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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
Commission file number: 0-28448
GENERAL SURGICAL INNOVATIONS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 97-3170244
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10460 BUBB ROAD, CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 863-2500
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
There were approximately 13,340,991 shares of Registrant's Common Stock
issued and outstanding as of November 1, 1997.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated balance sheets at September 30, 1997
and June 30, 1997 ........................................ 3
Consolidated statements of operations for the three months
ended September 30, 1997 and September 30, 1996 .......... 4
Consolidated statements of cash flows for the three months
ended September 30, 1997 and September 30, 1996 .......... 5
Notes to consolidated financial statements ................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 20
Item 2. Changes in Securities and Use of Proceeds .................... 21
Item 3. Defaults Upon Senior Securities .............................. 21
Item 4. Submission of Matters to a Vote of Security Holders .......... 21
Item 5. Other Information ............................................ 21
Item 6. Exhibits and Reports on Form 8-K ............................. 22
2
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September, 30 June, 30
1997 1997
------------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,753 $ 7,900
Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . . 38,292 35,831
Accounts receivable, net of allowance for doubtful accounts of
$63 on September 30, 1997 and $47 on June 30, 1997. . . . . . . . . . . . 1,451 2,131
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,489 1,717
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . 1,161 971
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,146 48,550
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . 2,346 2,251
Intangible and other assets, net . . . . . . . . . . . . . . . . . . . . . . . 245 261
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,737 $ 51,062
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 609 $ 504
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785 1,044
Bank borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 167
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,561 1,715
Bank borrowings, less current portion. . . . . . . . . . . . . . . . . . . . . 143 185
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 196 175
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900 2,075
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value:
Authorized: 2,000,000 shares; issued and outstanding: none
Common stock, $.001 par value:
Authorized: 50,000,000 shares; issued and outstanding 13,340,133
on September 30, 1997 and 13,290,644 on June 30, 1997 . . . . . . . . . . . 13 13
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 65,114 65,089
Notes receivable from shareholders . . . . . . . . . . . . . . . . . . . . . . (87) (87)
Deferred compensation, net . . . . . . . . . . . . . . . . . . . . . . . . . . (263) (297)
Unrealized gain (loss) on available-for-sale securities. . . . . . . . . . . . 13 (38)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,953) (15,693)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 47,837 48,987
-------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . . $ 49,737 $ 51,062
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
September 30,
----------------------
1997 1996
-------- --------
Sales. . . . . . . . . . . . . . . . . . . . . . $ 1,567 $ 2,470
Guaranteed payments. . . . . . . . . . . . . . . 775 -
-------- --------
Total revenue. . . . . . . . . . . . . . . . . . 2,342 2,470
Cost of sales. . . . . . . . . . . . . . . . . . 956 993
-------- --------
Gross profit. . . . . . . . . . . . . . . . 1,386 1,477
-------- --------
Operating Expenses:
Research and development . . . . . . . . . . . 765 462
Sales and marketing. . . . . . . . . . . . . . 1,126 1,108
General and administrative . . . . . . . . . . 1,346 723
-------- --------
Total operating expenses . . . . . . . . . . . 3,237 2,293
-------- --------
Operating loss . . . . . . . . . . . . . . . . (1,851) (816)
Interest income. . . . . . . . . . . . . . . . . 603 625
Interest expense . . . . . . . . . . . . . . . . (12) (12)
Other income (expense) . . . . . . . . . . . . . - (26)
-------- --------
Net loss . . . . . . . . . . . . . . . . . . . $ (1,260) $ (229)
-------- --------
-------- --------
Net loss per share . . . . . . . . . . . . . . . $ (0.09) $ (0.02)
-------- --------
-------- --------
Shares used in computing net loss per share. . . 13,314 13,147
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED,
CONSOLIDATED FINANCIAL STATEMENTS.
4
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,260) $ (229)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization of deferred compensation. . . . . . . . . . . . . . . . . . . . 34 50
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 282 102
Provision for uncollectable accounts . . . . . . . . . . . . . . . . . . . . 16 (28)
Loss on write-off of fixed assets. . . . . . . . . . . . . . . . . . . . . . - 26
Provision for excess and obsolete inventory. . . . . . . . . . . . . . . . . (4) -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 664 223
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 (190)
Prepaid expenses and other current assets . . . . . . . . . . . . . . . (190) 209
Intangible and other assets . . . . . . . . . . . . . . . . . . . . . . (2) -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 (137)
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (273) 104
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . - (33)
-------- --------
Net cash generated by (used in) operating activities . . . (396) 97
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . (6,060) (7,924)
Proceeds from sales and maturities of available-for-sale securities. . . . . . 3,542 -
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . . . . (211) (78)
-------- --------
Net cash used in investing activities. . . . . . . . . . . (2,729) (8,002)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . 25 36
Payments on capital lease obligations. . . . . . . . . . . . . . . . . . . . . (5) -
Principal payments on bank borrowings. . . . . . . . . . . . . . . . . . . . . (42) (29)
-------- --------
Net cash generated by (used in) financing activities. . . . (22) 7
-------- --------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . . (3,147) (7,898)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . 7,900 28,339
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . $ 4,753 $ 20,441
-------- --------
-------- --------
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12 $ 10
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for notes receivable. . . . . . . . . . . . . . . . . $ - $ 11
Repurchase of common stock for notes receivable. . . . . . . . . . . . . . . . $ - $ -
Change in unrealized gain on available-for-sale securities . . . . . . . . . . $ 51 $ 2
Property acquired under capital leases . . . . . . . . . . . . . . . . . . . . $ 40 $ -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements as of
September 30, 1997 of General Surgical Innovations, Inc. (the "Company") and
subsidiary have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included.
Operating results for the three month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the fiscal
year ended June 30, 1998, or any future interim period.
These financial statements and notes should be read in conjunction
with the Company's audited financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.
2. Reclassification:
Certain amounts in the financial statements have been reclassified
to conform with current year's presentation. These reclassifications had no
impact on previously reported working capital, operating income, or net
income.
3. Net Loss Per Share:
Net loss per share is computed using the weighted average number of
common shares outstanding. Common equivalent shares from stock options are
excluded from the computation as their effect is antidilutive.
4. Inventories:
Inventories comprise (IN THOUSANDS):
Sept. 30, June 30,
1997 1997
------ ------
(unaudited)
Raw materials ..................... $ 685 $ 706
Work in progress................... 144 43
Finished goods .................... 660 968
------ ------
$1,489 $1,717
------ ------
------ ------
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto included in
part I, Item I of this Quarterly Report and with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that, except for the historical information
contained in this Quarterly Report on Form 10-Q, the matters discussed herein
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, market demand for the Company's products,
the Company's ability to shift market focus successfully, fluctuations in
revenues among different product lines and markets, the timing and number of
orders and shipments, distribution efforts by Ethicon-Endo Surgery, Inc.
("EES"), a Johnson & Johnson company, EES's success in achieving certain
levels of sales growth, the performance of the Company's new corporate
partnering relationships, the Company's ability to establish and develop
other new corporate partnering relationships, the timely development and
market acceptance of new products and surgical procedures, the impact of
competitive products and pricing, results of ongoing litigation, the
Company's ability to further expand into international markets, approval of
its products by government agencies such as the United States Food and Drug
Administration, and other risks detailed below and included from time to time
in the Company's other SEC reports and press releases, copies of which are
available from the Company upon request. The Company assumes no obligation to
update any forward-looking statements contained herein. The factors listed
below under "Factors Affecting Future Results," as well as other factors,
have in the past affected, and could in the future affect, the Company's
actual results and could cause the Company's results for future quarters to
differ materially from those expressed in any forward-looking statements
contained in the following discussion.
References made in this Quarterly Report on Form 10-Q to "General
Surgical Innovations, Inc.," the "Company" or the "Registrant" refer to
General Surgical Innovations, Inc. and its subsidiary. The following General
Surgical Innovations, Inc. trademarks are mentioned in this Quarterly Report:
SPACEMAKER-Registered Trademark-, registered trademark of the Company;
ENDOSAPH-TM-, SAPHtrak-TM-, SPACEKEEPER-TM- and Knotmaker-TM-, trademark of
the Company.
OVERVIEW
Since its inception in April 1992, GSI has been engaged in the
development, manufacturing and marketing of balloon dissection systems and
related minimally invasive surgical instruments. The Company began commercial
sales of its balloon dissection systems for hernia repair in September 1993.
To date, the Company has received from the FDA five 510(k) clearances for use
of the Company's technology to perform dissection of tissue planes anywhere
in the body using a broad range of balloon sizes and shapes. The Company
currently sells products in the United States and certain other countries in
Europe, Asia and South America for selected applications, such as hernia
repair, subfascial endoscopic perforator surgery and breast augmentation and
reconstruction surgery.
7
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In March 1994, the Company entered into a distribution agreement with
U.S. Surgical Company ("USSC") providing USSC with limited exclusive rights
to distribute the Company's balloon dissection systems in the hernia repair
market in both the United States and certain international countries. In
November 1996, the Company terminated its distribution agreement with USSC.
In December 1996, the Company entered into a five year OEM supply
agreement (the "Expanded EES Agreement") with EES, pursuant to which GSI
granted EES worldwide sales and marketing rights to sell the
SPACEMAKER-Registered Trademark- Balloon Dissection Systems in the
laparoscopic hernia repair and urinary stress incontinence ("USI") markets.
