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, 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 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 will conduct a 400 patient pivotal trial in the U.S., Europe, and Australia. Conceptus believes 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 must raise additional capital to complete the pivotal trial and to execute a significant marketing launch of the STOP product.
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
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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. Because surgical tubal ligation requires penetration of the abdomen, 92% of these procedures are performed under general anesthesia with the attendant risk of general anesthesia, unintended injury to internal organs, and surgical complications resulting in an open procedure. The rate of occurrence of surgical complications is approximately 1.7%. 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,
long recovery time, and high costs associated with surgical tubal ligation, women through-out the world have made surgical tubal ligation the most prevalent form of contraception world-wide.
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. strong gender bias
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 blocking 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 long-term 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, cutting of the body, time away from family and work obligations, and could reduce the cost of 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.
Mechanism of Contraception
In the Phase II and pivotal clinical trials there is a three-month waiting period after 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. The three month waiting period is a conservative estimate of the time required for the STOP device to effectuate its mechanism of contraception. The Company continues to perform clinical studies to determine the feasibility of reducing this waiting period.
The mechanism of contraception of the STOP device is a combination of: (a) blocking the fallopian tube to prevent meeting of sperm and egg, and (b) transformation of the fallopian tube architecture to an environment that does not support conception. Results from completed histological analysis in fallopian tubes with properly placed devices demonstrate that the STOP device has become completely incorporated into the fallopian tube tissue with a proliferation of smooth muscle cells and fibrotic tissue interlaced throughout the device. Conceptus believes these two combined effects of STOP may provide effective long-term 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.
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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.
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 women represent a group of women with the highest propensity to switch their method of contraception because STOP removes the "surgical switching costs" of obtaining a permanent, highly effective method that requires no user compliance, and has a low risk of side-effects. Conceptus believes these women may have a high 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.
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
effects of oral contraceptives have limited their acceptance among women 30 - 44 where only 6.2% of these women use oral contraceptives. Due to concerns that use of IUDs may result in increased incidence of pain and heavy menstrual bleeding, which could mask the symptoms of serious uterine disease, use of IUDs among women in the United States age 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 prostate cancer, erectile dysfunction, and chronic pain syndrome. 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 a summary of this Phase II clinical study as of February 29, 2000.
Table 3: Phase II Clinical Trial Summary as of February 29, 2000
- ---------------------------------------------------------- ---------------------
Women with successful placements 129 - ---------------------------------------------------------- ---------------------
Average procedure time 20 minutes
- ---------------------------------------------------------- ---------------------
Woman-months of wearing 993 - ---------------------------------------------------------- ---------------------
Woman-months of effectiveness 507 - ---------------------------------------------------------- ---------------------
Percentage of women who rate tolerance to wearing the STOP device as "good to excellent". 99%*
- ---------------------------------------------------------- ---------------------
Reported pregnancies None
- ---------------------------------------------------------- --------------------- * gamma design only.
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 pivot 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 and was treated with non-prescription medication which is commonly available in drugstores and supermarkets. Further analysis of this post procedure discomfort revealed that 56% of patients reported resolution of pain with one day, and 100% of patients reported resolution of discomfort within 14 days. 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 consist of clinical or technical difficulties primarily due to a combination of improper device placement, pathology of the patient's uterus and/or fallopian tubes, and device related technical difficulties. In 2% of cases, patients have moved on to surgical retrieval of the STOP device in conjunction with a surgical tubal ligation. In response to these events, the Company has revised it 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 their standard 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.
These products increase the safety of resectoscope procedures, including therapeutic procedures, which remove abnormal tissue in the uterus or prostate. In performing these procedures 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
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
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.
Following submission of the 510(k), the manufacturer or distributor may not place the device into commercial distribution unless and until an order is issued by the FDA finding the product to be substantially equivalent. In response to a 510(k), the FDA may declare that the device is substantially equivalent to another legally marketed device and allow the proposed device to be marketed in the United States. The FDA, however, may require further information, including clinical data, to make a determination regarding substantial equivalence, or may determine that the proposed device is not substantially equivalent and require a PMA. Such a request for additional information or determination that the device is not substantially equivalent would delay market introduction of the products that are the subject of the 510(k).
