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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 DECEMBER 31, 1996.
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.)
3172A PORTER DRIVE, PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 812-9730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 13,199,353 shares of Registrant's Common Stock issued
and outstanding as of December 31, 1996.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed, consolidated balance sheets at December 31, 1996 and
June 30, 1996......................................................... 3
Condensed, consolidated statements of operations for the three months
ended December 31, 1996 and 1995 and for the six months ended
December 31, 1996 and 1995............................................ 4
Condensed, consolidated statements of cash flows for the six months
ended December 31, 1996 and 1995...................................... 5
Notes to condensed, consolidated financial statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART II. OTHER INFORMATION
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,483 $ 28,339
Available-for-sale securities 36,412 21,451
Accounts receivable, net 1,714 873
Inventories 1,379 700
Prepaid expenses and other current assets 160 438
--------- ---------
TOTAL CURRENT ASSETS 51,148 51,801
Property and equipment, net 632 702
Intangible and other assets, net 247 264
--------- ---------
Total assets $ 52,027 $ 52,767
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 545 $ 614
Accrued liabilities 644 892
Bank borrowings 167 127
Deferred revenue - 100
--------- ---------
TOTAL CURRENT LIABILITIES 1,356 1,733
Bank borrowings, less current portion 269 360
Other long-term liabilities 200 200
--------- ---------
Total liabilities 1,825 2,293
Shareholders' equity:
Preferred stock, $.001 par value:
Authorized: 2,000,000 shares; none issued and outstanding
Common stock, $.001 par value:
Authorized: 50,000,000 shares; issued and outstanding 13,199,353 13 13
on Dec. 31, 1996 and 13,132,903 on June 30, 1996
Additional paid in capital 65,002 64,885
Notes receivable from shareholders (105) (112)
Deferred compensation, net (396) (496)
Unrealized gain/(loss) on available-for-sale securities (29) 1
Accumulated deficit (14,283) (13,817)
--------- ---------
Total shareholders' equity 50,202 50,474
--------- ---------
Total liabilities and shareholders' equity $ 52,027 $ 52,767
--------- ---------
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 361 $ 1,217 $ 2,831 $ 1,708
Guaranteed payments 1,500 - 1,500 -
---------- --------- ---------- ---------
Gross Sales 1,861 1,217 4,331 1,708
Cost of Sales 359 586 1,352 920
---------- --------- ---------- ---------
Gross Profit 1,502 631 2,979 788
---------- --------- ---------- ---------
Operating Expenses:
Research and development 484 278 946 480
Sales and marketing 1,095 998 2,203 1,753
General and administrative 830 395 1,553 706
---------- --------- ---------- ---------
Total operating expenses 2,409 1,671 4,702 2,939
---------- --------- ---------- ---------
Operating loss (907) (1,040) (1,723) (2,151)
Interest and other income 670 25 1,257 88
---------- --------- ---------- ---------
Net loss $ (237) $ (1,015) $ (466) $ (2,063)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net loss per share $ (0.02) $ (0.15) $ (0.04) $ (0.31)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Shares used in computing net loss per share 13,183,440 6,555,770 13,165,128 6,554,626
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities (2,000) (2,434)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (37,305) -
Maturities of available-for-sale securities 22,500 -
Acquisition of property and equipment (124) (161)
Proceeds from payments on shareholder notes receivable 18 -
------------ ------------
Net cash used in investing activities (14,911) (161)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on obligations under capital leases and
capital loans (51) (43)
Proceeds from issuance of common stock, net of
issuance costs 106 1
------------ ------------
Net cash provided by (used in) financing
activities 55 (42)
------------ ------------
Net decrease in cash and cash equivalents (16,856) (2,637)
Cash and cash equivalents, beginning of period 28,339 4,541
------------ ------------
Cash and cash equivalents, end of period $ 11,483 $ 1,904
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited condensed, consolidated financial
statements as of December 31, 1996 and for the three and six month periods
ended December 31, 1996 and 1995 of General Surgical Innovations, Inc. and
subsidiary (the "Company") 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 only of
normal recurring adjustments, considered necessary for a fair presentation
have been included. Operating results for the three month and six month
periods ended December 31, 1996 are not necessarily indicative of the results
that may be expected for the fiscal year ended June 30, 1997, 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, 1996.
2. RECENT PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123),
which establishes a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies
that elect not to adopt the new method of accounting. While the Company
studies the impact of the pronouncement, it continues to
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account for employees' stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123 will be effective for the
Company's 1997 fiscal year.
3. Inventories:
Inventories comprise:
Dec 31, Jun 30,
-------------------
1996 1995
---- ----
(in thousands)
Raw Materials................ $ 767 $ 387
Work in progress............. 93 153
Finished goods............... 519 160
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$1,379 $ 700
------ ------
------ ------
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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 condensed, 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, 1996.
