<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997, or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NUMBER: 0-19707
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
-----------
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
Preferred Share Purchase Rights
(Title of Class)
-----------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate 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 $39,963,118 as of February 27, 1998, 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 21,754,862 shares of issuer's Common Stock issued and
outstanding as of February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE> 2
Parts of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be held on May 22, 1998 are incorporated by reference into Part
III of this Form 10-K.
PART I
ITEM 1. BUSINESS
THE COMPANY
InnerDyne, Inc. (the "Company" or "InnerDyne") is primarily focused
upon the development and commercialization of access products based on its
proprietary radial dilation technology 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 also possesses
biocompatible coating technologies which have utility in enhancing the
compatibility and performance of devices placed in contact with human body
fluids and tissues, and in delivering selected pharmaceuticals and radioactive
isotopes to selected areas within a human body. 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 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 involve 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 toward minimally invasive techniques
was not widespread until the late 1980s. At that time, surgeons developed and
perfected a technique for gall bladder removal through the use of specialized
access, diagnostic and treatment devices. By 1997, an estimated 95% of the
approximately 675,000 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 diagnosis and treatment. It is estimated that in 1997 over 1.0
million procedures traditionally accomplished through open surgery were
performed in
1
<PAGE> 3
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 million surgical procedures
performed in 1997 were considered to be potential candidates for minimally
invasive approaches.
M.I.S. Access Devices
A trocar is the conventional device that is used by surgeons to access
a possible treatment site in an M.I.S. procedure. A trocar is generally a
sharp-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
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 a sharp-bladed trocar is
inserted. Once a trocar has penetrated the abdominal wall, the cutting portion
of the device 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 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 1997 sales of disposable trocars in the United States totaled
approximately $230 to $240 million, and global sales totaled more than $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, and as a result, a reusable trocar may not consistently and
cleanly cut through the muscle and skin layers that make up the abdominal wall.
The potential risk of serious trauma to the patient may be increased because
greater pressure can be required to force the trocar through the abdominal wall,
causing the abdominal cavity to partially collapse and reduce the space created
by insufflation. In addition, medical personnel that handle and clean reusable
trocars are also subject to the risk of cuts and skin punctures because a trocar
is a sharp cutting instrument.
Another device commonly used in M.I.S. procedures is a percutaneous
catheter. A number of minimally invasive percutaneous catheter-based therapies
have been developed to treat vascular disease, including coronary and peripheral
transluminal angioplasty, atherectomy and vascular stenting. In addition,
minimally invasive catheter-based diagnostic procedures such as x-ray
angiography and ultrasound imaging are used by physicians in connection with
therapeutic procedures. Industry sources estimate that in 1997 approximately 4.7
million minimally invasive vascular access procedures were performed worldwide.
In addition, approximately 1.2 million interventional radiology procedures
utilizing minimally invasive vascular access were performed in 1997.
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
larger diameter. Depending on the size and number of devices used by the
physician, this process can increase the likelihood of trauma to the vessel.
Additionally, following catheter-based procedures, the physician must close the
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 three to five inch or
larger incision that is made in the abdominal wall to gain access to the organ.
Open surgery typically 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.
2
<PAGE> 4
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"), are likely to seek treatment if this condition
significantly 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 performed in the United States each year are 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 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 entails 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 hemorrhaging from uterine vessels, air
emboli from gas-cooled lasers, postoperative intrauterine or tubal infection,
and 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 being developed. Although such procedures also
result in patient infertility, they are designed to cause 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 of tissue, 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 the primary source of excessive menstrual bleeding.
Biocompatible Coating Technologies
Cardiovascular disease is a 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 1997 approximately 1,000,000
balloon angioplasty, atherectomy and stenting procedures were performed
worldwide. Industry sources also indicate that cardiovascular stenting is
increasingly used to treat 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 patients who undergo percutaneous catheter-based
procedures. Stents are implantable medical devices that reduce arterial
obstruction by providing a rigid scaffolding to maintain patency in an occluded
blood vessel.
3
<PAGE> 5
Once placed, stents exert radial force against the walls of blood vessels to
enable the blood vessels to remain open and functional.
Preliminary indications are that restenosis following stenting can be
reduced through the coating of stents with radioactivity or anti-proliferative
drugs. The Company believes that opportunities may exist for companies with
technology to effectively coat stents with radiation or anti-proliferative
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
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 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 was 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. The
Company's Step access device replaces trocars, eliminating the risk of internal
organ damage from contact with the sharp surfaces of a trocar . In contrast to
conventional trocars, the Step device utilizes a standard insufflation needle
for penetration through the abdominal wall at each site where it is utilized,
creating only a small puncture wound. Following removal of the needle, a sheath
that surrounds the needle is then dilated up to a larger working channel through
the insertion of a tapered 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 tissue
to an appropriately sized working channel holds the cannula in place and
obviates the need for an anchoring system, which may cause a larger residual
wound. 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. The residual wound is approximately half the size of
that made using a conventional trocar of similar size. The Step is currently
utilized primarily 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 outcome 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. Two randomized prospective studies involving 331 patients
intended to replicate the findings of the initial outcome study were completed
during 1997. Results of both studies indicate that Step virtually eliminates
complications associated with the use of conventional trocars. These results
have been presented at major international conferences and have been submitted
for publication.
Short Step. The Short Step is a conventional Step device that has been
reduced in length to be particularly suitable for M.I.S. procedures involving
smaller individuals, especially children and thin females. The Short Step was
4
<PAGE> 6
commercially introduced in 1995. In January 1996, the Company announced that its
Short Step device 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. The Company hopes that the Seal
of Acceptance will help the Company expand awareness and sales of its Step
product line for use in the pediatric environment.
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, and management
expects a trend toward a somewhat more frequent usage of 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
were commercially introduced in 1997.
One-Step. The One-Step is a device with a universally adjustable valve
and seal system designed to eliminate the need for a reducer. The device is
intended to maintain insufflation while accommodating most conventional surgical
instruments. The One-Step device is expected to be commercially introduced in
1998.
Open Step. The Open-Step is a device designed to establish access into
the abdominal cavity using a technique known as open laparoscopy. The Open-Step
device is expected to be commercially introduced in 1998.