Under the Expanded EES Agreement, EES has begun selling GSI's dissector for
hernia repair. EES made guaranteed payments of $4.9 million in fiscal year
1997, and an additional payment in lieu of product purchases in the amount of
$775,000 in the first quarter of fiscal year 1998.
Additional sales in the United States (other than for hernia and USI
applications) are currently made through distributors and a small direct
sales force. The Company currently sells its products (other than for hernia
and USI applications) in international markets through a limited number of
distributors, which resell to surgeons and hospitals. The Company plans to
increase its direct sales force in the United States and may seek to
establish a direct sales force in one or more other countries in the future.
Any increase in the Company's direct sales force will require significant
expenditures and additional management resources.
To date, almost all of the sales to distributors and by the Company's
direct sales force have been for use in hernia repair procedures. While the
Company has developed or is developing balloon dissection systems for
vascular, urinary stress incontinence, plastic surgery and orthopaedic
applications, sales of products for hernia repair are expected to provide a
majority of the Company's revenues at least through fiscal 1998.
The Company has acquired rights to a significant number of patents from
third parties, including rights that apply to the Company's current balloon
dissection systems. The Company has historically paid and is obligated to pay
in the future to such third parties royalties equal to 4% of sales of such
products. The Company has also acquired patent rights under royalty-bearing
agreements with respect to certain surgical instruments, including the
KnotMaker product and the balloon valve trocar. The payment of such royalty
amounts will have an adverse impact on the Company's gross profit and results
of operations.
The Company has a limited history of operations and has experienced
significant operating losses since inception. The Company expects such
operating losses to continue at least through June 30, 1998. In order to
support increased levels of sales in the future and to augment its long-term
competitive position, including the development of balloon dissection systems
for other applications, the Company anticipates that it will be required to
make significant additional expenditures in sales and marketing and research
and development (including marketing-related clinical evaluations). In
addition, the Company has experienced higher administration expenses since
its initial public offering resulting from its obligations as a public
reporting company and defense of its patents.
The Company anticipates that its results of operations may fluctuate for
the foreseeable future due to several factors, including fluctuations in
purchases of the Company's products by its distributors, its distributors'
ability to achieve certain levels of sales growth, the status of the
Company's relationship with EES and other partners, the Company's ability to
sell its line of cardiovascular products, fluctuations in revenues among
different product lines and markets, the mix of sales among the distributors
and the Company's direct sales force, timing of new product introductions or
transitions to new products, the margins recognized from products for various
surgical procedures, the progress of marketing-related clinical
8
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evaluations, sales of competitive products and the introduction of new
products from competitors (including pricing pressures), activities related
to patents and patent approvals (including litigation) and regulatory and
third-party reimbursement matters, and the timing of research and development
expenses (including marketing-related clinical evaluations). In addition, the
Company's results of operations could be affected by the expansion of the
Company's distributor network, the ability of the Company's distributors to
effectively promote the Company's products and the ability of the Company to
quickly and cost effectively increase its direct domestic sales force. The
Company's limited operating history makes accurate prediction of future
operating results difficult or impossible.
The Company currently manufactures and ships product shortly after the
receipt of orders, and anticipates that it will do so in the future.
Accordingly, the Company has not developed a significant backlog and does not
anticipate that it will develop a material backlog in the future.
In January 1997, the Company entered into a new facility lease in
Cupertino, California and relocated its headquarters and manufacturing
operations to this new location in April 1997. The new facility's lease
comprises approximately 30,460 square feet, and the monthly rent is
approximately $47,000.
In October 1997, the Company received its CE mark certification,
pursuant to the Medical Devices Directive, which enables the Company to affix
CE marking on its products and continue selling its products within the
European Economic Area.
RESULTS OF OPERATIONS
REVENUE. Total revenue decreased by 5% to approximately $2.3 million
for the quarter ended September 30, 1997 from $2.5 million for the same
period in 1996. This decrease was due to slower-than-expected sales to EES
of the SPACEMAKER-Registered Trademark- I and II platforms for the hernia
market. The Company believes that its sales results will fluctuate from
quarter to quarter during at least the next several quarters.
COST OF SALES. Cost of sales decreased by 4% to approximately $956,000
for the quarter ended September 30, 1997 from $993,000 for the same period in
1996. This decrease in absolute dollars was related to lower unit sales in
the quarter ended September 30, 1997, as compared to the previous period.
Cost of sales increased as a percentage of sales to 61% for the quarter ended
September 30, 1997 from 40% for the quarter ended September 30, 1996. This
increase was primarily a result of under-utilized manufacturing capacity, the
cost of which was allocated among fewer unit sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses,
which include expenditures for marketing-related clinical evaluations and
regulatory expenses, increased by 66% to $765,000 in the quarter ended
September 30, 1997 from $462,000 for the same period in 1996 and increased as
a percentage of revenue to 33% in the quarter ended September 30, 1997 from
19% in the quarter ended September 30, 1996 as a result of increased spending
on new product development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 35% to approximately $2.5 million for
the quarter ended September 30, 1997 from $1.8 million for the quarter ended
September 30, 1996 primarily due to increased legal expenses related to
intellectual property litigation.
9
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INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME (EXPENSE). Interest
and other income (net of expense) increased to $591,000 for the quarter ended
September 30, 1997 from $587,000 for the quarter ended September 30, 1996.
Interest earned in the future will depend on the Company's funding cycles and
prevailing interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of approximately
$17.0 million at September 30, 1997. The Company has funded its operations
primarily through the sale of equity securities. From its inception through
September 30, 1997 the Company raised approximately $15.5 million through the
private placement of equity securities and approximately $46.9 million (net
of underwriting discounts and commissions) in an initial public offering.
As of September 30, 1997 the Company's principal source of liquidity
consists of cash, cash equivalents and available-for-sale securities of $43.0
million. In addition, the Company has a bank line of credit available for
$1,500,000. As of September 30, 1997, the Company has no amounts outstanding
under this line. The Company also has an equipment loan with an outstanding
balance of approximately $310,000.
The Company expects to incur substantial additional costs, including
costs related to patent litigation, increased sales and marketing activities,
increased research and development, expenditures in connection with seeking
regulatory approvals and conducting additional marketing-related clinical
evaluations, capital equipment and other costs associated with expansion of
the Company's manufacturing capabilities. The Company believes that its
current cash balances and short-term investments along with cash generated
from the future sales of products will be sufficient to meet the Company's
operating and capital requirements through at least calendar 1998. The
Company may seek additional equity or debt financing to address its working
capital needs or to provide funding for capital expenditures. There can be
no assurance that additional financing, if sought, will be available on
satisfactory terms or at all.
RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER
SHARE, which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 requires
restatement of all prior-period earnings per share data presented after the
effective date. SFAS 128 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), REPORTING COMPREHENSIVE
INCOME. This statement establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for fiscal years
beginning after December 15, 1997, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally
represents all changes in shareholders' equity except those resulting from
investments or contributions by shareholders. The Company is evaluating
alternative formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's results of operations.
10
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In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement supersedes
Statement of Financial Accounting Standards No. 14, FINANCIAL REPORTING FOR
SEGMENTS OF A BUSINESS ENTERPRISE. The new standard becomes effective for
fiscal years beginning after December 15, 1997, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard. The Company is evaluating the requirements of SFAS 131 and
the effects, if any, on the Company's current reporting and disclosures.
LIMITED OPERATING HISTORY; ANTICIPATED FUTURE LOSSES. The Company was
organized in April 1992 and began commercially shipping its first
SPACEMAKER-Registered Trademark- products in September 1993. Accordingly, the
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. As of September 30, 1997, the Company
had an accumulated deficit of $17.0 million. The Company's net operating
losses for the fiscal years ending June 30, 1995, 1996 and 1997 and for the
quarter ended September 30, 1997 were $4.1 million, $5.5 million, $1.9
million and $1.3 million, respectively. The Company expects to continue to
incur operating losses on a quarterly and annual basis through at least
fiscal year 1998. Due to the Company's limited operating history, there can
be no assurance of sales growth or profitability in the future. The Company
intends to increase its investments in research and development, sales and
marketing, marketing-related clinical evaluations and related infrastructure.
Due to the anticipated increases in the Company's operating expenses, the
Company's operating results will be adversely affected if sales do not
increase. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in rapidly evolving markets. To
address these risks, the Company must respond to competitive developments,
continue to attract, retain and motivate qualified persons and successfully
commercialize products incorporating advanced technologies. There can be no
assurance that the Company will be successful in addressing such risks.
