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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, 1999 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)
Delaware 97-3170244
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation 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 on the closing sale price of the Registrant's Common Stock on
the Nasdaq National Market on February 29, 2000 was approximately $57,366,527 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 9,661,731 shares of Registrant's Common Stock issued and
outstanding as of February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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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 and develops
minimally invasive devices for reproductive medical applications. The Company
was formed in 1992 in response to reports by physicians of the successful use of
products manufactured by Target Therapeutics, Inc., to access the fallopian
tubes. Conceptus has an exclusive, worldwide, royalty-free license to the
reproductive applications of the technology developed by Target. In 1997, Target
became a separate business unit of Boston Scientific Corporation ("BSC").
Conceptus' focus is to develop its STOP(TM) non-surgical permanent contraception
device for women. STOP is designed to be a less-invasive, safer, and less costly
alternative to surgical sterilization, more commonly known as tubal ligation.
The STOP device is designed to achieve contraception by elliciting a tissue
response which occludes the fallopian tubes. A STOP micro-coil is placed into
each fallopian tube in a procedure that is usually performed in 20 minutes, does
not require general anesthesia, and does not require any cutting of the body.
The STOP device does not contain any drugs and is intended to provide permanent
long-term contraception.
The Company has demonstrated the feasibility of the STOP(TM) device in a Phase
II study of preliminary safety and effectiveness and plans to commence a pivotal
trial in the U.S., Europe, and Australia in the first half of 2000. The
pre-market portion of the pivotal trial will study 400 patients with bilateral
placement of STOP devices through twelve months of effectiveness testing.
Conceptus believes the pre-market portion of the pivotal trial may be completed
in 2002 and FDA approval to market the STOP device in the United States may be
obtained in 2003. Prior to FDA approval, however, the Company plans to introduce
the STOP device in certain international markets upon clearance from local
governmental bodies. The Company may raise additional capital to complete the
pivotal trial and to execute a significant marketing launch of the STOP product.
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CONTRACEPTION OVERVIEW
Market Overview
The following facts are useful to gain perspective on the size of the
contraception market:
o Data from the United Nations indicates that 57% of reproductive couples
worldwide use some form of contraception.
o The Population Council estimates that there were approximately 16 million
sterilization procedures annually worldwide during the 1990's.
o Data from the Centers for Disease Control found that surgical tubal
ligation is the number one form of contraception in the U.S. Chart 1
illustrates U.S. contraceptive use among 60.2 million women of reproductive
age 14 - 44.
Chart 1: U.S. Contraceptive Use -- Women 14-44
[GRAPHIC OMITTED]
Tubal ligation is a highly effective means of achieving female sterilization.
The difficulty in accessing the fallopian tubes, however, has made it necessary
to perform surgery in order to accomplish tubal ligation. Typically, fallopian
tubes are ligated by cutting or cauterizing the tubes, or by mechanical
occlusion of the fallopian tube using clips or rings in a surgical procedure
such as a laparoscopy or laparotomy. The risks associated with surgical
procedures are primarily unintended injury to the patient and risks associated
with general anesthesia. Surgical procedures have overall complication rates of
about 2% and 6% for laparoscopy and laparotomy, respectively. Additionally,
procedures performed under general anesthesia have a complication rate that is
five times higher than procedures performed with local anesthesia. Because of
these risks, 92% of these procedures are performed in a hospital setting to
ensure access to emergency equipment, facilities, and personnel. Therefore the
cost of surgical tubal ligation has a range of $2,500 to $8,000, depending on
the degree of invasiveness. The typical surgical procedure takes approximately
45 minutes and is followed by 4 - 5 hours of recovery time in a hospital
setting. Additionally, women typically take 3 - 4 days off work convalescing at
home. Despite the risks,
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long recovery time, and high costs associated with surgical tubal ligation,
women throughout the world have made surgical tubal ligation the most prevalent
form of contraception worldwide.
In summary, surgical female tubal ligation is the most prevelant form of
contraception in the U.S. due to the combination of four strong drivers:
1. very high effectiveness
2. no recurring user compliance
3. very low risk of long-term side-effects
4. decreasing prevalence of vasectomy
STOP(TM), the Non-surgical Approach to Permanent Contraception
STOP is designed to be a less-invasive, safer, and less costly alternative to
surgical sterilization, more commonly known as tubal ligation. The STOP device
is designed to achieve contraception by occluding the fallopian tubes. A STOP
micro-coil is placed into each fallopian tube in usually a 20 minute office
procedure that does not require general anesthesia and does not require any
cutting of the body. The STOP device does not contain any drugs and is intended
to provide permanent contraception. The major differences between a STOP
procedure and surgical tubal ligation are summarized in Table 1:
Table 1: STOP vs Surgical Tubal Ligation
- ----------------------------- --------------------- -------------------------
Attribute STOP Surgical
- ----------------------------- --------------------- -------------------------
Where Performed Office Operating room
- ----------------------------- --------------------- -------------------------
Patient Sedation Local General
- ----------------------------- --------------------- -------------------------
Procedure Time 20 minutes* 45 minutes
- ----------------------------- --------------------- -------------------------
Recovery Time 1 Hour* 4 - 5 Hours
- ----------------------------- --------------------- -------------------------
Days off Work Under 1 Day* 3 - 4 Days
- ----------------------------- --------------------- -------------------------
Global Cost $1,500* $2,500-$8,000
- ----------------------------- --------------------- -------------------------
* Estimated by Conceptus, Inc.
The STOP device is designed to provide the benefits of tubal ligation without
the risks associated with general anesthesia and incisional surgery.
Additionally, STOP may reduce time away from work and family obligations and may
reduce the cost of a tubal ligation by about 44%. Conceptus believes that
approximately 90% of surgical tubal ligation procedures performed annually in
the U.S. may be replaced with STOP procedures.
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Mechanism of Contraception
The mechanism of contraception of the STOP device is a combination of: (a) a
tissue response which occludes the fallopian tube, and (b) transformation of the
fallopian tube architecture to an environment that does not support conception.
Interim results from the Company's on-going histology study provides evidence
that tissue response to the STOP device is occlusive in nature and should
provide for long-term anchoring as well as pregnancy prevention. Additionally,
the histology study demonstrates that the tissue reaction is predictable and
localized to the STOP device.
In the Phase II and pivotal clinical trials there is a three-month waiting
period after device placement before STOP can be relied upon for contraception.
During this time alternative contraception must be used. At the three month
follow-up visit, an x-ray and a pressurized dye test is performed to see if the
tubes have been occluded by the STOP devices. If all criteria have been met, a
doctor can recommend that a woman may rely on STOP for contraception. Based on
histology data gathered to date, Conceptus believes that the three month waiting
period is a sufficient amount of time required for the STOP device to effectuate
its mechanism of contraception.
Significant Existing Market & Large Potential Market
The Company estimates that there are approximately 800,000 surgical tubal
ligations performed annually. The following graphic illustrates how these
procedures may represent just a portion of a much larger potential market.
[GRAPHIC OMITTED]
The top of the cone represents the current demonstrated market of approximately
800,000 surgical tubal ligations. These women are willing to tolerate the
surgical requirements in order to reliably and conveniently control their
fertility with a low risk of side-effects. Among these women, the strongest
predictor of tubal ligation is the number of children with 90% of these women
having two or more children.
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Among the 23.7 million women using reversible methods of contraception, there
are 7.5 million women with two or more children. Conceptus believes these 7.5
million women represent a group of women with the highest propensity to switch
their method of contraception to STOP. Conceptus believes these women may have a
propensity to switch to STOP because data from the 1995 National Survey of
Family Growth, indicates that there is considerable switching between reversible
methods of contraception. The survey found that 44% of women using reversible
methods discontinue use for a method-related cause within 12 months, which
increases to 61% by 24 months. Researchers believe this may reflect the fact
that women are not overwhelmingly satisfied with long-term use of reversible
methods and would welcome a more reliable and convenient method of
contraception.
Existing Reversible Methods are Not Ideal
Existing methods of reversible contraception may have drawbacks that make them
less than ideal as long-term methods of contraception. Table 2 summarizes the
failure rates, user compliance, and published side effects associated with
various methods of contraception.