Management believes that the positive attributes of the Step product
line may also enable minimally invasive access to organs 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 Step product line has been shown to enable laparoscopic access
through the abdominal wall and across the peritoneal space into the stomach for
the treatment of benign tumors. InnerDyne believes that the use of Step products
could substantially reduce recovery times for these types of procedures. The
Company expects that the enhanced capabilities of radially expanding dilation
may enable additional surgical procedures to be performed through minimally
invasive techniques. The Company filed a 510(k) application for intra-organ
indications of its Step products with the Food and Drug Administration ("FDA")
in 1998.
Distribution of Step Products. The Step family of products is
distributed to health care professionals in both domestic and international
markets. In the United States, the Company's M.I.S. access product line is
generally sold directly to health care professionals by a network of sales
representatives, a limited number of whom are employees of the Company. These
sales representatives are managed on a regional basis by InnerDyne management
employees. In order to attempt to enhance the effectiveness of these domestic
sales activities, agreements with buying groups that represent multiple provider
institutions have been pursued. InnerDyne signed two buying group agreements in
1997. These agreements cover approximately 1,350 hospitals across the United
States and may allow the Company to more effectively compete for a portion of
the minimally invasive surgical access business in these hospitals.
In selected foreign countries, local distributors purchase products
from the Company for subsequent resale to their respective countries' health
care systems. Distributors in selected foreign markets can and have been changed
when the Company has deemed the performance of individual distributor
organizations to be unsatisfactory.
Other Applications. InnerDyne announced an agreement covering the
development and potential use of its proprietary radial dilation technology for
specialized vascular access with EndoTex Interventional Systems in 1996. The
5
<PAGE> 7
agreement covers the development of access products expected to be used in
conjunction with EndoTex's technologies to treat carotid disease and aortic
aneurysms.
The Company entered into an agreement covering the development of a
less traumatic means of placing enteral feeding tubes with Sherwood-Davis & Geck
("SDG") in 1997. The Company announced that it had received the single
regulatory milestone payment associated with the SDG agreement during the second
quarter of 1997. In the first quarter of 1998, InnerDyne and SDG terminated the
development agreement as a result of the sale of SDG to another corporation.
During the second quarter of 1997, InnerDyne established a business
unit to better define the value that radial dilation technology can bring to
interventional cardiology and radiology procedures, and to develop access
products based on this assessment, if the value statement is positive. The
Company proceeded with animal studies and device refinements in the third and
fourth quarters of 1997 and will continue testing the product concept in
conjunction with cardiology advisors. If the trial results are positive and
subsequent human use demonstrates clinical benefits, the Company will explore
alternative methods of effective distribution in the interventional vascular
marketplace and may launch a radial dilation vascular access device during 1998,
or in subsequent years.
InnerDyne also committed resources to an investigation of the potential
market opportunity in arthroscopic procedures during 1997. Limited clinical
usage of the initial design accompanied by substantial exposure and feedback
from arthroscopic surgeons was completed during the last half of 1997. The
Company is exploring the potential this product may have, if any, and
alternative distribution methods in the arthroscopic marketplace. In addition,
the Company is exploring the potential use of its proprietary radial dilation
technology in other applications, such as access for thoracic and tracheal
procedures, and is likely to increase resources associated with the pursuit of
one or more of these opportunities in the ensuing quarters. Developmental
expenditures for new applications for the Company's proprietary radial dilation
technology may impact the timing and achievement of sustained profitability.
There can be no assurance that these new applications will demonstrate clinical
benefits or that the Company can develop a product that will be commercially
accepted.
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 most 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 this system. The results of these limited trials indicate
that the EnAbl System may represent 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 of the EnAbl system and to
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. In July 1997, the Company announced that U.S. Surgical had
made the first milestone payment due under the terms of the agreement.
6
<PAGE> 8
Licensing, contract and grant revenues will continue to 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 such agreements, and depends on whether the Company or the licensee
can satisfy performance milestones.
Biocompatible Coating 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, other bioactive
molecules or radioisotopes 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
or radioisotope. Because both points of attachment utilize covalent bonds, the
Company believes that its coating process may result in a stronger bond to the
surface of a device than many 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. InnerDyne is developing a proprietary technology that coats materials
with an organic coating to which rhenium-188 or another radioisotope can be
attached to reduce restenosis in patients who have had interventional vascular
procedures.
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
initial technology transfer was completed during the first quarter of 1995, at
which time the Company received the balance of an 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 was 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
application 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
technology transfer. Boston Scientific is expected to make a decision with
respect to technology transfer in 1998.
In December 1997, InnerDyne and Oak Ridge National Laboratory ("ORNL")
announced that the Department of Energy had awarded ORNL and Brookhaven National
Laboratories ("BNL") a cooperative research and development agreement for the
development of InnerDyne's proprietary method of labeling or attaching
radioactivity to implantable devices. The ORNL researchers will help to optimize
chemical methods required to efficiently attach a radioactive source to stents.
Generators from ORNL and this new technology will be provided to investigators
at BNL who will, in conjunction with the Interventional Cardiology Group at the
State University of New York at Stonybrook, prepare the radioactive stents and
implant them into the arteries of swine and rabbits to evaluate the
effectiveness of this unique and potentially powerful new approach to inhibit
restenosis. Management believes that the combination of InnerDyne and Oak Ridge
National Laboratory technologies may positively impact the overall costs
associated with stenting procedures, if successful, by providing a method of
attaching a radioisotope just prior to implantation to inhibit restenosis.
Because of the strength of the covalent bonds used in the Company's TRC
technology, and other properties noted above, the Company believes that its
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 potential licensees of the
Company's 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.
7
<PAGE> 9
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, and clinical and
regulatory expenses for the years ended December 31, 1997, 1996, and 1995 were
approximately $3.3 million, $2.8 million, and $2.3 million, respectively. The
increases in 1997 and 1996 were primarily the result of expenses related to new
product development programs, including costs associated with development, and
clinical trials and regulatory submissions. As of December 31, 1997, the Company
had 20 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, the Open-Step, and biocompatible coatings technologies.
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. A
second agreement involving the licensing and development of the Company's radial
dilation technology was signed in January 1997 with Sherwood Davis & Geck, then
a subsidiary of American Home Products. The agreement involved the development
and future manufacture of a product designed to improve the gastrointestinal
placement of enteral feeding tubes. With the change in emphasis associated with
the sale of the SD&G subsidiary to Tyco International, the parties mutually
agreed to terminate the agreement. All rights involving devices to improve the
placement of enteral feeding tubes have reverted to InnerDyne.
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.