DEPENDENCE UPON BALLOON DISSECTION PRODUCTS; RISK OF TECHNOLOGICAL
OBSOLESCENCE. All of the Company's sales since inception have been derived
from sales of its balloon dissection products, with a substantial portion
derived from sales for hernia repair procedures. Failure of the Company to
develop and successfully commercialize balloon dissection products for
applications other than hernia repair could have a material adverse effect on
the Company's business, financial condition and results of operations. The
success of the Company's products depends on the market acceptance of and
demand for the Company's products and related procedures, the nature of the
technological advances inherent in the product designs, reduction in patient
trauma or other benefits provided by such products, results of
marketing-related clinical evaluations, continued adoption of minimally
invasive surgery ("MIS") procedures by surgeons, reimbursement for the
Company's products by health care payors and the Company's receipt of
regulatory approvals. There can be no assurance that the Company's products
will have the required technical characteristics, that the Company's products
will provide adequate patient benefits, that marketing-related clinical
evaluations results will be favorable, that surgeons will continue to adopt
MIS procedures, that recently-introduced products or future products of the
Company or related procedures will gain market acceptance, or that required
regulatory approvals will be obtained. The failure to achieve any of the
foregoing could have a material adverse effect on the Company's business,
financial condition and results of operations. To the extent demand for the
Company's balloon dissection systems for hernia repair declines and the
Company's newly-introduced products are not commercially accepted or its
existing products are not developed for new procedures, there could be a
material
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adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON KEY DISTRIBUTORS. In December 1996, the Company
entered into a five year OEM supply agreement (the "Expanded EES Agreement")
with EES, pursuant to which GSI granted EES worldwide sales and marketing
rights to sell the SPACEMAKER-Registered Trademark- Balloon Dissection
Systems in the laparoscopic hernia repair and urinary stress incontinence
("USI") markets. The Expanded EES Agreement supersedes the June 1996
licensing agreement between the Company and EES. Under the Expanded EES
Agreement, EES was obligated to make $4.9 million in guaranteed payments to
the Company during the year ended June 30, 1997, but is not obligated to make
any further guaranteed payments. There can be no assurance that EES's
manufacturing, marketing or distribution efforts will be successful. EES's
failure to achieve certain levels of sales growth or product orders could
have a material adverse effect on the Company's business, financial condition
and results of operations. Although the Company intends to establish
additional distributorships in the United States for products in areas other
than hernia repair and urinary stress incontinence, there can be no assurance
that such efforts will be successful. Failure to add additional distributors
to its distribution network in the United States could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's products are currently sold internationally to general
surgeons and specialists through EES and independent distributors in Europe,
Asia, Latin America and the Middle East. In June 1997, GSI entered into an
exclusive agreement with Japan Lifeline to market and distribute in Japan
GSI's balloon dissection systems for use in vascular procedures. Japan
Lifeline is expected to begin distribution of the GSI balloon dissection
systems following receipt of the Japanese Ministry of Health and Welfare
approval, which the Company expects will occur in early 1998.
To date, substantially all of the Company's international sales for
hernia repair procedures have been made through Autosuture, a USSC affiliate,
under the same terms and conditions as the Company's agreement with USSC,
which was terminated in November 1996. Thus, the Company does not anticipate
that it will have future sales through Autosuture. Although EES has taken
over as the Company's international distributor, there can be no assurance
that EES's efforts in international distribution will be successful.
LIMITED MARKETING AND DIRECT SALES EXPERIENCE. The Company has only
limited experience marketing and selling its products through its direct
sales force, and has sold its products in commercial quantities through its
direct sales force to the hernia market and, to a lesser degree, to the
cardiovascular and cosmetic and reconstructive surgery markets. Establishing
marketing and sales capability sufficient to support sales in commercial
quantities for the cardiovascular market targeted by the Company will require
significant resources. There can be no assurance that the Company will be
able to recruit and retain additional qualified marketing or sales personnel,
or that future sales efforts of the Company will be successful. In markets
other than cardiovascular, the Company intends to establish partnership
relationships with additional distribution partners, and there can be no
assurance that the Company will be successful in establishing such
partnership relationships on commercially reasonable terms, if at all. The
failure to establish and maintain an effective distribution channel for the
Company's products, or establish and retain qualified and effective sales
personnel to support commercial sales of the Company's products, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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UNCERTAINTY OF MARKET ACCEPTANCE; NO ASSURANCE OF CLINICAL ADVANTAGE.
The Company's success is substantially dependent upon the success of its
SPACEMAKER-Registered Trademark- balloon dissection products. The Company
believes that market acceptance of the Company's products will depend on the
Company's ability to provide evidence to the medical community of the safety,
efficacy, clinical advantage and cost-effectiveness of its products and the
procedures in which these products are intended to be used. Market acceptance
is also dependent on the adoption of laparoscopic techniques generally and
the conversion of non-balloon dissection techniques to balloon dissection
techniques specifically. To date, the Company's products have only been used
to treat a limited number of patients and the Company has limited long-term
outcomes data. If the Company is not able to demonstrate consistent clinical
benefits resulting from the use of its products (including reduced procedure
time, reduced patient trauma and lower costs), the Company's business,
financial condition and results of operations could be materially and
adversely affected.
The Company further believes that the ability of health care providers
to obtain adequate reimbursement for procedures using the Company's
SPACEMAKER-Registered Trademark- balloon dissector products and related
instruments will be critical to market acceptance of the Company's products.
Although the Company believes that procedures using its balloon dissection
products currently may be reimbursed in the United States under certain
existing procedure codes, there can be no assurance that such procedure codes
will remain available or that reimbursement under these codes will be
adequate. The Company has limited experience in obtaining third-party
reimbursement, and the failure to obtain reimbursement for some or all of its
products could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
The Company introduced its balloon dissectors in late 1993 and to date
there has been relatively little education among surgeons about the benefits
of balloon dissection technology. Further, due to the novelty of balloon
dissection procedures, many surgeons and surgeons' assistants have not
developed the requisite skills to perform balloon dissection procedures. To
the extent that laparoscopic techniques are adopted slowly, that balloon
dissectors are incorporated into laparoscopic techniques less often or that
surgeons are unwilling or unable to develop the skills necessary to utilize
balloon dissectors, the Company's business, financial condition and results
of operations could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY RESULTS. Results of the Company's operations
may fluctuate significantly from quarter to quarter and will depend on
numerous factors, including (i) new product introductions by the Company and
its competitors and fluctuations in revenues among different product lines
and markets, (ii) purchases of the Company's products by EES and other
distributors, (iii) the rate of adoption by surgeons of balloon dissection
technology in markets targeted by the Company, (iv) the sales efforts of the
Company's distributors, (v) the mix of sales among distributors and the
Company's direct sales force, (vi) timing of patent and regulatory approvals,
if any, (vii) timing and growth of operating expenditures, (viii) timing of
research and development expenses, including marketing-related clinical
evaluation expenditures, (ix) intellectual property litigation and (x)
general market conditions. In the past, the Company's sales were highly
dependent upon the marketing efforts and success of United States Surgical
Corporation, which was the Company's major distributor until the relationship
was mutually terminated in November 1996. In December 1996, the Company
entered into the Expanded Ethicon Agreement, pursuant to which GSI granted
EES worldwide sales and marketing rights to sell the SPACEMAKER-TM- Balloon
Dissection Systems in the laparoscopic hernia repair and urinary stress
incontinence markets. The Company's sales in any period will be highly
dependent upon the marketing efforts and success of EES, which are not within
the control of the Company. EES made approximately $4.9 million in guaranteed
payments to the Company in fiscal year 1997, which constituted 54% of
revenues for fiscal year 1997. EES is not obligated to make any such
guaranteed payments in future quarters. The Company anticipates that sales to
EES will fluctuate in the future. Failure
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by EES to achieve certain levels of sales growth or purchases could adversely
affect the Company's operating results. In addition, announcements or
expected announcements by the Company, its competitors or its distributors of
new products, new technologies or pricing changes could cause existing or
potential customers of the Company to defer purchases of the Company's
existing products and could alter the mix of products sold by the Company,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
future products or product enhancements will be successfully introduced or
that such introductions will not adversely affect the demand for existing
products. As a result of these and other factors, the Company's quarterly
operating results have fluctuated in the past, and the Company expects that
such results may fluctuate in the future. Due to such quarterly fluctuations
in operating results, quarter-to-quarter comparisons of the Company's
operating results are not necessarily meaningful and should not be relied
upon as indicators of likely future performance or annual operating results.
In addition, the Company's limited operating history makes accurate
prediction of future operating results difficult or impossible to make. There
can be no assurance that in the future the Company will achieve sales growth
or become profitable on a quarterly or annual basis, if at all, or that its
growth, if any, will be consistent with predictions by securities analysts
and investors. In such event, the price of the Company's Common Stock would
likely be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success
will depend on its ability to obtain patent protection for its products and
processes, to preserve its trade secrets and proprietary technology and to
operate without infringing upon the patents or proprietary rights of third
parties.
In May 1996, the Guidant Corporation unit of Origin MedSystems, Inc.
("Origin"), a competitor of the Company, filed an action against GSI in the
U.S. District Court for the Northern District of California, alleging patent
infringement of its patent entitled "Apparatus and Method for Peritoneal
Retraction." In June, 1996, GSI filed an action against Origin in the U.S.
District Court for the Northern District of California alleging patent
infringement of its patent for a method of tissue plane dissection using
balloon systems. In addition, on September 26, 1997, the Company filed
another action against Origin alleging patent infringement of its patent for
a method of serial inflation of tissue dissectors. A decision against the
Company in any of these actions could have a material adverse effect on the
Company's business, financial condition or results of operations.
One of the patent applications filed by the Company, which is directed
to a surgical method using balloon dissection technology, has been placed in
interference with a patent application filed by Origin. The Company believes
that the inventor named in its patent application was the first to invent
this subject matter, and has asserted that the Origin patent application was
filed after a disclosure made by such inventor to employees of Origin. Origin
takes a contrary position. This interference is presently pending in the
United States Patent and Trademark Office ("USPTO") and, as permitted by the
rules of the USPTO, has been referred to an arbitrator for completion of the
interference proceeding. A decision is not expected in this interference
proceeding until calendar year 1998. Failure of the Company to prevail in
such interference proceeding would have a material adverse effect on the
Company's business, financial condition and results of operations.
