UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
Commission file number 0-27802
ARTERIAL VASCULAR ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3144218
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3576 Unocal Place, Santa Rosa, California 95403
(Address of principal executive offices) (Zip code)
(707) 525-0111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding
Common Stock, $0.001 par value 30,966,883 as of January 31, 1997
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INDEX TO FORM 10-Q
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1996 3
and June 30, 1996
Condensed Consolidated Statements of Operations for the three 4
months and six months ended December 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for the 5
six months ended December 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submissions of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<CAPTION>
December 31, June 30,
1996 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,319 $ 59,238
Short-term investments 63,091 32,354
Trade accounts receivable, net 18,681 13,213
Inventories 6,029 3,352
Deferred income tax 2,016 2,016
Prepaid expenses and other current assets 6,820 2,338
--------- ---------
Total current assets 117,956 112,511
Deferred income tax 172 172
Property, plant and equipment, net 16,072 8,974
Purchased technology and other intangible assets, net 422 500
--------- ---------
Total assets $ 134,622 $ 122,157
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 2,342 $ 1,671
Accrued expenses 2,948 2,479
Income taxes payable -- 1,436
--------- ---------
Total current liabilities 5,290 5,586
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STOCKHOLDERS' EQUITY
Common stock 31 31
Additional paid-in capital 92,589 91,776
Notes receivable for common stock (301) (301)
Deferred compensation (59) (87)
Treasury stock (390) --
Cumulative translation adjustment (61) --
Retained earnings 37,523 25,152
--------- ---------
Total stockholders' equity 129,332 116,571
--------- ---------
Total liabilities and stockholders' equity $ 134,622 $ 122,157
========= =========
<FN>
See accompanying notes
</FN>
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- --------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $18,228 $11,142 $36,796 $21,714
Cost of sales 3,733 2,427 6,644 4,918
------- ------- ------- -------
Gross profit 14,495 8,715 30,152 16,796
------- ------- ------- -------
Operating expenses:
Research and development 2,259 657 4,114 1,205
Selling, general and administrative 6,204 812 9,335 1,258
------- ------- ------- -------
Total operating expenses 8,463 1,469 13,449 2,463
------- ------- ------- -------
Operating income 6,032 7,246 16,703 14,333
Interest and other income 1,054 138 2,329 260
------- ------- ------- -------
Income before provision for income taxes 7,086 7,384 19,032 14,593
Provision for income taxes 2,480 2,513 6,661 4,966
------- ------- ------- -------
Net income $ 4,606 $ 4,871 $12,371 $ 9,627
======= ======= ======= =======
Net income per share $ 0.15 $ 0.18 $ 0.39 $ 0.35
Shares used in per share calculation 31,590 27,308 31,611 27,301
<FN>
See accompanying notes
</FN>
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,371 $ 9,627
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 729 338
Provision for doubtful accounts 114 76
Provision for obsolete inventory 13 66
Amortization of deferred compensation 28 157
Income tax reduction relating to stock plans 763 2,148
Deferred income taxes -- 316
Foreign currency translation (61) --
Changes in assets and liabilities:
Short-term investments (30,737) --
Accounts receivable (5,582) (3,965)
Inventories (2,690) (1,022)
Prepaids and other current assets (293) (610)
Accounts payable 671 621
Accrued liabilities 469 (34)
Customer deposits -- (1,405)
Income taxes payable (5,625) (622)
-------- --------
Net cash provided by (used in) operating activities (29,830) 5,691
-------- --------
Cash flows from investing activities:
Proceeds from sale of investments -- 100
Acquisition of property, plant and equipment (7,749) (1,606)
-------- --------
Net cash used in investing activities (7,749) (1,506)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 50 35
Acquisition of treasury stock (390) --
-------- --------
Net cash provided by (used in) financing activities (340) 35
-------- --------
Net increase (decrease) in cash and cash equivalents (37,919) 4,220
Cash and cash equivalents, at beginning of period 59,238 2,533
-------- --------
Cash and cash equivalents, at end of period $ 21,319 $ 6,753
======== ========
<FN>
See accompanying notes
</FN>
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5
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, in accordance with
generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of Management, all
adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the financial position and
results of operations have been included. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements contained in the Company's Form
10-K for the fiscal year ended June 30, 1996.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The year-end
balance sheet data was derived from audited financial statements, but
does not include disclosures required by generally accepted
accounting principles.
Operating results for the three and six months ended December 31,
1996 are not necessarily indicative of the results to be expected for
any other interim period or for the full fiscal year.
2. Inventories (in thousands):
December 31, June 30,
1996 1996
------------ -----------
Raw materials $ 839 $ 456
Work in process 1,393 1,211
Finished goods 3,797 1,685
------------ -----------
$ 6,029 $ 3,352
============ ===========
3. Computation of Net Income Per Share
Net income per share is computed using the weighted average number of
common and common equivalent shares, when dilutive, outstanding
during the period. Common equivalent shares comprise stock options
using the treasury stock method. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued by the Company at prices below the initial
public offering price during the twelve-month period prior to the
offering have been included in the calculation as if they were
outstanding for all periods presented prior to the offering date
(using the treasury stock method and the initial public offering
price).
6
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Stock Repurchase Program
During the first quarter of fiscal 1997, the Board of Directors
authorized a stock repurchase program pursuant to which the Company
may repurchase shares of its common stock with an aggregate value of
up to $10 million. The repurchases may be made from time to time on
the open market at prevailing market prices or in negotiated
transactions off the market. Although the Company does not currently
intend to repurchase a significant number of additional shares under
the repurchase program, the program will continue until discontinued
by the Board of Directors. The Company has used, and plans to use,
existing cash balances to finance any repurchases. The Company may
use the repurchased shares to offset grants under its employee equity
incentive plan. As of December 31, 1996, the Company had repurchased
30,000 shares of its common stock at an aggregate cost of $390,000.
5. Contingencies
ESS Litigation. In October 1992, a subsidiary of the Company
purchased substantially all the assets of Endothelial Support
Systems, Inc. (subsequently known as Endovascular Support Systems,
Inc.) ("ESS") in consideration of certain royalty payments payable by
the Company based on the net sales of products using or adapted from
such assets. The purchased assets included the technology which
resulted in the Company's only issued patents. Following such asset
purchase, the Company between June 1993 and March 1995 purchased in
several transactions 100% of the shares of capital stock of ESS from
its shareholders in consideration of shares of common stock of the
Company and, in certain instances, other consideration, and ESS was
merged into the Company. In June 1996, the Company received notice of
a lawsuit filed by Dr. Azam Anwar and Benito Hidalgo, each of whom is
a former shareholder of ESS (who together held approximately 48% of
ESS's outstanding shares of common stock) and each of whom currently
holds shares of common stock of the Company, in the District Court of
Dallas County, Texas. The suit names as defendants the Company,
Bradly A. Jendersee and John D. Miller, each a director, officer and
principal stockholder of the Company, Dr. Simon H. Stertzer, a
director and principal stockholder of the Company, and Dr. Gerald
Dorros, a principal stockholder of the Company. In January 1997, the
plaintiffs filed an amended petition alleging common law fraud,
negligent misrepresentation, securities fraud pursuant to the Texas
Securities Act, fraud pursuant to the Texas Business and Commercial
Code, control person liability, aider and abetter liability of the
individual defendants, civil conspiracy, breach of fiduciary duty,
and constructive fraud in connection with the Company's acquisition
of ESS and the Company's acquisition of shares of ESS capital stock
from the plaintiffs. The plaintiffs seek unspecified damages,
rescission of the Company's acquisition of the ESS assets and its
subsequent acquisition of the ESS stock, reconstitution of ESS,
punitive damages, interest and attorneys' fees and other relief.
7
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On February 10 and 12, 1997, the court overruled defendants' special
appearances and denied defendants' motions objecting to jurisdiction,
motions to dismiss based on forum non conveniens, and motions to
abate or stay the Texas proceedings. The Company believes it has
meritorious defenses to the claims in the Texas action and intends to
vigorously defend itself. However, no assurance can be given as to
the outcome of the action. The inability of the Company to prevail in
the action, including the loss or impairment of the right to produce
products based on the Company's issued patents, could have a material
adverse effect on the Company's business, financial condition and
results of operations.
The Company also received notice in August 1996 of a lawsuit filed by
Messrs. Anwar and Hidalgo in the Superior Court of Sonoma County,
California, which names the same defendants as in the Texas action
and alleges claims for securities fraud and unregistered securities
under the California securities laws, breach of fiduciary duty and
fraud. The plaintiffs seek unspecified damages, rescission of the
Company's acquisition of the ESS assets and its subsequent
acquisition of the ESS stock, reconstitution of ESS and other relief.
The defendants, including the Company, have filed an answer denying
plaintiff's claims, and also filed a cross-complaint against the
plaintiffs. The cross-complaint alleges claims against Mr. Hidalgo
for specific performance, breach of contract, breach of the implied
covenant of good faith and fair dealing, and declaratory relief based
on comparative indemnity, contribution and absence of fraud. The
cross-complaint alleges claims against Dr. Anwar for intentional and
negligent interference with contract, equitable estoppel and
declaratory relief based on absence of fraud. Mr. Hidalgo and Dr.
Anwar have filed an answer generally denying the claims contained in
the cross-complaint.
On July 11, 1996, the Company, along with the individual defendants
named in the Texas and Sonoma County actions, filed two actions
against Mr. Hidalgo in the Superior Court of San Mateo County,
California. The first action alleges claims for specific performance,
breach of contract, breach of the implied covenant of good faith and
fair dealing, and declaratory relief based on indemnity. These claims
arise out of a stock exchange agreement entered into between Mr.
Hidalgo and the Company, and out of Mr. Hidalgo's actions as a
director of ESS. The second action alleges claims for specific
performance, breach of contract, and breach of the implied covenant
of good faith and fair dealing. These claims arise out of a
separation and release agreement entered into between Mr. Hidalgo and
the Company.
On December 6, 1996, the Superior Court of Sonoma County, California,
pursuant to the stipulation of the parties, transferred the Sonoma
County action to the Superior Court of San Mateo County. On December
11, 1996, the Superior Court of San Mateo County, pursuant to the
stipulation of the parties, consolidated all three pending California
actions into a single action (the "Consolidated Action"), and ordered
that the pleadings from the Sonoma County action shall be the
operative pleadings in the
8
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Consolidated Action. The Company believes that it has meritorious
defenses to the claims alleged by the plaintiffs, and that it has
meritorious claims against the plaintiffs, in the Consolidated
Action. However, no assurance can be given as to the outcome of the
Consolidated Action. The inability of the Company to prevail in the
Consolidated Action, including the loss or impairment of the right to
produce products based on the Company's issued patents, could have a
material adverse effect on the Company's business, financial
condition and results of operations.
The Company has agreed to indemnify each of the individuals named as
defendants in the lawsuits against the Company relating to the ESS
transaction.
Claims of Terminated Distributors. In connection with the Company's
termination of certain distributor relationships, several of such
distributors have filed, or have threatened to file, claims against
the Company with respect to such terminations.
In early 1996, in connection with the Company's termination of its
distribution relationship with Cardiologic GmbH effective April 8,
1996, the Company received notice from such distributor alleging an
exclusive distribution agreement between the parties with a term
expiring in December 1998. The distributor threatened to file an
action for breach of the alleged agreement, including making a claim
for compensation equal to one year's average commission and seeking
to enjoin distribution of the Company's products in Germany.
In November 1996, in connection with the Company's termination of its
distribution relationship with Alfatec-Medicor N.V.
("Alfatec-Medicor") and Medicor Nederland B.V. in Belgium and The
Netherlands, respectively, effective September 30, 1996, the Company
received notice that of a lawsuit filed by Alfatec-Medicor in Second
Chamber of the Commercial Court of Brussels, Belgium, alleging
insufficient notice of termination of a distribution agreement
between the parties, promotion costs, personnel restructuring claims
and additional compensation. Alfatec-Medicor seeks compensation of
BF189,389,135 (approximately $5.6 million using current exchange
rates), of which BF30,000,000 (approximately $885,000) is being
sought as a provisional payment at a hearing scheduled for April 18,
1997. The Company has requested from Alfatec-Medicor information that
would support its claims for indemnification, but has not yet
received such information.
On August 19, 1996, in connection with the Company's termination of
its distribution relationship in Switzerland with Medicor AG,
effective September 30, 1996, such distributor filed an action
against the Company in the United States District Court for the
Northern District of California alleging breach of written, oral and
implied-in-fact contracts, inducement to breach an employment
contract with one of such distributor's employees, intentional
interference with contractual relations, intentional and negligent
interference with prospective economic advantage, misappropriation of
trade secrets, and intentional and negligent misrepresentation. On
October 11, 1997, the court denied the distributor's request for
preliminary and temporary injunctive relief. On January 30, 1997, the
court entered an order dismissing the entire action on forum non
9
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
conveniens grounds. As part of the dismissal, AVE has agreed to
submit to the jurisdiction of the appropriate forum in Switzerland,
waive any defense of statute of limitations to any substantially
similar claims made there, make available witnesses and documents
there and satisfy any judgment entered against it there. On January
27, 1997, the Company filed an action in the debt collection office
of Cham, Switzerland against Medicor AG for $93,000 plus accrued
interest in connection with unpaid accounts receivable from the
distributor relationship.
In connection with the Company's termination of its distribution
relationship in France with Medi Service, S.A.R.L./Fournitures
Hospitalieres S.A. effective September 30, 1996, the Company received
notice from such distributor that it had filed an action before the
Tribunal de Grande Instance of Mulhouse in France seeking
compensation for breach of an alleged exclusive distribution
agreement for an indeterminate period between the parties. The
Company counterclaimed for unpaid accounts receivable of
approximately $1.8 million and for damages for abusive legal
proceedings. On September 23, 1996, the Tribunal rejected the
distributor's claims for damages for unlawful termination as well as
the Company's counterclaim for abusive legal proceedings. The
Tribunal reserved judgement with respect to the repurchase of the
distributor's inventory of AVE products and the payment of unpaid
accounts receivable sought by the Company. The parties have submitted
briefs on these issues and a scheduling hearing is scheduled for
February 21, 1997.
With respect to each of the aforementioned distributors, the Company
has consulted with local counsel in the applicable country and
believes that the termination of each of the distributor
relationships was lawful. The Company understands that under the laws
of certain countries, including Belgium and The Netherlands, under
certain circumstances, certain indemnities may be claimed by
distributors for insufficient notice of termination and/or goodwill
compensation. The Company intends to vigorously defend itself against
pending claims and any other claims that may be brought by such
distributors. However, no assurance can be given as to the outcome of
any pending or threatened litigation, and any successful claim for
damages or injunctive relief by one or more of such distributors
could have a material adverse effect on the Company's business,
financial condition and results of operations.
From time to time, the Company is involved in other legal proceedings
arising in the ordinary course of its business. As of the date
hereof, the Company is not a party to any other legal proceedings
with respect to which an adverse outcome would, in management's
opinion, have a material adverse effect on the Company's business,
financial condition or results of operations.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The statements contained in this Form 10-Q that are not historical
are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements made herein include, without limitation,
statements regarding the extent and timing of new product
introductions, competition, regulatory approvals, expenditures and
margin levels, and the establishment of direct sales forces in
targeted countries. All forward-looking statements in this document
are based on information available to the Company as of the date
hereof, and the Company assumes no obligation to update any such
forward-looking statement. It is important to note that the Company's
actual results could differ materially from those in such
forward-looking statements. Additional risk factors include those
discussed in the reports filed by the Company from time to time on
Forms 10-K, 10-Q and 8-K.