<TABLE>
Table 2: Method Failure Rates, User Compliance, Side Effects
<CAPTION>
- -------------------------- -------------------- -------------------- ---------------------------------------
Method 1st Year Failure Compliance Side Effects
Rate
- -------------------------- -------------------- -------------------- ---------------------------------------
<S> <C> <C> <C>
Tubal Ligation .5% None Post operative complications
- -------------------------- -------------------- -------------------- ---------------------------------------
Hormonal changes, stroke, heart
Oral Pill 6.9% Daily attack, ovarian cysts, pulmonary
embolism
- -------------------------- -------------------- -------------------- ---------------------------------------
Condom 8.7% Occurrence Cervical cancer
- -------------------------- -------------------- -------------------- ---------------------------------------
Diaphragm 8.1% Occurrence Vaginal infection, bladder
infection, cervical cancer,
- -------------------------- -------------------- -------------------- ---------------------------------------
IUD .5%-2% Monthly self exam Uterine perforation, anemia,
Irregular menses
- -------------------------- -------------------- -------------------- ---------------------------------------
Injectables / 3.2% / 2.3% 3 months / 3 years Hormonal changes,
Implantables Irregular menses
- -------------------------- -------------------- -------------------- ---------------------------------------
</TABLE>
As shown in Table 2, tubal sterilization has the lowest failure rate of .5%. The
pill, condom, and diaphragm have much higher failure rates of 6.9%, 8.7%, and
8.1% in the first year, respectively. These reversible methods have relatively
high failure rates because they have the burden of imperfect user compliance,
which is inherent in most reversible methods of contraception.
The reliance on tubal ligation is due in part to concerns about the safety and
reliability of those birth control methods that are readily accepted by younger
women. Consequently, despite recent favorable clinical studies, patient concerns
about the long-term
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effects of oral contraceptives have limited their acceptance among women 30 - 44
where only 6.2% of these women use oral contraceptives. Use of IUDs among women
in the United States age 15 - 44 is less than 1%. Other long-term reversible
methods such as injectables and implantables have low failure rates, but have
undesirable side effects and disadvantages that may make these methods poorly
accepted. For these reasons, Conceptus believes women may be seeking new methods
of permanent contraception.
What About Vasectomy?
Vasectomy is a highly effective method of contraception that is performed in a
doctor's office with local anesthesia and typically takes about 20 minutes. The
vas deferens is ligated or resected and the cut ends are typically cauterized.
Patients are observed for about 20 minutes before release and are encouraged to
use an ice pack for about 4 hours to reduce swelling. Support devices are
recommend for two days. Before relying on the vasectomy for contraception,
however, men must be tested for two successive months to ensure no presence of
sperm. The potential risks of vasectomy include an increased risk of erectile
dysfunction, chronic pain syndrome, and a theoretical risk of prostate cancer.
The number of vasectomies performed in the U.S. has decreased to approximately
200,000 procedures per year in the 1990's, predominately as a result of female
tubal ligation becoming more safe and prevalent. Conceptus believes this trend
may be continued if STOP is proven safe and effective.
Clinical & Regulatory Status
In 1997, the Company commenced a Phase II clinical study in Australia and
expanded this study into the U.S. and Europe in 1998. Table 3 provides an
interim summary of this Phase II clinical study.
<TABLE>
Table 3: Interim Phase II Clinical Trial Summary
<CAPTION>
Gamma & Beta
Gamma Design Designs Combined
February 4, 2000 March 31, 2000
- ---------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Women with successful placements 123 133
- ---------------------------------------------------------- --------------------- ---------------------
Placement rate 90% *
- ---------------------------------------------------------- --------------------- ---------------------
Average procedure time 20 minutes *
- ---------------------------------------------------------- --------------------- ---------------------
Woman months of wearing 778 1,214
- ---------------------------------------------------------- --------------------- ---------------------
Woman months of effectiveness 369 710
- ---------------------------------------------------------- --------------------- ---------------------
Percentage of women who rate tolerance to wearing
STOP device as "good", "very good", or "excellent"
for follow-up reported 99% *
- ---------------------------------------------------------- --------------------- ---------------------
Adverse events 6% *
- ---------------------------------------------------------- --------------------- ---------------------
Reported pregnancies None None
- ---------------------------------------------------------- --------------------- ---------------------
<FN>
* Data is not relevant as the Beta design was discontinued in 1998.
</FN>
</TABLE>
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STOP is designed to be a permanent method of contraception capable of being
placed in an office setting with minimal patient sedation. To support the
feasibility of an office based placement Conceptus is collecting data in its
Phase II and pivotal trials regarding the time required to complete the
procedure, the use of analgesia and/or anesthesia, patient tolerance of the
placement procedure, and patient tolerance of wearing the device.
In the Phase II trial, 94% of the procedures were performed without general
anesthesia, and 91% of patients have reported "good" to "excellent" tolerance of
the procedure. Post procedure discomfort was reported in 78% of patients.
Further analysis of this post procedure discomfort revealed that 56% of patients
reported resolution of pain within one day, and 100% of patients reported
resolution of discomfort within 14 days. In about half of these cases,
discomfort was treated with non-prescription medication. Additionally, Conceptus
has gathered data from its Phase II trial that suggests the STOP device does not
significantly alter menstruation patterns.
Adverse events have occurred in about 6% of Phase II cases. These adverse events
were due to placement errors in 4% of cases, and in 2% of cases were due to
technical difficulties with the device. Surgical retrieval of the STOP device in
conjunction with a tubal ligation was performed in about 2% of patients. In
response to these events, the Company has revised its physician training and
clinical protocol and implemented design changes to reduce the potential for
these types of adverse events.
U.S. regulatory clearance of the STOP device is subject to Pre-Market Approval
("PMA") by the FDA. In March 2000, Conceptus obtained FDA approval to commence a
400 patient international pivotal trial of the STOP device. The Company plans to
conduct the pivotal trial with 10-20 clinical sites in the U.S., Europe, and
Australia. In the pivotal trial, Conceptus will place devices in a minimum 400
women. In the first three months after placement of the STOP device, women will
use an alternative form of contraception. After this three month period, women
will have an office visit to ensure proper placement of the STOP device and with
physician approval, will begin relying solely on STOP for contraception.
Conceptus will then follow these women through the end of the study. Clinical
endpoints of the pivotal trial include pregnancy prevention, and safety and
comfort during and after the STOP procedure.
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 TTAC system and the STARRT
Falloposcopy system. Both the TTAC and STARRT products have produced limited
revenues since approval by the FDA and are not actively marketed. The Company
continues to consider various licensing and/or distribution strategies to market
these products, but does not intend to expend significant resources on marketing
activities on these products.
Electro-Surgical Products
Conceptus' electro-surgical products consist of the ERA and FUTURA Resectoscope
Sleeves, for use in therapeutic resection procedures in gynecology and urology,
respectively. These products were acquired by the Company through its
acquisition of Microgyn, Inc.,a privately held company, in November 1996.
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These products increase the safety of resectoscope procedures, including
therapeutic procedures, which remove abnormal tissue in the uterus or prostate.
In performing these procedures, traditionally a non-conductive/non-physiologic
distention medium is employed. Unfortunately, these fluids are electrolyte-free
(hypotonic) and can change levels of vital electrolytes such as sodium,
potassium, and chloride in the blood stream of the patient. Significant risk to
the patient is incurred by over-absorption of hypotonic solutions, which include
serious heart, lung, and brain disorders, which sometimes result in coma or
death.
The Company's ERA and FUTURA products consist of a simple, disposable sleeve,
when installed on a standard hysteroscope, permits the use of normal saline,
which is physiologically compatible with the patient. The Company believes that
the ability to effectively use isotonic solutions during hysteroscopic
procedures reduces the potential of serious electrolyte disturbances and their
associated complications. Both the ERA and FUTURA and products have produced
limited revenues since approval by the FDA and are not actively marketed. The
Company continues to consider various licensing and/or distribution strategies
to market these products, but does not intend to expend significant resources on
marketing activities on these products.
Research and Development
The Company's research and development activities are performed by a combination
of internal employees and external consultants. The Company intends to continue
to focus its research and development efforts on the development of the STOP
device. Research and development expenses in 1999, 1998, and 1997 were $4.3
million, $4.3 million, and $5.4 million, respectively.
Manufacturing
The Company currently manufactures the STOP device in its facilities at 1021
Howard Ave., San Carlos California. The Company was inspected by the FDA in
March 1997, and was in substantial compliance with all FDA requirements
including FDA Good Manufacturing Practices ("GMP") for medical devices. The
Company has also been inspected in the past by the California Department of
Health Services ("CDHS") and is registered with the State of California to
manufacture its medical devices and drugs. The State of California Food and Drug
Branch conducted a two-day inspection of the San Carlos facility in February
1997 and as a result of that inspection, recommended that Conceptus be issued a
drug license by the State of California Department of Health Services. Conceptus
purchases materials from various suppliers and may rely on single sources for
some of these items. The Company does not have a formal supply contract with key
vendors and, accordingly, no assurance can be made that such firms will continue
to supply the Company with such materials in sufficient quantities, or at all.