If a manufacturer or distributor of medical devices cannot establish that a proposed device is substantially equivalent to a legally marketed device, the manufacturer or distributor must seek premarket approval of the proposed device through submission of a PMA. A PMA must be supported by extensive data, including, laboratory, preclinical and clinical trial data to prove the safety and effectiveness of the device as well as extensive manufacturing information. Following receipt of a PMA, if the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will "file" the application. The PMA approval process can be lengthy, expensive and uncertain. FDA review of a PMA generally takes approximately two years or more from the date of filing to complete. If granted, the 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. 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.
The Company is also required to register as a medical device manufacturer with the FDA and state agencies, such as the CDHS and to list its products with the FDA. As such, the Company will be periodically inspected by both the FDA and CDHS for compliance with GMP and other applicable regulations. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner. In July 1994, the Company's San Carlos facility was inspected by the CDHS with no observations, and the Company was subsequently granted a California medical device manufacturing license. In February 1997, the Company's San Carlos facility was inspected by the CDHS, and granted a California drug manufacturing license. In March 1997, the Company was inspected by the FDA, with no action indicated.
The Company is required to provide information to the FDA on death or serious injuries that its medical devices have allegedly caused or contributed to, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA strictly prohibits the marketing of approved devices for uses other than those specifically cleared for marketing by the FDA. If the FDA believes that a company is not in compliance with the law or regulations, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the company, its officers and its employees. Failure to comply with the regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations.
The promotion of most products regulated by the FDA is subject to both FDA and Federal Trade Commission jurisdictions. The Company is also subject to regulation by the Occupational Safety
and Health Administration and by other government entities. Regulations regarding the manufacture and sale of the Company's products are subject to change. The Company cannot predict what impact, if any, such changes might have on its business, financial condition or results of operations. See "Risk Factors Government Regulations."
International
Export sales of investigational PMA devices or devices not cleared for commercial distribution in the United States to certain countries are subject to FDA export permit requirements. In order to obtain such 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.
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-
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
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.
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.
ITEM 3.
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.
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.
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
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.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(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.
ITEM 7.
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. The STOP device is designed to achieve contraception by elliciting a tissue response that occludes the fallopian tubes. 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. Because the STOP device is intended for permanent contraception, 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) blocking the fallopian tube to prevent meeting of sperm and egg, and (b) transformation of the fallopian tube architecture to an environment that does not support conception. Results from completed histological analysis in 23 fallopian tubes with properly placed devices demonstrate that the STOP device has become completely incorporated into the fallopian tube tissue with a proliferation of smooth muscle cells and fibrotic tissue interlaced throughout the device. Conceptus believes these two combined effects of the STOP device may provide effective long-term contraception.
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. The three month waiting period is a conservative estimate of the time required for the STOP device to effectuate
its mechanism of contraception. The Company continues to perform clinical studies to determine the feasibility of reducing this waiting period.
As of February 29, 2000, the women in the Phase II study have accumulated 507 woman-months of effectiveness with no reported pregnancies. Additionally, these women in the Phase II study have accumulated 993 woman-months of wear with a low rate of adverse events. These adverse events all involved improper device placement and resulted in the inability of the patient to rely on the STOP device for contraception. The Company believes the rate of occurrence of these types of adverse events can be reduced to an insignificant rate with physician education and experience and design evolution of the STOP delivery system.
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. In support of these regulatory approvals 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
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 or manufacturing 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 and third-party manufacturing 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.
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."
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.
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
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
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
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
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.
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
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
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.
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
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.
ITEM 7A.
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is incorporated by reference from the Company's 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.
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.
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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the information under the caption "Certain Relationships and Related Transactions" in the Proxy Statement.
PART IV
ITEM 14.
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.
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.
(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.
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
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
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
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.
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
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
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.
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.
5. Investments
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.
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.
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.
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)
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.
Conceptus, Inc. Notes to Financial Statements December 31, 1999
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.
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