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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996, or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to .
COMMISSION FILE NUMBER: 0-19707
INNERDYNE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 87-0431168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1244 Reamwood Avenue, Sunnyvale, CA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 745-6010
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $44,700,828 as of February 28, 1997, based upon
the closing sale price of the issuer's Common Stock on the Nasdaq National
Market reported for such date. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
There were 21,618,658 shares of issuer's Common Stock issued and
outstanding as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be held on May 23, 1997 are incorporated by reference into
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
InnerDyne, Inc. (the "Company" or "InnerDyne") is primarily focused upon
the development and commercialization of access products used to perform
minimally invasive surgical ("M.I.S.") procedures. In December 1996, the
Company announced the signing of an agreement which grants United States
Surgical Corporation ("U.S. Surgical") exclusive worldwide sales and
marketing rights for the Company's proprietary thermal ablation technology.
The Company intends to continue developing its radial dilation and
biocompatible coating technologies, internally or through strategic alliances.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K, THE MATTERS DISCUSSED THROUGHOUT THIS ANNUAL REPORT ON FORM 10-K
ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
INCLUDE, BUT ARE NOT LIMITED TO, THE IMPACT OF INTENSE COMPETITION IN THE
COMPANY'S MARKET, THE EXTENT OF MARKET ACCEPTANCE OF THE COMPANY'S STEP-TM-
FAMILY OF PRODUCTS, THE TIMELY DEVELOPMENT AND MARKET ACCEPTANCE OF NEW
PRODUCTS, THE COMPLIANCE OF THE COMPANY'S MANUFACTURING FACILITIES WITH GOOD
MANUFACTURING PRACTICES ("GMP") REGULATIONS, THE CONTINUED ACCEPTANCE OF
MINIMALLY INVASIVE SURGICAL PROCEDURES, THE COMPANY'S ABILITY TO FURTHER
EXPAND INTO INTERNATIONAL MARKETS, PUBLIC POLICY RELATING TO HEALTH CARE
REFORM IN THE UNITED STATES AND OTHER COUNTRIES, APPROVAL OF THE COMPANY'S
PRODUCTS BY GOVERNMENT AGENCIES SUCH AS THE UNITED STATES FOOD AND DRUG
ADMINISTRATION (THE "FDA") AND THE RISKS SET FORTH IN GREATER DETAIL BELOW
UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND INCLUDED FROM TIME TO TIME IN THE COMPANY'S
OTHER SECURITIES AND EXCHANGE COMMISSION ("SEC") REPORTS AND PRESS RELEASES,
COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY UPON REQUEST. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
INDUSTRY BACKGROUND
MINIMALLY INVASIVE SURGICAL PROCEDURES
Medical practitioners have, for many years, sought means to improve the
care of their patients and minimize the trauma and recovery time associated
with such care. In recent years, as life expectancy has increased, overall
health care costs have far outpaced the average inflation rate. The
performance of surgical procedures utilizing minimally invasive techniques
has been a response to both the need to continuously improve the quality of
patient care and the increasing pressures to control the total cost of
providing that care. Minimally invasive surgical procedures typically involve
a few small incisions rather than the large incisions used in traditional
open surgery, thereby reducing patient trauma. M.I.S. procedures require
three basic capabilities: (1) a means to gain access to the treatment site;
(2) a means to assess the treatment site; and (3) a means to provide therapy.
Although less invasive alternatives to traditional open surgery have
existed for a number of years, the trend towards minimally invasive
techniques was not widespread until the late 1980's. At that time, surgeons
developed and perfected a technique for gall bladder removal through the use
of specialized access, diagnostic and treatment devices. By 1994, an
estimated 85% of the approximately 625,000 gall bladder procedures in the
United States were performed using minimally invasive techniques. A number of
surgical procedures other than gall bladder surgery are undergoing conversion
to minimally invasive approaches, including the treatment of gynecological
disorders and the diagnosis and treatment of vascular disease. In addition,
M.I.S. procedures may be useful for intra-organ diagnostic and treatment
procedures. It is estimated that in 1994 over 1.0 million procedures
traditionally accomplished through open surgery were performed in the United
States using M.I.S. techniques. M.I.S. procedure growth is expected to
significantly outpace increases in total surgical procedures for the balance
of the decade. It is estimated that more than 5.3 million domestic surgical
procedures performed in 1994 were considered to be potential candidates for
minimally invasive approaches.
M.I.S. ACCESS DEVICES
The trocar is the conventional device that is used by surgeons to access
a possible treatment site in a M.I.S. procedure. A trocar is generally a
sharply pointed cutting instrument surrounded by a rigid sheath, or cannula,
that is forced through the abdominal wall by the surgeon and cuts through the
muscle and skin layers which make up the abdominal wall. Trocar insertion is
normally preceded by the insertion of an insufflation (inflation) needle into
the
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abdominal cavity through which a gas can be pumped to insufflate the
abdominal cavity as a means of providing working space and added clearance
such that internal body organs are less likely to be damaged as the
sharp-bladed trocar is inserted. Once a trocar has penetrated the abdominal
wall, the cutting surface is removed, leaving the cannula through which
instruments and diagnostic tools can be placed into the abdominal cavity of
the patient. The proximal end of the trocar, which remains outside the body,
is normally equipped with a valve system designed to allow the passage of
instruments while maintaining the insufflation gas pressure. Trocars are most
commonly provided in 5mm, 10mm and 12mm working channel sizes, and leave
residual wounds which approximate these nominal sizes. From one to as many as
five trocars are used for access in M.I.S. procedures, depending on the
extent and complexity of the particular procedure. In addition, anchors are
frequently used with trocars to assure maintenance of insufflation pressure
and to prevent slippage of the trocars as instruments are passed through them
during a procedure. These anchor devices, when used, can further enlarge the
wound size and increase trauma to adjacent tissues.
Trocars consist of two types: disposable and reusable. Industry sources
estimate that in 1995 sales of disposable trocars in the United States
totaled approximately $230 to $240 million and that global sales totaled
approximately $300 million. Reusable trocars are used to a greater extent
internationally than in the United States. Reusable trocars must be sharpened
from time to time when they become dull. Between sharpening and after a
number of sharpenings, a reusable trocar may not consistently and cleanly cut
through the muscle and skin layers that make up the abdominal wall. As a
result, the potential risk of serious trauma to the patient is increased
because greater pressure must be applied to force the trocar through the
abdominal wall, causing it to partially collapse and reduce the space created
by the insufflation. In addition, as a trocar is a sharply-pointed cutting
instrument, medical personnel that handle and clean reusable trocars are
subject to the risk of cuts and skin punctures from a device that has been in
contact with a patient's blood.
Another device commonly used in M.I.S. procedures is the percutaneous
catheter. A number of minimally invasive percutaneous catheter-based
therapies have been developed to treat vascular disease, including coronary
and peripheral transluminal angioplasty, artherectomy and vascular stenting.
In addition, minimally invasive catheter-based diagnostic procedures such as
x-ray angiography and ultrasound imaging are also used by physicians in
connection with therapeutic procedures. Industry sources estimate that in
1995 approximately 4 million minimally invasive vascular access procedures
were performed worldwide.
The conventional technique used to access the vasculature suffers from
certain drawbacks. If a physician needs to utilize a device that exceeds the
diameter of the introducer sheath, the physician must insert a new sheath
with a wider diameter. Depending on the width and number of devices used by
the physician, this process can increase the likelihood of trauma to the
arterial vessel. Additionally, following catheter-based procedures, the
physician must close the arterial access site. In current practice,
anticoagulation therapy is generally discontinued for up to four hours prior
to closure of the access site to allow the patient's clotting function to
normalize. During this period the patient must remain immobile to prevent
bleeding at the access site. The Company believes that a less traumatic means
of vascular access could potentially offer advantages over conventional
techniques.
Advanced access devices may also prove useful for intra-organ surgical
procedures. The surgical treatment of an organ deep within the abdominal
cavity is typically conducted through open surgery, involving a 3 to 5 inch
or larger incision that is made in the abdominal wall to give access to the
organ. Open surgery requires a hospital stay and a prolonged recovery
period. Alternatively, the organ can be treated through a less invasive
technique that involves the insertion of a long flexible channel and scope
through a natural body orifice such as the mouth or the rectum to gain access
to the organ. However, this technique is limited in its effectiveness due to
the restricted size of the channel and the torturous path that must be
navigated by the scope.
TREATMENT FOR MENORRHAGIA
In recent years, M.I.S. procedures have been developed to treat
excessive menstrual bleeding. Women who perceive their menstrual bleeding to
be excessive, including women who are clinically diagnosed with excessive
menstrual bleeding ("menorrhagia"), may seek treatment if this condition
interferes with their daily lives. A World Health Organization survey of
menstrual perceptions and patterns among 5,322 women in 10 countries found
that approximately 19% of women consider their menstruation abnormally heavy.
The most common surgical procedure for definitive treatment of excessive
menstrual bleeding is hysterectomy, the surgical removal of the uterus
through the vagina or abdominal wall, which results in permanent infertility.
Industry sources estimate that approximately 19% of the estimated 600,000
hysterectomy procedures in the United States each year are performed to treat
excessive menstrual bleeding. Currently available, less invasive treatment
options include long-term drug therapy using estrogen-progesterone
medications or other drugs such as GnRH agonists, temporary treatment by
dilatation and curettage, a procedure generally used in conjunction with drug
therapy in which the uterine contents are either scraped away by an
instrument or removed
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through vacuum aspiration, and surgical endometrial ablation. Surgical
endometrial ablation is a minimally invasive procedure that utilizes a
resectoscope, a video monitor, a fluid distention medium such as glycine or
sorbitol, and a surgical ablation device such as an electrode loop,
rollerball or laser.
Each of these treatment methods bears certain risks and limitations. A
hysterectomy can require up to seven days of hospitalization and eight weeks
of recovery time, depending on the type of hysterectomy performed. Serious
complications from hysterectomy include hemorrhaging requiring blood
transfusions, injury to the bowel or bladder, intestinal obstruction,
life-threatening cardiopulmonary events and death. Other complications
include postoperative fever and infections. Although less invasive than a
hysterectomy, the dilatation and curettage procedure must be repeated
periodically, since it is usually effective only during the first few
menstrual cycles after the procedure, and consequently subjects the patient
to the risks of uterine perforation, infection and the complications of
general anesthesia each time it is performed. Uterine perforation is a
possible complication of surgical endometrial ablation and is potentially
fatal when it results in damage to the internal iliac vessels, ureter, bowel
or bladder. Other complications of surgical endometrial ablation include
major hemorrhaging from uterine vessels, air embolus from gas-cooled lasers,
postoperative intrauterine or tubal infection, complications associated with
general anesthesia and fluid overload due to use of glycine and sorbitol.
Surgical endometrial ablation will also result in patient infertility.
In light of the limitations of current therapies for menorrhagia, other
less invasive procedures are currently being developed. Although these
procedures also result in patient infertility, they are designed to result in
fewer complications and adverse side effects and a shorter recovery time.
These procedures include endometrial ablation techniques that employ radio
frequency ("RF") energy or freezing techniques and techniques that are
designed to treat excessive menstrual bleeding by thermally ablating the
endometrial lining of the uterus through the introduction of a heated balloon
catheter or a heated solution. These procedures are designed to destroy the
endometrial lining, thereby reducing or eliminating excessive menstrual
bleeding.
BIOCOMPATIBLE COATING TECHNOLOGIES
Cardiovascular disease is the leading cause of death in the United
States. Atherosclerosis, the principal cause of cardiovascular disease,
results from the progressive accumulation of plaque as a result of the
deposit of cholesterol and other fatty materials on the walls of arteries.
Atherosclerosis results in reduced blood flow to the muscles of the heart and
peripheral anatomy. Atherosclerosis in the coronary arteries can ultimately
lead to heart attack and death. Arteries diseased with atherosclerosis may be
treated with medical procedures designed to increase blood flow. Established
treatments include open heart surgery, a highly invasive surgical procedure,
and less invasive percutaneous catheter-based procedures such as coronary and
peripheral transluminal angioplasty.
In recent years, a number of new percutaneous catheter-based therapies
have been developed to increase blood flow, including atherectomy and
vascular stenting. Industry sources estimate that during 1995 approximately
900,000 balloon angioplasty, atherectomy and stenting procedures were
performed worldwide. Industry sources also indicate that cardiovascular
stenting is a growing procedure for treating cardiovascular disease due to
its demonstrated ability to reduce the occurrence of restenosis, a
re-narrowing of a treated blood vessel that typically occurs within six
months of treatment in approximately one-third of the patients that undergo
percutaneous catheter-based procedures. Stents are implantable medical
devices that reduce arterial obstruction by providing a rigid scaffolding to
dilate an occluded blood vessel. Once placed, stents exert radial force
against the walls of blood vessels to enable the blood vessels to remain open
and functional. Recent studies indicate that restenosis of vessels treated
with stents may be significantly reduced when the stents are coated with
anticoagulants.
In light of the growth of stenting as a procedure for treating
cardiovascular disease and preliminary indications that restenosis following
stenting can be reduced through the coating of stents, the Company believes
that opportunities exist for companies with technology for effectively
coating stents with anticoagulants or other therapeutic drugs.
INNERDYNE'S PRODUCTS AND TECHNOLOGY
RADIAL DILATION TECHNOLOGY
The primary focus of the Company is the development and commercial
application of its proprietary radial dilation technology. The key feature of
this proprietary technology is the capability to enter the body of a patient
by creating a small puncture wound, which can subsequently be dilated, or
increased in size, to create a larger working channel. Employment of radial
dilation within an expandable sheath permits the dilation to be accomplished
in a manner
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that tends to minimize tissue trauma. Upon completion of a procedure, the
dilation sequence is reversed, and the result is a smaller residual wound
than would be experienced through the employment of similarly sized
conventional access devices. Potential benefits of radial dilation technology
include reduced risk, less patient trauma and reduced procedure time.
Step PRODUCT LINE. The Company has developed a family of STEP products
utilizing InnerDyne's proprietary radial dilation technology. The initial
STEP products were introduced commercially in late 1994 and are designed to
provide access to the abdominal cavity in order to facilitate the
visualization and treatment of target areas within the cavity while
minimizing the tissue trauma associated with such access.
Step. The STEP device incorporates the Company's proprietary radial
dilation technology and is InnerDyne's first product to be launched on a
commercial basis. The Company has received 510(k) clearances from the FDA to
market this device for laparoscopic and thorascopic M.I.S. procedures. With
the Company's STEP access device, a trocar does not need to be utilized,
eliminating the risk of internal organ damage from contact with the sharp
bladed trocar. In contrast to conventional trocars, the STEP device utilizes
a standard insufflation needle for the penetration through the abdominal wall
at each site where it is utilized, creating only a small puncture wound.
Following removal of the needle, the sheath that surrounds the needle is then
dilated up to a larger working channel through the insertion of a dilator and
cannula. Following dilation, the dilator is removed, leaving a rigid sheath
that serves as a working channel with an integral insufflation valve at the
proximal end. The radial dilation of the tissue into an appropriately sized
working channel holds the cannula in place and obviates the need for an
anchoring system. After completion of a procedure, the rigid cannula is
removed, and the sheath retracts, permitting the opening in each of the
muscular layers of the abdominal wall to recover, leaving a residual wound
that is approximately half the size of that made using a conventional trocar
of similar size. The STEP is currently utilized in minimally invasive
general, gynecological and pediatric surgical procedures.
Management believes that positive attributes of the STEP product could
significantly affect health care system costs and patient satisfaction with
M.I.S. procedures in which trocars have traditionally been used. The results
of a Company-sponsored retrospective comparative outcomes study examining
this issue were released during late 1995. The study included 98 patients,
and compared an almost equal number of procedures performed using STEP
devices and conventional trocars for access. Statistically significant
results of that study indicated that STEP reduced device-related
complications during surgery by over 90% and resulted in an approximate 22%
savings in surgery time. Based upon published operating room costs, this time
savings would equate to dollar savings of $345 to $515 per procedure, a
substantial outcome for a product that is believed to be competitively priced
with conventional trocars. Management also believes that post-procedure
complications, such as infection and incisional hernias at access sites, may
be reduced with the use of the STEP device as compared to conventional
trocars. A prospective study intended to corroborate and expand the findings
of the published outcomes study is underway, and is expected to be completed
during 1997.
SHORT Step. The Short STEP is a conventional STEP device that has been
reduced in length and is particularly suitable for M.I.S. procedures
involving smaller individuals, especially children and thin females. The
Short STEP was commercially introduced in 1995.
REPOSABLE Step. Launched in 1996, the Reposable STEP incorporates the
radial dilation features of disposable STEP devices in a partially reusable
access device. A substantial market for reusable trocars exists, primarily
outside the United States, where the pressures on cost and the recognition of
the total costs involved in surgical procedures are perceived somewhat
differently. Although there is substantial usage of reusable access devices
in the U.S., and management expects a trend toward a somewhat more frequent
usage of reusable devices, there are significant offsetting concerns relating
to total health care system costs and safety involved with reusable devices.
The Reposable STEP includes a number of reusable components, consisting of a
combination of metal and plastic parts that may be cleaned and sterilized by
most conventional methods. The dilator, cannula and needle are reusable,
while the sheath and valve are single use components, designed to be disposed
of following surgery.
MINI Step. The Mini STEP is a small-diameter radially dilating access
device designed for use in office micro-laparoscopic surgery utilizing small
instruments, and in tubal ligation and pediatric procedures. The working
diameter of the Mini STEP ranges from a nominal 2mm to 8mm. Like the STEP
device, Mini STEP is expected to offer clinicians the potential to reduce
device-related surgical complications and surgery time. The Mini STEP devices
are expected to be commercially introduced in early 1997.
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ONE-Step. The One-STEP is a STEP device with a universally adjustable
valve and seal system designed to eliminate the need for a reducer. The
device can maintain insufflation and accommodate most conventional surgical
instruments. The One-STEP devices are expected to be commercially introduced
in mid-1997.
R.E.D. The Radially Expanding Dilator ("R.E.D.") is the second product
type based upon the Company's proprietary radial dilation technology. The
R.E.D. is designed to enable access to organs deep within the abdominal
cavity. The only current alternative for this type of access involves the
insertion of a long flexible channel and scope through a natural body orifice
such as the mouth or the rectum, and only limited procedures are possible due
to the restricted size of the channel and the tortuous path that must be
navigated by the scope. The R.E.D. is designed to provide access through the
abdominal wall, across the peritoneal space, and into an internal organ.
InnerDyne believes that with use of the R.E.D. product, substantial
reductions in patient recovery times may be possible. The Company expects
that the enhanced capabilities of the R.E.D. may enable additional surgical
procedures to be performed through minimally invasive techniques. This
product has been released only on a very limited basis, and feedback
indicates it enables additional procedures to be performed endoscopically.
However, initial experience indicates a relatively high surgeon skill level
and advanced training is necessary to perform these intra-organ procedures
successfully. Accordingly, widespread commercialization of the R.E.D. will
require significant market development efforts.
OTHER APPLICATIONS. InnerDyne has announced agreements for the use of
its proprietary radial dilation technology for specialized vascular access
and the placement of enteral feeding tubes. In addition, the Company is
exploring the potential use of its proprietary radial dilation technology in
other applications such as access for vascular, thoracic and orthopedic
procedures.
THERMAL ABLATION TECHNOLOGY
The Company has developed proprietary technology that is intended to
thermally ablate the lining of a body organ. The Company's ENABL-TM- Thermal
Ablation System (the "ENABL System") is based on this proprietary technology
and is designed to treat menorrhagia or excessive uterine bleeding by
thermally ablating the endometrial lining of the uterus through the
controlled introduction and heating of a normal saline solution IN SITU. The
ENABL System, which includes a control console, a reusable handpiece, and a
disposable probe, enables the clinician to fill the uterus with normal saline
solution, which is then heated. The heated solution ablates -- or destroys
- -- the uterine lining, the source of the abnormal bleeding. The ENABL System
is designed to help physicians treat women suffering from this common and
often debilitating condition in a minimally invasive and less costly manner,
with potentially fewer complications. The system is expected to be easy for
the physician to use, and to offer the possibility to conduct the procedure
under local anesthesia. As a result, the procedure may take less time than
currently available therapies and can potentially be performed in an
outpatient surgery center or a physician's office. Although this procedure is
expected to result in the infertility of the patient, the Company believes
that the ENABL System has the potential to result in fewer complications and
adverse side effects and reduced recovery times compared to current
therapies. For these reasons the Company also believes that the ENABL System
has the potential to be more cost-effective than many current therapies. The
Company has completed initial safety and preliminary efficacy trials with a
redesigned system. The results of these limited trials give preliminary
indications that the ENABL System represents a safe means of ablating uterine
tissue. However, there can be no assurance that the feasibility of this
technology will be satisfactorily demonstrated in expanded efficacy trials or
that the system will be successfully commercialized.
In December 1996, InnerDyne announced that it had signed an agreement
which granted U.S. Surgical exclusive worldwide sales and marketing rights
for the ENABL System. Under the terms of the agreement, in exchange for
initial license fees, milestone payments, and royalties based upon future
sales, U.S. Surgical gained the rights to complete development, manufacture
and market the technology on a worldwide basis. The agreement also provides
U.S. Surgical with an option to purchase rights to the technology for defined
applications.
BIOCOMPATIBLE COATINGS TECHNOLOGIES
The Company possesses certain proprietary technologies in the area of
biocompatible coatings. The technologies that comprise the Company's
thromboresistant coating ("TRC") capability are believed to have application
when foreign objects remain in contact with various areas of the body,
particularly within the blood stream, for sustained periods of time. These
technologies include the ability to deposit an extremely thin layer
(approximately one micron) of siloxane on a surface and the ability to graft
a bioactive substance, such as the drug heparin, to that siloxane layer. The
Company's TRC utilizes a "tether" molecule to attach heparin or other
bioactive molecules to the previously applied siloxane subsurface. One end of
the tether molecule is covalently bonded to the siloxane coating, and the
other end of the tether molecule is covalently bonded to the bioactive
molecule. Because both points of attachment utilize covalent bonds, the
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Company believes that its coating process results in a stronger bonding of
heparin or other bioactive molecules to the surface of the device than other
methods presently in use, which it believes generally use a weaker ionic bond
in at least one of the attachment points. TRC coatings, employed with the
siloxane layer alone or in combination with bioactive substances, can extend
the life of blood-gas exchange devices or provide the capability to extend
the duration of contact of a coated device with blood or other body fluids
while minimizing the physiological impacts of such contact.
In 1994, the Company signed a license agreement with SENKO Medical
Manufacturing Co., Ltd. ("SENKO"), a Japan-based manufacturer and marketer of
membrane oxygenators used in open heart surgery, pursuant to which the
Company licensed one of its TRC technologies to SENKO. In connection with
this agreement, the Company transferred its siloxane coating technology to
SENKO for the coating of microporous hollow fibers used in production of
oxygenators. The technology transfer was completed during the first quarter
of 1995, at which time the Company received the balance of the initial
payment from SENKO, and the royalty payment period commenced. In 1996,
InnerDyne received an order from SENKO to build a second fiber coating
system, which is expected to be delivered during the first half of 1997.
In April 1996, the Company announced the signing of an agreement with
Boston Scientific Corporation ("Boston Scientific") covering the potential
applications and use of InnerDyne's proprietary biocompatible coating
technologies with Boston Scientific's stents, grafts, vena cava filters and
other implantable medical devices. The agreement involves an equity
investment by Boston Scientific in InnerDyne, initial research support and
future license fees and royalty payments if Boston Scientific decides to
proceed with a technology transfer.
Because of the strength of the covalent bonds used in the Company's TRC
technology and its other properties noted above, the Company believes that
this technology may have advantages over presently available bioactive
coating technologies in several potential applications, including the coating
of vascular stents, grafts, vena cava filters and other implantable devices.
The Company has undertaken a number of discussions with other potential
licensees of the Company's biocompatible coating technologies, and samples of
coated products have been provided to several companies. These discussions
have been with parties interested in the use of the technologies to enhance
gas exchange, as well as third parties interested in the possible coating of
in-dwelling devices for various applications. To date, the Company has not
entered into a contractual arrangement with any such parties.
RESEARCH AND DEVELOPMENT
The Company has made significant investments in the research and
development of its proprietary technologies, including radial dilation,
thermal ablation and biocompatible coatings. Research, development, clinical
and regulatory expenses for the years ended December 31, 1996, 1995 and 1994
were approximately $2.8 million, $2.3 million, and $4.0 million,
respectively. The increase in 1996 was primarily the result of expenses that
related to new products and the thermal ablation program, including costs
associated with development, clinical trials and regulatory submissions. The
decrease in 1995 was primarily the result of expenses included in 1994 that
related to completed or discontinued development programs. As of December 31,
1996, the Company had 18 full-time employees engaged in research,
development, clinical and regulatory activities. Currently, the Company's
research and development efforts are primarily focused on providing enhanced
versions of the STEP device, including the One-STEP and the Mini STEP. In
addition, limited usage of the Company's R.E.D. product by a select group of
physicians is being routinely monitored to determine both the effectiveness
and utility of the product in intra-organ procedures.
InnerDyne also devotes research and development efforts to pursue
potential partnerships that might lead to utilization of the Company's radial
dilation technology in areas outside its primary business focus. The
Company's first agreement involving licensing and development of its
proprietary radial dilation technology was announced in February 1996. The
agreement with EndoTex covers the development of access products expected to
be used in conjunction with EndoTex's technologies to treat carotid disease
and aortic aneurysms. The second transaction involving the licensing and
development of InnerDyne's proprietary radial dilation technology was
announced in January 1997 with Sherwood-Davis & Geck, a subsidiary of
American Home Products Corporation. Under the terms of the agreement,
InnerDyne will manufacture for Sherwood-Davis & Geck, on an exclusive basis,
a specialized STEP product designed to improve gastrointestinal placement of
Sherwood-Davis & Geck's enteral feeding tubes.
In December 1996, InnerDyne announced that it had signed an agreement
which granted U.S. Surgical Corporation exclusive worldwide sales and
marketing rights for the ENABL System. In 1996, the Company completed initial
human clinical safety trials and initiated efficacy studies in two foreign
countries. The Company is continuing development of the ENABL System on an
interim basis as the project is transitioned to U.S. Surgical.
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The Company's proprietary biocompatible coating technologies have been
evaluated by a number of potential licensees. Agreements are in place with
SENKO covering the coating of gas exchange fibers and with Boston Scientific
for the potential coating of stents, grafts, vena cava filters and other
implantable devices.
The future success of the Company will depend upon its ability to
develop and gain regulatory clearance for new and enhanced versions of
products in a timely fashion. In addition, the Company may seek to identify
opportunities to obtain products or technologies from third parties. There
can be no assurance that the Company will be able to successfully develop or
acquire new products or technologies, license its proprietary technologies to
third parties, obtain regulatory clearance for its products, or gain market
acceptance of new and enhanced products. Delays in development, clearance or
acceptance of new products could have a material adverse effect on the
Company's business, results of operations and financial condition.
SALES AND MARKETING
The Company is marketing its M.I.S. access products mainly to general
surgeons, gynecologists and pediatric laparoscopists. A domestic network of
independent sales representatives, who typically sell other complementary
products to the same customer base, and a limited number of direct
representatives, who are InnerDyne employees compensated on a commission-only
basis, was in place at the end of 1996. This United States network of sales
representatives is managed on a regional basis by Company employees who
possess substantial expertise and industry experience. Their efforts are
supported by a marketing and customer service organization, that also
coordinates the Company's advertising and sales material support, as well as
the Company's participation in major industry trade meetings.
In January 1996, the Company announced that its Short STEP device, a
smaller version of the standard STEP product, had been awarded the Seal of
Acceptance by the Alliance of Children's Hospitals, Inc. ("Alliance"). The
Alliance is a wholly-owned subsidiary of Child Health Corporation of America,
which is comprised of 35 free-standing children's hospitals across the United
States. The Alliance selected the STEP system, after extensive research and
review, based upon its ability to reduce both the trauma and operative
complications associated with pediatric laparoscopic surgical procedures. In
exchange for an ongoing royalty payment, the Company is entitled to use this
seal in connection with the marketing and sale of its STEP line of products.
It is hoped that the Seal of Acceptance can help the Company expand awareness
and sales of its STEP product line for use in the pediatric environment.
Internationally, the Company expects to utilize a network of independent
distributors to market its products in selected foreign countries. The effort
to identify and reach agreements with appropriate foreign distributors gained
substantial momentum during 1996. As of December 31, 1996, orders had been
received from distributors in 21 countries. Management expects to make
additional progress in this regard during 1997, and expects foreign sales to
positively impact future revenue growth.
The Company has limited experience in marketing its products, and faces
substantial competition from well-entrenched and formidable competitors. As a
result, there can be no assurance that the Company will successfully achieve
acceptable levels of product sales at prices that provide an adequate return
or that the Company will be able to build a network of international
distributors capable of effectively marketing its M.I.S. access products or
that such distributors will generate significant sales of such products.
Failure to do so would have a material adverse impact on the Company's
business, results of operations and financial condition.
MANUFACTURING
The Company initiated manufacture of commercial quantities of its STEP
device in its Salt Lake City, Utah facility during late 1994. Current
manufacturing operations consist primarily of the assembly and testing of
purchased components to produce finished products, which are then packaged
for sterilization in an outside facility. The Company has implemented steps
to automate selected portions of the STEP assembly operation to help reduce
product costs and to achieve a more uniform standard of product consistency.
During the assembly process and following sterilization, the Company conducts
appropriate tests and inspection of its products in an effort to assure that
products meet established specifications, and to verify appropriate levels of
product sterility.
The Company has limited experience in manufacturing M.I.S. access
products or other products in commercial quantities at acceptable costs. The
Company is registered as a manufacturer of medical devices with appropriate
state and federal authorities, including the FDA, and is registered to ISO
9001 standards, which confirms compliance with a number of foreign quality
systems. See "--Government Regulation." The Company's success will depend in
part on its
<PAGE>
ability to manufacture its products in compliance with the FDA's GMP
regulations, the International Standards Organization 9000 ("ISO 9000") and
other regulatory requirements in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable manufacturing costs.
Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel. Failure to
maintain production volumes or increase production volumes in a timely or
cost-effective manner would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that pending regulatory changes currently being
introduced by the FDA are likely to result in a system of United States
regulatory requirements for manufacturers of medical devices which more
closely resembles the ISO 9000 series of quality systems standards adopted by
most European countries. The Company's ISO 9001 registration is expected to
aid efforts to achieve compliance with revised United States regulatory
requirements.
