transfer of the manufacturing operation
to the Company was completed in March 1998.
The following table sets forth the clinical indications and regulatory
status of the Company's ERA and FUTURA product lines:
<TABLE>
<CAPTION>
PRODUCT SYSTEMS CLINICAL INDICATIONS U.S. STATUS INTERNATIONAL STATUS
- ---------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
ERA Resectoscope Sleeve Therapeutic hysteroscopy 510(k) clearance for Product released in the
gynecology United Kingdom in the fourth
quarter of 1997. CE Mark
completed first quarter
1998.
FUTURA Resectoscope Sleeve Therapeutic hysteroscopy 510(k) clearance for urology CE Mark completed first
quarter 1998.
</TABLE>
ERA PRODUCT LINE
The ERA product line for gynecology focuses 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.
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 operating 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. Non-conductive fluids are electrolyte-free (hypotonic)
substances and therefore can change levels of vital electrolytes such as sodium,
potassium, and chloride in the blood stream of the patient. Fluids such as
mannitol, sorbitol and glycine are adequate for this purpose but present a risk
to 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 pressure 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 pressure of about 20 mmHg. During the procedure, fluid loss into the
patient is carefully monitored, via fluid deficit calculations, comparing fluids
used versus fluids recovered. The surgeon is kept apprised of the
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<PAGE>
patient's fluid status, because of the complications associated with the
absorption of large amounts of hypotonic solutions. These include serious heart,
lung, and brain disorders, which sometimes result in coma or death.
The Company's ERA product line consists of the following products: a simple,
disposable ERA Resectoscope Sleeve, cutting loops and coagulating roller balls.
The ERA Resectoscope Sleeve, when installed on a 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 with the patient. The Company believes that the
ability to effectively use isotonic solutions during hysterscopic procedures
should minimize the risk of serious electrolyte disturbances and their
associated complications. The ERA product line is easy to use because it is
designed for total mechanical compatibility with existing hysteroscopic
instrumentation and power sources.
FUTURA PRODUCT LINE
While the Company will continue to focus on gynecological applications,
there is an important urological application for the resectoscope sleeve. The
FUTURA Resectoscope Sleeve enables the urologist to perform a Transurethral
Resection of the Prostate ("TURP") more safely by reducing the risk of certain
surgical complications. TURP is used to treat symptomatic enlargement of the
prostate, or benign prostatic hyperplasia ("BPH"). Approximately 180,000 TURP
procedures were performed in the United States in 1997.
TURP typically involves the electrosurgical removal of abnormal tissue
through a resectoscope, without the need for an incision. Conventional
electrosurgical procedures, however, require the use of hypotonic irrigation
solutions, the excessive absorbtion of which is associated with a potentially
catastrophic complication referred to as "TUR Syndrome." In order to reduce the
risk of TUR Syndrome, most hospitals have determined a strict surgical protocol
limiting the TURP procedure time, which may make it difficult for physicians to
completely resect abnormal prostate tissue in a single procedure. The FUTURA
Resectoscope Sleeve, which utilizes the same patented Microgyn technology used
for the gynecological application, enables the urologist to perform
transurethral procedures using isotonic (physiologic) solutions, eliminating the
risk of TUR Syndrome, and permitting the extra procedure time that may be needed
to complete resection of the prostate.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are performed internally
by its 15-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, 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
female and male reproductive disorders. Research and development expense for the
fiscal years ended 1997, 1996 and 1995 were $5.4 million, $3.8 million and $2.6
million, respectively.
MANUFACTURING
The Company manufactures its proprietary catheters and resectoscope sleeves
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
14
<PAGE>
a drug license by the CDHS. See "Risk Factors--Dependence Upon Sole Source
Suppliers; Lack of Contractual Arrangements" and "--Limited Manufacturing
Experience."
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 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 ERA and FUTURA 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. See "Risk
Factors--Uncertainty of Market Acceptance."
The Company distributes its products in approximately 12 countries through a
combination of direct sales to customers and a worldwide network of
distributors. The Company currently sells its products to international markets
through a limited number of distributors who resell to physicians and hospitals.
Domestically, the Company sells its products through a small direct sales force
and U.S. distributors. Sales to distributors are made on open credit terms and
may include purchase discounts. Of the Company's sales for the fiscal year ended
December 31, 1997, 83% were derived from domestic sales and 17% were derived
from export sales to international distributors. Sales to three of the Company's
distributors, Mallinckrodt Group, Inc. ("Mallinckrodt"), Imagyn Medical
Technologies, Inc. ("Imagyn"), and Schering Health Care, Ltd. ("Schering")
accounted for approximately 63%, 27% and 5%, respectively, of total sales for
the year ended December 31, 1997. Since December 31, 1997, Imagyn has not
purchased any of the Company's products. In March 1998, Imagyn notified the
Company of its intent to terminate the distribution agreement between the
parties as of June 30, 1998. Although the Company and Imagyn are currently
renegotiating the terms of their relationship, there can be no assurance that
the parties will reach an agreement on such terms. There can be no assurance
that the Company will be able to obtain a suitable alternate distributor for its
products for urologic applications. The inability to attract new significant
distributors or the loss of one or more of the Company's distributors could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Limited Sales, Marketing and
Distribution Experience; Emerging Market" and "--Dependence Upon International
Distributors and Sales."
The Company is focusing its United States marketing efforts primarily on the
Company's estimated 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
15
<PAGE>
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. 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. See "Risk Factors--Limited Sales, Marketing and
Distribution Experience; Emerging Market" and "--Uncertainty of Market
Acceptance."
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.
Although the Company is fully dedicated to meeting the needs of the
interventional gynecologist, some of the Company's 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, a major supplier of radiological
contrast media. Pursuant to this agreement, Conceptus granted Mallinckrodt
marketing rights for radiology applications of the T-TAC system in North,
Central and South America. The Company retained all marketing rights for its
T-TAC system in the gynecology market segment. If the Company and Imagyn are
unable to renegotiate the terms of their existing relationship pursuant to which
Imagyn distributes FUTURA products for urologic applications, the Company will
not have a relationship with a distributor of urologic products. There can be no
assurance that the Company will be able to obtain a suitable alternate
distributor for its products for urologic applications. 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. See
"Risk Factors--Limited Sales, Marketing and Distribution Experience; Emerging
Market."
In addition to the Mallinckrodt partnership, the Company currently markets
its products internationally primarily through established distributors of
specialty gynecological products, with one exception. In June 1996, the Company
appointed Schering, a major supplier of reproductive pharmaceuticals to the
interventional gynecology market, as Conceptus' exclusive distributor in the
United Kingdom to this market. 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
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<PAGE>
distributor 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. See "Risk Factors--Dependence Upon International
Distributors and Sales."
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, 1998, Conceptus had applied for 14 United States patents,
five of which have been issued to the Company, and has filed 25 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 products, as well as the Company's S/TOP device, allowing the use
of a 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 Conceptus technology. Conceptus's exclusive license of
Target's technology is applicable to all technology available to the Company as
of February 1, 1996. Conceptus does not have any preferential rights for Target
technology developed following that date. As of March 1, 1998, Target held, and
Conceptus exclusively licensed from Target within the field of reproductive
physiology, 78 issued United States patents, numerous 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. See "Risk Factors--Reliance on Patents and Protection of Proprietary
Technology."
17
<PAGE>
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 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 an expensive, lengthy and uncertain process. 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).
18
<PAGE>
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 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.
As of February 28, 1998, the Company has received five 510(k) clearances for
certain diagnostic and therapeutic indications of its T-TAC system. In addition,
the Company has received two 510(k) clearances for its STARRT Falloposcopy
system and its Stargate Catheter, both for the diagnosis of PTO. Conceptus has
also received two 510(k) clearances for its FUTURA Resectoscope Sleeve in
urologic applications and its ERA Resectoscope Sleeve in gynecological
applications.
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, and granted a
California drug manufacturing license. In March 1997, the Company was inspected
by the FDA, with no action indicated.
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 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 jurisdictions. 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. See "Risk Factors-- Government Regulations."
INTERNATIONAL
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
19
<PAGE>
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.
The European Union has promulgated rules that require manufacturers of
medical products to obtain by mid-1998 the right to affix to their products 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 has 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 to a
Company product the CE mark will prohibit the Company from selling such product
in member countries of the European Union after mid-1998. The Company received
ISO certification in January 1998. 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 which 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 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. See "Risk Factors--Government Regulations."
THIRD-PARTY REIMBURSEMENT
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 determine 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 ERA and FUTURA 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
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
20
<PAGE>
business, financial condition and results of operations. See "Risk
Factors--Uncertainty Relating to Third Party Reimbursement."
COMPETITION
In the infertility segment, 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 which may compete directly with the Company's systems.
In the therapeutic hysteroscopy market, there are four major endoscope
companies (Karl Storz Endoscopy, Inc., Olympus, Inc., Circon Corporation and
Richard Wolf Medical Instruments Corporation) that account for the majority of
sales of the equipment and instruments used to perform these procedures.
Although the Company believes it has 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.
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 sleeve 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.
See "Risk Factors-- Competition; Uncertainty of Technological Change" and
"--Reliance on Patents and Protection of Proprietary Technology."
PRODUCT LIABILITY AND INSURANCE
The manufacture and sale of medical products involve 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 $5,000,000 per occurrence
and an annual aggregate maximum of $5,000,000, 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 more of 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. See "Risk
Factors--Product Liability Risk and Recalls; Limited Insurance Coverage."
21
<PAGE>
EMPLOYEES
As of March 1, 1998 the Company employed 67 individuals, 28 of whom were
engaged directly in research, development, regulatory and quality assurance
affairs, 9 in manufacturing and 30 in marketing, sales and administrative
positions. The Company also contracts with outside consultants. 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 often
subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel. None of the Company's
employees is covered by a collective bargaining agreement. Conceptus believes
that it maintains good relations with its employees. See "Risk
Factors--Dependence Upon Key Personnel."
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages, as of February 28,
1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Kathryn A. Tunstall............................... 47 President, Chief Executive Officer and Director
Steve Bacich...................................... 36 Vice President, Research and Development
Cynthia M. Domecus................................ 38 Senior Vice President, Clinical Research, Regulatory
Affairs and Quality Assurance
Sanford Fitch..................................... 57 Senior Vice President, Chief Financial Officer and
Director
James J. Messemer................................. 39 Vice President, Business Development
Robert Thomas..................................... 36 Vice President, Operations
</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. She serves as a director of RESOLVE, a non-profit infertility
support, education and advocacy organization. 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.
MR. BACICH joined Conceptus in March 1997 as Vice President, Research and
Development. Prior to joining Conceptus, Mr. Bacich spent seven years as a
Co-founder and Director of New Product Development for Imagyn Medical, Inc., a
medical device manufacturer of gynecological products for infertility and
endoscopic procedures. From August 1987 to September 1989, Mr. Bacich held
engineering positions in research and development and serving most recently as
Senior Staff Engineer, Business Development for the Edwards Less Invasive
Surgery Division of Baxter. From 1985 to 1987, Mr. Bacich held research and
development positions at Mentor Corporation, a reconstructive surgery and
urology company. From 1983 to 1985, Mr. Bacich held research and development
positions at American Medical Optics, an ophthalmic medical device manufacturer
and Division of American Hospital Supply Corporation. Mr. Bacich holds a B.S. in
Biomedical Engineering from the University of California, San Diego.
MS. DOMECUS has served as Senior Vice President, Clinical Research,
Regulatory Affairs and Quality Assurance of Conceptus since May 1994. From March
1992 to May 1994 she served as Senior Director and
22
<PAGE>
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 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 has served as Vice President, Finance and Operations, Chief
Financial Officer and a director of the Company since 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 1983 through 1989,
Mr. Fitch was the Vice President and Chief Financial Officer of Komag Inc., a
manufacturer of rigid media for the disk drive industry. Mr. Fitch holds an B.S.
in Chemistry and an M.B.A. from Stanford University.
MR. MESSEMER has served as Vice President, Business Development of Conceptus
since joining the Company in February 1993. 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. THOMAS joined Conceptus in March 1997 as Vice President, Operations.
From March 1990 to February 1997, Mr. Thomas was a founder and Vice President of
Thomas Medical Products, a private medical device firm that was acquired by
Vital Signs, Inc. From November 1984 to February 1990, Mr. Thomas served in
various capacities in Operations Management with the Pharmaseal Division of
Baxter Healthcare in the Access Devices business unit. Mr. Thomas holds a B.A.
in Economics from Ursinus College.
During fiscal 1997, Dr. Lee Blumenfeld served as Vice President, Worldwide
Sales and Marketing, a position he held since 1995. Dr. Blumenfeld left the
Company effective as of December 31, 1997.
ITEM 2. PROPERTIES
The Company is currently occupying approximately 14,000 square feet in San
Carlos, California. The facility is subject to a lease which expires in
December, 1999. The Company has leased additional space in the amount of
approximately 16,397 square feet, also in San Carlos, California which is
subject to a lease which expires in May, 2002. The Company believes that it will
be able to lease additional space or renew its existing leases as necessary.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending or threatened legal proceedings against the
Company. The Company from time to time is involved in routine legal matters
incident to its business. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of the
Company, the ultimate outcome of any litigation is uncertain.
23
<PAGE>
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, 1997.
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 January 1, 1997 through March 31, 1997......................... $ 14.25 $ 9.375
Period from April 1, 1997 through June 30, 1997............................ $ 12.75 $ 8.50
Period from July 1, 1997 through September 30, 1997........................ $ 10.25 $ 6.625
Period from October 1, 1997 through December 31, 1997...................... $ 11.00 $ 4.125
</TABLE>
As of February 28, 1998, the Company had approximately 130 stockholders of
record and approximately 1,780 beneficial owners of its Common Stock. The
Company's directors, executive officers and principal stockholders, including
BSC, beneficially owned, in the aggregate, approximately 22% of the Company's
outstanding Common Stock. These stockholders, if acting together, would be able
to influence substantially all matters requiring approval by the stockholders of
the Company, including any determination with respect to the acquisition or
disposition of assets by the Company, future issuances of Common Stock or other
securities by the Company, declaration of dividends on the Common Stock and the
election of directors. Such concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of the Company. See
"Risk Factors--Volatility of Stock Price" and "--Influence by Directors,
Executive Officers and Principal Stockholders." The Company has never paid cash
dividends on its Common Stock and does not anticipate paying cash dividends in
the foreseeable future. The Company intends to retain any future earnings 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.
24
<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, YEAR ENDED DECEMBER 31,
1992) TO DECEMBER --------------------------------------------
31, 1993 1994 1995 1996 1997
----------------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ -- $ 389 $ 243 $ 664 $ 1,426
Cost of sales.................................... -- 718 1,021 1,208 3,516
------- --------- --------- ---------- ----------
Gross profit..................................... -- (329) (778) (544) (2,090)
Operating costs and expenses:
Research and development....................... 1,237 1,778 2,589 8,509 5,429
Selling, general and administrative............ 1,081 1,894 2,805 4,824 6,323
------- --------- --------- ---------- ----------
Total operating expenses..................... 2,318 3,672 5,394 13,333 11,752
------- --------- --------- ---------- ----------
Loss from operations............................. (2,318) (4,001) (6,172) (13,877) (13,842)
Interest and investment income, net.............. 62 125 323 2,185 1,784
------- --------- --------- ---------- ----------
Net loss..................................... $ (2,256) $ (3,876) $ (5,849) $ (11,692) $ (12,058)
------- --------- --------- ---------- ----------
------- --------- --------- ---------- ----------
Basic and diluted net loss per share............. $ (1.39) $ (1.29)
---------- ----------
---------- ----------
Shares used in computing basic and diluted net
loss per share................................. 8,396 9,381
---------- ----------
---------- ----------
Pro forma basic and diluted net loss per share
(1)............................................ $ (1.37)
---------
---------
Shares used in computing pro forma basic and
diluted net loss per share (1)................. 4,273
---------
---------
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 1,260 $ 5,253 $ 5,082 $ 39,021 $ 27,058
Working capital.......................................... 976 5,089 4,407 37,078 26,608
Total assets............................................. 1,610 6,221 6,092 40,093 29,480
Long-term portion of debt and capital lease
obligations............................................ 22 264 153 34 1
Redeemable convertible preferred stock................... 3,465 11,453 16,624 -- --
Accumulated deficit...................................... (2,256) (6,132) (11,981) (23,673) (35,731)
Total stockholders' equity............................... (2,254) (6,125) (11,877) 37,595 27,504
</TABLE>
- ------------------------
(1) See Note 1 to Notes to Consolidated Financial Statements for information
concerning calculation of pro forma basic and diluted net loss per share
25
<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's current focus is on
improving the safety of resectoscopic procedures, developing products for
improved diagnosis of infertility and providing a non-surgical approach to
fallopian tube sterilization, the most commonly performed contraceptive
procedure worldwide. 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, to conduct research and development, and
to expand marketing and sales activities.
The Company's initial commercial products, the T-TAC and STARRT Falloposcopy
systems, have generated limited sales to date. The Company currently sells its
products to international markets through a limited number of distributors who
resell to physicians and hospitals. Domestically, the Company sells its products
through a small direct sales force and U.S. distributors. Sales to distributors
are made on open credit terms and may include purchase discounts. In 1996 and
1995, the Company made adjustments to the profile of its distributors, resulting
in replacement and addition of new distributors in domestic and international
markets. In 1997, the Company added an additional domestic distributor. 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.
Sales in 1997 were through a small direct sales force and existing distributors,
as well as a new distributor, on open credit terms and consisted of commercial
shipments of T-TAC and FUTURA 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 Falloposcopy system altered infertility diagnosis in the majority of
cases versus conventional infertility diagnosis. In February 1998, the Company
received 510(k) clearance of its second generation STARRT catheter, the Stargate
Catheter, a component of the Company's STARRT Falloposcopy System, for the
diagnosis of PTO. The Stargate Catheter is a modification of the VS Falloposcopy
Catheter, which was previously cleared for marketing in the United States by the
FDA. The Stargate Catheter is designed to improve visualization of the fallopian
tube by reducing the amount light reflected off of tubal surfaces.
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, Inc. in exchange for $3.0 million in cash on the acquisition date and
$1.0 million in stock paid six months after the acquisition date, plus $752,000
due to assumption of certain liabilities and related acquisition expenses. In
May 1997, the Company satisfied the $1.0 million accrued acquisition cost by
issuing 104,708 shares of Common Stock. 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. The Company is continuing product
development of the Microgyn product portfolio, clinical and marketing activities
and is developing a distribution strategy for both international and domestic
customers.
In the second half of 1997 the Company introduced the ERA and FUTURA
Resectoscope Sleeve products from the Microgyn technology portfolio. These
products allow the use of physiologic solution when performing hysteroscopic
procedures, which increases the safety of resection procedures by eliminating
the risk of dilutional hyponatremia, a complication that can lead to serious
heart, lung, and brain
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disorders. The Company received 510(k) clearance for its FUTURA Resectoscope
Sleeve for urologic applications in the first quarter of 1997. In September
1997, the Company received 510(k) clearance for its ERA Resectoscope Sleeve for
gynecological procedures. Also in September 1997, the Company entered into a
marketing and distribution agreement with Imagyn, formerly UroHealth, Inc.,
granting Imagyn an exclusive, worldwide license to distribute products for
urologic applications of the resectoscope sleeve. Since December 31, 1997,
Imagyn has not purchased any of the Company's products. In March 1998, Imagyn
notified the Company of its intent to terminate the distribution agreement
between the parties as of June 30, 1998. Although the Company and Imagyn are
currently renegotiating the terms of their relationship, there can be no
assurance that the parties will reach an agreement on such terms. There can be
no assurance that the Company will be able to obtain a suitable alternate
distributor for its products for urologic applications. The inability to attract
new significant distributors or the loss of one or more of the Company's
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company intends to sell the
ERA Resectoscope Sleeve for gynecologic applications in the United States and
internationally through a combination of a direct sales force and distributors
in certain markets and regions.