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, fluctuations in revenues among different product lines and
markets, the timing of orders and shipments, the ramp-up of distribution
efforts by Ethicon-Endo Surgery, Inc. ("EES"), EES's success in achieving
certain levels of sales growth, the Company's ability to manage growth and
the transition to EES and possible 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, the termination of the
Company's distributorship agreement with United States Surgical Corporation
("USSC"), 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,
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; 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 four 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
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applications, such as hernia repair, subfascial endoscopic perforator surgery
and breast augmentation and reconstruction surgery.
In November 1996, the Company terminated its distribution agreement
with USSC which provided 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 December 1996, the Company entered into a five year OEM supply
agreement (the "Expanded EES Agreement") with Ethicon Endo-Surgery,Inc.
("EES"), a Johnson & Johnson company ("JNJ") pursuant to which GSI granted
EES exclusive worldwide sales and marketing rights to sell the Spacemaker-TM-
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 pursuant to
which GSI granted EES the right to market its new balloon dissection product.
Under the Expanded EES Agreement, GSI will manufacture certain products and
EES will market and distribute these products in the hernia and USI markets.
In addition to the development of balloon dissection systems, the companies
will collaborate on development of additional products for these markets. EES
made an initial guaranteed payment of $1.5 million under the Expanded EES
Agreement. In addition, the Expanded EES Agreement provides that EES will
either purchase products, or make payments in lieu of such purchases, to
ensure that GSI maintains a gross margin of $1.6 million and $1.7 million in
the third and fourth quarters of fiscal 1997, respectively (ie through June
30, 1997). Following this initial ramp-up period, EES is required to make
certain minimum quarterly product purchases.
Additional sales in the United States are currently made through a
small direct sales force. The Company currently sells its products (other
than for hernia and SUI applications) in international markets through a
limited number of distributors who 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, all of the sales made through distributors and almost all
of the sales 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 urinary stress incontinence, vascular, plastic surgery
and orthopedics applications, sales of products for hernia repair are
expected to provide a substantial majority of the Company's revenues at least
through fiscal 1997.
The Company has acquired significant 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, which payments are expected to exceed certain minimum royalty
payments due under agreements with such parties. 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 currently under development.
In February 1996, the Company acquired Adjacent Surgical, Inc., a
company engaged in the development of balloon dissection systems for use in
vascular applications. The transaction resulted in a one-time expense related
to in-process research and development of approximately $2.8 million, in the
quarter ended March 31, 1996. From time to time, the Company has had
discussions with third parties regarding various strategic relationships,
although the Company currently has no commitments with respect to any such
relationships. The Company plans
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to continue to investigate potential strategic relationships in the future.
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 calendar year 1997. The
increase in the Company's sales to date has been due to demand for the
Company's balloon dissector systems principally for hernia repair. 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
manufacturing, research and development (including marketing-related clinical
evaluations), sales and marketing and administration. In addition, the
Company anticipates higher administration expenses resulting from its
obligations as a public reporting company.
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 EES, EES's ability to achieve certain
levels of sales growth, the status of the Company's relationship with EES or
other partners, 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 evaluations, the
introduction of competitive products (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
timing of orders from distributors, 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 local facility lease and
is planning to relocate 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.
RESULTS OF OPERATIONS
REVENUE. Revenue increased by 53% to approximately $1.9 million for
the quarter ended December 31, 1996 from $1.2 million for the same period in
1995. Revenue for the six months ended December 31, 1996 increased 154% to
approximately $4.3 million from $1.7 million for the six months ended
December 31, 1995. This increase was due to growth in direct unit sales of
the Spacemaker I and II platforms for the hernia market and an initial
guaranteed payment of $1.5 million from EES pursuant to the Expanded EES
Agreement. The Expanded EES Agreement provides that EES will purchase
products, or make payments in lieu of such purchases, to ensure that GSI
maintains a gross margin of $1.6 million and $1.7 million in the third and
fourth quarters of fiscal 1997, respectively (ie through June 30, 1997). As
the Company begins its transition to EES, the Company believes that its sales
results will fluctuate from quarter to quarter during at least the next
several quarters.
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COST OF SALES. Cost of sales decreased by 39% to approximately
$359,000 for the quarter ended December 31, 1996 from $586,000 for the same
period in 1995, and increased as a percentage of sales to 99% for the quarter
ended December 31, 1996 from 48% for the quarter ended December 31, 1995.