Delays associated with any future shortages of materials could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Risk Factors-Dependence Upon Sole Source Suppliers; Lack of
Contractual Arrangements" and -"Limited Manufacturing Experience and Third Party
Manufacturers."
Marketing & Distribution
Because the STOP device is still in clinical trials, the Company is not actively
marketing or distributing the STOP device. As the STOP product progresses
through various clinical trials, the
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Company will evaluate various distribution strategies including direct
distribution, use of local and/or regional distributors, and strategic
partnerships.
There can be no assurance that any of the Company's future distribution partners
will successfully market the Company's products for applications in radiology,
gynecology, or urology. See "Risk Factors-Limited Sales, Marketing and
Distribution Experience; Emerging Market."
Patents, Trade Secrets and Licenses
The Company'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 February 29, 2000,
Conceptus had applied for multiple United States patents, seven of which have
been issued to the Company, and has filed 25 foreign patents, two of which have
been issued to the Company. 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 the
Company's STOP device. 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. 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
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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."
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 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.
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 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.
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Following submission of the 510(k), the manufacturer or distributor may not
place the device into commercial distribution unless and until an order is
issued by the FDA finding the product to be substantially equivalent. In
response to a 510(k), the FDA may declare that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA, however, may require further
information, including clinical data, to make a determination regarding
substantial equivalence, or may determine that the proposed device is not
substantially equivalent and require a PMA. Such a request for additional
information or determination that the device is not substantially equivalent
would delay market introduction of the products that are the subject of the
510(k).
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA. A PMA must be supported by extensive data,
including, laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device as well as extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. The PMA approval process can be lengthy, expensive and uncertain.
FDA review of a PMA generally takes approximately 1-2 years 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. There can be no assurance
that any future products or applications developed by the Company will not
require approval under the more lengthy and expensive PMA process.
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
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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 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 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. The Company plans to become ISO compliant in late 2000 and also
plans to obtain the "CE Mark" for the STOP device in late 2000.
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 the U.S. and 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. Large-scale market
acceptance of the Company's STOP and other products will depend on the
availability and level of reimbursement in international markets targeted by the
Company. 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.
13
<PAGE>
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 products. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either government or private reimbursement systems, or that
physicians will support and advocate reimbursement for use of the Company's
systems for all indications intended by the Company. Failure by physicians,
hospitals and other users of the Company's products to obtain sufficient
reimbursement from health care payors or adverse changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors Uncertainty Relating to Third Party Reimbursement."
Competition
Currently, 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 Company is aware of several
attempts to develop a non-surgical trans-cervical method of tubal ligation
including radio frequency coagulation, intratubal cryogenic freezing, polymeric
embolic agents, nitenol stents, silicone plugs, and hydrogelic plugs.
Competition will also come from existing and future methods of reversible
contraception. There can be no assurance that STOP will be able to successfully
compete against these methods.
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 safety sheath
technology. However, many of the Company's competitors have substantially
greater name recognition and financial resources than the Company and have
greater resources and expertise in research and development, obtaining
regulatory approvals, manufacturing and marketing. Certain of these companies
are developing and marketing devices for the diagnosis and treatment of
disorders of the female reproductive system and others may choose to enter this
market at a later date. See "Risk Factors-
14
<PAGE>
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, 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."
Employees
As of February 29, 2000 the Company employed 33 individuals, 25 of whom were
engaged directly in product development, regulatory/clinical affairs, quality
assurance, and pilot manufacturing. The Company is dependent upon several 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
<TABLE>
The executive officers of the Company, and their ages, as of February 29, 2000, are as follows:
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Name Age Position
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Steven Bacich.............. 38 President, CEO, and Director
- -------------------------------------------------------------------------------------------------------------
Cynthia M. Domecus......... 40 Senior Vice President, Clinical Research and Regulatory Affairs
- -------------------------------------------------------------------------------------------------------------
Stan Van Gent.............. 39 Vice President, Marketing
- -------------------------------------------------------------------------------------------------------------
Ashish Khera............... 30 Vice President, Research and Development
- -------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Mr. Bacich was promoted to President and CEO in January 2000 and 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 enodscopic procedures. From August
1987 to September 1989, Mr. Bacich held engineering positions in research and
development and served 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 and Regulatory Affairs
of Conceptus since May 1994. From March 1992 to May 1994 she served as Senior
Director and Director of Regulatory and Quality Affairs for Systemix, a
biotechnology firm. From 1986 to 1992, Ms. Domecus served in varying regulatory
affairs capacities with Collagen Corporation, a biomedical device manufacturer,
serving 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. Van Gent joined Conceptus in February 2000 as Vice President Marketing.
Prior to joining Conceptus, Mr. Van Gent was Director of International marketing
for Valley Lab, and was responsible for international market introduction,
reimbursement, strategic positioning, and branding for $70 million of product
revenues. Mr. Van Gent also held various positions in marketing, sales, and
engineering over the past 10 years for Allergan Medical Optics, Imagyn Medical,
and Cabot Medical. Mr. Van Gent holds a B.S. degree in Biomedical Engineering
from the University of California, San Diego.
Mr. Khera was promoted to Vice President, Research and Development in January
2000 and joined Conceptus in April 1995 as a Sr. Project Engineer. Prior to
joining Conceptus, Mr. Khera was employed as a Project Engineer by Pfizer, Inc.
from 1992-1995 where he developed medical devices for use in cardiovascular and
cancer treatment applications. Mr. Khera holds a B.S. degree in Mechanical
Engineering from Carnegie Mellon University.
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, 2001. 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. This larger facility has been
sub-leased at amounts greater than the Company's lease obligation through the
entire lease term. The Company believes that it will be able to lease additional
space or renew its existing leases as necessary.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
A complaint alleging sexual harassment was filed against the Company and certain
named officers of the Company in the Superior Court of San Mateo on December 17,
1997. In December, 1999, the Company was exonerated of all charges from this
proceeding. Please see footnote 11 in the Consolidated Notes to Financial
Statements.
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, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 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.
High Low
---- ---
October 1, 1999 - December 31, 1999 $3.75 $1.31
July 1, 1999 - September 30, 1999 $1.75 $1.00
April 1, 1999 - June 30, 1999 $1.53 $0.78
January 1, 1999 - March 31, 1999 $1.94 $0.97
October 1, 1998 - December 31, 1998 $2.25 $0.66
July 1, 1998 - September 30, 1998 $1.75 $0.53
April 1, 1998 - June 30, 1998 $3.50 $1.25
January 1, 1998 - March 31, 1998 $5.25 $3.50
As of February 29, 2000 there were approximately 119 stockholders of record.
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
17
<PAGE>
be dependent upon the Company's financial condition, results of operations,
capital requirements and such other factors as the Board of Directors deems
relevant.
In October 1998, the Company received notification from the National Association
of Securities Dealer's Inc. ("NASD") that due to the decline of the Company's
stock price, the Company was not in compliance, throughout the third quarter of
1998, with certain listing maintenance requirements of the Nasdaq National
Market. In November 1998, the Company's Common Stock satisfied these maintenance
requirements with a closing bid price of at least $1.00 per share for ten
consecutive trading days. While these maintenance requirements were satisfied
within the required ninety-day period required by the NASD, there can be no
assurance that Company's Common Stock will stay in compliance with these and
other listing maintenance requirements. If delisting were to occur, the Company
expects that trading of its Common Stock would be conducted on the OTC Bulletin
Board. The closing price of the Company's Common Stock on December 31, 1999 was
$3.75 per share.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
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.