In the fourth quarter of 1997, the Company acquired the exclusive
manufacturing rights from Medical Scientific, Inc., the supplier of the
Company's ERA and FUTURA Resectoscope Sleeves. The manufacturing know-how
related to the ERA and FUTURA Resectoscope Sleeves has been transferred to the
Company's facility in San Carlos, with full production anticipated by the end of
the first quarter 1998. The acquisition and transfer of these manufacturing
rights resulted in additional cost of goods expenditures approximating $1.1
million.
Certain of the Company's products are manufactured by original equipment
manufacturers while others are manufactured by Conceptus at its location in San
Carlos, California. If the volume of T-TAC, STARRT, and ERA and FUTURA products
increases significantly, the Company expects to increase its direct
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.
The Company continues to devote significant resources to the product
development program for the S/TOP device, a non-surgical alternative to surgical
tubal ligation, the most commonly used method of sterilization. The system
utilizes a unique micro-coil designed to be permanently implanted into the
fallopian tube in order to obtain effective sterilization. Peri- and
pre-hysterectomy patients have participated in trials to determine the tissue
response to the implanted microcoil. In July 1997, the Company commenced a Phase
II efficacy study of the S/TOP system in Australia. The Phase II study involves
device placement in fertile women who desire permanent sterilization. Study
patients will be monitored for a minimum of two years.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Sales increased 115% to $1,426,000 in 1997 from $664,000 in 1996. This
increase was due to increased commercial shipments of the Company's T-TAC
products to a significant domestic distributor, as well as commercial shipments
of the Company's FUTURA products to a new domestic distributor. 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
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distributors. Sales to domestic customers represented 83% of sales in 1997, 68%
of sales in 1996 and 48% of sales in 1995.
Cost of sales increased 191% to $3.5 million in 1997 from $1.2 million in
1996. This increase was primarily due to approximately $1.1 million associated
with the acquisition of the exclusive manufacturing rights of the Company's ERA
and FUTURA products from MSI, combined with increased unit shipments of T-TAC
and FUTURA products. 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.
Research and development ("R&D") expenses, which include clinical and
regulatory expenses, increased to $5.4 million in 1997 from $3.8 million in 1996
(net of $4.8 million of acquired in-process research and development) and $2.6
million in 1995. The increase of $1.6 million in 1997 and the prior year
increases were primarily attributable to the increased number of research and
development employees and related use of supplies, prototype materials and
inventory, and increased expenses associated with supporting various clinical
trials.
As discussed above, the Company expensed $4.8 million of acquired in-process
research and development in connection with the acquisition of Microgyn in 1996.
Selling, general and administrative ("SG&A") expenses increased to $6.3
million in 1997 from $4.8 million in 1996 and $2.8 million in 1995. The $1.5
million increase in 1997 and the $2.0 million increase in 1996 were primarily
due to the growth in marketing expenses associated with promoting the Company's
products and growth of United States and European sales and marketing personnel,
increased administrative costs required to support expanding operations and
increased administrative costs of being a public company,
Net interest and investment income decreased to $1.8 million in 1997 from
$2.2 million in 1996. The decrease is a result of lower average cash balances
due to the utilization of cash for operations. Net interest and investment
income increased to $2.2 million in 1996 from $323,000 in 1995. The increase in
1996 was due to higher average cash balances from proceeds of the initial public
offering in February 1996. Proceeds from these financing activities were
invested in high grade short-term investments. Interest expense for all periods
was insignificant.
As a result of the items discussed above, net loss increased to $12.1
million in 1997 from $11.7 million in 1996 and $5.8 million in 1995.
At December 31, 1997 the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $29.7 million and $11.0
million, respectively. In addition, at December 31, 1997 the Company had
research credit carryforwards of approximately $700,000. The net operating loss
and credit carryforwards described above will expire, if not utilized, at
various dates beginning in the years 1998 through 2012. 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. See "Risk Factors--Limited Operating
History; Anticipated Future Losses."
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("Statement 128"), which the Company adopted in the year ended December 31,
1997. Under the new requirements for calculating basic earnings per share, the
effect of potentially dilutive securities such as stock options is excluded. The
impact of Statement 128 results in no change to the Company's net loss per
share, as potentially dilutive securities have been excluded from the current
computation as they are antidilutive. Basic and diluted net loss is computed
using the weighted average number of shares of common stock outstanding.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly exceeded
its sales, resulting in an accumulated deficit of $35.7 million at December 31,
1997. 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, resulting in
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
had raised approximately $16.6 million from the private placement of equity
securities.
At December 31, 1997, Conceptus had cash, cash equivalents and investments
of $27.1 million compared with $39.0 million at December 31, 1996. The decrease
in 1997 was due to $12.0 million used in 1997 operations, 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 1997 were $1.0 million compared with $375,000 in
1996. This increase was primarily due to the implementation of a new computer
system, the acquisition of machinery and equipment necessary to manufacture the
ERA and FUTURA Resectoscope Sleeves and the leasehold improvements on the
Company's new facility. 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 1999. 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 devoted to developing, manufacturing and marketing the Company's
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.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants. 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.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS FORM 10-K, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN THIS FORM 10-K.
UNCERTAINTY OF MARKET ACCEPTANCE. 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
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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
upon the willingness of such persons 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.
DEPENDENCE UPON TRANSCERVICAL TUBAL ACCESS AND CATHETERIZATION
PRODUCTS. The Company's initial commercial products, the T-TAC and STARRT
Falloposcopy systems, have generated limited sales to date. Current applications
for these systems include accessing, 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.
LIMITED OPERATING HISTORY; ANTICIPATED FUTURE LOSSES. 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 Falloposcopy and S/TOP systems and, since 1996, the ERA and FUTURA
product lines. The Company has generated only limited revenues and has only
limited 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, 1997, had an accumulated deficit of
$35.7 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. Whether the Company can successfully manage
the transition to a large-scale commercial enterprise will depend upon a number
of factors, including obtaining selected regulatory and reimbursements approvals
for its existing or potential products, establishing its commercial
manufacturing capability, developing its U.S. marketing and selling capabilities
and establishing an international network. Failure to make such a transition
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. 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 five 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
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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
micro-catheters (the "Target patent"), has been the subject of four
reexamination proceedings in the USPTO. Following the completion of the first of
such proceedings, the USPTO issued a reexamination certificate and confirmed the
patentability. After the USPTO's review of petitions for second, third and
fourth reexaminations, Target received notice from the USPTO that it had
reaffirmed the patentability of the claims of the Target patent. In addition, in
November 1994, Target filed a lawsuit in United States District Court against
SciMed Life Systems, Inc. ("SciMed"), a subsidiary of BSC, 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 against sales of such companies' products believed to be infringing the
Target patent. The defendants responded by challenging the validity of the
Target 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. Upon the recent merger
between BSC and Target, the lawsuit has been dismissed as to SciMed.
Subsequently, the Court of Appeals vacated the preliminary injunction. The
lawsuit was dismissed as to Cordis pursuant to a settlement agreement signed
January 9, 1998. Any invalidation of the Target patent could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Legislation is pending in Congress that, if enacted in its present form,
would limit the ability of medical device manufacturers in the future to obtain
patents on surgical and medical procedures that are not performed by, or as a
part of, devices or compositions that are themselves patentable. While the
Company cannot predict whether the legislation will be enacted, or precisely
what limitations will result from the law if enacted, any limitation or
reduction in the patentability of medical and surgical methods and procedures
could have a material adverse effect on the Company's ability to protect its
proprietary methods and procedures.
In addition to patents, the Company relies on 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
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Company shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will not be breached or that the
Company will have adequate remedies for any 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. The manufacture and sale of medical devices,
including the medical devices used in the Company's T-TAC and STARRT
Falloposcopy systems and ERA and FUTURA Resectoscope Sleeves, are subject to
extensive regulation by numerous government authorities, both in the United
States and internationally. In the United States, the principal regulatory
authorities are the Food and Drug Administration ("FDA") and corresponding state
agencies, such as the California Department of Health Services ("CDHS"). The
process of obtaining and maintaining required regulatory clearances is lengthy,
expensive and uncertain. The FDA requires companies that wish to market a new
medical device or an existing medical device for use for a new indication to
obtain either a premarket notification clearance under Section 510(k) of the
Federal Food, Drug, and Cosmetic Act ("510(k)") or a premarket approval ("PMA")
prior to the introduction of such product into the market. 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. The PMA approval 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.
There can be no assurance that the Company will be able to obtain necessary
510(k) clearances or PMA or other 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.
Sales of medical devices outside of the United States are subject to
international 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.
The European Union has promulgated rules that require manufacturers of
medical products to obtain by mid-1998 the right to affix to their products 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 has 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 to a
Company product the CE mark will prohibit the Company from selling such product
in member countries of the European Union after mid-1998. The Company received
ISO certification in January 1998. Many countries in which the Company currently
operates or intends to operate either do not currently regulate
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medical devices or have minimal registration requirements; however, these
countries may develop more extensive regulations in the future which 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 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.
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 Good Manufacturing Practices
("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. The Company cannot predict the impact, if any, such
changes might have on its business, financial condition or results of
operations.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE; EMERGING MARKET. The
Company has only limited experience marketing and selling its products in
commercial quantities. 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.
The Company currently sells its products to international markets through a
limited number of distributors who resell to physicians and hospitals.
Domestically, the Company sells its products through a small direct sales force
and U.S. distributors. Sales to distributors are made on open credit terms and
may include purchase discounts. In 1997, sales to two of the Company's
distributors accounted for approximately 90% of the Company's total net sales.
One of these distributors, Imagyn, has notified the Company of its intention to
terminate the distribution agreement between the parties as of June 30, 1998.
Although the Company and Imagyn are currently renegotiating the terms of their
relationship, there can be no assurance that the parties will reach an agreement
on such terms. The loss of either of these two distributors or the inability to
attract new significant distributors could have a material adverse effect on the
Company's business, financial condition or results of operations. Furthermore,
interventional gynecology is an emerging medical market with widely varying
practice patterns. Therefore, there is no proven distribution channel for
marketing the Company's products in the United States or internationally. 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 worldwide
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.
DEPENDENCE UPON INTERNATIONAL DISTRIBUTORS AND SALES. The Company currently
has a limited network of international distributors, which market the Company's
products to certain European, African, Asian and Australian countries. The
Company's international sales are dependent upon the marketing efforts of, and
sales by, these distributors. The Company relies on these distributors to assist
it in obtaining product registration and reimbursement approvals in certain
international markets. The Company's strategy is to
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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. Furthermore, Conceptus 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 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 commercialize successfully its current or future
products in any international market.
UNCERTAINTY RELATING TO 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 cost associated with the treatment of
patients. Although reimbursement for catheterization and hysteroscopy procedures
has generally been available in the United States, there can be no assurance
that such reimbursement will continue to be available. The Company does not
expect that third-party reimbursement will be available for its 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. To date, the Company has received FDA clearance and
approval on its products in connection with its T-TAC and STARRT Falloposcopy
systems, and the Company believes third-party reimbursement will be available 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. In addition, the Company has received FDA
clearance and approval on its ERA and FUTURA Resectoscope Sleeves and believes
third-party reimbursement will be available under existing procedures codes for
hysteroscopy and TURP. 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 or
hysteroscopy 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 include both government-sponsored and private
healthcare insurance. 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
34
<PAGE>
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.
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. The medical device
industry is highly competitive. The Company expects competition for devices to
diagnose and treat female reproductive disorders to increase. 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. 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. 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.
As the Company commercializes its S/TOP system, it expects to compete
against other 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 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
successfully 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.
LIMITED MANUFACTURING EXPERIENCE. The Company has limited experience in
manufacturing its products in commercial quantities. The Company currently
manufactures the T-TAC and STARRT products in small quantities for commercial
sales. The Company will begin commercial production of the ERA and FUTURA
product lines during the first quarter of 1998. 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.
DEPENDENCE UPON SOLE SOURCE SUPPLIERS; LACK OF CONTRACTUAL
ARRANGEMENTS. Conceptus purchases both raw materials used in its products and
finished goods from various suppliers and relies on single sources for most of
these items. 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. 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
commercial sales and, to the extent that FDA approvals are received, United
States commercial sales.
35
<PAGE>
POSSIBLE FUTURE CAPITAL REQUIREMENTS. Conceptus believes that its existing
capital resources will be sufficient to fund its operations through 1999.
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 devoted to developing,
manufacturing and marketing the Company's products. The Company's capital
requirements will also depend on, among other things, the resources required to
hire, develop and maintain 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. Furthermore,
any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. 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.
PRODUCT LIABILITY RISK AND RECALLS; LIMITED INSURANCE COVERAGE. The
manufacture and sale of medical products involve 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 $5,000,000 per occurrence and an
annual aggregate maximum of $5,000,000, 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.
DEPENDENCE UPON KEY PERSONNEL. 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 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.
INFLUENCE OF BOSTON SCIENTIFIC CORPORATION. As of February 28, 1998, BSC
beneficially owned approximately 14.92% of the Company's outstanding Common
Stock. Accordingly, BSC may be able to exercise influence over the business and
financial affairs of the Company. In April 1997, BSC completed the acquisition
of Target, by merging Target with a wholly owned subsidiary. Certain of the
Company's products are based upon patents and other intellectual property
licensed from Target, on an exclusive basis within the field of reproductive
physiology. In the event that such Target patents are at any time invalidated,
the Company's proprietary position in the marketplace would be severely
compromised and the Company's competitors could have the ability to incorporate
the Target technology in their products. In addition, should the Target
technology licensed to the Company be found to infringe upon a third party's
36
<PAGE>
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.
INFLUENCE BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. As
of February 28, 1998, the Company's directors, executive officers and principal
stockholders, including BSC, beneficially owned, in the aggregate, approximately
22% of the Company's outstanding Common Stock. These stockholders, if acting
together, would be able to influence substantially all matters requiring
approval by the stockholders of the Company, including any determination with
respect to the acquisition or disposition of assets by the Company, future
issuances of Common Stock or other securities by the Company, declaration of
dividends on the Common Stock and the election of directors. Such concentration
of ownership may also have the effect of delaying, deferring or preventing a
change in control of the Company.
POTENTIAL FLUCTUATIONS IN FUTURE QUARTERLY RESULTS. 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, progress of clinical trials and introduction of competitive
products.
VOLATILITY OF 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. The Company's stock price has in
the past been, and may in the future be, subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenue 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.
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.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS. Certain provisions of the
Company's Certificate of Incorporation and Bylaws may have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of these provisions allow the
Company to issue Preferred Stock without any vote or further action by the
stockholders, provide for a classified board of directors, eliminate the right
of stockholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. In addition, the Company has
adopted a stockholder rights plan. The stockholder rights plan, and the charter
and bylaw provisions described above, may make it more difficult for
stockholders to take certain corporate actions and could have the effect of
delaying or preventing a change in control of the Company.
ABSENCE OF DIVIDENDS. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company intends to retain any future
37
<PAGE>
earnings 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.
YEAR 2000 COMPLIANCE. The "Year 2000 issue" arises because most computer
systems and programs were designed to handle only a two-digit year, not a
four-digit year. These computers may interpret "00" as the year 1900 and could
either stop processing date-related computations or could process them
incorrectly. The Company has been informed by its information system vendors
that such systems are able to process the Year 2000 accurately and accordingly
does not anticipate any Year 2000 issues from its own information systems,
databases or programs. However, the Company could be adversely impacted by Year
2000 issues faced by major distributors, suppliers, customers, vendors and
financial service organizations with which the Company interacts. The Company is
in the process of developing a plan to determine the impact that third parties
which are not Year 2000 compliant may have on the operations of the Company.
There can be no assurance that such plan will be able to address fully, or at
all, the impact of the "Year 2000 issue" on the Company, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 42.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 26, 1998, which Proxy Statement will be
filed within 120 days after the end of the Company's 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.
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.
38
<PAGE>
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, 1997 and 1996
Consolidated Statements of Operations Years Ended December 31, 1997,
1996 and 1995
Consolidated Statement of Stockholders' Equity Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows Years Ended December 31, 1997,
1996, and 1995
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.
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.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------
<C> <S>
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.
10.16(9) Third Addendum to Lease Agreement with Dani Investment Partners.
10.17(9) Lease Agreement with Three Sisters Ranch Enterprises dated April 15, 1997
10.18(10) Change of Control Agreement dated as of May 13, 1997 by and between Registrant
and Kathryn A. Tunstall.
10.19(10) Change of Control Agreement dated as of May 13, 1997 by and between Registrant
and Sanford Fitch.
10.20(10) Form of Senior Management Change of Control Agreement.
10.21(11) Marketing and Distribution Agreement, dated as of September 16, 1997, between
the Registrant and Imagyn Medical Technologies.
10.22 Loan Agreement with Steve Bacich dated April 24, 1997.
10.23 Promissory Note with Steve Bacich dated April 24, 1997.
10.24 Master Consulting Agreement with Florence Comite dated September 10, 1997.
10.25 Manufacturing Transition Agreement with Medical Scientific, Inc. dated October
1, 1997.
10.26 Royalty Agreement with Medical Scientific, Inc. dated October 1, 1997.
10.27 Master Consulting Agreement with Howard Palefsky dated October 15, 1997.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (See Page 60 of this Report).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule for the period from January 1, 1996 to March
31, 1996.
</TABLE>
- ------------------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form SB-2, as amended (File No. 33-99890-LA), which became
effective on February 1, 1996.
40
<PAGE>
(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.
(9) 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 April 30, 1997.
(10) 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, 1997.
(11) Incorporated by reference to Exhibit 10.16 filed in response to Item 6(a)
of the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
41
<PAGE>
CONCEPTUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ 43
Audited Financial Statements
Consolidated Balance Sheets........................................................... 44
Consolidated Statements of Operations................................................. 45
Consolidated Statement of Stockholders' Equity........................................ 46
Consolidated Statements of Cash Flows................................................. 47
Consolidated Notes to Financial Statements............................................ 48
</TABLE>
42
<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. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
at December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Palo Alto, California
February 2, 1998
43
<PAGE>
CONCEPTUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 9,250 $ 16,939
Short-term investments.............................................. 17,808 22,082
Accounts receivable, net of allowance for doubtful accounts of $77
and $178 at December 31, 1997 and 1996, respectively.............. 540 105
Inventories......................................................... 355 182
Other current assets................................................ 290 234
-------- --------
Total current assets.................................................. 28,243 39,542
Property and equipment, net........................................... 1,090 543
Other assets.......................................................... 147 8
-------- --------
$ 29,480 $ 40,093
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 699 $ 588
Accrued compensation................................................ 670 455
Accrued acquisition costs........................................... -- 1,000
Other accrued liabilities........................................... 135 302
Current portion of deferred revenue................................. 97 --
Current portion of debt and capital lease obligations............... 34 119
-------- --------
Total current liabilities............................................. 1,635 2,464
Long-term portion of debt and capital lease obligations............... 1 34
Long-term portion of deferred revenue................................. 340 --
Commitments
Stockholders' equity:
Common stock, $0.003 par value, 30,000,000 shares authorized;
9,495,053 and 9,206,795 shares issued and outstanding at December
31, 1997 and 1996, respectively................................... 63,505 61,876
Stockholder notes receivable........................................ (54) (49)
Deferred compensation............................................... (216) (559)
Accumulated deficit................................................. (35,731) (23,673)
-------- --------
Total stockholders' equity............................................ 27,504 37,595
-------- --------
$ 29,480 $ 40,093
-------- --------
-------- --------
</TABLE>
See accompanying notes.