Patent interference or infringement involves complex legal and factual
issues and is highly uncertain, and there can be no assurance that any
conclusion reached by the Company regarding patent interference or
infringement will be consistent with the resolution of such issue by a court.
In the event the Company's products are found to infringe patents held by
competitors, there can be no assurance that the Company will be able to
modify successfully its products to avoid infringement, or that any modified
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products will be commercially successful. Failure in such event to either
develop a commercially successful alternative or obtain a license to such
patent on commercially reasonable terms would have a material adverse effect
on the Company's business, financial condition and results of operations. As
discussed above, the Company is defending itself, and may in the future have
to defend itself, in court against allegations of infringement of third-party
patents. Patent litigation is expensive, requires extensive management time,
and could subject the Company to significant liabilities, require disputed
rights to be licensed from third parties or require the Company to cease
selling its products.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
No assurance can be given that any patents based on pending patent
applications or any future patent applications will be issued, that the scope
of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents or patents to
which it has licensed rights will be held valid under current challenges or
if subsequently challenged or that persons or entities in addition to Origin
will not claim rights in or ownership of the patents and other proprietary
rights held or licensed by the Company or that the Company's existing patents
will cover the Company's future products. Furthermore, there can be no
assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any
patents issued to or licensed by the Company or that may be issued in the
future to the Company. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's pending patent applications, nor can the Company be certain that it
will not infringe any patents that may issue to others on such applications.
Legislation has recently been enacted in Congress, the effect of which
is to immunize physicians and their employers from liability for patent
infringement for alleged infringement of patent claims directed to medical
procedures.
The patent laws of European and certain other foreign countries
generally do not allow for the issuance of patents for methods of surgery on
the human body. Accordingly, the ability of the Company to gain patent
protection for its methods of tissue dissection will be significantly
limited. As a result, there can be no assurance that the Company will be able
to develop a patent portfolio in Europe or that the scope of any patent
protection will provide competitive advantages to the Company.
ROYALTY PAYMENT OBLIGATIONS. The Company has acquired a significant
number of patent rights from third parties, including rights that apply to
the Company's current balloon dissection systems. The Company has
historically paid and is obligated to pay in the future to such third parties
royalties equal to 4% of sales of such products. The Company has also
acquired patent rights under royalty-bearing agreements with respect to
certain surgical instruments. The payment of such royalty amounts will have
an adverse impact on the Company's gross profit and results of operations.
There can be no assurance that the Company will be able to continue to
satisfy such royalty payment obligations in the future, and a failure to do
so could have a material adverse effect on the Company's business, financial
condition and results of operations.
EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF
ABILITY TO MANAGE GROWTH. The Company began commercial sales of its balloon
dissection products in September 1993 and, as a result, has limited
experience in manufacturing, marketing and selling its products commercially.
In January 1997 the Company entered into a real estate lease and has
relocated its headquarters and manufacturing operations in
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April 1997 to this new facility. In addition, the Company has experienced
rapid growth in the number of its employees, the number of products under
development, the number and amount of products manufactured, and the
geographic scope of its sales. In order to augment its long-term competitive
position, the Company anticipates that it will be required to make
significant additional expenditures in research and development and sales and
marketing. The Company's inability to manage its growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. Competition in the
market for medical devices used in tissue dissection surgical procedures is
intense and is expected to increase. The Company competes primarily with
other producers of MIS tissue dissection instruments. Origin, a subsidiary of
Guidant Corporation, and others currently compete against the Company in the
development, production and marketing of MIS tissue dissection instruments
and tissue dissection technology. To the extent that surgeons elect to use
open surgical procedures rather than MIS, the Company also competes with
producers of tissue dissection instruments used in open surgical procedures,
such as blunt dissectors or graspers. A number of companies currently compete
against the Company in the development, production and marketing of tissue
dissection instruments and technology for open surgical procedures. In
addition, the Company indirectly competes with producers of therapeutic
drugs, when such drugs are used as an alternative to surgery. Many of the
Company's competitors have substantially greater capital resources, name
recognition, expertise in research and development, manufacturing and
marketing and obtaining regulatory approvals. There can be no assurance that
the Company's competitors will not succeed in developing balloon dissectors
or competing technologies that are more effective than products marketed by
the Company or that render the Company's technology obsolete. Additionally,
even if the Company's products provide performance comparable to competing
products or procedures, there can be no assurance that the Company will be
able to obtain necessary regulatory approvals or compete against competitors
in terms of price, manufacturing, marketing and sales.
Many of the alternative treatments for medical indications that can be
treated by balloon dissection products and laparoscopic surgery are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies could make such other
therapies more effective or cost-effective than balloon dissectors and
minimally invasive surgery, and could render the Company's technology
non-competitive or obsolete. There can be no assurance that surgeons will use
MIS to replace or supplement established treatments or that MIS will remain
competitive with current or future treatments. The failure of surgeons to
adopt MIS could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition to the Company's development of its balloon dissection
systems, the Company has also developed surgical instruments for use in MIS.
There can be no assurance that the Company's surgical instruments will
successfully compete with those manufactured by other producers of such
surgical instruments. The failure to achieve commercial market acceptance of
such surgical instruments could have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT. The Company's success
will depend upon the ability of surgeons to obtain satisfactory reimbursement
from healthcare payors for the Company's products. In the United States,
hospitals, physicians and other healthcare providers that purchase medical
devices generally rely on third-party payors, such as private health
insurance plans, to reimburse all or part of the costs associated with the
treatment of patients. Reimbursement in the United States for the Company's
balloon dissection products is currently available from most third-party
payors, including most major private health care insurance plans and
Medicaid, under existing surgical procedure codes. The Company does not
expect that third-party reimbursement in the United States will be available
for use of its other products unless and until clearance or
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approval is received from the federal Food and Drug Administration (the
"FDA"). If FDA clearance or approval is received, third-party reimbursement
for these products will depend upon decisions by individual health
maintenance organizations, private insurers and other payors. Many payors,
including the federal Medicare program, pay a preset amount for the surgical
facility component of a surgical procedure. This amount typically includes
medical devices such as the Company's. Thus, the surgical facility or surgeon
may not recover the added cost of the Company's products. In addition,
managed care payors often limit coverage to surgical devices on a preapproved
list or obtained from an exclusive source. If the Company's products are not
on the list or are not available from the exclusive source, the facility or
surgeon will need to obtain an exception from the payor or the patient will
be required to pay for some or all of the cost of the Company's product. The
Company believes that procedures using its balloon dissection products
currently may be reimbursed in the United States under certain existing
procedure codes. However, there can be no assurance that such procedure codes
will remain available or that the reimbursement under these codes will be
adequate. Given the efforts to control and decrease health care costs in
recent years, there can be no assurance that any reimbursement will be
sufficient to permit the Company to increase revenues or achieve or maintain
profitability. The unavailability of third party or other adequate
reimbursement could have a material adverse effect on the Company's business,
financial condition and results of operations.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. Many international markets
have government-managed health care systems that govern reimbursement for new
devices and procedures. In most markets, there are private insurance systems
as well as government-managed systems. Large-scale market acceptance of the
Company's balloon dissection systems and other products will depend on the
availability and level of reimbursement in international markets targeted by
the Company. Currently, the Company has been informed by its international
distributors that the balloon dissectors have been approved for reimbursement
in many of the countries in which the Company markets its products. Obtaining
reimbursement approvals can require 12 to 18 months or longer. There can be
no assurance that the Company will obtain reimbursement in any country within
a particular time, for a particular amount, or at all. Failure to obtain such
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
Regardless of the type of reimbursement system, the Company believes
that surgeon advocacy of its products will be required to obtain
reimbursement. Availability of reimbursement will depend on the clinical
efficacy of the procedure and the utility and cost of the Company's products.
There can be no assurance that surgeons will support and advocate
reimbursement for use of the Company's systems for all applications intended
by the Company. Failure by surgeons, hospitals and other users of the
Company's products to obtain sufficient reimbursement from health care payors
or adverse changes in government and private third-party payors' policies
toward reimbursement for procedures employing the Company's products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION. The Company's SPACEMAKER-Registered
Trademark- balloon dissection systems and other products are subject to
extensive and rigorous regulation by the FDA and, to varying degrees, by
state and foreign regulatory agencies. Under the federal Food, Drug, and
Cosmetic Act, the FDA regulates the clinical testing, manufacture, labeling,
packaging, marketing, distribution and record keeping for medical devices, in
order to ensure that medical devices distributed in the United States are
safe and effective for their intended use. Prior to commercialization, a
medical device generally must receive FDA and foreign regulatory clearance or
approval, which can be an expensive, lengthy and uncertain process. The
Company is also subject to routine inspection by the FDA and state agencies,
such as the California Department of Health Services ("CDHS"), for compliance
with Good Manufacturing Practice requirements, Medical Device Reporting
requirements and
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other applicable regulations. Noncompliance with applicable requirements can
result in warning letters, import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals, recall or seizure
of products, operating restrictions, refusal of the government to approve
product export applications or allow the Company to enter into supply
contracts, and criminal prosecution. Delays in receipt of, or failure to
obtain, regulatory clearances and approvals, if obtained, or any failure to
comply with regulatory requirements could have a material adverse effect on
the Company's business, financial condition and results of operations.
Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. The SPACEMAKER-Registered Trademark- I platform, SPACEMAKER
II platform, SPACEMAKER Plastics platform, SPACEMAKER SAPHtrak platform and
KnotMaker product each have received 510(k) clearance for use during general,
endoscopic, laparoscopic or cosmetic and reconstructive surgery, either when
tissue dissection is required or, with respect to the KnotMaker product, when
a surgical knot for suturing is required. The Company has promoted these
products for surgical applications (E.G., hernia repair, subfascial
endoscopic perforator surgery and breast augmentation and reconstruction),
and may in the future promote these products for the dissection or knotmaking
required for additional selected applications (E.G., treatment of stress
urinary incontinence, saphenous vein harvesting and a variety of orthopaedic
procedures such as anterior spinal fusion). For any medical device 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. The Company has made modifications to its products
which the Company believes do not affect the safety or effectiveness of the
device or constitute a major change to the intended use and therefore do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA will agree with any of the Company's determinations not
to submit a new 510(k) notice for any of these changes or will not require
the Company to submit a new 510(k) notice for any of the changes made to the
product. If such additional 510(k) clearances are required, there can be no
assurance that the Company will obtain them on a timely basis, if at all, and
delays in receipt of or failure to receive such approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the FDA requires the Company to submit a new 510(k)
notice for any product modification, the Company may be prohibited from
marketing the modified product until the 510(k) notice is cleared by the FDA.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
Company currently relies on its international distributors for the receipt of
premarket approvals and compliance with clinical trial requirements in those
countries that require them, and it expects to continue to rely on
distributors in those countries where the Company continues to use
distributors. In the event that the Company's international distributors fail
to obtain or maintain premarket approvals or compliance in foreign countries
where such approvals or compliance are required, the Company may be required
to cause the applicable distributor to file revised governmental
notifications, cease commercial sales of its products in the applicable
countries or otherwise act so as to stop any ongoing noncompliance in such
countries. Any enforcement action by regulatory authorities with respect to
past or any future regulatory noncompliance could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In October 1997, the Company received its CE mark certification, pursuant
to the Medical Devices Directive, which enables the Company to affix CE
marking on its products and continue selling its products within the European
Economic Area.
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LIMITED MANUFACTURING EXPERIENCE; UNCERTAINTY REGARDING FUTURE
FACILITIES. The Company has only limited experience in manufacturing its
products in commercial quantities. The Company intends to scale up its
production of new products and to increase its manufacturing capacity for
existing and new products. However, 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. Difficulties experienced by the Company
in manufacturing scale-up and manufacturing difficulties (including, in the
event of low demand, over-capacity) could have a material adverse effect on
its business, financial condition and results of operations. There can be no
assurance that the Company will be successful in scaling up or that it will
not experience manufacturing difficulties or product recalls in the future.
In January 1997, the Company entered into a new facility lease in
Cupertino, California, and has relocated its headquarters and manufacturing
operations to this new location during April 1997. The new facility's lease
comprises approximately 30,460 square feet, and the monthly rent is
approximately $47,000.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS; LACK OF CONTRACTUAL ARRANGEMENTS.
The Company currently relies upon single source suppliers for several
components of its balloon dissection products, and in most cases there are no
formal supply contracts. There can be no assurance that the component
materials obtained from single source suppliers will continue to be available
in adequate quantities, if at all, or, if required, that the Company will be
able to locate alternative sources of such component materials on a timely
basis, if at all, to market its products. In addition, there can be no
assurance that the single source suppliers will meet the Company's future
requirements for timely delivery of products of sufficient quality and
quantity. The failure to obtain sufficient quantities and qualities of such
component materials, or the loss of any of the Company's single source
suppliers, could cause a delay in GSI's ability to fulfill orders while it
identifies and certifies a replacement supplier, if any, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE.
The Company's business exposes it to potential product liability risks or
product recalls that are inherent in the design, development, manufacture and
marketing of medical devices, in the event the use of the Company's products
causes or is alleged to have caused adverse effects on a patient or such
products are believed to be defective. The Company's products are designed to
be used in certain procedures where there is a high risk of serious injury or
death. Such risks will exist even with respect to those products that have
received, or may in the future receive, regulatory clearance for commercial
sale. As a result, there can be no assurance that the Company's product
liability insurance is adequate or that such insurance coverage will continue
to be available on commercially reasonable terms or at all. Particularly
given the lack of data regarding the long-term results of the use of balloon
dissection products, there can be no assurance the Company will avoid
significant product liability claims. Consequently, a product liability claim
or other claim with respect to uninsured or underinsured liabilities could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. There were no international
sales in the first quarter of 1998. Sales outside of the United States
accounted for .5% and 4% of the Company's sales in fiscal 1997 and 1996,
respectively. The Company expects that international sales will represent an
increasing portion of revenue in the future. The Company intends to continue
to expand its sales outside of the United States and to enter additional
international markets, which will require significant management attention
and financial resources and subject the Company further to the risks of
selling internationally. These risks include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions, reduced protection
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for intellectual property rights, and the burdens of complying with a variety
of foreign laws. In addition, because all of the Company's sales are
denominated in U.S. dollars, fluctuations in the U.S. dollar could increase
the price in local currencies of the Company's products in foreign markets
and make the Company's products relatively more expensive than competitors'
products that are denominated in local currencies. There can be no assurance
that regulatory, currency and other factors will not adversely impact the
Company's operations in the future or require the Company to modify its
current business practices.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is dependent
upon a limited number of key management and technical personnel. The loss of the
services of one or more of such key employees could have a material adverse
effect on the Company's business, financial condition, and results of
operations. In addition, the Company's success will be dependent upon its
ability to attract and retain additional highly qualified sales, management,
manufacturing and research and development personnel. The Company faces intense
competition in its recruiting activities and there can be no assurance that the
Company will be able to attract and/or retain qualified personnel.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices of the Company's
common stock and the stock of many other publicly held medical device
companies have in the past been, and can in the future be expected to be,
especially volatile. Announcements regarding competitive developments,
product sales, clinical marketing trial results, release of reports by
securities analysts, developments or disputes concerning patents or
proprietary rights, regulatory developments, changes in regulatory or medical
reimbursement policies, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market price of the Common Stock. In addition, the
securities markets have from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1996, the Guidant Corporation unit of Origin filed an action
against GSI in the United States District Court for the Northern District of
California, alleging patent infringement of its patent entitled "Apparatus
and Methods for Peritoneal Retraction." In June, 1996, GSI filed a claim
against Origin in the United States District Court for the Northern District
of California, alleging patent infringement of its patent for a method of
tissue plane dissection using balloon systems. In addition, on September 26,
1997, the Company filed another action against Origin alleging patent
infringement of its patent for a method of serial inflation of tissue
dissectors. A decision against the Company in any of these actions would have
a material adverse effect on the Company's business, financial condition or
results of operations.
One of the patent applications filed by the Company, which is directed
to a surgical method using balloon dissection technology, has been placed in
interference with a patent application filed by Origin. The Company believes
that the inventor named in its patent application was the first to invent
this subject matter, and has asserted that the Origin patent application was
filed after a disclosure made by such inventor to employees of Origin.
Origin takes a contrary position. This interference is presently pending in
the United States Patent and Trademark Office ("USPTO") and, as permitted by
the rules of the USPTO, has been referred to an arbitrator for completion of
the interference proceeding. A decision is not expected in the interference
proceeding until calendar year 1998, and, while the Company believes it will
be successful in this interference proceeding, there can be no assurance of
such success. Failure of the Company to prevail in such interference
proceeding would have a material adverse effect on the Company's business,
financial condition and results of operations.
20
<PAGE>
From time to time the Company may be exposed to litigation arising out
of its products or operations. The Company is not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company, except for the patent interference
and infringement proceedings discussed herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-02774 (the
"REGISTRATION STATEMENT"), which was declared effective by the Commission on
May 9, 1996. Pursuant to the Registration Statement, the Company registered
and sold 3,450,000 shares of its Common Stock, $0.001 par value per share,
for its own account. The offering commenced on May 10, 1996 and terminated
when all of the registered shares had been sold. The aggregate offering
price of the registered shares was $51,750,000. The managing underwriters of
the offering were Cowen & Company and UBS Securities LLC.
From May 10, 1996 to September 30, 1997, the Company incurred the following
expenses in connection with the offering:
Underwriting discounts and commissions $3,622,500
Other expenses $1,187,025
----------
Total Expenses $4,809,525
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above were $46,940,475. From May 10, 1996 to September 30, 1997,
the Company used such net offering proceeds, in direct or indirect payments
to others, as follows:
Construction of plant, building and facilities $ 1,164,154
Purchase and installment of machinery and equipment $ 1,071,416
Repayment of indebtedness $ 711,149
Working capital $19,630,578
-----------
Total $22,577,297
This use of proceeds does not represent a material change in the use of
proceeds described in the prospectus of the Registration Statement.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
------- ------------
3.4 Amended and Restated Bylaws
11.1 Statement of Computation of Earnings (Net Loss) Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENERAL SURGICAL INNOVATIONS, INC.
By:/s/ STEPHEN J. BONELLI
Stephen J. Bonelli
Vice President, Finance and Administration
Principal and Chief Financial Officer
Date: November 13, 1997
23
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
GENERAL SURGICAL INNOVATIONS, INC.
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
GENERAL SURGICAL INNOVATIONS, INC.