<CAPTION>
(In thousands, except per share data)
Year Ended December 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 243 $ 664 $ 1,426 $ 449 $ 95
Cost of sales 1,021 1,208 3,516 1,702 137
------------ ------------- ------------- ------------- -----------
Gross profit (loss) (778) (544) (2,090) (1,253) (42)
Operating costs and expenses:
Research and development 2,589 8,509 5,429 4,317 4,251
Selling, general and admin 2,805 4,824 6,323 5,349 3,729
------------ ------------- ------------- ---------------------------
Total operating expenses 5,394 13,333 11,752 9,666 7,980
------------ ------------- ------------- ---------------------------
Loss from operations (6,172) (13,877) (13,842) (10,919) (8,022)
Interest & investment income, net 323 2,185 1,784 1,254 723
------------ ------------- ------------- ------------- -----------
Net loss $ (5,849) $ (11,692) $ (12,058) $ (9,665) $ (7,299)
============ ============= ============= ============= ===========
Basic and diluted net loss per share $ (1.39) $ (1.29) $ (1.01) $ (0.76)
============= ============= ============= ===========
Shares used in computing basic and
diluted net loss per share 8,396 9,381 9,562 9,662
============= ============= ============= ===========
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
=======
Year Ended December 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------------ ------------ ------------ -----------
Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................... $ 5,082 $ 39,021 $ 27,058 $ 17,071 $ 10,769
Working capital.............................. 4,407 37,078 26,608 16,500 10,030
Total assets................................. 6,092 40,093 29,480 19,031 11,903
Long-term portion of debt and capital lease
obligations............................... 153 34 1 - -
Redeemable convertible preferred stock....... 16,624 - - - -
Accumulated deficit.......................... (11,981) (23,673) (35,731) (45,396) (52,695)
Total stockholders' equity................... (11,877) 37,595 27,504 18,014 10,914
</TABLE>
(1) 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.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since its inception on September 18, 1992, the Company has been primarily
engaged in the design, development and marketing of minimally invasive devices
for reproductive medical applications. Conceptus, Inc. is developing STOP, an
innovative medical device designed to provide a non-surgical alternative to
surgical tubal ligation, the leading form of contraception worldwide. Data from
the United Nations show that worldwide, 30% of reproductive couples using
contraception rely on surgical tubal ligation. A survey performed by the Centers
for Disease Control indicates that surgical tubal ligation is the most prevalent
form of contraception in the U.S., and that 35% of women age 35-44 have had a
tubal ligation. An estimated 800,000 surgical tubal ligations are performed each
year in the U.S., of which 93% are performed in a hospital or surgi-center and
require general anesthesia.
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 develop appropriate
marketing and distribution systems for the STOP device.
The Company continues to devote significant financial and human resources on the
development of its STOP non-surgical permanent contraception device for women.
STOP is designed to be a less-invasive, safer, and less costly alternative to
tubal ligation. A STOP micro-coil is placed into each fallopian tube in a 20
minute procedure, which can be performed in an office setting. The procedure
does not require general anesthesia and does not require any cutting of the
body. Additionally, STOP does not employ hormones or drugs for contraception
thus it is intended to be an alternative to long-term use of oral
contraceptives, IUDs or hormonal implants. The STOP device is intended to
provide permanent contraception, and the feasibility of device removal and
possible return to fertility has not been investigated.
The mechanism of contraception of the STOP device is a combination of: (a) a
tissue response which occludes the fallopian tube, and (b) transformation of the
fallopian tube architecture to an environment that does not support conception.
Interim results from the Company's on-going histology study provides evidence
that tissue reponse to the STOP device is occlusive in nature and should provide
for long-term anchoring as well as pregnancy prevention. Additionally, the
histology study demonstrates that the tissue reaction is predictable and
localized to the STOP device.
In July 1997, the Company commenced a Phase II clinical study of preliminary
safety and effectiveness of STOP. The Phase II study involves device placement
in fertile women who desire permanent contraception and will be monitored for a
minimum of two years. In the current Phase II clinical trial there is a
three-month waiting period after placement of the STOP device before it can be
relied upon for contraception. During this time, alternative contraception must
be used. At the three-month follow-up visit, an x-ray is taken and a pressure
test is performed to see if the tubes have been occluded by the STOP devices. If
all criteria have been met, a doctor can recommend that a woman can begin
relying on STOP for contraception. Based on histology data gathered to date,
Conceptus believes that the three month waiting period is a sufficient amount of
time required for the STOP device to effectuate
20
<PAGE>
its mechanism of contraception.
As of March 31, 2000, the women in the Phase II study have accumulated 710
woman-months of effectiveness with no reported pregnancies. Additionally, these
women in the Phase II study have accumulated 1,214 woman-months of wear with a
low rate of adverse events. Adverse events have occurred in about 6% of Phase II
cases with the gamma design. These adverse events were due to placement errors
in 4% of cases, and in 2% of cases were due to technical difficulties with the
device. Surgical retrieval of the STOP device in conjunction with a tubal
ligation was performed in about 2% of patients. In response to these events, the
Company has revised physician training and clinical protocol and implemented
design changes to reduce the potential for these types of adverse events.
U.S. regulatory clearance of the STOP device is subject to the Food & Drug
Administration ("FDA") Pre-Market Approval ("PMA") process. Accordingly,
Conceptus intends to complete an international pivotal trial with clinical sites
in the U.S., Europe, and Australia. The Company expects to conduct the pivotal
trial in 10 - 20 sites. In March 2000, the Company obtained approval from the
FDA to commence a 400 patient pivotal trial of the STOP device. The Company
estimates that PMA approval of the STOP device may be obtained in 2003. The
Company also plans to seek regulatory clearance for the STOP device in certain
international markets before and after FDA approval. The Company intends to seek
the "CE Mark" for STOP in 2000.
The Company's other products, the TTAC product line, STARRT Falloposcopy system,
and the ERA and FUTURA resectoscope sleeves have generated limited sales to
date. Prior to the July 1998 restructuring, the Company had sought to license or
acquire products that were complementary to these products in order to develop a
critical mass of medical devices to justify the hiring of a direct, specialty
sales force. Failing to build a line of products that would enable cost
effective, direct marketing to the interventional gynecology market, the Company
implemented a restructuring plan in July 1998 when the Company assessed that the
near-term market potential of these products did not justify a direct, specialty
salesforce. This restructuring reduced the number of employees by approximately
fifty from seventy-two at the beginning of 1998 by eliminating all sales and
marketing personnel, the manufacturing function, and most administrative
personnel. As a result of these actions the Company recorded an one-time
restructuring charge of about $1.0 million in the second quarter of 1998.
Prior to the 1998 restructuring the Company sold its products to U.S. and
international markets through a limited number of distributors who resell to
physicians and hospitals. Sales to distributors were made on open credit terms
and may include purchase discounts. Sales in 1997 and 1998 were through a small
direct sales force (which was eliminated in July, 1998) and distributors, on
open credit terms and consisted of commercial shipments of TTAC, STARRT, ERA and
FUTURA products.
The ERA and FUTURA Resectoscope Sleeve allow the use of physiologic solution
when performing gynecological and urologic procedures, which increases the
safety of resection procedures by eliminating the risk of dilutional
hyponatremia, a complication that can lead to
21
<PAGE>
serious heart, lung, and brain disorders. The Company received 510(k) clearance
for its FUTURA Resectoscope Sleeve for urology 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 urological applications of the resectoscope sleeve.
Since December 31, 1997, Imagyn has not purchased any of the Company's products.
As of June 30, 1998, this distribution agreement with Imagyn was terminated by
Imagyn. The Company is actively seeking sales and marketing partners to
distribute the ERA Resectoscope Sleeve for gynecologic applications in the
United States and internationally.
Given the Company's focus on the STOP product, the Company is not actively
marketing the TTAC, STARRT, and the ERA and FUTURA products. Until the Company
is successful in establishing marketing and sales partners to distribute these
products, revenues are expected to decrease from 1999 levels. The Company
continues to evaluate possible marketing arrangements for these products.
Future revenues and results of operations may fluctuate significantly from
quarter to quarter and will depend upon, among other factors, the rate at which
the Company establishes domestic and international distributors or marketing
partners, actions relating to regulatory and reimbursement matters, the extent
to which the Company's products gain market acceptance, 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 believes that development of the TAC, STARRT, and ERA and
FUTURA products has reached a logical stage sufficient to enable distribution to
the marketplace. Therefore, the Company does not expect to expend significant
resources on further development of these products nor does the Company plan on
expending significant resources marketing these products without a significant
marketing and distribution partner. Future sales of the T-TAC, STARRT, ERA, and
FUTURA products are expected to be very low or decrease from current levels
until effective distribution partners are secured.
In October 1998, the Company received notification from the National Association
of Securities Dealer's Inc. ("NASD") that due to the decline of the Company's
stock price, the Company was not in compliance, throughout the third quarter of
1998, with certain listing maintenance requirements of the Nasdaq National
Market. In November 1998, the Company's Common Stock satisfied these maintenance
requirements with a closing bid price of at least $1.00 per share for ten
consecutive trading days. While these maintenance requirements were satisfied
within the required ninety-day period required by the NASD, there can be no
assurance that Company's Common Stock will stay in compliance the maintenance
requirements. If delisting were to occur, the Company expects that trading of
its Common Stock would be conducted on the OTC Bulletin Board or in the
over-the-market in what is commonly referred to as the "pink sheets".
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
In 1999, sales decreased to an immaterial level as the Company ceased all
marketing and distribution of the TTAC, STARRT, and ERA and FUTURA products to
focus solely on the STOP product. The Company expects revenues to remain
immaterial in 2000 as the Company continues to seek regulatory approval of the
STOP device in various countries. Sales in 1998 decreased by $1.0 million to
$0.4 million from $1.4 million in 1997 as a result of the lack of orders from
significant distribution partners combined with the elimination, in July 1998,
of all sales and marketing personnel. Sales to domestic customers represented
100%, 33%, and 83% of sales in 1999, 1998, and 1997, respectively.