44
<PAGE>
CONCEPTUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net sales...................................................... $ 1,426 $ 664 $ 243
Cost of sales.................................................. 3,516 1,208 1,021
-------- -------- -------
Gross profit................................................... (2,090) (544) (778)
Operating expenses:
Research and development..................................... 5,429 3,757 2,589
Selling, general and administrative.......................... 6,323 4,824 2,805
Acquired in-process research and development................. -- 4,752 --
-------- -------- -------
Total operating costs and expenses............................. 11,752 13,333 5,394
-------- -------- -------
Operating loss................................................. (13,842) (13,877) (6,172)
Interest and investment income, net............................ 1,797 2,211 361
Interest expense............................................... (13) (26) (38)
-------- -------- -------
Net loss....................................................... $(12,058) $(11,692) $(5,849)
-------- -------- -------
-------- -------- -------
Basic and diluted net loss per share........................... $ (1.29) $ (1.39)
-------- --------
-------- --------
Shares used in computing basic and diluted net loss per
share........................................................ 9,381 8,396
-------- --------
-------- --------
Pro forma basic and diluted net loss per share................. $ (1.37)
-------
-------
Shares used in computing pro forma basic and diluted net loss
per share.................................................... 4,273
-------
-------
</TABLE>
See accompanying notes.
45
<PAGE>
CONCEPTUS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------
REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994..................... 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, pursuant to exercise of
options.......................................... -- -- -- -- 116,543 98
Issuance of common stock for cash in 1996 at
$8.7125 to $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..................... 0 $ 0 0 $ 0 9,206,795 $ 61,876
Issuance of common stock for cash in 1997 at $0.30
to $10.50 per share, pursuant to exercise or
options.......................................... -- -- -- -- 158,265 172
Issuance of common stock for cash in 1997 at $4.25
to $7.86 per share, pursuant to the employee
stock purchase plan.............................. -- -- -- -- 25,285 140
Issuance of common stock to former shareholders of
Microgyn, Inc.................................... -- -- -- -- 104,708 1,000
Extension of stockholder note receivable.......... -- -- -- -- -- --
Amortization of deferred compensation, net of
reversal of forfeited shares..................... -- -- -- -- -- 317
Net loss.......................................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Balances at December 31, 1997..................... 0 $ 0 0 $ 0 9,495,053 $ 63,505
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
<CAPTION>
TOTAL
STOCKHOLDER'
EQUITY (NET
STOCKHOLDER DEFERRED ACCUMULATED CAPITAL
NOTE RECEIVABLE COMPENSATION DEFICIT DEFICIENCY)
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994..................... $ (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, pursuant to exercise of
options.......................................... -- -- -- 98
Issuance of common stock for cash in 1996 at
$8.7125 to $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......................................... -- -- -- 47
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
Issuance of common stock for cash in 1997 at $0.30
to $10.50 per share, pursuant to exercise or
options.......................................... -- -- -- 172
Issuance of common stock for cash in 1997 at $4.25
to $7.86 per share, pursuant to the employee
stock purchase plan.............................. -- -- -- 140
Issuance of common stock to former shareholders of
Microgyn, Inc.................................... -- -- -- 1,000
Extension of stockholder note receivable.......... (5) -- -- (5)
Amortization of deferred compensation, net of
reversal of forfeited shares..................... -- 343 -- 660
Net loss.......................................... -- -- (12,058) (12,058)
--- ------ ------------- -------------
Balances at December 31, 1997..................... $ (54) $ (216) $ (35,731) $ 27,504
--- ------ ------------- -------------
--- ------ ------------- -------------
</TABLE>
See accompanying notes.
46
<PAGE>
CONCEPTUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss........................................................................ $ (12,058) $ (11,692) $ (5,849)
Adjustments to reconcile net loss to net cash used in operating activities:
Charge for in-process research and development................................ -- 4,752 --
Depreciation and amortization................................................. 498 305 240
Amortization of deferred compensation......................................... 523 219 90
Recognition of deferred revenue............................................... (48) -- --
Changes in operating assets and liabilities:
Accounts receivable......................................................... (435) (92) 113
Inventories................................................................. (173) (128) 170
Other current assets........................................................ (56) 216 (335)
Accounts payable............................................................ 111 (397) 364
Accrued compensation........................................................ 215 154 100
Other accrued liabilities................................................... (30) 1,150 66
---------- ---------- ---------
Net cash used in operating activities........................................... (11,453) (5,513) (5,041)
---------- ---------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of investments......................................................... (61,785) (34,469) (8,731)
Maturities of investments....................................................... 64,078 14,621 7,759
Sales of investments............................................................ 1,981 -- 1,495
Purchase of Microgyn net of cash acquired....................................... -- (4,343) --
Capital expenditures............................................................ (1,030) (375) (170)
Change in other assets.......................................................... (154) 12 9
---------- ---------- ---------
Net cash provided by (used in) investing activities............................. 3,090 (24,554) 362
---------- ---------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock................................... -- -- 5,171
Proceeds from distributor agreement............................................. 485 -- --
Proceeds from issuance of common stock.......................................... 312 44,321 7
Increase in stockholders notes.................................................. (5) -- --
Principal payments on debt and capital lease obligations........................ (118) (163) (147)
---------- ---------- ---------
Net cash provided by financing activities....................................... 674 44,158 5,031
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents............................ (7,689) 14,091 352
Cash and cash equivalents at beginning of year.................................. 16,939 2,848 2,496
---------- ---------- ---------
Cash and cash equivalents at end of year........................................ $ 9,250 $ 16,939 $ 2,848
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.......................................................... $ 13 $ 26 $ 38
---------- ---------- ---------
---------- ---------- ---------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Equipment acquired under capital lease obligations.............................. $ -- $ -- $ 69
---------- ---------- ---------
---------- ---------- ---------
Issuance of common stock in exchange for note receivable........................ $ -- $ -- $ 24
---------- ---------- ---------
---------- ---------- ---------
Issuance of common stock to Microgyn shareholders............................... $ 1,000 $ -- $ --
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes.
47
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 and market minimally
invasive devices for reproductive medical applications. The Company's focus is
to improve the safety of resectoscopic procedures and to provide a non-surgical
approach to fallopian tube sterilization, the most commonly performed
contraceptive procedure worldwide. The Company 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's catheter systems are based on
technology initially developed and used by Target Therapeutics, Inc. ("Target"),
a business unit of Boston Scientific Corporation ("BSC"), and licensed
exclusively to Conceptus in the field of reproductive physiology. Conceptus
markets its products in the United States and internationally.
Due to a higher level of sales activity in the current year, the Company
exited the development stage in 1997. The Company was in the development stage
through December 31, 1996.
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 into 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 1997,
1996 and 1995, net sales include direct sales within the United States, as well
as through international and domestic distributors. These customers have no
contractual right of return or stock rotation privileges.
48
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement
128"), which the Company adopted in the year ended December 31, 1997. Statement
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Under the new requirements for
calculating basic earnings per share, the effect of potentially dilutive
securities such as stock options is excluded. The impact of Statement 128
results in no change to the Company's net loss per share, as potentially
dilutive securities have been excluded from the computation as they are
antidilutive. Basic and diluted net loss per share is computed using the
weighted average number of common shares outstanding.
Basic and diluted net loss per share have also been retroactively restated
to apply the requirements of Staff Accounting Bulletin No. 98, issued by the SEC
in February 1998 ("SAB 98"). Under SAB 98, certain shares of common stock and
options and warrants to purchase shares of common stock issued at prices
substantially below the per share price of shares sold in the Company's initial
public offering, previously included in the computation of shares outstanding
pursuant to Staff Accounting Bulletin Nos. 55, 62 and 83, are now excluded from
the computation as their effect is antidilutive under Statement 128.
Pro forma basic and diluted net loss per share has been computed as
described above and also gives effect to common equivalent shares from
convertible preferred shares issued prior to the initial public offering that
converted to preferred shares upon completion of the Company's initial public
offering.
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" ("Statement 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. The Company continues
to account for employee stock options in accordance with APB 25 and has adopted
the "disclosure only" alternative described in SFAS 123.
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 of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" at the time of purchase.
At December 31, 1997 and 1996, 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
49
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
prices. At December 31, 1997 and 1996, 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 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 that 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. Customers comprising more than 10% of net sales at December
31 are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----- ----- -----
Customer 1............................................................... 63% 46% --
Customer 2............................................................... 27% -- --
Customer 3............................................................... -- 19% --
Customer 4............................................................... -- 11% 26%
Customer 5............................................................... -- -- 23%
</TABLE>
Export sales were $239,000, $188,000 and $126,000 during the years ending
December 31, 1997, 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.
50
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. ACQUISITION
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. In May 1997, the Company satisfied the $1.0
million accrued acquisition cost by issuing 104,708 shares of the Company's
Common Stock. 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 $4,572,000 aggregate acquisition cost as purchase of in-process research and
development. Consequently, the $4,572,000 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)
Basic and diluted net loss per share................... $ (0.93)
</TABLE>
In October 1997, the Company purchased the exclusive manufacturing rights to
the Microgyn product line from the Company's supplier, Medical Scientific, Inc.
The manufacturing know-how related to the Microgyn product line has been
transferred to the Company's facility as of the end of the first quarter of
1998. The purchase and transfer of these manufacturing rights resulted in
additional cost of goods expenditures approximating $1.1 million.
51
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 expired on the earlier of
December 1996, an underwritten public offering of the Company's Common Stock in
which the aggregate proceeds were at least $7,500,000 and the price per share
was 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. The notes are payable over a 36-month and
48-month period. During 1997, one note was paid in full; as a result, the
Company had one note payable for $6,000 at December 31, 1997 outstanding under
the secured loan agreement. In 1996, the Company had these two notes payable for
a total of $40,000. In connection with these secured loan 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 was $3.00 per share and the remaining
7,000 shares had 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 and 1995, $15,000 and
$49,000, respectively, were paid to Target under this supply agreement. There
were no amounts paid under this agreement during 1997.
In addition, the Company paid certain employee benefits incurred by Target
on the Company's behalf. In 1997, no amounts were paid due to the discontinuance
of the agreement as of December 31, 1996. In 1996 and 1995, $177,000 and
$237,000, respectively, were paid.
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.
52
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
4. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials............................................................. $ 89 $ 134
Finished goods and work-in-process........................................ 266 48
--------- ---------
$ 355 $ 182
--------- ---------
--------- ---------
Property and equipment, net:
Machinery and equipment................................................... $ 643 $ 356
Office equipment and furniture and fixtures............................... 1,319 856
Leasehold improvements.................................................... -- 54
Leasehold improvements--construction in progress.......................... 98 --
--------- ---------
2,060 1,266
Less accumulated depreciation and amortization............................ (970) (723)
--------- ---------
Property and equipment, net............................................... $ 1,090 $ 543
--------- ---------
--------- ---------
</TABLE>
53
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. INVESTMENTS
The following is a summary of available-for-sale securities as of:
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
--------------------
<S> <C> <C>
DECEMBER 31,
--------------------
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash.................................................................... $ 395 $ 95
Cash equivalents:
Money market funds.................................................... 882 7,847
Commercial paper...................................................... 3,492 2,020
Corporate notes....................................................... 2,086 --
U.S. government obligations........................................... 2,395 6,977
--------- ---------
$ 9,250 $ 16,939
--------- ---------
--------- ---------
Short-term and long-term investments:
U.S. government obligations........................................... $ 8,353 $ 11,033
Corporate notes....................................................... 8,443 11,049
Certificates of deposit............................................... 1,012 --
--------- ---------
$ 17,808 $ 22,082
--------- ---------
--------- ---------
</TABLE>
The contractual maturities of all investments are due in one year or less.
6. COMMITMENTS
The Company leases its current facility under an operating lease which
expires in December 1999. The Company has also leased an additional facility
under an operating lease, effective May 1997, which expires May 2002. The total
minimum annual rental commitments under the leases as of December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Year ending December 31,
1998.......................................................................... $ 490
1999.......................................................................... 499
2000.......................................................................... 232
2001.......................................................................... 242
2002.......................................................................... 102
------
Total minimum rental commitment............................................... $ 1,565
------
------
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$347,000, $129,000, and $110,000, respectively.
At December 31, 1997 and 1996, assets acquired under noncancelable capital
leases with Target consist of office equipment with an aggregate cost of
$322,000 at both 1997 and 1996, and accumulated amortization of $284,000 and
$229,000, respectively.
54
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. STOCKHOLDER'S 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, consultants and directors. Effective
May 1997, the shares of Common Stock reserved for issuance were increased by
1,000,000 shares to 2,575,000 shares. The Company has reserved 2,128,943 shares
of its Common Stock which may be issued with respect to outstanding options at
December 31, 1997 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 of the
Common Stock on the date of grant 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. The fair market value of the Common Stock on the date of
grant is 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 1993 Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS ---------------------------
AVAILABLE NUMBER OF
FOR GRANT SHARES PRICE PER SHARE
---------- ---------- ---------------
<S> <C> <C> <C>
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 canceled..................................................... 39,679 (39,679) $0.30-$9.15
---------- ---------- ---------------
Balance at December 31, 1995........................................... 497,185 906,566 $0.30-$9.15
Options granted...................................................... (439,707) 439,707 $9.25-$19.75
Options exercised.................................................... -- (116,543) $0.30-$9.15
Options canceled..................................................... 165,315 (165,315) $0.30-$10.50
---------- ---------- ---------------
Balance at December 31, 1996........................................... 222,793 1,064,415 $0.30-$19.75
Additional authorized................................................ 1,000,000 -- --
Options granted...................................................... (755,000) 755,000 $7.00-$13.625
Options exercised.................................................... -- (158,265) $0.30-$10.50
Options canceled..................................................... 172,388 (172,388) $0.30-$19.75
---------- ---------- ---------------
Balance at December 31, 1997........................................... 640,181 1,488,762 $0.30-$19.75
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
55
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. STOCKHOLDER'S EQUITY (CONTINUED)
At December 31, 1997, 1996 and 1995, options to purchase 652,982, 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 for 1997 and 1996. At
December 31, 1997, 12,500 common shares are subject to repurchase by the Company
(37,153 shares subject to repurchase at December 31, 1996).
On August 1, 1996, all non-officer employee grants of stock options under
the 1993 Stock 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 canceled options in the 1993
Plan table.
For the year ended December 31, 1995, the Company recorded deferred
compensation of $868,000 for the difference between the exercise price and the
deemed fair value for financial statement presentation purposes of the Company's
Common Stock, as determined by the board of directors, for 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 deferred
compensation expense is being amortized over the vesting period of the options,
generally four years. The amount amortized during the years ended December 31,
1997, 1996 and 1995 was $175,000, $219,000 and $90,000, respectively. During
1997, the Company reversed compensation expense of $280,000 related to forfeited
unvested shares due to employee resignations during 1996 and 1997.
In addition, during 1997 the Company recorded deferred compensation of
$138,000 for the difference between the exercise price and the deemed fair value
for an option granted to an officer during 1997. The deferred compensation
expense is being amortized over the vesting period of four years. The amount
amortized during the year ended December 31, 1997 was $26,000.
1995 DIRECTORS STOCK OPTION PLAN
On November 29, 1995, the board approved the 1995 Director's 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 1997 and
1996, 32,000 and 12,000 options, respectively, were granted. No options were
granted in 1995.
1995 EMPLOYEE STOCK PURCHASE PLAN
On November 29, 1995, the board approved the 1995 Employee Stock Purchase
Plan ("ESPP"), under which employees may purchase shares of the Company's Common
Stock, 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 ESPP, employees can choose each year to have up to 10% of their
annual base earnings withheld to purchase the Company's Common Stock. During
1997 and 1996, 25,285
56
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. STOCKHOLDER'S EQUITY (CONTINUED)
and 18,524 shares, respectively, were issued. The Company has reserved 200,000
shares of Common Stock for issuance under the ESPP. During 1995, no shares were
issued.
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 loss 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 Statement 123. 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 option grants in 1997 and 1996:
dividend yield of zero, expected volatility of 60%, risk-free interest rate of
6% and an expected life of 5 years. 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 1997, 1996 and 1995:
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 1997 and 1996 was $3.09 and $4.32, respectively. The
effects of applying FAS 123 for recognizing compensation expense and providing
pro forma disclosures in 1997, 1996 and 1995 are not likely to be representative
of the effects on reported net income in future years.
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>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Pro forma net loss.......................................... $ (12,908) $ (12,463) $ (5,917)
Pro forma basic net loss per share.......................... $ (1.38) $ (1.48) $ (1.38)
</TABLE>
57
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. STOCKHOLDER'S EQUITY (CONTINUED)
A summary of the activity of the Company's 1993 Plan and the Directors' Plan
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------------
<S> <C> <C> <C> <C>
WEIGHTED-AVG
WEIGHTED-AVG EXERCISE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES PRICE
- ---------------------------------------------------------- ---------- --------------- ---------- -------------
Outstanding at beginning of year.......................... 1,076,415 $ 5.72 906,566 $ 2.46
Granted................................................... 787,000 $ 9.29 453,388 $ 15.06
Exercised................................................. (158,265) $ 1.09 (116,543) $ 0.84
Forfeited................................................. (172,388) $ 6.93 (166,946) $ 12.83
Outstanding at end of year................................ 1,532,792 $ 7.96 1,076,415 $ 5.72
Options exercisable at year-end........................... 652,982 447,953
Weighted-average fair value of option granted during the
year.................................................... $4.96 $5.99
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-AVG.
NUMBER REMAINING WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES 12/31/97 LIFE (YEARS) PRICE AT 12/31/97 PRICE
- ------------------------------------- -------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$0.30-$0.48.......................... 234,993 6.15 $ 0.40 209,221 $ 0.39
$0.51-$7.00.......................... 218,195 8.87 $ 4.26 67,258 $ 0.56
$7.375-$9.125........................ 45,800 9.72 $ 7.78 6,250 $ 8.78
$9.15-$9.15.......................... 160,248 7.78 $ 9.15 86,789 $ 9.15
$9.25-$9.25.......................... 18,400 9.07 $ 9.25 4,504 $ 9.25
$9.625-$9.625........................ 404,825 9.36 $ 9.63 123,393 $ 9.63
$9.63-$10.41......................... 172,319 8.50 $ 10.11 50,525 $ 10.04
$10.50-$11.625....................... 156,466 8.46 $ 10.74 63,983 $ 10.68
$12.25-$19.25........................ 103,183 8.95 $ 14.59 30,227 $ 16.24
$19.75-$19.75........................ 18,333 8.16 $ 19.75 10,832 $ 19.75
-------------- ------
$0.30-$19.75......................... 1,532,762 8.41 $ 7.96 652,982 $ 6.27
</TABLE>
8. INCOME TAXES
As of December 31, 1997, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $29,700,000 and
$11,000,000, respectively. In addition, the Company had research credit
carryforwards of approximately $700,000. The net operating loss and credit
carryforwards described above will expire at various dates beginning in the
years 1998 through 2012, 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, as amended.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.