TABLE OF CONTENTS
Page
----
ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 PRINCIPAL OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - MEETINGS OF SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 NOTICE OF SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . 4
2.5 ADVANCE NOTICE OF SHAREHOLDER NOMINEES . . . . . . . . . . . . . . . 4
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . . 5
2.7 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.8 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . . 6
2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.10 CUMULATIVE VOTING . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . 7
2.12 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT . . . . . . . . . 7
2.13 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING. . . . . . . . . . . . . 8
2.14 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.15 INSPECTORS OF ELECTION. . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . .10
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . . . . .10
3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . . .11
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . .12
3.6 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.7 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . .12
3.8 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.9 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.10 ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
3.11 NOTICE OF ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . .13
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . .13
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<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
3.13 FEES AND COMPENSATION OF DIRECTORS. . . . . . . . . . . . . . . . .14
3.14 APPROVAL OF LOANS TO OFFICERS*. . . . . . . . . . . . . . . . . . .14
ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . .14
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .14
4.2 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . . .15
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . .16
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . .16
5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . . . .16
5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . . .16
5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . . .16
5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
5.8 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .17
5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
5.10 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . .18
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS. . . . . . . . . . . . . . . . . . . . . . . . . .18
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . .18
6.2 INDEMNIFICATION OF OTHERS. . . . . . . . . . . . . . . . . . . . . .18
6.3 PAYMENT OF EXPENSES IN ADVANCE . . . . . . . . . . . . . . . . . . .19
6.4 INDEMNITY NOT EXCLUSIVE. . . . . . . . . . . . . . . . . . . . . . .19
6.5 INSURANCE INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . .19
6.6 CONFLICTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . .20
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER . . . . . . . . . . . .20
7.2 MAINTENANCE AND INSPECTION OF BYLAWS . . . . . . . . . . . . . . . .20
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. . . . . . . .21
7.4 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .21
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER. . . . . . . . . . . . . . . .21
7.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .22
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . .22
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . .23
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. . . . . . . .23
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS. . . . . . . . . . . . . .23
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. . . . . . . . . .23
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
8.4 CERTIFICATES FOR SHARES. . . . . . . . . . . . . . . . . . . . . . .23
8.5 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . .24
8.6 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .24
ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .24
9.1 AMENDMENT BY SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . .24
9.2 AMENDMENT BY DIRECTORS . . . . . . . . . . . . . . . . . . . . . . .25
-iii-
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
GENERAL SURGICAL INNOVATIONS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state
and the corporation has one or more business offices in such state, then the
board of directors shall fix and designate a principal business office in the
State of California.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside
the State of California designated by the board of directors. In the absence
of any such designation, shareholders' meetings shall be held at the
principal executive office of the corporation.
2.2 ANNUAL MEETING
(a) The annual meeting of shareholders shall be held each year on a
date and at a time designated by the board of directors. In the absence of
such designation, the annual meeting of shareholders shall be held on the
third Wednesday of May in each year at 10:00 a.m. However, if such day falls
on a legal holiday, then the meeting shall be held at the same time and place
on the next succeeding full business day. At the meeting, directors shall be
elected, and any other proper business may be transacted.
(b) Nominations of persons for election to the board of directors of
the corporation and the proposal of business to be transacted by the
shareholders may be made at an annual meeting of shareholders (i) pursuant to
the corporation's notice with respect to such meeting, (ii)
<PAGE>
by or at the direction of the board of directors or (iii) by any shareholder
of the corporation who was a shareholder of record at the time of giving of
the notice provided for in this Section 2.2, who is entitled to vote at the
meeting and who has complied with the notice procedures set forth in this
Section 2.2.
(c) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (iii) of paragraph (b) of
this Section 2.2, the shareholder must have given timely notice thereof in
writing to the secretary of the corporation and such business must be a
proper matter for shareholder action under the Corporations Code of
California (the "Code"). To be timely, a shareholder's notice shall be
delivered to the secretary at the principal executive offices of the
corporation not less than twenty (20) days nor more than ninety (90) days
prior to the first anniversary of the preceding year's annual meeting of
shareholders; provided, however, that in the event that the date of the
annual meeting is more than thirty (30) days prior to or more than sixty (60)
days after such anniversary date, notice by the shareholder to be timely must
be so delivered not earlier than the ninetieth (90th) day prior to such
annual meeting and not later than the close of business on the later of the
twentieth (20th) day prior to such annual meeting or the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made. Such shareholder's notice shall set forth (i) as to each person
whom the shareholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (including
such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (ii) as to any other
business that the shareholder proposes to bring before the meeting, a brief
description of such business, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (iii)
as to the shareholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made (A) the name and address of
such shareholder, as they appear on the corporation's books, and of such
beneficial owner and (B) the class and number of shares of the corporation
which are owned beneficially and of record by such shareholder and such
beneficial owner.
(d) Only persons nominated in accordance with the procedures set forth
in this Section 2.2 shall be eligible to serve as directors and only such
business shall be conducted at an annual meeting of shareholders as shall
have been brought before the meeting in accordance with the procedures set
forth in this Section 2.2. The chairman of the meeting shall determine
whether a nomination or any business proposed to be transacted by the
shareholders has been properly brought before the meeting and, if any
proposed nomination or business has not been properly brought before the
meeting, the chairman shall declare that such proposed business or nomination
shall not be presented for shareholder action at the meeting.
-2-
<PAGE>
(e) For purposes of this Section 2.2, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service.
(f) Nothing in this Section 2.2 shall be deemed to affect any rights of
shareholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 SPECIAL MEETING
(a) A special meeting of the shareholders may be called at any time by
the board of directors, or by the chairman of the board, or by the president,
or by one or more shareholders holding shares in the aggregate entitled to
cast not less than ten percent (10%) of the votes at that meeting.
(b) If a special meeting is called by any person or persons other than
the board of directors or the president or the chairman of the board, then
the request shall be in writing, specifying the time of such meeting and the
general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, any vice
president or the secretary of the corporation. No business may be transacted
at such special meeting otherwise than specified in such notice. The officer
receiving the request shall cause notice to be promptly given to the
shareholders entitled to vote, in accordance with the provisions of Sections
2.4 and 2.5 of these bylaws, that a meeting will be held at the time
requested by the person or persons calling the meeting, so long as that time
is not less than thirty-five (35) nor more than sixty (60) days after the
receipt of the request. If the notice is not given within twenty (20) days
after receipt of the request, then the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when
a meeting of shareholders called by action of the board of directors may be
held.
(c) Only such business shall be conducted at a special meeting of
shareholders as shall have been brought before the meeting pursuant to the
notice of meeting given in accordance with the provisions of Section 2.3(b).
Nominations of persons for election to the board of directors may be made at
a special meeting of shareholders at which directors are to be selected
pursuant to such notice of meeting (i) by or at the direction of the board of
directors or (ii) by any shareholder of the corporation who is a shareholder
of record at the time of giving of notice provided for in this Section
2.3(c), who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in this Section 2.3(c). Nominations by
shareholders of persons for election to the board of directors may be made at
such a special meeting of shareholders if the shareholder's notice required
by Section 2.2(c) shall be delivered to the secretary at the principal
executive offices of the corporation not earlier than the ninetieth (90th)
-3-
<PAGE>
day prior to such special meeting and not later than the close of business on
the later of the twentieth (20th) day prior to such special meeting or the
tenth (10th) day following the day on which public announcement is first made
of the date of the special meeting and of the nominees proposed by the board
of directors to be selected at such meeting.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if
sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty
(30)) nor more than sixty (60) days before the date of the meeting. The
notice shall specify the place, date, and hour of the meeting and (i) in the
case of a special meeting, the general nature of the business to be
transacted (no business other than that specified in the notice may be
transacted) or (ii) in the case of the annual meeting, those matters which
the board of directors, at the time of giving the notice, intends to present
for action by the shareholders (but subject to the provisions of the next
paragraph of this Section 2.4 any proper matter may be presented at the
meeting for such action). The notice of any meeting at which directors are
to be elected shall include the name of any nominee or nominees who, at the
time of the notice, the board intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect
financial interest, pursuant to Section 310 of the Code, (ii) an amendment of
the articles of incorporation, pursuant to Section 902 of the Code, (iii) a
reorganization of the corporation, pursuant to Section 1201 of the Code, (iv)
a voluntary dissolution of the corporation, pursuant to Section 1900 of the
Code, or (v) a distribution in dissolution other than in accordance with the
rights of outstanding preferred shares, pursuant to Section 2007 of the Code,
then the notice shall also state the general nature of that proposal.