22
<PAGE>
In 1999, Cost of Sales decreased to an immaterial level as the Company ceased
all marketing and distribution of the TTAC, STARRT, and ERA and FUTURA products
to focus solely on the STOP product. The Company, expects cost of sales to
remain immaterial in 2000 as the Company continues to seek regulatory approval
of the STOP device in various countries. In 1998, cost of sales decreased $1.8
million to $1.7 million from $3.5 million in 1997 due to the absence of
approximately $1.1 million of expenses incurred in 1997 for the purchase of
manufacturing rights for the Microgyn sleeve products combined with the
elimination of all manufacturing activities in July 1998.
Research and development ("R&D") expenses, which include clinical, regulatory,
and quality assurance expenses were $4.3 million in 1999 and 1998 and were $5.4
million in 1997. R&D expenses are expected to increase significantly in 2000 as
the Company commences the pivotal trial of the STOP device and scales-up its
pilot manufacturing operations. The decrease in R&D expenses in 1998 was due to
reduced development and clinical activities associated with the Microgyn, TTAC,
and STARRT products.
Selling, general and administrative ("SG&A") expenses were $3.7 million, $5.3
million and $6.3 million in 1999, 1998, and 1997, respectively. SG&A expenses
decreased in 1999 and 1998 as a result of the corporate restructuring effected
in July 1998, where all sales and marketing functions were eliminated and
administrative personnel were significantly reduced. However, as the Company
implements its international marketing efforts for the STOP device, SG&A
expenses are expected to increase significantly from the current levels.
Net interest and investment income were $0.7 million, $1.3 million and $1.8
million in 1999, 1998, and 1997, respectively. The decrease is a result of lower
average cash balances due to the utilization of cash for operations.
As a result of the items discussed above, net loss decreased to $7.3 million in
1999 from $9.7 million in 1998. Net loss was $12.1 million in 1997.
At December 31, 1999 the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $42.0 million and $15.2
million, respectively. In addition, the Company had research credit
carryforwards of approximately $750,000 as of December 31, 1999. The net
operating loss and credit carryforwards described above will expire, if not
utilized, at various dates beginning in the years 2000 through 2019. 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."
23
<PAGE>
Liquidity and Capital Resources
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $52.0 million at
December 31, 1999. At December 31, 1999, Conceptus had cash, cash equivalents
and investments of approximately $10.8 million compared with $17.1 million at
December 31, 1998. The decrease in 1999 was primarily due to $6.4 million used
in operations, to fund increasing levels of research and development of the
Company's STOP non-surgical permanent contraception device and expansion of the
STOP Phase II clinical study.
Capital expenditures in 1999 were immaterial. In 1998 capital expenditures were
$0.9 million and were primarily leasehold improvements and related furniture and
fixtures for a new building. As a result of the Company's restructuring in July
1998, the Company subleased this new building and related furniture and
fixtures, for the entire lease term, at amounts greater than the cost of
improvements and related furniture and fixtures. Capital expenditures in 1997
were $1.0 million.
For the full year 2000, the Company expects to incur a net loss of approximately
$12 million for product development, pilot manufacturing, and the STOP pivotal
trial. Conceptus believes that its existing capital resources will be sufficient
to complete enrollment in the STOP pivotal trial but does not currently have
sufficient capital resources to fund completion of the pivotal trial nor does it
have sufficient funds to successfully commercialize the STOP product.
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, execution and implementation of partnering
arrangements, 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. Accordingly, the Company may require
additional financing 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.
Impact of Year 2000
In prior years the Company discussed the nature and progress of its plans to
become Year 2000 compliant. In 1999, the Company completed its testing and
remediation of critical information systems and as of February 29, 2000, has not
experienced any disruptions in information systems due to the inability of
systems to properly process the year 2000. The Company will continue to monitor
critial information systems to ensure continued operation of such systems.
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.
Early State of STOP Development - Uncertainty of Product Development and Lack of
Long Term Follow-Up Data. The Company has not yet completed development of the
STOP contraception device and expects to increase research and development
expenditures as the Company implements design changes in pursuit of a
commercially viable design. To obtain revenues from the STOP device the Company
must successfully develop, obtain regulatory approval of, manufacture and market
the STOP device. The Company has demonstrated technical feasiblity in Phase II
clinical trials of the STOP device and anticipates significantly more
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expenditures to complete a large pivotal clinical trial, prior to
commercialization. There can be no assurance that the Company's research and
development efforts will be successfully completed. Additionally, until the
development and clinical testing processes are complete, there can be no
assurance the STOP device will perform in the manner anticipated, or that the
results observed in animal and human clinical trials will be experienced in
long-term use. The first Phase II placement of the device was in July 1997, and
as of February 29, 2000 a total of 133 women have had a successful STOP
procedure, thus the Company has obtained limited clinical data on the safety and
efficacy of the product. Because the Company has not yet obtained any long-term
safety or efficacy data there can be no assurance that long-term safety and
efficacy data when collected will be consistent with the results obtained in
early Phase II clinical trials nor can there be any assurance that the STOP
device can be successfully used by a wide range of patients on a long-term basis
as a safe and effective permanent contraceptive method.
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
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.
Limited Sales, Marketing and Distribution Experience; Emerging Market. The
Company has only limited experience marketing and selling its products in
commercial quantities. Interventional gynecology is an emerging medical market
with widely varying practice patterns. Therefore, there is no proven
distribution channel for marketing the Company's current and future 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 for the Company's
current or future 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 Transcervical Tubal Access and Catheterization Products. The
Company's initial commercial products, the TTAC 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.
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 TTAC, STARRT
Falloposcopy and STOP systems
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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,
1999, had an accumulated deficit of 52.7 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 issued patents, any future patents that may be
issued as a result of the Company's United States or foreign patent
applications, or the patents under which the Company has license rights, will
offer any degree of protection to the Company's products against competitive
products. There can be no assurance that any patents that may be issued or
licensed to the Company or any of the Company's patent applications will not be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
industry have employed intellectual property litigation to gain a competitive
advantage. There can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings declared by the United States Patent and Trademark Office ("USPTO")
to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce patents issued to the Company, to protect the
Company's trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others.
Any litigation or interference proceedings involving the Company will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses
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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 Therapeutics, a unit of Boston Scientific Corporation
("BSC"), 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 re-examinations, 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 merger between Target and BSC, the lawsuit was
dismissed as to SciMed. Subsequently, the Court of Appeals vacated the
preliminary injuction. The lawsuit was dismissed as to Cordis pursuant to a
settlement agreement signed in January 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 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 STOP, TTAC, and STARRT and ERA and
FUTURA
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products, 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. There can be no assurance 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 which require manufacturers of medical
products to obtain 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 the CE mark will prohibit
the Company from selling such product in member countries of the European Union
after 1998. In conjunction with the Company's restructuring in July 1998, the
Company elected to let its ISO9000 certification lapse. The Company plans to
become ISO 9000 compliant and obtain the CE mark in late 2000.
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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.
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. If FDA clearance or
approval is received for new products, third-party reimbursement for these
products will be dependent upon decisions by individual health maintenance
organizations, private insurers and other payors. 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 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
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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 STOP 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 and Reliance on Third Party Manufacturers. The
Company has limited experience in manufacturing its products in commercial
quantities. If the Company is successful in estabilishing distribution partners
for its products the Company plans to increase internal maufacturing operations
as well as utilize third party manufacturers to manufacture the products. The
Company has identified candidates that it believes could adequately produce the
products with the appropriate quality and sufficient volumes. However, third
party 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 and its third party manufacturers 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 may rely on single sources for some 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
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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.
Possible Future Capital Requirements. Conceptus believes that its existing
capital resources will be sufficient to fund its operations through 2000.
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
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.
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Reliance on Target Therapeutic's License. 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 as 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 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.
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 will likely 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. Finally, the Company participates in a highly dynamic industry, which
often results in significant stock price volatility. In October 1998, the
Company received notification from the National Association of Securities
Dealer's Inc. ("NASD") that due to the decline of the Company's stock price, the
Company was not in compliance, throughout the third quarter of 1998, with
certain listing maintenance requirements of the Nasdaq National Market. In
November 1998, the Company's Common Stock satisfied these maintenance
requirements with a closing bid price of at least $1.00 per share for ten
consecutive trading days. While these maintenance requirements were satisfied
within the required ninety-day period required by the NASD, there can be no
assurance that Company's Common Stock will stay in compliance the maintenance
requirements. If delisting were to occur, the Company expects that trading of
its Common Stock would be conducted on the OTC Bulletin Board or in the
over-the-counter market.