58
<PAGE>
CONCEPTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. INCOME TAXES (CONTINUED)
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.
Significant components of the Company's deferred tax assets as of December
31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
(IN THOUSANDS)
Net operating loss carryforwards........................................ $ 10,700 $ 6,700
Research credits (expiring 2006-2012)................................... 700 375
Capitalized R&D......................................................... 800 250
Other--net.............................................................. 700 240
---------- ---------
Total deferred tax assets............................................... 12,900 7,565
Valuation allowance for deferred tax assets............................. (12,900) (7,565)
---------- ---------
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 $2,865,000 during 1996.
9. LITIGATION
The Company is also subject to other legal proceedings and claims that arise
in the ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity of
the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
59
<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 30th day of March 1998
<TABLE>
<S> <C> <C>
CONCEPTUS, INC
By: /s/ KATHRYN A. TUNSTALL
-----------------------------------------
Kathryn A. Tunstall
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ KATHRYN A. TUNSTALL Officer and Director
- ------------------------- (Principal Executive March 30, 1998
(Kathryn A. Tunstall) Officer)
Senior Vice President,
/s/ SANFORD FITCH Chief Financial Officer
- ------------------------- and Director (Principal March 30, 1998
(Sanford Fitch) Financial and Accounting
Officer)
/s/ FLORENCE COMITE
- ------------------------- Director March 30, 1998
(Florence Comite)
/s/ ROBERT F. KUHLING
- ------------------------- Director March 30, 1998
(Robert F. Kuhling)
/s/ THOMAS C. MCCONNELL
- ------------------------- Director March 30, 1998
(Thomas C. McConnell)
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- -------------------------- -------------------
<C> <S> <C>
/s/ NANCY S. OLSON
- ------------------------- Director March 30, 1998
(Nancy S. Olson)
/s/ HOWARD D. PALEFSKY
- ------------------------- Director March 30, 1998
(Howard D. Palefsky)
/s/ RICHARD D. RANDALL
- ------------------------- Director March 30, 1998
(Richard D. Randall)
</TABLE>
61
<PAGE>
EXHIBIT 10.22
CONCEPTUS, INC.
LOAN AGREEMENT
--------------
This Loan Agreement is made as of April 24, 1997 by and between
Conceptus, Inc., a Delaware corporation (the "COMPANY"), and Steve Bacich
("BORROWER").
RECITALS
--------
Borrower has borrowed from the Company, and the Company has lent to
Borrower, an aggregate of $100,000 (the "BORROWED AMOUNT") pursuant to an
unsecured promissory note in the form attached hereto as EXHIBIT A (the
"NOTE") on the terms and conditions contained herein and in the Note.
AGREEMENT
---------
In consideration of the foregoing, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties agree
as follows:
1. LOANING OF BORROWED AMOUNT. Borrower acknowledges that he received
a wire transfer from the Company in the amount of the Borrowed Amount (the
"LOAN") on April 24, 1997. Borrower agrees that the Company issued such wire
transfer subject to the terms and conditions contained in this Agreement.
2. PROMISSORY NOTE. In consideration of the Company's delivery of the
Borrowed Amount, Borrower will execute the Note in the principal amount of
such Borrowed Amount and bearing interest at a rate of 9.5% per annum,
compounded annually from April 24, 1997, the date upon which Borrower
received the Borrowed Amount.
3. USE OF PROCEEDS. Borrower represents and warrants that the
proceeds of the Loan were applied solely to the purchase of Borrower's
residence at 20 Fairway Place, Half Moon Bay, CA 94109.
4. REPAYMENT OF LOAN.
(a) Upon March 26 of 1998, 1999, 2000 and 2001, the first four
anniversaries of Borrower's employment with the Company, Borrower shall be
deemed by the Company to have repaid an amount equal to the sum of (i) 25% of
the Borrowed Amount and (ii) the accrued interest thereon.
(b) Upon termination of Borrower's employment with the Company
with or without Cause (as defined in Paragraph 4(c)), any amount of the Loan,
including accrued interest, not deemed repaid pursuant to Paragraph 4(a)
shall be repaid immediately by Borrower; provided, however, if Borrower's
employment with the Company is Involuntarily Terminated (as
<PAGE>
defined in Paragraph 4(c)) other than for Cause in connection with a Change
of Control (as defined in Paragraph 4(c)), then any amount of the Loan,
including accrued interest, not deemed repaid pursuant to Paragraph 4(a)
shall be deemed repaid by Borrower in full as of the date of such termination.
(c) The following terms used in Paragraph 4(b) above shall have
the following meanings:
(i) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
(1) OWNERSHIP. Any "Person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under such
act), directly or indirectly, of securities of the Company representing 20%
or more of the total voting power represented by the Company's then
outstanding voting securities WITHOUT the approval of the Board of Directors
of the Company; or
(2) MERGER/SALE OF ASSETS. A merger or consolidation of
the Company whether or not approved by the Board of Directors of the Company,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 50% of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(3) CHANGE IN BOARD COMPOSITION. A change in the
composition of the Board of Directors of the Company, as a result of which
fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company
as of May 13, 1997 or (B) are elected, or nominated for election, to the
Board of Directors of the Company with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination
is in connection with an actual or threatened proxy contest relating to the
election of directors to the Company).
(ii) CAUSE. "Cause" shall mean (i) gross negligence or
willful misconduct in the performance of Borrower's duties to the Company
where such gross negligence or willful misconduct has resulted or is likely
to result in substantial and material damage to the Company or its
subsidiaries; (ii) repeated unexplained or unjustified absence from the
Company; (iii) a material and willful violation of any federal or state law;
(iv) commission of any act of fraud with respect to the Company; or (v)
conviction of a felony or a crime involving moral turpitude causing material
harm to the standing and reputation of the Company, in each case as
determined in good faith by the Board of Directors of the Company.
<PAGE>
(iii) INVOLUNTARILY TERMINATED. "Involuntarily Terminated"
shall include any termination by the Company other than for Cause and
Borrower's voluntary termination, upon 30 days prior written notice to the
Company, following (i) any reduction of Borrower's base compensation (other
than in connection with a general decrease in base salaries for most
similarly situated employees of the successor corporation); or (ii)
Borrower's refusal to relocate to a location more than 50 miles from the
Company's current location.
5. DEFAULT. Borrower shall be deemed to be in default of the Note and
of this Agreement in the event payment of principal or interest on the Note
shall be delinquent for a period of 10 days or more.
6. REMEDIES IN THE EVENT OF DEFAULT. In the case of an event of
default, as set forth above, the Company shall have the right to accelerate
payment of the Note upon notice to Borrower, and shall thereafter be entitled
to pursue any or all of its remedies under applicable law, including, without
limitation, offsetting from Borrower's salary, bonuses, vacation pay or other
amounts due to Borrower from the Company, any amount due and payable by
Borrower under the Note.
7. NO EMPLOYMENT RIGHTS. Nothing in this Agreement or the Note is
intended or shall be construed to confer upon Borrower any right to
employment or continued employment with the Company, or shall alter in any
way the nature of Borrower's employment with the Company.
8. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations,
or liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.
(b) GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State
of California, without giving effect to principles of conflicts of law.
(c) NOTICES. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient upon receipt, when
delivered personally or by a nationally-recognized delivery service (such as
Federal Express or UPS) or confirmed facsimile, or 48 hours after being
deposited in the U.S. mail as certified or registered mail with postage
prepaid, if such notice is addressed to the party to be notified at such
party's address or facsimile number as set forth below, or as subsequently
modified by written notice.
(d) SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith.
<PAGE>
In the event that the parties cannot reach a mutually agreeable and
enforceable replacement for such provision, then (i) such provision shall be
excluded from this Agreement, (ii) the balance of the Agreement shall be
interpreted as if such provision were so excluded and (iii) the balance of
the Agreement shall be enforceable in accordance with its terms.
(e) ADVICE OF LEGAL COUNSEL. Each party acknowledges and
represents that, in executing this Agreement, it has had the opportunity to
seek advice as to its legal rights from legal counsel and that the person
signing on its behalf has read and understood all of the terms and provisions
of this Agreement. This Agreement shall not be construed against any party
by reason of the drafting or preparation thereof.
[Signature Page Follows]<PAGE>
<PAGE>
The parties hereto have executed this Loan Agreement as of the day and
year first above written.
BORROWER
/s/ Steve Bacich
------------------------------------
STEVE BACICH
Address: 20 Fairway Place
Half Moon Bay, CA 94109
CONCEPTUS, INC.
By: /s/ Kathryn Tunstall
Title: President and Chief Executive
Officer
<PAGE>
EXHIBIT 10.23
PROMISSORY NOTE
---------------
$100,000 April 24, 1997
San Carlos, California
FOR VALUE RECEIVED, Steve Bacich ("BORROWER") promises to pay to
Conceptus, Inc., a Delaware corporation (the "COMPANY"), the principal sum of
One Hundred Thousand Dollars ($100,000), together with interest on the unpaid
principal hereof from the date hereof at the rate of 9.5% per annum,
compounded annually. This Note is made pursuant to the terms of a Loan
Agreement of even date herewith (the "AGREEMENT") between Borrower and the
Company and is subject to the terms and conditions of the Agreement. ALL
CAPITALIZED TERMS USED BUT NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE
MEANINGS GIVEN SUCH TERMS IN THE AGREEMENT.
All principal and accrued interest shall be due and payable in full on
the earliest of (a) March 26, 2001 or (b) the termination of Borrower's
employment relationship with the Company with or without Cause.
Notwithstanding the foregoing, upon March 26 of 1998, 1999, 2000 and 2001,
the first four anniversaries of Borrower's employment with the Company,
Borrower shall be deemed by the Company to have repaid an amount equal to the
sum of (i) 25% of the Borrowed Amount and (ii) the accrued interest thereon;
provided, further, if Borrower's employment with the Company is Involuntarily
Terminated other than for Cause in connection with a Change of Control, then
any amount of the Loan, including accrued interest, not deemed repaid as
provided above shall be deemed repaid by Borrower in full as of the date of
such termination.
Borrower may at any time prepay all or any portion of the principal or
interest owing hereunder. Payments of principal and interest shall be made
in lawful money of the United States of America and shall be credited first
to the accrued interest, with the remainder applied to principal.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by
Borrower.
This Note is not secured.
The holder of this Note shall have full recourse against Borrower. In
case of an event of default (as described in Section 5 of the Agreement), the
Company may proceed against the Borrower as set forth in the Agreement or as
permitted by applicable law.
/s/ Steve Bacich
--------------------------
STEVE BACICH
Address: 20 Fairway Place
Half Moon Bay, CA 94019
<PAGE>
EXHIBIT 10.24
CONCEPTUS, INC.
MASTER CONSULTING AGREEMENT
This Agreement is entered into by and between Conceptus, Inc., a
Delaware corporation, ("Conceptus"), and Florence Comite, MD (hereinafter
"Consultant"), this 10th day of September 1997. It is agreed that the
Consultant is performing these services as an employee of and on behalf of
Medicine & Health, LLC.
In consideration of the mutual promises contained herein, the parties
hereto agree as follows:
SECTION 1: CONSULTING
1.1 SERVICES. Consultant shall render consulting services in the area
of establishment and direction of Scientific Advisory Board, participation on
S/TOP Advisory Board and general consulting on Women's Health issues
hereinafter its "Duties"). Consultant shall consult with the Board of
Directors, officers, and department heads of Conceptus, and such other
personnel as designated by the President of Conceptus, in regard to her
Duties.
1.2 SERVICES FOR OTHERS. Consultant shall be free to represent or
perform services for other persons during the term of this Agreement,
provided that performance of such services does not interfere with
Consultant's Duties under this Agreement. However, Consultant agrees that
Consultant does not presently perform, and does not intend to perform, during
the term of this Agreement, consulting or other services for third parties
whose businesses or proposed businesses in any way involve the design or use
of products that are or would be competitive with the products or proposed
products of Conceptus (except for companies previously disclosed by
Consultant to Conceptus in writing). Should Consultant propose to perform
consulting or other services for any such third party, Consultant agrees to
notify Conceptus in writing in advance (specifying the name of the
organization for whom Consultant proposes to perform such services) and to
provide information to Conceptus sufficient to allow it to determine if the
performance of such services would conflict with areas of interest to
Conceptus, or any further services that Conceptus might request of Consultant
under this Agreement.
1.3 PAYMENT. Conceptus agrees to pay Consultant for its services to be
rendered under this Agreement in accordance with the payment terms set forth
in each Project Designation. Conceptus shall reimburse Consultant for her
reasonable expenses incurred in the performance of her Duties, including, but
not limited to, reasonable expenses for travel and similar items. Conceptus
will reimburse Consultant for such reasonable, authorized expenses incurred
by Consultant upon the presentation by Consultant, from time to time, of a
detailed and itemized account of such expenses substantiated by receipts.
<PAGE>
1.4 TERM. This Agreement shall have an initial term of twelve (12)
months, commencing on September 10, 1997 and terminating at the close of
business on September 9, 1998. This Agreement shall be automatically renewed
for additional twelve (12) month terms, on the same terms and conditions as
set forth in this Agreement, unless either party gives written notice to the
other party not less than sixty (60) days prior to the end of the then
current term of such party's intention not to renew this Agreement. In
addition, at any time during the term of this Agreement, either party may
terminate this Agreement by giving written notice to the other party not less
than sixty (60) days prior to the date of termination; provided, however,
that if this Agreement is terminated by Conceptus during any twelve (12)
month term, Conceptus shall, within thirty (30) days after the date of
termination, pay to Consultant all amounts that would have been due to
Consultant as set forth on the Project Designation during the remainder of
such term of this Agreement.
1.5 INDEPENDENT CONTRACTOR. Consultant's services are to be performed
as an independent contractor with the customary and usual independence
associated therewith and Consultant shall not be deemed to be an employee of
Conceptus or to have the authority to enter into any contract on behalf of
Conceptus or to otherwise bind Conceptus to any agreement unless expressly
authorized in writing to do so. Consultant shall be responsible for payment
of all income, social security and other taxes incurred by Consultant.
Consultant agrees to indemnify and hold harmless Conceptus to the extent of
any obligations imposed by law on Conceptus to pay any withholding taxes,
social security, unemployment or disability insurance, or similar items in
connection with any payment made to Consultant by Conceptus for Consultant's
services provided hereunder.
1.6 NO ASSIGNMENT. Because of the nature of the services to be
rendered by Consultant, this Agreement may not be assigned by Consultant
without the prior written consent of Conceptus.
SECTION 2: CONFIDENTIALITY
In consideration of its access to the premises of Conceptus and/or its
access to certain Confidential Information of Conceptus, in connection with
its business relationship with Conceptus, Consultant hereby represents and
agrees as follows:
2.1. CONFIDENTIAL INFORMATION. For purposes of this Agreement, the term
"Confidential Information" means:
(a) Any information which Conceptus possesses that has been
created, discovered or developed by or for Conceptus or which has otherwise
been made known to Conceptus, and which has or could have commercial value or
utility in the business in which Conceptus is engaged; or
(b) Any information that is related to the business of Conceptus
and is generally not known by non-Conceptus personnel.
<PAGE>
By way of illustration, but not limitation, Confidential Information includes
trade secrets and any information concerning products, processes, formulas,
designs, inventions (whether or not patentable or registrable under copyright
or similar laws and whether or not reduced to practice), discoveries,
concepts, ideas, improvements, techniques, methods, research, development and
test results, specifications, data, know-how, software, formats, marketing
plans and analyses, business plans and analyses, strategies, forecasts,
customer and supplier identities, characteristics and agreements.
2.2 EXCLUSIONS. Notwithstanding the foregoing, the term Confidential
Information shall not include:
(a) Any information which becomes generally available to the
public other than as a result of a breach of the confidentiality portions of
this Consulting Agreement or any other agreement requiring confidentiality
between Conceptus and Consultant;
(b) Information received from a third party in rightful possession
of such information who is not restricted from disclosing such information; and
(c) Information known by Consultant prior to its receipt of such
information from Conceptus which prior knowledge can be documented.
2.3 DOCUMENTS. Conceptus and Consultant agree and acknowledge that
Consultant shall perform many of her Duties outside the premises of
Conceptus. Accordingly, Consultant may possess outside the premises of
Conceptus notes, formulas, programs, data, records, machines or other
documents or items which contain or constitute Confidential Information and
Consultant shall have the right to make reproductions or copies of the same,
but only to the extent necessary to perform the Duties. Consultant shall
promptly return any such documents or items, along with any reproductions or
copies, to Conceptus upon Conceptus's demand or upon termination of this
Agreement.
2.4 NO DISCLOSURE. Consultant agrees that Consultant will hold in
trust and confidence all Confidential Information and will not disclose to
others, directly or indirectly, any Confidential Information or anything
relating to such information without the prior written consent of Conceptus,
except as may be necessary in the course of its business relationship with
Conceptus. Consultant further agrees that Consultant will not use any
Confidential Information without the prior written consent of Conceptus,
except as may be necessary in the course of its business relationship with
Conceptus, and that the provisions of this Section 2.4 shall survive
termination of this Agreement.
2.5 PATENTS; COPYRIGHTS. Consultant acknowledges and agrees that all
Confidential Information existing or developed by or for Conceptus shall be
the sole property of Conceptus, and Conceptus shall be the sole owner of all
patent, copyright and other rights and protections in connection therewith.
Consultant hereby assigns to Conceptus all right, title and interest that
Consultant may have to or acquire in all such Confidential Information. Upon
learning of any Confidential Information not already disclosed to Conceptus
during the term of this Agreement,
<PAGE>
Consultant agrees that Consultant will promptly disclose its knowledge of
such Confidential Information to Conceptus.
2.6 OWNERSHIP. Consultant agrees that all Confidential Information
that is related to or which results from work performed by Consultant for
Conceptus ("Inventions") shall be the sole and exclusive property of
Conceptus or its nominees. Conceptus and its nominees shall have the right
to use and/or to apply for patents, copyrights or other statutory or common
law protections for such Inventions in any and all countries. Consultant
further agrees (i) to assist Conceptus in every proper way to obtain and from
time to time to enforce such patents, copyrights and other rights and
protections relating to Inventions, and (ii) to execute and deliver to
Conceptus or its nominee upon request all such documents as Conceptus or its
nominee may determine are necessary or appropriate (including assignments of
inventions). (Such documents may be necessary to: (a) vest in Conceptus or
its nominee clear and marketable title in and to Inventions, (b) apply for,
prosecute and obtain patents, copyrights and other rights and protections
relating to Inventions, or (c) enforce patents, copyrights and other rights
and protections relating to Inventions.) Consultant's obligations pursuant to
this Section shall continue beyond the termination of its consulting
relationship with Conceptus, but Conceptus agrees to compensate Consultant
after the termination of the consulting relationship at a reasonable rate for
time actually spent or expenses incurred by Consultant at Conceptus's request.
2.7 LIMITS OF APPLICATION. Consultant has been informed and
understands that the provisions of Section 2.5 above do not apply to any
Invention that qualifies in all respects under Section 2870 of the California
Labor Code, which provides:
"(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those that either:
(i) Relate at the time of conception or reduction to practice
of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(ii) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports
to require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable."