2.5 ADVANCE NOTICE OF SHAREHOLDER NOMINEES
Only persons who are nominated in accordance with the procedures set
forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the board of directors of the
corporation may be made at a meeting of shareholders by or at the direction
of the board of directors or by any shareholder of the corporation entitled
to vote for the election of directors at the meeting who complies with the
notice procedures set forth in this Section 2.5. Such nominations, other
than those made by or at the direction of the board of directors, shall be
made pursuant to timely notice in writing to the secretary of the
corporation. To be timely, a shareholder's notice shall be delivered to or
mailed and received at the principal executive offices of the corporation not
less than twenty (20) days nor more than ninety (90) days prior to the
meeting; provided, however, that in the event that less than thirty (30)
days' notice or prior public disclosure of the date of the meeting is given
or made to shareholders, notice by the shareholder to be timely must be so
received not later than the close of business on the 10th day
-4-
<PAGE>
following the day on which such notice of the date of the meeting was mailed
or such public disclosure was made. Such shareholder's notice shall set
forth (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a Director, (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as
a director if elected); and (b) as to the shareholder giving the notice (1)
the name and address, as they appear on the corporation's books, of such
shareholder and (2) the class and number of shares of the corporation which
are beneficially owned by such shareholder. At the request of the board of
directors any person nominated by the board of directors for election as a
director shall furnish to the secretary of the corporation that information
required to be set forth in a shareholder's notice of nomination which
pertains to the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the
procedures set forth in this Section 2.5. The Chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination
was not made in accordance with the procedures prescribed by the Bylaws, and
if he or she should so determine, he or she shall so declare to the meeting
and the defective nomination shall be disregarded.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only
if the corporation has outstanding shares held of record by five hundred
(500) or more persons (determined as provided in Section 605 of the Code) on
the record date for the shareholders' meeting, or (iv) by telegraphic or
other written communication. Notices not personally delivered shall be sent
charges prepaid and shall be addressed to the shareholder at the address of
that shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice. If no such address
appears on the corporation's books or is given, notice shall be deemed to
have been given if sent to that shareholder by mail or telegraphic or other
written communication to the corporation's principal executive office, or if
published at least once in a newspaper of general circulation in the county
where that office is located. Notice shall be deemed to have been given at
the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the
shareholder at that address, then all future notices or reports shall be
deemed to have been duly
-5-
<PAGE>
given without further mailing if the same shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
2.8 ADJOURNED MEETING; NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of
the shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting
except as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting
if the time and place are announced at the meeting at which the adjournment
is taken. However, if a new record date for the adjourned meeting is fixed or
if the adjournment is for more than forty-five (45) days from the date set
for the original meeting, then notice of the adjourned meeting shall be
given. Notice of any such adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
2.9 VOTING
The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.10 of these
bylaws, subject to the provisions of Sections 702 through 704 of the Code
(relating to voting shares held by a fiduciary, in the name of a corporation
or in joint ownership).
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The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as may be otherwise provided in the articles of incorporation,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote of the shareholders. Any shareholder
entitled to vote on any matter may vote part of the shares in favor of the
proposal and refrain from voting the remaining shares or, except when the
matter is the election of directors, may vote them against the proposal; but,
if the shareholder fails to specify the number of shares which the
shareholder is voting affirmatively, it will be conclusively presumed that
the shareholder's approving vote is with respect to all shares which the
shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the
shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number or
a vote by classes is required by the Code or by the articles of incorporation.
2.10 CUMULATIVE VOTING
Shareholders shall not be entitled to cumulate votes for the election of
directors of this corporation.
This Article shall become effective only when the corporation becomes,
and only for so long as the corporation remains, a listed corporation within
the meaning of Section 301.5 of the California Corporations Code.
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
No action shall be taken by the shareholders of the corporation other
than at an annual or special meeting of the shareholders, upon due notice and
in accordance with the other provisions of these Bylaws.
2.12 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and
notice, if a quorum be present either in person or by proxy, and if, either
before or after the meeting, each person entitled to vote, who was not
present in person or by proxy, signs a written waiver of notice or a consent
to the holding of the meeting or an approval of the minutes thereof. The
waiver of notice or consent or approval need not specify either the business
to be transacted or the purpose of any annual or special meeting of
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shareholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in the second paragraph of Section
2.4 of these bylaws, the waiver of notice or consent or approval shall state
the general nature of the proposal. All such waivers, consents, and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened. Attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
Code to be included in the notice of the meeting but not so included, if that
objection is expressly made at the meeting.
2.13 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less than ten
(10) days before the date of any such meeting, and in such event only
shareholders of record on the date so fixed are entitled to notice and to
vote, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date the record date
for determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held; and
The record date for any other purpose shall be as provided in Article
VIII of these bylaws.
2.14 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the
secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not
state that it is irrevocable shall continue in full force and effect unless
(i) the person who executed the proxy revokes it prior to the time of voting
by delivering a writing to the corporation stating that the proxy is revoked
or by executing a subsequent proxy and presenting it to the meeting or by
voting in person at the meeting, or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before
the vote pursuant to that proxy is counted; provided, however, that no proxy
shall be valid after the expi-
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ration of eleven (11) months from the date of the proxy, unless otherwise
provided in the proxy. The dates contained on the forms of proxy
presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Sections 705(e) and 705(f) of the Code.
2.15 INSPECTORS OF ELECTION
Before any meeting of shareholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its
adjournment. If no inspector of election is so appointed, then the chairman
of the meeting may, and on the request of any shareholder or a shareholder's
proxy shall, appoint an inspector or inspectors of election to act at the
meeting. The number of inspectors shall be either one (1) or three (3). If
inspectors are appointed at a meeting pursuant to the request of one (1) or
more shareholders or proxies, then the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector
fails to appear or fails or refuses to act, then the chairman of the meeting
may, and upon the request of any shareholder or a shareholder's proxy shall,
appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence
of a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
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ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code and any limitations in the
articles of incorporation and these bylaws relating to actions required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less than four
(4) nor more than seven (7). The exact number of directors shall be seven
(7) until changed, within the limits specified above, by a bylaw amending
this Section 3.2, duly adopted by the board of directors or by the
shareholders. The indefinite number of directors may be changed, or a
definite number may be fixed without provision for an indefinite number, by a
duly adopted amendment to the articles of incorporation or by an amendment to
this bylaw duly adopted by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that
an amendment reducing the fixed number or the minimum number of directors to
a number less than five (5) cannot be adopted if the votes cast against its
adoption at a meeting, or the shares not consenting in the case of an action
by written consent, are equal to more than sixteen and two-thirds percent
(16-2/3%) of the outstanding shares entitled to vote thereon. No amendment
may change the stated maximum number of authorized directors to a number
greater than two (2) times the stated minimum number of directors minus one
(1).
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
The board of directors shall be divided into two classes, as nearly
equal in number as possible. The term of office of the first class shall
expire at the 1997 annual meeting of shareholders or any special meeting in
lieu thereof and the term of office of the second class shall expire at the
1998 annual meeting of shareholders or any special meeting in lieu thereof.
At each annual meeting of shareholders or special meeting in lieu thereof
following such initial classification, directors elected to succeed those
directors whose terms expire shall be elected for a term of office to expire
at the second succeeding annual meeting of shareholders or special meeting in
lieu thereof after their election and until their successors are duly elected
and qualified. The foregoing provisions shall become effective only when the
corporation becomes a listed corporation within the meaning of Section 301.5
of the California Corporations Code.
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Directors need not be shareholders unless so required by the articles of
incorporation or these bylaws, wherein other qualifications for directors may
be prescribed.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote
of the shareholders or by court order may be filled only by the affirmative
vote of a majority of the shares represented and voting at a duly held
meeting at which a quorum is present (which shares voting affirmatively also
constitute a majority of the required quorum). Each director so elected
shall hold office for a term expiring at the annual meeting of shareholders
at which the term of office of the class to which they have been elected
expires, if applicable, and if no such classes shall have been established,
at the next annual meeting of the shareholders and until a successor has been
elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the board of directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or
convicted of a felony, (iii) if the authorized number of directors is
increased, or (iv) if the shareholders fail, at any meeting of shareholders
at which any director or directors are elected, to elect the number of
directors to be elected at that meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
other than to fill a vacancy created by
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removal shall require the consent of the holders of a majority of the
outstanding shares entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of California that has been designated from time
to time by resolution of the board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the board may be held at any place within
or outside the State of California that has been designated in the notice of
the meeting or, if not stated in the notice or if there is no notice, at the
principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in
the meeting can hear one another; and all such directors shall be deemed to
be present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any
vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4)
days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or telegram, it shall be delivered
personally or by telephone or to the telegraph company at least forty-eight
(48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director
or to a person at the office of the director who the person giving the notice
has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in
Section 3.10 of these bylaws. Every act
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or decision done or made by a majority of the directors present at a duly
held meeting at which a quorum is present shall be regarded as the act of the
board of directors, subject to the provisions of Section 310 of the Code (as
to approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of the Code (as to
appointment of committees), Section 317(e) of the Code (as to indemnification
of directors), the articles of incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting.
A waiver of notice need not specify the purpose of any regular or special
meeting of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours.
If the meeting is adjourned for more than twenty-four (24) hours, then notice
of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.7 of
these bylaws, to the directors who were not present at the time of the
adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action
by written consent shall have the same force and effect as a unanimous vote
of the board of directors. Such written consent and any counterparts thereof
shall be filed with the minutes of the proceedings of the board.
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3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall
not be construed to preclude any director from serving the corporation in any
other capacity as an officer, agent, employee or otherwise and receiving
compensation for those services.
3.14 APPROVAL OF LOANS TO OFFICERS*
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any
officer of the corporation or its parent or subsidiary, whether or not a
director, or adopt an employee benefit plan or plans authorizing such loans
or guaranties provided that (i) the board of directors determines that such a
loan or guaranty or plan may reasonably be expected to benefit the
corporation, (ii) the corporation has outstanding shares held of record by
100 or more persons (determined as provided in Section 605 of the Code) on
the date of approval by the board of directors, and (iii) the approval of the
board of directors is by a vote sufficient without counting the vote of any
interested director or directors.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the
vote of a majority of the authorized number of directors. Any committee, to
the extent provided in the resolution of the board, shall have all the
authority of the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
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* This section is effective only if it has been approved by the shareholders
in accordance with Sections 315(b) and 152 of the Code.