Since its inception in 1991, the Company has been engaged in the
design, development, manufacturing and marketing of stent systems and
balloon angioplasty catheters designed to be utilized in connection
with the treatment of atherosclerosis. The Company began commercial
sales of its balloon angioplasty catheters in October 1993 and its
coronary stents in October 1994. The Company's products are currently
commercially sold only outside of the United States, primarily in
Europe and Japan. In Japan, the Company currently sells only balloon
catheters. The Company is seeking regulatory approval for sale of
certain of its stent systems in Japan and Spain. In November 1995,
the Company received United States Food and Drug Administration
("FDA") clearance to conduct clinical trials with the Company's Micro
Stent and Micro Stent II systems in the United States under an
Investigational Device Exemption ("IDE"). Subsequently, the Company
received FDA approval to include in these trials patients afflicted
with restenotic lesions, patients with long lesions that can be
treated with the Micro Stent II XL, and patients with abrupt or
threatened vessel closure. The Company has also received conditional
approval to include in the trials its single-operator stent delivery
system. In addition, in December 1996, the Company received clearance
from the FDA to conduct clinical trials with the Company's Peak
balloon angioplasty catheter. The Company does not expect FDA
approval of its stent products for sale in the United States prior to
1998, and there can be no assurance when or if such approval will be
obtained. As a result, the Company expects international sales to
account for substantially all of its revenues for at least the next
12 months. The Company expects to incur substantial clinical research
and other costs in connection with obtaining regulatory approvals for
its stents in the United States and other countries.
The Company has a limited history of operations and only began to
generate positive net income in fiscal 1995. The increase in the
Company's sales to date has been due to greater demand for the
Company's stent systems and, to a lesser degree, its coronary balloon
catheter systems. In order to support increased levels of sales in
the future and to augment its long term competitive position, the
Company anticipates that it will be required to make continuing
significant additional expenditures in manufacturing,
11
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research and development (including clinical study and regulatory
costs), sales and marketing and administration, both in absolute
dollars and as a percentage of net sales. The Company has also
experienced higher administrative expenses resulting from its
obligations as a public reporting company.
Until April 1996, substantially all of the Company's sales were to
international distributors who resell products to health care
providers. The Company terminated its relationship with distributors
in Germany and the United Kingdom in April and May 1996,
respectively, and in France, Switzerland, Belgium and The Netherlands
effective September 30, 1996. The Company has established a direct
sales force in each of those countries. The establishment and
maintenance of direct sales forces has required and will continue to
require significant ongoing expenditures, additional management
resources and has resulted, and may continue to result, in additional
costs to eliminate existing distributor relationships (including
litigation by former distributors). Sales in Belgium, France, The
Netherlands and Switzerland were significantly below levels
originally anticipated in the three months ended December 31, 1996,
due in part to the Company's conversion to direct sales forces there,
and there can be no assurance that any such direct sales force will
be successful in the future. See Note 5 to the unaudited Condensed
Consolidated Financial Statements in Item 1.
Generally, the Company manufactures and ships product shortly after
the receipt of orders, and anticipates that it will do so in the
future. The Company developed a significant short-term backlog during
January 1997 in connection with the scale-up of manufacturing of its
AVE gfx Stent product. The Company expects that this backlog will be
reduced during the quarter ending March 31, 1997.
The Company anticipates that its results of operations may fluctuate
for the foreseeable future due to several factors, including
variations in operating expenses, the costs and the outcome of
litigation, competition (including pricing pressures), costs and the
timing of establishing direct sales operations, the timing of
research and development expenses (including clinical trial related
expenditures), the timing of new product introductions or transitions
to new products, sales by distributors, the mix of sales among
distributors and the Company's direct sales force, timing of
regulatory and third party reimbursement approvals, the level of
third-party reimbursement, the Company's ability to manufacture its
products efficiently, and seasonal factors impacting the number of
elective angioplasty procedures. In addition, the Company's results
of operations could be affected by the timing of orders from
distributors, changes in the Company's distributor network (including
expenses in connection with termination of former distributors), the
ability of the Company's distributors to effectively promote the
Company's products and the ability of the Company to quickly and
cost-effectively establish an effective direct sales force in
targeted countries. Failure to quickly or cost-effectively establish
or maintain and manage effective sales forces in such countries,
particularly in France and Germany, could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's limited operating history makes accurate
prediction of future operating results difficult or impossible.
Although the Company has experienced growth in recent years, there
can be no assurance that, in the future, the Company will sustain
revenue growth or remain profitable on a quarterly or annual basis or
that its growth will be consistent with predictions made by
securities
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analysts. The Company has experienced, and may experience in one or
more future quarters, operating results which are below the
expectations of public market analysts and investors. In such event,
the price of the Company's common stock has been, and would likely
be, materially and adversely affected.
Results of Operations - Three and Six Months Ended December 31, 1996
and 1995
Net sales. For the three months ended December 31, 1996, net sales
increased to $18.2 million from $11.1 million in the comparable
period in fiscal 1996. The increase in net sales was due to
significant increases in sales of the Company's stent systems,
particularly the AVE gfx Stent and the Micro Stent II family of
products. The AVE gfx Stent was released in certain countries
internationally in September 1996, and the Micro Stent II was
released in certain countries internationally in October 1995.
For the first six months of fiscal 1997, net sales increased to $36.8
million from $21.7 million in the first six months of fiscal 1996.
The increase in net sales was due to significant increases in sales
of the Company's stent systems, particularly the AVE gfx Stent and
the Micro Stent II family of products.
The Company anticipates that stent system sales will continue to
constitute the vast majority of total net sales. In the fourth
quarter of fiscal 1996, the Company commenced direct sales operations
in the United Kingdom and Germany, and in the second quarter of
fiscal 1997 the Company began selling directly in France,
Switzerland, Belgium and The Netherlands. All other sales made by the
Company were through unaffiliated distributors. The Company believes
that the increasing number of devices in the international stent
market and the desire of companies to obtain market share has
resulted in increased price competition, particularly in the second
quarter of fiscal 1997, which has caused the Company to reduce prices
on its stent systems. Price reductions in response to competitive
pressure reduced net sales in the second quarter of fiscal 1997. The
Company expects such price competition to continue. If the Company is
forced to effect further price reductions, such reductions would
continue to reduce net sales in future periods if not offset by
increased unit sales or other factors.
Cost of Sales. Cost of sales increased to $3.7 million in the three
months ended December 31, 1996 from $2.4 million in the comparable
period in fiscal 1996, and decreased as a percentage of net sales to
20% in the fiscal 1997 period from 22% in the fiscal 1996 period.
Cost of sales increased to $6.6 million in the first six months of
fiscal 1997 from $4.9 million in the first six months of fiscal 1996,
and decreased as a percentage of net sales to 18% in the 1997 period
from 23% in the 1996 period. The increase in absolute dollars during
the three- and six-month periods was primarily a result of the
increased volume of products sold and to a lesser extent, the costs
of additional manufacturing capacity and personnel necessary to
support increased sales volume. The decrease as a percentage of net
sales was primarily the result of leveraging certain fixed overhead
expenses across a higher base of sales and an increase in stent
system sales as a percentage of total sales.
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Research and Development. Research and development expenses, which
include clinical study and regulatory costs, increased to $2.3
million in the three months ended December 31, 1996 from $657,000 in
the comparable period in fiscal 1996, and increased as a percentage
of net sales to 12% in the fiscal 1997 period from 6% in the fiscal
1996 period. Such research and development expenses increased to $4.1
million in the first six months of fiscal 1997 from $1.2 million in
the first six months of fiscal 1996, and increased as a percentage of
net sales to 11% in the 1997 period from 6% in the 1996 period. The
increase during the three- and six-month periods was primarily due to
the addition of research and development personnel, increased levels
of spending in connection with clinical studies relating to the AVE
gfx Stent, the Micro Stent II and Micro Stent II XL systems and costs
incurred in connection with the development of additional products,
including the renal and iliac artery Bridge stents.
The Company expects research and development expenses to continue to
increase in absolute dollars as the Company increases clinical trial
activities and pursues development of next generation products.
Selling, General and Administrative. Selling, general and
administrative expenses increased in absolute dollars to $6.2 million
in the three months ended December 31, 1996 from $812,000 in the
comparable period in fiscal 1996, and increased as a percentage of
net sales to 34% in the 1997 period from 7% in the 1996 period.
Selling, general and administrative expenses increased in absolute
dollars to $9.3 million in the first six months of fiscal 1997 from
$1.3 million in the first six months of fiscal 1996, and increased as
a percentage of net sales to 25% in the 1997 period from 6% in the
1996 period. The increase in absolute dollars and as a percentage of
sales primarily reflected additional costs of marketing and other
personnel necessary to support the Company's higher level of
operations, increased legal costs relating primarily to litigation
with former shareholders of Endothelial Support Systems, Inc.,
subsequently known as Endovascular Support Systems, Inc. ("ESS"), and
certain distributor terminations, which together resulted in related
legal expenses of $1.3 million during the quarter, and the
commencement in October 1996 of direct sales operations in Belgium,
France, The Netherlands and Switzerland. The Company also recognized
a charge of approximately $400,000 in the quarter ended December 31,
1996 relating to expenses for a proposed secondary offering that was
postponed.
The Company expects selling, general and administrative costs to
continue to increase in absolute dollars in the future primarily due
to
14
<PAGE>
direct sales operations in certain European countries, the increased
level of sales, product support and manufacturing operations, and
increases in finance, legal and administrative costs in connection
with public company obligations and ESS and other ongoing litigation.
Interest and Other Income. The Company had interest and other income
of $1.1 million in the three months ended December 31, 1996, compared
to $138,000 in the comparable period in fiscal 1996. The Company had
interest and other income of $2.3 million in the first six months of
fiscal 1997, compared to $260,000 in the first six months of fiscal
1996. The increase during such periods was primarily due to interest
income earned from the Company's increased cash and cash equivalents
and short-term investment balances.
Provision for Income Taxes. The Company's provision for income taxes
was $2.5 million in the three months ended December 31, 1996 and in
the comparable period in fiscal 1996. The Company's provision for
income taxes was $6.7 million in the first six months of fiscal 1997,
compared to $5.0 million in the first six months of fiscal 1996. The
increase in this provision during such periods was a result of the
Company's higher earnings during the fiscal 1997 period.
Net Income. The Company had net income of $4.6 million for the three
months ended December 31, 1996 compared to net income of $4.9 million
for the comparable period in fiscal 1996. Earnings per share
decreased to $0.15 in the three months ended December 31, 1996 from
$0.18 in the comparable period in fiscal 1996.
The Company had net income of $12.4 million for the first six months
of fiscal 1997 compared to net income of $9.6 million for the first
six months of fiscal 1996. Earnings per share increased to $0.39 in
the first six months of fiscal 1997 from $0.35 in the first six
months of fiscal 1996.
Liquidity and Capital Resources
Net cash used in operating activities was $29.8 million for the six
months ended December 31, 1996, which included the Company's purchase
of short-term investments totaling $30.7 million. Excluding these
investments, the Company had net cash provided by operating
activities of $907,000, principally arising as a result of positive
net income for the period. Cash, cash equivalents and short-term
investments totaled $84.4 million at December 31, 1996 as compared to
$91.6 million at June 30, 1996. Working capital increased to $112.7
million at December 31, 1996 as compared to $106.9 million at June
30, 1996. Inventories increased to $6.0 million at December 31, 1996
from $3.4 million at June 30, 1996, primarily due to the commencement
of direct sales operations in France, Switzerland, Belgium and The
Netherlands in the second quarter of fiscal 1997 and slower than
expected sales in such countries. Of the $18.7 million in accounts
receivable at December 31, 1996, approximately $2.4 million was due
from former distributors of the Company that have threatened or
commenced litigation in connection with the termination of
distribution relationships. The Company has commenced or expects to
commence litigation against such terminated distributors to collect
such amounts. See Note 5 to the Condensed Consolidated Financial
Statements in Item 1. The Company expects accounts receivable and
inventories to
15
<PAGE>
increase in absolute dollar amounts as sales increase. As of the date
of this report, the Company had no outstanding debt.
The Company expects to incur substantial additional costs, including
costs related to increased sales and marketing activities (including
the establishment of direct sales forces internationally), increased
research and development, expenditures in connection with seeking
regulatory approvals and conducting additional clinical trials,
capital equipment and other costs associated with expansion of the
Company's manufacturing capabilities. The Company may require
additional equity or debt financing to address its working capital
needs or to provide funding for capital expenditures in the future.
However, there can be no assurance that events in the future will not
require the Company to seek additional capital sooner or, if so
required, that it will be available on terms acceptable to the
Company.
16
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 5 to the Condensed
Consolidated Financial Statements in this Form
10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was
held on December 4, 1996, to consider and vote upon
three matters. The first matter related to the
election of five director nominees: Bradly A.
Jendersee, Robert D. Lashinski, John D. Miller, Dr.
J. Irawan Sugeng, and Dr. Simon Stertzer. The votes
cast and withheld for such nominees were as
follows:
Name For Withheld
---- --- --------
Bradly A. Jendersee 23,708,777 453,408
Robert D. Lashinski 24,058,871 103,314
John D. Miller 24,058,871 103,314
Dr. J. Irawan Sugeng 24,050,216 111,969
Dr. Simon Stertzer 24,060,205 101,980
The second matter related to the ratification of
the appointment of Ernst & Young LLP as independent
auditors of the Company for fiscal 1997. 23,971,511
votes were cast for approval, 1,750 were cast
against and there were 188,924 abstentions. The
third matter related to the approval of an
amendment to the Company's 1996 Equity Incentive
Plan to increase the shares issuable thereunder by
700,000. 21,828,774 votes were cast for approval,
1,922,065 were cast against, and there were 157,934
abstentions and 253,412 broker nonvotes.
Based on these voting results, each of the
directors nominated was elected and the second and
third matters were passed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.26 International Distribution Agrement, dated
as of January 22, 1997, between Japan
Lifeline Co., Ltd., and the Company.
(Confidential treatment has been requested
for certain information contained in this
document. Such information has been
omitted and filed separately with the
Securities and Exchange Commission
pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.)
10.27 Form of Change in Control Option Vesting
Acceleration Agreement between the Company
and Lawrence J. Fassler and certain other
key employees.
10.28 Employment Agreement, dated as of February
3, 1997, between the Company and Scott J.
Solano.
11.1 Statement regarding calculation of net
income per share.
27 Financial Data Schedule
17
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(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter ended December 31, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ARTERIAL VASCULAR ENGINEERING, INC.
Date: February 11, 1997 /s/ John D. Miller
------------------
John D. Miller
Vice President of Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
INDEX TO EXHIBITS
Exhibit
10.26 International Distribution Agreement, dated as of January 22,
1997, between Japan Lifeline Co., Ltd. and the
Company.(Confidential treatment has been requested for certain
information contained in this document. Such information has
been omitted and filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.)
10.27 Form of Change in Control Option Vesting Acceleration
Agreement between the Company and Lawrence J. Fassler and
certain other key employees.
10.28 Employment Agreement, dated as of February 3, 1997, between
the Company and Scott J. Solano.
11.1 Statement regarding calculation of net income per share.
27 Financial Data Schedule
INTERNATIONAL DISTRIBUTORSHIP AGREEMENT
between
ARTERIAL VASCULAR ENGINEERING, INC.
and
JAPAN LIFELINE CO., LTD.