2.8 PURSUIT OF INVENTIONS
(a) The Consultant shall promptly disclose to Conceptus in writing
all Inventions, patentable or unpatentable, that the Consultant conceives
and/or reduces to practice, either solely or jointly with Conceptus, during
the term of this Agreement.
<PAGE>
(b) Within one hundred twenty (120) days after the Consultant
discloses and Invention to Conceptus, Conceptus shall notify Consultant
whether Conceptus will attempt to develop the Invention into a commercial
product. If Conceptus notifies Consultant that it will not attempt to
develop the Invention into a commercial product, then Conceptus shall
promptly assign to Consultant all the right, title, and interest therein held
by Conceptus pursuant to Section 2.5 hereof. If Conceptus notifies
Consultant that it will attempt to develop the Invention into a commercial
product, then Conceptus shall:
(i) Make reasonable efforts consistent with Conceptus's
business plans and resources to develop the Invention into a commercial
product, provided, however, that Conceptus shall be free to terminate such
efforts at any time in which case Conceptus shall, if Consultant so desires,
assign to Consultant all right, title and interest therein held by Conceptus;
(ii) If the Invention is deemed patentable under U.S. law by
Conceptus's patent attorneys, promptly file for and diligently seek U.S.
patent coverage for the Invention, provided, however that Conceptus shall be
free at any time to cease such efforts, in which case Conceptus shall, if
consultant so desires, assign any patent/patent applications on the Invention
to Consultant; and
(iii) Pay Consultant royalties on the Invention as follows:
(A) If the Invention is patented in the United States
and Consultant is the sole inventor thereof, four percent (4%) of Conceptus's
net sales price for product covered by the patent, for the duration of the
patent (as used herein "net sales price" shall mean the gross invoice price
for the product less the sum of the following deductions, where applicable:
case, trade, or quantity discounts; sales, use, tariff, import/export duties
or other excise taxes imposed upon sales; transportation charges and
allowance or credits to customers or distributions for rejections or
returns); or
(B) If the Invention is not patented in the U.S. and
consultant is the sole inventor thereof, three percent (3%) of Conceptus's
net sales price for the product covered by the Invention for a period of five
(5) years from the first commercial sale of such product; or
(C) If the Invention is patented in the U.S. and
Consultant is a joint inventor thereof with Conceptus, two percent (2%) of
Conceptus's net sales price for the product covered by the patent for the
duration of the patent; or
(D) If the Invention is not patented in the U.S. and
Consultant is a joint inventor thereof with Conceptus, two percent (2%) of
Conceptus's net sales price for the product covered by the Invention for a
period of five (5) years from the first commercial sale of the product.
Royalties shall be paid on a calendar year basis for sales of the invention
made in the preceding year.
<PAGE>
2.9 NO CONFLICTING AGREEMENTS. Consultant represents that Consultant
has not brought, and will not bring, to Conceptus, and will not use in the
performance of its responsibilities for Conceptus, any materials or documents
of a former employer that are not generally available to the public, unless
Consultant has obtained the express written consent of such former employer
for Consultant's possession and use of such materials or documents for the
specific purposes that Consultant proposes to make of such materials or
documents under this Agreement. Moreover, Consultant represents that its
performance of this Agreement and the performance of its Duties as a
consultant of Conceptus does not and will not breach any agreement or
relationship of trust and confidence Consultant may have with any third
party, whether oral, written or implied. Consultant agrees that Consultant
has not entered into and will not enter into any agreement in conflict with
this Agreement.
2.10 PUBLICATION. Consultant shall not submit for publication or
publish any scientific writing, oral presentation, poster session or any
similar disclosure of results or conclusions resulting from the services
performed under this Agreement without the prior express written consent of
Conceptus.
2.11 REMEDIES. Consultant understands that, in the event Consultant
fails to comply with this Article 2 of this Agreement, Conceptus may suffer
irreparable harm that may not be adequately compensated by monetary damages.
Accordingly, Consultant agrees that, in the event of its breach or threatened
breach of any term of this Article 2, Conceptus shall be entitled to
injunctive or other preliminary or equitable relief in addition to such other
remedies as may be available to Conceptus for such breach or threatened
breach, including damages.
SECTION 3: MISCELLANEOUS
3.1 ACTIONS; EXPENSES. In the event of any action at law or in equity
to enforce the provisions of this Agreement, the unsuccessful party shall pay
to the other reasonable costs and expenses so incurred, including attorneys'
fees.
3.2 GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of California.
3.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement ( including
the Project Designation attached as Exhibit A hereto) expresses the entire
understanding with respect to the subject matter hereof and supersedes and
terminates any prior oral or written agreements with respect to the subject
matter hereof. Any term of this Agreement may be amended and observance of
any term of this Agreement may be waived only with the written consent of the
parties hereto. Waiver of any term or condition of this Agreement by any
party shall not be construed as a waiver of any subsequent breach or failure
of the same term or condition or a waiver of any other term or condition of
this Agreement. The failure of any party at any time to require performance
by any other party of any provision of this Agreement shall not affect the
right of any such party to require future performance of such provision or
any other provision of Agreement.
<PAGE>
Consultant and Conceptus hereby accept and agree to the above terms and
acknowledge receipt of a copy of this Agreement.
CONCEPTUS, INC. (HIRING AUTHORITY)
By: /s/ Kathryn Tunstall
------------------------------------------
Name: Kathryn Tunstall
----------------------------------------
Title: President & CEO
---------------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
CONCEPTUS, INC. (CHIEF FINANCIAL OFFICER)
By: /s/ Sanford Fitch
------------------------------------------
Name: Sanford Fitch
----------------------------------------
Title: Chief Financial Officer
---------------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
"CONSULTANT"
By: /s/ Dr. Florence Comite
------------------------------------------
Name: Dr. Florence Comite
----------------------------------------
Address: Women's Health at Yale
40 Temple Street, Suite 3D
New Haven, CT 06510
Telephone: (203) 764-9868
<PAGE>
EXHIBIT A
PROJECT DESIGNATION
1. DESCRIPTION OF PROJECT: Establishment and direction of Scientific
Advisory Board
Participation on S/Top Advisory Board
Consulting on Women's Health Issues
2. TIME DEVOTED TO PROJECT: Two (2) days per month
Up to twenty-four (24) additional days per year
to include trips to Conceptus and travel on
behalf of Conceptus.
3. COMPENSATION: An annual stipend of $72,000
(a) PAYMENT SCHEDULE: To be paid on monthly basis, $6,000 per month to
Medicine and Health Today, L.L.C.
(b) EXPENSES AUTHORIZED FOR REIMBURSEMENT BY CONCEPTUS: Out-of-pocket
expenses, including local travel and local telephone calls, shall be
reimbursed by Conceptus. Conceptus shall reimburse Consultant for any
out-of-area travel and long-distance telephone calls, including car and
cellular telephone calls.
4. DURATION OF PROJECT: One year
<PAGE>
Signatures:
CONCEPTUS, INC. (HIRING AUTHORITY)
By: /s/ Kathryn Tunstall
--------------------------------------
Name: Kathryn Tunstall
------------------------------------
Title: President & CEO
-----------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
CONCEPTUS, INC. (CHIEF FINANCIAL OFFICER)
By: /s/ Sanford Fitch
--------------------------------------
Name: Sanford Fitch
------------------------------------
Title: Chief Financial Officer
-----------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
"CONSULTANT"
By: /s/ Dr. Florence Comite
--------------------------------------
Name: Dr. Florence Comite
------------------------------------
Address: Women's Health at Yale
40 Temple Street, Suite 3D
New Haven, CT 06510
Telephone: (203) 764-9868
<PAGE>
EXHIBIT 10.25
MANUFACTURING TRANSITION AGREEMENT
This Agreement (the "Agreement") is made as of the 1st day of October,
1997 (the "Effective Date"), by and among Medical Scientific, Inc., a
Massachusetts corporation having a principal place of business at
125 John Hancock Road, Taunton, Massachusetts 02780 ("MSI"), Conceptus, Inc.,
a Delaware corporation having a principal place of business at
1021 Howard Avenue, San Carlos, California 94070 ("Conceptus"), and Microgyn,
Inc., a Massachusetts corporation and wholly owned subsidiary of Conceptus
("Microgyn"). (Conceptus and Microgyn are collectively referred to
hereinafter as the "Company.")
WITNESSETH
WHEREAS, the Company and MSI desire to terminate or amend certain
agreements between them; and
WHEREAS, Microgyn desires to acquire certain manufacturing know-how of
MSI; and
WHEREAS, MSI is willing to exchange such manufacturing know-how for
certain payments and other consideration from the Company;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
ARTICLE I
TERMINATION, RELEASE AND AMENDMENT OF AGREEMENTS
A. Termination of Agreements.
MSI and Microgyn hereby agree to terminate effective as of the Effective
Date, (i) the Manufacturing Agreement, dated July 23, 1996 (the
"Manufacturing Agreement"), and (ii) the Sublicense Agreement, dated July 23,
1996 (the "Sublicense Agreement"), each entered into by them, upon the terms
and conditions contained herein and those contained in the Royalty Agreement,
dated as of October 1, 1997, the form of which is attached hereto as EXHIBIT A
(the "Royalty Agreement"), entered into by MSI and the Company simultaneously
with this Agreement. MSI and Microgyn acknowledge and agree that, after
termination, neither party shall have any further rights or obligations under
either the Manufacturing Agreement or the Sublicense Agreement, except for
the respective indemnification and confidentiality provisions of such
agreements which survive termination of such agreements.
B. Release of Promissory Note.
In connection with the termination of the Manufacturing Agreement, the
Company further agrees that the obligation of MSI payable to Conceptus, in
the principal amount of $800,000, plus accrued interest thereon is hereby
terminated, provided, that, during the period lasting for 93 days after the
date this Agreement is executed by the parties, November 14, 1997, MSI
neither files a petition in bankruptcy nor has filed, or consents to the
filing, against it of a petition of bankruptcy which is not dismissed within
60 days, or a petition to take advantage of any insolvency nor makes an
assignment for the benefit of creditors.
<PAGE>
C. Amendment of Agreements.
1. In connection with the termination of the Sublicense Agreement, the
Company and MSI also agree that Section 1(b)(ii) of the Non-Competition
Agreement by and among MSI, Conceptus and Microgyn dated as of November 26,
1996 (the "Non-Competition Agreement"), is hereby amended to read in its
entirety as follows:
The "Competing Business" shall mean the design, manufacture, and/or
marketing of products in the field of gynecology and urology directly or
indirectly competitive with the Microgyn Sheath System as described in
the Microgyn Business Plan dated as of July 1996, including components
thereof and materials incorporated therein.
In all other respects, the Non-Competition Agreement shall remain in full
force and effect.
2. MSI and Microgyn further agree that the second sentence of Article IV
of the Joint Ownership and Cross-License Agreement, dated July 23, 1996 (the
"Joint Ownership and Cross-License Agreement"), entered into by them, is
hereby amended to read in its entirety as follows:
All such filings shall be in the name of Microgyn and/or Conceptus, Inc.,
the parent company of Microgyn, and all marketing and sales rights
or privileges obtained as a result of such approvals shall accrue solely
to Microgyn and Conceptus, Inc.
In all other respects, the Joint Ownership and Cross-License Agreement shall
remain in full force and effect.
ARTICLE II
MANUFACTURE OF THE PRODUCTS
A. Products.
During the term of this Agreement, MSI agrees to manufacture and to sell
the Products (as defined herein) exclusively to the Company, and the Company
agrees to purchase such Products from MSI. For purposes of this Agreement,
"Products" shall mean those products with the specifications described on
attached EXHIBIT B (the "Existing Products") as well as those products
currently only described on EXHIBIT B, whose specifications shall be attached
to EXHIBIT B once such specifications are developed by MSI and the Company
(the "New Products"). (The specifications for the Products are referred to
herein as the "Product Specifications.")
B. License to Manufacture.
During the term of this Agreement, the Company grants to MSI a
non-royalty bearing license to use any Company proprietary technology,
whether owned or licensed by the Company, necessary to manufacture the
Products exclusively for the Company.
C. Manufacturing Facility.
1. MSI will manufacture the Products in accordance with (i) the Product
Specifications; (ii) Good Manufacturing Practices ("GMP") as required by the
United States Food, Drug and Cosmetic Act, as amended (the "Act"); and (iii)
pertinent rules and regulations of the United States Food and Drug
Administration ("FDA").
2. MSI will not make any changes, that would potentially affect Product
safety or efficacy, in its manufacturing processes or procedures with respect
to the Products or the Product Specifications
-2-
<PAGE>
without the Company's prior written approval. The Company agrees, however,
to respond by facsimile to any change requests made by MSI within 24 hours of
receipt of such requests.
3. The Company shall have the right to have qualified employees or
agents of the Company present at MSI's plant at all times during normal
business hours to inspect MSI's facilities and manufacturing procedures for
compliance with GMP and the Company's quality assurance requirements and to
inspect MSI's inventory of Products, work-in-process, raw materials to be
used for Products, production records and such other matters as may be
pertinent to proper quality assurance of Products to be delivered hereunder.
4. MSI will permit authorized representatives of the FDA to inspect
MSI's plant and production facilities relating to or used in connection with
the manufacture of Products and will promptly notify the Company when MSI
receives notice of any such inspection. MSI will advise the Company of the
findings of any FDA inspection and will immediately take steps to correct any
deficiencies found by the FDA relating to the manufacture of the Products.
ARTICLE III
FUNDING FOR MANUFACTURING OPERATIONS
A. Funding
During the period commencing on the Effective Date and continuing until
the earlier of (i) the Transfer Completion Date (as defined below) or (ii)
March 31, 1998, unless earlier terminated pursuant to Article X (the
"Manufacturing Transition Period"), the Company shall pay the direct and
indirect costs associated with the manufacture of the Products and specified
on EXHIBITS D and E attached hereto and incorporated herein by this reference.
1. The Company shall purchase all raw materials, subassemblies and
components necessary for MSI to manufacture the Products (the "Materials").
Until MSI completes a physical inventory of the Materials it has on hand (the
"Materials Inventory"), MSI shall order the Materials on behalf of the
Company and instruct the various vendors to invoice the Company directly for
Materials to be received before November 1, 1997. To the extent that vendors
require that MSI purchase the Materials, the Company shall pay to MSI by wire
transfer upon receipt of copies of invoices from such vendors the amounts due
for the Materials provided. In addition, following completion of the
Materials Inventory by MSI on or about October 30, 1997, the Company shall
reimburse MSI for the cost of all Materials on hand not previously paid for
by the Company; provided, however, the Company shall have the right, within
five days after MSI's completion of the Materials Inventory, to verify the
Materials Inventory information provided by MSI. Thereafter, the Company will
order all Materials in coordination with MSI.
2. Concurrently with the Materials inventory to be taken on or about
October 30, 1997, MSI shall take a physical inventory of its work-in-process
of the Products and finished goods of the Products (the "Product Inventory").
The Company and MSI shall agree on a value of the Product Inventory based on
the direct Materials and labor costs and the Company shall thereafter
purchase the Product Inventory from MSI; provided, however, the Company shall
have the right, within five days after MSI's completion of the Product
Inventory, to verify the Product Inventory information provided by MSI. The
purchase price shall be the agreed upon value less any direct labor costs
included in said value which were previously paid for by the Company.
3. The Company shall prepay the sum of $93,937.00, adjusted as provided
below (the "Overhead Prepayment"), by wire transfer to MSI on the last day of
each calendar month during the
-3-
<PAGE>
Manufacturing Transition Period (but not including the last day of the
Manufacturing Transition Period) to cover MSI's costs, as specified on
EXHIBIT D, which includes the salaries of the MSI production employees listed
on EXHIBIT E, associated with the manufacture of the Products for the
succeeding calendar month. MSI acknowledges that the Company has already
paid an aggregate of $187,874.00 by wire transfer to MSI to cover MSI's costs
associated with the manufacture of the Products for the months of October and
November. Prior to each succeeding payment date, MSI shall reconcile the
prior month's actual direct labor costs and related payroll taxes and
employee benefits with the estimated amount of direct labor costs and related
payroll taxes and employee benefits included in the prior month's Overhead
Prepayment and advise the Company of any differences. The next Overhead
Prepayment due from the Company shall be adjusted to reflect such
differences. MSI acknowledges that the Overhead Prepayments required by this
provision shall cease upon the termination of this Agreement; provided,
however, the Company agrees to pay the salaries of the MSI production
employees listed on EXHIBIT E through March 31, 1998 so long as this
Agreement is not terminated as a result of a material breach by MSI. MSI
further acknowledges that if this Agreement is terminated in the middle of a
calendar month, any Overhead Prepayment in excess of the salaries of the MSI
production employees ("Excess Overhead Prepayment") made by the Company shall
be pro rated for such partial month and the unused balance of the Overhead
Prepayment shall be offset against the Cash Component of the Purchase Price
(as defined below) and/or royalties, if any, owed to MSI pursuant to the
Royalty Agreement.
4. The Company shall also make a one-time payment of $6,000 to MSI upon
the signing of this Agreement for certain nonrecurring indirect costs.
Additionally, the Company agrees to pay via wire transfer to MSI within seven
days of receipt of copies of invoices therefor all consulting and
professional fees (not including legal fees) incurred after the Effective
Date, as specified on EXHIBIT F or as approved in writing in advance by the
Company, related to (i) the manufacture or regulatory compliance of the
Products and (ii) the accounting and record keeping for the Products.
5. The Company shall have the right, twice during the term of this
Agreement, and upon reasonable notice and during normal business hours, to
have qualified employees or agents of the Company audit all books, records
and documentation, however prepared and regardless of storage medium,
relating to MSI's labor and Materials costs for manufacturing the Products
for the purpose of assessing and confirming those costs. All information
audited pursuant to this provision shall be considered Confidential
Information for the purposes of Article IX hereof.
6. MSI acknowledges that the Company owns all the capital equipment
listed on EXHIBIT G hereof. Upon termination of this Agreement, MSI agrees
that it will, upon the Company's instruction, promptly assemble and package
all such equipment and the Materials and Product Inventories and ship, at the
Company's expense, such equipment and inventories within five business days
of the date of the Company's instruction, to a location specified by the
Company via a carrier selected by the Company.
ARTICLE IV
UNIT PRODUCTION AND PRODUCT SHIPMENT
A. Unit Production.
During the term of this Agreement, MSI shall produce on an aggregate
basis through December 31, 1997, at least 50% of the number of units of each
Existing Product as specified on EXHIBIT C (the "Minimum Required Units"),
and will use its best efforts to produce 100% of the number of units of each
New Product as specified on EXHIBIT C (the "Target Units") as of the last day
of each calendar month thereafter. Any failure of MSI to produce the Minimum
Required Units for any of the Existing Products or to use its best efforts to
produce the Target Units for any of the New Products, other than a failure
which is due to any factor or factors outside of MSI's control, shall be
deemed a material breach of this Agreement by MSI.