This increase in cost of sales as a percentage of sales was primarily a
result of under-utilized manufacturing capacity as the Company had lower
sales during its transition to EES as its new major distributor. Cost of
sales for the six months ended December 31, 1996 decreased as a percent of
sales to 48% or approximately $1.4 million as compared to 54% of sales or
approximately $920,000 for the six months ended December 31, 1995.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development
expenses, which include expenditures for marketing-related clinical
evaluations and regulatory expenses, increased by 74% to $484,000 in the
quarter ended December 31, 1996 from $278,000 for the same period in 1995 due
to increased funding of new product development. Research and development
expenses for the six months ended December 31, 1996 were approximately
$946,000 compared to $480,000 for the six months ended December 31, 1995. The
Company expects research and development expenses to increase in absolute
dollars as the Company pursues development of new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased by 38% to $1.9 million for the quarter
ended December 31, 1996 from $1.4 million for the quarter ended December 31,
1995. For the six months ended December 31, 1996 SG&A expenses were $3.8
million compared to $2.5 million for the six months ended December 31, 1995.
This increase was primarily due to the growth of a direct sales force in the
United States and the growth in marketing and other personnel associated with
the Company's higher levels of operations. The Company expects selling,
general and administrative expenses to continue to increase in absolute
dollars as the Company's sales and manufacturing infrastructure (including
additional sales personnel) increases and as the Company increases its
finance and administrative expenditures to meet its obligations as a public
reporting company.
INTEREST AND OTHER INCOME. Interest and other
income increased to $670,000 for the quarter ended December 31,
1996 from $25,000 for the quarter ended December 31, 1995. For the six
months ended December 31, 1996 interest and other income increased
to $1.3 million from $88,000 for the same period in 1995 due to higher
average cash, cash equivalents and available-for-sale securities balances.
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 $14.3 million at
December 31, 1996. The Company has funded its operations primarily through
the sale of equity securities. From its inception through December 31, 1996
the Company raised approximately $15.2 million through the private placement
of equity securities and approximately $46.9 million (net of underwriting
discounts and commissions) in an initial public offering.
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As of December 31, 1996 the Company's principal source of liquidity
consists of cash, cash equivalents and short-term investments of $47.9
million, as compared to approximately $49.8 million at June 30, 1996. This
decrease reflects approximately $2 million used to fund operations.
The Company expects to incur substantial additional costs, including
costs related to 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 and higher administration costs resulting from its
obligations as a reporting company. While 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 calendar 1997, there can be no
assurance that the Company will not require additional financing within this
time frame. 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
required, will be available on satisfactory terms or at all.
FACTORS AFFECTING FUTURE RESULTS
LIMITED OPERATING HISTORY; ANTICIPATED FUTURE LOSSES. The Company
was organized in April 1992 and began commercially shipping its first
Spacemaker 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 December 31, 1996, the Company had an
accumulated deficit of $14.3 million. The Company's net operating losses for
the fiscal years ending June 30, 1994, 1995 and 1996 and for the quarter
ended December 31, 1996 were, $3.1 million, $4.1 million, $5.5 million,
and $237,000 respectively. The Company expects to continue to incur operating
losses on a quarterly and annual basis through at least calendar year 1997.
Due to the Company's limited operating history, and the recent transition to
EES as its major distributor, there can be no assurance of sales growth or
profitability in the future. The Company intends to increase significantly
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 successfully and 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 nature of the technological
advances inherent in the product designs, reductions 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, market acceptance of the Company's products
and related procedures, 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
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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
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 DISTRIBUTOR. In December 1996, the Company entered
into a five year OEM supply agreement (the "Expanded EES Agreement") with
Ethicon Endo-Surgery,Inc. ("EES"), a Johnson & Johnson company ("JNJ")
pursuant to which GSI granted EES exclusive worldwide sales and marketing
rights to sell the Spacemaker-TM- 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 pursuant to which GSI granted EES the right to
market its new balloon dissection product. Under the Expanded EES agreement,
GSI will manufacture certain products and EES will market and distribute
these products in the hernia and USI markets. The parties expect to jointly
develop and begin marketing this dissector for SUI repair in early calendar
1997. In addition to the development of balloon dissection systems, the
companies will collaborate on development of additional products for these
markets. EES made an initial payment of $1.5 million under the Expanded EES
Agreement. In addition, the Expanded EES Agreement provides that EES will
either purchase products, or make payments in lieu of such purchases, to
ensure that GSI maintains a gross margin of $1.6 million and $1.7 million in
the third and fourth quarter of fiscal 1997, respectively (ie through June
30, 1997). Following this initial ramp-up period, EES is required to make
certain minimum quarterly product purchases. No manufacture or distribution
of products has occurred to date pursuant to the Expanded EES Agreement, and
there can be no assurance that such manufacturing, marketing or distribution
efforts will be successful. EES's failure to achieve certain levels of sales
growth or a reduction in orders from EES 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 diversify its distribution network in the United
States could have a material adverse effect on the Company's business,
financial condition and results of operations.