Dated as of January 22, 1997
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
Section 1. Definitions..........................................................................1
Section 2. Relationship of Parties..............................................................1
2.1 Appointment..........................................................................1
2.2 Exclusivity..........................................................................2
2.3 Independent Contractor...............................................................2
Section 3. Marketing of Products................................................................3
3.1 Obligations of Distributor...........................................................3
3.2 Obligations of AVE...................................................................5
3.3 Forecasts............................................................................5
3.4 Reports..............................................................................5
Section 4. Purchase and Sale of Products .......................................................5
4.1 Orders...............................................................................5
4.2 Delivery.............................................................................6
4.3 Price................................................................................6
4.4 Payment..............................................................................6
4.4 Payment..............................................................................6
4.5 Taxes................................................................................6
4.6 Interest.............................................................................6
4.7 Returns..............................................................................7
*
Section 5. Confidentiality; Proprietary Rights .................................................7
5.1 Confidentiality......................................................................7
5.2 Insider Information - Securities Law Violations......................................8
5.3 Ownership ...........................................................................8
5.4 Enforcement..........................................................................8
5.5 Trademarks and Trade Names...........................................................8
5.6 Assignments..........................................................................9
Section 6. Warranty, Remedies and Disclaimers...................................................9
6.1 Warranty.............................................................................9
6.2 Exclusive Remedies...................................................................9
6.3 DISCLAIMER...........................................................................10
Section 7. Product Liability....................................................................10
7.1 Indemnity............................................................................10
7.2 Insurance............................................................................10
Section 8. Other Obligations of Distributor.....................................................11
8.1 No Unauthorized Warranties...........................................................11
8.2 Compliance Laws......................................................................11
8.3 U.S. Export Controls.................................................................11
8.4 Insurance ...........................................................................11
8.5 Noncompete...........................................................................11
- ----------------------------------------------------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed seperately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act, as
amended.
i
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8.6 Indemnity............................................................................12
Section 9. Term and Termination.................................................................13
9.1 Commencement.........................................................................13
9.2 Expiration...........................................................................13
9.3 Termination by AVE...................................................................13
9.4 Termination by Distributor...........................................................14
9.5 Effect of Termination................................................................15
9.6 Acknowledgment.......................................................................15
Section 10. Resolution of Disputes..............................................................16
10.1 Negotiation.........................................................................16
10.2 Mediation...........................................................................16
10.3 Arbitration.........................................................................16
Section 11. Equitable and Payment Remedies......................................................17
Section 12. Miscellaneous.......................................................................17
12.1 Limitation of Liability.............................................................17
12.2 Force Majeure.......................................................................17
12.3 Distributor's Representation........................................................18
12.4 Assignment..........................................................................18
12.5 Successors and Assigns..............................................................18
12.6 Notice..............................................................................18
12.7 Entire Agreement....................................................................18
12.8 Nonwaiver...........................................................................18
12.9 Interpretation......................................................................19
12.10 Governing Law; Venue ..............................................................19
ii
</TABLE>
<PAGE>
This Agreement, dated as of January 22, 1997, is made and entered into
between Arterial Vascular Engineering. Inc., a Delaware corporation ("AVE"), and
Japan Lifeline Co., Ltd., a company organized under the laws of Japan
("Distributor").
AVE and Distributor agree as follows:
Section 1. Definitions
1.1 "Confidential Information" means any information furnished or made
known to Distributor or its officers, directors, employees, agents or
representatives during the Term, including, but not limited to, information
relating to Product specifications, design data, finances, know-how, general
business operations, prices and pricing policies, marketing practices,
litigation, identity of customers or any other confidential and/or proprietary
aspect of AVE's business; provided, however, that Confidential Information shall
not include (i) information that at the time of disclosure to Distributor is in
the public domain, (ii) information that, after disclosure to Distributor,
becomes part of the public domain, by publication or otherwise, through an
authorized source other than Distributor and without fault by Distributor, and
(iii) information that Distributor can show by written records was in
Distributor's possession prior to its disclosure to Distributor and was not
acquired, directly or indirectly, from the Company.
1.2 "Extension Period" means a mutually agreed period of time, if any,
extending the Term and which would commence on the expiration of the Initial
Term.
1.3 "Initial Term" means the period of time commencing on the date of
this Agreement and ending on July 31,1999.
1.4 "Minimum Purchases" for the Initial Term are as set forth in the
attached Schedule B.
1.5 "Products" means only those products of AVE that are specifically
listed in the attached Schedule A. AVE may change the specifications,
components, design, performance and appearance of, or discontinue production of,
any Product at any time. AVE will give Distributor written notice of any such
change, whereupon Schedule A will be deemed amended to reflect such change.
1.6 "Term" means the period of time determined in accordance with
Section 9.
1.7 "Territory" means the geographical area described in the attached
Schedule C.
1.8 "Trademarks" means the trademarks and trade names of AVE identified
in the attached Schedule D as well as any other trademarks and trade names which
are obtained by either party with respect to the Products during the Term.
Section 2. Relationship of Parties
2.1 Appointment
1
<PAGE>
(a) Subject to Section 2.1(c), AVE hereby appoints Distributor, and
Distributor hereby accepts AVE's appointment, as AVE's distributor for the
promotion, distribution and sale of the Products in the Territory during the
Term, subject to and in accordance with the provisions of this Agreement.
(b) Distributor shall be allowed to appoint sub-distributors, dealers,
retailers or other non-employee representatives to work in connection with the
promotion, distribution and sales of Products in the Territory; provided that
Distributor shall be responsible for the agreement of and the observance by any
such sub-distributor, dealer, retailer or other non-employee representative of
all of the covenants and agreements of Distributor under this Agreement
(including, without limitation, the covenants and agreements in Sections 5, 6,
and 8), and shall otherwise be responsible for the performance of any such
sub-distributors, dealers, retailers or other non-employee representatives; and
provided further that Distributor will be responsible for any and all
termination or other compensation claims that any such sub-distributor, dealer,
retailer or other non-employee representative may have against AVE under any
sub-distributorship or similar agreement it may have with Distributor or under
any applicable law.
(c) With respect to products offered by AVE for sale or distribution as
of the date hereof or at any time hereafter that are not included in the
Products, AVE expressly reserves the right to promote, sell, distribute and
deliver any such additional products, either directly or through any other
person or entity, to potential and actual purchasers thereof in the Territory,
and, notwithstanding any term in this Agreement to the contrary, (i) nothing
shall obligate AVE to impose any restriction upon the use or resale of such
additional products by a purchaser thereof, (ii) the use or resale of such
additional products in any area by such a purchaser shall not constitute a
breach of any provision of this Agreement by AVE, (iii) AVE shall be under no
obligation to procure the termination of such use or resale, and (iv) neither
AVE nor any of its distributors shall be under any obligation to forward to
Distributor any purchase inquiries or purchase orders that AVE or such
distributor receives from any potential purchaser of such additional products in
the Territory, but rather AVE or such distributor shall be entitled to pursue
such sale on its own without any compensation being due to the Distributor.
2.2 Exclusivity
(a) Subject to Section 2.1(c), during the Term AVE will not:
(i) appoint another distributor of Products whose territory
includes any portion of the Territory; or
(ii) make direct sales of Products to dealers or retailers
located in the Territory.
(b) Distributor shall obtain all authorizations, consents, orders and
approvals that may be required under Section 6 of the Japanese Anti-Monopoly Act
and any law of similar effect within the Territory, and shall timely make any
necessary filings with the Fair Trade Commission of Japan, with respect to the
transactions contemplated by this Agreement. Distributor shall hold AVE harmless
from and indemnify it against any and all claims, losses, liabilities, damages
and costs and expenses (including, without limitations, costs of investigation,
court costs, arbitrator's fees and attorneys' fees) that AVE may incur arising
out of or relating to any failure to obtain such authorizations, consents,
orders and approvals or any failure to timely make any necessary filings with
the Fair Trade Commission of Japan with respect to the transactions contemplated
by this Agreement. Except to the extent that the ability to sell Products in the
Territory is materially prejudiced by any failure of Distributor to fulfill its
obligations described in the first sentence of this Section 2.2(b), the remedy
described in the immediately preceding sentence shall be AVE's sole remedy with
respect to any such failure.
2
<PAGE>
2.3 Independent Contractor
Distributor, and each sub-distributor, dealer, retailer or other
non-employee representative appointed by Distributor in accordance with Section
2.1, is an independent contractor and not an agent, employee, franchise or
partner of AVE, and is acting in the ordinary course of business. Neither
Distributor nor any of such sub-distributors, dealers, retailers or other
non-employee representatives has any authority to, and none of them shall,
create or assume any obligation, express or implied, on behalf of AVE.
Distributor shall be responsible for all taxes and payments concerning
Distributor, its employees, or its sales representatives. This Agreement does
not create or evidence any joint venture or partnership of the parties.
Section 3. Marketing of Products
3.1 Obligations of Distributor
Distributor will use its best efforts to aggressively develop sales of
the Products and support AVE's marketing program in the Territory. In
furtherance thereof, Distributor will use its best efforts to:
(a) Keep on hand a reasonable inventory of Products sufficient to
allow for prompt delivery of Products to purchasers, which inventory shall in
any event be not less than one month's average projected sales of the Products
in the Territory;
(b) participate regularly in local and regional trade shows,
medical conventions or similar events in the Territory, conduct appropriate
local promotional, advertising and other marketing efforts for the Products, and
provide AVE with copies of all advertising and promotional materials furnished
to potential purchasers of the Products;
(c) provide appropriate and professional application advice and
counseling for each Product sold by Distributor, and provide prompt follow-up
service and advice to purchasers of Products when so requested by the purchaser;
(d) respond promptly to sales leads or referrals furnished by AVE
or by other distributors or dealers of AVE;
(e) have an appropriate number of sales representatives and
marketing staff, as may be reasonably determined by Distributor, attend such
technical, product familiarization and marketing meetings as AVE may reasonably
require from time to time, for which AVE will pay reasonable and documented food
and lodging expenses, and for which Distributor will bear travel and all other
expenses;
(f) maintain and furnish quarterly, as reasonably requested by
AVE, reasonably detailed records of sale of each Product sold under this
Agreement, including individual account information;
(g) manage all clinical trials required to obtain governmental
approval to import, handle, market, sell, demonstrate, use or distribute
Products (or any addition, improvement or modification to any Product) in the
Territory and any other clinical trials sponsored by AVE involving hospitals in
the Territory, and to collect and transmit to AVE, on a regular and timely
basis, such information, documentation and data from said clinical trials as AVE
may reasonably request;
(h) during the testing or clinical evaluation phase of
development of any Product (or any addition, improvement or modification, to any
Product), use its best efforts to collect and
3
<PAGE>
transmit to AVE on a regular and timely basis such information and data from
hospitals and others involved in testing and use of such Products as AVE may
reasonably request;
(i) deliver to customers or potential customers designated by
AVE, free of charge, such promotional demonstration units as may be delivered
free of charge to Distributor by AVE;
(j) distribute to all purchasers of the Product, as requested by
AVE, Product information bulletins and all other Product related documents or
information, and assist in translating accurately such documents or information
into a language other than English as appropriate or necessary for distribution
of the Products in the Territory;
(k) assist in promptly executing Product recalls as directed by
AVE, in which event AVE will reimburse Distributor for all documented,
reasonable, out-of-pocket expenses reasonably incurred by Distributor to comply
with AVE's directives in connection with repurchasing Products subject to
recall;
(l) promptly advise AVE of each complaint that Distributor may
receive or become aware of concerning the Products, and telephone AVE
immediately to report any information of which Distributor becomes aware that
suggests that any of the Products may have been associated in any way with an
injury to a user or patient;
(m) refer to AVE any inquiry, other than a purchase order or
potential purchase order, from the public, any governmental authority, any trade
association or any news media, publication or reporter concerning the Products
or AVE;
(n) not market Products outside the Territory, and not knowingly
sell, lease, give or otherwise provide Product for any use or application other
than one specifically authorized by AVE in writing or in literature accompanying
the Product;
(o) secure any and all registrations, permits, licenses,
approvals, and other governmental actions required to import, handle, market,
sell, demonstrate, use and distribute Products in the Territory (in such a
manner that such registrations, permits, licenses and approvals may be timely
transferred to AVE at the end of the Term), provide to AVE timely progress
reports on any such action, and promptly provide AVE copies of all
registrations, permits, licenses, approvals, certificates, correspondence and
other documentation related to any such action;
(p) provide to AVE all information, documents and other
assistance required by AVE to obtain U.S. export approvals, if any, required to
import, handle, market, sell, demonstrate, use and distribute Product in
Territory;
(q) conduct its business, including, but not limited to the
obligations set forth herein, in a professional and lawful manner and otherwise
in a manner not detrimental to the business reputation of AVE;
(r) if Distributor appoints any sub-distributors, dealers,
retailers or other non-employee representatives in accordance with paragraph
2.1, Distributor hereby acknowledges that AVE shall have the right to
communicate directly with said sub-distributor, dealer, retailer, or other
non-employee representative on all issues related to distribution of the Product
in the Territory or any issues arising directly or indirectly from the
distribution of said products, provided that AVE will consult and agree with the
Distributor in advance as to the substance of such communications, which
agreement shall not be unreasonably withheld by the Distributor; and
(s) except as otherwise stated herein, Distributor shall be
solely responsible for all expenses incurred in performance of the obligations
set forth herein.
4
<PAGE>
3.2 Obligations of AVE
Subject to Section 2.1(c), AVE will use its best efforts to:
(a) provide to Distributor free of charge reasonable amounts of
sales literature and training materials;
(b) provide Distributor reasonable advance notice in the event
that it discontinues production of any of the Products;
(c) refer to Distributor all inquiries for purchase of Products
received from within the Territory;
(d) keep Distributor informed of any Product complaints or
adverse reactions that are, in AVE's reasonable judgment, significant, and of
all matters that are, in AVE's reasonable judgment, important concerning the
quality and performance of Products;
(e) provide technical specifications and other information
required to support Distributor's securing of registrations, permits, licenses,
approvals and other governmental actions required to import, handle, market,
sell, demonstrate, use or distribute Products in the Territory;
(f) provide technical support to Distributor as may be reasonably
necessary to sell and market Products in the Territory; and
(g) periodically send a representative to visit the Territory to
support Distributor's sales and training efforts.
3.3 Forecasts
At least fifteen (15) days before the beginning of each calendar
quarter, Distributor will furnish AVE with a rolling forecast of sales for the
following six (6) months of Product by units within each Product group, and an
estimate of Distributor's forthcoming orders for Products during the next
calendar quarter. Forecasts are not binding on Distributor.
3.4 Reports
Distributor will furnish AVE with an annual marketing plan (detailing
planned sales training, staffing, convention and trade show attendance,
advertising, etc.) not less than ninety (90) days before the start of each AVE
calendar year. Distributor will also give AVE a written summary of Distributor's
marketing initiatives, quarterly sales reports, and such other information as
AVE may reasonably request within thirty (30) days after the end of each
calendar quarter, it being understood that immaterial delays by Distributor in
the delivery of such summary information to AVE beyond such 30-day period shall
not constitute a breach of this Agreement.
5
<PAGE>
Section 4. Purchase and Sale of Products
4.1 Orders
Distributor's orders for Products are subject to acceptance by AVE and
to the provisions of this Agreement, but in no event shall Distributor order and
purchase less than the Minimum Purchases, which Distributor hereby acknowledges
are reasonable and constitute a material obligation of this Agreement, and AVE
shall be obligated to supply such Minimum Purchases to Distributor. Once
accepted, AVE will fill and ship orders in accordance with its customary
procedures subject to Product availability, and may allocate its output
according to its sole judgment if demand exceeds its manufacturing capacity;
provided, however, that AVE will pay Distributor the amount, and under the
circumstances, set forth in Schedule E in the event that certain of the Products
are not provided to Distributor. AVE will use reasonable efforts to utilize the
mode of shipment and carrier requested by Distributor.
4.2 Delivery
AVE will deliver all Products sold to Distributor FOB at AVE's
warehouse. Title to and all risk of loss of or damage or casualty to such
Products will pass to Distributor upon delivery to the carrier. If Product is
not shipped freight collect, Distributor will reimburse AVE on demand for all
shipping charges, premiums for freight insurance, customs duties, import and
export fees, and transportation costs incurred by AVE. AVE will use reasonable
efforts to utilize the freight forwarder and customs broker requested by
Distributor.
4.3 Price
AVE will sell Products to Distributor under the Agreement at the prices
set forth in the attached Schedule E. All prices are payable in United States
currency unless provided otherwise on the applicable invoice. Prices for the
Products shall not be changed during the Initial Term. Prices for the Products
during any Extension Period shall be determined by mutual agreement of AVE and
Distributor at the time of any agreement with respect to such Extension Period.
4.4 Payment
Except as set forth in Schedule F, Distributor will pay each of AVE's
invoices within sixty (60) days after the date of the invoice. AVE may at its
discretion refuse orders, require payment in full, ship C.O.D. or halt shipments
in transit if any prior invoice is not paid in full during the aforementioned
60-day period or such other period as may be set forth in Schedule F if AVE
reasonably deems such steps necessary to secure payment; provided that AVE shall
give notice to Distributor of the existence of any such unpaid invoices and
allow Distributor a 10-day grace period in which to remit such payment before
taking the aforementioned actions.