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(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except
at a rate or in a periodic amount or within a price range determined by the
board of directors; or
(g) the appointment of any other committees of the board of
directors or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws,
Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7
(special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of
notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment),
and Section 3.12 (action without meeting), with such changes in the context
of those bylaws as are necessary to substitute the committee and its members
for the board of directors and its members; provided, however, that the time
of regular meetings of committees may be determined either by resolution of
the board of directors or by resolution of the committee, that special
meetings of committees may also be called by resolution of the board of
directors, and that notice of special meetings of committees shall also be
given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
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5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these
bylaws, shall be chosen by the board, subject to the rights, if any, of an
officer under any contract of employment. Any contract of employment with an
officer shall be unenforceable unless in writing and specifically authorized
by the board of directors.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and
perform such duties as are provided in these bylaws or as the board of
directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except
in case of an officer chosen by the board of directors, by any officer upon
whom such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice
to the rights, if any, of the corporation under any contract to which the
officer is a party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed
in these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and
perform such other powers and duties as may from time to time be assigned to
him by the board of directors or as may be prescribed by these bylaws. If
there is no president, then the chairman of the board shall also be the chief
executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these bylaws.
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5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation.
He shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform
all the duties of the president and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of
directors, these bylaws, the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors,
committees of directors and shareholders. The minutes shall show the time
and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented
at shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer
agent or registrar, as determined by resolution of the board of directors, a
share register, or a duplicate share register, showing the names of all
shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the
number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or
by these bylaws. He shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by these
bylaws.
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5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositories as
may be designated by the board of directors. He shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to
the president and directors, whenever they request it, an account of all of
his transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors and officers against expenses
(as defined in Section 317(a) of the Code), judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with any
proceeding (as defined in Section 317(a) of the Code), arising by reason of
the fact that such person is or was an agent of the corporation. For
purposes of this Article VI, a "director" or "officer" of the corporation
includes any person (i) who is or was a director or officer of the
corporation, (ii) who is or was serving at the request of the corporation as
a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other
than directors and officers) against expenses (as defined in Section 317(a)
of the Code), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding (as defined in Section
317(a) of the Code), arising by reason of the fact that such person is or was
an agent of the corporation. For purposes of this Article VI, an "employee"
or "agent" of the corporation
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(other than a director or officer) includes any person (i) who is or was an
employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the board of directors shall be paid by the corporation in advance
of the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled
to be indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the articles of
incorporation.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the corporation against any liability asserted against or incurred by such
person in such capacity or arising out of such person's status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(1) That it would be inconsistent with a provision of the articles
of incorporation, these bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or
other amounts were paid, which prohibits or otherwise limits indemnification;
or
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(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its
shareholders listing the names and addresses of all shareholders and the
number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and
has filed a Schedule 14B with the Securities and Exchange Commission relating
to the election of directors, may (i) inspect and copy the records of
shareholders' names, addresses, and shareholdings during usual business hours
on five (5) days' prior written demand on the corporation, (ii) obtain from
the transfer agent of the corporation, on written demand and on the tender of
such transfer agent's usual charges for such list, a list of the names and
addresses of the shareholders who are entitled to vote for the election of
directors, and their shareholdings, as of the most recent record date for
which that list has been compiled or as of a date specified by the
shareholder after the date of demand. Such list shall be made available to
any such shareholder by the transfer agent on or before the later of five (5)
days after the demand is received or five (5) days after the date specified
in the demand as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made in person
or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its
principal business office in California the original or a copy of these
bylaws as amended to date, which bylaws shall be open to inspection by the
shareholders at all reasonable times during office hours. If the principal
executive office of the
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<PAGE>
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of
these bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees
of the board of directors shall be kept at such place or places as are
designated by the board of directors or, in absence of such designation, at
the principal executive office of the corporation. The minutes shall be kept
in written form, and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written
form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a
purpose reasonably related to the holder's interests as a shareholder or as
the holder of a voting trust certificate. The inspection may be made in
person or by an agent or attorney and shall include the right to copy and
make extracts. Such rights of inspection shall extend to the records of each
subsidiary corporation of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the
physical properties of the corporation and each of its subsidiary
corporations. Such inspection by a director may be made in person or by an
agent or attorney. The right of inspection includes the right to copy and
make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of
the fiscal year adopted by the corporation. Such report shall be sent at
least fifteen (15) days (or, if sent by third-class mail, thirty-five (35)
days) before the annual meeting of shareholders to be held during the next
fiscal year and in the manner specified in Section 2.5 of these bylaws for
giving notice to shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in
financial position for the fiscal year, and (iv) any report of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit
from the books and records of the corporation.
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The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100)
holders of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120) days after the close of such fiscal year,
deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of a balance sheet as of the end of such fiscal year and
an income statement and statement of changes in financial position for such
fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a
written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the then current
fiscal year ended more than thirty (30) days before the date of the request,
and for a balance sheet of the corporation as of the end of that period, then
the chief financial officer shall cause that statement to be prepared, if not
already prepared, and shall deliver personally or mail that statement or
statements to the person making the request within thirty (30) days after the
receipt of the request. If the corporation has not sent to the shareholders
its annual report for the last fiscal year, the statements referred to in the
first paragraph of this Section 7.6 shall likewise be delivered or mailed to
the shareholder or shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared
without audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation,
or any other person authorized by the board of directors or the president or
a vice president, is authorized to vote, represent, and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority herein granted may be exercised either by such person directly or
by any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
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ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a
meeting), the board of directors may fix, in advance, a record date, which
shall not be more than sixty (60) days before any such action. In that case,
only shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except
as otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close
of business on the day on which the board adopts the applicable resolution or
the sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders
for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the
agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The board
of directors may authorize the issuance of certificates for shares partly
paid provided that these certificates shall state the total
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amount of the consideration to be paid for them and the amount actually paid.
All certificates shall be signed in the name of the corporation by the
chairman of the board or the vice chairman of the board or the president or a
vice president and by the chief financial officer or an assistant treasurer
or the secretary or an assistant secretary, certifying the number of shares
and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that
officer, transfer agent or registrar before that certificate is issued, it
may be issued by the corporation with the same effect as if that person were
an officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter
is surrendered to the corporation and canceled at the same time. The board
of directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account
of the alleged loss, theft or destruction of the certificate or the issuance
of the replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of
these bylaws. Without limiting the generality of this provision, the
singular number includes the plural, the plural number includes the singular,
and the term "person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New bylaws may be adopted or these bylaws may be amended or repealed by
the vote of holders of a majority of the outstanding shares entitled to vote;
provided, however, that if the articles of incorporation of the corporation
set forth the number of authorized directors of the corporation, then the
authorized number of directors may be changed only by an amendment of the
articles of incorporation.
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9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing
the authorized number of directors (except to fix the authorized number of
directors pursuant to a bylaw providing for a variable number of directors),
may be adopted, amended or repealed by the board of directors.
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CERTIFICATE OF AMENDMENT OF BYLAWS
OF
GENERAL SURGICAL INNOVATIONS, INC.
The undersigned, being the duly acting and appointed Secretary of
General Surgical innovations, Inc., a California corporation, hereby
certifies that the Bylaws of this corporation were amended by a resolution
duly adopted by the Board of Directors at a meeting held on August 5, 1997,
pursuant to which the second sentence of Article III, Section 3.2 was amended
to read as follows:
"The exact number of directors shall be seven (7) until changed,
within the limits specified above, by a bylaw amending this
Section 3.2, duly adopted by the board of directors or by the
shareholders."
Dated: August 5, 1997
/s/ Tae Hea Nahm
-----------------------
Tae Hea Nahm
Secretary
<PAGE>
EXHIBIT 11.1
GENERAL SURGICAL INOVATIONS, INC. AND SUBSIDIARY
COMPUTATION OF NET LOSS PER SHARE (1) (2)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Primarily and Fully Diluted:
Weighted average common shares...................... 13,314 13,147
-------- --------
Shares used in per share calculation................... 13,314 13,147
-------- --------
-------- --------
Net loss............................................... $(1,260) $ (229)
-------- --------
-------- --------
Net loss per share..................................... $ (0.09) $ (0.02)
-------- --------
-------- --------
</TABLE>
- ---------------
(1) There is no difference between primary and fully diluted net loss per
share for all periods presented.
(2) This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations
found on pages 3 and 4 of the Company's Form 10-Q for the year-to-date,
and is qualified in its entirety by reference to such financial statements.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,753
<SECURITIES> 38,292
<RECEIVABLES> 1,514
<ALLOWANCES> 63
<INVENTORY> 1,489
<CURRENT-ASSETS> 47,146
<PP&E> 3,190
<DEPRECIATION> 844
<TOTAL-ASSETS> 49,737
<CURRENT-LIABILITIES> 1,561
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 47,824
<TOTAL-LIABILITY-AND-EQUITY> 49,737
<SALES> 1,567
<TOTAL-REVENUES> 2,342
<CGS> 956
<TOTAL-COSTS> 956
<OTHER-EXPENSES> 3,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 591
<INCOME-PRETAX> (1,260)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,260)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,260)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