In December 1997, InnerDyne and Oak Ridge National Laboratory announced
that the Department of Energy had awarded ORNL and Brookhaven National
Laboratories a cooperative research and development agreement to support
development of InnerDyne's proprietary method of labeling or attaching
radioactivity to implantable devices.
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.
The Step family of products is distributed to health care professionals
in both domestic and international markets. In the United States, the Company's
M.I.S. access product line is generally sold directly to health care
professionals by a network of sales representatives, a limited number of which
are employees of the Company. These sales representatives are managed on a
regional basis by InnerDyne management employees. In order to attempt to enhance
the effectiveness of these domestic sales activities, agreements with buying
groups that represent multiple provider institutions have been pursued.
InnerDyne signed two buying group agreements in the third quarter of 1997. These
agreements cover
8
<PAGE> 10
approximately 1,350 hospitals across the United States and may allow the Company
to more effectively compete for a portion of the minimally invasive surgical
access business in these hospitals.
In selected foreign countries, local distributors purchase products
from the Company for subsequent resale to their respective countries' health
care systems and medical professionals. Distributors in selected foreign markets
can and have been changed when the Company has deemed the performance of
individual distributor organizations to be unsatisfactory. As of December 31,
1997, orders had been received from distributors in 30 countries. Management
expects to make additional progress in this regard during 1998, 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 in 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
ability to manufacture its products in compliance with the FDA's GMP
regulations, and 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.
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
9
<PAGE> 11
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 eight issued United States patents relating to its
thermal ablation system technology. The Company also holds six 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 a number of 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 involve 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 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Patents and Proprietary Rights."
10
<PAGE> 12
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 into 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
provisions allowing a certain percentage of purchases from other vendors, or
permitting new technology products to be considered outside of a purchasing
agreement. The Company has taken and intends to continue to take advantage of
such provisions.
The Company faces a formidable task in 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 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 and initial introduction 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 commercialized by GyneCare, Inc., now a unit of Johnson & Johnson.
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 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 coating 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
11
<PAGE> 13
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 is subject to the PMA approval process prior to
marketing by U.S. Surgical within the United States. There can be no assurance
that U.S. Surgical 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 could 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. 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 Company's business,
financial condition and results of operations. 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
12
<PAGE> 14
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 Radially Expanding Dilator
(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. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission.
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, injunctions and/or civil
fines.
The FDA has proposed and is implementing changes to the GMP regulations
that may 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 Company's
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 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.
13
<PAGE> 15
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 $2,000,000 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 operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Product Liability; Claims in Excess of Insurance
Coverage."
EMPLOYEES
At December 31, 1997, the Company had 109 full-time and 10 temporary
and part-time employees. All but one 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 109 full-time employees on December 31, 1997, 51 were involved
in manufacturing operations, 16 in research and development and
regulatory/clinical affairs, 4 in biocompatible coatings development, 11 in
administration, and 27 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, 1998, the executive officers of the Company, who are elected by
and serve at the discretion of the Board of Directors, were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
William G. Mavity 48 President, Chief Executive Officer and Director
Robert A. Stern 40 Vice President and Chief Financial Officer
Daniel J. Genter 61 Senior Vice President, Sales and Marketing
Michael Orth 35 Vice President, Research & Development
</TABLE>
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 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 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 and an MBA from the University of New Mexico, Anderson School of
Management.
14
<PAGE> 16
Daniel J. Genter joined the Company in April 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 spent over twenty years with
Johnson & 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.
Michael J. Orth joined InnerDyne in March 1995. Prior to joining the
Company, he was the Director, R&D for UNISURGE, Inc., a manufacturer of
minimally invasive surgical products, for two years. From November 1987 to July
1992, he was with Advanced Cardiovascular Systems, including an assignment as a
Business Unit Manager. He had earlier worked for Techmedica, an orthopedic
products supplier. Mr. Orth holds Bachelor of Science degrees from the
California Polytechnic University in Mechanical Engineering and Engineering
Technology, and an MBA degree from Santa Clara 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 two separate buildings, totaling
approximately 27,000 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 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 were 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, 1997.
15
<PAGE> 17
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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
FISCAL 1997
First Quarter ended March 31, 1997..................... 4 1/4 1 23/32
Second Quarter ended June 30, 1997..................... 3 3/16 1 23/32
Third Quarter ended September 30, 1997................. 3 5/8 2 5/8
Fourth Quarter ended December 31, 1997................. 4 1/8 2 1/2
</TABLE>
As of February 28, 1998, there were 268 stockholders of record;
however, the Company believes it has a minimum of 4,000 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, 1997, the Company issued and sold (without payment of
any selling commission to any person) the following unregistered securities:
(1) In January 1996, August 1996, and February 1997 the Company issued
6,000 shares, 784 shares, and 6,000 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. The Company
expects to continue issuing shares under this license agreement in the future.
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
relationship with the Company, to information about the Company.
16
<PAGE> 18
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 in this
Annual Report on Form 10-K. The statements of operations data for the years
ended December 31, 1995, 1996 and 1997 and the balance sheet data as of December
31, 1996 and 1997 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, 1993
and 1994 and the balance sheet data as of December 31, 1993, 1994 and 1995 are
derived from, and are qualified by reference to, audited financial statements
not included in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- ------ ------ ------- ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 43 879 5,275 9,086 15,664
Net loss ........................ $(10,359) (9,904) (5,627) (4,659) (907)
======== ====== ====== ======= =======
Net loss per share .............. $ (.69) (.61) (.32) (.23) (.04)
======== ====== ====== ======= =======
BALANCE SHEET DATA:
Total assets .................... $ 17,550 7,847 5,370 11,362 11,319
Long-term debt, excluding current
installments ................. $ 199 30 187 630 649
</TABLE>
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, 1997, 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., designs, develops, manufactures and commercializes
minimally invasive surgical access products incorporating its proprietary radial
dilation technology. The Company is also pursuing applications for radial
dilation in areas outside its primary market focus which it intends to
commercialize either internally or through strategic alliances. 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 facilitating the technology transfer and
commercialization of this product. InnerDyne also develops biocompatible coating
technologies which are utilized for increasing the efficiency of membrane
oxygenator fibers and the application of specialized drugs and/or radioactive
isotopes to the surface of implantable medical devices, enhancing their
performance.