The materials utilized in the Company's M.I.S. products consist of both
standard and custom components that are purchased from a variety of
independent sources. The plastic parts used in the STEP product are injection
molded by outside vendors. The majority of these parts are produced utilizing
molds that have been specially machined for and are owned by the Company.
Although the Company maintains significant inventories of molded parts, any
inability to utilize these molds for any reason might have a material adverse
effect upon the Company's ability to meet its customers' demand for product.
In addition to plastic parts produced from injection molds owned by the
Company, a number of other materials are available only from a limited number
of sources at the present time, including the sheath component of the
Company's STEP products. Efforts to identify and qualify additional sources
of this sheath component and other key materials and components are underway.
Although InnerDyne believes that alternative sources of these components can
be obtained, internal testing and qualification of substitute vendors could
require significant lead times and additional regulatory submissions. There
can be no assurance that such internal testing and qualification or
additional regulatory approvals will be obtained in a timely fashion, if at
all. Any interruption of supply of raw materials could have a material
adverse effect on the Company's ability to manufacture its products, and
therefore on its business, financial condition and results of operations.
"See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Dependence on Sole Sources."
PATENTS AND PROPRIETARY RIGHTS
It is the Company's policy to aggressively protect its technology by,
among other things, filing patent applications for the patentable
technologies that it considers important to the development of its business.
The Company holds seven issued United States patents, covering various
aspects of its radial dilation technology. The Company also has a license
agreement giving it exclusive rights, assuming certain defined minimum
payments are met, to a related access technology that is covered by two
issued and one pending patent. In addition, during 1995 the Company obtained
a non-exclusive license to a patent covering a specialized access device
which facilitates the placement of a vision device into the abdominal cavity.
The Company holds seven issued United States patents relating to its
thermal ablation system technology. The Company also holds five issued United
States patents relating to its biocompatible coating technologies. The
Company has continued to pursue the expansion of its coating-related
intellectual property, as opportunities for business partnerships in this
area have been pursued. See "--InnerDyne's Products and
Technology--Biocompatible Coating Technologies." The Company also holds eight
issued foreign patents, and has filed additional United States and foreign
patent applications relating to its various technologies. In addition to
patent rights related to its radial dilation, thermal ablation and
biocompatible coating technologies, the Company also has a number of issued
and pending patents relating to its blood gas exchange, pumping and other
technologies. There can be no assurances that any pending patent applications
will be issued in their present scope, or at all.
The Company's success will depend in large part on its ability to obtain
patent protection for products and processes, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties.
Although InnerDyne has obtained certain patents and applied for additional
United States and foreign patents covering certain aspects of its technology,
no assurance can be given that any additional patents will be issued or that
the scope of any patent protection will exclude competitors or provide a
competitive advantage, or that any of the Company's patents will be held
valid if subsequently challenged. The validity and breadth of claims covered
in medical technology patents involves complex legal and factual questions
and therefore may be highly uncertain. InnerDyne also relies upon unpatented
trade secrets, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent trade
secrets. In addition, whether or not the Company's patents are issued, others
may hold or receive patents that contain claims having a scope that covers
products developed by InnerDyne.
<PAGE>
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in
the medical device industry have used litigation to gain competitive
advantage. Litigation involving the Company would result in substantial cost
to and diversion of management attention from the day-to-day operation of the
business, but could be necessary to enforce patents issued to the Company, to
protect trade secrets and other specialized knowledge unknown to outside
parties, to defend the Company against claimed infringement of the rights of
others or to determine the scope and validity of the proprietary rights of
others. An adverse determination in litigation could subject the Company to
significant liabilities to third parties, could require the Company to seek
licenses from third parties under less favorable terms than might otherwise
be possible and could prevent the Company from manufacturing, selling or
using its products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has in the past, and may in the future, receive
correspondence from third parties claiming that the Company's products or
technology infringe intellectual property rights of such third parties. The
Company and its patent counsel thoroughly review such claims and no such
outstanding claims currently exist. However, there can be no assurance that
InnerDyne will not receive additional claims that its products or technology
infringe third party rights or that third parties will not litigate such
claims. Any such occurrence could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Patents and Proprietary Rights."
COMPETITION
The primary industry in which the Company competes, minimally invasive
surgery, is dominated by two large, well-positioned entities that are
intensely competitive and frequently offer substantial discounts as a
competitive tactic. U.S. Surgical is primarily engaged in developing,
manufacturing and marketing surgical wound management products, and has
historically been the firm most responsible for providing products that have
led to the growth of the industry. U.S. Surgical supplies a broad line of
products to the M.I.S. industry, including products that facilitate access,
assessment and treatment. Ethicon Endo-Surgery ("Ethicon"), a Johnson &
Johnson company, has made a major investment in the M.I.S. field in recent
years and is one of the leading suppliers of hospital products in the world.
Furthermore, U.S. Surgical and Ethicon each utilize purchasing contracts that
link discounts on the purchase of one product to purchases of other products
in their broad product lines. Substantially all of the hospitals in the
United States have purchasing contracts with one or both of these entities.
Accordingly, customers may be dissuaded from purchasing access products from
the Company rather than U.S. Surgical or Ethicon to the extent it would cause
them to lose discounts on products that they regularly purchase from U.S.
Surgical or Ethicon.
Notwithstanding the challenges faced by the Company in selling in a
market dominated by two large competitors, the majority of the Company's
revenues since the fourth quarter of 1994 have come from product sales in
this market. U.S. Surgical and Ethicon purchasing contracts typically include
a provision allowing a certain percentage of purchases from other vendors,
and the Company has taken and intends to continue to take advantage of such
provisions.
The Company faces a formidable task in successfully gaining significant
revenues within the M.I.S. access market. In order to succeed, management
believes that the Company will need to objectively demonstrate substantial
product benefits, and its sales effort must be able to effectively present
such benefits to both clinicians and health care administrators. The M.I.S.
access market segment is dominated by U.S. Surgical and Ethicon. Both
entities introduced new access devices, trocars with added features, during
the past two years. A number of other entities participate in various
segments of the M.I.S. access market.
There can be no assurance that the Company will be able to successfully
compete in the M.I.S. access market and failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the thermal ablation market, the primary competition for the ENABL
System is current therapies for the treatment of excessive menstrual
bleeding, including drug therapy, dilatation and curettage, surgical
endometrial ablation and hysterectomy. The ENABL System will also compete
against other techniques under development for the treatment of excessive
menstrual bleeding, including endometrial ablation techniques that employ RF
energy or freezing techniques ("cryoablation") and the uterine balloon
therapy system being clinically tested by GyneCare, Inc. There are other
companies developing alternative methods of uterine tissue ablation that
compete with the ENABL System. There can be no assurance that these companies
will not succeed in developing technologies and products that are more
effective than any which have been or are being developed by the Company and
U.S. Surgical or that would render the Company's
<PAGE>
technologies or products obsolete or not competitive. Such competition could
have a material and adverse effect on the Company's business, financial
condition and results of operations. As a result of the entry of large and
small companies into the market, the Company expects competition for devices
and systems used to treat excessive menstrual bleeding to increase. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors--Intense Competition."
GOVERNMENT REGULATION
Clinical testing, manufacture and sale of the Company's products,
including the STEP product line, the ENABL System and the Company's
biocompatible coatings technology, are subject to regulation by the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or
premarket approval for devices, withdrawal of marketing approvals and
criminal prosecution. The FDA also has the authority to request recall,
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
In the United States, medical devices are classified into one of three
classes (I.E., Class I, II or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls (E.G., labeling, premarket
notification and adherence to GMPs) and Class II devices are subject to
general and special controls (E.G., performance standards, postmarket
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (E.G., life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices).
Before a new device can be introduced in the market, the manufacturer
must generally obtain FDA clearance of a 510(k) notification or approval of
a Premarket Approval ("PMA") application. A PMA application must be filed if
a proposed device is not substantially equivalent to a legally marketed Class
I or Class II device, or if it is a Class III device for which the FDA has
called for PMAs. The PMA application must contain the results of clinical
trials, the results of all relevant bench tests, laboratory and animal
studies, a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to
manufacture the device. The FDA's review of a PMA application generally takes
one to two years from the date the PMA is accepted for filing, but it may
take significantly longer. The review time is often significantly extended by
the FDA asking for more information or clarification of information already
provided in the submission. Modifications to a device that is the subject of
an approved PMA, its labeling or manufacturing process may require approval
by the FDA of PMA supplements or new PMAs. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has
been sought by other companies have never been approved for marketing.
If human clinical trials of a device are required, and the device
presents a "significant risk," the sponsor of the trial (usually the
manufacturer or the distributor of the device) will have to file an
Investigational Device Exemption ("IDE") application prior to commencing
human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number
of investigational sites with a specific number of patients, as approved by
the FDA. If the device presents a "nonsignificant risk" to the patient, a
sponsor may begin the clinical trial after obtaining approval for the study
by one or more appropriate IRBs without the need for FDA approval. Sponsors
of clinical trials are permitted to sell investigational devices distributed
in the course of the study provided such compensation does not exceed
recovery of the costs of manufacture, research, development and handling. An
IDE supplement must be submitted to and approved by the FDA before a sponsor
or investigator may make a change to the investigational plan that may affect
its scientific soundness or the rights, safety or welfare of human subjects.
The ENABL System will likely be subject to the PMA approval process
prior to marketing by U.S. Surgical within the United States. There can be no
assurance that the Company will be able to obtain the necessary regulatory
approval on a timely basis, or at all, and a delay in receipt of or failure
to receive such approval would have a material adverse effect on the
Company's business, financial condition and results of operations.
A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a
legally marketed Class I or Class II medical device or a Class III medical
device for which
<PAGE>
the FDA has not called for PMAs. The FDA recently has been requiring more
rigorous demonstration of substantial equivalence than in the past, including
in some cases requiring submission of clinical trial data. The FDA may
determine that the proposed device is not substantially equivalent to a
predicate device, or that additional information is needed before a
substantial equivalence determination can be made. It generally takes from
four to 12 months from submission to obtain 510 (k) premarket clearance, but
may take longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, or that additional
information is needed before a substantial equivalence determination can be
made. "A not substantially equivalent" determination, or a request for
additional information, could prevent or delay the market introduction of new
products that fall into this category and could have a material adverse
effect on the Companys business, financial condition and results of
operations. For any of the Companys devices cleared through the 510 (k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the device or that constitute a major change to
the intended use of the device will require a new 510 (k) submission. There
can be no assurance that the Company will obtain 510 (k) premarket clearance
within a reasonable time frame, or at all, for any of the devices or
modifications for which it may file a 510 (k).
The Company has received clearance from the FDA for the marketing of its
STEP device for use in accessing the abdominal and thoracic cavities for the
performance of minimally invasive surgical procedures. The Company has also
received FDA clearance for the marketing of its R.E.D. product for use in the
areas of gastrostomy, cystostomy, cholecystotomy, the dilation of biliary and
urethral strictures, laparoscopy and enterostomy. The Company has also
received market clearance for alternative versions of its STEP and R.E.D.
products, including products designed to employ its radial dilation
technology in vascular and arthroscopic applications and for biliary
indications. Although the Company has been successful in preparing requests
for 510(k) clearance, there can be no assurance that 510(k) clearances for
future products or product modifications can be obtained in a timely manner
or at all, or that any existing clearance can be successfully maintained. A
delay in receipt of, or failure to receive or maintain, such clearances would
have a material adverse effect on the Company's business, financial condition
and results of operations. Although the Company is strictly limited to
marketing its products for the indications for which they were cleared,
physicians are not prohibited by the FDA from using the products for
indications other than those cleared by the FDA. There can be no assurance
that the Company will not become subject to FDA action resulting from
physician use of its products outside of their approved indications.
The Company has made modifications to its cleared devices that the
Company believes do not require the submission of the new 510(k) notices.
There can be no assurance, however, that the FDA would agree with any of the
Companys determinations not to submit a new 510(k) notice for any of these
changes or would not require the Company to submit a new 510(k) notice for
any of the changes made to the device. If the FDA requires the Company to
submit a new 510(k) notice for any device modification, the Company may be
prohibited from marketing the modified device until the 510(k) notice is
cleared by the FDA.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approval are subject to pervasive and continuing regulation by
the FDA and certain state agencies and various foreign governments.
Manufacturers of medical devices for marketing in the United States are
required to adhere to applicable regulations setting forth detailed GMP
requirements, which include testing, control and documentation requirements.
Manufacturers must also comply with Medical Device Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product
may have caused or contributed to a death or serious injury, or in which its
product malfunctioned and, if the malfunction were to recur, it would be
likely to cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved
uses.
The Company is registered as a manufacturer of medical devices with the
FDA. The Company is subject to routine inspection by the FDA and certain
state agencies for compliance with GMP requirements, MDR requirements and
other applicable regulations. Failure of the Company to maintain satisfactory
GMP compliance could have a significant adverse effect on the Company's
ability to continue to manufacture and distribute its products and, in the
most serious cases, result in the seizure or recall of products, injunction
and/or civil fines.
The FDA has proposed changes to the GMP regulations that will likely
increase the cost of compliance with GMP requirements. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that
laws and regulations will not have a material adverse effect upon the
Companys business, financial condition or results of operations.
The Company has received certification to ISO 9000 standards, permitting
it to affix the CE Mark to its products, allowing unencumbered movement of
its products within the European Union. The Company is required to undergo
<PAGE>
periodic surveillance audits to assure continuing compliance with these
standards. Failure to demonstrate satisfactory compliance on an ongoing basis
could adversely impact InnerDyne's ability to distribute its products within
the European Union.
PRODUCT LIABILITY AND INSURANCE
The development, manufacturing and sale of the Company's products entail
the risk of product liability claims, involving both potential financial
exposure and associated adverse publicity. To date, InnerDyne has not
experienced any product liability claims. The Company's current product
liability insurance coverage limits are $1,000,000 per occurrence and
$2,000,000 in the aggregate, and there can be no assurance that such coverage
limits are adequate to protect the Company from any liabilities it might
incur in connection with the development, manufacture, and sale of its
current and potential products. In addition, the Company may require
increased product liability insurance. Product liability insurance is
expensive and may not be available in the future on acceptable terms, or at
all. In addition, if such insurance is available, there can be no assurance
that the limits of coverage of such policies will be adequate. A successful
product liability claim in excess of the Company's insurance coverage could
have a material adverse effect on the Companys business, financial condition
and results of operation. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Risk Factors--Product
Liability and Insurance."
EMPLOYEES
At December 31, 1996, the Company had 92 full-time and 4 temporary and
part-time employees. All of the temporary and part-time employees worked at
the Company"s Salt Lake City facility, and were primarily involved in
manufacturing and support activities related to the Company's M.I.S. access
products. Of the 92 full-time employees on December 31, 1996, 42 were
involved in manufacturing operations, 14 in research and development and
regulatory/clinical affairs, 4 in biocompatible coatings development, 10 in
administration, and 22 in sales, marketing and customer service.
None of the Company's employees is covered by a collective bargaining
agreement, and management believes that its relationship with its employees
is good.
EXECUTIVE OFFICERS OF THE COMPANY
The Company has corporate officers that are not executive officers. As
of February 28, 1997, the executive officers of the Company, who are elected
by and serve at the discretion of the Board of Directors, are as follows:
Name Age Position
- ---------------------------- ----- ------------------------------------------
William G. Mavity 47 President, Chief Executive Officer and
Director
Robert A. Stern 39 Vice President and Chief Financial Officer
Daniel J. Genter 60 Senior Vice President, Sales and Marketing
WILLIAM G. MAVITY joined the Company as President, Chief Executive
Officer and a director in October 1993, after having spent more than twenty
years in various capacities with the 3M Company ("3M"), including more than
ten years within a number of the operating units of 3M's health care
business. From August 1992 until October 1993, Mr. Mavity served as
Operations Director for 3M's Medical Device Division. From April 1989 until
August 1992, Mr. Mavity served as General Manager of 3M's Sarns
cardiovascular surgery business unit. From July 1988 until April 1989, Mr.
Mavity served as Manufacturing Manager for the Sarns subsidiary. Mr. Mavity
holds a B.E.A. degree from the University of Delaware.
ROBERT A. STERN joined the Company in January of 1996 as Vice President
and Chief Financial Officer. From October 1991 to January 1996, Mr. Stern
held the position of Chief Financial Officer, Vice President of Corporate
Finance and member of the Board of Directors of RhoMed Incorporated, a New
Mexico-based biopharmaceutical company. Mr. Stern has had ten years
experience in investment banking and cash management, and was the principal
stockholder and Managing Director of R.A. Stern & Associates from December
1986 to April of 1990. R. A. Stern & Associates was sold to PaineWebber in
1989. Mr. Stern received a B.S. from the University of New Hampshire,
Whittemore School of Business and Economics.
DANIEL J. GENTER joined the Company in April of 1996 as Senior Vice
President of Sales and Marketing. From May 1993 to April 1996, Mr. Genter
held the position of Divisional Vice President of the Kanetta Pharmacal
Division of Sanofi Winthrop Pharmaceuticals, a business unit established for
the development, manufacture and marketing of sterile parenteral multisource
pharmaceutical products. From December 1990 to May 1993, Mr. Genter served as
Vice President of Marketing for Schein Pharmaceutical, Inc., a manufacturer
and distributor of pharmaceutical products. Mr. Genter
<PAGE>
spent over twenty years with Johnson and Johnson in its McNeil Laboratories,
Critikon and Home Health Care companies, holding positions in general
management, sales management, marketing and clinical development. Mr. Genter
also served as President of Sharplan Lasers, Inc., a medical laser
manufacturer. Mr. Genter studied Mechanical Engineering at Tulane University
and holds a B.S. in Mathematics from the State University of New York and an
MBA from Pepperdine University.
ITEM 2. PROPERTIES
InnerDyne leases approximately 20,500 square feet in Sunnyvale,
California to house the Company's administrative personnel, research and
development, marketing and sales support activities, of which approximately
6,000 square feet are subleased to another entity. The Sunnyvale facility is
leased through December 1998.
Additional space is leased in three separate buildings, totaling
approximately 30,500 square feet, in Salt Lake City, Utah. These facilities
house administrative personnel, manufacturing operations, biocompatible
coating research activities and the Company's primary distribution function.
The leases for the Salt Lake City buildings expire in August 1997 and August
1999.
Management believes that currently leased facilities will be sufficient
for the immediate future, and that adequate additional space is available
within the same geographical areas. If additional space was required, and it
could not be obtained in near proximity to current facilities at an
acceptable cost, it could have a material adverse effect on the Company's
operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol IDYN since the merger in April 1994 with InnerDyne Medical,
Inc. From January 1992 to April 1994, the Company's Common Stock traded on the
Nasdaq National Market under the symbol CRDS. The prices per share reflected in
the table below represent the range of low and high closing sale prices for the
Company's Common Stock as reported in the Nasdaq National Market for the
quarters indicated. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
High Low
---- ---
FISCAL 1995
First Quarter ended March 31, 1995 . . . . . . . . 5 1/4 3 1/4
Second Quarter ended June 30, 1995 . . . . . . . . 4 5/8 2 1/2
Third Quarter ended September 30, 1995 . . . . . . 3 7/8 1 7/8
Fourth Quarter ended December 31, 1995 . . . . . . 3 3/8 2 1/4
FISCAL 1996
First Quarter ended March 31, 1996 . . . . . . . . 4 1/4 2 3/8
Second Quarter ended June 30, 1996 . . . . . . . . 5 13/16 3 1/8
Third Quarter ended September 30, 1996 . . . . . . 4 5/8 2 3/4
Fourth Quarter ended December 31, 1996 . . . . . . 3 7/8 2 3/4
As of February 28, 1997, there were 299 stockholders of record, however,
the Company believes it has a minimum of 1,200 beneficial stockholders.
The Company has not historically paid cash dividends. The Company
currently intends to retain all future earnings, if any, for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. The Company is prohibited from paying dividends or making any other
distributions under the terms of its credit agreement with Silicon Valley Bank.
See Note 6 of Notes to Financial Statements.
Since January 1, 1996, the Company issued and sold (without payment of
any selling commission to any person) the following unregistered securities:
(1) In January 1996 and August 1996, the Company issued 6,000 shares
and 784 shares, respectively, of its Common Stock to a single entity in
connection with a license agreement with such entity. The Company did not
receive any cash proceeds from such issuances.
(2) In March and April of 1996, holders of warrants to purchase an
aggregate of 242,952 shares of Common Stock exercised such warrants,
resulting in total proceeds to the Company of $704,568.
(3) In May 1996, the Company issued 166,667 shares of its Common Stock
to a single entity in connection with a license agreement with such entity,
for an aggregate purchase price of $500,001.
There were no underwriters employed in connection with any of the
transactions set forth above. The issuances of the securities set forth above
were deemed to be exempt from registration under the Securities Act of 1933,
as amended (the "Act") in reliance on Section 4(2) of the Act as transactions
by an issuer not involving any public offering. The recipients of securities
in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and
with the Company's financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K. The statements of operations data for the
years ended December 31, 1994, 1995 and 1996 and the balance sheet data as of
December 31, 1995 and 1996 are derived from, and are qualified by reference to,
the audited financial statements included elsewhere in this Annual Report on
Form 10-K. The statements of operations data for the years ended December 31,
1992 and 1993 and the balance sheet data as of December 31, 1992, 1993 and
1994, are derived from, and are qualified by reference to, audited financial
statements not included in this Annual Report on Form 10-K.
Year Ended December 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 133 43 879 5,275 9,086
Net loss $(8,315) (10,359) (9,904) (5,627) (4,659)
-------- -------- --------- -------- -------
-------- -------- --------- -------- -------
Net loss per share $ (.64) (.69) (.61) (.32) (.23)
-------- -------- --------- -------- -------
-------- -------- --------- -------- -------
BALANCE SHEET DATA:
Total assets $25,609 17,550 7,847 5,370 11,362
<PAGE>
Long-term debt, excluding current
installments $ 338 199 30 187 630
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS ANNUAL REPORT ON FORM-10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AND
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION AND PRESS RELEASES,
COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY UPON REQUEST. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
BACKGROUND
InnerDyne, Inc. (the "Company" or "InnerDyne") is the successor
corporation resulting from the merger of CardioPulmonics, Inc.
("CardioPulmonics") and InnerDyne Medical, Inc. ("IMI") in April 1994.
CardioPulmonics was founded in 1985 to develop, manufacture and market
proprietary pulmonary and cardiopulmonary products. These efforts resulted in
the development of a blood-gas exchange device and proprietary biocompatible
coating technologies. IMI was founded in 1989 to develop medical devices used
in M.I.S. procedures incorporating IMI's proprietary radial dilation and
thermal ablation technologies. Subsequent to the merger, InnerDyne discontinued
efforts to develop and commercialize the blood-gas exchange device and focused
primarily on the development, manufacture and commercialization of proprietary
M.I.S. access products. InnerDyne commercially introduced its first M.I.S.
access device, STEP, in the fourth quarter of 1994. The Company intends to
continue developing its proprietary radial dilation and biocompatible coating
technologies, internally or through strategic alliances.
RISK FACTORS
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. InnerDyne has experienced
operating losses since its inception in December 1985. InnerDyne reported net
losses of $4.7 million on revenues of $9.1 million, $5.6 million on revenues of
$5.3 million and $9.9 million on revenues of $878,909 for the fiscal years ended
December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996,
InnerDyne had an accumulated deficit of approximately $51.3 million.
In the future, the Company expects to incur substantial additional
operating losses and have cash outflow requirements as a result of
expenditures related to expansion of sales and marketing capability,
expansion of manufacturing capacity, research and development activities,
compliance with regulatory requirements, and possible investment in or
acquisition of additional complementary products, technologies or businesses.
The timing and amounts of these expenditures will depend upon many factors,
such as the availability of capital, progress of the Company's research and
development, and factors that may be beyond the Company's control, such as
the results of product trials, the requirements for and the time required to
obtain regulatory approval for existing products and any other products that
may be developed or acquired, and the market acceptance of the Company's
products. The Company believes that it is likely to incur operating losses at
least through 1997. The cash needs of the Company have changed significantly
as a result of the merger completed during 1994 and the support requirements
of the added business focus areas. There can be no assurance that the Company
will not continue to incur losses, that the Company will be able to raise
cash as necessary to fund operations or that the Company will ever achieve
profitability.
INTENSE COMPETITION. The primary industry in which the Company competes,
minimally invasive surgery, is dominated by two large, well-positioned entities
that are intensely competitive and frequently offer substantial discounts as a
competitive tactic. U.S. Surgical is primarily engaged in developing,
manufacturing and marketing surgical wound management products, and has
historically been the firm most responsible for providing products that have
led to the growth of the industry. U.S. Surgical supplies a broad line of
products to the M.I.S. industry, including products which facilitate access,
assessment and treatment. Ethicon has made a major investment in the M.I.S.
field in recent years and is one of the leading suppliers of hospital products
in the world. Furthermore, U.S. Surgical and Ethicon each utilize purchasing
contracts that link discounts on the purchase of one product to purchases of
other products in their broad product lines. Substantially all of the hospitals
in the United States have purchasing contracts with one or both of these
entities. Accordingly, customers may be dissuaded from purchasing access
products from the Company rather than U.S. Surgical or Ethicon to the extent it
would cause them to lose discounts on products that they regularly purchase
from U.S. Surgical or Ethicon.
<PAGE>
The Company faces a formidable task in successfully gaining significant
revenues within the M.I.S. access market. In order to succeed, management
believes that the Company will need to objectively demonstrate substantial
product benefits, and its sales effort must be able to effectively present such
benefits to both clinicians and health care administrators. The M.I.S. access
market is dominated by U.S. Surgical and Ethicon. Both entities introduced new
access devices, trocars with added features, during the past two years. A
number of other entities participate in various segments of the M.I.S. access
market.
There can be no assurance that the Company will be able to successfully
compete in the M.I.S. access market, and failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In the thermal ablation market, the primary competition for the ENABL
System is current therapies for the treatment of excessive menstrual bleeding,
including drug therapy, dilatation and curettage, surgical endometrial ablation
and hysterectomy. The ENABL System will also compete against other techniques
under development for the treatment of excessive menstrual bleeding, including
endometrial ablation techniques that employ RF energy or freezing techniques
("cryoablation") and the uterine balloon therapy system being clinically tested
by GyneCare, Inc.
Additionally, there are other companies developing alternative methods of
uterine tissue ablation that compete with the ENABL System. There
can be no assurance that these companies will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by the Company and U.S. Surgical or that would render the
Company's technologies or products obsolete or not competitive. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations. As a result of the entry of
large and small companies into the market, the Company expects competition for
devices and systems used to treat excessive menstrual bleeding to increase.
See "Item 1. Business--Competition."
CONTINUED DEPENDENCE ON Step PRODUCTS. To date, substantially all of the
Company's revenues from product sales are attributable to STEP products and
InnerDyne currently anticipates that sales of STEP products will represent
substantially all of the Company's revenues in the immediate future.
Accordingly, the success of the Company is largely dependent upon increased
market acceptance of its STEP product line by the medical community as a
reliable, safe and cost-effective access product for minimally invasive
surgery. InnerDyne commenced commercial sales of its STEP product in the fourth
quarter of 1994, and to date sales have been made to a relatively limited
number of physicians and hospitals. Recommendations and endorsements by
influential members of the medical community are important for the increased
market acceptance of the Company's STEP products, and there can be no assurance
that existing recommendations or endorsements will be maintained or that new
ones will be obtained. Failure to increase market acceptance of the Company's
STEP products would have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Item 1. Business--Products
and Technology."
RELIANCE ON FUTURE PRODUCTS AND NEW APPLICATIONS; UNCERTAINTY OF
TECHNOLOGY CHANGES. The medical device industry is characterized by innovation
and technological change. The Company has made significant investments in
researching and developing its proprietary technologies, including radial
dilation, thermal ablation and biocompatible coatings. During 1997, the Company
expects to commercially introduce the One-STEP and the Mini STEP, each of which
is a further enhancement of its STEP product line. The future success of the
Company will depend in part on the timely commercial introduction and market
acceptance of these products. There can be no assurance that these products
will be timely introduced in commercial quantities, if at all, or that such
products will achieve market acceptance. A failure by the Company to timely
introduce such products or a failure of such products to achieve market
acceptance could have a material adverse effect on the Company's business,
financial condition and results of operations. The future success of the
Company will also depend upon, among other factors, its ability to develop and
gain regulatory clearance for new and enhanced versions of products in a timely
fashion, including, but not limited to, the ENABL Thermal Ablation System being
developed with U.S. Surgical. There can be no assurance that the Company will
be able to successfully develop new products or technologies, manufacture new
products in commercial volumes, obtain regulatory approvals on a timely basis
or gain market acceptance of such products. Delays in development,
manufacturing, regulatory approval or market acceptance of new or enhanced
products could have a material adverse impact on the Company's business,
financial condition and results of operations. See "Item 1. Business--Research
and Development."
LIMITED MANUFACTURING EXPERIENCE; COMPLIANCE WITH GOOD MANUFACTURING
PRACTICES. The Company initiated manufacture of commercial quantities of its
STEP access device in its Salt Lake City, Utah facility during late 1994.
Accordingly, the Company has limited experience in manufacturing M.I.S. access
products or other products in commercial quantities at acceptable costs. The
Company's success will depend in part on its ability to manufacture its
<PAGE>
products in compliance with the FDA's Good Manufacturing Practices ("GMP")
regulations and other regulatory requirements in sufficient quantities and on a
timely basis, while maintaining product quality and acceptable manufacturing
costs. Manufacturers often encounter difficulties in scaling up production of
new products, including problems involving production yields, quality control
and assurance, component supply and shortages of qualified personnel. In
connection with its ISO 9001 certification, InnerDyne will now undergo periodic
audits by a regulatory body. The Company believes that pending regulatory
changes currently being introduced by the FDA are likely to result in a system
of United States regulatory requirements for manufacturers of medical devices
which more closely resembles the ISO 9000 series of quality systems standards
adopted by most European countries. Failure to maintain production volumes or
increase production volumes in a timely or cost-effective manner would have a
material adverse effect on the Company's business, financial condition and
results of operations. Failure to maintain satisfactory GMP compliance could
have a significant impact on the Company's ability to continue to manufacture
and distribute its products and, in the most serious cases, result in the
seizure or recall of products. See "Item 1. Business--Manufacturing."