-4-
<PAGE>
B. Passage of Title and Shipping Costs.
All shipments of Products to the Company or its customers shall be
F.O.B. MSI's Taunton, Massachusetts facility, and all shipping costs, duties,
fees and taxes, other than taxes payable by MSI based upon its income or
assets, in connection with such sales and shipments shall be the sole
responsibility of the Company. Except for units of Products shipped during
the month of October 1997, MSI shall not invoice the Company for the cost of
such units because the Company shall have already paid such costs pursuant to
Article III of this Agreement; provided, however, the Company shall be
obligated to pay the Unit Payment (as defined below) as provided in Section C
of this Article IV. The parties shall agree to a price to be paid for units
of Products shipped during the month of October 1997.
C. Unit Payments.
As an additional incentive to MSI to ship at least the Minimum Required
Units to the Company as soon as possible and as additional consideration for
the transfer of the Manufacturing Know-How by MSI, the Company agrees to pay
to MSI the following amounts (each, a "Unit Payment"): (i) for each unit
shipped in October 1997, $20 per unit; (ii) for each unit shipped in November
1997, $15 per unit; and (iii) for each unit shipped during the remainder of
the Manufacturing Transition Period, $10 per unit. The Company shall pay the
Units Payments promptly after it has received, inspected and accepted the
units shipped; provided, however, the Company shall not pay the Unit Payment
for any units shipped in excess of the aggregate number of units by Product
specified in EXHIBIT C. The Company agrees that it will inspect all units
promptly upon receipt and that any units not rejected and returned to MSI
within seven business days of receipt shall be deemed accepted.
D. Employee Bonus Pool.
As an incentive to MSI employees to manufacture Products in accordance
with the respective Product Specifications, the Company agrees to pay to MSI
each month during the Manufacturing Transition Period for creation of an
employee bonus pool (the "Bonus Pool") an amount equal to three dollars
($3.00) per unit of Product manufactured by MSI in accordance with the
respective Product Specifications, as determined by the Company upon receipt
and inspection of the units. MSI agrees to set up the Bonus Pool, to deposit
all amounts paid by Conceptus pursuant to this Section D in the Bonus Pool
and to distribute the entire Bonus Pool pro rata to its production employees
listed on EXHIBIT E.
ARTICLE V
TRANSFER OF MANUFACTURING KNOW-HOW
A. Manufacturing Know-How.
For the purposes of this Agreement, the term "Manufacturing Know-How"
shall mean all documentation, information, techniques, technologies and
"know-how" owned or licensed by MSI relating to the manufacture of the
Products.
B. Transfer of Manufacturing Know-How.
As of the Effective Date, MSI hereby assigns and transfers to Microgyn,
free and clear of all liens, mortgages, encumbrances and charges, all of
MSI's intellectual property rights (including, without limitation,
collectively, worldwide patents, trade secrets, copyrights, trademarks, mask
work rights, moral rights, trade names, rights in trade dress, and all other
intellectual property rights and proprietary rights, whether arising under
the laws of the United States or any other state, country or jurisdiction,
including all rights or causes of action for infringement or misappropriation
of any of the foregoing ("Intellectual Property Rights")) to the
Manufacturing Know-How.
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<PAGE>
C. License of Manufacturing Know-How.
As of the Transfer Completion Date (as defined below), Microgyn hereby
grants to MSI an exclusive, worldwide, irrevocable, fully-paid license to
use, modify and improve the Manufacturing Know-How in MSI's Field of Use (as
such term is defined in the Joint Ownership and Cross-License Agreement).
D. Cooperation of MSI.
During the Manufacturing Transition Period, MSI shall use its best
efforts to cooperate with the Company in transferring the Manufacturing
Know-How to Microgyn. MSI shall take all steps necessary to help establish
the Company or a third party selected by the Company as a manufacturing
facility to manufacture the Products for the Company.
E. Purchase Price.
In consideration for the transfer of the Manufacturing Know-How by MSI,
the Company will, as of the date on which the Company determines, in its sole
discretion, that the transfer of the Manufacturing Know-How is completed, as
evidenced by the commencement of full commercial production of the Products
by the Company or a third party (the "Transfer Completion Date"):
1. pay in cash by wire transfer the following (the "Cash Component"):
<TABLE>
<CAPTION>
Transfer Completion Date Amount in Cash
------------------------ --------------
<S> <C>
October, 1997 $283,000
November, 1997 $225,000
December, 1997 $165,000
January, 1998 $120,000
February, 1998 $80,000
March, 1998 $40,000
</TABLE>
provided, however, the Cash Component shall be pro rated if the
Transfer Completion Date shall occur in the middle of a calendar
month; provided, further, the Cash Component shall be reduced by any
unused balance of the Excess Overhead Prepayment; PLUS
2. pay the royalties as provided in the Royalty Agreement; provided,
however, the royalties may be reduced by any unused balance of the
Excess Overhead Prepayment that is not offset against the Cash
Component.
-6-
<PAGE>
ARTICLE VI
REGULATORY MATTERS
A. Traceability.
MSI and the Company shall each maintain such traceability records with
respect to the Products as shall be necessary to comply with applicable GMP
regulations, including but not limited to master device and lot history
records.
B. Complaint Files.
Each of MSI and the Company shall maintain appropriate complaint files
relating to the Products manufactured by MSI pursuant to this Agreement and
each shall promptly report in writing to the other any complaint related to
Product quality.
C. Reliability Reporting.
Each of MSI and the Company shall promptly report in writing to the
other any failure of a Product manufactured by MSI pursuant to this
Agreement, any change in the statistically demonstrated reliability of such a
Product or any other material information relative to the reliability of such
a Product.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of MSI.
MSI hereby represents and warrants to the Company as follows:
1. MSI is a corporation organized, validly existing and in corporate
good standing under the laws of Massachusetts, has all requisite corporate
power and authority to own and operate its property and carry on its business
and is not required to qualify to do business in any other jurisdiction.
2. The execution and delivery of this Agreement has been duly and
validly authorized by all necessary corporate action on the part of MSI, and
(assuming valid execution by the Company) this Agreement is a valid and
binding obligation of MSI enforceable against it.
3. As of the date of this Agreement, MSI is not a party to any lawsuit,
nor is there any outstanding claim against MSI, alleging that use of the
Manufacturing Know-How infringes the proprietary rights of any third party.
4. As of the date this Agreement, there are no liens, mortgages,
encumbrances, charges or other claims by any third party to the Manufacturing
Know-How.
5. As of the date of this Agreement, MSI is not a party to any
agreement or understanding, oral or written, which would, in any manner, be
inconsistent with the rights granted herein to the Company and MSI shall not
enter into any agreement or understanding, oral or written, during the term
of this Agreement, nor during the term of this Agreement, directly or
indirectly, engage in any activity which would, in any manner, be
inconsistent with the rights herein granted to the Company.
6. MSI represents and warrants that all Products delivered hereunder
will conform to and meet the Product Specifications for a period of one year
from time of delivery to the Company.
-7-
<PAGE>
7. MSI represents and warrants that it will manufacture the Products in
accordance with Article II hereof and that such Products shall be free from
defects in materials and workmanship under normal use and service for a
period of one year following delivery. The Company's sole remedy under this
warranty shall be the replacement of any unit of Product which is determined
to be defective during the Manufacturing Transition Period.
8. MSI represents and warrants that all Products delivered hereunder
shall be labeled in conformity with the specifications provided by the
Company, which specifications shall comply with the Act and all applicable
laws of each applicable jurisdiction into which the Company intends to sell
the Products.
B. Representations and Warranties of the Company.
The Company hereby represents and warrants to MSI as follows:
1. Conceptus is a corporation organized, validly existing and in
corporate good standing under the laws of Delaware, has all requisite
corporate power and authority to own and operate its property and carry on
its business and is not required to qualify to do business in any other
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, results of operations or financial condition
of Conceptus. Microgyn is a corporation organized, validly existing and in
corporate good standing under the laws of Massachusetts, has all requisite
corporate power and authority to own and operate its property and carry on
its business and is not required to qualify to do business in any other
jurisdiction.
2. The execution and delivery of this Agreement has been duly and
validly authorized by all necessary corporate action on the part of each of
Conceptus and Microgyn, and (assuming valid execution by MSI) this Agreement
is a valid and binding obligation of each of Conceptus and Microgyn
enforceable against each of them.
3. As of the date of this Agreement, neither Conceptus nor Microgyn is
a party to any lawsuit, nor is there any outstanding claim against Conceptus
or Microgyn, respectively, alleging that use of the Manufacturing Know-How
infringes the proprietary rights of any third party.
4. As of the date of this Agreement, neither Conceptus nor Microgyn is
a party to any agreement or understanding, oral or written, which would, in
any manner, be inconsistent with the rights granted herein to MSI and neither
Conceptus nor Microgyn shall enter into any agreement or understanding, oral
or written, during the term of this Agreement, nor during the term of this
Agreement, directly or indirectly, engage in any activity which would, in any
manner, be inconsistent with the rights herein granted to MSI.
5. The Company shall provide MSI on a timely basis with (i) the funding
called for by Article III hereof and (ii) all materials, product designs,
documentation, information and equipment necessary to allow MSI to achieve
the Minimum Required Units and Target Units and to meet the Product
Specifications.
ARTICLE VIII
INDEMNIFICATION
1. MSI and the Company will indemnify and hold each other harmless from
and against any and all suits, actions, losses, obligations, deficiencies,
liabilities, claims, damages, cost and expenses (including court costs and
reasonable attorneys' fees) which arise out of, are caused by, relate to, or
-8-
<PAGE>
result or occur from or in connection with their respective acts or omissions
in connection with their respective activities under this Agreement.
2. MSI agrees to indemnify, defend and hold the Company harmless from
and against any and all suits, actions, losses, obligations, deficiencies,
liabilities, claims, damages, cost and expenses (including court costs and
reasonable attorneys' fees) arising from claims that the Manufacturing
Know-How infringes or misappropriates any Intellectual Property Rights of a
third party. MSI agrees that the Company may offset any payments it is
required to make to MSI hereunder or pursuant to the Royalty Agreement
against any funds owed to the Company by MSI pursuant to this second
paragraph of Article VIII.
3. If any claim by a third party is made against any party hereto and
the party against whom said claim is made intends to seek indemnification
with respect thereto as set forth in this Article VIII (the "Indemnitee"),
the Indemnitee will promptly give written notice to the indemnifying party
(the "Indemnitor") of such claim. The failure of the Indemnitee to give
prompt notice shall not relieve the Indemnitor of its obligations hereunder,
unless such failure materially prejudices the defense of the claim for which
indemnification is sought. The Indemnitor will have ten days after such
notice is given to elect, by written notice given to the Indemnitee, to
undertake, conduct and control, through counsel of its own choosing and at
the Indemnitor's sole risk and expense, the good faith settlement or defense
of such claim, and the Indemnitee will cooperate with the Indemnitor in
connection therewith; provided the Indemnitee will be entitled to participate
in such settlement or defense through counsel chosen by the Indemnitee, and
the fees and expense of such counsel will be borne by the Indemnitee; and,
provided further, that the Indemnitor shall not make any settlement involving
the payment of money by the Indemnitee without first making available the
funds needed to pay the settlement and will not make any settlement involving
any injunction or similar restriction against the Indemnitee without the
consent of the Indemnitee, which consent shall not be unreasonably withheld.
If the Indemnitor does not make a timely election to undertake the good faith
defense or settlement of the claim as aforesaid, or if the Indemnitor fails
to proceed with the good faith defense or settlement of the matter after
making such election, in either such event, the Indemnitee will have the
right to contest, settle or compromise the claim at its exclusive discretion,
at the risk and expense of the Indemnitor to the full extent set forth above,
as the case may be. The provisions of this Article VIII shall survive
termination of the Agreement.
ARTICLE IX
CONFIDENTIALITY
For purposes of this Agreement, "Confidential Information" shall mean
any information of a confidential and/or proprietary nature as to which
either party has acquired or, during the term of this Agreement, acquires,
any interest, including, but not limited to, all discoveries, inventions,
improvements and ideas related to any process, formula, machine, device,
manufacture, composition of matter, plan or design, whether patentable or
not, or relating to the conduct of its business which, prior to the date
hereof or during the term of this Agreement, was or is disclosed to the other
party. In order for any information to be deemed Confidential Information, it
must be in written form and appropriately marked confidential at the time of
disclosure to the other party, or alternatively, if the information is
disclosed orally, it must be confirmed as confidential in writing by the
disclosing party within ten days of such disclosure. Notwithstanding the
foregoing, the term "Confidential Information" shall not include any
information which: (i) has been published or otherwise becomes a matter of
public knowledge by any means other than the receiving party's default in the
observance or performance of any term or provision of this Article on its
part to be observed and performed; (ii) was known to the receiving party at
the time of such disclosure or as evidenced by its business records
maintained in the ordinary course; (iii) is at any time disclosed to the
-9-
<PAGE>
receiving party by any person or entity not a party hereto who it believes,
after reasonable inquiry, has the right to do disclose same; or (iv) is
independently developed by the receiving party.
During the term of this Agreement and for a period of five years
thereafter, each party will maintain the other party's Confidential
Information in confidence and will not disclose same to any person or entity
not a party hereto or use same for the benefit of any such third party. The
receiving party will keep and maintain complete and accurate written records
of the Confidential Information of the other party, will mark such
Confidential Information with such legends as the disclosing party may
reasonably direct, and will promptly deliver same to the disclosing party
upon the expiration or termination hereof or at such other times as the
disclosing party may request.
ARTICLE X
TERM AND TERMINATION
A. Term.
This Agreement shall be effective upon execution by both parties and
shall continue until March 31, 1998 unless sooner terminated in accordance
with the provisions of this Agreement.
B. Termination.
This Agreement may be terminated:
1. By either MSI or the Company upon the other's failure to satisfy any
of its obligations hereunder or material breach of any representation or
warranty hereunder (a "default"). Upon a default, the non-defaulting party
shall provide written notice to the defaulting party of such default, and the
defaulting party shall have ten days to cure such default, unless the default
is a payment default, in which case the defaulting party shall have five days
to cure such default. If the defaulting party fails to cure such default
within said ten day or five day period, the non-defaulting party may
immediately terminate this Agreement. In the event of a payment default, the
defaulting party shall pay interest on the amount due at the rate of 1.5% per
month until payment is made in full. Any payments made by a defaulting party
shall first be applied against accrued interest and then against principal.
2. By either party upon the filing against the other of a petition in
bankruptcy which is not dismissed within 60 days, or upon either party filing
or consenting to the filing against it of a petition in bankruptcy or a
petition to take advantage of any insolvency act, or making an assignment for
the benefit of creditors.
3. Upon any termination of this Agreement by the Company pursuant to
this Article X, including, without limitation, because of MSI's failure to
produce the Minimum Required Units that meet the Product Specifications, then
the Company may deem the Transfer Completion Date to have occurred
immediately and MSI shall forfeit its rights hereunder to receive any future
Overhead Prepayments and the Cash Component of the Purchase Price.
4. Upon any termination of this Agreement by MSI pursuant to this
Article X, then MSI may deem the Transfer Completion Date to have occurred
immediately and the Company shall pay the Cash Component for the full month
in which such termination occurs.
5. Upon any termination of this Agreement pursuant to this Article X,
all rights and obligations of the parties hereunder shall cease except that
the provisions of Articles I, V, VIII, IX, X and XI shall survive termination
of this Agreement and all amounts owed by the Company or MSI to the
-10-
<PAGE>
other as of the date of such termination, except as provided is the
proceeding paragraph, shall be immediately due and payable.
ARTICLE XI
MISCELLANEOUS
A. No Assignment.
Neither MSI nor the Company shall have the right to assign any of its
rights or obligations under this Agreement, other than to its successor by
merger, consolidation or sale of assets, without the prior written consent of
the other party, which consent shall not be unreasonably withheld.
B. Severability.
Any provision of this Agreement which is found to be prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. Each provision of
this Agreement shall be valid and enforceable to the fullest extent permitted
by law. If any provision contained in this Agreement shall be held to be
excessively broad as to scope, activity or subject so as to be unenforceable
at law, such provision shall be construed by limiting and reducing it so as
to be enforceable to the extent compatible with the applicable law as then in
effect.
C. Notice.
All notices or other communications required or permitted to be given
under this Agreement shall be in writing and will be deemed effective and
given when delivered in person, sent by delivery service or by certified or
registered mail, postage and certification prepaid, or sent by telecopier or
facsimile with confirmation to the following addresses:
If to MSI: Medical Scientific, Inc.
125 John Hancock Road
Taunton, Massachusetts 02780
Fax: 508.880.7347
Attn: President
With a copy to: Warner & Stackpole LLP
75 State Street
Boston, Massachusetts 02109
Fax: 617.951.9151
Attn: Michael A. Hickey, Esq.
If to Microgyn: Microgyn, Inc.
1021 Howard Avenue
San Carlos, California 94070
Fax: 650.508.7600
Attn: President
If to Conceptus: Conceptus, Inc.
1021 Howard Avenue
San Carlos, California 94070
-11-
<PAGE>
Fax: 650.508.7600
Attn: President
With a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Fax: 650.233.8386
Attn: Michael W. Hall, Esq.
D. Counterparts.
This Agreement may be executed by the parties in separate counterparts,
each of which when so executed and delivered will be an original, but all of
which together will constitute one and the same instrument. In pleading or
proving this Agreement, it will not be necessary to produce or account for
more than one such counterpart.
E. Captions.
The captions of sections or subsections of this Agreement are for
reference only and will not affect the interpretation or construction of this
Agreement.
F. Waivers.
No waiver of any breach or default hereunder will be valid unless in a
writing signed by the waiving party. No failure or other delay by either
party in exercising any right, power, or privilege hereunder will be or
operate as a waiver thereof, nor will any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege.
G. Further Assurances; Cooperation.
From time to time on and after the date hereof, MSI and the Company will
promptly execute and deliver all such further instruments and other
documents, and will promptly take all such further actions, as the other may
reasonably request, in order to effect or confirm the transactions hereby
contemplated and to carry out the purposes of this Agreement. In addition,
each of MSI and the Company will cooperate with the other in all reasonable
respects relating to the transactions and relationship between the parties
contemplated hereby.
H. Force Majeure.
Any delay in the performance of any of the duties or obligations of any
party hereto shall not be considered a breach of this Agreement and the time
required for performance shall be extended for a period equal to the period
of such delay; provided, that such delay has been caused by or is the result
of any acts of God, acts of the public enemy, insurrections, riots,
embargoes, labor disputes (including strikes, lockouts, job actions, or
boycotts), fires, explosions, earthquakes, floods, shortages of material or
energy or other unforeseeable causes beyond the control and without the fault
or negligence of the party so affected. The party so affected shall give
prompt notice to the other party of such cause, and shall take whatever
reasonable steps are necessary to relieve the effect of such cause as rapidly
as possible.
I. Entire Agreement.
This Agreement and the Royalty Agreement, together with the exhibits
hereto and thereto, contain the entire understanding and agreement among the
parties, and supersedes any prior understandings or agreements among them,
with respect to the subject matter hereof.
-12-
<PAGE>
J. Governing Law.
This Agreement will to the maximum lawful extent be governed by and
interpreted and construed in accordance with the internal laws of the
Commonwealth of Massachusetts, as applied to contracts made, and entirely to
be performed, within Massachusetts, and without reference to principles of
conflicts or choice of law.
K. Relationship of Parties.
The relationship of the Company and MSI will be one of independent
contracting parties, and not that of partners, joint venturers,
principal-and-agent, or otherwise. Neither the Company nor MSI will have or
purport to have any right, power, or authority to bind the other.