17
<PAGE> 19
RISK FACTORS
History of Losses; Profitability Uncertain. InnerDyne has experienced
operating losses since its inception in December 1985. InnerDyne reported net
losses of $907,000 on revenues of $15.7 million, $4.6 million on revenues of
$9.1 million and $5.6 million on revenues of $5.3 million for the fiscal years
ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997,
InnerDyne had an accumulated deficit of approximately $52.2 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 mid 1998. 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.
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 during the past two years. A number of other entities participate
in various segments of the M.I.S. market, including access.
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 and initial introduction 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 commercialized by GyneCare, Inc., a division of Johnson & Johnson.
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
18
<PAGE> 20
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 the
majority of the Company's revenues for 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--InnerDyne's 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 1998, the Company
expects to commercially introduce the Open-Step, and possibly the One-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, the ability to develop and gain
regulatory clearance for new and enhanced versions of products in a timely
fashion. 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 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 now undergoes periodic audits by a
regulatory body. The Company believes that regulatory changes currently being
introduced by the FDA will 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 satisfactory regulatory system 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. 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. 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
19
<PAGE> 21
products. In particular, fluctuations in production volumes affect gross margins
from quarter to quarter. Furthermore, gross margins and net income or loss can
fluctuate from quarter to quarter to the extent the Company recognizes
non-product revenue during a quarter because the Company typically derives
higher 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 may 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 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
20
<PAGE> 22
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 coating 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 is subject to the PMA approval process prior to marketing by U.S.
Surgical within the United States. There can be no assurance that U.S. Surgical
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 could 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,
21
<PAGE> 23
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, injunctions and/or
civil fines. See "Item 1. Business--Manufacturing and --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 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 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,
22
<PAGE> 24
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 a 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 $2,000,000 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 Company's Common Stock has been and is likely to
continue to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products by
the Company or its competitors, FDA and international regulatory actions,
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
23
<PAGE> 25
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,
1998, directors and principal stockholders of the Company, and certain of their
affiliates, beneficially owned approximately 25% 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,
the fact that the Company's Certificate of Incorporation does not permit
stockholders to cumulate votes in the election of directors as well as the
Company's adoption of a poison pill Preferred Share Purchase Rights plan in
September 1997 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, the poison pill 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, the poison
pill 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 $15,664,365 were realized during the year ended
December 31, 1997, compared to total revenues of $9,086,127 in 1996 and
$5,275,060 in 1995. Total revenues are comprised of revenues from product sales
and licensing, contract and grant revenues. Revenues from product sales
increased to $12,149,395 in 1997 from $7,773,547 in 1996 and $4,729,651 in 1995,
reflecting increased sales of the Step device in each year. Licensing, contract
and grant revenues were $3,514,970, $1,312,580 and $545,409 in 1997, 1996 and
1995, 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 coating and
radial dilation technology.
Total costs and expenses were $16,789,068 in 1997, compared to
$13,946,878 in 1996 and $11,122,791 in 1995. Expenses in 1997 and 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.
Cost of sales were $5,070,946 in 1997, compared to $4,363,367 in 1996
and $3,148,915 in 1995. Costs of 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. The increase each year was due to the
production of higher volumes of the Step
24
<PAGE> 26
device. Although the Company anticipates that cost of sales will continue to
increase in absolute dollars in future periods, cost of sales as a percentage of
revenue is expected to decrease in 1998 if sales and production volumes
increase.
Research, development, regulatory and clinical expenses were $3,292,775
in 1997, compared to $2,839,556 in 1996 and $2,299,311 in 1995. 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 1997 represents
the additional development funding and clinical expenses related to the
development of the One-Step, and Mini Step, as well as vascular and arthroscopic
access devices. The increase in 1996 represented costs associated with
development of the Reposable Step device. The Company anticipates that research,
development, regulatory and clinical expenditures are likely to increase in
future periods.
Sales and marketing expenses were $6,161,934 in 1997, compared to
$4,740,050 in 1996 and $3,895,338 in 1995. 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 each year reflects the expansion of sales
and marketing functions for M.I.S. products as sales volumes increased.
InnerDyne expects that sales and marketing expenses will continue to increase in
absolute dollars.
General and administrative expenses were $2,263,413 in 1997, compared
to $2,003,905 in 1996 and $1,779,227 in 1995. 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 1997 and 1996 reflects
additional staffing to support investor relations, financial functions, and
professional services. The Company anticipates that general and administrative
expenses will increase in absolute dollars to support expanding operations.
Interest income was $327,943 in 1997, $263,679 in 1996 and $250,594 in
1995. The increase in 1997 was due to higher interest earned as the Company's
cash and cash equivalents increased. Interest expense was $117,338 in 1997,
$62,011 in 1996 and $28,908 in 1995. This interest expense was primarily the
result of debt incurred to finance equipment to support operations of the
Company.
Primarily for the reasons outlined above, InnerDyne incurred net losses
of $907,466 or $.04 per share in 1997, $4,659,083 or $.23 per share in 1996 and
$5,627,115 or $.32 per share in 1995. Management believes that the Company is
likely to incur operating losses at least through the first half of 1998.
LIQUIDITY AND CAPITAL RESOURCES
From its inception to December 31, 1997, the Company has incurred a
cumulative deficit of approximately $52.2 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
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
underwriter's discounts and offering expenses).
At December 31, 1997, cash and cash equivalents totaled $6,091,497
compared to $7,270,285 at December 31, 1996. The Company had $427,276, $776,901,
and $542,658 in capital expenditures in the years ended December 31, 1997, 1996,
and 1995 respectively. Working capital totaled $ 7,651,675 at December 31, 1997,
and the Company had long-term debt, excluding current installments, totaling
$649,061 relating to financing of equipment.
In June 1997, 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% based on eligible
receivables. The Company also has an equipment advance line of credit, which
allows the Company to borrow up to
25
<PAGE> 27
$500,000 per year based on eligible equipment purchases. Amounts outstanding on
this equipment advance line of credit are periodically converted to 48 month
term loans bearing interest at prime plus 1%. As of December 31, 1997, the
Company had drawn $300,000 for financing of working capital needs on the
revolving line of credit, secured by certain accounts receivable, and had
borrowed $216,793 under the current agreement with Silicon Valley Bank for the
financing of capital expenditures. Debt balances as of December 31, 1997 on the
Company's balance sheet also include amounts loaned to the Company under
previous equipment lines of credit agreements with Silicon Valley Bank.