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
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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; Shareholder Rights Plan. 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash balances in excess of short-term operating needs are invested
in highly liquid, short-term government securities and high quality commercial
paper. However, due to the short-term and high quality nature of these
instruments, the Company believes these financial instruments are exposed to a
low level of interest rate risk.
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 53.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Certain information required by Part III is incorporated by reference from the
Company's proxy statement (the "Proxy Statement") for its annual meeting of
stockholders to be held May 25, 2000, 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 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.
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.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements and Report of Ernst & Young
LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows Years Ended December 31,
1999, 1998, and 1997
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)
Exhibit
Number Description
-------- -----------
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)(12) 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.
36
<PAGE>
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)(2) Change of Control Agreement dated as of May 13, 1997 by
and between Registrant and Kathryn A. Tunstall.
10.19(10)(2) Change of Control Agreement dated as of May 13, 1997 by
and between Registrant and Sanford Fitch.
10.20(10)(2) 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(2) Loan Agreement with Steve Bacich dated April 24, 1997.
10.23(2) Promissory Note with Steve Bacich dated April 24, 1997.
10.24(2) Master Consulting Agreement with Florence Comite dated
September 10, 1997.
10.25(2) Manufacturing Transition Agreement with Medical
Scientific, Inc. dated October 1, 1997.
10.26(2) Royalty Agreement with Medical Scientific, Inc. dated
October 1, 1997.
10.27(2) Master Consulting Agreement with Howard Palefsky dated
October 15, 1997.
10.28(2) Sublease Agreement with Avio Digital, Inc. dated October
1, 1998.
10.29(2) Severance Agreement dated May 29, 1998 between the
Registrant and James Messemer.
10.30(2) Severance Agreement dated October 21, 1998 between the
Registrant and Sanford Fitch.
11.1 Statement of computation of net loss per share.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney (See Page 58 of this Report).
27.1 Financial Data Schedule.
----------------
(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.
37
<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.
(12) 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, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
38
<PAGE>
CONCEPTUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ............................................ 40
Audited Financial Statements
Consolidated Balance Sheets ............................................... 41
Consolidated Statement of Operations ...................................... 42
Consolidated Statement of Stockholders' Equity ............................ 43
Consolidated Statements of Cash Flows ..................................... 44
Consolidated Notes to Financial Statements ................................ 45
39
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conceptus, Inc.
We have audited the accompanying consolidated balance sheets of Conceptus, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United
States.
Palo Alto, California Ernst & Young, LLP
January 20, 2000
40
<PAGE>
<TABLE>
Conceptus, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<CAPTION>
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,494 $ 11,503
Short-term investments 7,275 5,568
Accounts receivable, net of allowance for doubtful accounts
of $579 and $661 at December 31, 1999 and 1998, respectively 18 139
Other current assets 94 65
------------------ ------------------
Total current assets 10,881 17,275
Property and equipment, net 845 1,391
Other assets 177 365
------------------ ------------------
Total assets $ 11,903 $ 19,031
================== ==================
Liabilities and stockholders' equity Current liabilities:
Current liabilities:
Accounts payable $ 130 $ 165
Clinical trial accruals 259 -
Accrued compensation 235 421
Other accrued liabilities 130 92
Current portion of deferred revenue 97 97
------------------ ------------------
Total current liabilities 851 775
Long-term portion of deferred revenue 138 242
Commitments
Stockholders' equity:
Common stock, $0.003 par value, 30,000,000 shares authorized, 63,609 63,570
9,661,731 and 9,620,205 shares issued and outstanding at
December 31, 1999 and 1998, respectively
Stockholder notes receivable - (54)
Deferred compensation - (106)
Accumulated deficit (52,695) (45,396)
------------------ ------------------
Total stockholders' equity 10,914 18,014
------------------ ------------------
$ 11,903 $ 19,031
================== ==================
<FN>
See accompanying notes.
</FN>
</TABLE>
41
<PAGE>
<TABLE>
Conceptus, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Net sales $ 95 $ 449 $ 1,426
Cost of sales 137 1,702 3,516
-------- --------- ---------
Gross profit (loss) (42) (1,253) (2,090)
Operating expenses:
Research and development 4,251 4,317 5,429
Selling, general and administrative 3,729 5,349 6,323
-------- --------- ---------
Total operating expenses 7,980 9,666 11,752
-------- --------- ---------
Operating loss (8,022) (10,919) (13,842)
Interest, and investment income, net 723 1,254 1,784
-------- --------- ---------
Net loss $(7,299) $ (9,665) $(12,058)
======== ========= =========
Basic and diluted net loss per share $ (0.76) $ (1.01) $ (1.29)
======== ========= =========
Shares used in computing basic
and diluted net loss per share 9,662 9,562 9,381
======== ========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
42
<PAGE>
<TABLE>
Conceptus, Inc.
Consolidated Statement of Stockholders' Equity
(In thousands, except share and per share amounts)
<CAPTION>
Common Stock Stockholder
-------------------- Note
Shares Amount Receivable
--------- --------- ----------
<S> <C> <C> <C>
Balances at December 31, 1996 9,206,795 $61,876 $ (49)
Issuance of common stock for cash in 1997 at $0.30 to $10.50
per share, pursuant to exercise of options 158,265 172 -
Issuance of common stock for cash in 1997 at $4.25 to $7.86
per share, pursuant to 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 - - (5)
Amortization of deferred compensation, net of reversal of
forfeited shares - 317 -
Net loss and comprehensive loss - - -
--------- --------- ----------
Balances at December 31, 1997 9,495,053 $63,505 $ (54)
Issuance of common stock for cash at $0.30 - $.075
per share, pursuant to exercise of options 95,785 44 -
Issuance of common stock for cash at $1.22 - $1.381
per share, pursuant to the employee stock purchase plan 29,367 37 -
Amortization of deferred compensation, net of reversal of
forreited shares - (16) -
Net loss and comprehensive loss - - -
--------- --------- ----------
Balances at December 31, 1998 9,620,205 $63,570 $ (54)
Issuance of common stock for cash at $0.30 - $.075
per share, pursuant to exercise of options 11,111 1 -
Issuance of common stock for cash at $1.22 - $1.381
per share, pursuant to the employee stock purchase plan 30,415 38 -
Amortization of deferred compensation, net of reversal of
forreited shares - -
Repayment of notes receivable 54
Net loss and comprehensive loss - - -
--------- --------- ----------
Balances at December 31, 1999 9,661,731 $63,609 $ -
========= ========= ==========
</TABLE>
<TABLE>
Conceptus, Inc.
Consolidated Statement of Stockholders' Equity
(In thousands, except share and per share amounts)
<CAPTION>
Total
Deferred Deficit Stockholders'
Compensation Accumulated Equity
------------ ----------- ------------
<S> <C> <C> <C>
Balances at December 31, 1996 ($559) ($23,673) $37,595
Issuance of common stock for cash in 1997 at $0.30 to $10.50
per share, pursuant to exercise of options - - 172
Issuance of common stock for cash in 1997 at $4.25 to $7.86
per share, pursuant to employee stock purchase plan - - 140
Issuance of common stock to former shareholders of
Microgyn Inc. - - 1,000
Extension of stockholder note receivable - - (5)
Amortization of deferred compensation, net of reversal of
forfeited shares 343 - 660
Net loss and comprehensive loss - (12,058) (12,058)
------------ ----------- ------------
Balances at December 31, 1997 ($216) ($35,731) $27,504
Issuance of common stock for cash at $0.30 - $.075
per share, pursuant to exercise of options - - 44
Issuance of common stock for cash at $1.22 - $1.381
per share, pursuant to the employee stock purchase plan - - 37
Amortization of deferred compensation, net of reversal of
forreited shares 110 - 94
Net loss and comprehensive loss - (9,665) (9,665)
------------ ----------- ------------
Balances at December 31, 1998 ($106) ($45,396) $18,014
Issuance of common stock for cash at $0.30 - $.075
per share, pursuant to exercise of options - - 1
Issuance of common stock for cash at $1.22 - $1.381
per share, pursuant to the employee stock purchase plan - - 38
Amortization of deferred compensation, net of reversal of
forreited shares 106 - 106
Repayment of notes receivable 54
Net loss and comprehensive loss - (7,299) (7,299)
------------ ----------- ------------
Balances at December 31, 1999 $ - ($52,695) $10,914
============ =========== ============
<FN>
See accompanying notes.
</FN>
</TABLE>
43
<PAGE>
<TABLE>
Conceptus, Inc.