4.5 Taxes
The purchase prices and other amounts specified in this Agreement do not
include sales, use or other applicable taxes, unless expressly stated to the
contrary. Distributor will pay all such taxes.
4.6 Interest
Any amount not paid when due will be subject to finance charges at the
rate of one and one-half percent (1.5%) per month or the maximum rate permitted
by applicable usury law, whichever is less, determined and compounded on a daily
basis from the date due until the date paid. Payment of such finance charges
will not excuse or cure Distributor's breach or default for late
6
<PAGE>
payment. If AVE retains a collection agency, attorney or other person or entity
to collect overdue payments, all collection costs, including but not limited to
reasonable attorney's fees, will be payable by Distributor.
4.7 Returns
Authorization is required for all returns and a Returned Goods
Authorization (RGA) number must be obtained prior to returning product to AVE.
An RGA number can be obtained by a fax transmittal to 707-525-1990 requesting
and RGA number for specified product(s). Please include quantity, part numbers
and lot numbers. All returns are to be sent to ARTERIAL VASCULAR ENGINEERING,
INC., 5355 Skylane Boulevard, Santa Rosa, CA 95403 U.S.A. An RGA number must
appear on the outside of the box. AVE will not accept or return any merchandise
that:
1. is a special order.
2. has been held by the Distributor for more than 90 days, except with respect
to (i) merchandise that the Distributor has reasonably determined to be
defective, in which case such merchandise shall be returned within 30 days of
the discovery of such defect, and (ii) the exchange of Products described in
Section 4.8.
3. is in unsalable condition, used merchandise, or merchandise returned in
damaged packaging or shelf box.
4. has not been shipped freight prepaid, C.O.D. shipments will not be accepted.
AVE reserves the right to have final approval on all merchandise returns.
Distributor shall be refunded the original FOB price plus shipping costs
actually incurred by Distributor with respect to returns of Products that are
determined by AVE to be defective with respect to the design, specifications,
quality or original packaging of such Products. Except with respect to the
exchange of Products described in Section 4.8 and the return of Products under
warranty claims in accordance with Section 6.2 hereof, all other returns will be
subject to a 20% reprocessing and restocking charge unless otherwise agreed in
writing by AVE.
*
Section 5. Confidentiality; Proprietary Rights
5.1 Confidentiality
During the term of this Agreement or at anytime thereafter, Distributor
will not, and shall cause any sub-distributors, dealers, retailers or other
non-employee representatives appointed by Distributor in accordance with Section
2.1 not to, from the date hereof until the date that is the third (3rd)
anniversary of the date of expiration or termination of this Agreement, disclose
or allow the disclosure to any third parties, or use other than in the
performance of Distributor's obligations under this Agreement, any confidential,
proprietary or trade secret information of AVE (including, but not limited to,
information relating to AVE's products, technology, know-how, research, customer
lists, supplier lists, marketing plans, financial information, costs or pricing
information) without the express prior written consent of AVE; provided,
however, that to the extent (but only to the extent) necessary and customary in
connection with the sales of the Products, the Distributor and any such
sub-distributors, dealers, retailers or other non-employee representatives shall
not be precluded from disclosing or allowing access to Confidential Information
to (i) those of its or
- ----------------------------------------------------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed seperately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act, as
amended.
7
<PAGE>
their employees for whom such information is necessary for the performance of
their duties to the Distributor or such sub-distributors, dealers, retailers or
other non-employee representatives and (ii) purchasers and potential purchasers
of the Products not owned or controlled by a competitor of AVE. Distributor
hereby agrees that damages or any other remedy available at law would be
inadequate to redress or remedy available at law would be inadequate to address
or remedy any loss or damage suffered by AVE upon any breach of this section by
the Distributor.
5.2 Insider Information - Securities Law Violations
In the course of the performance of Distributor's duties, it is possible
that Distributor will receive information considered to be material inside
information within the meaning and intent of the federal securities laws, rules,
and regulations of the U.S.A. Distributor will not directly or indirectly
disclose or otherwise use this information in deciding to or advising another to
buy, sell, or otherwise deal in AVE's securities.
5.3 Ownership
The Products involve valuable patent, copyright, trade secret, trade
name, trademark and other proprietary rights of AVE. No title to or ownership of
any such proprietary right is transferred to Distributor under this Agreement or
by use of any trademark, patent or other proprietary right. AVE reserves all
such proprietary rights. Distributor will not infringe, misappropriate or
violate any proprietary rights of AVE. Without limiting the generality of the
foregoing, Distributor will not register or attempt to register, directly or
indirectly, within the Territory or elsewhere, any such patents, copyrights,
trade names, trademarks or other proprietary rights other than in the name of
AVE.
5.4 Enforcement
Distributor will immediately notify AVE of any infringement,
misappropriation or violation of any of AVE's proprietary rights. In the event
of any such infringement, misappropriation or violation relating to the
activities of Distributor or any of its employees, agents, representatives or
customers, Distributor will take all steps reasonably necessary to terminate the
same. Distributor will immediately notify AVE of any legal proceeding initiated
by Distributor in connection with such infringement, misappropriation or
violation. AVE may, at its option and expense, assume control of any such
proceeding. If AVE assumes control, AVE will have exclusive control over the
prosecution and settlement of the proceeding and Distributor will provide such
assistance related to such proceeding as AVE may reasonably request and assist
AVE in enforcing any settlement or order made in connection with such
proceeding.
5.5 Trademarks and Trade Names
AVE hereby grants Distributor a royalty-free right to use the Trademarks
in the Territory during the Term solely for the purpose of identifying the
Products in conjunction with Distributor's marketing and sale of the Products
under this Agreement, and solely in accordance with the Product quality and
other standards issued from time to time by AVE. Except as permitted under this
paragraph, AVE reserves all rights in the Trademarks. Distributor will not use
the Trademarks for any purpose other than as permitted under this paragraph 5.4.
Distributor will transact business in a manner which enhances the reputation and
good will attached to the Trademarks. Distributor will properly identify and
accurately describe as a product of AVE all of the Products. Distributor will
not alter, remove, deface or obscure any notice of trademark, trade name,
patent, copyright, proprietary right or trade secret on a Product and will not
add to a Product any other additional trademark. Distributor shall not use any
words, phrase symbol, trademark or trade name which is confusingly similar to
the Trademarks or which constitute a colorable imitation of the Trademark.
8
<PAGE>
5.6 Assignments
At the end of the Term, Distributor will assign to AVE or such other
person or entity as AVE may designate all rights, registrations, reservations,
licenses, permits and similar items made or obtained by Distributor relating,
directly or indirectly, to the Products, the Trademarks, or any other related
proprietary rights. Notwithstanding the foregoing, Distributor may retain such
rights, licenses, etc. as are necessary for the continued operations of its
business independent of the Products, the Trademarks and other related
proprietary rights of AVE.
Section 6. Warranty, Remedies and Disclaimers
6.1 Warranty
AVE warrants that, upon delivery:
(a) each Product will be free from defects in materials and
workmanship; and
(b) each Product will conform in all material respects to its
specifications established by AVE.
6.2 Exclusive Remedies
6.2.1 AVE will repair, replace or otherwise correct any Product
that does not conform to the warranty set forth in paragraph 6.1(a) or (b),
provided that:
(a) Distributor, at AVE's request and Distributor's expense,
returns the nonconforming Product to AVE's plant within 30 days of Distributor's
discovery of such defect; and
(b) such nonconformity is not the result of any use of the
Products other than in strict accordance with AVE's instructions and user
manual.
6.2.2 AVE will defend Distributor against any claim that the
Products infringe any patent arising under the law of any country (including the
United States and Japan) in which AVE has been granted a patent or has filed a
patent application; provided that Distributor:
(a) notifies AVE of the claim of promptly after Distributor
learns of the same;
(b) allows AVE to assume exclusive control of the defense and
settlement of the claim;
(c) cooperates with AVE and provides such assistance as AVE may
reasonably request in connection with the defense or settlement of the claim;
(d) does not settle the claim without AVE's written consent,
which consent will not be unreasonably withheld; and
(e) complies with any settlement or court order made in
connection with the claim.
AVE will have no Liability or obligation for any infringement or
alleged infringement that arises out of the use of Products with any equipment,
devices, or other goods not made by or furnished by AVE or arising out of any
modification of Products not done by or at the direction of AVE.
9
<PAGE>
6.3 Disclaimer
AVE MAKES NO REPRESENTATION OR WARRANTY WITH REGARD TO ANY PRODUCT OR
OTHER ITEM FURNISHED UNDER THIS AGREEMENT EXCEPT AS SPECIFICALLY SET FORTH IN
PARAGRAPH 6.1. EXCEPT AS PROVIDED IN PARAGRAPHS 6.2.1 AND 6.2.2, AVE DISCLAIMS
AND DISTRIBUTOR WAIVES AND RELEASES ALL WARRANTY OBLIGATIONS OF AVE, EXPRESS OR
IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY PRODUCTS OR OTHER
ITEMS DELIVERED BY OR ON BEHALF OF AVE UNDER THIS AGREEMENT (INCLUDING, BUT NOT
LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING,
OR USAGE OF TRADE, AND ANY CLAIM OF INFRINGEMENT).
Section 7. Product Liability
7.1 Indemnity
AVE will defend Distributor against any claim of bodily injury
(including death) or damage to personal property to the extent caused by
negligence or any defect in the design or manufacture of the products, provided
that Distributor:
(a) notifies AVE of the claim promptly after Distributor learns
of the same;
(b) allows AVE to assume control of the defense settlement of the
claim;
(c) cooperates with AVE and provides such assistance as AVE may
reasonably request in connection with the defense or settlement of the claim;
and
(d) does not settle the claim without AVE's written consent,
which consent will not be unreasonably withheld.
Further, in such event, AVE will: pay any damages awarded against
Distributor in any proceeding resulting from the claim; reimburse the expenses
reasonably incurred by Distributor to provide the assistance requested by AVE in
connection with the defense settlement of the claim; and, if the claim is
settled, pay any amounts consented to by AVE. This paragraph will not apply to
the extent any claim arises out of any breach of or default under this Agreement
by Distributor or Distributor's negligence.
7.2 Insurance
During the Term, AVE will maintain product liability insurance coverage
issued by a responsible insurer, with limits of coverage not less than one
million dollars ($1,000,000) per claim and $20,000,000 in the aggregate. Upon
Distributor's request and subject to the consent of AVE's insurer, AVE will name
Distributor as an additional insured under such coverage and will provide a
certificate of insurance from the insurer certifying that the coverage is in
place.
Section 8. Other Obligations of Distributor
8.1 No Unauthorized Warranties
Distributor will not make or extend on behalf of AVE any written or oral
warranty in respect of any of the Products except as may be contained in sales
literature or brochures that are published or approved in writing by AVE.
Distributor will not advise, perform or demonstrate any use or
10
<PAGE>
application of any Product that is not specifically approved in writing by AVE.
Distributor will not impair the sterility or integrity of the Products while
they are in Distributor's custody.
8.2 Compliance With Laws
Distributor represents and warrants that it is thoroughly familiar with
applicable laws, ordinances, regulations another governmental requirements
concerning the importation, handling, marketing, sale, demonstration, use and
distribution of Products in the Territory. Distributor will comply with all
laws, ordinances, regulations and other governmental requirements applicable to
its business and to the importation, handling, marketing, sale, demonstration,
use and distribution of Products pursuant to this Agreement.
8.3 U.S. Export Controls Without limiting the generality of paragraph
8.2, Distributor will not, directly or indirectly, export or re-export any
Products, technical data associated with the Products, or the immediate Products
(including, but not limited to, processes, services, data and reports) derived
from use of the Products from the Territory, without first obtaining the
appropriate license from the United States Bureau of Export Administration or
its successor.
8.4 Insurance
During the Term, Distributor will maintain adequate liability insurance
coverage issued by a responsible insurer satisfactory to AVE as an additional
insured and afford AVE not less than twenty (20) days advance notice of
cancellation or material change in the policy. Upon AVE's request, Distributor
will provide a certificate of insurance from the insurer certifying that
coverage is in place.
8.5 Noncompete
(a) Except as set forth in Section 8.5(b), Distributor warrants and
agrees that it does not now and will not during the Term, and that it will cause
any sub-distributor, dealer, retailer or other non-employee representative
appointed by Distributor in accordance with Section 2.1 not to during the Term,
without the prior written consent of AVE, directly or indirectly design,
develop, manufacture, license, register, market, sell, distribute or promote any
product in the Territory that competes directly with any of the Products or any
other of AVE's balloon angioplasty catheters or stent systems (whether coronary
or noncoronary) that it may offer from time to time Product or have a
significant financial interest in any person or entity that does so. Distributor
represents and warrants that such restriction will not cause it to be prevented
from handling products with respect to which it has previously acted as a
distributor, agent or other representative for a person or entity.
(b) AVE agrees to allow Distributor to pursue the registration,
licensing and preparation for sale of products that may compete with the
Products, and to sell competing balloon angioplasty catheters at any time after
January 1, 1999; provided that prior to commencing any such registration,
licensing or sales Distributor will first complete the transfer to AVE or AVE's
designee of any and all registrations, licenses or other governmental
authorizations with respect to the Products or any other products of AVE, at no
charge to AVE; and provided further that Distributor shall in no event be
released from its obligation not to manufacture, market, sell, distribute or
promote competing coronary stents during the Term.
8.6 Indemnity
(a) Each of Distributor, on the one hand, and AVE, on the other hand (as
the case may be, the "Indemnifying Party"), will indemnify and hold harmless the
other (as the case may be, the "Indemnified Party") from any liabilities,
losses, claims, damages, penalties, judgments, suits, costs
11
<PAGE>
and expenses (costs and expenses incurred in connection with performing
obligations and, interest and applicable costs and reasonable attorneys',
engineers' and investigators' fees and disbursements) or disbursements of any
kind ("Losses") arising out of or resulting from (i) a breach of or default
under this Agreement by the Indemnifying Party or (ii) any personal injury,
death or property damage, sustained by any person arising out of or resulting
from the activities contemplated by this Agreement, where such injury, death or
damage is caused by the negligence or misconduct of the Indemnifying Party's
officers, directors, employees, affiliates, agents or representatives (or, in
the case of Distributor, of the sub-distributors, dealers, retailers or other
non-employee representatives appointed by Distributor in accordance with Section
2.1).
(b) Distributor shall indemnify AVE and hold it harmless from any Losses
arising out of or resulting from the Distributor's business or the sale or use
of the Products by it or any sub-distributor, dealer, retailer or other
non-employee representative appointed by Distributor in accordance with Section
2.1
(c) An Indemnified Party shall give prompt notice to the Indemnifying
Party of any Losses for which such Indemnified Party seeks indemnification,
stating the amount of the Loss, if known, and method of computation thereof, and
containing a reference to the provisions of this Agreement in respect of which
such right of indemnification is claimed or arises. The obligations and
liabilities of the Indemnifying Party under this Section 8.5 with respect to
Losses arising from claims of any third party which are subject to the
indemnification provided for in this Section 8.5 ("Third Party Claims") shall be
governed by and contingent upon the following additional terms and conditions:
(i) If the Indemnifying Party acknowledges in writing its
obligation to indemnify the Indemnified Party hereunder against any
Losses that may result from such Third Party Claim, then the
Indemnifying Party shall be entitled to assume and control the defense
of such Third Party Claim at its expense and through counsel of its
choice if it gives prompt notice of its intention to do so to the
Indemnified Party; provided, however, that if there exists or is
reasonably likely to exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the Indemnified Party for
the same counsel to represent both the Indemnified Party and the
Indemnifying Party, then the Indemnifying Party shall be entitled to
retain its own counsel at the expense of the Indemnifying Party.
(ii) The Indemnified Party shall cooperate with the Indemnifying
Party in such defense and make available to the Indemnifying Party, at
the Indemnifying Party's expense, all witnesses, pertinent records,
materials and information in the Indemnified Party's possession or under
the Indemnified Party's control relating thereto as is reasonably
required by the Indemnifying Party. In the event the Indemnified Party
is, directly or indirectly, conducting the defense against any such
Third Party Claim, the Indemnifying Party shall coooperate with the
Indemnified Party in such defense and make available to the Indemnified
Party, at the Indemnifying Party's expense, all witnesses, pertinent
records, materials and information in the Indemnifying Party's
possession or under the Indemnifying Party's control relating thereto as
is reasonably required by the Indemnified Party.