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 has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
completed in a timely manner, the Year 2000 problem could have a material impact
on the operations of the Company.
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 to meet its cash needs through at least 1998, 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
None.
26
<PAGE> 28
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 22, 1998 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
The information required by this item is 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the information under the caption "Common Stock Ownership of Certain Beneficial
Owners and Management" in the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is 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.
27
<PAGE> 29
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.
2. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
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.
10.9(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 QED 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.
</TABLE>
28
<PAGE> 30
<TABLE>
<S> <C>
10.31*(10) Letter Agreement with Robert A. Stern
dated January 10, 1996.
10.32*(11) Change of Control Agreement dated as of
September 12, 1996 between the Registrant
and William G. Mavity.
10.33(9)(11) License Agreement dated as of December
20, 1996 by and among the Registrant
and United States Surgical Corporation.
10.34(9)(11) License, Supply and Distribution
Agreement dated as of January 6, 1997 by
and between the Registrant and Sherwood
Medical Company.
10.35*(11) Letter Agreement with Daniel J. Genter
dated March 13, 1996.
10.36(11) Amendment to Loan and Security Agreement
dated as of February 4, 1997 between the
Registrant and Silicon Valley Bank.
10.37*(11) Form of Senior Management Change of
Control Agreement.
10.38(12) Amended and Restated Loan and Security
Agreement dated as of June 19, 1997 by
and between the Registrant and Silicon
Valley Bank.
10.39 Termination of License, Supply and
Distribution Agreement by and between the
Registrant and Sherwood Medical Company
dated March 12, 1998.
23.1 Consent of Independent Certified Public
Accountants.
27.1 Financial Data Schedule.
</TABLE>
--------------
* Management compensatory plan or arrangement.
(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.
(11) Incorporated by reference to exhibits filed in response
to Item 14, "Exhibits, Financial Statement Schedules and
Reports on Form 8-K," of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996.
29
<PAGE> 31
(12) 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 June 30, 1997.
(b) Reports on Form 8-K: None
30
<PAGE> 32
INNERDYNE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
31
<PAGE> 33
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, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InnerDyne, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
San Francisco, California
January 30, 1998
F1
<PAGE> 34
INNERDYNE, INC.
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,091,497 7,270,285
Accounts receivable, less allowance for doubtful
accounts of $177,930 in 1997 and $159,165 in 1996 (note 4) 1,920,966 1,290,805
Interest and other receivables 702,606 283,913
Inventories (note 3) 1,454,266 1,159,098
Prepaid expenses 116,821 151,150
------------ -----------
Total current assets 10,286,156 10,155,251
------------ -----------
Equipment and leasehold improvements:
Equipment (note 4) 3,595,696 3,216,320
Leasehold improvements 198,826 169,492
------------ -----------
3,794,522 3,385,812
Less accumulated depreciation and amortization 2,807,281 2,226,503
------------ -----------
Net equipment and leasehold improvements 987,241 1,159,309
Deposits 45,695 47,020
------------ -----------
$ 11,319,092 11,361,580
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit (note 4) $ 300,000 300,000
Current installments of long-term debt (note 4) 340,543 223,914
Accounts payable 489,602 301,946
Accrued payroll 585,157 310,885
Accrued commissions 219,286 120,323
Accrued clinical costs 209,686 209,686
Other accrued expenses 490,207 505,983
------------ -----------
Total current liabilities 2,634,481 1,972,737
Long-term debt, excluding current installments (note 4) 649,061 629,557
Commitments (note 5)
Stockholders' equity (note 6):
Preferred stock, $.01 par value. Authorized 1,000,000 shares; no
shares issued and outstanding in 1997 and 1996 -- --
Common stock, $.01 par value. Authorized 40,000,000 shares; issued and
outstanding 21,754,862 shares in 1997 and 21,542,034 shares in 1996 217,549 215,420
Additional paid-in capital 60,000,046 59,818,445
Accumulated deficit (52,182,045) (51,274,579)
------------ -----------
Net stockholders' equity 8,035,550 8,759,286
------------ -----------
$ 11,319,092 11,361,580
============ ===========
</TABLE>
See accompanying notes to financial statements.
F2
<PAGE> 35
INNERDYNE, INC.
Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Product sales $ 12,149,395 7,773,547 4,729,651
Licensing, contract, and grant revenue (note 8) 3,514,970 1,312,580 545,409
------------ ----------- -----------
Total revenues 15,664,365 9,086,127 5,275,060
Costs and expenses:
Cost of sales 5,070,946 4,363,367 3,148,915
Research, development, regulatory, and clinical 3,292,775 2,839,556 2,299,311
Sales and marketing 6,161,934 4,740,050 3,895,338
General and administrative 2,263,413 2,003,905 1,779,227
------------ ----------- -----------
Total costs and expenses 16,789,068 13,946,878 11,122,791
------------ ----------- -----------
Operating loss (1,124,703) (4,860,751) (5,847,731)
Other income (expense):
Interest income 327,943 263,679 250,594
Interest expense (117,338) (62,011) (28,908)
Gain (loss) on asset disposal 6,632 -- (1,070)
------------ ----------- -----------
Total other income 217,237 201,668 220,616
------------ ----------- -----------
Net loss $ (907,466) (4,659,083) (5,627,115)
============ =========== ===========
Basic and diluted loss per share $ (.04) (.23) (.32)
============ =========== ===========
Weighted average shares outstanding 21,671,604 20,324,033 17,561,480
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F3
<PAGE> 36
INNERDYNE, INC.
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Addi- Net
tional Accum- stock-
Common paid-in ulated holders'
stock capital deficit equity
-------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
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 net of expenses of $58,291 (note 6) 14,360 3,172,707 -- 3,187,067
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 underwriters' 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 8) 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
Issuance of shares upon exercise of stock options and
under employee stock purchase plan 2,069 197,093 -- 199,162
Issuance of shares for services rendered 60 14,940 -- 15,000
Additional expenses related to 1996 public offering -- (30,432) -- (30,432)
Net loss -- -- (907,466) (907,466)
-------- ----------- ----------- ----------
Balances at December 31, 1997 $217,549 60,000,046 (52,182,045) 8,035,550
======== =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F4
<PAGE> 37
INNERDYNE, INC.
Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (907,466) (4,659,083) (5,627,115)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of equipment and leasehold
improvements 596,426 565,887 578,201
Discount accretion on marketable investment securities -- -- (51,540)
Provision for allowance on doubtful accounts 45,687 108,566 73,290
Provision for obsolete inventory 120,145 60,757 43,881
(Gain) loss on asset disposal (6,632) -- 1,070
Common stock issued for services rendered 15,000 15,000 --
Increase in accounts receivable, interest,
and other receivables (1,094,541) (751,727) (603,851)
Increase in inventories (415,313) (634,732) (235,093)
Decrease (increase) in prepaid expenses and deposits 35,654 (11,960) 149,513
Increase (decrease) in accounts payable 187,656 95,626 (181,210)
Increase (decrease) in accrued expenses 357,459 294,842 (39,779)
----------- ----------- ----------
Net cash used in operating activities (1,065,925) (4,916,824) (5,892,633)
----------- ----------- ----------
Cash flows from investing activities:
Purchase of marketable investment securities -- -- (1,935,064)
Maturities of marketable investment securities -- 997,604 2,739,000
Capital expenditures (427,276) (776,901) (542,658)
Proceeds from disposal of equipment and
leasehold improvements 9,550 -- --
----------- ----------- ----------
Net cash provided by (used in) investing activities (417,726) 220,703 261,278
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 284,639 670,072 241,712
Proceeds from line of credit -- 300,000 --
Proceeds from issuance of common stock, net 199,162 9,393,551 3,345,174
Additional expenses related to 1996 public offering (30,432) -- --
Principal payments under capital leases -- (29,683) (46,875)
Principal payments on long-term debt (148,506) (88,348) (168,902)
----------- ----------- ----------
Net cash provided by financing activities 304,863 10,245,592 3,371,109
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents (1,178,788) 5,549,471 (2,260,246)
Cash and cash equivalents at beginning of year 7,270,285 1,720,814 3,981,060
----------- ----------- ----------
Cash and cash equivalents at end of year $ 6,091,497 7,270,285 1,720,814
=========== =========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 117,338 62,011 28,908
Supplemental Schedule of Noncash Activities
Write off of accounts receivable 26,922 22,691 --
</TABLE>
See accompanying notes to financial statements.
F5
<PAGE> 38
INNERDYNE, INC.
Notes to Financial Statements
December 31, 1997, 1996, and 1995
(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
$5,043,065 and $6,519,797 at December 31, 1997 and 1996,
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 two to five
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.
F6
<PAGE> 39
INNERDYNE, INC.
Notes to Financial Statements
(g) Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128). SFAS 128 became effective for financial
statements with interim and annual periods ending after December
15, 1997. Accordingly, the Company has adopted SFAS 128.
SFAS 128 establishes a different method of computing the net loss
per share than was previously required under the provisions of
Accounting Principles Board Opinion No. 15. SFAS 128 requires the
presentation of basic and diluted loss per share. Basic is the
amount of net loss for the period available to each share of
common stock outstanding during the reporting period. Diluted
earnings per share is the amount of net loss for the period
available to each share of common stock outstanding during the
reporting period and to each share that would have been
outstanding assuming the issuance of common shares for all
dilutive potential common shares outstanding during the period.
Potential common shares (stock options and warrants) have not been
included in the computation of loss per share, 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.
F7
<PAGE> 40
INNERDYNE, INC.
Notes to Financial Statements
(k) Fair Value Disclosure
At December 31, 1997 and 1996, the book value of the Company's
financial instruments approximates fair value.
(3) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Raw materials and supplies $ 1,110,989 725,953
Finished goods 583,639 553,362
Reserve for obsolescence (240,362) (120,217)
----------- ----------
$ 1,454,266 1,159,098
=========== ==========
</TABLE>
(4) Long-term Debt and Line of Credit
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
9.50% - 10.25% term loans payable to bank,
secured by equipment, payable in monthly
installments of $30,637 including interest
through 2002 $ 989,604 853,471
Less current installments 340,543 223,914
----------- ----------
Long-term debt, excluding current
installments $ 649,061 629,557
=========== ==========
</TABLE>
The aggregate maturities of long-term debt for the years subsequent to
December 31, 1997 are as follows: 1998, $340,543; 1999, $314,705; 2000,
$240,594; 2001, $66,663, and 2002, $27,099.
In June 1997, 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 through June 18, 1998 on a revolving credit basis at
prime plus one percent based on eligible receivables. The Company also
has an equipment advance line of credit, which allows the Company to
borrow up to $500,000 based on eligible equipment purchases. Amounts
outstanding on this equipment advance line of credit are periodically
converted to 48 month term loans bearing interest at prime plus one
percent. As of December 31, 1997 the Company had drawn $300,000 for
financing of working capital needs on the revolving line of credit,
secured by certain accounts receivable, and had borrowed $216,793 under
the current agreement with Silicon Valley Bank for the financing of fixed
assets. Debt balances summarized above also include amounts loaned to the
Company under previous equipment lines of credit agreements with Silicon
Valley Bank.
F8
<PAGE> 41
INNERDYNE, INC.
Notes to Financial Statements
(5) 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 $421,317 in 1997, $425,798 in
1996, and $347,294 in 1995.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of December
31, 1997 are:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 340,924
1999 107,597
2000 6,624
2001 2,064
-----------
Total minimum lease payments $ 457,209
===========
</TABLE>
(6) Capital Stock and Stock Based Compensation Plans
During 1995, the Company completed a private placement of securities 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 became 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, 1997, -0- shares, -0- shares, 209,600
shares, and 144,000 shares remained available for future grant under the
plans, 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.
F9
<PAGE> 42
INNERDYNE, INC.
Notes to Financial Statements
(6) Capital Stock and Stock Based Compensation Plans (continued)
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 94,033, 45,253, and 49,107
shares in 1997, 1996, and 1995, respectively, and had issued 200,953
shares cumulative through December 31, 1997.
A summary of the activity under the Plans follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
----------- ------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 2,536,469 $ 2.60 1,739,045 $ 1.92 1,815,898 $ 1.47
Options granted 764,000 2.85 1,163,975 3.42 455,439 3.68
--------- --------- ---------
3,300,469 2,903,020 2,271,337
--------- --------- ---------
Options exercised 112,795 .39 115,661 .57 214,093 .24
Options canceled 156,405 2.34 250,890 2.67 318,199 2.99
--------- --------- ---------
269,200 366,551 532,292
--------- --------- ---------
Options outstanding at
end of year 3,031,269 $ 2.59 2,536,469 $ 2.60 1,739,045 $ 1.92
========= ========= =========
Options exercisable
at end of year 1,493,895 $ 2.39 907,189 $ 2.00 582,632 $ 1.40
Weighted-average fair
value of options
granted during
the year $ 1.24 $ 1.90 $ 1.82
</TABLE>
On June 10, 1997, the Company reduced the exercise price on 455,399
options to the fair market value of the Company's common stock on that
date. Officer and Director options were excluded from the repricing.