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows used in operating activities
Net loss $ (7,299) $ (9,665) $ (12,058)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 604 599 498
Allowance for doubtful accounts (82) 444 39
Amortization of deferred compensation 106 94 523
Recognition of deferred revenue (104) (98) (48)
Changes in operating assets and liabilities
Accounts receivable 203 (43) (474)
Inventories - 355 (173)
Other current assets (29) 225 (56)
Account payable (35) (534) 111
Clinical trial accrual 259 - -
Accrued compensation (186) (249) 215
Other accrued liabilities 38 (43) (30)
----------- ----------- ------------
Net cash (used in) provided by operating activities (6,525) (8,915) (11,453)
----------- ----------- ------------
Cash flows used in investing activities
Purchase of investments (4,555) (4,555) (61,785)
Maturities of investments 2,848 16,795 64,078
Sales of investments - - 1,981
Capital expenditures (58) (875) (1,030)
Investment in Advanced Reproductive - (256) -
Change in other assets 188 13 (154)
----------- ----------- ------------
Net cash used in (provided by) investing activities (1,577) 11,122 3,090
----------- ----------- ------------
Net cash provided by financing activities
Proceeds from distributor agreement - - 485
Proceeds from issuance of common stock 39 81 312
Repayment (issuance) of stockholders note 54 - (5)
Principal payments on debt and capital lease obligations - (35) (118)
----------- ----------- ------------
Net cash provided by financing activities 93 46 674
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents (8,009) 2,253 (7,689)
Cash and cash equivalents at beginning of year 11,503 9,250 16,939
----------- ----------- ------------
Cash and cash equivalents at end of year $ 3,494 $ 11,503 $ 9,250
=========== =========== ============
Supplemental schedule of noncash financing activities
Issuance of common stock to Microgyn shareholders $ - $ - $ 1,000
=========== =========== ============
<FN>
See accompanying notes
</FN>
</TABLE>
44
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
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 provide
a non-surgical approach to fallopian tube sterilization. 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.
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.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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 1999, 1998
and 1997, 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.
Net Loss Per Share
45
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
share is computed on the weighted average number of shares of common stock and
common stock equivalent shares (stock options and warrants to purchase common
stock) if dilutive. Basic and diluted net loss per share are equivalent for all
periods presented due to the Company's net loss position in all periods
presented.
Stock-Based Compensation
The Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), 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. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB 25 and related
Interpretations. Accordingly, compensation costs for stock options granted to
employees and directors is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
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
money market funds and U.S. corporate notes, which bear minimal risk.
Management considers all their investments as available-for-sale.
Available-for-sale securities are carried at estimated fair value, with the
unrealized gains and losses reported in stockholders' equity. The fair values
for marketable debt securities are based on quoted market prices. At December
31, 1999 and 1998, the fair value of investments approximates cost. 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.
46
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
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.
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 based on a customer credit assessment.
Customers comprising more than 10% of net sales at December 31 are as follows:
Percentage of Net Sales
---------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Customer 1 -- 18% --
Customer 2 41% 11% --
Customer 3 -- -- 63%
Customer 4 -- -- 27%
Customer 5 13% -- --
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.
Reporting Comprehensive Income (Loss)
Conceptus adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income,"("Statement 130) in the year ended December 31,
1998. Statement 130 establishes new rules for the reporting and display of
comprehensive
47
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
income (loss) and its components. Statement 130 requires unrealized gains or
losses on the Company's available for-sale securities to be included in other
comprehensive income (loss). Comprehensive loss approximates net loss for the
periods presented.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," at
December 31, 1998. Statement 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Under Statement
131, the Company's operations are treated as one operating segment as it only
reports profit and loss information on an aggregate basis to the chief operating
decision makers of the Company.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), which is required to be adopted for the year ending December 31, 2001.
The Company does not anticipate that the adoption of Statement 133 will have a
significant effect on the results of operations or the financial position of the
Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin no. 101, "Revenue Recognition in Financial Statements" ("SAB 101").
This summarizes certain areas of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company believes that its current revenue recognition principles comply with
SAB 101.
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
48
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
based upon meeting certain future milestones. No additional consideration has
been paid subsequent to the May 1997 stock issuance.
49
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
3. Related Party Transactions
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. As of December 31, 1998 both notes were paid in full. As of December 31,
1997 $40,000 was payable on one note. 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.
<TABLE>
4. Balance Sheet Information
<CAPTION>
December 31,
1999 1998
(In thousands)
<S> <C> <C>
Property and equipment:
Machinery and equipment $ 752 $ 719
Office equipment and furniture and fixtures 1,616 1,591
Leasehold improvements 625 625
-----------------------------------
2,993 2,935
Less accumulated depreciation and (2,148) (1,544)
amortization
-----------------------------------
Property and equipment, net $ 845 $ 1,391
===================================
</TABLE>
5. Investments
<TABLE>
The following is a summary of available-for-sale securities as of:
<CAPTION>
Estimated Fair Value
-----------------------------------
December 31,
1999 1998
-----------------------------------
(In thousands)
<S> <C> <C>
Cash equivalents:
Money market funds $ 14 $10,008
Corporate notes 3,310 1,004
-----------------------------------
$ 3,324 $11,012
===================================
Short-term investments:
Corporate notes $ 7,265 $ 5,568
===================================
</TABLE>
50
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
6. Commitments
The Company leases its current facility under an operating lease which expires
in December 2001. 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, 1999 are as
follows:
(In thousands)
Year ending December 31,
2000 $ 568
2001 620
2002 102
---------------
Total minimum rental commitment $ 1,290
===============
As of October 15, 1998 the Company entered into a sublease agreement for its
additional facility which expires May 2002. The total minimum annual rental
commitments will be offset by the following sublease rental income in the
following years:
(In thousands)
Year ending December 31,
2000 $ 487
2001 507
2002 217
---------------
Total minimum sublease commitment $ 1,211
===============
Rent expense for the years ended December 31, 1999, 1998, and 1997 was $533,000
$515,000, and $347,000, respectively.
51
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
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 2,033,158 shares
of its Common Stock which may be issued with respect to outstanding options at
December 31, 1999 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 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.
<TABLE>
Activity under the 1993 Plan is as follows:
<CAPTION>
Options Outstanding
Options -------------------------------------------
Available Number of Price
for Grant Shares Per Share
---------------------------------------------------------------
<S> <C> <C> <C>
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 cancelled 172,388 (172,388) $0.30-$19.75
---------------------------------------------------------------
Balance at December 31, 1997 640,181 1,488,762 $0.30-$19.75
Options granted (1,228,082) 1,228,082 $1.25-$4.63
Options exercised -- (95,785) $0.30-$10.50
Options cancelled 1,207,777 (1,207,777) $0.30-$19.75
---------------------------------------------------------------
Balance at December 31, 1998 619,876 1,413,282 $0.30-$19.75
Options granted (424,500) 424,500 $1.219-$1.875
Options exercised -- (11,111) $0.48-$0.51
Options cancelled 51,267 (51,267) $0.51-$11.625
---------------------------------------------------------------
Balance at December 31, 1999 246,643 1,775,404 $0.30-$19.75
===============================================================
</TABLE>
52
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
At December 31, 1999, 1998, and 1997, options to purchase 1,226,462, 576,736,
and 652,982 common shares, respectively, were exercisable. There were no
restricted stock issuances for 1999, 1998 and 1997. At December 31, 1999 and
1998, there were no common shares subject to repurchase by the Company (12,500
shares subject to repurchase at December 31, 1997). On July 21, 1998, all
employee grants of stock options under the 1993 Stock Plan issued were repriced
(a total of 486,932 options) to reflect an exercise price of $1.25. Any option
holder who elected to reprice an option was not permitted to exercise the
repriced option, even if vested, for one year. The repriced options are
reflected as both granted and forfeited options in the 1993 Plan table.
On April 7, 1998, employee grants of stock options under the 1993 Stock Plan
issued were repriced (a total of 63,300 options) to reflect an exercise price of
$3.50. The repriced options are reflected as both granted and forfeited options
in the 1993 Plan table.
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. No options were
granted during 1999. During 1998, 1997 and 1996, 7,500, 32,000 and 12,000
options, respectively, were granted.
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
1999, 1998, and 1997, 30,415, 29,367, and 25,285 shares, respectively, were
issued. The Company has reserved 200,000 shares of Common Stock for issuance
under the ESPP.