(iii) No such Third Party Claim may be settled by the
Indemnifying Party without the written consent of the Indemnified Party,
which consent shall not be unreasonably withheld.
(d) To the extent that the undertakings of AVE or Distributor set forth
in this Section 8.5 may be unenforceable, AVE or Distributor, as the case may
be, shall contribute the maximum amount that it is permitted to contribute under
applicable law to the payment and satisfaction of all Losses incurred by AVE or
Distributor, as the case may be.
12
<PAGE>
(e) The provisions of this Section 8.5 shall survive the expiration,
termination or suspension of this Agreement.
Section 9. Term and Termination
9.1 Commencement
The Term will commence as of the date of this Agreement.
9.2 Expiration
(a) Unless sooner terminated pursuant to paragraph 9.3 or 9.4 for the
material breach of any provisions of this Agreement or the parties have agreed
to an Extension Period as set forth in the following sentence, this Agreement
shall automatically expire without notice or any other action by either party at
the end of the Initial Term. The Term may be extended for an Extension Period as
may be negotiated by the parties if the parties agree in writing to Minimum
Purchases and other terms for the Extension Period no later than six (6) months
prior to the expiration of the Initial Term. AVE shall not be obligated to offer
this Extension Period and either party may decline to extend this Agreement with
or without cause.
(b) Distributor shall transfer to AVE or AVE's designee at the end of
the Term all applicable, registrations, permits, licenses and other applicable
governmental approvals in the Territory for the Products and any other coronary
stent products not covered in this Agreement. Distributor shall take all
reasonable actions to assure that such transfer is successfully completed at the
end of the Initial Term.
9.3 Termination by AVE
Upon the occurrence of any of the following, AVE may terminate this
Agreement, and the Term shall be deemed to have ended, by giving Distributor
written notice of such termination:
(a) any failure of the Distributor to meet or exceed the most
recently applicable Minimum Purchases by failure to timely send payment
therefore;
(b) any material change in the ownership or control of
Distributor or any sale, transfer or relinquishment by Distributor of a
substantial interest in the ownership of the business to be carried on by
Distributor under this Agreement, notice of which shall immediately be given by
Distributor to AVE, and the failure by Distributor to remedy such circumstance
within 30 days of its occurrence, without the prior written consent of AVE, but
in each case only to the extent that the resulting ownership, control or holder
of a substantial business interest is a competitor of AVE;
(c) the insolvency of Distributor, the filing of a petition in
bankruptcy by or against Distributor, the appointment of a receiver for
Distributor or Distributor's property, the execution of an assignment by
Distributor of all or substantially all of its assets for the benefit of its
creditors, or the conviction of Distributor or any principal or manager of the
Distributor for any crime tending to adversely affect the ownership or operation
of business, notice of which shall immediately be given by Distributor to AVE,
and the failure by Distributor to remedy such circumstance within 30 days of its
occurrence; or
(d) the material breach by Distributor of any of its material
obligations under this Agreement (it being understood that individually
immaterial obligations may in the aggregate constitute a material obligation)
and the failure by Distributor to remedy such breach within 30 days of being
notified of its existence by AVE;*.
- ----------------------------------------------------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed seperately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act, as
amended.
13
<PAGE>
9.4 Termination by Distributor
Upon the occurrence of any of the following, Distributor may terminate
this Agreement, and the Term shall be deemed to have ended, by giving AVE
written notice of such termination:
(a) the insolvency of AVE, the filing of a petition in bankruptcy
by or against AVE, the appointment of a receiver for AVE or AVE's property, or
the execution of an assignment by AVE of all or substantially all of its assets
for the benefit of its creditors, notice of which shall immediately be given by
AVE to Distributor, and the failure by AVE to remedy such circumstance within 30
days of its occurrence; or
(b) the material breach by AVE of any of its material obligations
under this Agreement (it being understood that individually immaterial
obligations may in the aggregate constitute a material obligation) and the
failure by AVE to remedy such breach within 30 days of being notified of its
existence by Distributor;*.
9.5 Effect of Termination
Any expiration or termination pursuant to paragraphs 9.2, 9.3 or 9.4
will be without prejudice to any other right or remedy afforded to either party
under this Agreement or any applicable law (e.g., in the case of any breach or
default by the other party), and will not affect any rights or obligations which
have arisen prior to the date of such termination. Termination of the Agreement
shall not relieve the parties of any obligation or liability arising prior to
such termination, including the obligation to maintain the confidentiality of
certain information as referenced in Section 5.1 above. In the event of
expiration or termination, Distributor will:
(a) not have any further right to market, sell or distribute
Products in the Territory other than as may be necessary to sell Distributor's
inventory of Products, if any, remaining after the repurchase of Products
described in Section 9.5(c), provided that the amount of remaining inventory is
reasonable in view of Distributor's normal inventory control practices over the
term of this Agreement;
(b) return to AVE any Products, sales materials, manuals, price
lists, and mailing lists provided by AVE to Distributor for demonstration,
promotional, or marketing purposes;
(c) in the event of a termination of this Agreement pursuant to
Sections 9.3 or 9.4, make available for repurchase by AVE, and AVE shall
repurchase, any coronary stent Products held by Distributor that have not been
committed for sale to a customer within the 90-day period
- ----------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
14
<PAGE>
following the termination, with any such repurchase to be at the original
transfer price between AVE and Distributor; provided that AVE shall be under no
obligation to repurchase a quantity of coronary stent Products in excess of *
for the Products in the Territory, as measured by *, and in any event shall not
be obligated to repurchase more than *; and provided further that AVE shall be
under no obligation to repurchase any coronary stent Products which were
supplied to Distributor more than twelve (12) months prior to the date of
termination.
(d) in the event that the transfer by Distributor to AVE or AVE's
designee of any and all registrations, permits, licenses and other governmental
approvals for the Products and any other coronary stent products not covered in
this Agreement does not occur by the end of the Term, continue to act as
importer of the Products and continue to meet the applicable Minimum Purchases
following such date until such time as such transfer has been successfully
completed.
The provisions of this Section 9.5 shall survive the expiration, termination or
suspension of this Agreement.
9.6 Acknowledgment
Any expiration or termination of the Term will be final and absolute. Each party
waives any right, either express or implied by applicable law or otherwise, to
renewal of this Agreement or to any damages or compensation arising solely out
of the due expiration or termination of this Agreement in accordance with this
Section 9. Each of the parties have considered the possibility of such
expiration or termination and the possibility of loss and damage resulting
therefrom in making expenditures in the course of the performance of this
Agreement. It is the express intent and agreement of the parties that neither
will be liable to the other for damages or otherwise by reason of the expiration
or termination of the Term as provided for herein. Nothing herein will prevent
the party terminating this Agreement for material breach by the other party from
pursuing its legal and equitable remedies as otherwise permitted hereunder. In
addition, either party may challenge (as permitted hereunder) a termination
based on its alleged material breach if it determines in good faith that the
breach has not occurred, has been cured within the permitted period, or is
otherwise excused, and provides written notice of such determination not more
than thirty days after its receipt of notice of termination.
Section 10. Resolution of Disputes
10.1 Negotiation
Each party agrees that any dispute between the parties relating to this
Agreement will first be submitted in writing to the President of each party.
Such officers, or other executive officers designated by them, will then meet
and confer with each other in a good faith effort to resolve such dispute. Any
decision of such officers that is documented in a writing signed by both of them
will be final and binding on the parties. In the event that the officers are
unable to resolve any dispute within 30 days after submission of the matter to
them, either party may refer the dispute to mediation as described below.
10.2 Mediation
The parties agree that any and all disputes, claims or controversies
arising out of or relating to this Agreement shall be submitted to
J.A.M.S./ENDISPUTE, or its successor, for mediation, and if the matter is not
resolved through mediation, then it shall be submitted to J.A.M.S./ENDISPUTE, or
its successor, for final and binding arbitration. Either party may commence
mediation by providing to J.A.M.S./ENDISPUTE and the other party a written
request for mediation, setting forth
- ----------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
15
<PAGE>
the subject of the dispute and the relief requested. The parties will cooperate
with J.A.M.S./ENDISPUTE and with one another in selecting a mediator from
J.A.M.S./ENDISPUTE's panel of neutrals, and in scheduling the mediation
proceedings. The parties covenant that they will participate in the mediation in
good faith, and that they will share equally in its costs. All offers, promises,
conduct and statements, whether oral or written, made in the course of the
mediation by any of the parties, their agents, employees, experts and attorneys,
and by the mediator or any J.A.M.S./ENDISPUTE employees, are confidential,
privileged and inadmissable for any purpose, including impeachment, in any
arbitration or other proceeding involving the parties, provided that evidence
that is otherwise admissable or discoverable shall not be rendered inadmissible
or non-discoverable as a result of its use in the mediation. Either party may
initiate arbitration with respect to the matters submitted to mediation by
filing a written demand for arbitration at any time following the initial
mediation session or 45 days after the date of filing the written request for
mediation, whichever occurs first. The mediation may continue after the
commencement of arbitration if the parties so desire. Unless otherwise agreed by
the parties, the mediator shall be disqualified from serving as arbitrator in
the case. The provisions of this Section 10.2 may be enforced by any court of
competent jurisdiction, and the party seeking enforcement shall be entitled to
an award of all costs, fees and expenses, including attorneys' fees, to be paid
by the party against whom enforcement is ordered.
10.3 Arbitration
Any controversies or claims among the parties arising out of or relating
to this Agreement or any breach thereof that are not resolved by their mutual
agreement, shall, upon demand of either party, be submitted to final and binding
arbitration before J.A.M.S./ENDISPUTE, or its successor, pursuant to the United
States Arbitration Act, 9 U.S.C. Sec. 1 et seq. Either party may commence the
arbitration process called for in this agreement by filing a written demand for
arbitration with J.A.M.S./ENDISPUTE, with a copy to the other party. The
arbitration will be conducted in accordance with the provisions of either
J.A.M.S./ENDISPUTE's Streamlined Arbitration Rules and Procedures (if the amount
in dispute does not exceed $250,000) or J.A.M.S./ENDISPUTE's Comprehensive
Arbitration Rules and Procedures (if the amount in dispute exceeds $250,000) in
effect at the time of filing of the demand for arbitration. The parties will
cooperate with J.A.M.S./ENDISPUTE and with one another in selecting an
arbitrator from J.A.M.S./ENDISPUTE's panel of neutrals, and in scheduling the
arbitration proceedings. The parties covenant that they will participate in the
arbitration in good faith. The arbitrator, in his or her discretion, shall be
authorized to award the prevailing party reimbursement of the costs and fees of
J.A.M.S./ENDISPUTE and the arbitrator, and reimbursement for its reasonable
attorneys' fees, disbursements (inlcuding, for example, expert witness fees and
expenses, photocopy charges, travel expenses, etc.) and costs arising from the
arbitration; provided, however, that until any such order is issued, the parties
shall bear equally the costs and fees of J.A.M.S./ENDISPUTE and the arbitrator.
The arbitration will be conducted in San Francisco, California. The arbitrator's
decision may be enforced by any court of competent jurisdiction, and the party
seeking enforcement shall be entitled to an award of all costs, fees and
expenses, including reasonable attorneys' fees, to be paid by the party against
whom enforcement is ordered. The arbitrator is specifically authorized to grant
injunctive relief, either as part of the final decision or prior to the final
decision. The parties desire that the courts promptly enforce all injunctive
relief granted prior to final decision as though it were part of the final
decision, even though such enforcement may be requested prior to final decision.
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<PAGE>
Section 11. Equitable and Payment Remedies
Notwithstanding the provisions of section 10, either party may seek an
injunction or other equitable relief, and judgment for failure to pay for
Products purchased, before the United States District Court for the Northern
District of the State of California or the Tokyo District Court to compel the
performance of any obligation owed to it by the other party.
Section 12. Miscellaneous
12.1 Limitation of Liability
EXCEPT FOR CLAIMS ARISING UNDER PARAGRAPH 6.2.2, AVE'S LIABILITY
(WHETHER IN TORT, CONTRACT OR OTHERWISE AND NOTWITHSTANDING ANY FAULT,
NEGLIGENCE (WHETHER ACTIVE, PASSIVE OR IMPUTED), PRODUCT LIABILITY, OR STRICT
LIABILITY OF AVE) UNDER THIS AGREEMENT OR WITH REGARD TO ANY PRODUCTS OR OTHER
ITEMS FURNISHED UNDER THIS AGREEMENT WILL IN NO EVENT EXCEED THE GREATER OF (A)
THE COMPENSATION PAID TO AVE UNDER SECTION 4 OR (B) THE LOST PROFITS OF
DISTRIBUTOR BASED ON THE MINIMUM PURCHASES (AS DEFINED HEREIN) THAT WOULD HAVE
BEEN MADE BY IT PRIOR TO THE FIRST ANNIVERSARY OF THIS AGREEMENT. IN NO EVENT
WILL AVE OR DISTRIBUTOR BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES ARISING OUT OF ITS PERFORMANCE OR NONPERFORMANCE OF THIS
AGREEMENT OR THE USE OF, INABILITY TO USE, OR RESULTS OF USE OF ANY PRODUCTS.
12.2 Force Majeure
Neither party will be liable for, or be considered to be in breach of or
default under this Agreement on account of, any delay or failure to perform as
required by this Agreement (other than for payment under Section 4) as a result
of any cause or condition beyond such party's reasonable control.
12.3 Distributor's Representation
Distributor represents and warrants to AVE that Distributor is free to
enter into and perform this Agreement without thereby being in breach of or
default under the terms of any other contract, commitment or understanding.
12.4 Assignment
Distributor will not assign this Agreement, in whole or in part,
directly, by operation of law, or otherwise, except with the prior written
consent of AVE. No assignment by Distributor, with or without AVE's consent,
will relieve Distributor of Distributor's responsibilities under this Agreement.
12.5 Successors and Assigns; No Third-Party Beneficiaries
This Agreement shall be binding upon and inure solely to the benefit of
the parties hereto and their respective successors and permitted assigns (if
any). Nothing herein, express or implied, is intended or shall confer upon any
other person or entity any legal or equitable right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
12.6 Notice
Notices or consents under this Agreement will be in writing and
delivered personally or, if mailed, will be sent certified mail, return receipt
requested, or by telex or facsimile or overnight
17
<PAGE>
express service, if addressed to the recipient's address set forth on the
signature page of this Agreement, or in either case to such other address as may
be established by notice to the other party. Notice will be effective only upon
actual receipt.
12.7 Entire Agreement
This Agreement contains the entire agreement, and supersedes any and all
prior agreements, between the parties with regard to the appointment of
Distributor as a distributor of Products and Distributor's purchase and sale of
Products. AVE will not be bound by, and specifically objects to, any terms,
conditions, or other provisions that are different from or in addition to the
provisions of the Agreement. Without limiting the generality of the foregoing,
any printed terms, conditions or other provisions that are included in or
accompany any of the Distributor's orders for Products under this Agreement will
not apply to or be binding on AVE. This Agreement may not be waived, amended or
rescinded except by a writing signed by the party to be charged thereby.
12.8 Nonwaiver
The failure of either party to insist upon or enforce strict performance
of any of the provisions of this Agreement or to exercise any rights or remedies
under this Agreement will not be construed as a waiver or relinquishment to any
extent of such party' right to assert or rely upon any such provisions, rights
or remedies in that or any other instance; rather, the same will be and remain
in full force and effect.
12.9 Interpretation
The English Language of the Agreement will govern any interpretation of
or dispute regarding the terms of this Agreement. Paragraph captions are for
convenience of reference and do not alter or limit the terms of this Agreement.