L. Arbitration.
The parties agree to work together in good faith to resolve any disputes
arising under or in connection with this Agreement and the transactions and
relationship between the parties contemplated hereby, and to explore
resolution of the dispute through methods of alternative dispute resolution.
If the parties are unable to resolve a dispute, it shall be finally settled
by a panel of three arbitrators, each having at least five years of
experience as an arbitrator and otherwise mutually acceptable to the parties,
in an arbitration administered by American Arbitration Association in
accordance with the internal laws of the Commonwealth of Massachusetts
(except that any dispute relating to the construction or effect of any patent
shall be resolved under the applicable laws of the United States or such
other jurisdiction as granted such patent). Any demand for arbitration
hereunder must be made before the running of the legal statute of limitations
applicable to the claim at issue. Any such arbitration shall take place in
Boston, Massachusetts, unless otherwise agreed by the parties, and shall be
subject to the then applicable Federal Rules of Civil Procedure. The panel
of arbitrators will not have any right, power, or authority to award any
punitive or exemplary damages or other damages in excess of purely
compensatory damages. Each of the Company and MSI will be responsible for
one-half of the fees and expenses of the panel of arbitrators, and all of
such party's own costs and expenses, in connection with any such arbitration.
Judgment upon any award rendered by the panel of arbitrators, if such award
is in accordance with applicable law and the terms of this Agreement, may be
entered in any court of competent jurisdiction. The decision of the panel of
arbitrators shall be in writing and shall set forth in reasonable detail the
basis for such decision.
[SIGNATURES ON NEXT PAGE]
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date above first written.
MICROGYN, INC.
By: /s/ Sanford Fitch
Name: Sanford Fitch
Title: Chief Financial Officer
CONCEPTUS, INC.
By: /s/ Kathryn Tunstall
Name: Kathryn Tunstall
Title: President and Chief Executive Officer
MEDICAL SCIENTIFIC, INC.
By: /s/ Paul C. Nardella
Name: Paul C. Nardella
Title: President
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<PAGE>
EXHIBIT A
ROYALTY AGREEMENT
-----------------
See Exhibit 10.26.
<PAGE>
EXHIBIT B
EXISTING PRODUCTS:
1. Existing Sheath for Olympus Resectoscope
2. Existing Sheath for Storz Resectoscope
NEW PRODUCTS:
1. New Sheath for ACMI/Circon Resectoscope 25.6F, model GEOSHCF outer sheath
2. New Sheath for Olympus Resectoscope 27F, model A4724 outer sheath
PRODUCT SPECIFICATIONS
----------------------
See Attached
This exhibit contains the following:
- - Detailed diagram and schedule of the QCII-ASSY SHEATH (O)
- - Detailed diagram and schedule of the QCII-ASSY SHEATH (S)
<PAGE>
EXHIBIT C
UNITS ORDERED
-------------
<TABLE>
<CAPTION>
Product Type Number of Units Total Units by Month
------------ --------------- --------------------
<S> <C> <C> <C>
October 1997 Olympus 1,400
Storz 1,500 2,900
November 1997 Olympus 500
Storz 3,500 4,000
December 1997 Circon (New) 500
Storz 4,000 4,500
January 1998 Circon (New) 3,000
Olympus (New) 1,000 4,000
February 1998 Circon (New) 1,000
Olympus (New) 3,000 4,000
March 1998 Circon (New) 2,000
Olympus (New) 2,000 4,000
23,400
------
------
</TABLE>
<PAGE>
EXHIBIT D
MSI MONTHLY OVERHEAD POOL
-------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1. SALARIES $41,554
Position @ MSI % Time to be Spent
-------------- on Microgyn
----------------
Product Development Technologist 100%
Engineer 50%
Chief Executive Officer 60%
Vice President, Engineering 90%
Project Manager 100%
Director Operations 100%
Administrative Assistant 25%
Office Manager 50%
Inventory & Documentation Mgr. 100%
Engineer 50%
2. DIRECT LABOR $20,257
11 Assemblers
1 Production Lead
l Quality Inspector
3. PAYROLL TAXES (@ 7.65%) $ 4,384
4. UNEMPLOYMENT INSURANCE $ 1,542
5. HEALTH INSURANCE $12,500
6. RENT and UTILITIES $ 6,000
7. PROPERTY and LIABILITY INSURANCE $ 2,000
8. SUPPLIES $ 2,000
9. OFFICE, TELEPHONE, POSTAGE & SHIPPING,
REPAIRS & MAINTENANCE & OTHER $ 3,700
TOTAL MONTHLY PAYMENT $93,937
</TABLE>
<PAGE>
EXHIBIT E
CERTAIN MSI PRODUCTION EMPLOYEES AND SALARIES
---------------------------------------------
Steve Labonte (Instrument Assembly Supervisor)
Anita Figueira (QA Lab Technician)
Maria Amaral
Marie Freitas
Lucia Benoit
Debra Shiek
Fatima Barbara
Luis Cotto
Betty Sevra
Maria Gato
Elizabeth Shiek
Max Imhoff
Helia Jorge
TOTAL MONTHLY SALARIES: . . . . . . . . . . . . . . . . . . . . . . . .$20,257
<PAGE>
EXHIBIT F
AUTHORIZED CONSULTANTS AND PROFESSIONALS
----------------------------------------
PAUL GARANT
FRANK BIMBO
ROBERT DIGIANTOMMASO
<PAGE>
EXHIBIT G
COMPANY'S CAPITAL EQUIPMENT
---------------------------
<TABLE>
<CAPTION>
ASSET NUMBER DESCRIPTION AMOUNT
- -------------------------------------------------------------------------
<S> <C> <C>
1344 Universal Hub Sheath 9,250.00
1345 ELC 400 Cur Lmps 7,539.00
1345 Shutters for ELCs 6,526.80
1345 ELC-UV6A Cur. Sys. 5,995.50
1345 AC 992 Fluid Disp. 2,756.25
1345 Ultrasonic Cleaner 4,520.45
1345 Drying Oven 5,542.37
1345 1L 309B Radiometer 1,034.25
1345 RF Tip form. Gen. 14,647.50
1345 Ultrasonic Welder 15,009.75
1345 Bar Sealer 13,193.25
1364 RF Tip Tapering Equipment 12,883.85
- -------------------------------------------------------------------------
Total $98,898.97
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.26
ROYALTY AGREEMENT
This Agreement (the "Agreement") is made as of the 1st day of October,
1997, by and among Medical Scientific, Inc., a Massachusetts corporation
having a principal place of business at 125 John Hancock Road, Taunton,
Massachusetts 02780 ("MSI"), Conceptus, Inc., a Delaware corporation having a
principal place of business at 1021 Howard Avenue, San Carlos, California
94070 ("Conceptus"), and Microgyn, Inc., a Massachusetts corporation and
wholly owned subsidiary of Conceptus ("Microgyn"). (Conceptus and Microgyn
are collectively referred to hereinafter as the "Company.")
WITNESSETH
WHEREAS, MSI and the Company are entering into that certain
Manufacturing Transition Agreement, dated as of October 1, 1997 (the
"Manufacturing Transition Agreement"), pursuant to which MSI is transferring
to Microgyn, and Microgyn is acquiring from MSI, certain manufacturing
know-how (as more fully described in the Manufacturing Transition Agreement,
the "Manufacturing Know-How"); and
WHEREAS, in consideration for the Manufacturing Know-How, the Company is
paying the Purchase Price (as defined in the Manufacturing Transition
Agreement), which includes the payment of royalties as provided herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
A. Capitalized terms used but not otherwise defined herein shall have
the meanings assigned to such terms in the Manufacturing Transition Agreement
unless the context otherwise requires.
B. "AFFILIATE" shall mean at any time, any person or legal entity then
directly or indirectly controlled by, controlling or under common control
with the party with respect to which this term is associated, and shall
include, without limitation, any person or legal entity which owns, either of
record or beneficially, 50% or more of the voting stock of any party hereto,
or 50% or more of the voting stock of which is owned by any party hereto.
C. "REVENUE-GENERATING SHEATH" shall mean any Sheath that the Company,
its Affiliates or agents sell to end-users or to distributors or resellers
for sale to end-users, as evidenced by the creation of an invoice by the
Company; or any Sheath otherwise transferred or disposed of for value, but
not including Sheaths provided to third parties solely for demonstration
purposes or for use in clinical trials.
D. "ROYALTY" shall have the meaning assigned to it in Article II.
E. "ROYALTY PERIOD" shall mean the four-year period commencing on the
first day following the Transfer Completion Date.
F. "SHEATH" shall mean any disposable device that fits over an
operative resectoscope and converts the resectoscope from a monopolar device
into a bipolar device. The term "Sheath" includes the Products.
<PAGE>
ARTICLE II
ROYALTIES
A. ROYALTY PAYMENTS. As part of the Purchase Price for the transfer
of the Manufacturing Know-How from MSI to the Company, the Company hereby
agrees to pay to MSI during the Royalty Period a royalty of three dollars
($3.00) per Revenue-Generating Sheath (the "Royalty"); provided, however, the
Company shall have the right to offset any unused balance of the Excess
Overhead Prepayment that is not offset against the Cash Component; provided,
further, the Company shall not be obligated to pay any Royalty, and no
Royalties shall accrue prior to the Transfer Completion Date.
B. ROYALTY REPORTS.
1. For each calendar month during the Royalty Period, the Company
shall furnish or cause to be furnished to MSI, within 20 days of the end of
each calendar month, a written report showing: (i) the number of
Revenue-Generating Sheaths sold, transferred or otherwise disposed of for
value during such month; and (ii) the Royalties which shall have accrued
hereunder in respect of such sales. The Company shall keep accurate records
in sufficient detail to enable the Royalties hereunder to be determined and
to be verified by MSI. All information provided pursuant to this paragraph
shall be considered Confidential Information for purposes of Article IV
hereof.
2. Royalties shown to have accrued by each report shall be due
and payable on the date such report is due. Payments in whole or in part may
be made in advance of such due date. All royalty payments due shall be paid
in U.S. dollars via wire transfer.
C. RIGHT TO AUDIT. MSI shall have the right, once every twelve
months, at its own expense, to have an independent public accountant,
reasonably acceptable to the Company, examine the relevant financial books
and records of account of the Company during normal business hours, upon
reasonable notice, to determine or verify the number of Revenue-Generating
Sheaths sold during the Royalty Period. If errors of five percent (5%) or
more during a 12-month period are discovered as a result of such examination,
the Company shall reimburse MSI for the reasonable expense of such
examination and pay the deficiency immediately. All information audited
pursuant to this paragraph shall be considered Confidential Information for
purposes of Article IV hereof.
D. PAYMENT DELAY. In case of any delay in payment by the Company to
MSI not occasioned by an event described in Section H of Article VII hereof,
a late payment charge of one and one-half percent (1.5%) per month, assessed
from the due date of said payment, shall be due and payable by the Company
without any special notice. Any payments made by the Company subsequent to
the determination that a late payment charge applies, shall first be applied
to the late payment charge and then to the outstanding royalty payable.
ARTICLE III
INDEMNIFICATION
The Company will indemnify and hold MSI harmless from and against any
and all suits, actions, losses, obligations, deficiencies, liabilities,
claims, damages, cost and expenses (including court costs and reasonable
attorneys' fees) which arise out of, are caused by, relate to, or result or
occur from or in connection with the Company's acts or omissions in
connection with its activities under this Agreement. If any claim by a third
party is made against MSI and MSI intends to seek indemnification with
respect thereto as set forth in this Article III, MSI will promptly give
written notice to the Company of such claim. The failure of MSI to give
prompt notice shall not relieve the Company of its obligations hereunder,
unless such
-2-
<PAGE>
failure materially prejudices the defense of the claim for which
indemnification is sought. The Company will have ten days after such notice
is given to elect, by written notice given to MSI, to undertake, conduct and
control, through counsel of its own choosing and at the Company's sole risk
and expense, the good faith settlement or defense of such claim, and MSI will
cooperate with the Company in connection therewith; provided MSI will be
entitled to participate in such settlement or defense through counsel chosen
by MSI, and the fees and expense of such counsel will be borne by MSI; and,
provided further, that the Company shall not make any settlement involving
the payment of money by MSI without first making available the funds needed
to pay the settlement and will not make any settlement involving any
injunction or similar restriction against MSI without the consent of MSI,
which consent shall not be unreasonably withheld. If the Company does not
make a timely election to undertake the good faith defense or settlement of
the claim as aforesaid, or if the Company fails to proceed with the good
faith defense or settlement of the matter after making such election, in
either such event, MSI will have the right to contest, settle or compromise
the claim at its exclusive discretion, at the risk and expense of the Company
to the full extent set forth above, as the case may be. The provisions of
this Article III shall survive termination of the Agreement.
ARTICLE IV
CONFIDENTIALITY
For purposes of this Agreement, "Confidential Information" shall mean
any information of a confidential and/or proprietary nature as to which
either party has acquired or, during the term of this Agreement, acquires,
any interest, including, but not limited to, all discoveries, inventions,
improvements and ideas related to any process, formula, machine, device,
manufacture, composition of matter, plan or design, whether patentable or
not, or relating to the conduct of its business which, prior to the date
hereof or during the term of this Agreement, was or is disclosed to the other
party. In order for any information to be deemed Confidential Information, it
must be in written form and appropriately marked confidential at the time of
disclosure to the other party, or alternatively, if the information is
disclosed orally, it must be confirmed as confidential in writing by the
disclosing party within ten days of such disclosure. Notwithstanding the
foregoing, the term "Confidential Information" shall not include any
information which: (i) has been published or otherwise becomes a matter of
public knowledge by any means other than the receiving party's default in the
observance or performance of any term or provision of this Article on its
part to be observed and performed; (ii) was known to the receiving party at
the time of such disclosure or as evidenced by its business records
maintained in the ordinary course; (iii) is at any time disclosed to the
receiving party by any person or entity not a party hereto who it believes,
after reasonable inquiry, has the right to do disclose same; or (iv) is
independently developed by the receiving party.
For a period of five years from the date of this Agreement, each party
will maintain the other party's Confidential Information in confidence and
will not disclose the same to any person or entity not a party hereto or use
the same for the benefit of any such third party. The receiving party will
keep and maintain complete and accurate written records of the Confidential
Information of the other party, will mark such Confidential Information with
such legends as the disclosing party may reasonably direct, and will promptly
deliver same to the disclosing party upon the expiration or termination
hereof or at such other times as the disclosing party may request.
-3-
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF MSI.
MSI hereby represents and warrants to the Company the following:
1. MSI is a corporation organized, validly existing and in
corporate good standing under the laws of Massachusetts, has all requisite
corporate power and authority to own and operate its property and carry on
its business and is not required to qualify to do business in any other
jurisdiction.
2. The execution and delivery of this Agreement has been duly and
validly authorized by all necessary corporate action on the part of MSI, and
(assuming valid execution by the Company) this Agreement is a valid and
binding obligation of MSI enforceable against it.
3. As of the date of this Agreement, MSI is not a party to any
lawsuit, nor is there any outstanding claim against MSI, alleging that use of
the Manufacturing Know-How infringes the proprietary rights of any third
party.
B. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to MSI the following:
1. Conceptus is a corporation organized, validly existing and in
corporate good standing under the laws of Delaware, has all requisite
corporate power and authority to own and operate its property and carry on
its business and is not required to qualify to do business in any other
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, results of operations or financial condition
of Conceptus. Microgyn is a corporation organized, validly existing and in
corporate good standing under the laws of Massachusetts, has all requisite
corporate power and authority to own and operate its property and carry on
its business and is not required to qualify to do business in any other
jurisdiction.
2. The execution and delivery of this Agreement has been duly and
validly authorized by all necessary corporate action on the part of each of
Conceptus and Microgyn, and (assuming valid execution by MSI) this Agreement
is a valid and binding obligation of each of Conceptus and Microgyn
enforceable against each of them.
3. As of the date of this Agreement, neither Conceptus nor
Microgyn is a party to any lawsuit, nor is there any outstanding claim
against Conceptus or Microgyn, respectively, alleging that use of the
Manufacturing Know-How infringes the proprietary rights of any third party.
4. As of the date of this Agreement, neither Conceptus nor
Microgyn is a party to any agreement or understanding, oral or written, which
would, in any manner, be inconsistent with the rights granted herein to MSI
and neither Conceptus nor Microgyn shall enter into any agreement or
understanding, oral or written, during the term of this Agreement, nor during
the term of this Agreement, directly or indirectly, engage in any activity
which would, in any manner, be inconsistent with the rights herein granted to
MSI.
-4-
<PAGE>
ARTICLE VI
TERM AND TERMINATION
A. TERM. This Agreement shall be effective as of the Transfer
Completion Date and shall continue until the end of the month following the
due date of the last payment to be made by the Company to MSI hereunder
unless sooner terminated in accordance with the provisions of this Agreement.
B. Termination. This Agreement may be terminated only upon the
express written consent of all of the parties hereto. Upon the expiration or
termination of this Agreement, all rights and obligations of the parties
hereunder shall cease except that the provisions of Articles I, III, IV, VI
and VII shall survive, and any obligations of the Company to pay Royalties or
other amounts to MSI which have accrued as of the date of termination or
expiration shall not be affected.
ARTICLE VII
MISCELLANEOUS
A. NO ASSIGNMENT. The Company shall have no right to assign any of
its rights or obligations under this Agreement, other than to its successor
by merger, consolidation or sale of assets, without the prior written consent
of MSI, which consent shall not be unreasonably withheld.
B. SEVERABILITY. Any provision of this Agreement which is found to be
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
Each provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law. If any provision contained in this Agreement
shall be held to be excessively broad as to scope, activity or subject so as
to be unenforceable at law, such provision shall be construed by limiting and
reducing it so as to be enforceable to the extent compatible with the
applicable law as then in effect.
C. NOTICE. All notices or other communications required or permitted
to be given under this Agreement shall be in writing and will be deemed
effective and given when delivered in person, sent by delivery service or by
certified or registered mail, postage and certification prepaid, or sent by
telecopier or facsimile with confirmation to the following addresses:
If to MSI: Medical Scientific, Inc.
125 John Hancock Road
Taunton, Massachusetts 02780
Fax: 508.880.7347
Attn: President
With a copy to: Warner & Stackpole LLP
75 State Street
Boston, Massachusetts 02109
Fax: 617.951.9151
Attn: Michael A. Hickey, Esq.
-5-
<PAGE>
If to Microgyn: Microgyn, Inc.
1021 Howard Avenue
San Carlos, California 94070
Fax: 650.508.7600
Attn: President
If to Conceptus: Conceptus, Inc.
1021 Howard Avenue
San Carlos, California 94070
Fax: 650.508.7600
Attn: President
With a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Fax: 650.233.8386
Attn: Michael W. Hall, Esq.
D. COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered will be
an original, but all of which together will constitute one and the same
instrument. In pleading or proving this Agreement, it will not be necessary
to produce or account for more than one such counterpart.
E. CAPTIONS. The captions of sections or subsections of this
Agreement are for reference only and will not affect the interpretation or
construction of this Agreement.
F. WAIVERS. No waiver of any breach or default hereunder will be
valid unless in a writing signed by the waiving party. No failure or other
delay by either party in exercising any right, power, or privilege hereunder
will be or operate as a waiver thereof, nor will any single or partial
exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege.