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly
operating results have in the past fluctuated and will continue to fluctuate
significantly in the future depending on the timing and shipment of product
orders, new product introductions and changes in pricing policies by the
Company or its competitors, the timing and market acceptance of the Company's
new products and product enhancements, the continued market acceptance of
InnerDyne's STEP product line by the medical community, the Company's product
mix, the mix of distribution channels through which the Company's products are
sold, the extent to which the Company recognizes non-product revenues during a
quarter, and the Company's ability to obtain sufficient supplies of sole or
limited source components for its products. In particular, fluctuations in
production volumes affect gross margins from quarter to quarter. Furthermore,
gross margins can fluctuate from quarter to quarter to the extent the Company
recognizes non-product revenue during a quarter because the Company derives
higher gross margins from non-product revenue than from product sales. In
response to competitive pressures or new product introductions, the Company may
take certain pricing or other actions that could materially and adversely
affect the Company's operating results. In addition, new product introductions
by the Company could contribute to quarterly fluctuations in operating results
as orders for new products commence and orders for existing products decline.
The Company's expense levels are based, in part, on its expectations of
future revenues. Because a substantial portion of the Company's revenue in each
quarter normally results from orders booked and shipped in the final weeks of
that quarter, revenue levels are extremely difficult to predict. If revenue
levels are below expectations, net income will be disproportionately affected
because only a small portion of the Company's expenses varies with its revenue
during any particular quarter. In addition, the Company typically does not
operate with any material backlog as of any particular date.
As a result of the foregoing factors and potential fluctuations in
operating results, results of operations in any particular quarter should not
be relied upon as an indicator of future performance. In addition, in some
future quarter the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially and adversely affected.
RELIANCE ON COLLABORATIVE RELATIONSHIPS; RESTRICTIONS ON ACTIVITIES. The
Company has entered into, and intends to continue to pursue collaborative
arrangements with corporations and research institutions with respect to the
research, development, regulatory approval and marketing of certain of its
potential products. InnerDyne's future success may depend, in part, on its
relationship with such third parties, their strategic interest in the potential
products under development and, eventually, their success in marketing or
willingness to purchase any such products. The Company's existing and
anticipated contracts with such third parties restrict the rights of InnerDyne
to engage in certain areas of product development, manufacturing and marketing.
In addition, these third parties may have the unilateral right to terminate any
such arrangement without significant penalty. There can be no assurance that
InnerDyne will be successful in establishing or maintaining any such
collaborative arrangements or that any such arrangements will be successful.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. InnerDyne began
commercial sales of its first M.I.S. access product in the fourth quarter of
1994 and, therefore, has limited sales, marketing and distribution experience.
The Company is marketing its M.I.S. access products mainly to general surgeons,
gynecologists and pediatric laparoscopists. In the United States, InnerDyne
markets its products primarily through direct representatives who are employed
by the Company within selected geographical areas and a network of independent
sales representatives who typically sell other complementary M.I.S. products to
the same customer base. If the need arises, the Company may expand its sales
force, which will require recruiting and training additional personnel. There
can be no assurance that the Company will be able to recruit and train such
additional personnel in a timely fashion. Loss of a significant number of
InnerDyne's current sales
<PAGE>
personnel or independent sales representatives, or failure to attract
additional personnel, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company expects to market its products outside of the United States
through international distributors in selected foreign countries after
regulatory approvals, if necessary, are obtained. Although InnerDyne currently
has relationships with a limited number of international distributors, there
can be no assurance that the Company will be able to build a network of
international distributors capable of effectively marketing its M.I.S. access
products or that such distributors will generate significant sales of such
products. The Company has limited experience in marketing its products, and
faces substantial competition from well-entrenched and formidable competitors.
As a result, there can be no assurance that the Company will successfully
achieve acceptable levels of product sales at prices which provide an adequate
return. Failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1.
Business--Sales and Marketing."
PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend in
large part on its ability to obtain patent protection for products and
processes, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. Although InnerDyne has obtained certain
patents and applied for additional United States and foreign patents covering
certain aspects of its technology, no assurance can be given that any
additional patents will be issued or that the scope of any patent protection
will exclude competitors or provide a competitive advantage, or that any of the
Company's patents will be held valid if subsequently challenged. The validity
and breadth of claims covered in medical technology patents involves complex
legal and factual questions and therefore may be highly uncertain. InnerDyne
also relies upon unpatented trade secrets, and no assurance can be given that
others will not independently develop or otherwise acquire substantially
equivalent trade secrets. In addition, whether or not the Company's patents are
issued, others may hold or receive patents that contain claims having a scope
that covers products developed by InnerDyne.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry and companies in
the medical device industry have used litigation to gain competitive advantage.
Litigation involving the Company would result in substantial cost to and
diversion of management attention from the day-to-day operation of the
business, but could be necessary to enforce patents issued to the Company, to
protect trade secrets and other specialized knowledge unknown to outside
parties, to defend the Company against claimed infringement of the rights of
others or to determine the scope and validity of the proprietary rights of
others. An adverse determination in litigation could subject the Company to
significant liabilities to third parties, could require the Company to seek
licenses from third parties under less favorable terms than might otherwise be
possible and could prevent the Company from manufacturing, selling or using its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has in the past, and may in the future, receive correspondence
from third parties claiming that the Company's products or technology infringe
intellectual property rights of such third parties. The Company and its patent
counsel thoroughly review such claims and no such outstanding claims currently
exist. However, there can be no assurance that InnerDyne will not receive
additional claims that its products or technology infringe third party rights
or that third parties will not litigate such claims. Any such occurrence could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Item 1. Business--Patents and Proprietary
Rights."
GOVERNMENT REGULATION. Clinical testing, manufacture and sale of the
Company's products, including the STEP product line, the ENABL System and the
Company's biocompatible coatings technology, are subject to regulation by the
FDA and corresponding state and foreign regulatory agencies. Pursuant to the
Federal Food, Drug, and Cosmetic Act, and the regulations promulgated
thereunder, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals
and criminal prosecution. The FDA also has the authority to request recall,
repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.
Before a new device can be introduced in the market, the manufacturer must
generally obtain FDA clearance of 510(k) notification or approval of a PMA. A
PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
Class III device for which the FDA has called for PMAs. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing. The ENABL System will likely be subject to the PMA approval process
prior to marketing by U.S. Surgical within the United States. There can be no
assurance that the Company will be able to obtain the necessary regulatory
approval on a timely basis, or at all, and a delay in receipt of or
<PAGE>
failure to receive such approval would have a material adverse effect on the
Company's business, financial condition and results of operations.
A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a legally
marketed Class I or Class II medical device or a Class III medical device for
which the FDA has not called for PMAs. For any of the Company's devices cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require a new
510(k) submission. There can be no assurance that the Company will obtain
510(k) premarket clearance within a reasonable time frame, or at all, for any
of the devices or modifications for which it may file a 510(k).
The Company has received clearance from the FDA for the marketing of its
STEP device for use in accessing the abdominal and thoracic cavities for the
performance of minimally invasive surgical procedures. The Company has also
received FDA clearance for the marketing of its R.E.D. product for use in the
areas of gastrostomy, cystostomy, cholecystotomy, the dilation of biliary and
urethral strictures, laparoscopy and enterostomy. The Company has also
received market clearance for alternative versions of its STEP and R.E.D.
products, including products designed to employ its radial dilation technology
in vascular and arthroscopic applications and for biliary indications. Although
the Company has been successful in preparing requests for 510(k) clearance,
there can be no assurance that 510(k) clearances for future products or product
modifications can be obtained in a timely manner or at all, or that any
existing clearance can be successfully maintained. A delay in receipt of, or
failure to receive or maintain, such clearances would have a material adverse
effect on the Company's business, financial condition and results of
operations. Although the Company is strictly limited to marketing its products
for the indications for which they were cleared, physicians are not prohibited
by the FDA from using the products for indications other than those cleared by
the FDA. There can be no assurance that the Company will not become subject to
FDA action resulting from physician use of its products outside of their
approved indications.
The Company has made modifications to its cleared devices that the Company
believes do not require the submission of new 510(k) notices. There can be no
assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes or
would not require the Company to submit a new 510(k) notice for any of the
changes made to the device. If the FDA requires the Company to submit a new
510(k) notice for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice is cleared by the FDA.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approval are subject to pervasive and continuing regulation by the
FDA and certain state agencies and various foreign governments. Manufacturers
of medical devices for marketing in the United States are required to adhere to
applicable regulations setting forth detailed GMP requirements, which include
testing, control and documentation requirements. Manufacturers must also comply
with Medical Device Reporting ("MDR") requirements that a firm report to the
FDA any incident in which its product may have caused or contributed to a death
or serious injury, or in which its product malfunctioned and, if the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury.
The Company is registered as a manufacturer of medical devices with the
FDA. The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements, MDR requirements and other
applicable regulations. Failure of the Company to maintain satisfactory GMP
compliance could have a significant adverse effect on the Company's ability to
continue to manufacture and distribute its products and, in the most serious
cases, could result in the seizure or recall of products, injunction and/or
civil fines. See "Manufacturing" and "Item 1. Business--Government Regulation."
DEPENDENCE ON SOLE SOURCES. The materials utilized in the Company's
M.I.S. products consist of both standard and custom components that are
purchased from a variety of independent sources. The plastic parts used in the
STEP product are injection molded by outside vendors. The majority of these
parts are produced utilizing molds that have been specially machined for and
are owned by the Company. Although the Company maintains significant
inventories of molded parts, any inability to utilize these molds for any
reason might have a material adverse effect on the Company's ability to meet
its customers' demand for product. In addition to plastic parts produced from
injection molds owned by the Company, a number of other materials are available
only from a limited number of sources at the present time, including the sheath
component of the Company's STEP products. Efforts to identify and qualify
additional sources of this sheath component and other key materials and
components are underway. Although InnerDyne believes that alternative sources
of these components can be obtained, internal testing and qualification of
substitute vendors could require significant lead times and additional
regulatory submissions. There can be no assurance that such internal testing
and qualification or additional regulatory approvals will be obtained in a
timely fashion, if at all. Any interruption of supply of raw materials
<PAGE>
could have a material adverse effect on the Company's ability to manufacture
its products and, therefore, on its business, financial condition and results
of operations. See "Item 1. Business--Manufacturing."
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT. In the United States,
health care providers, such as hospitals and physicians, that purchase medical
devices, such as the Company's products, generally rely on third-party payors,
principally federal Medicare, state Medicaid and private health insurance plans,
to reimburse all or part of the cost of the procedure in which the medical
device is being used. In addition, certain health care providers are moving
toward a managed care system in which such providers contract to provide
comprehensive health care for a fixed cost per person. Managed care providers
are attempting to control the cost of health care by authorizing fewer elective
surgical procedures. The Company is unable to predict what changes will be made
in the reimbursement methods utilized by third-party health care payors.
Furthermore, the Company could be adversely affected by changes in reimbursement
policies of governmental or private health care payors, particularly to the
extent any such changes affect reimbursement for procedures in which the
Company's products are used. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors for procedures in which the Company's products are used or adverse
changes in governmental and private third-party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both government
sponsored health care and private insurance. The Company intends to seek
international reimbursement approvals, although there can be no assurance that
any such approvals will be obtained in a timely manner, if at all, and failure
to receive international reimbursement approvals could have an adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought.
DEPENDENCE ON INTERNATIONAL SALES. In the future, the Company expects to
derive an increasing portion of its revenue from international sales. To the
extent that the Company's international sales increase in future periods, a
significant portion of the Company's revenues could be subject to the risks
associated with international sales, including economic or political
instability, shipping delays, changes in applicable regulatory policies,
fluctuations in foreign currency exchange rates and various trade restrictions,
all of which could have significant impact on the Company's ability to deliver
products on a competitive and timely basis. Future imposition of, or significant
increases in the level of, customs duties, import quotas or other trade
restrictions could have an adverse effect on the Company's business, financial
condition and results of operations. The regulation of medical devices,
particularly in the European Economic Community, continues to expand and there
can be no assurance that new laws or regulations will not have an adverse effect
on the Company.
DEPENDENCE ON KEY PERSONNEL. InnerDyne is dependent upon a limited
number of key management and technical personnel. The Company's future
success will depend in part upon its ability to attract and retain highly
qualified personnel. The Company will compete for such personnel with other
companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful
in hiring or retaining qualified personnel. The loss of key personnel or the
inability to hire or retain qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Item 1. Business--Employees", "Item 1. Business--Executive
Officers of the Company" and "Item 10. Directors and Executive Officers of
Registrant."
PRODUCT LIABILITY; CLAIMS IN EXCESS OF INSURANCE COVERAGE. The
development, manufacture and sale of the Company's products entail the risk of
product liability claims, involving both potential financial exposure and
associated adverse publicity. The Company's current product liability insurance
coverage limits are $1,000,000 per occurrence and $2,000,000 in the aggregate,
and there can be no assurance that such coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the
development, manufacture and sale of its current and potential products. In
addition, the Company may require increased product liability insurance. Product
liability insurance is expensive and may not be available in the future on
acceptable terms, or at all. In addition, if such insurance is available, there
can be no assurance that the limits of coverage of such policies will be
adequate. A successful product liability claim in excess of the Company's
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operation. See "Item 1. Business--
Product Liability and Insurance."
STOCK PRICE VOLATILITY. The stock market in general and stocks of medical
device companies in particular, have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Common Stock has been and is likely to continue to be highly volatile. Factors
<PAGE>
such as fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors, FDA
and international regulatory actions, actions with respect to reimbursement
matters, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others, changes
in health care policy in the United States and internationally, changes in stock
market analyst recommendations regarding the Company, other medical device
companies or the medical device industry generally or general market conditions
may have a significant effect on the market price of the Common Stock. See "Item
5. Market for Registrant's Common Stock and Related Stockholder Matters."
ENVIRONMENTAL REGULATIONS. The Company is subject to a variety of local,
state and federal governmental regulations relating to the use, storage,
handling, manufacture and disposal of toxic and other hazardous substances used
to manufacture the Company's products. The Company believes that it is currently
in compliance in all material respects with applicable governmental
environmental regulations. Nevertheless, the failure by the Company to comply
with current or future environmental regulations could result in the imposition
of substantial fines on the Company, suspension of production, alteration of its
manufacturing processes or cessation of operations. Compliance with such
regulations could require the Company to acquire expensive remediation equipment
or to incur substantial expenses. Any failure by the Company to control the use,
disposal, removal or storage of, or to adequately restrict the discharge of, or
assist in the cleanup of, hazardous or toxic substances, could subject the
Company to significant liabilities, including joint and several liability under
certain statutes. The imposition of such liabilities could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
CONTROL BY DIRECTORS AND PRINCIPAL STOCKHOLDERS. As of February 28, 1997,
directors and principal stockholders of the Company, and certain of their
affiliates, beneficially own approximately 23.2% of the Company's outstanding
Common Stock. Accordingly, these persons, as a group, may be able to control the
Company and significantly affect the direction of the Company's affairs and
business, including any determination with respect to the acquisition or
disposition of assets by the Company, future issuances of Common Stock or other
securities by the Company and the election of directors. Such concentration of
ownership may also have the effect of delaying, deferring or preventing a change
in control of the Company.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS OF COMMON STOCK.
Provisions of the Company's Certificate of Incorporation that allow the Company
to issue Preferred Stock without any vote or further action by the stockholders
as well as the fact that the Company's Certificate of Incorporation does not
permit stockholders to cumulate votes in the election of directors may have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Certain provisions of Delaware law applicable to the Company could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203, which prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met. The possible issuance
of Preferred Stock, the inability of stockholders to cumulate votes in the
election of directors and provisions of Delaware law could have the effect of
delaying, deferring or preventing a change in control of the Company, including
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. The possible
issuance of Preferred Stock and these provisions could also limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock.
RESULTS OF OPERATIONS
Total revenues of $9,086,127 were realized during the year ended
December 31, 1996, compared to total revenues of $5,275,060 in 1995 and $878,909
in 1994. Total revenues are comprised of revenues from product sales and
licensing, contract and grant revenues. Product sales increased to $7,773,547 in
1996 from $4,729,651 in 1995 and $275,517 in 1994, reflecting continued
acceptance of the STEP device, which was commercially introduced in the fourth
quarter of 1994. Licensing, contract and grant revenues were $1,312,580,
$545,409 and $603,392 in 1996, 1995 and 1994, respectively. These revenues
related to agreements with third parties covering the development of the
Company's proprietary thermal ablation technology, and licensing of the
Company's proprietary biocompatible coatings and radial dilation technology.
Licensing, contract and grant revenues fluctuate from year to year, and from
quarter to quarter, based upon the number of agreements in effect and the amount
and timing of the payments to be made to InnerDyne pursuant to agreements.
Total costs and expenses were $13,946,878 in 1996, compared to $11,122,791
in 1995 and $10,939,559 in 1994. Expenses in 1996 grew because of increased
costs of sales on higher sales volume, and included clinical, research and
development and regulatory expenses related to the ENABL System and higher
sales and marketing expenses related to the commercialization of the
Company's M.I.S. products, including STEP and Reposable STEP. Expenses in
1995 and 1994 include start-up costs to build the Company's manufacturing
capability
<PAGE>
and increases in sales and marketing expenses for M.I.S. products, as the
Company built the sales and marketing resources necessary to support
commercialization of its initial M.I.S. products, which began in the fourth
quarter of 1994. Expenses in 1994 also include costs related to development
programs that have been completed or discontinued and expenses associated with
the Company's merger.
Cost of product sales were $4,363,367 in 1996, compared to $3,148,915 in
1995 and $1,939,974 in 1994. Cost of product sales are primarily comprised of
direct material costs of components for finished products, as well as labor
costs and an allocated portion of overhead expenses. Cost of product sales in
1996, 1995 and late 1994 include start-up manufacturing and "pilot"
production expense. The increase each year was due to the resulting
production of higher volumes of the STEP device. Although the Company
anticipates that cost of product sales will continue to increase in absolute
dollars in future periods, cost of product sales as a percentage of revenue
is expected to decrease in 1997 if sales and production volumes increase.
Research, development, regulatory and clinical expenses were $2,839,556 in
1996, compared to $2,299,311 in 1995 and $3,951,536 in 1994. Research,
development, regulatory and clinical expenses are primarily comprised of salary
and benefits, costs incurred in protecting the Company's intellectual property
and an allocated portion of overhead expenses. The increase in 1996 represents
the additional development funding and clinical expenses related to the ENABL
System and the development of the ONE-STEP, Reposable STEP and Mini STEP access
devices. The decrease in 1995 reflects the completion or discontinuation of
development programs, including costs associated with development, clinical
trials and regulatory submission of a device using the Company's gas exchange
and blood pumping technologies. The Company anticipates that research,
development, regulatory and clinical expenditures are likely to increase in
future periods.
Sales and marketing expenses were $4,740,050 in 1996, compared to
$3,895,338 in 1995 and $2,063,123 in 1994. Sales and marketing expenses are
primarily comprised of salary, benefits and commissions; an allocated portion of
overhead expenses; advertising, promotional and customer service expenses and
cost of product samples. The increase reflects the expansion of sales and
marketing functions for M.I.S. products as sales volumes increased in 1995 and
1996, and as the Company assembled its sales force of direct and independent
representatives and international distributors following the initial
commercialization of its M.I.S. products in the fourth quarter of 1994. The
expenses in 1996 included compensation to sales representatives, costs of sample
and demonstration product, costs to complete outcomes studies, costs of
promotional and advertising programs and costs associated with establishing
international distributors. InnerDyne expects that sales and marketing expenses
will continue to increase in absolute dollars.
General and administrative expenses were $2,003,905 in 1996, compared to
$1,779,227 in 1995 and $2,984,926 in 1994. General and administrative expenses
are primarily comprised of salary and benefits, an allocated portion of overhead
expenses, as well as legal, accounting, insurance and other general corporate
expenses. The increase in expenses in 1996 reflects additional staffing to
support investor relations and financial functions, increased insurance costs,
and professional services. The decrease in expenses in 1995 reflects
efficiencies resulting from the Company's April 1994 merger, particularly in the
areas of general and administrative staffing, insurance costs and professional
services. Expenses in 1994 included legal, accounting, consulting, filing and
other expenses related to the merger, as well as expenses associated with the
integration of the two companies. The Company anticipates that general and
administrative expenses will increase in absolute dollars to support expanding
operations.
Interest income was $263,679 in 1996, $250,594 in 1995 and $459,830 in
1994. The increase in 1996 was due to higher interest earned as the Company's
cash, cash equivalents and marketable investment securities increased. Interest
expense was $62,011 in 1996, $28,908 in 1995 and $63,511 in 1994. This interest
expense was primarily the result of debt and capital leases incurred to finance
equipment to support operations of the Company, in addition to interest incurred
in 1994 related to loans to IMI from its stockholders.
Primarily for the reasons outlined above, InnerDyne incurred net losses of
$4,659,083 or $.23 in 1996, $5,627,115 or $.32 per share in 1995 and $9,904,142
or $.61 per share in 1994. Management believes that the Company is likely to
incur operating losses at least through 1997.
LIQUIDITY AND CAPITAL RESOURCES
From its inception to December 31, 1996, the Company has incurred an
accumulative deficit of approximately $51.3 million. Since inception, the
Company's cash expenditures have exceeded its revenues. Prior to 1992, the
Company was funded primarily through private placements of equity securities.
In 1992, the Company completed an initial public offering of 2,875,000 shares
of its Common Stock at $11.00 per share, which raised approximately $28.8
million (net of underwriter's discounts and offering expenses). The 1994
acquisition of InnerDyne Medical, Inc. was accomplished through the issuance of
additional Common Stock of the Company. In June 1995, the Company closed a
private
<PAGE>
placement of 1,435,599 shares of the Company's Common Stock and warrants to
purchase 287,200 additional shares of Common Stock, with gross proceeds to the
Company of approximately $3.2 million. In March and April of 1996, holders of
warrants to purchase an aggregate of 242,952 shares of Common Stock exercised
such warrants, resulting in gross proceeds to the Company of $704,561. The
Company concluded a public offering on May 20, 1996, with the sale of 2,650,000
shares of Common Stock at $3.50 per share, which raised $8,015,268 (net of
underwriters and issuance expenses).
At December 31, 1996, cash and cash equivalents totaled $7,270,285 compared
to a total cash, cash equivalents and marketable investment securities balance
of $2,718,418 at December 31, 1995. The Company had $776,901 and $542,658 in
capital expenditures in the years ended December 31, 1996 and 1995,
respectively. Working capital totaled $8,182,514 at December 31, 1996, and the
Company had long-term debt, excluding current installments, totaling $629,557
relating to financing of equipment.
In February 1996, the Company renewed its credit facility with Silicon
Valley Bank. Subject to certain covenants and conditions, the Company may borrow
up to $2,000,000 on a revolving credit basis at prime plus 1 1/4% and $750,000
as a 42-month term loan at prime plus 1 3/4%. The revolving credit portion of
the facility is available based on the existence and magnitude of eligible
receivables, and the term loan portion of the facility is available based on
eligible equipment purchases. As of December 31, 1995, the Company had borrowed
$241,712 under the previous agreement with Silicon Valley Bank, and as of
December 31, 1996 had borrowed an additional $670,072 under the current
agreement for the financing of capital expenditures and $300,000 under the
revolving credit facility for financing of working capital needs.
In the future, the Company expects to incur substantial additional
operating losses and cash outflow requirements as a result of expenditures
related to expansion of sales and marketing capability, expansion of
manufacturing capacity, research and development activities, compliance with
regulatory requirements, and possible investment in or acquisition of additional
complementary products, technologies or businesses. The timing and amounts of
these expenditures will depend upon many factors, such as the availability of
capital, progress of the Company's research and development, and factors that
may be beyond the Company's control, such as the results of product trials, the
requirements for and the time required to obtain regulatory approval for
existing products and any other products that may be developed or acquired, and
market acceptance of the Company's products.
The Company's capital requirements will depend on numerous factors,
including market acceptance and demand for its products; the resources the
Company devotes to the development, manufacture and marketing of its products;
the progress of the Company's clinical research and product development
programs; the receipt of, and the time required to obtain regulatory clearances
and approvals; the resources required to protect the Company's intellectual
property; and other factors. The timing and amount of such capital requirements
cannot be accurately predicted. Funds may also be used for the acquisition of
businesses, products and technologies that are complementary to those of the
Company. Consequently, although the Company believes that the proceeds of the
public offering of shares of its Common Stock completed in May 1996, together
with revenues, credit facilities and other sources of liquidity, will provide
adequate funding for its capital requirements through at least 1997, the Company
may be required to raise additional funds through public or private financings,
collaborative relationships or other arrangements. There can be no assurance
that the Company will not require additional funding or that such additional
funding, if needed, will be available on terms attractive to the Company, or at
all. Any additional equity financings may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting of stockholders to be held May 23, 1997
and the information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is incorporated by
reference from the information under the caption "Election of Directors
- --Nominees" in the Registrant's Proxy Statement. See "Item 1.
Business--Executive Officers of the Company" for information with respect to
the executive officers of the Company.
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Compensations of Executive Officers" and "Certain Relationships and Related
Transactions" in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Common
Stock Ownership of Certain Beneficial Owners and Management" in the
Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions
"Compensation of Executive Officers" and "Certain Relationships and Related
Transactions" in the Registrant's Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements and Schedules
Financial Statements - See pages F-1 to F-16.
Schedules not listed above have been omitted because they are
not required or the information required to be set forth therein
is included in the Financial Statements or notes thereto.
<PAGE>
2. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
3.1(7) Restated Certificate of Incorporation of Registrant.
3.2(2) Bylaws of Registrant.
10.1*(4) 1987 Stock Option Plan, as amended.
10.2*(8) 1991 Directors' Stock Option Plan, as amended.
10.3*(8) 1991 Employee Stock Purchase Plan, as amended.
10.4(1) Purchase Agreement (Series C) dated as of June 26, 1990, as
amended.
10.6(1) Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.7*(1) Defined Contribution "401(k)" Plan as amended January 1, 1990.
10.8(1) Equipment Financing Agreement dated as of June 1, 1990 between
Lease Management Services, Inc. and the Registrant.
10.9(2) Lease dated June 1989 between the Registrant and William J.
Lowenberg.
10.13*(3) Letter Agreement with William G. Mavity.
10.14*(4) Consulting Agreement with Robert M. Curtis dated January 12,
1994.
10.16(5) Lease Extension with BSL Associates.
10.17(5) Lease Agreements with QAD Associates.
10.18(5)(9) Licensing Agreement with SENKO Medical Instrument Mfg. Co., Ltd.
10.19*(5) InnerDyne Medical, Inc. 1989 Incentive Stock Plan.
10.20*(5) Interventional Thermodynamics Inc. 401(k) Plan.
10.22(6)(9) License and Development Agreement dated as of August 25, 1994
by and among InnerDyne, Inc., InnerDyne Medical, Inc. and
CooperSurgical, Inc.
10.23(7) Loan and Security Agreement and Collateral Assignment, Patent
Mortgage and Security Agreement dated as of February 23, 1995
between the Registrant and Silicon Valley Bank.
10.24(8) Common Stock and Warrant Purchase Agreement dated as of
June 2, 1995 by and among the Registrant and the purchasers
named therein, including form of Common Stock Warrant.
10.25(10) Amendment to Loan and Security Agreement dated as of February 29,
1996 between the Registrant and Silicon Valley Bank.
10.26*(10) 1996 Stock Option Plan.
10.27(9)(10) Licensing, Development and Manufacturing Agreement dated as of
February 2, 1996 between the Registrant and EndoTex
Interventional Systems, Inc.
10.28(9)(10) National Contract dated October 1995 between the Registrant and
Surgical Care Affiliates, Inc.
10.29(9)(10) License Agreement dated as of January 1, 1996 between the
Registrant and Alliance of Children's Hospitals, Inc.
10.31*(10) Letter Agreement with Robert A. Stern dated January 10, 1996.
10.32* Change of Control Agreement as of September 12, 1996 between
the Registrant and William G. Mavity.
10.33+ License Agreement dated as of December 20, 1996 by and among
the Registrant and United States Surgical Corporation.
10.34+ License, Supply and Distribution Agreement dated as of January 6,
1997 by and between the Registrant and Sherwood Medical Company.
10.35* Letter Agreement with Daniel J. Genter dated March 13, 1996.
10.36 Amendment to Loan and Security Agreement dated as of February 4,
1997 between the Registrant and Silicon Valley Bank.
10.37* Form of Senior Management Change of Control Agreement.
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule.
- --------------
* Management compensatory plan or arrangement.
+ Confidential treatment requested.
<PAGE>
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-44361), filed December 4, 1991.
(2) Incorporated by reference to exhibits filed in response to Item
14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992.
(3) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended September 30, 1993.
(4) Incorporated by reference to exhibits filed in response to Item 21,
"Exhibits and Financial Statement Schedules," of the Registrant's
Registration Statement on Form S-4, as amended (File No. 33-74624), filed
January 31, 1994.
(5) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 1994.
(6) Incorporated by reference to exhibits filed in response to Item 6
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 1994.
(7) Incorporated by reference to exhibits filed in response to Item 13,
"Exhibit List and Reports on Form 8-K," of the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1994.
(8) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K" of the Registrant's Quarterly Report on
Form 10-QSB for the Quarterly period ended June 30, 1995.
(9) Confidential treatment granted for portions of this exhibit by order of
the Securities and Exchange Commission.
(10) Incorporated by reference to exhibits filed in response to Item 13,
"Exhibit List and Reports on Form 8-K," of the Registrants Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(b) Reports on Form 8-K: None
<PAGE>
INNERDYNE, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of KPMG Peat Marwick LLP, Independent Auditors. . . . . . . . . . . F-2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
InnerDyne, Inc.:
We have audited the accompanying balance sheets of InnerDyne, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InnerDyne, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996
in conformity with generally accepted accounting principles.
San Francisco, California
January 29, 1997
<PAGE>
INNERDYNE, INC.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,270,285 1,720,814
Marketable investment securities (note 4) - 997,604
Accounts receivable, less allowance for doubtful
accounts of $159,165 in 1996 and $73,290 in 1995 1,290,805 735,911
Interest and other receivables 283,913 195,646
Inventories (note 5) 1,159,098 585,123
Prepaid expenses 151,150 78,959
------------ -----------
Total current assets 10,155,251 4,314,057
------------ -----------
Equipment and leasehold improvements:
Equipment 3,216,320 2,473,578
Leasehold improvements 169,492 135,333
------------ -----------
3,385,812 2,608,911
Less accumulated depreciation and amortization 2,226,503 1,660,616
------------ -----------
Net equipment and leasehold improvements 1,159,309 948,295
Deposits 47,020 107,251
------------ -----------
$ 11,361,580 5,369,603
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (note 6) $ 300,000 -
Current installments of long-term debt (note 6) 223,914 85,058
Current installments under capital leases (note 7) - 29,683
Accounts payable 301,946 206,320
Accrued expenses 505,983 344,115
Accrued payroll 310,885 123,079
Accrued commissions 120,323 108,369
Accrued clinical costs 209,686 276,472
------------ -----------
Total current liabilities 1,972,737 1,173,096
Long-term debt, excluding current installments (note 6) 629,557 186,689
Commitments (note 7)
Stockholders' equity (note 8):
Preferred stock, $.01 par value. Authorized 1,000,000
shares; no shares issued and outstanding in 1996 and 1995 - -
Common stock, $.01 par value. Authorized 40,000,000 shares;
issued and outstanding 21,542,034 shares in 1996 and
18,315,501 shares in 1995 215,420 183,155
Additional paid-in capital 59,818,445 50,442,159
Accumulated deficit (51,274,579) (46,615,496)
------------ -----------
Net stockholders' equity 8,759,286 4,009,818
------------ -----------
$ 11,361,580 5,369,603
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
INNERDYNE, INC.