12.10 Governing Law; Venue
This Agreement will be governed by and interpreted in accordance with the local
laws of the State of California, without regard to conflicts of law provisions
and not including the provisions of the U.N. Convention on Contracts for the
International Sale of Goods. Subject to Articles 10 and 11, Distributor
irrevocably consents and submits to the jurisdiction of the Federal and State
courts of and located in San Francisco, California, and AVE irrevocably consents
to the jurisdiction of the Tokyo District Court. Neither AVE nor Distributor
will commence or prosecute any suit, claim, or proceeding arising under this
Agreement other than in the courts identified in the preceding sentence, and
each irrevocably consents to the service of any and all process by the mailing
of copies of such process to AVE or Distributor, as the case may be, at its
address set forth below. A copy of any service made on Distributor will also be
delivered to Greg Beattie, Mendelson & Brown, 1040 Marina Village Parkway, Suite
B, Alameda, CA 95403. Any remedy of AVE set forth in this Agreement is in
addition to any other remedy afforded to AVE under this Agreement, any other
contract, by law or otherwise.
18
<PAGE>
IN WITNESS THEREOF, the parties have executed this Agreement as of the
date first above written.
AVE: DISTRIBUTOR:
Arterial Vascular Engineering, Inc. Japan Lifeline Co., Ltd.,
By: /s/ Brad Jendersee By: /s/ Takeshi Masumoto
--------------------- -----------------------
Brad Jendersee Takeshi Masumoto
Title: President Title: President
Address: 3576 Unocal Place Address: 2-38-1 Ikebukuro, Toshima ku
Santa Rosa, CA 95403 Tokyo 171
U.S.A.
FAX: 707-525-0114 FAX: 81-3-3590-1772
19
<PAGE>
SCHEDULE A - PRODUCTS
1. All existing, improved and future versions of AVE's balloon angioplasty
catheters, including, without limitation, AVE's Peak(TM), Elite(TM) and
Nike(TM) products.
2. All existing, improved and future versions of AVE's coronary stent systems,
but to the extent (and only to the extent) that such products are included
in, and ultimately approved as part of, the first Shonin registration,
permit and license application submitted prior to the date hereof by
Distributor to the Japanese governmental authorities in connection with the
completed clinical trial of the Micro Stent(TM) Product.
<PAGE>
SCHEDULE B - MINIMUM PURCHASES
Balloon Angioplasty Catheters
Distributor shall purchase at least * balloon angioplasty catheters in each
three-month period commencing with the period beginning * and ending with the
three-month period ending *. Distributor may purchase any combination of AVE's
offered balloon angioplasty catheters with respect to such minimum purchase
requirements. After *, Distributor will cease to be subject to any minimum
purchase requirements with respect to balloon angioplasty catheters.
Coronary Stent Systems
Beginning with the AVE fiscal quarter immediately following the AVE fiscal
quarter in which Distributor obtains the necessary governmental registrations,
licenses and permits to market and sell such coronary stent systems in the
Territory, Distributor shall purchase in each AVE fiscal quarterly period at
least* coronary stent systems.
- --------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
<PAGE>
SCHEDULE C - TERRITORY
Entire country of Japan.
<PAGE>
SCHEDULE D - TRADEMARKS
Trademarks and trade names of AVE either pending or issued:
1. AVE
2. Arterial Vascular Engineering, Inc.
3. Arterial Vascular Engineering Canada, Inc.
4. The AVE Logo
5. Micro Stent
6. Micro Stent II*
7. Micro Stent II XL*
8. Micro Stent 2.5*
9. Micro Stent II LP*
10. Micro Stent II HP*
11. AVE gfx Stent*
12. Nike
13. Elite
14. Peak
- ----------------
* For purposes of this Agreement, such trademark may be used by Distributor in
the Territory in accordance with Section 5.5 only to the extent that the product
relating to such trademark is a Product pursuant to Schedule A.
<PAGE>
SCHEDULE E - PRICE LIST
The following list confirms the prices as mutually agreed by AVE and Distributor
for the Initial Term:
$ * per balloon angioplasty catheter (regardless of whether such catheter is a
Peak(TM), Elite(TM), Nike(TM) or improved or future version thereof).
$* per coronary stent system *; provided, however, that during the period
commencing with the date that Distributor obtains the necessary governmental
registrations, licenses and permits to market and sell such coronary stent
Products in the Territory and ending on the earlier of (i) the six-month
anniversary of such date and (ii) the date that Japanese insurance reimbursement
is granted for such Products, the purchase price for up to * coronary stent
systems per month shall be $* per coronary stent system (it being understood and
agreed that Distributor shall use its best efforts to market and sell such
coronary stent systems during the pre-reimbursement period and not to accumulate
them in its inventory); provided further, however, that during the AVE fiscal
quarter during which Distributor obtains the necessary governmental
registrations, licenses permits and approvals to market and sell such coronary
stent Products in the Territory (and only in the event and to the extent that
such registrations, licenses, permits and approvals are actually received), the
purchase price of up to * coronary stent systems shall be $* per coronary stent
system; and provided further, however, that if AVE fails to make available to
Distributor the number of coronary stent systems at the * price set forth in the
immediately preceding proviso within two months after their order by Distributor
(which order may be in reasonable anticipation of gaining the necessary
governmental approvals), then (i) if such failure is for any reason other than
the termination of this Agreement pursuant to Section 9.3, AVE shall* and (ii)
if such failure is because of the termination of this Agreement pursuant to
Section 9.3(d) prior to Distributor's having gained the necessary governmental
approvals to market and sell coronary stent Products in the Territory (whether
or not an order had been placed by Distributor), AVE shall * (A) * if the
termination occurs in the quarterly period ending March 31, 1997, (B) * if the
termination occurs in the quarterly period ending June 30, 1997, (C) * if the
termination occurs in the quarterly period ending September 30, 1997, and (D) *
if the termination occurs in (or after) the quarterly period ending December 31,
1997.
All prices are in U.S. dollars and are F.O.B. shipping point, Richmond, BC,
Canada
- --------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
<PAGE>
SCHEDULE F -- SPECIAL PAYMENT TERMS
With respect to Distributor's orders and purchases of AVE's coronary stent
products, Distributor will pay each of AVE's invoices as follows: (i) with
respect to invoices dated in the three-month period beginning with the first
such order, within * days after the date of the invoice; (ii) with respect to
the three-month period immediately following the three-month period in clause
(i), within * days after the date of the invoice; and (iii) for all subsequent
orders, within sixty (60) days after the date of the invoice.
- --------
* Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
<PAGE>
*
Certain confidential information contained in this document, marked by
asterisks, has been omitted and filed separately with the Securities and
Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
CHANGE IN CONTROL
OPTION VESTING ACCELERATION AGREEMENT
This change in control option vesting acceleration agreement (this
"Agreement") is made this ____ day of ____________, 1997, by and between
Arterial Vascular Engineering, Inc. (the "Company") and ____________
("Employee").
WHEREAS, Employee has recently been employed as the ___________________
of the Company; and
WHEREAS, the Company wishes to arrange for the continued availability
of Employee's services to the Company; and
WHEREAS, Employee desires to serve the Company.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the Company and Employee enter into this Agreement.
ARTICLE 1
DEFINITIONS
For purposes of the Agreement, the following terms shall have the
meanings set forth below:
1.1 "Annual Base Salary" means Employee's annual base salary at the
rate in effect during the last regularly scheduled payroll period immediately
preceding (i) the Change in Control or (ii) the Covered Termination, whichever
is greater.
1.2 "Change in Control" means the occurrence of any of the following
events:
(a) (i) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) fifty percent (50%) or more of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (ii) the
stockholders of the Company approve either a plan of liquidation or dissolution
of the Company or an agreement for the sale, lease, exchange or other transfer
or disposition by the Company of fifty percent (50%) or more of the Company's
assets;
(b) any person (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), is or becomes the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%) or
more of the Company's outstanding common stock; or
<PAGE>
(c) a change in the composition of the Company's
Board of Directors (the "Board") within a three (3)-year period, as a result of
which fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who (i) are directors of the Company on the date
of this Agreement or (ii) are directors that were nominated by the Company.
Notwithstanding the foregoing, "Incumbent Directors" shall not include
an individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company.
1.3 "Constructive Termination" means that the Employee voluntarily
terminates his employment after any of the following are undertaken without
Employee's express written consent:
(a) the assignment to Employee of any duties or
responsibilities which result in any diminution or adverse change of Employee's
position, status or circumstances of employment as in effect immediately prior
to a Change in Control of the Company; a change in Employee's titles or offices
as in effect immediately prior to a Change in Control of the Company which
results in any diminution or adverse change of Employee's position, status or
circumstances of employment; or any removal of Employee from or any failure to
re-elect Employee to any of such positions, except in connection with the
termination of his employment for death, disability, retirement, fraud,
misappropriation, embezzlement or any other voluntary termination of employment
by Employee other than a Constructive Termination;
(b) a reduction by the Company in Employee's Annual
Base Salary by greater than ten (10) percent;
(c) any failure by the Company to continue in effect
any benefit plan or arrangement, including incentive plans or plans to receive
securities of the Company, in which Employee is participating at the time of a
Change in Control of the Company (hereinafter referred to as "Benefit Plans"),
or the taking of any action by the Company which would materially adversely
affect Employee's participation in or reduce Employee's benefits under the
Benefit Plans or deprive Employee of any fringe benefit enjoyed by Employee at
the time of a Change in Control of the Company; provided, however, that no
Constructive Termination shall be deemed to occur following a Change in Control
of the Company if the Company offers a range of benefit plans and programs
which, taken as a whole, are comparable to the Benefit Plans as determined in
good faith by the Company;
(d) a relocation of Employee, or the Company's
principal offices if Employee's principal office is at such offices, to a
location more than forty (40) miles from the location at which Employee was
performing his duties prior to a Change in Control of the Company, except for
required travel by Employee on the Company's business to an extent substantially
consistent with Employee's business travel obligations at the time of a Change
in Control of the Company;
2
<PAGE>
(e) any material breach by the Company of any
provision of this Agreement; or
(f) any failure by the Company to obtain the
assumption of this Agreement by any successor or assign of the Company.
1.4 "Covered Termination" means an Involuntary Termination or a
Constructive Termination occurring in either case within one (1) year following
a Change in Control. No other event shall be a Covered Termination for purposes
of this Agreement.
1.5 "Involuntary Termination" means Employee's dismissal or discharge
by the Company (or, if applicable, by the successor entity) for reasons other
than commission of a felony or any other crime involving moral turpitude,
repeated failure to perform services in accordance with the requests of
superiors within the context of Employee's duties, or the commission of a
material fraud, misappropriation, embezzlement or other act of gross dishonesty
on the part of Employee which resulted in material loss, damage or injury to the
Company.
The termination of an Employee's employment would not be deemed to be
an "Involuntary Termination" if such termination occurs as a result of the death
or disability of Employee.
ARTICLE 2
EMPLOYMENT BY THE COMPANY
2.1 Responsibilities. Employee shall devote his full time and attention
during normal business hours to the business affairs of the Company, except for
reasonable vacations and for illness or incapacity. Nothing in this Agreement,
however, shall preclude Employee from devoting reasonable time required for
serving as a director or member of any committee of any organization involving
no conflict of interest with the interests of the Company, from engaging in
charitable and community activities, and from managing his personal affairs,
provided that such activities do not materially interfere with the regular
performance of duties and responsibilities under this Agreement.
2.2 Term of Agreement. This Agreement shall remain in full force and
effect so long as Employee is employed by Company; provided, however, that the
rights and obligations of the parties hereto contained in Articles 3 and 4 shall
survive any termination for the longer of (i) one year from the date of the
Agreement or (ii) one year following a Covered Termination.
3
<PAGE>
ARTICLE 3
OPTION VESTING ACCELERATION; ALTERNATIVE SEVERANCE BENEFITS
3.1 Stock Option Vesting Acceleration; Alternative Severance Benefits.
(a) All stock options held by Employee shall become fully vested and exercisable
immediately upon the occurrence of a Covered Termination; provided, however,
that if the Board, upon receipt of a written opinion of the Company's
independent auditors, (i) determines that the enforcement of this subsection
3.1(a) would preclude accounting for any proposed business combination involving
a Change in Control as a "pooling of interests" and (ii) otherwise desires to
approve a proposed Change in Control business combination which requires as a
condition to the closing of such transaction that it be accounted for as a
"pooling of interests," then this subection 3.1(a) shall become null and void
and of no force or effect, and Employee shall instead, upon the occurrence of a
Covered Termination, be entitled to the severance benefits set forth in
subsection 3.1(b). For purposes of this subsection 3.1(a), the Board's
determination shall require the unanimous approval of the non-employee members
of the Board.
(b) In the event that subsection 3.1(a) becomes null and void pursuant
to its terms, then Employee shall receive from the Company, upon the occurrence
of a Covered Termination, a cash amount equal to 100% of his total taxable
compensation (including, without limitation, salary, bonus and other
compensation) received from or payable by the Company during the 12-month period
ending on the date of the Covered Termination.
3.2 Employee Agreement and Release Prior to Receipt of Benefits. Upon
the occurrence of a Covered Termination, and prior to the receipt of any
benefits under this Agreement in connection with the occurrence of a Covered
Termination, Employee shall, as of the date of a Covered Termination, execute an
employee agreement and release in substantially the form attached hereto as
Exhibit A ("Agreement and Release"). Such Agreement and Release shall
specifically relate to all of Employee's rights and claims in existence at the
time of such execution and shall confirm Employee's obligations under the
Company's standard form of proprietary information agreement. It is understood
that Employee has twenty-one (21) days to consider whether to execute such
Agreement and Release and Employee may revoke such Agreement and Release within
seven (7) business days after execution of such Agreement and Release. In the
event Employee does not execute such Agreement and Release within the twenty-one
(21) day period, or if Employee revokes such Agreement and Release within the
seven (7) business-day period, no benefits shall be payable or otherwise become
effective under this Agreement and this Agreement shall be null and void.
3.3 Further Action. To the extent that Employee's stock option
agreements evidencing outstanding stock options do not provide for the
following, such agreements shall hereby be deemed to be amended (unless
subsection 3.1(a) becomes null and void) to provide for full vesting of stock
options upon the occurrence of a Covered Termination; provided, however, that to
the extent that an amendment would result in a charge to earnings for the
Company, no such amendment shall be deemed made until the earlier of (i) such
time as the aforementioned
4
<PAGE>
adverse effects shall not result from such amendment and (ii) immediately prior
to the occurrence of a Covered Termination.
3.4 Certain Reductions in Payments or Benefits. (a) In the event that
any payments or other benefits received or to be received by Employee pursuant
to this Agreement ("Payments") would (1) constitute a "parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), and (2) but for this Section 3.4, be subject to the excise tax
imposed by Section 4999 of the Code (the "Excise Tax"), then, in accordance with
this Section 3.4, such Payments shall be reduced to the maximum amount that
would result in no portion of the payments being subject to the Excise Tax, but
only if and to the extent that such a reduction would result in Employee's
receipt of Payments that are greater than the net amount that Employee would
receive hereunder (after application of the Excise Tax) if no reduction is made.
The amount of required reduction, if any, shall be the smallest amount so that
Employee's net proceeds with respect to the Payments (after taking into account
payment of any Excise Tax) shall be maximized, as determined by Employee.
Employee's determination of any required reduction pursuant to this subsection
3.4(a) shall be conclusive and binding upon the Company. The Company shall
reduce Payments in accordance with this subsection 3.4(a) only upon written
notice from Employee indicating the amount of such reduction, if any. If the
Internal Revenue Service (the "IRS") determines that a Payment is subject to the
Excise Tax, then subsection 3.4(b) shall apply.
(b) If, notwithstanding any reduction described in subsection 3.4(a)
(or in the absence of any such reduction), the IRS determines that Employee is
liable for the Excise Tax as a result of the receipt of Payments, then Employee
shall be obligated to pay back to the Company, within thirty (30) days after
final IRS determination, an amount of the Payments equal to the "Repayment
Amount." The Repayment Amount shall be the smallest such amount, if any, as
shall be required to be paid to the Company so that Employee's net proceeds with
respect to the Payments (after taking into account the payment of the Excise Tax
imposed on such Payments) shall be maximized. Notwithstanding the foregoing, the
Repayment Amount shall be zero if a Repayment Amount of more than zero would not
eliminate the Excise Tax imposed on the Payments. If the Excise Tax is not
eliminated pursuant to this subsection 3.4(b), Employee shall pay the Excise
Tax.