F10
<PAGE> 43
INNERDYNE, INC.
Notes to Financial Statements
(6) Capital Stock and Stock Based Compensation Plans (continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------ ------------------------------
Weighted-avg.
Number remaining Number
Range of Outstand- contract- Weighted-avg. exercisable Weighted-avg.
exercise ing at ual exercise at exercise
prices 12/31/97 life price 12/31/97 price
----------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.09-0.42 167,553 4.5 yrs. $0.20 162,983 $ 0.21
1.50-2.00 732,775 1.4 1.65 553,516 1.70
2.01-2.50 12,250 2.8 2.50 7,134 2.50
2.51-3.00 1,370,591 3.6 2.78 375,518 2.80
3.01-3.50 535,100 3.7 3.42 244,662 3.44
3.51-6.50 213,000 2.7 4.37 150,082 4.54
------------ ------------
0.09-6.50 3,031,269 3.1 2.59 1,493,895 2.39
============ ============
</TABLE>
The Company accounts for these plans and its ESPP under APB 25, under
which no compensation cost has been recognized. Had compensation cost for
these plans and the ESPP 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>
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C> <C>
Net loss As reported $ (907,466) (4,659,083) (5,627,115)
Pro forma (1,622,314) (5,393,559) (5,771,695)
Basic loss per share As reported (0.04) (0.23) (0.32)
Pro forma (0.07) (0.27) (0.33)
</TABLE>
Pro forma net loss reflects only options granted in 1997, 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 1997, 1996, and 1995 respectively:
risk free interest rates of 6.5 percent, 6.2 percent, and 6.5 percent;
expected dividend yields of 0 percent; expected lives of 3.07, 3.15, and
3.15 years; and expected volatility of 74 percent, 77 percent, and 71
percent.
F11
<PAGE> 44
INNERDYNE, INC.
Notes to Financial Statements
(6) Capital Stock and Stock Based Compensation Plans (continued)
In September 1997, the Board of Directors approved the adoption of a
Shareholders Rights Plan (the Rights Plan). The Rights Plan provides for
the distribution of a preferred stock purchase right (Right) as a
dividend to shareholders of record of the Company's common stock as of
October 15, 1997. This Right entitles stockholders to acquire stock in
the Company or in an acquirer at a discounted price in the event that a
person or group acquires 15 percent or more of the Company's outstanding
voting stock or announces a tender offer that would result in ownership
of 15 percent or more of the Company's stock. Each right entitles the
registered holder to purchase from the Company 1/1000th of a share of
Series A Participating Preferred Stock at a price of $2.00 per 1/1000th
of a preferred share, subject to adjustment. The Rights may only be
exercised on the occurrence of certain events related to a tender offer
as described above. The Rights will expire on September 19, 2007. The
Rights may be redeemed by the Company at $0.01 per right at any time on
or before the tenth day following acquisition by a person or group of 15
percent or more of the Company's stock.
(7) Income Taxes
The Company has reported no income tax expense or benefit for the years
ended December 31, 1997, 1996, and 1995, 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.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 66,368 48,032
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax Reform
Act of 1986, and reserves for obsolescence 121,378 71,741
Equipment, principally due to differences in depreciation 117,741 118,406
Accrued expenses 119,621 108,962
Research activities credit carryforward 559,765 366,370
Net operating loss carryforwards 15,692,647 15,318,213
Other 32,849 30,147
----------- ----------
Total gross deferred tax assets 16,710,369 16,061,871
Less valuation allowance 16,710,369 16,061,871
----------- ----------
Net deferred tax assets $ -- --
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$14,192,219. The net change in the valuation allowance for the years
ended December 31, 1997 and 1996 is an increase of $648,498 and
$1,869,652, respectively. The increase in the valuation allowance in 1997
is primarily attributable to the increase in the net operating loss
carryforwards and credits incurred in 1997.
F12
<PAGE> 45
INNERDYNE, INC.
Notes to Financial Statements
(7) Income Taxes (continued)
Subsequently, recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1997 will be allocated as an
income tax benefit to be reported in the statement of operations.
At December 31, 1997, 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 regular Research activities
Expiring income tax purposes credit carryforward
-------------- ----------------------- --------------------
<S> <C> <C>
2001 $ 56,000 -
2002 170,000 -
2003 797,000 -
2004 1,879,000 282,000
2005 3,675,000 267,000
2006 6,521,000 354,000
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
2012 622,000 193,000
Estimated NOLs and credits which
will expire unutilized due to
the change in ownership
described below (10,000,000) (995,000)
------------- ---------
$ 42,071,000 660,000
============= =========
</TABLE>
As a result of a 1994 merger, the Company underwent 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
$17,222,000 incurred after the merger are not subject to the change in
ownership limitation.
F13
<PAGE> 46
INNERDYNE, INC.
Notes to Financial Statements
(8) Collaborative and Licensing Agreements
During 1997, the Company had the following collaborative development and
licensing agreements:
(a) SENKO Medical Instrument Manufacturing Co. Ltd. (SENKO) -
Effective April 5, 1994, the Company entered into an agreement
licensing its proprietary coating technology 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.
(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.
(d) Sherwood-Davis & Geck (SDG), formerly a subsidiary of American
Home Products- On January 6, 1997, the Company signed an exclusive
manufacturing agreement with SDG, a recognized leader in the
development, manufacture, and sale of enteral feeding pumps and
related devices. In the second quarter of 1997, the Company
announced that it received the single regulatory milestone
payment. In the first quarter of 1998, the Company and SDG decided
to terminate the development agreement based on the sale of SDG
and a change of corporate priorities for SDG.
(9) Employee Benefit Plan
The Company has a deferred savings plan which qualifies under Internal
Revenue Code Section 401(k). All full-time employees, who are 21 or older
and have completed 60 days of service, are eligible to participate. For
1997 and 1996, the Company did not make any matching contributions.
Company matching contributions for future years are at the discretion of
the Board of Directors.