Statements of Operations
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product sales $ 7,773,547 4,729,651 275,517
Licensing, contract, and grant revenue (note 10) 1,312,580 545,409 603,392
----------- ---------- -----------
Total revenues 9,086,127 5,275,060 878,909
Costs and expenses:
Cost of product sales 4,363,367 3,148,915 1,939,974
Research, development, regulatory, and clinical 2,839,556 2,299,311 3,951,536
Sales and marketing 4,740,050 3,895,338 2,063,123
General and administrative 2,003,905 1,779,227 2,984,926
----------- ---------- -----------
Total costs and expenses 13,946,878 11,122,791 10,939,559
----------- ---------- -----------
Operating loss (4,860,751) (5,847,731) (10,060,650)
Other income (expense):
Interest income 263,679 250,594 459,830
Interest expense (62,011) (28,908) (63,511)
Loss on asset disposal - (1,070) (239,811)
----------- ---------- -----------
Total other income 201,668 220,616 156,508
----------- ---------- -----------
Net loss $(4,659,083) (5,627,115) (9,904,142)
----------- ---------- -----------
----------- ---------- -----------
Net loss per share $ (.23) (.32) (.61)
----------- ---------- -----------
----------- ---------- -----------
Weighted average shares outstanding 20,324,033 17,561,480 16,196,903
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
INNERDYNE, INC.
Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Notes
Additional receivable Net stock-
Common paid-in Accumulated from holders'
stock capital deficit stockholders equity
-------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $157,366 46,609,946 (31,084,239) (16,250) 15,666,823
Issuance of shares upon exercise of stock
options and under employee stock
purchase plan 6,641 133,321 - - 139,962
Issuance of shares for services rendered 572 113,866 - - 114,438
Issuance of shares for conversion of notes
and accrued interest 1,103 228,869 - - 229,972
Issuance of shares upon exercise of warrants
for cash and on a net exercise basis 481 27,975 - - 28,456
Repayment of notes receivable from
stockholders - - - 16,250 16,250
Net loss - - (9,904,142) - (9,904,142)
-------- ---------- ------------ ------------ ----------
Balances at December 31, 1994 166,163 47,113,977 (40,988,381) - 6,291,759
Issuance of shares upon exercise of stock
options and under employee stock
purchase plan 2,632 155,475 - - 158,107
Issuance of shares for private placement
(note 8) 14,360 3,230,998 - - 3,245,358
Private placement expenses (note 8) - (58,291) - - (58,291)
Net loss - - (5,627,115) - (5,627,115)
-------- ---------- ------------ ------------ ----------
Balances at December 31, 1995 183,155 50,442,159 (46,615,496) - 4,009,818
Issuance of shares upon exercise of stock
options and under employee stock
purchase plan 1,609 172,113 - - 173,722
Issuance of shares upon warrant
exercise 2,429 702,132 - - 704,561
Issuance of shares in public offering (net
of underwriter and issuance expenses of
$1,259,732) 26,500 7,988,768 - - 8,015,268
Issuance of shares for services
rendered 60 14,940 - - 15,000
Issuance of common stock to
Boston Scientific Corporation
for cash (note 10) 1,667 498,333 - - 500,000
Net loss - - (4,659,083) - (4,659,083)
-------- ---------- ------------ ------------ ----------
Balances at December 31, 1996 $215,420 59,818,445 (51,274,579) - 8,759,286
-------- ---------- ------------ ------------ ----------
-------- ---------- ------------ ------------ ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
INNERDYNE, INC.
Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,659,083) (5,627,115) (9,904,142)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of equipment and leasehold improvements 565,887 578,201 674,668
Amortization of intangible assets - - 77,808
Amortization of discount on marketable investment securities - (51,540) -
Provision for allowance on doubtful accounts 108,566 73,290 -
Provision for obsolete inventory 60,757 43,881 -
Loss on asset disposal - 1,070 239,811
Common stock issued for services rendered 15,000 - 114,438
Interest accrued on convertible note payable - - 9,972
Increase in accounts receivable, interest, and other receivables (751,727) (603,851) (325,246)
Increase in inventories (634,732) (235,093) (254,334)
Decrease (increase) in prepaid expenses and deposits (11,960) 149,513 (115,079)
Increase (decrease) in accounts payable 95,626 (181,210) 118,459
Increase (decrease) in accrued expenses 294,842 (39,779) (214,698)
----------- ----------- -----------
Net cash used in operating activities (4,916,824) (5,892,633) (9,578,343)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of marketable investment securities - (1,935,064) (2,788,934)
Maturities of marketable investment securities 997,604 2,739,000 3,578,718
Proceeds from notes receivable from stockholders - - 16,250
Capital expenditures (776,901) (542,658) (652,430)
Proceeds from disposal of equipment and leasehold improvements - - 1,321
----------- ----------- -----------
Net cash provided by investing activities 220,703 261,278 154,925
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable - - 220,000
Proceeds from issuance of long-term debt 670,072 241,712 -
Proceeds from line of credit 300,000
Proceeds from issuance of common stock, net 9,393,551 3,345,174 168,418
Principal payments under capital leases (29,683) (46,875) (54,760)
Principal payments on long-term debt (88,348) (168,902) (176,917)
----------- ----------- -----------
Net cash provided by financing activities 10,245,592 3,371,109 156,741
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,549,471 (2,260,246) (9,266,677)
Cash and cash equivalents at beginning of year 1,720,814 3,981,060 13,247,737
----------- ----------- -----------
Cash and cash equivalents at end of year $ 7,270,285 1,720,814 3,981,060
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 62,011 28,908 52,060
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Issuance of common stock in exchange for convertible promissory notes
and/or accrued interest $ - - 229,972
Write off of accounts receivable 22,691 - -
</TABLE>
See accompanying notes to financial statements.
<PAGE>
INNERDYNE, INC.
Notes to Financial Statements
December 31, 1996, 1995, and 1994
(1) DESCRIPTION OF THE COMPANY
InnerDyne, Inc. (the Company) is engaged primarily in the development and
commercialization of access products used to perform minimally invasive
surgery (MIS) procedures. The Company markets its MIS access products
domestically through a network of direct and independent representatives,
mainly to general surgeons and gynecologists, who represent the primary
medical disciplines performing MIS procedures in the U.S. Internationally,
the Company markets its MIS products through independent distributors for
resale to foreign health care institutions. In addition, the Company has
licensing agreements and/or is pursuing licensing opportunities related to
its proprietary radial dilation, biocompatible coating, and thermal
ablation technologies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash
equivalents consist of money market funds and commercial paper of
$6,519,797, $1,137,013, and $3,851,990 at December 31, 1996, 1995,
and 1994, respectively.
(b) INVENTORIES
Raw materials and supplies inventories are stated at the lower of
cost or market. Finished goods are stated on the basis of
accumulated manufacturing costs, but not in excess of market (net
realizable value). Cost is determined using the first-in, first-out
(FIFO) method.
(c) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization of equipment and leasehold improvements is provided
using the straight-line method over the estimated useful lives of the
assets which range from three to eight years.
(d) INTANGIBLE ASSETS
Patent costs related to products and technologies still in the
development stage are expensed as incurred.
(e) REVENUE RECOGNITION
Revenues are recognized upon shipment of products.
(f) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
<PAGE>
(g) NET LOSS PER SHARE
The Company's loss per share is based on the weighted average number
of common shares outstanding during the periods. Common stock
equivalents (stock options and warrants) have not been included in the
computation as they would not have a dilutive effect.
(h) INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(i) STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION. SFAS 123 encourages
entities to adopt a fair value based method of accounting for stock
options or similar equity instruments. However, it also allows an
entity to continue measuring compensation cost for stock based
compensation using the intrinsic-value method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES (APB 25). The Company has elected to
continue to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS No. 123.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(k) RECLASSIFICATION
Certain amounts in 1995 and 1994 have been reclassified to conform
with the 1996 presentation.
(3) MERGER
On April 28, 1994, InnerDyne, Inc. (formerly CardioPulmonics, Inc.)
completed a merger, whereby it issued 7,465,237 shares of its common
stock in exchange for all of the outstanding common and preferred stock,
warrants, and retirement of certain notes payable from stockholders of
InnerDyne Medical, Inc., a privately held California corporation that
was founded to develop and manufacture proprietary medical devices used
in minimally invasive surgical procedures. In addition,
CardioPulmonics, Inc. assumed outstanding options to purchase shares of
common stock of InnerDyne Medical, Inc. Subsequent to the merger,
CardioPulmonics, Inc. changed its name to InnerDyne, Inc. The merger
has been accounted for as a pooling-of-interests combination and,
accordingly, the Company's financial statements have been restated for
all periods prior to the merger to include the results of operations,
financial positions, and cash flows of InnerDyne Medical, Inc.
<PAGE>
(3) MERGER
Net revenue and net loss for the individual entities prior to the merger
are as follows:
Cardio-
Pulmonics, InnerDyne
Inc. Medical, Inc. Combined
---------- ------------- ---------
Three months ended March 31, 1994:
Net revenue $ - 28,957 28,957
Net loss 1,271,409 1,350,271 2,621,680
Merger expenses totaling $687,807 were charged to expense during 1994.
(4) MARKETABLE INVESTMENT SECURITIES
The Company held no marketable securities as of December 31, 1996 and all
marketable investment securities held at December 31, 1995, are classified
as held-to-maturity. Held-to-maturity securities are those securities that
the Company has the ability and the intent to hold until maturity. Held-
to-maturity securities are recorded at cost, adjusted for the amortization
or accretion of premiums or discounts. Gains and losses on investment
security transactions are reported on the specific-identification method.
Dividend and interest income are recognized when earned. A decline in the
market value of any security below cost that is deemed other than temporary
results in a charge to earnings and the establishment of a new cost basis
for the security.
All marketable securities at December 31, 1995 were Corporate Commercial
Paper, due within one year, with a fair market value of $997,500. Gross
unrealized holding losses totaled $104. There were no gross unrealized
holding gains. Additionally, there were no material realized gains or
losses on marketable investment securities for the years ending
December 31, 1996, 1995, and 1994.
(5) INVENTORIES
Inventories consist of the following:
1996 1995
---------- ----------
Raw materials and supplies $ 725,953 445,936
Finished goods 553,362 198,647
Reserve for obsolescence (120,217) (59,460)
---------- ----------
$1,159,098 585,123
---------- ----------
---------- ----------
<PAGE>
(6) LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt consists of the following:
1996 1995
---------- ----------
11.5%-16.6% installment financing agreements
secured by equipment $ - 30,035
10.0% - 10.25% term loans payable to bank,
secured by equipment, payable in monthly
installments of $25,858 including interest
through 2000 853,471 241,712
---------- ----------
Total long-term debt 853,471 271,747
Less current installments 223,914 85,058
---------- ----------
Long-term debt, excluding current
installments $629,557 186,689
---------- ----------
---------- ----------
The aggregate maturities of long-term debt for the years subsequent to
December 31, 1996 are as follows: 1997, $223,914; 1998, $270,405; 1999,
$240,617; and 2000, $118,535.
On February 29, 1996, the Company renewed its credit facility with
Silicon Valley Bank. Subject to certain covenants and conditions, the
Company may borrow up to $2,000,000 on a revolving credit basis at prime
plus 1-1/4 percent based on eligible receivables. The Company also has
an equipment advance line of credit, which allows the Company to borrow
up to $750,000 per year based on eligible equipment purchases. Amounts
outstanding on this equipment advance line of credit are periodically
converted to 42 month term loans bearing interest at prime plus 1-3/4
percent. As of December 31, 1996, the Company had drawn $300,000 on the
revolving line of credit, secured by certain accounts receivable, and
had term loans totaling $853,471 as indicated above.
(7) LEASES
The Company has several noncancelable operating leases, primarily for
its facilities, that expire over the next four years. It is generally
expected that, in the normal course of business, operating leases that
expire will be renewed or replaced by other leases with similar terms.
Rental expense for all operating leases was $425,798 in 1996, $347,294
in 1995, and $263,070 in 1994.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December
31, 1996 are:
Years ended December 31:
1997 $ 353,427
1998 319,318
1999 81,750
2000 5,760
2001 1,920
---------
Total minimum lease payments $ 762,175
---------
---------
<PAGE>
(7) LEASES (continued)
The Company also leased certain equipment under long-term capital
leases. During 1996, the Company paid off its capital lease obligation
and retained the related assets. At December 31, 1995, capitalized
costs of $213,713 and accumulated amortization of $191,150 are included
in property and equipment. Amortization of assets held under capital
leases is included with depreciation expense.
(8) CAPITAL STOCK AND STOCK-BASED COMPENSATION PLANS
The Company completed a private placement of securities on June 2, 1995
in which it sold 1,435,999 shares of common stock and 287,200 warrants
to purchase common stock for cash proceeds of $3,245,358. During 1996,
warrants to purchase 44,248 shares of common stock were canceled and the
remaining warrants to purchase 242,952 shares of common stock were
exercised.
The Company completed a public offering of securities in May 1996, in
which it sold 2,650,000 shares of common stock for proceeds, net of
underwriters fees and other offering expenses, of $8,015,268. In
connection with this offering, warrants to purchase 250,000 shares of
the Company s common stock were issued to the underwriters. The Company
has reserved 250,000 shares of its common stock for the exercise of
these warrants. These warrants become fully vested on May 14, 1997, are
exercisable at an exercise price of $4.20 per share and expire on May
15, 2002.
The Company has four fixed option plans. They are the 1987 Stock Option
Plan (the 1987 Plan), the 1989 Incentive Stock Plan (the 1989 Plan), the
1996 Stock Option Plan (the 1996 Plan), and the 1991 Directors' Stock
Option Plan (the Directors Plan), under which 2,650,000, 1,453,536,
1,000,000, and 300,000 shares have been reserved for issuance,
respectively. As of December 31, 1996, 13,826 shares, -0- shares,
775,000 shares, and 192,000 shares remained available for future grant
under the 1987 Plan, the 1989 Plan, the 1996 Plan, and the Directors
Plan, respectively. The exercise price of all granted options under
these Plans must be at least equal to fair market value of the common
stock on the date of grant, except that the exercise price for all
nonstatutory stock options granted under the 1996 Plan must be at least
equal to the fair market value of the common stock on the date of grant
for grants made to certain of the Company s executive officers and at
least 85 percent of the fair market value of the common stock on the
date of grant for all other persons. For all plans except the Directors
Plan, the number of shares, option price, and dates the options become
exercisable and expire are determined by the Board of Directors on an
option-by-option basis. Under the Directors Plan, directors are granted
options annually to acquire 10,000 shares which become exercisable on
the first anniversary of the date of grant.
<PAGE>
(8) CAPITAL STOCK AND STOCK-BASED COMPENSATION PLANS (continued)
A summary of the activity under the 1987 Plan, the 1989 Plan, the 1996 Plan,
and the Directors Plan follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- -------------------- ------------------------
Weighted- Weighted-
average average
Number of exercise Number of exercise Number of Exercise
shares price shares price shares price
----------- -------- --------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year . . . . . . . . . . . . . . . . . . 1,739,045 $ 1.92 1,815,898 $ 1.47 1,941,660 $ .04 - 9.25
Options granted. . . . . . . . . . . . . . 1,163,975 3.42 455,439 3.68 894,009 .15 - 4.00
----------- --------- ---------
2,903,020 2,271,337 2,835,669
----------- --------- ---------
Options exercised. . . . . . . . . . . . . 115,661 .57 214,093 .24 657,559 .04 - 1.88
Options canceled . . . . . . . . . . . . . 250,890 2.67 318,199 2.99 362,212 .13 - 9.25
----------- --------- ---------
366,551 532,292 1,019,771
----------- --------- ---------
Options outstanding at end of year . . . . 2,536,469 $ 2.60 1,739,045 $ 1.92 1,815,898 $ .09 - 6.50
----------- --------- ---------
----------- --------- ---------
Options exercisable at end of year . . . . 907,189 $ 2.00 582,632 $ 1.40 362,838 $
Weighted-average fair value of options
granted during the year. . . . . . . . . $ 1.90 $ 1.82
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------- ----------------------------------
Number
Range of Outstanding Weighted-avg. Number
exercise at remaining Weighted-avg. exercisable at Weighted-avg.
prices 12/31/96 contractual life exercise price 12/31/96 exercisable price
- ----------- ------------ ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.09-0.42 267,971 6.3 yrs. $ 0.18 220,837 $ 0.19
1.50-2.00 798,575 3.0 1.64 417,419 1.71
2.50-3.38 675,649 4.1 3.01 70,071 3.10
3.50-3.88 503,525 4.6 3.59 110,313 3.64
4.13-4.50 171,150 3.2 4.47 66,800 4.45
5.00-6.50 119,599 3.8 5.27 21,749 6.45
--------- -------
0.09-6.50 2,536,469 4.0 2.60 907,189 2.00
--------- -------
--------- -------
</TABLE>
<PAGE>
(8) CAPITAL STOCK AND STOCK-BASED COMPENSATION PLANS (continued)
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with FASB Statement No. 123, the Company's
net loss and loss per share would have been increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C> <C>
Net loss As reported $(4,659,083) (5,627,115)
Pro forma (5,393,559) (5,771,695)
Primary EPS As reported (0.23) (0.32)
Pro forma (0.26) (0.33)
</TABLE>
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the effect that calculating compensation cost for stock-based
compensation under SFAS 123 has on the pro forma net loss as shown above may
not be representative of the effects on reported net losses or income for
future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995, respectively: risk
free interest rates of 6.2 percent and 6.5 percent; expected dividend yields
of 0 percent; expected lives of 3.15 years; and expected volatility of 77
percent and 71 percent.
The Company also has an employee stock purchase plan (the ESPP), whereby
qualified employees are allowed to purchase limited amounts of the Company's
common stock at the lesser of 85 percent of the market value of the stock at
the beginning or end of the offering period. The Company has reserved
300,000 shares of common stock for future purchases by full-time employees
under the ESPP. The Company issued 45,253, 49,107, and 6,501 shares in
1996, 1995, and 1994, respectively, and issued 106,920 shares cumulative to
date through December 31, 1996.
Because the discount allowed to employees under the ESPP approximates the
Company's cost to issue equity instruments, the plan is not deemed to be
compensatory and, therefore, is excluded from the pro forma loss shown
above.
(9) INCOME TAXES
The Company has reported no income tax expense or benefit for the years
ended December 31, 1996, 1995, and 1994, due to net operating losses. The
difference between the expected tax benefit and actual tax benefit is
primarily attributable to the effect of these net operating losses being
offset by an increase in the Company's valuation allowance.
<PAGE>
(9) INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts . . . . . . . . $ 48,032 27,337
Inventories, principally due to additional
costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986, and reserves
for obsolescence . . . . . . . . . . . . . . . 71,741 134,078
Equipment, principally due to differences in
depreciation . . . . . . . . . . . . . . . . . 118,406 132,046
Accrued expenses. . . . . . . . . . . . . . . . 108,962 106,955
Startup and package design costs. . . . . . . . - 5,830
Research activities credit carryforward . . . . 366,370 338,723
Net operating loss carryforwards. . . . . . . . 15,318,213 13,425,908
Other . . . . . . . . . . . . . . . . . . . . . 30,147 21,342
----------- ----------
Total gross deferred tax assets . . . . 16,061,871 14,192,219
Less valuation allowance. . . . . . . . 16,061,871 14,192,219
----------- ----------
Net deferred tax assets . . . . . . . . $ - -
----------- ----------
----------- ----------
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995 was
$12,017,053. The net change in the valuation allowance for the years ended
December 31, 1996 and 1995 is an increase of $1,869,652 and $2,175,166,
respectively. The increase in the valuation allowance in 1996 is primarily
attributable to the increase in the net operating loss carryforwards and
credits incurred in 1996.
Subsequently, recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1996 will be allocated as an
income tax benefit to be reported in the statement of operations.
<PAGE>
(9) INCOME TAXES (continued)
At December 31, 1996, the Company has net operating loss and research
activities credit carryforwards to offset future income for federal income
tax purposes approximately as follows:
<TABLE>
<CAPTION>
Net Operating loss
carryforward for Research activities
regular income tax credit
Expiring purposes carryforward
- ------------- ------------------ ---------------------
<S> <C> <C>
2001 $ 56,000 -
2002 170,000 -
2003 797,000 -
2004 1,879,000 182,000
2005 3,675,000 267,000
2006 6,139,000 354,000
2007 11,309,000 294,000
2008 8,185,000 33,000
2009 7,885,000 127,000
2010 6,281,000 37,000
2011 4,691,000 68,000
Estimated NOLs and credits which
will expire unutilized due
to the change in ownership
described below (10,000,000) (995,000)
------------ --------
$ 41,067,000 367,000
------------ --------
------------ --------
</TABLE>
As a result of the merger discussed in note 3, the Company has undergone a
greater than 50 percent change of ownership under the rules of the Tax
Reform Act of 1986. Consequently, certain of the Company's net operating
loss carryforwards and research credit carryforwards will expire unutilized.
Such estimated amounts have been disclosed in the table above. The maximum
amount of the remaining net operating loss carryforwards available to offset
future income in a given year is limited to the product of the Company's
value on the date of ownership change and the federal long-term tax-exempt
rate, plus any limited carryforward not utilized in prior years. Net
operating losses of approximately $16,600,000 incurred after the merger are
not subject to the change in ownership limitation.
(10) COLLABORATIVE AND LICENSING AGREEMENTS
During 1996, the Company was a party to the following collaborative
development and licensing agreements:
(a) SENKO Medical Instrument Manufacturing Co. Ltd. (SENKO) - Effective
April 5, 1994, the Company entered into a license agreement covering its
proprietary coating technology. Under the terms of the agreement, the
Company licensed its siloxane coating of microporous hollow fibers to
SENKO, in exchange for an initial payment and continuing royalties. The
Company assisted in the construction and startup of the coating system in
SENKO'S manufacturing facility in Japan. In May 1996, the Company received
an order from SENKO to build a second fiber coating system for use by
SENKO. The fibers coated by means of this process will be used in SENKO'S
membrane oxygenator line. The agreement covers a period of up to ten
years. Revenue totaling $364,842 was recognized in 1996, $156,693 in 1995,
and $225,700 in 1994.
<PAGE>
(10) COLLABORATIVE AND LICENSING AGREEMENTS (continued)
(b) Boston Scientific Corporation (BSC) - Effective April 17, 1996, the
Company entered into an agreement with BSC covering the potential
application and use of the Company's proprietary biocompatible coating
technologies with BSC's stents, grafts, vena cava filters, and other
implantable medical devices. As part of this agreement, BSC purchased
167,777 shares of the Company's common stock for $500,000. Additionally,
the agreement involves initial research support, future license fees, and
royalty payments if BSC decides to proceed with a technology transfer.
(c) United States Surgical Corporation (USSC) - Effective December 20,
1996, the Company entered into an agreement which grants USSC exclusive
worldwide sales and marketing rights for its EnAbl-TM- Thermal Ablation
System, a proprietary technology for treating abnormal uterine bleeding.
In exchange for initial license fees, milestone payments, and royalties
based upon future sales, USSC gains the rights to complete development,
manufacture, and market the technology on a worldwide basis, as well as the
Company's agreement not to compete in their intended field of application.
The agreement also provides USSC with an option to purchase rights to the
technology for defined applications.
Since December 31, 1996, the Company has also entered into the following
license, supply and distribution agreement:
(d) Sherwood-Davis & Geck, subsidiary of American Home Products (SDG) - On
January 6, 1997, the Company signed an agreement with SDG, a recognized
leader in the development, manufacture, and sale of enteral feeding pumps
and related devices. The Company will manufacture for SDG, on an exclusive
basis, a specialized STEP-TM- product designed to improve gastrointestinal
placement of SDG's enteral feeding tubes. SDG will market the kits
containing the device worldwide, and the Company will handle assembly of
the kits. The Company will have a 12-year manufacturing agreement and a
minimum purchase guarantee from SDG for the next three years at prices set
in the agreement. SDG is also obligated to make a series of licensing fee
payments commencing upon execution of the agreement and milestone payments
upon the achievement of certain regulatory approvals.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INNERDYNE, INC.
Date: March 28, 1997 By: /s/ WILLIAM G. MAVITY
----------------------------------
William G. Mavity
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William G. Mavity and Robert A. Stern,
or either of them, his attorneys-in-fact, each with the power of substitution
for him in any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ WILLIAM G. MAVITY
---------------------- President, Chief Executive Officer and Director March 28, 1997
William G. Mavity (Principal Executive Officer)
/s/ ROBERT A. STERN
---------------------- Vice President and Chief Financial Officer March 28, 1997
Robert A. Stern (Principal Financial and Accounting Officer)
/s/ ROBERT M. CURTIS
---------------------- Director March 28, 1997
Robert M. Curtis
---------------------- Director March , 1997
Eugene J. Fischer
/s/ EDWARD W. BENECKE
---------------------- Director March 28, 1997
Edward W. Benecke
/s/ GUY P. NOHRA
---------------------- Director March 28, 1997
Guy P. Nohra
/s/ STEVEN N. WEISS
---------------------- Director March 28, 1997
Steven N. Weiss
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 *(4) 1987 Stock Option Plan, as amended.
10.2 *(8) 1991 Directors' Stock Option Plan, as amended.
10.3 *(8) 1991 Employee Stock Purchase Plan, as amended.
10.4 (1) Purchase Agreement (Series C) dated as of June 26, 1990, as
amended.
10.6 (1) Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.7 *(1) Defined Contribution "401(k)" Plan as amended January 1, 1990.
10.8 (1) Equipment Financing Agreement dated as of June 1, 1990 between
Lease Management Services, Inc. and the Registrant.
10.9 (2) Lease dated June 1989 between the Registrant and William J.
Lowenberg.
10.13*(3) Letter Agreement with William G. Mavity.
10.14*(4) Consulting Agreement with Robert M. Curtis dated January 12,
1994.
10.16 (5) Lease Extension with BSL Associates.
10.17 (5) Lease Agreements with QAD Associates.
10.18 (5)(9) Licensing Agreement with SENKO Medical Instrument Mfg. Co.,
Ltd.
10.19*(5) InnerDyne Medical, Inc. 1989 Incentive Stock Plan.
10.20*(5) Interventional Thermodynamics Inc. 401(k) Plan.
10.22 (6)(9) License and Development Agreement dated as of August 25, 1994
by and among InnerDyne, Inc., InnerDyne Medical, Inc. and
CooperSurgical, Inc.
10.23 (7) Loan and Security Agreement and Collateral Assignment, Patent
Mortgage and Security Agreement dated as of February 23, 1995
between the Registrant and Silicon Valley Bank.
10.24 (8) Common Stock and Warrant Purchase Agreement dated as of June 2,
1995 by and among the Registrant and the purchasers named
therein, including form of Common Stock Warrant.
10.25 (10) Amendment to Loan and Security Agreement dated as of February 29,
1996 between the Registrant and Silicon Valley Bank.
10.26 *(10) 1996 Stock Option Plan.
10.27 (9)(10) Licensing, Development and Manufacturing Agreement dated as of
February 2, 1996 between the Registrant and EndoTex
Interventional Systems, Inc.
10.28 (9)(10) National Contract dated October 1995 between the Registrant and
Surgical Care Affiliates, Inc.
10.29 (9)(10) License Agreement dated as of January 1, 1996 between the
Registrant and Alliance of Children's Hospitals, Inc.
10.31*(10) Letter Agreement with Robert A. Stern dated January 10, 1996.
10.32* Change of Control Agreement as of September 12, 1996 between
the Registrant and William G. Mavity.
10.33+ License Agreement dated as of December 20, 1996 by and among
the Registrant and United States Surgical Corporation.
10.34+ License, Supply and Distribution Agreement dated as of January 6,
1997 by and between the Registrant and Sherwood Medical Company.
10.35* Letter Agreement with Daniel J. Genter dated March 13, 1996.
10.36 Amendment to Loan and Security Agreement dated as of February 4,
1997 between the Registrant and Silicon Valley Bank.
10.37* Form of Senior Management Change of Control Agreement.
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule.
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* Management compensatory plan or arrangement.
+ Confidential treatment requested.
<PAGE>
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 33-44361), filed December 4, 1991.
(2) Incorporated by reference to exhibits filed in response to Item
14(a)(3), "Exhibits," of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992.
(3) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-Q for quarterly period ended September 30, 1993.
(4) Incorporated by reference to exhibits filed in response to Item 21,
"Exhibits and Financial Statement Schedules," of the Registrant's
Registration Statement on Form S-4, as amended (File No. 33-74624), filed
January 31, 1994.
(5) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 1994.
(6) Incorporated by reference to exhibits filed in response to Item 6
"Exhibits and Reports on Form 8-K," of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 1994.
(7) Incorporated by reference to exhibits filed in response to Item 13,
"Exhibit List and Reports on Form 8-K," of the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1994.
(8) Incorporated by reference to exhibits filed in response to Item 6,
"Exhibits and Reports on Form 8-K" of the Registrant's Quarterly Report on
Form 10-QSB for the Quarterly period ended June 30, 1995.
(9) Confidential treatment granted for portions of this exhibit by order of
the Securities and Exchange Commission.
(10) Previously filed.
(b) Reports on Form 8-K: None
<PAGE>
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of September 12, 1996, by and between William G. Mavity
(the "Employee") and InnerDyne, Inc., a Delaware corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's
Board of Directors (the "Board"). The Board recognizes that such
consideration can be a distraction to the Employee and can cause the Employee
to consider alternative employment opportunities. The Board has determined
that it is in the best interests of the Company and its stockholders to
assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a
Change of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue
his employment with the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon termination of the Employee's employment in connection
with a Change of Control, which benefits are intended to provide the Employee
with financial security and provide sufficient income and encouragement to
the Employee to remain with the Company notwithstanding the possibility of a
Change of Control.