53
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
Pro Forma Valuation of Options
The Company applies APB 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: no expected dividend, expected
volatility factor of 1.0 for 1999, 0.6 for 1998 and 1997, risk-free interest
rate of 6% and an expected life of 5 years for 1999, 4 years for 1998, and 5
years for 1997. 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: no expected dividend; an expected life of five
years for 1999, four years for 1998, and one year for 1997, expected volatility
factor of .7 and risk-free interest rate of 5% for 1999, 6% for 1998, and 5% for
1997. The weighted average fair values of those purchase rights granted in 1999,
1998, and 1997 were $0.47, $0.87, and $3.09, respectively. The effects of
applying FAS 123 for recognizing compensation expense and providing pro forma
disclosures in 1999, 1998, and 1997 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 net loss per share
information):
1999 1998 1997
---- ---- ----
Proforma net loss $(7,970) $(10,229) $(12,908)
Proforma basic and diluted net loss per share $ (0.82) $ (1.06) $ (1.38)
<TABLE>
54
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
A summary of the activity of the Company's 1993 Plan and the Directors' Plan for
the years ended December 31, are as follows:
<CAPTION>
1999 1998
---- ----
Weighted-Avg Weighted-Avg
Fixed Options Shares Exercise Price Shares Exercise Price
- ------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,680,200 $ 3.22 1,532,792 $ 7.96
Granted 424,500 $ 1.70 685,850 $ 2.15
Exercised (11,111) $ 0.49 (95,785) $ 0.46
Forfeited (59,768) $ 8.58 (442,657) $ 8.93
----------- -----------
Outstanding at end of year 2,033,821 $ 6.83 1,680,200 $ 3.22
=========== ===========
Options exercisable at year-end 1,233,227 576,736
=========== ===========
Weighted-average fair value of option
granted during the year $ 1.27 $ 5.01
====== ======
</TABLE>
<TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<CAPTION>
Weighted-Avg.
Number Remaining Weighted-Avg. Number
Range of Exercise Outstanding at Contractual Exercise Exercisable Weighted-Avg.
Prices 12/31/99 Life (years) Price at 12/31/99 Exercise Price
- ------------------------ ---------------- --------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$0.300-$0.510 218,929 4.75 $ 0.45 218,929 $ 0.45
$1.063-$1.500 989,742 7.76 $ 1.25 613,580 $ 1.25
$1.625-$2.625 388,500 9.88 $ 1.78 6,719 $ 2.63
$3.000-$4.625 164,800 8.09 $ 4.42 152,800 $ 4.49
$7.000-$11.130 246,500 7.16 $ 9.61 215,849 $ 9.63
$19.250-$19.750 25,350 6.32 $19.35 25,350 $ 19.35
---------------- --------------
$0.300-$19.750 2,033,821 7.63 $ 6.83 1,233,227 $ 8.14
================ ==============
</TABLE>
55
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
8. Income Taxes
As of December 31, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $44.2 million, and $15.2
million, respectively. In addition, at December 31, 1999, the Company had
research credit carryforwards for federal and state income tax purposes of
approximately $750,000 and $650,000, respectively. The net operating loss and
credit carryforwards described above will expire at various dates beginning in
the years 2000 through 2019, 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.
Deferred income taxes reflect the net effects of tax carryforwards and temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
56
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
December 31, 1999
<TABLE>
Significant components of the Company's deferred tax assets as of December 31
are as follows:
<CAPTION>
1999 1998
---------------------------------------------
(In thousands)
<S> <C>
Net operating loss carryforwards $15,900 $13,800
Research credits (expiring 2000-2019) 1,100 900
Capitalized R&D 1,100 900
Other - net 300 -
---------------------------------------------
Total deferred tax assets 18,400 15,600
Valuation allowance for deferred tax assets (18,400) (15,600)
---------------------------------------------
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 $ 2,800,000 during 1999.
9. Restructuring Accrual
In July 1998, the Company announced a restructuring to significantly reduced
spending levels through the elimination of all sales and marketing,
manufacturing, and most administrative personnel. The Company has eliminated
fifty-three positions worldwide since January 1, 1998, through natural attrition
and employee layoffs. As of December 31, 1999, all severance expense had been
paid. At December 31, 1998, $46,000 remains related primarily to severance and
cobra payments. This restructuring resulted in an additional charge to operating
expense in 1998 of $920,000 comprised of $725, 000 related to the reduction in
workforce and $195,000 to fully reserve all remaining inventory.
10. 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.
11. Subsequent Event (Unaudited)
In March 2000, the Company was reimbursed $453,000 from the Company's Directors'
and Officers' liability insurance policy for legal defense costs in connection
with a sexual harassment lawsuit filed against the Company on December 17, 1997.
On December 8, 1999, the Company and all defendants were found not guilty on all
charges and no appeals have been filed by the plaintiff as of February 29, 2000.
57
<PAGE>
Conceptus, Inc.
Notes to Financial Statements
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 2000.
CONCEPTUS, INC.
By: /s/ Steven Bacich
-----------------------------------
Steven Bacich, President
and Chief Executive Officer
POWER OF ATTORNEY
<TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven Bacich, his or her
attorney-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-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
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Steven Bacich President, Chief Executive Officer and
- ----------------- Director (Principal Executive Officer) March 30, 2000
(Steven Bacich)
/s/ Oliver Brouse Director Finance, (Principal Financial and
- ----------------- Accounting Employee) March 30, 2000
(Oliver Brouse)
/s/ Florence Comite
- --------------------
(Florence Comite) Director March 30, 2000
/s/ Sanford Fitch
- ------------------
(Sanford Fitch) Director March 30, 2000
/s/ Howard D. Palefsky
- -----------------------
(Howard D. Palefsky) Director March 30, 2000
/s/ Richard D. Randall
- -----------------------
(Richard D. Randall) Director March 30, 2000
/s/ Kathryn Tunstall
- -----------------------
(Kathryn Tunstall) Director March 30, 2000
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION
- -------------------------------------------
<S> <C>
Board of Directors Corporate Headquarters
1021 Howard Avenue
Kathryn A. Tunstall San Carlos, California 94070
Chairman of the Board 650-802-7240 (phone)
650-508-7600 (fax)
Howard Palefsky,
Vice Chairman of the Board Legal Counsel
Private Investor Latham & Watkins
Menlo Park, California
Steven Bacich
President and Chief Executive Officer Registar and Transfer Agent
ChaseMellon Shareholder Services L.L.C.
Florence Comite 85 Challenger Road
Director Overpack Centre
Ridgefield Park, New Jersey 07660
Sanford Fitch 800-522-6645 (phone)
Director www.chasemellon.com
Richard D. Randall Independent Auditors
Director Ernst & Young LLP
Palo Alto, California
Inquiries
Communications concerning stock transfer
requirements, lost certificates and changes of address
- ------------------------------------------- should be directed to the Transfer Agent.
Officers Inquiries regarding company financial information
should be directed to:
Steven Bacich Investor Relations
President and Chief Executive Officer 1021 Howard Avenue
San Carlos, CA 94070
(650) 802-7240
Cynthia M. Domecus
Senior Vice President, Clinical Research,
Regulatory Affairs
Ashish Khera
Vice President, Research and Development
Stan Van Gent
Vice President Marketing
- -------------------------------------------
Stock Market Information Form 10-K
As of February 29, 2000 there were A copy of the Company's 1999 Form 10-K is filed
approximately 119 shareholders of record with the Securities and Exchange Commission and is
of the Company's common stock. The Company available, without charge, by calling or writing the
has not paid dividends on its common stock. Company at the address under Inquiries.
Trademarks
STOP(TM), C logo design, Conceptus, Foot design, Pirouette(R)
Robust(R), VS(R) and Soft Torque(R), are registered
trademarks of the Company. Soft Seal(TM), Minicerv(TM),
Coaxess(TM), Stargate(TM), and FUTURA(TM) designs are
trademarks of the Company.
</TABLE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, No. 333-4186 and 333-30149) pertaining to the 1995 Director Stock
Option Plan, 1995 Employee Stock Purchase Plan, and 1993 Stock Plan of
Conceptus, Inc. of our report dated January 20, 2000, with respect to the
consolidated financial statements of Conceptus, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
Ernst & Young LLP
Palo Alto, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,494
<SECURITIES> 7,275
<RECEIVABLES> 597
<ALLOWANCES> 579
<INVENTORY> 0
<CURRENT-ASSETS> 10,881
<PP&E> 2,993
<DEPRECIATION> (2,148)
<TOTAL-ASSETS> 11,903
<CURRENT-LIABILITIES> 851
<BONDS> 0
0
0
<COMMON> 63,609
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,903
<SALES> 95
<TOTAL-REVENUES> 95
<CGS> 137
<TOTAL-COSTS> 7,980
<OTHER-EXPENSES> (723)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,299)
<EPS-BASIC> (.76)
<EPS-DILUTED> (.76)
</TABLE>