(10) Accounting Standards Issued Not Yet Adopted
In June of 1997, the FASB issued Statement No, 130, "Reporting
Comprehensive Income," and Statement No. 131 "Disclosures about Segments
of an Enterprise and Related Information." These statements, which are
effective for periods beginning after December 15, 1997 expand or modify
disclosures and, accordingly, will have no impact on the Company's
reported financial position, results of operations, or cash flows.
F14
<PAGE> 47
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, 1998 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, 1998
---------------------
William G. Mavity (Principal Executive Officer)
/s/ ROBERT A. STERN Vice President and Chief Financial Officer (Principal March 28, 1998
-------------------
Robert A. Stern Financial and Accounting Officer)
/s/ ROBERT M. CURTIS Director March 28, 1998
--------------------
Robert M. Curtis
/s/ EDWARD W. BENECKE Director March 28, 1998
---------------------
Edward W. Benecke
/s/ GUY P. NOHRA Director March 28, 1998
----------------
Guy P. Nohra
/s/ STEVEN N. WEISS Director March 28, 1998
-------------------
Steven N. Weiss
/s/ EUGENE J. FISCHER Director March 28, 1998
---------------------
Eugene J. Fischer
</TABLE>
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER
<S> <C>
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.
10.9(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 QED 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*(11) Change of Control Agreement dated as of September 12, 1996 between the
Registrant and William G. Mavity.
10.33(9)(11) License Agreement dated as of December 20, 1996 by and among the Registrant
and United States Surgical Corporation.
10.34(9)(11) License, Supply and Distribution Agreement dated as of January 6, 1997 by
and between the Registrant and Sherwood Medical Company.
10.35*(11) Letter Agreement with Daniel J. Genter dated March 13, 1996.
10.36(11) Amendment to Loan and Security Agreement dated as of February 4, 1997
between the Registrant and Silicon Valley Bank.
10.37*(11) Form of Senior Management Change of Control Agreement.
10.38(12) Amended and Restated Loan and Security Agreement dated as of
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
June 19, 1997 by and between the Registrant and Silicon Valley Bank.
10.39 Termination of License, Supply and Distribution Agreement by and between the
Registrant and Sherwood Medical Company dated March 12, 1998.
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule.
</TABLE>
- --------------
* Management compensatory plan or arrangement.
(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.
(11) Incorporated by reference to exhibits filed in response to Item 14,
"Exhibits, Financial Statement Schedules and Reports on Form 8-K," of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
(12) 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 June 30, 1997.
(b) Reports on Form 8-K: None
<PAGE> 1
EXHIBIT 10.39
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT is made 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 ("Sherwood"), and INNERDYNE,
INC., a corporation organized and existing under the laws of the State of
Delaware ("InnerDyne").
WHEREAS, Sherwood and InnerDyne have previously entered into a License,
Supply and Distribution Agreement made effective the 6th day of January, 1997
(the "License, Supply and Distribution Agreement"); and
WHEREAS, Sherwood and InnerDyne now desire to terminate the License,
Supply and Distribution Agreement;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties agree as follows:
SECTION 1. TERMINATION OF LICENSE, SUPPLY AND DISTRIBUTION AGREEMENT
Sherwood and InnerDyne agree that except for Sherwood's obligation to
return the 510(k) to InnerDyne in accordance with the terms of Section 8(a)(iv)
of the License, Supply and Distribution Agreement and their mutual obligation
to maintain confidentiality under Section 12 of the License, Supply and
Distribution Agreement (the "Surviving Obligations"), the parties agree that
all of their respective rights, licenses, privileges, duties and obligations
under the License, Supply and Distribution Agreement are hereby terminated by
this Agreement.
SECTION 2. PAYMENTS
Sherwood agrees that InnerDyne shall retain all payments previously made
by Sherwood to InnerDyne, and InnerDyne agrees that Sherwood has no further
obligations to make any payments to InnerDyne.
SECTION 3. RELEASE
Except with respect to the future performance of the Surviving
Obligations, each of the parties, by this Agreement, for itself, its successors
and assigns, does hereby release, acquit and forever discharge the other, its
affiliates and its successors and assigns, of any and all claims, damages,
debts, demands, liability, costs, expenses, actions, and causes of action, of
every kind and nature whatsoever, known or unknown, arising under the License,
Supply and Distribution Agreement. Each of the parties does hereby expressly
waive, to the fullest extent permitted by law, the provisions and benefits of
Section 1542 of the California Civil Code or any successor provision, which
provides:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with
the debtor."
Each party to this Termination Agreement acknowledges that it is aware that it
may hereafter discover facts in addition to or different from those which it
now knows or believes to be true with respect to the other's performance under
the License, Supply and Distribution Agreement, but that it is its intention to
hereby fully, finally and forever to release all matters arising under the
License, Supply and Distribution Agreement except the performance of the
Surviving Obligations.
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/ Robert A. Stern By: /s/ Kevin J. Garcia
-------------------------- -------------------------
Name: Robert A. Stern Name: Kevin J. Garcia
Title: Vice President, CFO Title: President
Date: 3/12/98 Date: 3/19/98
<PAGE> 1
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 Forms S-3 of InnerDyne, Inc. of our
report dated January 30, 1998, relating to the balance sheets of InnerDyne, Inc.
as of December 31, 1997 and 1996, and the related statements of operations,
stockholder's equity and cash flows, for each of the years in the three-year
period ended December 31, 1997, which report appears in this Form 10-K of
InnerDyne, Inc.
/s/ KPMG Peat Marwick LLP
San Francisco, California
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000822084
<NAME> INNERDYNE, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 6,091,497
<SECURITIES> 0
<RECEIVABLES> 2,098,896
<ALLOWANCES> 177,930
<INVENTORY> 1,454,266
<CURRENT-ASSETS> 10,286,156
<PP&E> 3,794,522
<DEPRECIATION> 2,807,281
<TOTAL-ASSETS> 11,319,092
<CURRENT-LIABILITIES> 2,634,481
<BONDS> 0
0
0
<COMMON> 60,217,595
<OTHER-SE> (52,182,045)
<TOTAL-LIABILITY-AND-EQUITY> 11,319,092
<SALES> 12,149,395
<TOTAL-REVENUES> 15,664,365
<CGS> 5,070,946
<TOTAL-COSTS> 16,789,068
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,338
<INCOME-PRETAX> (907,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> (907,466)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (907,466)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