D. To accomplish the foregoing objectives, the Compensation Committee of
the Board has directed the Company, upon execution of this Agreement by the
Employee, to agree to the terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in
Section 3 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as
defined under applicable law. If the Employee's employment terminates for
any reason, including (without limitation) any termination prior to a Change
of Control, the Employee shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this Agreement, or
as may otherwise be available in accordance with the terms of Employee's
offer letter from the Company dated September 15, 1993 (the "Offer Letter"),
the terms of certain Board resolutions and agreements issued to the Employee
with respect to the grant of stock options for the
<PAGE>
Company's securities and the Company's established employee plans and written
policies at the time of termination. The terms of this Agreement shall
terminate upon the earlier of (i) the date that all obligations of the
parties hereunder have been satisfied or (ii) two (2) years after a Change of
Control. A termination of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of this
Agreement.
2. CHANGE OF CONTROL.
(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. Subject to
Section 4 below, if the Employee's employment with the Company is terminated
at any time within two (2) years after a Change of Control, then the Employee
shall be entitled to receive severance benefits as follows:
(i) VOLUNTARY RESIGNATION. If the Employee voluntarily
resigns from the Company (other than as an Involuntary Termination (as
defined below), then the Employee shall not be entitled to receive severance
payments under this Agreement. The Employee will receive payment(s) for all
salary, bonuses and unpaid vacation accrued as of the date of the Employee's
termination of employment and the Employee's benefits will be continued under
the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of termination and in
accordance with applicable law.
(ii) INVOLUNTARY TERMINATION. If the Employee's
employment is terminated as a result of an Involuntary Termination other than
for Cause, then, subject to the provisions of Section 5 below, each stock
option to purchase the Company's Common Stock granted to the Employee over
the course of his employment with the Company and held by the Employee on the
date of termination of employment shall become immediately vested on such
date and each such option shall be exercisable in accordance with the
provisions of the option agreement and plan pursuant to which such option was
granted. In addition, the Employee will receive payment(s) for all salary,
bonuses and unpaid vacation accrued as of the date of the Employee's
termination of employment and the Employee's benefits will be continued under
the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of termination and in
accordance with applicable law and the Offer Letter.
(iii) INVOLUNTARY TERMINATION FOR CAUSE. If the
Employee's employment is terminated for Cause, then the Employee shall not be
entitled to receive severance payments under this Agreement. The Employee
will receive payment(s) for all salary, bonuses and unpaid vacation accrued
as of the date of the Employee's termination of employment and the Employee's
benefits will be continued under the Company's then existing benefit plans
and policies in accordance with such plans and policies in effect on the date
of termination and in accordance with applicable law.
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<PAGE>
(b) TERMINATION APART FROM CHANGE OF CONTROL. In the event
the Employee's employment terminates for any reason, either prior to the
occurrence of a Change of Control or after the two year period following the
effective date of a Change of Control, then the Employee shall not be
entitled to receive any severance payments under this Agreement. The
Employee will receive payment(s) for all salary, bonuses and unpaid vacation
accrued as of the date of the Employee's termination of employment and the
Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in
effect on the date of termination and in accordance with applicable law and
the Offer Letter.
3. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the total voting power represented by the Company's
then outstanding voting securities WITHOUT the approval of the Board; or
(ii) MERGER/SALE OF ASSETS. A merger or consolidation of
the Company whether or not approved by the Board, 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 the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(iii) CHANGE IN BOARD COMPOSITION. A change in the
composition of the Board, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of September 12,
1996 or (B) are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not include an individual
whose election or nomination is in connection with an actual or threatened
proxy contest relating to the election of directors to the Company).
(b) CAUSE. "Cause" shall mean (i) gross negligence or
willful misconduct in the performance of the Employee's duties to the Company
where such gross negligence or willful misconduct has resulted or is likely
to result in substantial and material damage to the Company or its
subsidiaries (ii) repeated unexplained or unjustified absence from
-3-
<PAGE>
the Company, (iii) a material and willful violation of any federal or state
law; (iv) commission of any act of fraud with respect to the Company; or (v)
conviction of a felony or a crime involving moral turpitude causing material
harm to the standing and reputation of the Company, in each case as
determined in good faith by the Board.
(c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
include any termination by the Company other than for Cause and the
Employee's voluntary termination, upon thirty (30) days prior written notice
to the Company, following (i) a material reduction or change in job duties,
responsibilities and requirements inconsistent with the Employee's position
with the Company and the Employee's prior duties, responsibilities and
requirements or a change in the Employee's reporting relationship such that
the Employee is no longer reporting to the Board; (ii) any reduction of the
Employee's base compensation (other than in connection with a general
decrease in base salaries for most officers of the successor corporation); or
(iii) the Employee's refusal to relocate to a facility or location more than
thirty (30) miles from the Company's current location.
4. LIMITATION ON PAYMENTS. In the event that the severance
and other benefits provided for in this Agreement to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this
Section, would be subject to the excise tax imposed by Section 4999 of the
Code, then the Employee's severance benefits under Sections 4(b)(iii) and
(iv) shall be payable either:
(a) in full, or
(b) as to such lesser amount
which would result in no portion of such severance benefits being subject to
excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Employee on an after-tax basis, of the
greatest amount of severance benefits under Section 2(a) notwithstanding that
all or some portion of such severance benefits may be taxable under Section
4999 of the Code. Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 4 shall be made in
writing by the independent public accountants of the Company (the
"Accountants"), whose determination shall be conclusive and binding upon the
Employee and the Company for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Section
280G and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company
shall bear all costs the Accountants may reasonably incur in connection with
any calculations contemplated by this Section 4.
5. CERTAIN BUSINESS COMBINATIONS. In the event it is determined
by the Board, upon consultation with the Company management and the Company's
independent public
-4-
<PAGE>
accountants, that the enforcement of any agreement between Employee and the
Company, including the provisions of Section 2(a) of this Agreement, which
allows for the acceleration of vesting of stock options granted for the
Company's Common Stock following of a Change of Control, would preclude
accounting for any proposed business combination of the Company involving a
Change of Control as a pooling of interests, and the Board otherwise desires
to approve such a proposed business transaction which requires as a condition
to the closing of such transaction that it be accounted for as a pooling of
interests, then any such provision of this Agreement shall be null and void.
For purposes of this Section 5, the Board's determination shall require the
unanimous approval of the non-employee Board members.
6. SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and/or assets shall assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. The terms of this Agreement
and all of the Employee's rights hereunder shall inure to the benefit of, and
be enforceable by, the Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.
7. NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. Mailed notices
to the Employee shall be addressed to the Employee at the home address which
the Employee most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
8. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Employee shall not be required
to mitigate the amount of any payment contemplated by this Agreement (whether
by seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that the Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed
to in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the
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<PAGE>
subject matter hereof. This Agreement supersedes any agreement of the same
title and concerning similar subject matter dated prior to the date of this
Agreement, and by execution of this Agreement both parties agree that any
such predecessor agreement shall be deemed null and void.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws
of the State of California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement
or the application thereof to any circumstance shall, in any jurisdiction and
to any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the
remaining terms and provisions of this Agreement or the application of such
terms and provisions to circumstances other than those as to which it is held
invalid or unenforceable, and a suitable and equitable term or provision
shall be substituted therefor to carry out, insofar as may be valid and
enforceable, the intent and purpose of the invalid or unenforceable term or
provision.
(f) ARBITRATION. Any dispute or controversy arising under or
in connection with this Agreement may be settled at the option of either
party by binding arbitration in the County of Santa Clara, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Punitive damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The parties shall each bear
their own expenses, legal fees and other fees incurred in connection with
this Agreement.
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this subsection (h)
shall be void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment.
In the case of any such assignment, the term "Company" when used in a
section of this Agreement shall mean the corporation that actually employs
the Employee.
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<PAGE>
(k) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and
year first above written.
INNERDYNE, INC. WILLIAM G. MAVITY
By: /s/GUY P. NOHRA By: /s/WILLIAM G. MAVITY
----------------------- ---------------------------
Guy P. Nohra, Chairman,
Compensation Committee
-8-
<PAGE>
EXHIBIT 10.33
LICENSE AGREEMENT
This Agreement, dated as of December ___ , 1996, is by and among
InnerDyne, Inc., a corporation organized and existing under the laws of the
State of Delaware and having an office at 1244 Reamwood Avenue, Sunnyvale, CA
94089 (hereinafter referred to as "IDI"); and United States Surgical
Corporation, a corporation organized and existing under the laws of the State
of Delaware and having principal offices at 150 Glover Avenue, Norwalk,
Connecticut (hereinafter referred to as "USSC") (IDI and USSC, collectively
hereinafter referred to as the "Parties").
NOW THEREFORE, in consideration of the mutual promises, agreements,
covenants, undertakings and obligations set forth herein and for other good
and valuable consideration, the Parties hereto agree as follows:
ARTICLE 1 - DEFINITIONS
1.1 DEFINITIONS. For the purposes of this Agreement, the definitions
set forth below shall be applicable.
Action - The term "Action" means a claim, action, suit or proceeding,
whether civil or criminal or in law or in equity.
Affiliate - The term "Affiliate" means a Person (defined below)
controlled by, controlling or under common control with a Party. For the
purpose of this Agreement, "control" means: (i) the ownership, directly or
indirectly, of 50% or more of the voting stock or analogous interest in such
Person, or in a Party; or (ii) the commonality of 50% or more of the active
directors on the Board of either such corporation with the active directors
on the Board of the other; or (iii) the commonality of 50% or more of the
active directors on the Board of either such corporation with the executive
officers, or holders of 5% or more of any class of the outstanding capital
stock, of the other; or (iv) the commonality of 50% or more of the partners
(general or limited), principals, or other
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
controlling parties of any such other Person, with the partners (general or
limited), principals or other controlling Persons of any other Affiliate of a
Party as defined herein; or (v) the existence of any other relationship
between a Party and such other Person which results in effective managerial
control by one over the other, regardless of whether such control is
continuously exercised.
[****] - The term [*****] shall mean the [******] on a Product calculated
as the difference between (a) [*****], and (b) [*****] during such period,
including [*****] all calculated in accordance with GAAP.
Confidential Information - The term "Confidential Information" means
verbal and written disclosures from IDI, on the one hand, or USSC, on the
other hand, (the "Discloser") to the other Party (the "Disclosee"), which
concern the Discloser, including without limitation information which
concerns the Discloser's business, operations, products or research and
development efforts, or which concern the Products or Know-How, but shall not
include information which: (a) at or after the time of disclosure is
published or otherwise becomes a part of the public domain through no fault
of Disclosee (but only after, and only to the extent that, it is published or
otherwise becomes part of the public domain); (b) Disclosee can show was
known to it at the time of disclosure, free of restriction; (c) has been or
hereafter is disclosed to Disclosee without any obligation of confidentiality
by a third Person who is in lawful possession of such information and has the
right to disclose it to Disclosee; (d) has been or hereafter is disclosed by
Discloser to a third Person free of any obligations of confidentiality; or
(e) is disclosed by Disclosee pursuant to the order or requirement of a
court, administrative agency or other governmental body, provided that the
Disclosee promptly informs the Discloser of its intent to make such
disclosure, takes all reasonable steps to limit such disclosure and does not
inhibit the Discloser in taking whatever lawful steps the Discloser considers
necessary to attempt to preserve the confidentiality of such information.
Disclosures made to Disclosee by Discloser which are specific shall not be
deemed to be within the foregoing exceptions merely because they are embraced
by general disclosures in the public domain or in the possession of Disclosee.
[*****] - The term [*****] means [********] of a Party which are [******]
calculated in accordance with GAAP, including a [******].
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Field - The term "Field" means [******].
First Milestone - The term "First Milestone" means [*******]
FDA - The term "FDA" means the United States Department of Health
and Human Services, Food and Drug Administration, or any successor agency.
510(k) Approval - The term "510(k) Approval" shall have the meaning set
forth in the laws and regulations governing or promulgated by the FDA.
GAAP - The term "GAAP" means generally accepted accounting
principles applied on a consistent basis.
Governmental Authority - The term "Governmental Authority" means
any court, administrative agency or commission or other governmental agency
or instrumentality, federal, state or local or any arbitrator of competent
jurisdiction including, without limitation, the FDA and all International
Regulatory Agencies (defined below).
International Regulatory Agency - means any federal, state or local
governmental agency outside the United States performing the same or similar
functions as the FDA.
Investigational Device Exemption - The term "Investigational Device
Exemption shall have the meaning set forth in the laws and regulations
governing or promulgated by the FDA.
Know-How - The term "Know-How" means any and all secret information or
Confidential Information, trade secrets, specifications, test results,
analyses and data, inventions, methods, processes, formulae, mixtures,
compositions, delivery systems, designs, techniques, applications, ideas or
concepts, whether or not reduced to practice, relating directly to the
Products, including, but not limited to, technology that is or could be the
subject matter of a foreign or domestic patent or patent application, whether
or not reduced to writing in a patent application.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Net Sales - (i) The term "Net Sales" for any period means [******]. The
term "Net Sales" shall [*****].
(ii) For the purposes of the "Net Sales" definition, the term
[******]. The Net Sales price of any Product [*****]. In the event that
the [*****] is inflated or discounted by USSC above or below [*****] as
the case may be, [******].
Patents and Patent Applications - The term "Patents and Patent
Applications" shall mean all patents and patent applications identified on
SCHEDULE 1 hereto, all other patents and patent applications filed by or
assigned to IDI prior or subsequent to the date hereof and relating to any
invention, method, process, formula, mixture composition and delivery system
having direct application to a Product, and all other foreign and domestic
patent applications filed in the name of, or assigned to, IDI covering any
invention, method, process, formula, mixture, composition and delivery system
having direct application to a Product and all foreign and domestic patents
issuing on any of the foregoing patent applications, and all continuations,
continuations-in-part, divisions, reissues, reexaminations, additions, and
renewals thereof.
Person - The term "Person" or "Persons" means any individual,
corporation, partnership, association, trust or other entity or organization,
including, without limitation, a Governmental Authority.
Product Marketing Approval - The term "Product Marketing Approval" shall
have the meaning set forth in the laws and regulations governing or
promulgated by the FDA.
Products - The term "Product" or "Products" means [*****] and embody or
utilize any or all of the following [******].
Second Milestone - The term "Second Milestone" means [******]. For
purposes of this definition [*******].
Sublicensee - The term "Sublicensee" means any third Person to whom USSC
grants a sublicense to manufacture or sell a Product in accordance with the
terms of this Agreement.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Subsidiary - The term "Subsidiary" means any Person, 50% or more of the
outstanding shares of any class of stock, general partnership interest, or
other equity of which is owned by USSC; and any operating division of USSC
not separately incorporated or organized as an independent business Person.
Third Milestone - The term "Third Milestone" means [****].
1.2 OTHER DEFINITIONS. In addition to the defined terms set forth in
Section 1.1 above, the following terms shall have the meanings set forth in
the referenced Sections of this Agreement:
Term Section
---- -------
Development Work 3.1
Force Majeure Event 15.1
IDI Indemnitees 7.1
Information 2.2
Inventions 3.2
Joint Results 14.1
License 2.1
Outside Offer 11.2
Royalty 4.1
Term 13.1
ARTICLE 2 - THE GRANT
2.1 GRANT. IDI hereby grants to USSC, and USSC hereby accepts, [*******]
(the "License"), [*****]. Without limiting the foregoing, the Parties hereby
intend that the License grants and conveys to USSC substantially all of IDI's
rights and interests in respect of the Patents and Patent Applications and in
the Know-How.
2.2 TENDER OF TECHNOLOGY. Within [*****] business days after the date
of this Agreement, IDI shall deliver to USSC (i) [*****] version of each
[****] now in IDI's possession and control, if any, and [****] of the
disposable thermal ablation devices, (ii) a copy of all written conceptual,
technical and design information, specifications, test results, analyses,
data, drawings, formulae, mixtures, compositions,
CONFIDENTIAL TREATMENT REQUESTED
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delivery systems, and any other useful information reduced to writing
(collectively, "Information") concerning the Patents and Patent Applications,
Know-How and Products now in IDI's possession or control.
ARTICLE 3 - FURTHER DEVELOPMENT; IMPROVEMENTS
3.1 FURTHER DEVELOPMENT. The Parties recognize and agree that from time
to time during the Term additional development work on the Product
(collectively, "Development Work") is desirable to further develop and/or
enhance its commercial value. IDI shall conduct such Development Work as the
Parties may mutually agree. The terms of such Development Work shall be
subject to the Parties' agreement, provided that the Parties agree that
[********]. IDI will [*********]. IDI shall [******]. USSC and its
representatives shall have [*****]. Nothing herein in this Section 3.1 shall
[******].
3.2 IMPROVEMENTS. If, during the term of this Agreement, IDI conceives
or develops any new invention, method, process, formula, mixture,
composition, delivery system, modification or improvement directly relating
to a Product, or the use or manufacture thereof (collectively, "Inventions"),
IDI shall promptly following conception or development furnish full details
thereof to USSC, including all Know-How directly involving or related
thereto. Such Inventions shall be deemed included in the License, except
insofar as USSC, upon request by IDI, agrees in writing to exclude from the
License all or any portion of such Inventions.
3.3 SURVIVAL. The provisions of this Article 3 shall survive
termination of this Agreement.
ARTICLE 4 - CONSIDERATION
4.1 CONSIDERATION. The total consideration to be paid by USSC for the
rights granted hereunder and the non-compete agreement pursuant to Article 10
shall be the following:
(a) License Fees as follows:
(i) [******];
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(ii) [******],
(iii) [*****]; and
(iv) [*****].
(b) A [*******] (the "Royalty") at the rate set forth below based on
[******] occurring during the Term of this Agreement, but only with respect
to [******]. Notwithstanding, all [****] if and for so long as [***] where
such [***].
Royalty If USSC's [**********] is:
------- -------------------------
[******] Less than or equal to [********]
[******] Greater than [*****] but less than [*****]
[*******] Equal to or greater than [******]
4.2 [******]. [*******] shall be payable for a sale of a Product
[******].
4.3 ROYALTY ACCRUAL. The Royalty shall accrue as and when a sale
subject to a Royalty is recorded by USSC in accordance with the definition of
[***], and shall be paid to IDI [*******].
CONFIDENTIAL TREATMENT REQUESTED
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ARTICLE 5 - REPORTS, PAYMENT AND RECORDS
5.1 REPORTS. USSC agrees to deliver quarterly written reports to IDI
for each three (3) month period ending on the last day of the months of
March, June, September, and December of each year, within forty-five (45)
days after the end of each such period. The report shall set forth the
number of Products sold by USSC, its Subsidiaries, Affiliates, Sublicensees
and permitted assignees during the immediately preceding calendar quarter,
[***] applicable to all such Products, and the calculation and amount of the
Royalty payable to IDI. Royalties shall be calculated using an estimated
[***] for the calendar year in which such Royalties are payable. For the
first calendar year in which Royalties are payable, the estimated [***] for
such calculations shall be reasonably estimated by USSC. In subsequent
calendar years, the estimated [***] for such calculations shall be the actual
[***] for the prior calendar year. All information contained in such
quarterly reports shall be treated as USSC's Confidential Information subject
to Article 6.
5.2 PAYMENT AND RECORDS. Simultaneously with the submission of each
report, USSC shall pay to IDI by check or bank transfer the full amount of
the Royalty payable to IDI for the report period under the terms of this
Agreement. Within [*****] after the end of each calendar year, USSC shall
calculate the Royalties actually payable with respect to [***] during such
calendar year using the [*****]for such calendar year and shall provide a
report to IDI setting forth such calculation. If the Royalties previously
paid by USSC with respect to [*****] during such calendar year [******]],
USSC shall pay the additional amount to IDI by check or bank transfer
simultaneously with the submission of such report to IDI. If the Royalties
previously paid by USSC [******] during such calendar year are [*******],
unless the amount exceeds [**********]in which event such amount shall be
paid by IDI to USSC within thirty (30) days of IDI receiving such Royalty
report. USSC shall maintain records in sufficient detail and, upon
reasonable notice, [***********]. Such examinations shall occur on or after
February 15 of any calendar year [*******], only during business hours, and
not more than once a year, and shall be solely for the purpose of verifying
the calculation of the Royalty due under this Agreement. A final such
examination may occur once during the year immediately succeeding termination
of this Agreement. In the event [************]. In any other event, the fees
and expenses [***] shall be borne by IDI. Unless written objection is
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made by IDI and delivered to USSC within 60 days after completion of such
examinations, the calculation of Royalties paid by USSC prior to the date of
such examination shall be final and binding on the Parties, except insofar as
adjusted or corrected as a result of USSC's regular annual audit. The
results of any audit conducted pursuant to this Section 5.2 shall be binding
upon the Parties. In the event that, as a result of any such audit, there is
any adjustment in the Royalty payable by USSC to IDI for the period covered
by the audit, (a) if the Royalties previously paid by USSC with respect to
the period covered by the audit are less than the Royalties actually payable
to IDI with respect to such period, USSC shall pay the additional amount to
IDI by check or bank transfer within sixty (60) days after completion of the
audit and (b) if the Royalties previously paid by USSC with respect to the
period covered by the audit are greater than the Royalties actually payable
to IDI with respect to such period, USSC shall reduce subsequent quarterly
Royalty payments due to IDI by such excess amount, unless the amount exceeds
[***********], in which event such amount shall be paid by IDI to USSC within
sixty (60) days of IDI receiving such audit report. It is understood that
USSC shall not be required to furnish or permit the examination of the
identities, at any time, of customers or other non-price information as to
specific sales. Any information provided to IDI or its accountants pursuant
hereto shall be treated as USSC's Confidential Information subject to Article
6.
ARTICLE 6 - PROPRIETARY INFORMATION
6.1 USSC CONFIDENTIALITY. USSC represents and warrants to IDI that it
has not, directly or indirectly, disclosed and agrees that it will not,
directly or indirectly, disclose, either during or for five (5) years
subsequent to the termination of this Agreement, any Confidential Information
of IDI, to any other Person, except to its attorneys and accountants as
required in connection with this Agreement who have been and will be
instructed to maintain its confidentiality and to third Persons who shall
execute binding written agreements requiring such third Persons not to
disclose Confidential Information disclosed to them by USSC. Notwithstanding
the foregoing, USSC shall have the right to use Confidential Information of
IDI without obtaining such written agreement in connection with any
regulatory interaction and patent filings involving or relating to the
Products.
6.2 IDI CONFIDENTIALITY. IDI represents and warrants to USSC that it
will not, directly or indirectly, disclose during or for five (5) years
subsequent to the termination
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of this Agreement, any Confidential Information of USSC, to any other Person,
except to IDI's attorneys and accountants as required in connection with
this Agreement who have been and will be instructed to maintain its
confidentiality.
6.3 VENDORS. It is not intended by this Article 6 that USSC shall be
required to obtain specific written commitments of confidentiality in
relation to this Agreement from materials and/or component suppliers where
only specifications are disclosed to said materials and/or component
suppliers by USSC.
6.4 EQUITABLE RELIEF. The Parties agree and acknowledge that any breach
of this Article 6 by IDI or USSC would likely cause irreparable injury to the
other Party and that such other Party's remedy at law for any such breach
would be inadequate. Accordingly, the Parties agree that, in addition to any
other remedies provided for herein or otherwise available at law, temporary
and permanent injunctive relief and other equitable relief may be granted in
any Action which may be brought by either Party to enforce the provisions of
this Article 6 without the necessity of proof of actual damage. Each Party
agrees promptly to seek temporary and permanent injunctive relief against any
of its Affiliates, directors, officers, employees or consultants who breach
the aforesaid obligations with respect to any matter relating to this
Agreement.
6.5 SURVIVAL. The provisions of this Article 6 shall survive
termination of this Agreement.
ARTICLE 7 - INDEMNIFICATION
7.1 INDEMNIFICATION. Subject to the fulfillment by IDI of its
obligations pursuant to Section 7.2 below, USSC agrees to defend, indemnify
and hold harmless IDI and each of its directors, officers, employees, agents
and representatives (collectively, "IDI Indemnitees"), from and against any
claims, demands, judgments, executions, awards, or damages, including
reasonable attorney's fees and expenses incurred by USSC in defending the
same, constituting a product liability Action or other Action arising as a
result of the design, manufacture, use or sale of a Product by USSC, its
Subsidiaries, Affiliates, Sublicensees or permitted assigns. In satisfaction
of the foregoing indemnification and hold harmless agreement, USSC may pay
directly to the claimant or plaintiff in any such claim or Action, the amount
of any award, judgment, settlement or recovery, or execution rendered
thereon, and may pay to IDI and each IDI
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Indemnitee, any other damages or reasonable expenses sustained by them in
defending any such Action. USSC shall have the sole and exclusive right and
obligation to conduct the legal defense, or to enter into any settlement
agreement, as it, in its sole discretion, deems appropriate. IDI may
participate in such Action through its own attorneys at its sole cost and
expense, subject to USSC's control of such Action.
7.2 NOTICE. In the event that any claim is asserted against IDI or an
IDI Indemnitee or any such Person is made a defendant in any Action involving
a matter which is the subject of USSC's indemnification and hold harmless
agreement as set forth above, then within thirty (30) days of such Person's
receipt of written notice of such event and within seven (7) days of receipt
of a complaint or other formal pleading regarding such event, IDI shall give
written notice of such Action to USSC, and USSC shall assume the defense and
control the defense and any settlement on behalf of such defendant. IDI
shall provide its full cooperation to USSC in connection with the defense of
such Action; provided that USSC shall reimburse IDI for all reasonable and
documented out-of-pocket expenses incurred by IDI in providing such
cooperation (other than attorneys fees and expenses).
7.3 SURVIVAL. The provisions of this Article 7 shall survive
termination of this Agreement.
ARTICLE 8 - REGULATORY INTERACTION
8.1 REGULATORY INTERACTION. Interaction with regulatory agencies in any
country, including but not limited to the FDA and any International
Regulatory Agencies, concerning the Products shall be conducted by USSC after
a transition period during which regulatory activities initiated by IDI prior
to the effective date of this Agreement will be transitioned to USSC.
Similarly, for purposes of any filings with the FDA and any International
Regulatory Agencies concerning the Products, USSC shall be the official
company sponsor, and any regulatory filings initiated prior to the effective
date of this agreement by IDI will be transitioned to USSC as soon as is
practical. IDI will use its best efforts to complete such transition
activities as soon as possible, but such transition, as evidenced by IDI
filing all necessary written requests for transfer, shall be completed no
later than 60 days from the effective date of this Agreement. [*************].
In the event of a dispute between USSC and IDI concerning any matter
relating to interaction with the FDA and any International Regulatory
Agencies, USSC
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shall have final authority to act as USSC, in its sole discretion, deems
appropriate with respect to the matter in dispute.
8.2 ASSISTANCE. During the Term, IDI, at USSC's request, shall assist
USSC in connection with regulatory interaction with the FDA and any
International Regulatory Agencies concerning the Products; provided that USSC
shall reimburse IDI for all reasonable and documented out-of-pocket expenses,
other than attorneys fees and expenses, incurred by IDI in providing such
assistance.
8.3 MARKETING RIGHTS. Notwithstanding any provision of this Agreement
to the contrary, USSC shall not be obligated to, and shall have no liability
to IDI for failure to evaluate, develop, test, conduct clinical trials, make,
have made, use, practice, manufacture or have manufactured any Product or
practice or use the Know-How or for failure to seek or pursue any regulatory
approvals with the FDA or any International Regulatory Agencies. USSC shall
have the unqualified right, at any time to cease or suspend all marketing
efforts and all efforts to obtain regulatory approvals from the FDA or any
International Regulatory Agencies. Nothing herein shall prevent USSC from
setting its own prices for Products or determining USSC's marketing policies
and practices in its sole discretion.
ARTICLE 9 - PATENT PROSECUTION AND INFRINGEMENT
9.1 PATENT PROSECUTION. Within ten (10) business days after the date of
this Agreement, IDI shall deliver to USSC copies of all Patents and Patent
Applications in its possession or control and all related documents and
correspondence in its possession or control to the extent not delivered by
the date of this Agreement. Subject to the last sentence of this Section
9.1, during the Term and subject to Section 9.2, USSC shall, at its own
expense, use reasonable commercial efforts to obtain and maintain patents
based on the Patents and Patent Applications in the United States. [****]
shall also assume prosecution and all future costs incurred and due during
the term of this Agreement in connection with the Patents and Patent
Applications filed prior to the date hereof set forth in SCHEDULE 1. [****]
agrees to fully cooperate with [****] in the preparation, filing and
prosecution of all applications for letters patent which [****] may file and
prosecute in the United States and foreign countries in accordance with this
Section 9.1, and in the prosecution of the Patents and Patent Applications,
and, in connection with such applications and the Patents and Patent
Applications, [***]further agrees to execute and deliver all documents which
[****] may deem necessary or
CONFIDENTIAL TREATMENT REQUESTED
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desirable; provided that [****]shall reimburse [***] for all reasonable
out-of-pocket expenses (other than attorneys fees and expenses) incurred by
[****] in fulfilling its obligations set forth in this Section 9.1.
9.2 NOTICE. IDI, on the one hand, and USSC, on the other hand, shall
promptly give written notice to the other of any apparent infringement by a
third Person discovered by it with respect to any patent issuing from the
Patents and Patent Applications. Such notice shall set forth the facts of
the apparent infringement in reasonable detail. [***] shall have the sole
and exclusive right to bring or settle, in [***] sole discretion, any Action
with respect to such apparent infringement at its own expense and for its own
benefit; In such event, [***] agrees to cooperate with [***] and to join in
such Action as a party plaintiff if requested to do so by [***] and to give
[***] all needed information, assistance and authority to file and prosecute
such Action; provided that [***] shall reimburse [***] for all reasonable and
documented out-of-pocket expenses, other than attorneys' fees and expenses,
incurred by [***] in providing such assistance.
9.3 PATENT DEFENSE. If USSC or IDI receives notice of a claim or Action
by a third Person alleging infringement of such third Person's rights in
connection with the manufacture, use or sale of a Product by USSC, its
Affiliates, Subsidiaries, Sublicensees or permitted assignees, USSC shall
have the sole and exclusive right to conduct the legal defense, and to enter
into any disposition with respect thereto, as USSC in its sole discretion
deems desirable. All costs of USSC's defense, including its attorneys' fees
and court costs, and any damages awarded or amounts paid in settlement in any
such Action shall be the sole responsibility of USSC. IDI shall fully
cooperate with USSC in its defense of such infringement claim or Action,
provided that USSC shall reimburse IDI for all reasonable and documented
out-of-pocket expenses, other than attorneys' fees and expenses, incurred by
it in providing such cooperation.