3.5 Certain Deferral of Payments. Notwithstanding the other provisions
of this Agreement, to the extent that any amounts payable pursuant to this
Agreement would not be deductible by the Company for federal income tax purposes
on account of the limitations of Section 162(m) of the Code, the Company may
defer payment of such amounts to the earliest one or more subsequent calendar
years in which the payment of such amounts would be deductible by the Company.
3.6 Non-Alienation of Benefits. No benefit hereunder shall be subject
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge, and any attempt to so subject a benefit hereunder shall be void.
5
<PAGE>
ARTICLE 4
GENERAL PROVISIONS
4.1 Notices. Any notices provided hereunder must be in writing and such
notices or any other written communication shall be deemed effective upon the
earlier of personal delivery (including personal delivery by telex or facsimile)
or five (5) days after mailing by first class mail, to the Company at its
primary office location and to Employee at his address as listed in the
Company's payroll records. Any payments made by the Company to Employee under
the terms of this Agreement shall be delivered to Employee either in person or
at his address as listed in the Company's payroll records.
4.2 Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
4.3 Waiver. If either party should waive any breach of any provisions
of this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
4.4 Complete Agreement. This Agreement, including Exhibit A and other
written agreements referred to in this Agreement, constitutes the entire
agreement between Employee and the Company and it is the complete, final, and
exclusive embodiment of their agreement with regard to this subject matter. This
Agreement is entered into without reliance on any promise or representation
other than those expressly contained herein.
4.5 Amendment or Termination of Agreement. This Agreement may be
amended or terminated only upon the mutual written consent of the Company and
Employee. The written consent of the Company to an amendment or termination of
this Agreement must be approved by the Compensation Committee of the Board after
such amendment or termination has been approved by such committee.
4.6 Counterparts. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
4.7 Headings. The headings of the Articles and Sections hereof are
inserted for convenience only and shall not be deemed to constitute a part
hereof nor to affect the meaning thereof.
6
<PAGE>
4.8 Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Employee and the Company, and
their respective successors, assigns, heirs, executors and administrators,
except that Employee may not assign any of his duties hereunder and he may not
assign any of his rights hereunder without the written consent of the Company,
which consent shall not be withheld unreasonably.
4.9 Arbitration. Any controversies or claims among the parties arising
out of or relating to this Agreement or any breach thereof that are not resolved
by their mutual agreement, shall, upon demand of either party, be submitted to
final and binding arbitration before J.A.M.S./ENDISPUTE, or its successor,
pursuant to the United States Arbitration Act, 9 U.S.C. Sec. 1 et seq. Either
party may commence the arbitration process called for in this agreement by
filing a written demand for arbitration with J.A.M.S./ENDISPUTE, with a copy to
the other party. The arbitration will be conducted in accordance with the
provisions of either J.A.M.S./ENDISPUTE's Streamlined Arbitration Rules and
Procedures (if the amount in dispute does not exceed $250,000) or
J.A.M.S./ENDISPUTE's Comprehensive Arbitration Rules and Procedures (if the
amount in dispute exceeds $250,000) in effect at the time of filing of the
demand for arbitration. The parties will cooperate with J.A.M.S./ENDISPUTE and
with one another in selecting an arbitrator from J.A.M.S./ENDISPUTE's panel of
neutrals, and in scheduling the arbitration proceedings. The parties covenant
that they will participate in the arbitration in good faith. The arbitrator, in
his or her discretion, shall be authorized to award the prevailing party
reimbursement of the costs and fees of J.A.M.S./ENDISPUTE and the arbitrator,
and reimbursement for its reasonable attorneys' fees, disbursements (inlcuding,
for example, expert witness fees and expenses, photocopy charges, travel
expenses, etc.) and costs arising from the arbitration; provided, however, that
until any such order is issued, the parties shall bear equally the costs and
fees of J.A.M.S./ENDISPUTE and the arbitrator. The arbitration will be conducted
in San Francisco, California. The arbitrator's decision may be enforced by any
court of competent jurisdiction, and the party seeking enforcement shall be
entitled to an award of all costs, fees and expenses, including reasonable
attorneys' fees, to be paid by the party against whom enforcement is ordered.
The arbitrator is specifically authorized to grant injunctive relief, either as
part of the final decision or prior to the final decision. The parties desire
that the courts promptly enforce all injunctive relief granted prior to final
decision as though it were part of the final decision, even though such
enforcement may be requested prior to final decision.
4.10 Choice of Law. All questions concerning the construction, validity
and interpretation of this Agreement will be governed by the law of the State of
California.
4.11 Non-Disclosure. The parties mutually agree not to disclose
publicly the fact that they are parties to this Agreement except to the extent
that disclosure is mandated by applicable law.
4.12 Construction. In the event of a conflict between the text of this
Agreement and any summary, description or other information regarding this
Agreement, the text of this Agreement shall control.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year written above.
ARTERIAL VASCULAR ENGINEERING, INC. EMPLOYEE
By:
------------------------------------ ------------------------------------
Bradly A. Jendersee
Duly Authorized by the Compens. Name:
Committee of the Board of Directors
Spousal Consent
Spousal consent not applicable (check if true) ___________
Spousal consent applicable: I hereby consent to this Agreement for purposes of
any community property interest I may have in the foregoing arrangements. I have
had the opportunity to seek independent counsel with regard to this consent and
have either consulted with counsel or voluntarily waive the right to such
counsel.
- ------------------------------------- ---------- --------------------------
Signature of Spouse Date Printed Name of Spouse
Exhibit A: Employee Agreement and Release
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EXHIBIT A
EMPLOYEE AGREEMENT AND RELEASE
I understand and agree completely to the terms set forth in the
foregoing agreement.
I hereby confirm my obligations under the Company's standard form of
proprietary information agreement.
Except as otherwise set forth in this Agreement, I hereby release,
acquit and forever discharge the Company, its parents and subsidiaries, and
their officers, directors, agents, servants, employees, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys fees, damages, indemnities
and obligations of every kind and nature, in law, equity, or otherwise, known
and unknown, suspected and unsuspected, disclosed and undisclosed (other than
any claim for indemnification I may have as a result of any third-party action
against me based on my employment with the Company), arising out of or in any
way related to agreements, events, acts or conduct at any time prior to and
including the execution date of this Agreement, including but not limited to:
all such claims and demands directly or indirectly arising out of or in any way
connected with my employment with the Company or the termination of that
employment, including but not limited to, claims of intentional and negligent
infliction of emotional distress; any and all tort claims for personal injury;
any and all claims or demands related to salary, bonuses, commissions, stock,
stock options, or any other ownership interests in the Company, vacation pay,
fringe benefits, expense reimbursements, severance pay, or any other form of
compensation(other than any claim for benefits expressly contemplated by the
Agreement); claims pursuant to any federal, state or local law or cause of
action including, but not limited to, the federal Civil Rights Act of 1964, as
amended; the federal Age Discrimination in Employment Act of 1967, as amended
("ADEA"); the federal Americans with Disabilities Act of 1990; the California
Fair Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; fraud; defamation; emotional distress; and breach of
the implied covenant of good faith and fair dealing.
I acknowledge that I am knowingly and voluntarily waiving and releasing
any rights I may have under ADEA. I also acknowledge that the consideration
given for the waiver and release in the preceding paragraph hereof is in
addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (A) my waiver and release do not apply to any rights or claims that may
arise after the Effective Date of this Agreement; (B) I have the right to
consult with an attorney prior to executing this Agreement; (C) I have
twenty-one (21) days to consider this Agreement (although I may choose to
voluntarily execute this Agreement earlier); (D) I have seven (7) days following
the execution of this Agreement by the parties to revoke the Agreement; and (E)
this Agreement shall not be effective until the date upon which the revocation
period has expired, which shall be the eighth day after this Agreement is
executed by me, provided that the Company has also executed this Agreement by
that date ("Effective Date").
In giving this release, which includes claims that may be unknown to me
at present, I acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must have materially
affected his settlement with the debtor." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the Company
By:
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Name:
Date:
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1
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is entered into as of February 3, 1997 (the "Effective
Date"), by and between Arterial Vascular Engineering, Inc., a Delaware
corporation (the "Company"), and Scott J. Solano (the "Executive").
WHEREAS, the Company desires to employ the Executive and the Executive
desires employment with the Company on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing recital and the
respective covenants and Agreements of the parties contained in this document,
the Company and the Executive agree as follows:
1. Employment.
(a) The Company hereby employs the Executive on a full time
exclusive basis to render services to the Company as Chief Operating Officer and
in connection therewith to perform such duties as the Company shall reasonably
require of the Executive.
(b) The Executive accepts this employment and agrees to
perform services for the Company and its subsidiaries and affiliates, loyally,
conscientiously and to the best of the Executive's talents and abilities during
the term of this Agreement.
(c) The Executive shall perform such services for the Company
as are customarily rendered by a Chief Operating Officer in the field of
percutaneous transluminal coronary angioplasty, coronary stents, peripheral
stents and such other areas as the Company may from time to time during the term
of this agreement become significantly involved (collectively referred to as the
"Field"), and such other related services as the Company may from time to time
reasonably request.
(d) The Executive may be designated an officer of the Company,
but the Executive shall not be entitled to any additional compensation for
holding any office. However, the Company agrees to indemnify the Executive
acting in an officer capacity to the fullest extent allowable under law.
(e) The Executive shall report only to the President, the
Chairman of the Board, and the Board of Directors of the Company.
2. Term.
The term of this Agreement (hereinafter the "Term") shall
commence on February 3, 1997 and shall continue through February 2, 2001 and may
be extended further by agreement of all parties.
3. Salary and Expenses.
The Company agrees to pay the Executive salary in accordance
with the Company's standard payroll practices applicable to executives, at the
rate of $200,000 per
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year ("Base Compensation"). Annually, the Board of Directors will review the
salary of the Executive and may increase the Executive's Base Compensation if it
believes an adjustment is appropriate in light of the Executive's duties, and
individual and corporate performance. The Executive shall be entitled to be
reimbursed by the Company for all normal and reasonable expenses incurred by the
Executive on behalf of the Company in connection with the Executive's services,
provided they are in accordance with approved Company policy, and subject to
submission of documentation therefor as required from time to time by the
Company.
4. Life Insurance.
(a) The Company shall have the right to purchase life
insurance on the Executive's life, for which the Company will be the
beneficiary. The Executive represents that to the best of the Executive's
knowledge the Executive is currently in good health, and insurable at normal
rates.
(b) Based upon the foregoing representation being accurate,
the Company shall provide the Executive with term life insurance in the amount
of $500,000, provided that the cost of such insurance shall not exceed normal
rates.
5. Benefits.
The Executive shall be entitled to four weeks of vacation a
year, and subject to the terms and conditions of the Company's plans (including,
where applicable, insurability at normal rates), the Company shall furnish the
Executive with medical insurance and benefits in accordance with Company
policies from time to time in effect for Executives at the Executive's level of
employment. In this connection and for the purposes described in paragraph 4,
the Executive agrees to furnish such applications and submit to such medical
examination as may be required.
6. Representation.
The Executive represents and warrants to the Company that the
Executive is free to enter into this Agreement, and is not subject to any
restrictions or Agreements relating to prior employment.
7. Exclusivity.
(a) The Executive shall be free to consult to, serve on the
board of directors of, purchase shares of and otherwise assist other companies
during the term of this Agreement, provided that such activities do not
interfere with the Executive's duties hereunder and do not violate the
restriction in paragraphs 7(b) and (c).
(b) Except with the Company's prior written consent, during
the Term hereof, the Executive shall not (except pursuant to this Agreement)
directly or indirectly enter the employ of or render any services in the United
States, Europe or Asia to any person, firm or corporation engaged in the
business of providing products or services in the Field. Further, during said
period the Executive shall not engage in such business on the Executive's own
account and the Executive shall not become interested in any such business
directly or indirectly, as an individual, partner, shareholder, director,
officer, principal, agent, Executive, trustee, consultant, or in any other
relationship or capacity, except as permitted by paragraph 8.
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(c) Except with the Company's prior written consent or in the
performance of the Executive's duties hereunder, the Executive shall not consult
with or give any advice to any third party in any way relating to the Field
while the Executive is employed by the Company.
(d) For purposes of this paragraph 7, the Company hereby
consents to the following outside activities: None.
8. Rights of Company.
The provisions of paragraphs 1, 7 and 12 are of the essence of
this Agreement and the material breach of any of them shall be grounds for the
immediate termination of the Executive's services. Notwithstanding the
foregoing, with respect to nonwillful breaches, the Executive shall be given
notice thereof and one week to cure the breach. Nothing contained in such
paragraphs shall be deemed to prohibit the Executive from acquiring, solely as
an investment, shares of capital stock of any publicly traded corporation in the
Field, provided that such investment does not exceed 5% of the stock of such
public corporation, and provided that such investment may exceed 5% with the
approval of the Board of Directors.
9. Termination.
(a) If the Executive shall become physically or mentally
disabled so that the Executive is unable to fully perform the services
hereunder, the Company shall continue to pay the Executive compensation (less
the amount of any disability insurance the Executive receives from Company
sources) only during the first twelve weeks of such incapacity. If such
incapacity continues for a period of 12 consecutive weeks or for shorter periods
aggregating 110 days during any 12-month period of the Term hereof, the Company
may at any time within 10 business days after the end of the aforesaid
disability period terminate the Term of this Agreement by written notice to the
Executive. If the Company terminates the Term of this Agreement by reason of the
Executive's disability, the restriction contained in paragraph 7(b) of this
Agreement shall also terminate.
(b) If the Executive shall die during the Term, this Agreement
shall automatically terminate and no further compensation shall accrue to the
Executive following the date of the Executive's death. Compensation which has
accrued prior to death shall be paid.
(c) The Company shall have the right to terminate the Term and
to discharge the Executive for Cause (as defined below) upon written notice. If
the Company discharges the Executive for Cause, the restrictions contained in
paragraph 7 shall remain in effect.
10. Severance Benefits.
(a) In the event the Executive's employment is terminated as a
result of an Involuntarily Termination during the Term for any reason (other
than for Cause), either prior to the occurrence of a Change of Control or after
the two-year period following a Change of Control, then the Executive shall be
entitled to receive severance pay which equals one half of the Executive's then
current Base Compensation. Any such severance payment to
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which the Executive is entitled to receive pursuant to such Involuntary
Termination shall be paid in one lump sum, payable on the Termination Date.
(b) If there is a Change of Control during the term of this
Agreement, and the Executive's employment terminates as a result of Involuntary
Termination other than for Cause at any time within two years after such Change
of Control, then the Executive shall be entitled to receive severance pay which
equals the Executive's then current Base Compensation. In addition to the amount
of severance pay that the Executive is entitled to receive in the event of an
Involuntary Termination of the Executive's employment other than for Cause, the
Executive shall be entitled to receive (a) vacation pay equal to the amount of
compensation for accrued but unused vacation time, payable in a lump sum at the
time of or prior to the Termination Date and (b) for the twelve months following
the Termination Date, all benefits which existed prior to termination as are
provided by the Company. Any severance payments to which the Executive is
entitled to receive pursuant to an Involuntary Termination shall be paid in two
equal sums, payable on the Termination Date and on the six month anniversary of
the Termination Date.
(c) If the Executive is terminated for Cause, then the
Executive shall not be entitled to receive severance or other benefits except
for those statutorily required.
(d) If the Company terminates the Executive's employment as a
result of the Executive's Disability, or such Executive's employment is
terminated due to the death of the Executive, then the Executive shall not be
entitled to receive severance or other benefits except for those (if any) as may
then be established under the Company's then existing severance and benefits
plans and policies at the time of such Disability or death.
(e) If the Executive's employment is terminated by the
Executive's voluntary resignation prior to a Change of Control, then the
Executive shall not be entitled to receive severance pay.