G. FURTHER ASSURANCES; COOPERATION. From time to time on and after
the date hereof, MSI and the Company will promptly execute and deliver all
such further instruments and other documents, and will promptly take all such
further actions, as the other may reasonably request in order to effect or
confirm the transactions hereby contemplated and to carry out the purposes of
this Agreement. In addition, each of MSI and the Company will cooperate with
the other in all reasonable respects relating to the transactions and
relationship between the parties contemplated hereby.
H. FORCE MAJEURE. Any delay in the performance of any of the duties
or obligations of any party hereto shall not be considered a breach of this
Agreement and the time required for performance shall be extended for a
period equal to the period of such delay; provided, that such delay has been
caused by or is the result of any act of God, acts of a public enemy,
insurrections, riots, embargoes, labor disputes (including strikes, lockouts,
job actions, or boycotts), fires, explosions, earthquakes, floods, shortages
of material or energy or other unforeseeable causes beyond the control and
without the fault or negligence of the party so affected. The party so
affected shall give prompt notice to the other party of such cause, and shall
take whatever reasonable steps are necessary to relieve the effect of such
cause as rapidly as possible.
I. ENTIRE AGREEMENT. This Agreement and the Manufacturing Transition
Agreement, together with the exhibits hereto and thereto, contain the entire
understanding and agreement among the parties, and supersedes any prior
understandings or agreements among them, with respect to the subject matter
hereof.
-6-
<PAGE>
J. GOVERNING LAW. This Agreement will to the maximum lawful extent be
governed by and interpreted and construed in accordance with the internal
laws of the Commonwealth of Massachusetts, as applied to contracts made, and
entirely to be performed, within Massachusetts, and without reference to
principles of conflicts or choice of law.
K. RELATIONSHIP OF PARTIES. The relationship of the Company and MSI
will be one of independent contracting parties, and not that of partners,
joint venturers, principal-and-agent, or otherwise. Neither the Company nor
MSI will have or purport to have any right, power, or authority to bind the
other.
L. ARBITRATION. The parties agree to work together in good faith to
resolve any disputes arising under or in connection with this Agreement and
the transactions and relationship between the parties contemplated hereby,
and to explore resolution of the dispute through methods of alternative
dispute resolution. If the parties are unable to resolve a dispute, it shall
be finally settled by a panel of three arbitrators, each having at least five
years of experience as an arbitrator and otherwise mutually acceptable to the
parties, in an arbitration administered by American Arbitration Association
in accordance with the internal laws of the Commonwealth of Massachusetts
(except that any dispute relating to the construction or effect of any patent
shall be resolved under the applicable laws of the United States or such
other jurisdiction as granted such patent). Any demand for arbitration
hereunder must be made before the running of the legal statute of limitations
applicable to the claim at issue. Any such arbitration shall take place in
Boston, Massachusetts, unless otherwise agreed by the parties, and shall be
subject to the then applicable Federal Rules of Civil Procedure. Each of the
Company and MSI will be responsible for one-half of the fees and expenses of
the panel of arbitrators, and all of such party's own costs and expenses, in
connection with any such arbitration. Judgment upon any award rendered by the
panel of arbitrators, if such award is in accordance with applicable law and
the terms of this Agreement, may be entered in any court of competent
jurisdiction. The decision of the panel of arbitrators shall be in writing
and shall set forth in reasonable detail the basis for such decision.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date above first written.
MICROGYN, INC.
By: /s/ Sanford Fitch
Name: Sanford Fitch
Title: Chief Financial Officer
CONCEPTUS, INC.
By: /s/ Kathryn Tunstall
Name: Kathryn Tunstall
Title: President and Chief Executive Officer
MEDICAL SCIENTIFIC, INC.
By: /s/ Paul C. Nardella
Name: Paul C. Nardella
Title: President
-8-
<PAGE>
EXHIBIT 10.27
CONCEPTUS, INC.
MASTER CONSULTING AGREEMENT
This Agreement is entered into by and between Conceptus, Inc., a Delaware
corporation, ("Conceptus"), and Howard Palefsky (hereinafter "Consultant"), this
15th day of October, 1997.
In consideration of the mutual promises contained herein, the parties
hereto agree as follows:
SECTION 1: CONSULTING
1.1 SERVICES. Consultant shall render consulting services in the area of
corporate development/strategic acquisitions, including working with the CEO and
Board to develop a strategy to acquire complimentary companies, products and
technologies and strategy implementation to include identifying/ obtaining
sources of financing and structuring the transaction. (hereinafter its
"Duties"). Consultant shall consult with the Board of Directors, officers, and
department heads of Conceptus, and such other personnel as designated by the
President and CEO of Conceptus, in regard to its Duties.
1.2 PROJECT DESIGNATION. Consultant shall work on a per project basis.
Upon identification of a project to be performed by Consultant during the term
of this Agreement, Conceptus shall prepare a Project Designation in the form
attached hereto and marked Exhibit A (the "Project Designation") which shall
detail the scope, duration and payment terms for the project in question. Upon
obtaining Consultant's consent to work on the project, the Project Designation
shall be signed by the parties and attached hereto. Consultant's relationship
with respect to such project shall thereafter be governed by this Agreement as
supplemented and/or amended by the terms and conditions set forth in the Project
Designation.
1.3 SERVICES FOR OTHERS. Consultant shall be free to represent or perform
services for other persons during the term of this Agreement, provided that
performance of such services does not interfere with Consultant's Duties under
this Agreement. However, Consultant agrees that Consultant does not presently
perform, and does not intend to perform, during the term of this Agreement,
consulting or other services for third parties whose businesses or proposed
businesses in any way involve the design or use of products that are or would be
competitive with the products or proposed products of Conceptus (except for
companies previously disclosed by Consultant to Conceptus in writing). Should
Consultant propose to perform consulting or other services for any such third
party, Consultant agrees to notify Conceptus in writing in advance (specifying
the name of the organization for whom Consultant proposes to perform such
services) and to provide information to Conceptus sufficient to allow it to
determine if the performance of such services would conflict with areas of
interest to Conceptus, or any further services that Conceptus might request of
Consultant under this Agreement.
<PAGE>
1.4 PAYMENT. Conceptus agrees to pay Consultant for its services to be
rendered under this Agreement in accordance with the payment terms set forth in
each Project Designation. Conceptus shall not be responsible for payment of
Consultant's expenses in the performance of its Duties, including, but not
limited to, expenses for travel and similar items, unless such expense, which
shall be reasonable in amount, is expressly authorized in writing by an Officer
or the Controller of Conceptus, prior to the incurring of such expenses, or is
permitted under the terms of a Project Designation. Conceptus will reimburse
Consultant for such reasonable, authorized expenses incurred by Consultant upon
the presentation by Consultant, from time to time, of a detailed and itemized
account of such expenses substantiated by receipts.
1.5 TERM. This Agreement shall be for a period of twenty-four (24)
months, commencing on October 15, 1997 and terminating on October 14, 1999;
however, this Agreement may be terminated at any time by either party by sixty
(60) days written notice to the other party.
1.6 INDEPENDENT CONTRACTOR. Consultant's services are to be performed as
an independent contractor with the customary and usual independence associated
therewith and Consultant shall not be deemed to be an employee of Conceptus or
to have the authority to enter into any contract on behalf of Conceptus or to
otherwise bind Conceptus to any agreement unless expressly authorized in writing
to do so. Consultant shall be responsible for payment of all income, social
security and other taxes incurred by Consultant. Consultant agrees to indemnify
and hold harmless Conceptus to the extent of any obligations imposed by law on
Conceptus to pay any withholding taxes, social security, unemployment or
disability insurance, or similar items in connection with any payment made to
Consultant by Conceptus for Consultant's services provided hereunder.
1.7 NO ASSIGNMENT. Because of the nature of the services to be rendered
by Consultant, this Agreement may not be assigned by Consultant without the
prior written consent of Conceptus. This Agreement may be assigned in whole or
in part by Conceptus without restriction.
SECTION 2: CONFIDENTIALITY
In consideration of its access to the premises of Conceptus and/or its
access to certain Confidential Information of Conceptus, in connection with its
business relationship with Conceptus, Consultant hereby represents and agrees as
follows:
2.1. CONFIDENTIAL INFORMATION. For purposes of this Agreement, the term
"Confidential Information" means:
(a) Any information which Conceptus possesses that has been
created, discovered or developed by or for Conceptus or which has otherwise been
made known to Conceptus, and which has or could have commercial value or utility
in the business in which Conceptus is engaged; or
<PAGE>
(b) Any information that is related to the business of Conceptus and
is generally not known by non-Conceptus personnel.
By way of illustration, but not limitation, Confidential Information includes
trade secrets and any information concerning products, processes, formulas,
designs, inventions (whether or not patentable or registrable under copyright or
similar laws and whether or not reduced to practice), discoveries, concepts,
ideas, improvements, techniques, methods, research, development and test
results, specifications, data, know-how, software, formats, marketing plans and
analyses, business plans and analyses, strategies, forecasts, customer and
supplier identities, characteristics and agreements.
2.2 EXCLUSIONS. Notwithstanding the foregoing, the term Confidential
Information shall not include:
(a) Any information which becomes generally available to the public
other than as a result of a breach of the confidentiality portions of this
Consulting Agreement or any other agreement requiring confidentiality between
Conceptus and Consultant;
(b) Information received from a third party in rightful possession
of such information who is not restricted from disclosing such information; and
(c) Information known by Consultant prior to its receipt of such
information from Conceptus which prior knowledge can be documented.
2.3 DOCUMENTS. Consultant agrees that, without the express written
consent of Conceptus, Consultant will not remove from Conceptus's premises, any
notes, formulas, programs, data, records, machines or any other documents or
items which in any manner contain or constitute Confidential Information, nor
will Consultant make reproductions or copies of same. In the event Consultant
receives any such documents or items by personal delivery from any duly
designated or authorized personnel of Conceptus, Consultant shall be deemed to
have received such express written consent of Conceptus. In the event that
Consultant receives any such documents or items, other than through personal
delivery as described in the preceding sentence, Consultant agrees to inform
Conceptus promptly of its possession of such documents or items. Consultant
shall promptly return any such documents or items, along with any reproductions
or copies, to Conceptus upon Conceptus's demand or upon termination of this
Agreement.
2.4 NO DISCLOSURE. Consultant agrees that Consultant will hold in trust
and confidence all Confidential Information and will not disclose to others,
directly or indirectly, any Confidential Information or anything relating to
such information without the prior written consent of Conceptus, except as may
be necessary in the course of its business relationship with Conceptus.
Consultant further agrees that Consultant will not use any Confidential
Information without the prior written consent of Conceptus, except as may be
necessary in the course of its business relationship with Conceptus, and that
the provisions of this Section 2.4 shall survive termination of this Agreement.
<PAGE>
2.5 PATENTS; COPYRIGHTS. Consultant acknowledges and agrees that all
Confidential Information existing or developed by or for Conceptus shall be the
sole property of Conceptus, and Conceptus shall be the sole owner of all patent,
copyright and other rights and protections in connection therewith. Consultant
hereby assigns to Conceptus all right, title and interest that Consultant may
have to or acquire in all such Confidential Information. Upon learning of any
Confidential Information not already disclosed to Conceptus during the term of
this Agreement, Consultant agrees that Consultant will promptly disclose its
knowledge of such Confidential Information to Conceptus.
2.6 OWNERSHIP. Consultant agrees that all Confidential Information that
is related to or which results from work performed by Consultant for Conceptus
("Inventions") shall be the sole and exclusive property of Conceptus or its
nominees. Conceptus and its nominees shall have the right to use and/or to
apply for patents, copyrights or other statutory or common law protections for
such Inventions in any and all countries. Consultant further agrees (i) to
assist Conceptus in every proper way to obtain and from time to time to enforce
such patents, copyrights and other rights and protections relating to
Inventions, and (ii) to execute and deliver to Conceptus or its nominee upon
request all such documents as Conceptus or its nominee may determine are
necessary or appropriate (including assignments of inventions). (Such documents
may be necessary to: (a) vest in Conceptus or its nominee clear and marketable
title in and to Inventions, (b) apply for, prosecute and obtain patents,
copyrights and other rights and protections relating to Inventions, or (c)
enforce patents, copyrights and other rights and protections relating to
Inventions.) Consultant's obligations pursuant to this Section shall continue
beyond the termination of its consulting relationship with Conceptus, but
Conceptus agrees to compensate Consultant after the termination of the
consulting relationship at a reasonable rate for time actually spent or expenses
incurred by Consultant at Conceptus's request.
2.7 LIMITS OF APPLICATION. Consultant has been informed and understands
that the provisions of Section 2.5 above do not apply to any Invention that
qualifies in all respects under Section 2870 of the California Labor Code, which
provides:
"(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
that either:
(i) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(ii) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable."
<PAGE>
2.8 NO CONFLICTING AGREEMENTS. Consultant represents that Consultant has
not brought, and will not bring, to Conceptus, and will not use in the
performance of its responsibilities for Conceptus, any materials or documents of
a former employer that are not generally available to the public, unless
Consultant has obtained the express written consent of such former employer for
Consultant's possession and use of such materials or documents for the specific
purposes that Consultant proposes to make of such materials or documents under
this Agreement. Moreover, Consultant represents that its performance of this
Agreement and the performance of its Duties as a consultant of Conceptus does
not and will not breach any agreement or relationship of trust and confidence
Consultant may have with any third party, whether oral, written or implied.
Consultant agrees that Consultant has not entered into and will not enter into
any agreement in conflict with this Agreement.
2.9 PUBLICATION. Consultant shall not submit for publication or publish
any scientific writing, oral presentation, poster session or any similar
disclosure of results or conclusions resulting from the services performed under
this Agreement without the prior express written consent of Conceptus.
2.10 REMEDIES. Consultant understands that, in the event Consultant fails
to comply with this Article 2 of this Agreement, Conceptus may suffer
irreparable harm that may not be adequately compensated by monetary damages.
Accordingly, Consultant agrees that, in the event of its breach or threatened
breach of any term of this Article 2, Conceptus shall be entitled to injunctive
or other preliminary or equitable relief in addition to such other remedies as
may be available to Conceptus for such breach or threatened breach, including
damages.
SECTION 3: MISCELLANEOUS
3.1 ACTIONS; EXPENSES. In the event of any action at law or in equity to
enforce the provisions of this Agreement, the unsuccessful party shall pay to
the other all costs and expenses so incurred, including attorneys' fees.
3.2 GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of California.
3.3 NOTICE. Any notice required or permitted to be given by Conceptus
under this Agreement shall be in writing and shall be deemed received and
sufficient when delivered personally or sent by telecopy or seventy-two (72)
hours after being deposited in the U.S. mail or with a courier service. Any
notice required or permitted to be given by Consultant under this Agreement
shall be in writing and shall be deemed received and sufficient when received by
Conceptus. The parties hereto agree that all such notices shall be delivered to
the addresses specified below.
3.4 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement expresses the
entire understanding with respect to the subject matter hereof and supersedes
and terminates any prior
<PAGE>
oral or written agreements with respect to the subject matter hereof. Any
term of this Agreement may be amended and observance of any term of this
Agreement may be waived only with the written consent of the parties hereto.
Waiver of any term or condition of this Agreement by any party shall not be
construed as a waiver of any subsequent breach or failure of the same term or
condition or a waiver of any other term or condition of this Agreement. The
failure of any party at any time to require performance by any other party of
any provision of this Agreement shall not affect the right of any such party
to require future performance of such provision or any other provision of
Agreement.
<PAGE>
Consultant and Conceptus hereby accept and agree to the
above terms and acknowledge receipt of a copy of this Agreement.
CONCEPTUS, INC. (HIRING AUTHORITY)
By: /s/ Kathryn Tunstall
------------------------------------------
Name: Kathryn Tunstall
---------------------------------------
Title: President and Chief Executive Officer
----------------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
CONCEPTUS, INC. (CHIEF FINANCIAL OFFICER)
By: /s/ Sanford Fitch
-----------------------------------------
Name: Sanford Fitch
---------------------------------------
Title: Chief Financial Officer
---------------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
"CONSULTANT"
By: /s/ Howard D. Palefsky
------------------------------------------
Name: Howard D. Palefsky
----------------------------------------
Address: 2800 Sand Hill Road, Suite 120
Menlo Park, CA 94025
Telephone: (650) 234-8215
<PAGE>
EXHIBIT A
PROJECT DESIGNATION
1. DESCRIPTION OF PROJECT:
Consultant shall render consulting services in the area of corporate
development/strategic acquisitions, including working with the CEO and
Board to develop a strategy to acquire complimentary companies, products
and technologies and strategy implementation to include identifying/
obtaining sources of financing and structuring the transaction. Consultant
shall consult with the Board of Directors, officers, and department heads
of Conceptus, and such other personnel as designated by the President and
CEO of Conceptus, in regard to its Duties.
2. TIME DEVOTED TO PROJECT: One day per week (52 days per year)
3. COMPENSATION: $100,000.00 per year, and
90,000 shares of stock, vested 1/24 monthly over two years.
(a) PAYMENT SCHEDULE: $ 8,333.33 monthly
(b) EXPENSES AUTHORIZED FOR REIMBURSEMENT BY CONCEPTUS: Out-of-pocket
expenses, including local travel and local telephone calls, shall be
reimbursed by Conceptus. Conceptus shall reimburse Consultant for any
pre-approved out-of-area travel and long-distance telephone calls,
including car and cellular telephone calls.
(c) INVOICE SUBMISSION AND PAYMENT: Invoices shall be submitted to
Conceptus monthly. Invoices shall be paid by Conceptus within thirty
(30) days of invoice date. Conceptus will not be liable for
reimbursable expenses incurred but not billed within three months
after the date of such expenses.
5. DURATION OF PROJECT: Two Years
<PAGE>
Signatures:
CONCEPTUS, INC. (HIRING AUTHORITY)
By: /s/ Kathryn Tunstall
------------------------------------------
Name: Kathryn Tunstall
----------------------------------------
Title: President and Chief Executive Officer
-----------------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
CONCEPTUS, INC. (CHIEF FINANCIAL OFFICER)
By: /s/ Sanford Fitch
-------------------------------------
Name: Sanford Fitch
-----------------------------------
Title: Chief Financial Officer
---------------------------------
Address: 1021 Howard Avenue
San Carlos, CA 94070
Telephone: (415) 802-7240
"CONSULTANT"
By: /s/ Howard D. Palefsky
-----------------------------------------
Name: Howard D. Palefsky
----------------------------------------
Address: 2800 Sand Hill Road, Suite 120
Menlo Park, CA 94025
Telephone: (650) 234-8215
<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 and 333-30149) pertaining to the 1995 Directors Stock
Option Plan, 1995 Employee Stock Purchase Plan, 1993 Stock Plan of Conceptus,
Inc. of our report dated February 2, 1998, with respect to the consolidated
financial statements of Conceptus, Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 1997, filed with the Securities
and Exchange Commission.
Palo Alto, California
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,250
<SECURITIES> 17,808
<RECEIVABLES> 617
<ALLOWANCES> 77
<INVENTORY> 355
<CURRENT-ASSETS> 28,243
<PP&E> 2,060
<DEPRECIATION> (970)
<TOTAL-ASSETS> 29,480
<CURRENT-LIABILITIES> 1,635
<BONDS> 0
0
0
<COMMON> 63,505
<OTHER-SE> (36,001)
<TOTAL-LIABILITY-AND-EQUITY> 29,480
<SALES> 1,426
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<CGS> 3,516
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