9.4 PATENT DEFENSE OF [***]. Subject to fulfillment by [***] of its
obligations pursuant to Section 9.6 below, [****] shall defend [***] against
a third Person's infringement claim or Action which results from the [*****]
its Affiliates, Subsidiaries, Sublicensees or permitted assignees, and
indemnify [***] against the cost of such defense undertaken by [***],
including reasonable attorneys' fees and expenses and court costs, and
damages awarded or amounts paid in settlement in any such Action. However,
notwithstanding the foregoing, [***].
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9.5 PATENT DEFENSE COSTS. The cost of [****] defense of any Action
referred to in Section 9.4 above and any damages awarded or any amount paid
in settlement or other disposition of such Action, [*****] as in existence on
the date of this Agreement and provided that, in the event of a settlement,
[*****], which approval shall not be unreasonably withheld. Notwithstanding,
[***] approval of a settlement shall not be required if such settlement would
(a) result in a greater than [*****]sharing of the costs and damages by [***]
, and/or (b) not maintain Royalties of a minimum of [******]. During the
pendency of any such Action, [***] under the terms of this Agreement. [***]
shall instruct such escrow agent to deposit such payments in an
interest-bearing account and to release the same to the third Person(s), if
any, awarded damages in such Action pursuant to such award of damages, or to
the third Person(s), if any, with whom [***] settles pursuant to this Section
9.5, to the extent required by the terms of such settlement, and the balance,
if any, of the principal and interest to [***].
9.6 NOTICE. In the event that any claim is asserted against [***] or
[***], or any of its respective officers, directors, employees, agents or
representatives, or such person is made a party defendant in any Action
involving a matter which is the subject of [***]'s indemnification and hold
harmless agreement as set forth above, or [***] or [***] becomes aware of an
Action or patent or patent application which might provide the basis for a
third Person's claim of infringement against [****], its Subsidiaries,
Affiliates, Sublicensees or permitted assignees as a result of their
manufacture, use or sale of a Product, then within thirty (30) days of
receipt by any one or more of [****] or by [***] of written notice of any
such event, and within ten (10) days of such Party's receipt of a written
complaint or other formal pleading regarding any such event, such Party shall
give the other Party hereto written notice of such Action or patent or patent
application.
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ARTICLE 10 - NON-COMPETE
10.1 NON-COMPETE. In consideration of the payments to be made to it
hereunder, during the Term, IDI hereby agrees not to, directly or indirectly,
develop, manufacture, or sell within the Field any Product or similar device
to any Person, or to [********] with respect to the design, development,
manufacture or sale within the Field of any Product or similar device
involving [*********], without USSC's prior written consent in USSC's sole
and absolute discretion. Notwithstanding the foregoing, IDI shall not be
limited in any respect by this Section 10.1 from developing, manufacturing or
selling any current or future products incorporating [********]. IDI shall
not be deemed in breach of this Agreement if [*******]. IDI shall reasonably
cooperate with any such enforcement efforts.
10.2 EQUITABLE RELIEF. The Parties agree and acknowledge that any
breach of this Article 10 by IDI would likely cause irreparable injury to
USSC and that USSC's remedy at law for any such breach would be inadequate.
Accordingly, the Parties agree that, in addition to any other remedies
provided for herein or otherwise available at law, temporary and permanent
injunctive relief and other equitable relief may be granted in any Action
which may be brought by USSC to enforce any provision of this Article 10
without the necessity of proof of actual damage.
ARTICLE 11 - RIGHT TO PURCHASE AND RIGHT OF FIRST REFUSAL
11.1 RIGHT TO PURCHASE. USSC shall have the right, at its option,
exercisable by notice to IDI during the Term, to purchase the Patents and
Patent Applications and Know-How within the Field by paying to IDI the
following amount:
(a) If exercised prior to payment of [*****], the sum of [*******]; or
(b) If exercised after payment of [*******], but prior to payment of
[******], the sum of [**********]; or
(c) If exercised after payment of [*******], but prior to payment of
[******], the sum of [*******]; or
(d) If exercised after the payment of [********], the sum of [*****].
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The above amounts are each to be reduced by [*******] if USSC agrees, at
its option, that the Field shall include only applications within [*****],
and excluding applications in [******]. In such event, [*******] to (a)
evaluate, develop, test, conduct clinical trials, obtain governmental
approvals, make, have made, use, practice, manufacture, have manufactured,
sell, transfer or commercialize Products, or (b) to practice and use the
Know-How.
Following such purchase by USSC, USSC shall have no further obligation to
make payments to IDI pursuant to Section 4 of this Agreement. Following such
purchase by USSC, [*******], solely outside the Field to (a) evaluate,
develop, test, conduct clinical trails, obtain governmental approvals, make,
have made, use, practice, manufacture, have manufactured, sell, transfer and
commercialize products incorporating inventions, methods or processes,
formulae, mixtures, compositions and delivery systems disclosed and/or
claimed in the Patents and Patent Applications, and (b) to [*******] at the
sole option of USSC, if USSC elects to exclude [****] as set forth
immediately above).
11.2 RIGHT OF FIRST REFUSAL. Without limiting USSC's rights under
Section 11.1, IDI hereby grants to USSC, and USSC hereby accepts, the right
of first refusal set forth herein. In accordance with such right of first
refusal, IDI shall not transfer, by sale, license or otherwise, any interest
in any of the Patents or Patent Applications, the Know-How or a Product to
any third Person, except pursuant to this Article 11. No such sale, license
or other transfer shall be made by IDI without the prior written consent of
USSC, which may be withheld in its sole and absolute discretion. Prior to
any sale, license or other transfer, IDI shall obtain a BONA FIDE, written
offer (the "Outside Offer") from such third Person describing the subject of
such sale, license or other transfer, the interest to be sold, licensed or
otherwise transferred, and a stated cash consideration at which the third
Person offers to acquire, and IDI desires to sell, license or otherwise
transfer, said interest. After obtaining the Outside Offer, IDI shall
promptly, and before accepting the Outside Offer, deliver to USSC an offer,
irrevocable for [*****]days from its receipt, to sell to USSC the interest
which is the subject of the Outside Offer for the cash consideration and upon
all other terms and conditions stated in the Outside Offer. A copy of the
Outside Offer shall accompany the offer by IDI to USSC. If USSC accepts such
offer within said [*****]days, IDI shall transfer the relevant interest to
USSC pursuant to the terms and conditions of such offer. Otherwise, subject
to the confidentiality and non-compete provisions of Articles 6 and 10, IDI
may transfer such
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interest to the third Person who made the Outside Offer in accordance with
its terms and conditions during the [******] days immediately following
expiration of the aforesaid [*****] day period provided the terms thereof are
no more favorable to such third Person then were last offered to USSC.
11.3 RIGHTS TO THE IDI TECHNOLOGY. Should USSC determine not to [******]
within the Field based upon the "IDI Technology" which is licensed to USSC
under this Agreement (i.e. for purposes of this Agreement "IDI Technology"
means the Patents and Patent Applications, Know-How, Improvements and
Information) (a) as stated in a written notice to IDI by an officer of USSC,
or (b) if USSC [*******] for Products within the Field for [*****], USSC will
[*****] for a thirty (30) day period following the delivery of such notice or
[*****]. The [****] the IDI Technology will be [*******], if such occurs
prior to the payments of any Milestones payment by USSC to IDI pursuant to
Section 4.1(a), and [*****] thereafter.
11.4 EQUITABLE RELIEF. The Parties agree and acknowledge that any
breach of this Article 11 by IDI would likely cause irreparable injury to
USSC and that USSC's remedy at law for any such breach would be inadequate.
Accordingly, the Parties agree that in addition to any other remedies
provided for herein or otherwise available at law, temporary and permanent
injunctive relief and other equitable relief may be granted in any Action
which may be brought by USSC to enforce any provision of this Article 11
without the necessity of proof of actual damages.
ARTICLE 12 - REPRESENTATIONS AND WARRANTIES
12.1 REPRESENTATIONS AND WARRANTIES. Each Party hereby represents and
warrants to the other Parties that (a) it has full right, power and authority
to enter into and be bound by the terms and conditions of this Agreement, to
transfer the rights and to carry out their respective obligations under this
Agreement, without the approval or consent of any other Person, (b) the
entering into of this Agreement, the transfer of rights and the carrying out
of their respective obligations under this Agreement is not prohibited,
restricted or otherwise limited by any contract, agreement or understanding
entered into by such Party, or by which such Party is bound, with any other
Person, including, without limitation, any Governmental Authority, (c) there
is no contract, agreement or understanding entered into by it, or by which
such Party is bound, which if enforced, terminated or modified, would be in
derogation of, contrary to, or adversely
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affect the rights acquired or to be acquired hereunder by USSC, and (d) there
is no Action or investigation pending or currently threatened against such
Party which, if adversely determined, would restrict or limit such Party's
right to enter into this Agreement, transfer the rights or carry out such
Party's obligations under this Agreement.
12.2 FURTHER REPRESENTATIONS AND WARRANTIES. IDI further represents and
warrants to USSC that: (a) it has not been granted, assigned or otherwise
transferred and it is not obligated to grant, assign or otherwise transfer,
and it shall not, except as permitted by Section 11.2 or Section 19.1 of this
Agreement, during the Term grant, assign or otherwise transfer any right,
title, interest, license or option, in, to, and under any Patents and Patent
Applications, Products or Know-How to any other Person including, without
limitation, any Governmental Authority; (b) no other Person has, or during
the Term of this Agreement (other than as permitted by this Agreement), shall
have, the right to acquire any right, title, interest, license or option in,
to, or under any Patents and Patent Applications, Products or Know-How; (c)
it has not filed any patent application or been issued or assigned any patent
on or prior to the date of this Agreement for any instrument, device or
system similar to a Product, other than the Patents and Patent Applications;
(d) all documents conferring ownership of the Know-How in IDI including any
agreement, power of attorney and recordation of license, are properly
executed and binding on IDI; (e) to the best of its knowledge and belief,
all of the Patents and Patent Applications included in SCHEDULE 1 hereto
remain in good standing and are not abandoned, lapsed or expired; (f) to the
best of its knowledge and belief, IDI is not aware of any act of fraud or
misrepresentation in connection with any of the Know-How including any act of
inequitable conduct in the prosecution of any of the Patents or Patent
Applications included in SCHEDULE 1 hereto; (g) to the best of its knowledge
and belief, IDI is not aware of any basis for invalidity or unenforceability
of any of the Patents and Patent Applications included in SCHEDULE 1 hereto,
including, without limitation, (i) material prior art which has not been
disclosed in the cumulative prosecution of the Patents and Patent
Applications included in SCHEDULE 1 hereto, and (ii) claim of prior invention
by others; and (h) to the best of its knowledge and belief, USSC's
manufacture, use or sale of a Product substantially as described in the
Patents and Patent Applications (excluding any further development work USSC
may do) would not infringe the patent rights of any third Person.
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12.3 RELIANCE. All representations, warranties and covenants made by
the Parties shall be considered to have been relied upon by the other Party
hereto regardless of any discussion, review or investigation made by or on
behalf of, the other Party, and shall survive termination of this Agreement.
12.4 SURVIVAL. The provisions of this Article 12 shall survive
termination of this Agreement.
ARTICLE 13 - TERM AND TERMINATION
13.1 TERM. The term of this Agreement (the "Term") shall commence upon
the date hereof and shall terminate upon the later of (a) Twenty (20) years,
and (b) the last day upon which all valid claims included in a patent within
Patents and Patent Applications expire.
13.2 EARLY TERMINATION. This Agreement shall be subject to termination
prior to the end of the Term as follows:
(a) Upon thirty (30) days prior written notice by IDI to USSC, in the
event that USSC fails to pay IDI all license fees and Royalties due under
Article 4 within (15) days after the due date of any such payment, unless
such failure is cured within ten (10) days after such notice;
(b) If at any time IDI shall fail to comply in any material respect with
any of its obligations under Articles 6, 10 or 11, or commit any fraud upon
USSC in connection with this Agreement or have willfully misrepresented any
matter which is the subject of the representations and warranties of IDI
contained herein, USSC may, subject to Section 13.4 below, terminate this
Agreement upon seven (7) days prior written notice to IDI, if such failure
is not cured within thirty (30) days after such notice. The remedies provided
in this Section 13.2(b) shall be in addition to any other remedies available
at law or in equity; or
(c) If at any time USSC shall fail to comply in any material respect
with any of its obligations under Articles 6, 7 or 9, or commit any fraud
upon IDI in connection with this Agreement or have willfully misrepresented
any matter which is the subject of the representations and warranties of USSC
contained herein, IDI may, subject to Section 13.4, terminate this Agreement
upon seven (7) days prior written notice to USSC, if such failure is not
cured within thirty (30) days after such notice. The
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
remedies provided in this Section 13.2(c) shall be in addition to any other
remedies available at law or in equity;
(d) Upon ten (10) days prior written notice to USSC, if IDI shall have
[******] under Section 11.3; or
(e) Notwithstanding any provision of this Agreement, [*******]
13.3 ESCROW. In the event that IDI commits any failure, fraud or
misrepresentation described in Section 13.2(b) above, in addition to all
other remedies available to it at law or in equity, USSC may, at its option
and in its sole discretion, thirty (30) days subsequent to the commencement
of any Action, by either Party hereto or any third Person, relating to or
arising out of such failure, fraud or misrepresentation, deposit with a bank
escrow agent payments then due or thereafter becoming due under this
Agreement until final determination of any damages to which USSC may be
entitled by reason of such breach. USSC shall instruct such escrow agent to
deposit such payments in an interest-bearing account and to release same only
(i) pursuant to agreement of the Parties, or (ii) to USSC to the extent of
any and all damages and costs awarded to USSC pursuant to a final
unappealable judgment of a court of competent jurisdiction and the balance,
if any, of principal and interest to IDI. The Parties agree that any such
withholding of payments shall not limit IDI's liability for damages in the
event of any failure, fraud or misrepresentation specified in Section 13.2(b)
or in the event of any other breach of this Agreement by IDI, and shall not
affect any right or license granted to USSC hereunder, or any other provision
of this Agreement or any Party's other available remedies.
13.4 NO TERMINATION. Notwithstanding any other provision of this
Agreement, a Party contesting in good faith any payment or issue under this
Agreement (i) who continues to comply with all other payment obligations and
provisions of this Agreement, and (ii) which pays over any such contested
amount to a bank escrow agent (with binding instructions to invest such
amount in an interest-bearing account and to release same only pursuant to
agreement of the Parties or final unappealable judgment of a court of
competent jurisdiction) shall not be considered in breach of this Agreement
for purposes of giving rise to any right of termination in the other Party,
so long as the contesting Party is vigorously pursuing its claim, until there
is a final judgment of a court of competent jurisdiction adverse to such
contesting Party with which judgment such Party has failed to comply within
fifteen (15) days after written notice thereof.
CONFIDENTIAL TREATMENT REQUESTED
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ARTICLE 14 - RIGHTS AFTER TERMINATION
14.1 RIGHTS AFTER TERMINATION.
(a) All rights and obligations of the Parties which accrue on or before
the effective termination date shall be fully enforceable by either Party
after termination.
(b) If this Agreement terminates and, as a result thereof, USSC is
required to cease making Products, USSC may, nonetheless, subject to the
Royalty provisions set forth herein, [******].
(c) All Know-How, inventions, developments and improvements, whether
patentable or not, are and, after termination of this Agreement, shall (i)
remain the property of IDI insofar as the same were conceived, made and
developed solely by IDI, prior to, or in performance of, this Agreement; and
(ii) the property of USSC insofar as the same were conceived, made and
developed within the Field solely by USSC prior to, or in performance of,
this Agreement or jointly by IDI and USSC ("Joint Results") in the
performance of this Agreement. USSC shall retain exclusive ownership of all
Know-How, inventions, developments and improvements within the Field which
were its property as of or prior to the date of this Agreement or which were
conceived, made and developed during the Term solely by USSC, whether or not
the same is necessary to reduce to practice any Joint Results.
(d) If this Agreement is terminated under Section 13.2(d) and [***],
then in such event, (i) USSC shall promptly [*****] and (ii) USSC shall
[*****] within the Field embodying Improvements solely to the IDI Technology
and which are [****]during the term of this Agreement prior to the date of
termination of this Agreement and, in consideration thereof, [********]. For
purposes of the aforesaid license, the definition of Net Sales set forth in
this Agreement, Section 4.3 and Article 5 shall apply, as if set out herein
at length; provided, however, that "IDI" shall be substituted for "USSC" and
"USSC" shall be substituted for "IDI" in such provisions.
14.2 SURVIVAL. The provisions of this Article 14 shall survive
termination of this Agreement.
ARTICLE 15 - FORCE MAJEURE
CONFIDENTIAL TREATMENT REQUESTED
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15.1 FORCE MAJEURE. If either Party is prevented from or delayed in
performing any of its obligations hereunder due to any cause which is beyond
the non-performing Party's reasonable control, including fire, explosion,
flood, or other acts of God, laws, regulations or acts, omissions or delays
of any Governmental Authority; war or civil commotion; strike, lockout or
labor disturbances; or failure of public utilities or common carrier (each a
"Force Majeure Event"), such non-performing Party shall not be deemed in
violation of this Agreement as a result thereof. The non-performing Party
shall use reasonable commercial efforts to cure or correct any such Force
Majeure Event and to resume performance of its affected obligations as soon
as practicable.
ARTICLE 16 - PUBLICITY
16.1 PUBLICITY. IDI shall not issue any press release or make any
public disclosure, announcement, comment or statement concerning the
existence or the terms and conditions of this Agreement or the transactions
contemplated hereby without the prior written consent of USSC, unless such
disclosure is required by law. In such event, IDI shall use all reasonable
efforts to obtain confidential treatment of materials or information so
disclosed and shall provide, to the extent possible, prompt, written and
sufficient advance notice thereof to USSC to enable USSC to seek a protective
order or otherwise prevent or restrict such disclosure. Each Party shall
give the other Party at least one business day written notice, with an
opportunity to comment, of any press release to be issued by such Party in
connection with this Agreement or the transactions contemplated hereby. Such
written notice shall be accompanied by a copy of the planned press release.
16.2 SURVIVAL. The provisions of this Article 16 shall survive
termination of this Agreement.
ARTICLE 17 - WAIVER
17.1 NO WAIVER. No waiver by either Party, express or implied, or any
breach of any term, condition, or obligation of this Agreement by either
Party shall be construed as a waiver of any subsequent breach of any term,
condition, or obligation of this Agreement, whether of the same or different
nature.
ARTICLE 18 - NOTICES
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
18.1 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and shall be mailed by certified mail, return receipt
requested, or delivered by messenger or air courier, and all payments shall
be delivered, to the party to whom such notice or payment is required or
permitted to be given at its address set forth as follows: if given to IDI,
to: Attn.: President/CEO, InnerDyne, Inc., 1244 Reamwood Avenue, Sunnyvale,
CA 94089; or, if given to USSC, to: Attn.: Thomas R. Bremer, Vice President
and General Counsel, United States Surgical Corporation, 150 Glover Avenue,
Norwalk, CT 06856. Any such notice shall be considered given when
delivered, as indicated by signed receipt or other written delivery record.
A Party may change that address to which notice to it is to be given by
notice as provided herein.
ARTICLE 19 - ASSIGNMENTS
19.1 NO ASSIGNMENT. Neither this Agreement nor the performance of any
part hereof may be assigned or transferred by either Party hereto without the
prior written consent of the other Party, except that (a) USSC may (i) assign
this Agreement, or the rights and obligations hereunder, to an Affiliate or
Subsidiary of USSC, provided that USSC guarantees the performance by such
Affiliate or Subsidiary thereof, and (ii) enter into a sublicense with any
third Person on terms as it shall determine in its sole and absolute
discretion provided, however, that such sublicense is not inconsistent with
the terms of this Agreement, and (b) nothing in this Section 19.1 is intended
to restrict or limit IDI's rights provided in Section 11.2 of this Agreement.
Any assignment, sublicense or transfer or attempt thereat other than as
permitted by this Section 19.1 and in compliance with the provisions hereof
shall be null and void.
ARTICLE 20 - CONSTRUCTION; ADJUDICATION
20.1 CONSTRUCTION. This Agreement, the validity, construction,
performance and interpretation thereof, and all issues and controversies
arising therefrom shall be construed and enforced in accordance with the
internal laws of the State of Delaware, U.S.A. applicable to contracts made
and to be performed entirely within the State of Delaware, U.S.A. without
reference to its conflict of law provisions.
20.2 EXCLUSIVE FORUM. Any Action under this Agreement by either Party
shall be brought only in, and the Parties hereby consent to the exclusive
venue and jurisdiction of, the federal and state courts located in the State
of Delaware, U.S.A. The
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Parties further consent that any process or notice of motion or other
application to any such court, and any papers in connection therewith, may be
served by certified mail, return receipt requested or by personal service or
in such other manner as may be permissible under the rules of the applicable
court.
20.3 SURVIVAL. The provisions of this Article 20 shall survive
termination of this Agreement.
ARTICLE 21 - ENTIRE UNDERSTANDING/AMENDMENT
21.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement between the Parties, and supersedes all previous
agreements (whether written or oral) concerning the subject matter hereof.
This Agreement shall not be modified, amended, or supplemented except by a
written document executed by all of the Parties.
CONFIDENTIAL TREATMENT REQUESTED
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ARTICLE 22 - HEADINGS
22.1 HEADINGS. The headings in this document are for information
purposes only and are not meant to have any legal effect in interpreting this
document.
ARTICLE 23 - SEVERABILITY; FURTHER ASSURANCES
23.1 SEVERABILITY. The invalidity or unenforceability of any paragraph
or provision of this document shall not affect the validity or enforceability
of any one or more of the other paragraphs or provisions.
23.2 COOPERATION. The Parties hereto will execute any further
instruments or perform any acts which are or may be necessary to effectuate
each of the terms and provisions of this Agreement.
ARTICLE 24 - COUNTERPARTS
24.1 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
INNERDYNE, INC.
By: /s/ William G. Mavity
--------------------------------------------------
Name: William G. Mavity
Title: President and Chief Executive Officer
UNITED STATES SURGICAL CORPORATION
By: /s/ Eiten Nahum
-------------------------------------------------
Name: Eiten Nahum
--------------------------------------------
Title:
---------------------------------------
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Title Date Patent No. Application No. Country Status
- ----- ---- ----------- --------------- ------- ------
<S> <C> <C> <C> <C> <C>
[*****] [***] [*****] [*****] US Issued
[*****] [***] [*****] [*****] US&Foreign Issued
(Europe, Canada, Japan)
[*****] [***] [*****] [*****] US Issued
[*****] [***] [*****] [*****] US Issued
[*****] [***] [*****] [*****] US&Foreign Issued
(Europe)
[*****] [***] [*****] [*****] US Issued
[*****] [***] [*****] [*****] US&Foreign Issued
(Europe, Japan)
[*****] [***] [*****] [*****] US&Foreign Pending
(Europe, Japan)
</TABLE>
<PAGE>
LICENSE, SUPPLY AND DISTRIBUTION AGREEMENT
THIS LICENSE, SUPPLY AND DISTRIBUTION AGREEMENT (the "Agreement"), made
effective this 6th day of January, 1997 ("Effective Date"), by and between
SHERWOOD MEDICAL COMPANY, a corporation organized and existing under the laws
of the State of Delaware, doing business as Sherwood-Davis & Geck, having an
office at 1915 Olive Street, St. Louis, Missouri 63103 ("Sherwood") and
INNERDYNE, INC., a corporation organized and existing under the laws of the
State of Delaware, having an office at 1244 Reamwood Avenue, Sunnyvale,
California 94089 ("InnerDyne").
WHEREAS, Sherwood manufactures and sells a variety of medical devices
including a line of enteral feeding products; and
WHEREAS, InnerDyne manufactures and sells a variety of medical devices
including a line of radially expanding access devices (hereinafter
R.E.A.D.s"); and
WHEREAS, Sherwood desires to obtain a sole source for the supply of
R.E.A.D.s for resale in combination with certain of Sherwood's enteral
feeding tubes and other products in the form of kits, and InnerDyne desires
to supply such R.E.A.D.s to Sherwood; and
WHEREAS, InnerDyne is willing to grant, and Sherwood desires to obtain,
certain license rights in order to market, sell and use R.E.A.D.s in the
gastrointestinal placement of its enteral feeding products;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following terms shall be deemed to have
the following meanings:
1(a) "Affiliate" means, for so long as one of the following
relationships is maintained, any corporation or other business entity
controlled by, controlling, or under common control with another entity, with
"control" meaning direct or indirect beneficial ownership of more than fifty
percent (50%) of the voting stock of such corporation, or more than a fifty
percent (50%) interest in the decision-making authority of such other
business entity.
1(b) "Development Costs" means any costs or expenses incurred by
InnerDyne in the development, research and testing of any modification to an
InnerDyne Product made by InnerDyne to accommodate the assembly of the
InnerDyne Products with Sherwood Products into Kits and/or at the request of
Sherwood.
1(c) "FDA" shall mean the United States Food and Drug Administration.
1(d) "Field" shall mean gastrointestinal placement of enteral feeding
products.
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1(e) "InnerDyne Products" shall mean the R.E.A.D.s listed in Exhibit
A attached hereto, any Modifications thereto, and any products manufactured
by InnerDyne which the parties may agree to include in Kits.
1(f) "Kit" shall mean any combination of Sherwood Products (including
one of Sherwood's enteral feeding tubes) and an InnerDyne Product for use in
the Field.
1(g) "Major Country" shall mean [ * * * * *].
1(h) "Modifications" shall mean improvements, derivative works,
alterations or other modifications made by InnerDyne to InnerDyne Products or
Sherwood Products pursuant to this Agreement.
1(i) "Sherwood Products" shall mean Sherwood's enteral feeding tubes
and other products supplied by Sherwood and listed in Exhibit B attached
hereto, any Modifications thereto, and any products manufactured by Sherwood
which the parties may agree to include in Kits.
1(k) "Territory" shall mean the world.
SECTION 2. GRANT OF LICENSE
2(a) GRANT OF LICENSE. Subject to the terms and conditions of this
Agreement, and for the term of this Agreement, InnerDyne hereby grants to
Sherwood and its Affiliates an exclusive license in the Territory to import,
export, sublicense (as stated in Section 2(b)), distribute, market and sell
the InnerDyne Products and any Modifications thereto solely in combination
with Sherwood Products or Modifications thereto as part of a Kit for use in
the Field throughout the Territory. Sherwood shall also have the license to
manufacture InnerDyne Products for assembly with Sherwood Products into Kits,
in the event that:
(i) InnerDyne materially defaults in the performance of its
obligations under Section 5(b) of the Agreement and fails to cure such
default within ninety (90) days after receipt of written notice by Sherwood
of such material default, EXCEPT if InnerDyne in good faith disputes the
existence of such material default, in which event the existence of such
material default shall be determined in accordance with the provisions of
Section 13 hereto; or
(ii) InnerDyne becomes insolvent, is declared a bankrupt or makes an
assignment for the benefit of creditors.
2(b) RIGHT TO SUBLICENSE. Subject to the terms and conditions of this
Agreement, Sherwood shall be entitled to grant sublicenses of its rights
under this Agreement to non-Affiliates solely upon prior written approval by
InnerDyne, which approval shall not unreasonably be withheld. Sherwood shall
deliver a complete copy of any sublicense agreement granted under this
Agreement to InnerDyne promptly upon execution of such sublicense agreement.
Sherwood shall have no other rights with respect to the InnerDyne Products or
any relationship with InnerDyne, except as specifically set forth in this
Agreement.
2(c) INDEPENDENT CONTRACTORS. It is understood that both parties
hereto are independent contractors and are engaged in the operation of their
own businesses. Neither
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<PAGE>
party hereto is to be considered the agent of the other party for any purpose
whatsoever, and neither party has any authority to enter into any contracts
or assume any obligations for the other party or make any warranties or
representations on behalf of the other party. Nothing in this Agreement or in
the activities of either party shall be deemed to create an agency,
partnership, or joint venture relationship.
SECTION 3. DILIGENCE; SUPPORT; OWNERSHIP
3(a) PROMOTION. Sherwood agrees to use reasonable efforts to promote
and sell the Kits, at its own expense, in Major Countries in the Territory as
soon as feasible after obtaining any necessary government approvals, using
generally the same channels and methods, exercising the same diligence and
adhering to the same standards which it employs with respect to its own
products.
3(b) MARKETING. Sherwood shall maintain the financial capability to
perform its obligations under this Agreement and shall, at its own expense,
establish and maintain sales, marketing and distribution, organization and
personnel of sufficient size to adequately and effectively sell the Kits in
the Territory. Sherwood will be responsible for the market launch of the Kits
in the Territory during the term of the Agreement. InnerDyne shall provide
Sherwood with marketing and technical information concerning the InnerDyne
Products as well as reasonable quantities of brochures, instructional
material, advertising literature and other product data, provided that all
such material will be printed in the English language. InnerDyne shall be
responsible for the accuracy of all information so provided to Sherwood.
Sherwood will produce, and obtain InnerDyne's prior approval of, all
materials relating to or otherwise describing InnerDyne Products used to
promote the Kits in the Territory. Each party agrees to share with the other
its marketing intelligence regarding the Kits by means of quarterly meetings
or business reports.
3(c) SALE TO QUALIFIED INDIVIDUALS. Sherwood shall use its reasonable
commercial efforts to distribute and sell the Kits for use only by qualified
individuals, as appropriate in the Territory, in compliance with local laws
and regulations and good commercial practice and for uses and applications
reasonably approved by InnerDyne for the Kits.
3(d) RECORDS AND REPORTING. Sherwood shall maintain adequate and
accurate books and records with respect to the sale or distribution of the
Kits during the term of the Agreement and for a minimum of three (3) years
after its termination. Upon prior notice, InnerDyne shall have the right
during reasonable business hours, to inspect the facilities of Sherwood which
are used or provided in connection with the manufacturing of components of
and distribution of the Kits.
3(e) SOLE SUPPLIER. Sherwood shall purchase or cause to be purchased
from InnerDyne all quantities of the Kits required by Sherwood to meet demand
by purchasers and potential purchasers of the Kits in the Territory, except
as otherwise contemplated by Section 2(a).
3(f) HARMFUL ACTS. Both InnerDyne and Sherwood understand,
acknowledge and agree that the maintenance of an image of excellence and high
level ethical marketing of the Kits is essential to the success of both
parties. Both parties agree that their respective sales, marketing,
distribution, or advertising will not knowingly reflect unfavorably on, or
dilute in any
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way, the other party's image of excellence and high level ethical marketing.