(f) If the Executive's employment is terminated by the
Executive's voluntary resignation subsequent to a Change of Control, then the
Executive shall be entitled to receive severance pay which equals one-half of
the Executive's then current Base Compensation. Any severance payments to which
the Executive is entitled to receive pursuant to a voluntary resignation
subsequent to a Change of Control shall be paid in six equal sums, payable on
the Termination Date and on each of the five monthly anniversaries of the
Termination Date thereafter.
(g) If there is a Change of Control during the term of this
Agreement, and the Executive's employment terminates as a result of an
Involuntary Termination other than for Cause at any time within two years after
such Change of Control, 100% of the unvested portion of any stock options held
by the Executive under the Company's stock option plans shall automatically be
accelerated and the Executive or the Executive's representative, as the case may
be, shall have the right to exercise all or any portion of such stock option, in
addition to any portion of the option exercisable prior to the Change of
Control; provided, however, that if the Company's Board of Directors (the
"Board"), upon receipt of a written opinion of the Company's independent
auditors, (i) determines that the enforcement of this paragraph 10(g) would
preclude accounting for any proposed business combination involving a Change in
Control as a
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"pooling of interests" and (ii) otherwise desires to approve a proposed Change
in Control business combination which requires as a condition to the closing of
such transaction that it be accounted for as a "pooling of interests," then this
paragraph 10(g) shall become null and void and of no force or effect, and
Executive shall instead, upon the occurrence of an Involuntary Termination other
than for Cause at any time within two years after a Change of Control, be
entitled to the severance benefits set forth in paragraph 10(h). For purposes of
this paragraph 10(g), the Board's determination shall require the unanimous
approval of the non-employee members of the Board.
(h) In the event that paragraph 10(g) becomes null and void
pursuant to its terms, then Executive shall receive from the Company, upon the
occurrence of an Involuntary Termination other than for Cause at any time within
two years after a Change of Control and in addition to any other severance
benefits payable under this Agreement, a cash amount equal to 50% of his total
taxable compensation (including, without limitation, salary, bonus and other
compensation) received from or payable by the Company during the 12-month period
ending on the date of the Involuntary Termination other than for Cause.
(i) Upon the occurrence of an Involuntary Termination other
than for Cause, and prior to the receipt of any benefits under this Agreement in
connection with the occurrence of an Involuntary Termination other than for
Cause, Executive shall, as of the date of an Involuntary Termination other than
for Cause, execute an Executive agreement and release in substantially the form
attached hereto as Exhibit A ("Agreement and Release"). Such Agreement and
Release shall specifically relate to all of Executive's rights and claims in
existence at the time of such execution and shall confirm Executive's
obligations under the Company's standard form of proprietary information
agreement. It is understood that Executive has twenty-one (21) days to consider
whether to execute such Agreement and Release and Executive may revoke such
Agreement and Release within seven (7) business days after execution of such
Agreement and Release. In the event Executive does not execute such Agreement
and Release within the twenty-one (21) day period, or if Executive revokes such
Agreement and Release within the seven (7) business-day period, no benefits
shall be payable or otherwise become effective under this Agreement.
(j) To the extent that Executive's stock option agreements
evidencing outstanding stock options do not provide for the following, such
agreements shall hereby be deemed to be amended (unless paragraph 10(g) becomes
null and void) to provide for full vesting of stock options upon the occurrence
of an Involuntary Termination other than for Cause at any time within two years
after a Change of Control; provided, however, that to the extent that an
amendment would result in a charge to earnings for the Company, no such
amendment shall be deemed made until the earlier of (i) such time as the
aforementioned adverse effects shall not result from such amendment and (ii)
immediately prior to the occurrence of an Involuntary Termination other than for
Cause at any time within two years after a Change of Control.
(k) In the event that any payments or other benefits received
or to be received by Executive pursuant to this Agreement ("Payments") would (1)
constitute a "parachute payment" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and (2) but for this
paragraph 10(k), be subject to the excise tax imposed by Section 4999 of the
Code (the "Excise Tax"), then, in accordance with this paragraph 10(k), such
Payments shall be reduced to the maximum amount that would result in no portion
of the payments being subject to the Excise Tax, but only if and to the extent
that such a reduction would result in Executive's receipt of Payments that are
greater than the net amount that Executive would receive hereunder (after
application of the Excise Tax) if no reduction is made. The amount of required
reduction, if any, shall be the smallest amount so that Executive's net proceeds
with respect to the
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Payments (after taking into account payment of any Excise Tax) shall be
maximized, as determined by Executive. Executive's determination of any required
reduction pursuant to this paragraph 10(k) shall be conclusive and binding upon
the Company. The Company shall reduce Payments in accordance with this paragraph
10(k) only upon written notice from Executive indicating the amount of such
reduction, if any. If the Internal Revenue Service (the "IRS") determines that a
Payment is subject to the Excise Tax, then paragraph 10(l) shall apply.
(l) If, notwithstanding any reduction described in paragraph
10(k) (or in the absence of any such reduction), the IRS determines that
Executive is liable for the Excise Tax as a result of the receipt of Payments,
then Executive shall be obligated to pay back to the Company, within thirty (30)
days after final IRS determination, an amount of the Payments equal to the
"Repayment Amount." The Repayment Amount shall be the smallest such amount, if
any, as shall be required to be paid to the Company so that Executive's net
proceeds with respect to the Payments (after taking into account the payment of
the Excise Tax imposed on such Payments) shall be maximized. Notwithstanding the
foregoing, the Repayment Amount shall be zero if a Repayment Amount of more than
zero would not eliminate the Excise Tax imposed on the Payments. If the Excise
Tax is not eliminated pursuant to this paragraph 10(l), Executive shall pay the
Excise Tax.
(m) Notwithstanding the other provisions of this Agreement, to
the extent that any amounts payable pursuant to this Agreement would not be
deductible by the Company for federal income tax purposes on account of the
limitations of Section 162(m) of the Code, the Company may defer payment of such
amounts to the earliest one or more subsequent calendar years in which the
payment of such amounts would be deductible by the Company.
11. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) "Change of Control" shall mean the occurrence of any of
the following events:
(i) Any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 50% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) The shareholders of the Company approve a (A)
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or (B) a plan of
complete liquidation of the Company or an Agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
(b) "Involuntary Termination" shall mean (i) without the
Executive's express written consent, the assignment to the Executive of any
duties or the significant reduction of the Executive's duties, either of which
is without good business reasons and
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is inconsistent with the Executive's position with the Company and
responsibilities in effect immediately prior to such assignment, or the removal
of the Executive from such position and responsibilities; (ii) without the
Executive's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Executive immediately prior to such reduction; (iii)
a reduction by the Company in the Base Compensation of the Executive as in
effect immediately prior to such reduction; (iv) a material reduction by the
Company in the kind or level of Executive benefits to which the Executive is
entitled immediately prior to such reduction with the result that the
Executive's overall benefits package is significantly reduced; (v) the
relocation of the Executive to a facility or a location more than 25 miles from
the Executive's then present location, without the Executive's express written
consent; (vi) any purported termination of the Executive by the Company which is
not effected for Disability or for Cause, or any purported termination for which
the grounds relied upon are not valid; or (vii) the failure of the Company to
obtain the assumption of this Agreement by any successors.
(c) "Cause" shall mean the commission of a felony or any other
crime involving moral turpitude, repeated failure to perform services in
accordance with the requests of superiors within the context of the Executive's
duties as described in this Agreement, the commission of any material fraud or
act of gross dishonesty, willful misconduct which causes harm, gross negligence
or a material breach of this Agreement.
(d) "Disability" shall mean that the Executive has been unable
to perform his duties under this Agreement as the result of the Executive's
incapacity due to physical or mental illness, and such inability, after at least
12 consecutive weeks or shorter periods aggregating 110 days during any 12-month
period, is determined to be total and permanent by a physician selected by the
Company or its insurers and acceptable to the Executive or the Executive's legal
representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days' written notice by the Company of its intention to terminate the
Executive's employment. In the event that the Executive resumes the performance
of substantially all of the Executive's duties hereunder before the termination
of the Executive's employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
(e) "Termination Date" shall mean (i) if this Agreement is
terminated by the Company for Disability, thirty (30) days after notice of
termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such thirty (30) day period), (ii) if the Executive's employment is
terminated by the Company for any other reason, the date on which a notice of
termination is given, provided that if within thirty (30) days after the Company
gives the Executive notice of termination, the Executive notifies the Company
that a dispute exists concerning the termination, the Termination Date shall be
the date on which the dispute is finally determined, either by mutual written
Agreement of the parties, by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Executive, the date on which the Executive delivers the notice of termination to
the Company.
12. Confidentially.
Prior hereto or concurrently herewith, the Executive has
signed or shall sign the Company's standard Proprietary Information Agreement.
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13. General.
(a) Applicable Law Controls. Nothing contained in this
Agreement shall be construed to require the commission of any act contrary to
law, and wherever there is any conflict between any provisions of this Agreement
and any material statute, law, ordinance or regulation contrary to which the
parties have no legal right to contract, then the latter shall prevail;
provided, however, that in any such event the provisions of this Agreement so
affected shall be curtailed and limited only to the extent necessary to bring
them within applicable legal requirements.
(b) Waiver/Estoppel. Any party hereto may waive the benefit of
any term, condition or covenant in this Agreement or any right or remedy at law
or in equity to which any party may be entitled but only by an instrument in
writing signed by the parties to be charged. The parties' rights and remedies
under and pursuant to this Agreement or at law or in equity shall be cumulative
and the exercise of any rights or remedies under one provision hereof shall not
be deemed an election of remedies; and any waiver or forbearance or any breach
of this Agreement or remedy granted hereunder or at law or in equity shall not
be deemed a waiver of any preceding or succeeding breach of the same or any
other provision hereof or of the opportunity to exercise such right or remedy or
any other right or remedy, whether or not similar, at any preceding or
subsequent time.
(c) Governing Law. This Agreement shall be governed by,
construed and enforced, and the legality and validity of each term and condition
shall be determined, in accordance with the laws of the State of California
applicable without regard to the principles of conflicts of laws.
(d) Captions. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
(e) No Joint Venture. Nothing herein contained shall
constitute a partnership between or a joint venture by the parties hereto or
appoint any party the agent of any other party. No party shall hold itself out
contrary to the terms of this paragraph and, except as otherwise specifically
provided herein, no party shall become liable for the representations, act or
omission of any other party. This Agreement is not for the benefit of any third
party who is not referred to herein and shall not be deemed to give any right or
remedy to any such third party.
(f) Assignment. The Company may assign this Agreement to any
entity into which or with which it may merge or which acquires a substantial
portion of its assets or business or with whom it has a joint venture,
partnership or other business relationship. Notwithstanding the foregoing
provision of this paragraph, no such assignment shall relieve the assignor from
any of its obligations hereunder or change any of the terms and provisions of
Executive's employment hereunder. This Agreement shall be fully effective and
binding upon the successors in interest, predecessors in interest, assigns and
affiliates and subsidiaries of the Company.
(g) Modification/Entire Agreement. This Agreement may not be
altered, modified or amended except by an instrument in writing signed by all of
the parties hereto. No person, whether or not an officer, agent, employee or
representative of
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any party, has made or has any authority to make for or on behalf of that party
any Agreement, representation, warranty statement, promise, arrangement or
understanding not expressly set forth in this Agreement. This Agreement
constitutes the entire Agreement between the parties and supersedes all prior
Agreements with respect to the subject matter hereof.
14. Counterparts. This Agreement may be executed in counterparts, which
together will constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EXECUTIVE ARTERIAL VASCULAR ENGINEERING, INC.
/s/ Scott J. Solano /s/ Brad Jendersee
- ------------------------- --------------------------
Scott J. Solano Brad Jendersee
President and Chief Executive Officer
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Consent of Spouse: I hereby consent to this Agreement for purposes of any
community property interest I may have in the foregoing arrangements. I have had
the opportunity to seek independent counsel with regard to this consent and
knowingly and voluntarily waive the right to such counsel.
/s/ Jeanmarie Solano
- -------------------------
Signature of Spouse
Jeanmarie Solano
- -------------------------
Printed Name of Spouse
Feb. 14, 1997
- -------------------------
Date Signed
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EXHIBIT A
EXECUTIVE AGREEMENT AND RELEASE
I understand and agree completely to the terms set forth in the
foregoing agreement.
I hereby confirm my obligations under the Company's standard form of
proprietary information agreement.
Except as otherwise set forth in this Agreement, I hereby release,
acquit and forever discharge the Company, its parents and subsidiaries, and
their officers, directors, agents, servants, employees, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys fees, damages, indemnities
and obligations of every kind and nature, in law, equity, or otherwise, known
and unknown, suspected and unsuspected, disclosed and undisclosed (other than
any claim for indemnification I may have as a result of any third-party action
against me based on my employment with the Company), arising out of or in any
way related to agreements, events, acts or conduct at any time prior to and
including the execution date of this Agreement, including but not limited to:
all such claims and demands directly or indirectly arising out of or in any way
connected with my employment with the Company or the termination of that
employment, including but not limited to, claims of intentional and negligent
infliction of emotional distress; any and all tort claims for personal injury;
any and all claims or demands related to salary, bonuses, commissions, stock,
stock options, or any other ownership interests in the Company, vacation pay,
fringe benefits, expense reimbursements, severance pay, or any other form of
compensation(other than any claim for benefits expressly contemplated by the
Agreement); claims pursuant to any federal, state or local law or cause of
action including, but not limited to, the federal Civil Rights Act of 1964, as
amended; the federal Age Discrimination in Employment Act of 1967, as amended
("ADEA"); the federal Americans with Disabilities Act of 1990; the California
Fair Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; fraud; defamation; emotional distress; and breach of
the implied covenant of good faith and fair dealing.
I acknowledge that I am knowingly and voluntarily waiving and releasing
any rights I may have under ADEA. I also acknowledge that the consideration
given for the waiver and release in the preceding paragraph hereof is in
addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (A) my waiver and release do not apply to any rights or claims that may
arise after the Effective Date of this Agreement; (B) I have the right to
consult with an attorney prior to executing this Agreement; (C) I have
twenty-one (21) days to consider this Agreement (although I may choose to
voluntarily execute this Agreement earlier); (D) I have seven (7) days following
the execution of this Agreement by the parties to revoke the Agreement; and (E)
this Agreement shall not be effective until the date upon which the revocation
period has expired, which shall be the eighth day after this Agreement is
executed by me, provided that the Company has also executed this Agreement by
that date ("Effective Date").
In giving this release, which includes claims that may be unknown to me
at present, I acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must have materially
affected his settlement with the debtor." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the Company.
By:
--------------------------------------
Name:
Date:
--------------------------------------
<TABLE>
EXHIBIT 11.1
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary
Weighted average common shares
outstanding 30,959 21,978 30,910 19,973
Weighted average common equivalent
shares assuming conversion of stock
options under the treasury stock method 631 1,699 701 3,697
Common and common equivalent shares
pursuant to Staff Accounting Bulletin No. 83 -- 3,631 -- 3,631
------- ------- ------- -------
Shares used in per share calculation 31,590 27,308 31,611 27,301
------- ------- ------- -------
Net income $ 4,606 $ 4,871 $12,371 $ 9,627
======= ======= ======= =======
Net income per share $ 0.15 $ 0.18 $ 0.39 $ 0.35
======= ======= ======= =======
<FN>
Net income per share is presented under the Primary basis as the effect of
dilution under the fully diluted basis is less than 3%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,319
<SECURITIES> 63,091
<RECEIVABLES> 19,085
<ALLOWANCES> 404
<INVENTORY> 6,029
<CURRENT-ASSETS> 117,956
<PP&E> 17,776
<DEPRECIATION> 1,704
<TOTAL-ASSETS> 134,622
<CURRENT-LIABILITIES> 5,290
<BONDS> 0
<COMMON> 31
0
0
<OTHER-SE> 129,301
<TOTAL-LIABILITY-AND-EQUITY> 134,622
<SALES> 36,796
<TOTAL-REVENUES> 36,796
<CGS> 6,644
<TOTAL-COSTS> 6,644
<OTHER-EXPENSES> 13,449
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,032
<INCOME-TAX> 6,661
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,371
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