Both parties agree that they shall not do anything, directly or indirectly,
to impair the current image or to lower the prestige or quality of the other
party's products or the Kits. Sherwood shall not make any changes,
alterations, modifications or additions to the InnerDyne Products without
prior written approval of InnerDyne.
3(g) OWNERSHIP. The parties hereto acknowledge and agree that, as
between InnerDyne and Sherwood, InnerDyne owns all right, title, and interest
in and to InnerDyne Products and Modifications to InnerDyne Products
developed by InnerDyne. In addition, the parties hereto acknowledge and agree
that, as between InnerDyne and Sherwood, Sherwood owns all right, title, and
interest in and to the Sherwood Products, and modifications to Sherwood
Products developed by Sherwood.
SECTION 4. ROYALTY AND MILESTONE PAYMENTS
4(a) ROYALTY. In exchange for the license granted pursuant to Section
2 of this Agreement, Sherwood agrees to make a [* * * * *], with
[* *] due and payable upon the execution of this Agreement and the
remaining [* * * * * *] to InnerDyne on the last day of each
of the first three full calendar months following the Effective Date of this
Agreement.
4(b) MILESTONE PAYMENTS. Within seven (7) business days of the date
of InnerDyne's receipt of FDA clearance of a 510(k) pre-market notification
of a Kit, Sherwood shall make a payment to InnerDyne of [* * *].
SECTION 5. MANUFACTURING AND INNERDYNE PRODUCT DEVELOPMENT
5(a) KIT DEVELOPMENT. The parties will cooperate to develop the
assembly of the Kits as deemed necessary by Sherwood and will negotiate in
good faith a budget for the Development Costs required for the development of
any Modifications to InnerDyne Products for their use with Sherwood Products
and their assembly in the Kits (the "Budget").
5(b) INNERDYNE MANUFACTURING RIGHTS. InnerDyne shall have the
exclusive right to manufacture Kits on behalf of Sherwood or its Affiliates
for use in the Field, and Sherwood hereby commits to purchase all of its
requirements of Kits from InnerDyne; except as otherwise provided in Section
2(a).
5(c) SUPPLY OF SHERWOOD PRODUCTS. Sherwood shall manufacture and/or
supply, without charge to InnerDyne, InnerDyne's requirements of Sherwood
Products to meet Sherwood's requirements for Kits.
[* * * * * *] of Sherwood Products. Sherwood shall fill
any and all requisition orders received from InnerDyne for Sherwood Products,
within [* * *] business days after receipt of such requisition
orders. InnerDyne shall only use Sherwood Products in the assembly of the
Kits and for no other purpose.
5(d) MANUFACTURING REQUIREMENTS. The Kits will be assembled and the
InnerDyne Products will be manufactured by InnerDyne in accordance with the
requirements of the FDA's current Good Manufacturing Practices regulations
and ISO 9001 standards, at InnerDyne's
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<PAGE>
cost. All Kits provided to Sherwood under this Agreement shall be C.E. marked
as soon as reasonably possible for immediate sale.
5(e) REIMBURSEMENT OF DEVELOPMENT COSTS. Sherwood shall reimburse
InnerDyne up to [* * *] for its Development Costs in accordance with
the Budget, upon presentation of an invoice, for any Modifications to the
InnerDyne Products that are required for such InnerDyne Products to conform
to the specifications set forth in Exhibit A. The expense of registering the
Kits for C.E. Marking shall also be reimbursed by Sherwood in accordance with
Exhibit D.
5(f) MACHINERY AND EQUIPMENT. InnerDyne has or will obtain all
machinery and equipment needed to meet Sherwood's requirements for the Kits
and the InnerDyne Products. All machinery and equipment used in the assembly
of the Kits and the manufacture of the InnerDyne Products shall be and remain
the sole and exclusive property of InnerDyne. InnerDyne shall maintain the
financial capability to perform its obligations under this Agreement and
shall at its own expense (unless otherwise provided by this Agreement)
establish and maintain a manufacturing organization and personnel of
sufficient size to adequately and effectively assemble the Kits.
5(g) SUPPLY OF INNERDYNE PRODUCTS. Pursuant to the terms of this
Agreement, InnerDyne shall supply to Sherwood all of Sherwood's requirements
for Kits.
SECTION 6. PRICE AND PAYMENT TERMS
6(a) PRICES.
(i) The initial purchase price of a Kit shall be [* * *]
(the "Initial Price"). [* * * * * * * *] The Adjusted
Price as determined by InnerDyne during the Adjustment Period shall become
effective as of the date of written notice thereof to Sherwood and shall
continue in effect until the subsequent Price Adjustment Date. If the
Adjusted Price is not further adjusted during the Adjustment Period following
such subsequent Price Adjustment Date, the Adjusted Price then in effect
shall continue in effect until the next subsequent Price Adjustment Date.
Notwithstanding the foregoing, such revisions in price shall not exceed
InnerDyne's actual changes in its cost for labor and materials directly
related to the manufacture of the InnerDyne Products, utilizing generally
accepted accounting principles consistently applied, but in no event will any
price increase, cumulatively, be proportionately greater than the increases,
if any, of the Producer Price Index (unadjusted) of the United States Bureau
of Labor Statistics, Commodity Code 06-6 ("Plastic resins and materials") for
the preceding [* * *]. Sherwood shall have the right, at its sole cost
and expense, to review InnerDyne's records to verify InnerDyne's costs, and
InnerDyne shall make such records available to Sherwood at all reasonable
times for such purposes.
(ii) All prices are calculated F.O.B. InnerDyne's manufacturing
facility, currently located in Salt Lake City, Utah. Customs, duties and
charges, if any, shall be borne by Sherwood. All import or export licenses,
approvals or both shall be obtained by Sherwood at its cost. Prices to
Sherwood do not include any federal, state or local taxes that may be
applicable to products. When InnerDyne has the legal obligation to collect
such taxes, the appropriate amount shall be added to Sherwood's invoice and
paid by Sherwood unless Sherwood provides InnerDyne with a valid tax
exemption certificate authorized by the appropriate taxing authority.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
6(b) PAYMENT. Full payment of the purchase price then in effect for a
Kit (including any freight, taxes or other applicable costs initially paid by
InnerDyne but to be borne by Sherwood) shall be in United States of America
dollars. All exchange, interest, banking, collection, and other charges shall
be at Sherwood's expense. Payment terms shall be net thirty (30) days, and
payment shall be made by wire transfer, check or other instrument approved by
InnerDyne. Any invoiced amount not paid when due shall be subject to a
service charge at the lower of the rate of one and one-half percent (1.5%)
per month or the maximum rate permitted by law. If Sherwood fails to make any
payment to InnerDyne when due, InnerDyne may, after written notice to
Sherwood and without affecting its rights under this Agreement, cancel or
delay any future shipments to Sherwood until such delinquent payment is made.
In the event that Sherwood shall contest an InnerDyne invoice in good faith
and shall notify InnerDyne of the reason(s) therefor, InnerDyne shall not
impose a service charge and/or discontinue any shipments except after first
considering Sherwood's claim and then notifying Sherwood in writing of any
unfavorable disposition. Five (5) days after the date of written notification
from InnerDyne to Sherwood that Sherwood's claim lacks merit, the service
charge set forth in this Section 6(b) shall be applied to the delinquent
payment and shall start to accrue, and InnerDyne may thereafter cancel or
delay any future shipments to Sherwood until the delinquent payment and
related service charge is paid in full to InnerDyne.
SECTION 7. PURCHASING, DELIVERY, TITLE, RISK OF LOSS, RETURNS
7(a) PURCHASE ORDERS; FORECASTS. Pursuant to this Agreement, Sherwood
will submit purchase orders for the Kits. Any terms and conditions included
in such purchase orders that conflict with the terms of this Agreement shall
be of no force or effect and shall form no part of this Agreement. Firm
purchase orders are to be placed by Sherwood at least [* * *] prior to
the required delivery date. From and after the date of FDA clearance of a
510(k) pre-market notification (the "510(k)") and thereafter during the final
quarter of each calendar year during the term of this Agreement, Sherwood
will provide InnerDyne with an annual forecast of its anticipated needs of
Kits for the following [* * *], and, beginning immediately upon the
date of the 510(k), will maintain a [* * *] rolling forecast of Kit
requirements, updated monthly, of which [* * *] will constitute a
firm order. Notwithstanding the foregoing, InnerDyne shall have no obligation
to supply Kits to Sherwood prior to [* * *] after the availability of
the initial commercial production lot of Kits or during any period for which
any of Sherwood's payments due to InnerDyne hereunder are [* * *]
or more past due in accordance with Section 6(b).
7(b) MINIMUM PURCHASE COMMITMENTS. Following the date of the
availability of the initial commercial production lot of Kits, Sherwood shall
purchase from InnerDyne the minimum quantity of Kits during each of the
[* * * * * *] as set forth in Exhibit C attached hereto.
[* *] prior to the expiration of the [* * * *] and [* * *]
prior to the expiration of each subsequent [* * * *] (a "Subsequent
Purchase Period") during the term of this Agreement, Sherwood and InnerDyne
[* * * * * * *]. The parties hereby agree that
[* * * * * * * * * *] shall have the option [***].
In the event that InnerDyne does not receive [* * * * * *],
the minimum quantity of Kits to be purchased by Sherwood during such
Subsequent Purchase Period shall be deemed to be [* * *].
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7(c) FAILURE TO MEET ANNUAL PURCHASE COMMITMENTS. During the term of
this Agreement, and provided InnerDyne shall supply Kits to Sherwood
according to forecast, if Sherwood fails to purchase or order the minimum
quantities of Kits set forth above during any Twelve Month Purchase Period or
Subsequent Purchase Period, InnerDyne may, on [* * * *] prior
written notice to Sherwood, convert the license granted to Sherwood under
Section 2 of this Agreement to a non-exclusive license for the full remaining
term of this Agreement, thereby permitting InnerDyne to also market, sell or
otherwise distribute InnerDyne Products to third parties for use in the Field
throughout the Territory. If the License is converted to non-exclusive by
InnerDyne, Sherwood [* * * * * *], and the price of Kits
sold to Sherwood for the remaining term of this Agreement shall be
[* * * * * *]. If InnerDyne converts the License to
non-exclusive as a result of Sherwood's failure to purchase or
[* * * * * * *] Purchase Period or Subsequent Purchase
Period as required by Section 7(b), InnerDyne's conversion of the License to
non-exclusive shall be InnerDyne's sole remedy against Sherwood for
Sherwood's breach of its minimum annual purchase obligations under Section
7(b) for that particular [* * * * *], as the case may be. However,
InnerDyne's conversion of the License to non-exclusive shall not be its sole
remedy for (i) a breach by Sherwood of any other term of this Agreement,
whether in the course of a breach by Sherwood of its obligations under
Section 7(b) or otherwise, (ii) a breach by Sherwood of its obligations under
Section 7(b) [* * * * *], or (iii) a breach by Sherwood of its
obligations under Section 7(b) for any previous
[* * * * * * * * * *]. In the event that
Sherwood fails to sell the Kit [* * * * * *], InnerDyne shall
have the right, on written notice to Sherwood, to convert the License to
non-exclusive for that country and to thereafter market, sell or otherwise
distribute InnerDyne Products to third parties for use in the Field in such
country. For purposes of this Section 7(c), if Sherwood cancels an order of
Kits made during a [* * * * * *] after the expiration of any
such period, the number of Kits deemed to have been ordered by Sherwood
during any such period, as applicable, shall be reduced by such cancellations.
7(d) SHIPPING . All Kits delivered pursuant to the terms of this
Agreement shall be suitably packed and marked for shipment at InnerDyne's
manufacturing facility to Sherwood's address set forth in this Agreement or
such other address as Sherwood may specify, and delivered to Sherwood or
Sherwood's carrier agent F.O.B. InnerDyne's manufacturing facility, at which
time title to such products and risk of loss shall pass to Sherwood.
InnerDyne shall deliver products to the carrier selected by Sherwood. In the
event that Sherwood does not provide written notice of such carrier,
InnerDyne shall select the carrier. Sherwood will obtain insurance sufficient
to cover the value of each shipment. Sherwood shall have the right to
inspect each lot of Kits and to reject any lot which in its reasonable
opinion is defective.
7(e) RETURNS. Sherwood will be responsible for receiving the initial
calls from customers regarding damaged or defective Kits through Sherwood's
sales and customer service forces and will work directly with such customers
to ensure the return and, if appropriate, replacement of such Kits. InnerDyne
will provide all reasonable assistance to Sherwood's sales and customer
service forces in connection with such efforts and shall designate a
representative with authority to coordinate the delivery of assistance.
Sherwood will initially be responsible for testing and determining the cause
of all Kit malfunctions and InnerDyne shall test and determine the cause of
such malfunctions only upon the reasonable request of Sherwood after Sherwood
has conducted such initial testing. InnerDyne will replace any defective Kit
at its expense and will be responsible for the return shipping and insurance
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
charges for defective Kits being returned if the defect is caused by or due
to a defective InnerDyne Product or InnerDyne's assembly of the Kits. To
return a defective Kit, Sherwood shall notify InnerDyne immediately and
request a Material Return Authorization ("MRA") number. InnerDyne shall
provide the MRA number to Sherwood within seven (7) days of receipt of the
request. Within seven (7) days of receipt of the MRA number, Sherwood shall
return to InnerDyne the rejected Kit with the MRA number displayed on the
outside of the carton. Sherwood shall be responsible for the shipping and
insurance charges of replacement Kits being shipped back to Sherwood if the
defect is not caused by or due to a defective InnerDyne Product or
InnerDyne's assembly of the Kits, and Sherwood shall also bear all of the
costs and expenses resulting from the return and replacement of any such
defective Kit or any recall of the Kits, to the extent that such recall is
not caused by or due to a defective InnerDyne Product or InnerDyne's assembly
of the Kits.
SECTION 8. GOVERNMENT REGULATIONS
8(a) APPROVALS AND REGISTRATIONS.
(i) InnerDyne agrees that it will use its commercially reasonable
efforts to obtain the 510(k) for the Kit. Upon InnerDyne's receipt of the
510(k) and the payment required by Section 4(b) above, the 510(k) shall be
transferred to and placed in the name of Sherwood. InnerDyne also agrees that
it will use its commercially reasonable efforts to obtain C.E. marking for
the Kit. Sherwood shall reimburse InnerDyne on a mutually agreed upon
schedule for all costs and expenses incurred by InnerDyne in registering the
Kits for C.E. marking, which costs and expenses shall be included in the
Budget for C.E. Marking, attached hereto as Exhibit D. Sherwood shall have
the right to reference the 510(k) and such C.E. marking in any regulatory
filings required for Sherwood to market the Kits in the Territory.
(ii) InnerDyne agrees that [* * * *], secure any and all other
required United States regulatory approvals necessary for the implementation,
execution and performance of this Agreement. Sherwood agrees to cooperate
fully with InnerDyne in its pursuit of such approvals. To the extent
permissible, InnerDyne shall obtain such approvals in Sherwood's name.
[* * * * * * * *]. InnerDyne shall obtain all
documents or licenses and shall comply with all applicable laws, including,
if required, registration of the Agreement necessary for the implementation,
execution and performance of this Agreement. InnerDyne shall notify Sherwood
of all permits, approvals and registrations obtained by it relating to Kits
or this Agreement and shall provide Sherwood with copies of all materials
documents related thereto.
(iii) Sherwood agrees [* * * *], secure any and all
required regulatory approvals or registrations in each jurisdiction within
the Territory that is outside of the United States as soon as feasible after
the date of this Agreement necessary for the implementation, execution and
performance of this Agreement. InnerDyne agrees to cooperate fully with
Sherwood in its pursuit of applicable approvals or registrations. Sherwood
shall obtain all necessary documents or licenses and shall comply with all
applicable laws, including, if required, registration of the Agreement.
Sherwood shall notify InnerDyne each time it submits an application for a
permit, approval or registration and shall notify InnerDyne of all permits,
approvals and registrations obtained by it.
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(iv) Upon any expiration, cancellation, or termination of this
Agreement, the approvals obtained under subsections (i), (ii) and (iii) above
relating solely to InnerDyne Products shall promptly be transferred and
delivered to, and shall inure to the benefit of InnerDyne or its designee, to
the extent that this is permissible under applicable law, at no cost to
InnerDyne other than the direct costs of transferring such approvals. Within
seven (7) days of any such expiration, cancellation, or termination, Sherwood
shall provide to InnerDyne copies of all documentation necessary to have any
applicable regulatory approvals relating solely to InnerDyne Products in each
jurisdiction of the Territory not already in InnerDyne's name transferred to
InnerDyne.
8(b) ILLEGAL TRANSFER. Sherwood agrees that it shall comply with all
applicable laws in the distribution of the Kits and that it shall not allow
the Kits, any trademarks or tradenames of InnerDyne, any proprietary
information of InnerDyne, or any direct product of such information, to be
knowingly made available, either directly or indirectly, or in any way to be
knowingly given, transferred, sold or re-exported to any country in violation
of the laws or export control regulations of such country or the European
Union. United States laws and export control regulations governing the
exportability of technical data and products to nations are subject to
change. If any jurisdiction included within the Territory shall, at the time
of execution of the Agreement, or at any time during the term of the
Agreement, be placed in an excluded category by the United States government
for the receipt of either technical data or the manufacture or sale of Kits
or products such as those of InnerDyne and/or Sherwood, Sherwood agrees that
it shall take actions necessary to cease business activity in the Kits in the
excluded country.
SECTION 9. WARRANTIES, COVENANTS AND INDEMNIFICATION
9(a) MUTUAL. The parties represent and warrant that they have the
full right to enter into this Agreement and that this Agreement does not
conflict with any other agreements so long as the terms of this Agreement are
met. The parties represent and warrant that their respective products shall
be manufactured and produced in accordance with their respective product
specifications, in compliance with all applicable laws, and in accordance
with Good Manufacturing Practices ("GMP").
9(b) INNERDYNE. InnerDyne represents and warrants that to its
knowledge it has the exclusive right to manufacture, sell and distribute the
InnerDyne Products and Modifications used in the Kits, that the assembly of
the InnerDyne Products and Modifications into Kits with the Sherwood Products
shall be in conformity with the Kit specifications as embodied in Exhibits A
and B, read together, and that to InnerDyne's knowledge the use of any
InnerDyne Product or Modification as contemplated by this Agreement shall not
infringe the intellectual property rights of any third party.
9(c) INDEMNIFICATION BY SHERWOOD. Sherwood shall defend, indemnify
and hold InnerDyne harmless from and against any action brought against
InnerDyne to the extent such action is based on a claim (including, without
limitation, a claim for infringement or willful infringement, except to the
extent that such infringement has been caused by the action of InnerDyne, its
employee or agents or is based upon or arises out of the manufacture,
importation, offer for sale, sale or use of an InnerDyne Product as
specifically authorized by InnerDyne) made by any third party: (i) arising
out of the negligent marketing, promotion, distribution and sale of the Kits,
where and to such extent the damages have been caused by the action of
Sherwood, its employees or agents; (ii) except as set forth in 9(d), arising
out of
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
the use of a Kit; (iii) arising out of the use of a Sherwood Product; or (iv)
that any Sherwood Product (or any part thereof or any intellectual property
incorporated therein) or the use of any Sherwood Product as contemplated by
the parties under this Agreement infringes any intellectual property right of
any third party; provided, however, that InnerDyne: (A) provides Sherwood
with prompt notice of any such claim; (B) allows Sherwood to direct the
defense and settlement of such claims; (C) provides Sherwood with the
information and assistance necessary for such defense and settlement of the
claims; and (D) does not enter into any settlement with respect to such
claim. If a final injunction is obtained on an action based on any such claim
against InnerDyne's assembly of the Kits by reason of such infringement, or
if in Sherwood's reasonable opinion, such an injunction is likely to be
obtained, Sherwood may, at its sole option, either: (x) obtain for InnerDyne
the right to continue assembling the Kits; (y) replace or modify the Kits so
that such Kits become non-infringing; or (z) terminate this Agreement.
[* * * * * * * * * * *].
9(d) INDEMNIFICATION BY INNERDYNE. InnerDyne shall defend, indemnify
and hold Sherwood harmless from and against any action brought against
Sherwood to the extent such action is based on a claim (including, without
limitation, a claim for infringement or willful infringement, except to the
extent such infringement has been caused by a modification or use of an
InnerDyne Product not specifically authorized by InnerDyne or is based upon
or arises out of the manufacture, importation, offer for sale, sale or use of
a Sherwood Product) made by any third party: (i) arising out of the
manufacture of Kits by InnerDyne where and to such extent the damages have
been caused by the negligent action of InnerDyne, its employees or agents;
(ii) arising out of the use of any InnerDyne Product; or (iii) that any
InnerDyne Product (or any part thereof or any intellectual property
incorporated therein) or the use of any InnerDyne Product as contemplated by
parties hereunder infringes any patent or trade secret owned by any third
party; provided, however, that Sherwood: (A) provides InnerDyne with prompt
notice of any such claim; (B) allows InnerDyne to direct the defense and
settlement of such claims; (C) provides InnerDyne with the information and
assistance necessary for such defense and settlement of the claims; and (D)
does not enter into any settlement with respect to such claim. If a final
injunction is obtained on an action based on any such claim against
Sherwood's promotion, sale, or use of the Kits by reason of such
infringement, or if in InnerDyne's reasonable opinion, such an injunction is
likely to be obtained, InnerDyne may, at its sole option, either: (x) obtain
for Sherwood the right to continue promoting, selling, or using the Kits; (y)
replace or modify the Kits so that such Kits become non-infringing; or (z)
terminate this Agreement.
[* * * * * * * * * * *].
9(e) COMBINED INFRINGEMENT. If as a result of a claim of infringement
of any intellectual property right of any third party,
[* * * * * *] by reason that the combination of the parties'
respective products as contemplated by this Agreement infringes the
intellectual property rights of a third party, then either of the parties
upon written notice to the other, or both parties acting jointly by mutual
agreement, may (i) obtain the right for the parties to continue their
respective performance obligations under the Agreement, or (ii) replace or so
modify their respective products so that the combination of their respective
products as contemplated by this Agreement becomes non-infringing.
[* * * * * * *]. Notwithstanding the foregoing, if
the parties are unable to reach agreement
[* * * * *] to the dispute resolution process
set forth in Section 13 below. If as part of such dispute resolution
process, [* * * * * * * *]. In the event that neither
of the parties, either individually or jointly, is, after the use of
reasonable commercial efforts, able to
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
accomplish such replacement or modification or to obtain the right to
continue the manufacture, importation, offer for sale, sale and/or use of the
combination of the parties' respective products in the manner contemplated by
this Agreement, [* * * * *]. If the arbitrator determines
[* * * * * * * * * *].
9(f) LIMITATION OF LIABILITY. THE PROVISIONS OF THIS ARTICLES 9 AND
7(e) SET FORTH THE ENTIRE LIABILITY OF INNERDYNE AND THE SOLE REMEDIES OF
SHERWOOD WITH RESPECT TO ANY THIRD-PARTY CLAIMS ARISING OUT OF INNERDYNE'S
MANUFACTURE OF THE KITS OR THE INNERDYNE PRODUCTS AND THE ENTIRE LIABILITY OF
SHERWOOD AND THE SOLE REMEDIES OF INNERDYNE WITH RESPECT TO THIRD-PARTY
CLAIMS ARISING OUT OF SHERWOOD'S MANUFACTURE OF THE SHERWOOD PRODUCTS AND ITS
MARKETING, PROMOTION, DISTRIBUTION AND SALE OF THE KITS. IN NO EVENT SHALL
INNERDYNE BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT
UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE
THEORY FOR ANY DIRECT (EXCEPT AS OTHERWISE SET FORTH IN ARTICLES 9 AND 7(e)
HERETO), INDIRECT, CONSEQUENTIAL, PUNITIVE OR OTHER DAMAGES, INCLUDING COST
OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES, SUFFERED BY
SHERWOOD OR ANY OF ITS CUSTOMERS ARISING OUT OF OR RELATED TO THE
DISTRIBUTION, PROMOTION, MARKETING, SALE OR USE OF THE KITS OR INNERDYNE
PRODUCTS IN THE TERRITORY.
9(f) DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
IN THIS AGREEMENT, AND TO THE FULLEST EXTENT PERMITTED BY LAW, NEITHER PARTY
MAKES ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO
ITS PRODUCTS OR THE KITS AND HEREBY DISCLAIMS ALL IMPLIED WARRANTIES,
INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
AND, IN THE CASE OF INNERDYNE, NONINFRINGEMENT WITH RESPECT TO SUCH INNERDYNE
PRODUCTS AND KITS.
SECTION 10. USE OF TRADEMARKS; LABELING
10(a) TRADEMARK LICENSE. The Kits shall bear Sherwood's trademarks
and/or tradenames. Sherwood hereby grants to InnerDyne the right to reproduce
Sherwood's trademarks and tradenames, whether registered or not, for use on
the Kits, solely in connection with sales of Kits by InnerDyne to Sherwood
under this Agreement. Except as otherwise stated herein, all right, title and
interest to Sherwood's trademarks and tradenames shall remain with Sherwood.
Sherwood shall have the right to reproduce InnerDyne trademarks and
tradenames in labeling, advertising and promoting the sale of the Kits for
use in the Field in the Territory, provided such trademarks and tradenames
shall be identified as the property of InnerDyne and used in accordance with
InnerDyne's trademark use guidelines.
10(b) ARTWORK/LABELING. Sherwood will solely be responsible for
providing the artwork for all over-labeling and/or outer packaging for
InnerDyne's prior approval, which will not be unreasonably withheld, at least
ninety (90) days prior to InnerDyne's first shipment of such Kits to Sherwood
hereunder. InnerDyne will perform the over-labeling and/or create the outer
packaging (as appropriate) on all Kits such that the Sherwood names and
trademarks are clearly visible and such labeling, and Kit markings generally,
comply with applicable regulatory
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<PAGE>
requirements, which shall have been identified by Sherwood and communicated
in writing sufficiently in advance to InnerDyne.
10(c) KITS LABELING. Sherwood shall solely be responsible for
providing labeling in conformance with the requirements of any United States
regulatory agency, for C.E. marking, and the requirements of any regulatory
agency in any jurisdiction in the Territory that is outside of the United
States. Sherwood shall not modify or alter any labeling provided by InnerDyne
for Kits without prior written approval by InnerDyne. InnerDyne shall have
the right to approve to any labeling provided by Sherwood, which approval
shall not unreasonably be withheld.
SECTION 11. FACILITY AND RECORD AUDIT
Upon giving reasonable notice to InnerDyne, Sherwood and any
representative thereof shall have the right to inspect, during normal
business hours, the manufacturing facility in which InnerDyne manufactures
the InnerDyne Products and assembles the Kits, and to review records of
InnerDyne to assure compliance with the terms of this Agreement. InnerDyne
shall exert its commercially reasonable efforts to obtain similar rights of
inspection and review at any subcontractors of InnerDyne involved in the
manufacture of the InnerDyne Products and the assembly of the Kits.
SECTION 12. CONFIDENTIALITY AND DISCLOSURE
12(a) CONFIDENTIALITY. Each party acknowledges that it has or will
have access to valuable proprietary information of the other party, including
but not limited to, technical data and customer and marketing information,
all of which are the property of the other party, have been maintained
confidential, and are used in the course of such other party's business. Each
party shall not, either during the term of this Agreement or thereafter,
disclose the other party's proprietary information to anyone other than those
of its employees having a need to know and shall refrain from use of such
information other than in the performance of this Agreement. In addition, the
receiving party shall take all reasonable precautions to protect the value
and confidentiality of such information to the originating party. All
records, files, notes, drawings, prints, samples, advertising material and
the like relating to the business, products or projects of the originating
party and all copies made from such documents, shall remain the sole and
exclusive property of the originating party and shall be returned to the
originating party immediately upon written request thereby. Each party agrees
to continue to maintain all proprietary information in confidence for a
period of five (5) years following termination of this Agreement, unless
written authorization to disclose any such information is first obtained from
the originating party hereunder.
12(b) EXCEPTIONS. Neither party shall be obligated or required to
maintain in confidence any information that (A) it is required to disclose
information by order or regulation of a governmental agency or a court of
competent jurisdiction, provided that such party shall not make any such
disclosure (other than a filing of information or materials with the U.S.
Securities and Exchange Commission made with a request for confidential
treatment for portions of such material for which such treatment may
reasonably be expected to be granted or a similar filing of information or
materials with the National Association of Securities Dealers) without first
notifying the other party and allowing the other party a reasonable
opportunity to seek injunctive relief from (or protective order with respect
to) the obligation to make such disclosure or (B) it can demonstrate with
written records: (i) is in the public domain or known to the receiving party
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CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
prior to disclosure by the originating party, (ii) becomes known to the
public after disclosure by the originating party, other than through breach
of this Agreement, (iii) becomes known to the receiving party from a source
other than the disclosing party without breach of any obligation of
confidence, or (iv) is or has been furnished to a third party by the
originating party without restriction on the third party's right to disclose.
SECTION 13. DISPUTE RESOLUTION
13(a) PRE-ARBITRATION. No arbitration with reference to this
Agreement shall arise until the following procedures have been satisfied. In
the event a disagreement or dispute under this Agreement is not resolved by
the designated representatives of each party by mutual agreement within
thirty (30) days after a meeting to discuss the disagreement, either party
may at any time thereafter provide the other written notice specifying the
terms of such disagreement in reasonable detail and the time sensitivity of
such issue. Upon receipt of such notice, the Chief Executive Officer of
InnerDyne and the President of Sherwood shall meet at a mutually agreed upon
time, but no later than ten (10) days after receipt of such notice, and
location for the purpose of resolving such disagreement. They will discuss
the problems and/or negotiate for a period of up to thirty (30) days, or
shorter period as specified in the notice, in an effort to resolve the
disagreement or negotiate an acceptable interpretation or revision of the
applicable portion of this Agreement mutually agreeable to both parties,
without the necessity of formal procedures relating thereto. During the
course of such negotiation, the parties will reasonably cooperate and provide
information that is not materially confidential in order that each of the
parties may be fully apprised of the issues in dispute. The institution of
arbitration to resolve the disagreement may occur only after the earlier of:
(a) the Chief Executive Officer and President mutually agreeing that
resolution of the disagreement through continued negotiation is not likely to
occur, or (b) following expiration of the thirty (30) days negotiation period.
13(b) ARBITRATION. Subject to Section 13(a), any claim, dispute or
controversy arising out of or in connection with or relating to this
Agreement or the breach or alleged breach thereof, except arising under
Sections 3(g) or 12, shall be submitted by the parties to arbitration in
accordance with the then current commercial arbitration rules of the Center
for Public Resources, Inc. ("CPR") except as otherwise provided herein. All
proceedings shall be held in English and a transcribed record prepared in
English. The parties shall choose one (1) arbitrator from a panel of five (5)
arbitrators provided by CPR within thirty (30) days of the establishment of
the panel. Each party shall be entitled to strike two (2) arbitrators from
the panel. The arbitration shall be conducted at a site designated by the
arbitrator and that is mutually acceptable to the parties. The parties hereby
agree that any remedy or relief, whether legal or equitable, that may be
granted by such arbitrator shall not exceed the scope of the agreement of the
parties as set forth in this Agreement. The judgment rendered by the
arbitrator shall include costs of arbitration, reasonable attorneys' fees and
reasonable costs for expert and other witnesses, and judgment on such award
may be entered in any court having jurisdiction thereof. Nothing in this
Agreement shall be deemed as preventing either party from seeking injunctive
relief (or any other provisional remedy) from any court having jurisdiction
over the parties and the subject matter of the dispute as necessary to
protect either party's name, proprietary information, trade secrets, know-how
or any other proprietary rights. If the issues in dispute involve scientific
or technical matters, any arbitrator chosen hereunder shall have educational
training and/or experience sufficient to demonstrate a reasonable level of
relevant scientific or medical knowledge.
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SECTION 14. TERM AND TERMINATION
14(a) TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and continue in full force and effect for a fixed term of
[* * *] from the date of receipt of the 510(k), unless terminated
earlier under the provisions of this Section 14 or other applicable
termination provisions of this Agreement. At the end of such fixed term, this
Agreement may be renewed in one-year increments provided that InnerDyne and
Sherwood agree in writing prior to the end of such fixed term, and each
additional term, upon the terms and conditions of such renewal, including,
without limitation, any amendments to this Agreement and the exhibits hereto
and the term of such renewal period. If such written agreement is not reached
prior to the end of the then-current contract term, then this Agreement shall
terminate at the end of such current contract term.
14(b) TERMINATION FOR CAUSE. If either party defaults in the
performance of any provision of this Agreement, then the nondefaulting party
shall give written notice of the default to the defaulting party, and if the
default is not cured within sixty (60) days, the Agreement will be
terminated; provided, however, if the default is such that it cannot
reasonably be cured within sixty (60) days, and the defaulting party shall
immediately and diligently undertake to cure the default after written notice
from the nondefaulting party during such sixty (60) day period, then the
Agreement shall not terminate at the end of the sixty (60) days period;
provided further, however, that if such default is not cured during the
following thirty (30) day period, then the Agreement shall automatically
terminate at the end of that thirty (30) day period.
14(c) TERMINATION FOR INSOLVENCY. Either party may terminate this
Agreement in the event that the other becomes insolvent, files a petition in
bankruptcy, or is declared bankrupt, or makes an assignment for benefit of
creditors, or there is reasonable evidence indicating the possibility of such
filing or assignment, during the term that this Agreement is in effect.
Termination under this provision shall be effective twenty (20) days
following written notice that this Agreement is being terminated for the
reason stated in this subject.
14(d) EFFECT OF TERMINATION; LIMITATION OF LIABILITY. In the event of
termination by either party in accordance with any of the provisions of this
Agreement, neither party shall be liable to the other, because of such
termination, for compensation, reimbursement or damages on account of the
loss of prospective profits or anticipated sales or on account of
expenditures, inventory, investments, leases or commitments in connection
with the business or goodwill of InnerDyne or Sherwood. Termination shall
not, however, relieve either party of obligations incurred prior to the
termination or of any obligations in this Agreement which by their terms
survive termination (including, without limitation, obligations of
confidentiality and transfer of regulatory approvals as set forth in Section
8(a)(iii) above, as discussed herein, and the obligations of the parties set
forth in Sections 9 and 13 above). Both InnerDyne and Sherwood shall be
entitled to cancel all Purchase Orders, to the extent Kits have not been
delivered to Sherwood, which are outstanding at the time of notice of
termination, provided however that, subject to payment in advance to
InnerDyne, Sherwood shall be entitled to receive the number of Kits necessary
to fulfill valid and binding customer purchase orders accepted by Sherwood
prior to notification of termination of this Agreement. Prior to filling such
purchase orders, InnerDyne shall be entitled to request and receive
documentary evidence of all such outstanding purchase orders and an
accounting of Sherwood's existing inventory of Kits. InnerDyne shall return
to Sherwood any Sherwood Products still on hand, at Sherwood's expense.
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14(e) POST-TERMINATION USE OF MATERIALS. After termination of this
Agreement, neither party shall use any trademarks, tradenames, patents,
intellectual property, signs, equipment, advertising matter or material which
refer to or are related to the other and shall refrain from acts and
omissions that indicate or suggest a relationship with the other and shall
immediately discontinue use of all of the other's property, promotional
material, and proprietary information.
14(f) NO DAMAGES FOR TERMINATION. NEITHER PARTY SHALL BE LIABLE TO
THE OTHER, INCLUDING DIRECT (OTHER THAN PURSUANT TO A TERMINATION UNDER
SECTION 14(b) ABOVE), INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES,
ON ACCOUNT OF THE TERMINATION OR EXPIRATION OF THIS AGREEMENT IN ACCORDANCE
WITH THIS ARTICLE 14. SHERWOOD WAIVES ANY RIGHTS IT MAY HAVE TO RECEIVE ANY
COMPENSATION OR REPARATIONS ON TERMINATION OR EXPIRATION OF THIS AGREEMENT
UNDER THE LAW OF ANY COUNTRY OUTSIDE THE UNITED STATES. Neither party shall
be liable to the other on account of termination or expiration of this
Agreement for reimbursement or damages for the loss of goodwill, prospective
profits or anticipated income, or on account of any expenditures,
investments, leases or commitments made by the other or for any other reason
whatsoever. THE PARTIES ACKNOWLEDGE THAT THIS SECTION 14(f) HAS BEEN INCLUDED
AS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT AND
THAT NEITHER PARTY WOULD HAVE ENTERED INTO THIS AGREEMENT BUT FOR THE
LIMITATIONS OF LIABILITY AS SET FORTH HEREIN.
SECTION 15. MISCELLANEOUS
15(a) ASSIGNMENT. This Agreement may not be assigned by either party
without the prior written consent of the other, which consent shall not be
unreasonably withheld; provided, however, that either party may assign or
transfer its rights and obligations under this Agreement to a successor to
all or substantially all of its assets, whether by sale, merger, operation of
law or otherwise.
15(b) ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the
entire agreement between the parties hereto with respect to the within
subject matter and supersedes all previous agreements, whether written or
oral. This Agreement shall not be changed or modified orally, but only by an
instrument in writing signed by both parties.
15(c) SEVERABILITY. If any provision of this Agreement is declared
invalid by a court of last resort or by any court from the decision of which
an appeal is not taken within the time provided by law, then and in such
event, this Agreement will be deemed to have been terminated only as to the
portion thereof which relates to the provision invalidated by that decision
and only in the relevant jurisdiction, but this Agreement, in all other
respects and all other jurisdictions, will remain in force; provided,
however, that if the provision so invalidated is essential to this Agreement
as a whole, then the parties shall negotiate in good faith to amend the terms
hereof as nearly as practical to carry out the original interest of the
parties and, failing such amendment, either party may submit the matter to
arbitration for resolution pursuant to Section 13(b).
15(d) NOTICES. All notices specified in this Agreement shall be given
in writing and shall be effective when either served by personal delivery or
facsimile transmission, or five (5) days
-15-
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
after being addressed to the other party at the address specified below and
deposited in first class mail. Unless otherwise specified in accordance with
the provision of this Section, the addresses of the parties shall be:
InnerDyne, Inc.
1244 Reamwood Avenue
Sunnyvale, California 94089
Attention: CEO or CFO
Facsimile Number: [* * *]
Sherwood Medical Company
1915 Olive Street
St. Louis, Missouri 63103
Attention: V.P. of Business Development
Facsimile Number: [* * *]
15(e) CHOICE OF LAW. The validity, performance, construction, and
effect of this Agreement shall be governed by the laws of the State of
California which are applicable to contracts between California residents to
be performed wholly within California.
15(f) WAIVER. The failure of either party to assert a right hereunder
or to insist upon compliance with any term or condition of this Agreement
shall not constitute a waiver of that right or excuse a similar subsequent
failure to perform any such term or condition by the other party. None of the
terms, covenants and conditions of this Agreement can be waived except by the
written consent of the party waiving compliance.
15(g) FORCE MAJEURE. If either party shall be delayed, interrupted in
or prevented from the performance of any obligation hereunder by reason of
force majeure including an act of God, fire, flood, earthquake, war (declared
or undeclared), public disaster, strike or labor differences, governmental
enactment, rule or regulation, or any other cause beyond such party's
control, such party shall not be liable to the other therefor; and the time
for performance of such obligation shall be extended for a period equal to
the duration of the contingency which occasioned the delay, interruption or
prevention, provided the party invoking such force majeure rights of this
subparagraph shall notify the other party of the force majeure as soon as
possible and exercises due diligence to remove the cause as soon as
reasonably practicable.
15(h) PUBLICITY. InnerDyne and Sherwood shall agree upon the
publication time and date of any press release or other public statement
announcing this Agreement or any transaction contemplated under this
Agreement. Neither party shall make any public statement prior to the public
release of such press release except as may be required by law, judicial
order or any listing agreement with a national securities exchange or
over-the-counter trading system to which InnerDyne or Sherwood is a party.
Except as permitted by this Section 15(h) or except as required by law,
judicial order or any listing agreement with a national securities exchange
or over-the-counter trading system to which InnerDyne or Sherwood is a party,
neither party shall disclose the terms and conditions of this Agreement
unless expressly authorized to do so by the other party, which authorization
shall not be unreasonably withheld; provided that disclosure is expressly
permitted by either party to its attorneys and accountants on a confidential
basis. Notwithstanding the foregoing, InnerDyne may disclose on a
confidential basis the terms and conditions of this Agreement to potential
underwriters in
-16-
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
connection with any proposed public offering by InnerDyne or to third parties
interested in merging with or acquiring or entering into a corporate partner
transaction with InnerDyne.
15(i) HEADINGS; CONSTRUCTION. The captions used herein are inserted
for convenience of reference only and shall not be construed to create
obligations, benefits, or limitations. No presumption shall operate in either
party's favor as a result of it or its counsel's role in drafting the terms
and provisions hereof.
15(j) EXPORT. Each party acknowledges that the laws and regulations
of the United States restrict the export and re-export of commodities and
technical data of United States origin. Each party agrees that it will not
export or re-export the technical data of the other party in any form without
any required United States and foreign government licenses.
15(k) COUNTERPARTS. This Agreement may be executed in counterparts,
all of which taken together shall be regarded as one and the same instrument.
Execution and delivery of this Agreement by exchange of facsimile copies
bearing the facsimile signature of a party hereto shall constitute a valid
and binding execution and delivery of this Agreement by such party. Such
facsimile copies shall constitute enforceable original documents.
-17-
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
15(l) ATTORNEYS' FEES. If any action or proceeding shall be commenced
to enforce this Agreement or any right arising in connection with this
Agreement, the prevailing party in such action or proceeding shall be
entitled to recover from the other party, the reasonable attorneys' fees,
costs and expenses incurred by such prevailing party in connection with such
action or proceeding.
[Signature page follows.]
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate originals by their duly authorized representatives.
INNERDYNE, INC. SHERWOOD MEDICAL COMPANY
D/B/A SHERWOOD-DAVIS & GECK
By: /s/ William G. Mavity By: /s/ D.G. Thomas
------------------------------ ------------------------------------
(Signature) (Signature)
William G. Mavity D.G. Thomas
------------------------------ ------------------------------------
(Print Name) (Print Name)
Title: President/CEO VP Global Strategic Planning and R&D
---------------------------- ------------------------------------
Date: January 6, 1997 January 6, 1997
---------------------------- ------------------------------------
SIGNATURE PAGE TO LICENSE, SUPPLY AND DISTRIBUTION AGREEMENT
<PAGE>
SL-1992
03/24/97
EXHIBIT A
INNERDYNE PRODUCTS
PRODUCT SPECIFICATION
RADIALLY EXPANDING ACCESS DEVICE (READ)
PRELIMINARY
The Radially Expanding Access Device (READ) will consist of four
assemblies: Radially Expanding Sleeve, Needle, Cannula and Dilator.
System Requirements:
[ * * * * * * * * *]
Radially Expanding Sleeve:
[ * * * * * * * * *]
Cannula
[ * * * * * * * * *]
Dilator
[ * * * * * * * * *]
Needle
[ * * * * * * * * *]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SL-1992
03/24/97
EXHIBIT B
SHERWOOD PRODUCTS
Product
-------
[ * * * * * * * * *]
[ * * * * * * * * *]
[ * * * * * * * * *]
[ * * * * * * * * *]
[ * * * * * * * * *]
[ * * * * * * * * *]
[ * * * * * * * * *]
[ * * * * * * * * *]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SL-1992
03/24/97
EXHIBIT C
MINIMUM ANNUAL QUANTITIES
Year Kits (Units)
---- ------------
[ * * * * * * * * *]
[ * * * * * * * * *]
[ * * * * * * * * *]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SL-1992
03/24/97
EXHIBIT D
BUDGET FOR C.E. MARKING
REGULATORY CE MARKING BUDGET FOR THE KIT
- - ANNUAL COSTS TO BE ADJUSTED AS NECESSARY IN THE EVENT OF CHANGE
--> Annual Certificate fee (including Project Management) [* *]
--> Annual audit costs estimated to be [* *]
--> Annual audit of Sherwood and Sherwood vendors [* *]
--> Annual maintenance cost for IDYN personnel 20 hours [* *]
- - FIRST YEAR COSTS IN ADDITION TO THE ANNUAL COSTS
--> Kema-RQI one time audit fee estimated to be [* *]
--> Cost for IDYN personnel 150 hours [* *]
CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT 10.35
Daniel J. Genter
610A Heritage Hills
Somers, New York 10589
Phone (914) 277-5437
March 13, 1996
Dear Dan,
I am pleased to make to you this offer of employment, and trust that it
will be acceptable to you, based upon our discussions to date. I would
appreciate your prompt acknowledgment, and hopefully acceptance, since as
you know this position is pivotal to our success in 1996 and future years.
Your title will be Senior Vice President, Sales and Marketing. Your
appointment as a Corporate Officer will be recommended for consideration by
the InnerDyne Board of Directors after an initial familiarization period to
allow you to become more knowledgeable concerning the public aspects of the
InnerDyne story.
Your base salary will be $160,000 per year, which will be reviewed
annually for merit based increases. In addition, you will receive a bonus
based upon sales achievement. For 1996, you will receive a bonus at the end
of the calendar year equivalent to 1% of the Company's incremental global
product revenue growth in 1996, versus 1995. In addition, should the
Company's global product revenues exceed $10 million in 1996, you will
receive an additional $25,000 bonus payment. Bonus plans for 1997 and beyond
will be mutually developed with similar earnings potential, though likely
with different milestones.
In addition, you will be granted options to purchase 225,000 shares of
the common stock of InnerDyne, Inc., in accordance with the Company's
existing employee stock option plans. Under that plan, 12/48 of the option
grant will vest on the anniversary date of your employment, and the balance
will vest monthly at the rate of 1/48 per month on the last day of each full
month following the first anniversary of the initial grant.
You will also be eligible for an automobile allowance of $500 per month,
which represents taxable compensation to the recipient. You will be awarded
three weeks vacation per year, in accordance with the Company's established
vacation accrual policies. You will also be eligible to participate in the
Company's established benefit plans, including medical and dental insurance,
an employee stock purchase plan, and a 401(k) plan to which the Company does
not currently make any contributions.
Finally, InnerDyne will make a one-time payment of $10,000 to offset
expenses associated with your relocation from the New York area to the Bay
area. This payment will represent taxable income to you. We will also support
reasonable additional expenses involved in relocation, such as an initial
visit to the area for yourself and your spouse to investigate housing
opportunities. These expenses should be reviewed with me prior to their
incurrence.
<PAGE>
Again, I trust you will find this offer acceptable. I am very much
looking forward to working with you to build InnerDyne, Inc. into the kind of
company that will offer ample rewards to both employees and stockholders. I
would appreciate your earliest possible acknowledgment and acceptance of this
offer, evidenced by your signature in the appropriate place below.
Sincerely,
/s/ William G. Mavity
William G. Mavity
President/CEO
Accepted by: /s/ Daniel E. Genter
----------------------
Daniel E. Genter
Date:
-----------------------------
<PAGE>
EXHIBIT 10.36
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of February 4, 1997,
by and between InnerDyne, Inc. ("Borrower") whose address is 1244 Reamwood
Avenue, Sunnyvale, CA 94089, and Silicon Valley Bank ("Bank") whose address
is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which
may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to,
among other documents, a Loan and Security Agreement, dated February 23,
1995, as may be amended from time to time, (the "Loan Agreement"). The Loan
Agreement provided for, among other things, a Committed Line in the original
principal amount of Two Million and 00/100 Dollars ($2,000,000.00)(the
"Revolving Facility") and a Term Facility in the original principal amount of
Six Hundred Thousand and 00/100 Dollars ($600,000.00), however, capped at Two
Hundred Thousand and 00/100 Dollars ($200,000.00) for the purchase of any
non-standard equipment (the "Term Facility No. 1"). The Loan Agreement has
been modified pursuant to an Amendment to Loan and Security Agreement dated
February 29, 1996, which provided for, among other things, a new Term
Facility in the original principal amount of Seven Hundred Fifty Thousand
Dollars and 00/100 Dollars, ($750,000.00), however, capped at Two Hundred
Thousand and 00/100 Dollars ($200,000.00) for the purchase of non-standard
equipment (the "Term Facility No. 2"). The Loan Agreement has been further
modified pursuant to a Loan Modification Agreement dated October 24, 1996,
which provided for, among other things, an increase for the purchase of
non-standard equipment cap under Term Facility No. 2 to Five Hundred Thousand
and 00/100 ($500,000.00). Defined terms used but not otherwise defined herein
shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be
referred to as the "Obligations."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the
Obligations is secured by the Collateral as described in the Loan Agreement
and a Collateral Assignment, Patent Mortgage and Security Agreement dated
February 23, 1995.
Hereinafter, the above-described security documents and guaranties,
together with all other documents securing repayment of the Obligations shall
be referred to as the "Security Documents." Hereinafter, the Security
Documents, together with all other documents evidencing or securing the
Obligations shall be referred to as the "Existing Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to the Loan Agreement.
1. "Maturity Date" means June 30, 1999.
B. Modification(s) to Term Facility No. 2.
<PAGE>
1. The "Equipment Availability Date" in Section 2.1.2(a) shall
mean May 21, 1997.
2. The last sentence in Section 2.1.2(b) is amended to read as
follows:
All unpaid Equipment Advances shall be due and payable on
November 21, 2000 (the "Term Facility No. 2 Maturity Date").
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that it has no defenses against the obligations to pay
any amounts under the Existing Loan Documents.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor
signing below) understands and agrees that in modifying the existing
Obligations, Bank is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Existing Loan Documents. Except as expressly
modified pursuant to this Loan Modification Agreement, the terms of the
Existing Loan Documents remain unchanged and in full force and effect. Bank's
agreement to modifications to the existing Obligations pursuant to this Loan
Modification Agreement in no way shall obligate Bank to make any future
modifications to the Obligations. Nothing in this Loan Modification Agreement
shall constitute a satisfaction of the Obligations. It is the intention of
Bank and Borrower to retain as liable parties all makers and endorsers of
Existing Loan Documents, unless the party is expressly released by Bank in
writing. No maker, endorser, or guarantor will be released by virtue of this
Loan Modification Agreement. The terms of this paragraph apply not only to
this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: BANK:
INNERDYNE, INC. SILICON VALLEY BANK
By: /s/ Robert A. Stern By: /s/ Kevin J. Conway
------------------------------- --------------------------------
Name: Robert A. Stern Name: Kevin J. Conway
----------------------------- ------------------------------
Title: VP Chief Financial Officer Title: Assistant Vice President
---------------------------- -----------------------------
<PAGE>
FORM OF SENIOR MANAGEMENT
CHANGE OF CONTROL AGREEMENT
This Senior Management Change of Control Agreement (the "Agreement") is
made and entered into effective as of March 25, 1997, by and between
_______________ (the "Employee") and InnerDyne, Inc., a Delaware corporation
(the "Company").
RECITALS
A. It is expected that another company or other entity may from time
to time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's
Board of Directors (the "Board"). The Board recognizes that such
consideration can be a distraction to the Employee and can cause the Employee
to consider alternative employment opportunities. The Board has determined
that it is in the best interests of the Company and its stockholders to
assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a
Change of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue
his employment with the Company.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon termination of the Employee's employment in
connection with a Change of Control, which benefits are intended to provide
the Employee with financial security and provide sufficient income and
encouragement to the Employee to remain with the Company notwithstanding the
possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to
agree to the terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in
Section 3 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as
defined under applicable law. If the Employee's employment terminates for
any reason, including (without limitation) any termination prior to a Change
of Control, the Employee shall not be entitled to any payments, benefits,
damages, awards or compensation other than as provided by this Agreement, or
as may otherwise be available in accordance with the terms of Employee's
offer letter from the
<PAGE>
Company dated __________, _____ (the "Offer Letter"), the terms of certain
Board resolutions and agreements issued to the Employee with respect to the
grant of stock options for the Company's securities and the Company's
established employee plans and written policies at the time of termination.
The terms of this Agreement shall terminate upon the earlier of (i) the date
that all obligations of the parties hereunder have been satisfied or (ii) two
(2) years after a Change of Control. A termination of this Agreement
pursuant to the preceding sentence shall be effective for all purposes,
except that such termination shall not affect the payment or provision of
compensation or benefits on account of a termination of employment occurring
prior to the termination of this Agreement.
2. CHANGE OF CONTROL.
(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. Subject to
Section 4 below, if the Employee's employment with the Company is terminated
at any time within one (1) year after a Change of Control, then the Employee
shall be entitled to receive severance benefits as follows:
(i) VOLUNTARY RESIGNATION. If the Employee
voluntarily resigns from the Company (other than as an Involuntary
Termination (as defined below), then the Employee shall not be entitled to
receive severance payments under this Agreement. The Employee will receive
payment(s) for all salary, bonuses and unpaid vacation accrued as of the date
of the Employee's termination of employment and the Employee's benefits will
be continued under the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination
and in accordance with applicable law.
(ii) INVOLUNTARY TERMINATION. If the Employee's
employment is terminated as a result of an Involuntary Termination other than
for Cause, then, subject to the provisions of Section 5 below, each stock
option to purchase the Company's Common Stock granted to the Employee over
the course of his employment with the Company and held by the Employee on the
date of termination of employment shall become immediately vested on such
date and each such option shall be exercisable in accordance with the
provisions of the option agreement and plan pursuant to which such option was
granted. In addition, the Employee will receive payment(s) for all salary,
bonuses and unpaid vacation accrued as of the date of the Employee's
termination of employment and the Employee's benefits will be continued under
the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of termination and in
accordance with applicable law and the Offer Letter.
(iii) INVOLUNTARY TERMINATION FOR CAUSE. If the
Employee's employment is terminated for Cause, then the Employee shall not be
entitled to receive severance payments under this Agreement. The Employee
will receive payment(s) for all salary, bonuses and unpaid vacation accrued
as of the date of the Employee's termination of employment and the Employee's
benefits will be continued under the Company's then existing benefit plans
and policies in accordance with such plans and policies in effect on the date
of termination and in accordance with applicable law.
-2-
<PAGE>
(b) TERMINATION APART FROM CHANGE OF CONTROL. In the event
the Employee's employment terminates for any reason, either prior to the
occurrence of a Change of Control or after the one year period following the
effective date of a Change of Control, then the Employee shall not be
entitled to receive any severance payments under this Agreement. The
Employee will receive payment(s) for all salary, bonuses and unpaid vacation
accrued as of the date of the Employee's termination of employment and the
Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in
effect on the date of termination and in accordance with applicable law and
the Offer Letter.
3. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the total voting power represented by the Company's
then outstanding voting securities WITHOUT the approval of the Board; or
(ii) MERGER/SALE OF ASSETS. A merger or consolidation
of the Company whether or not approved by the Board, 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 the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(iii) CHANGE IN BOARD COMPOSITION. A change in the
composition of the Board, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of March 25, 1997 or
(B) are elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the Incumbent Directors at the time of such
election or nomination (but shall not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest
relating to the election of directors to the Company).
(b) CAUSE. "Cause" shall mean (i) gross negligence or
willful misconduct in the performance of the Employee's duties to the Company
where such gross negligence or willful misconduct has resulted or is likely
to result in substantial and material
-3-
<PAGE>
damage to the Company or its subsidiaries (ii) repeated unexplained or
unjustified absence from the Company, (iii) a material and willful violation
of any federal or state law; (iv) commission of any act of fraud with respect
to the Company; or (v) conviction of a felony or a crime involving moral
turpitude causing material harm to the standing and reputation of the
Company, in each case as determined in good faith by the Board.
(c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
include any termination by the Company other than for Cause and the
Employee's voluntary termination, upon thirty (30) days prior written notice
to the Company, following (i) a material reduction or change in job duties,
responsibilities and requirements inconsistent with the Employee's position
with the Company and the Employee's prior duties, responsibilities and
requirements or a change in the Employee's reporting relationship such that
the Employee is no longer reporting to the Board; (ii) any reduction of the
Employee's base compensation (other than in connection with a general
decrease in base salaries for most officers of the successor corporation); or
(iii) the Employee's refusal to relocate to a facility or location more than
thirty (30) miles from the Company's current location.
4. LIMITATION ON PAYMENTS. In the event that the severance and
other benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section,
would be subject to the excise tax imposed by Section 4999 of the Code, then
the Employee's severance benefits under Sections 4(b)(iii) and (iv) shall be
payable either:
(a) in full, or
(b) as to such lesser amount which would result in no portion
of such severance benefits being subject to excise tax under Section 4999 of
the Code,
whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Employee on an after-tax basis, of the
greatest amount of severance benefits under Section 2(a) notwithstanding that
all or some portion of such severance benefits may be taxable under Section
4999 of the Code. Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 4 shall be made in
writing by the independent public accountants of the Company (the
"Accountants"), whose determination shall be conclusive and binding upon the
Employee and the Company for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Section
280G and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company
shall bear all costs the Accountants may reasonably incur in connection with
any calculations contemplated by this Section 4.
-4-
<PAGE>
5. CERTAIN BUSINESS COMBINATIONS. In the event it is determined
by the Board, upon consultation with the Company management and the Company's
independent public accountants, that the enforcement of any agreement between
Employee and the Company, including the provisions of Section 2(a) of this
Agreement, which allows for the acceleration of vesting of stock options
granted for the Company's Common Stock following of a Change of Control,
would preclude accounting for any proposed business combination of the
Company involving a Change of Control as a pooling of interests, and the
Board otherwise desires to approve such a proposed business transaction which
requires as a condition to the closing of such transaction that it be
accounted for as a pooling of interests, then any such provision of this
Agreement shall be null and void. For purposes of this Section 5, the Board's
determination shall require the unanimous approval of the non-employee Board
members.
6. SUCCESSORS. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly
to perform the obligations under this Agreement in the same manner and to the
same extent as the Company would be required to perform such obligations in
the absence of a succession. The terms of this Agreement and all of the
Employee's rights hereunder shall inure to the benefit of, and be enforceable
by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
7. NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. Mailed notices
to the Employee shall be addressed to the Employee at the home address which
the Employee most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
8. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Employee shall not be required
to mitigate the amount of any payment contemplated by this Agreement (whether
by seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that the Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge
is agreed to in writing and signed by the Employee and by an authorized
officer of the Company (other than the Employee). No waiver by either party
of any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
-5-
<PAGE>
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject
matter dated prior to the date of this Agreement, and by execution of this
Agreement both parties agree that any such predecessor agreement shall be
deemed null and void.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws
of the State of California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement
or the application thereof to any circumstance shall, in any jurisdiction and
to any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the
remaining terms and provisions of this Agreement or the application of such
terms and provisions to circumstances other than those as to which it is held
invalid or unenforceable, and a suitable and equitable term or provision
shall be substituted therefor to carry out, insofar as may be valid and
enforceable, the intent and purpose of the invalid or unenforceable term or
provision.
(f) ARBITRATION. Any dispute or controversy arising under or
in connection with this Agreement may be settled at the option of either
party by binding arbitration in the County of Santa Clara, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Punitive damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The parties shall each bear
their own expenses, legal fees and other fees incurred in connection with
this Agreement.
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this subsection (h)
shall be void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment.
In the case of any such assignment, the term "Company" when used in a section
of this Agreement shall mean the corporation that actually employs the
Employee.
-6-
<PAGE>
(k) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and
year first above written.
INNERDYNE, INC. ___________________________________
By: _______________________________ By: _______________________________
William G. Mavity, President
and Chief Executive Officer
-8-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
InnerDyne, Inc.:
We consent to incorporation by reference in Registration Statements No.
33-49628, 33-80022, 33-80032 and 333-07859 on Forms S-8 and Registration
Statements No. 33-96266 and 333-12801 on Form S-3 of InnerDyne, Inc. of our
report dated January 29, 1997, relating to the balance sheets of InnerDyne,
Inc. as of December 31, 1996 and 1995, and the related statements of
operations, cash flows, and statements of stockholders' equity for each of
the years in the three-year period ended December 31, 1996, which report
appears in this Form 10-K of InnerDyne, Inc.
KPMG Peat Marwick LLP
San Francisco, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,270,285
<SECURITIES> 0
<RECEIVABLES> 1,449,970
<ALLOWANCES> 159,165
<INVENTORY> 1,159,098
<CURRENT-ASSETS> 10,155,251
<PP&E> 3,385,812
<DEPRECIATION> 2,226,503
<TOTAL-ASSETS> 11,361,580
<CURRENT-LIABILITIES> 1,972,737
<BONDS> 629,557
0
0
<COMMON> 215,420
<OTHER-SE> 59,818,445
<TOTAL-LIABILITY-AND-EQUITY> 11,361,580
<SALES> 7,773,547
<TOTAL-REVENUES> 9,086,127
<CGS> 4,363,367
<TOTAL-COSTS> 13,946,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,011
<INCOME-PRETAX> (4,659,083)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,659,083)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