To date, substantially all of the Company's international sales for
hernia repair procedures have been made through Autosuture 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 the Company has replaced
this international distributor network through its agreement with Ethicon
Endo-Surgery, 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 only to the hernia market and, to a lesser degree, to the
cosmetic and reconstructive surgery market. Establishing marketing and sales
capability sufficient to support sales in commercial quantities for the other
markets targeted by the Company, including additional hernia, vascular,
urology, obstetrics, gynecology and orthopedic surgery markets, will require
significant resources, and there can be no assurance that the Company will be
able to recruit and retain additional qualified marketing personnel or direct
sales personnel or that future sales efforts of the Company will be
successful. In markets where there is a large potential customer base, 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
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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."
UNCERTAINTY OF MARKET ACCEPTANCE; NO ASSURANCE OF CLINICAL
ADVANTAGE. The Company's success is substantially dependent upon the success
of its Spacemaker 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
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 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 inability
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.
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 (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, (iii) the rate of adoption by
surgeons of balloon dissection technology in markets targeted by the Company,
(iv) the sales efforts of EES, (v) the mix of sales among distributor and the
Company's direct sales force, (vi) timing of patent and regulatory approvals,
if any, (vii) timing and growth in 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 exclusive worldwide sales and marketing rights to sell the Spacemaker-TM-
Balloon Dissection Systems in the laparoscopic hernia repair and urinary
stress incontinence (USI) 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. The Company anticipates that sales to EES
will fluctuate in the future. Failure by EES to achieve
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certain levels of sales growth or a decline in purchases by EES could result
in a decline in sales and adversely affect the Company's operating results.
No manufacture or distribution of products has occurred to date pursuant to
the EES Agreement, and there can be no assurance that efforts to do so will
be effective. In addition, announcements or expected announcements by the
Company, its competitors or its distributor 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. As of December 31, 1996, GSI had 17 United States
patents issued, and had applied for an additional 48 United States patents,
11 of which had been allowed. In addition, GSI had two foreign patents
issued, and 20 in prosecution as of such date. In May 1996, the Company was
issued a United States patent that contains claims regarding the use of
balloons to dissect tissue planes anywhere in the body.
In May 1996, the Guidant Corporation unit of Origin MedSystems, Inc.
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". GSI subsequently filed an
action against Origin Medsystems, Inc. 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. A decision
against the Company in either of these actions could have a material adverse
effect on the Company's business, financial condition or results of
operations. 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 if subsequently challenged or
that others 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.
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 Medsystems,
Inc. ("Origin"), a competitor of the Company. The Company believes that the
inventor named in its patent application
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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 1998. Failure of the Company
to prevail in such interference proceeding could 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
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 could have a material adverse effect
on the Company's business, financial condition and results of operations. In
any event, there can be no assurance that the Company will not be required 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.
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, which payments are expected
to exceed minimum royalty payments due under agreements with such parties.
The Company also has acquired patent rights under royalty-bearing agreements
with respect to certain surgical instruments, including the KnotMaker product
and the balloon valve trocar currently under development. The payment of such
royalty amounts will have an adverse impact on the Company's gross profit and
other 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 will be
relocating its headquarters and manufacturing operations in April 1997 to
this new facility. In addition, the Company experienced rapid growth in the
number of its employees, the number of products under development, the number
and amount of products manufactured and sold, and the geographic scope of its
sales. In order to augment its long-term competitive
16
<PAGE>
position, the Company anticipates that it will be required to make
significant additional expenditures in manufacturing, research and
development, sales and marketing, and administration. 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 focus on the 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
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
17
<PAGE>
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 reimbursement for the Company's products will
be available in the United States or in international markets under either
government or private reimbursement systems, or that 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 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 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
18
<PAGE>
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, 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 I platform, Spacemaker II platform,
Spacemaker Resposable 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 orthopedic 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. The Company plans to
file a 510(k) submission for its specialized trocar with a balloon valve,
which is intended to provide a seal to maintain insufflation of the surgical
space during MIS. There can be no assurance that the FDA will grant 510(k)
clearance for the Company's specialized trocar on a timely basis, if at all.
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 order to continue selling its products within the European
Economic Area following June 14, 1998, the Company will be required to
achieve compliance with the requirements of the Medical Devices Directive
(the "MDD") and to affix CE marking on its products to attest such
compliance. Failure by the Company to comply with CE marking requirements by
June 1998 would prohibit the Company from selling its products in the
European Economic Area unless and until compliance was achieved, which could
have a material adverse effect upon the Company's business, financial
condition and results of operations.
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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 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.
The Company currently occupies a single facility in Palo Alto,
California that houses its headquarters, administrative offices, research
laboratories and manufacturing facilities. In January 1997, the Company
entered into a new facility lease for premises in Cupertino, California, and
is planning to relocate its headquarters and manufacturing operations to this
new location during April 1997. The new facilities lease comprises
approximately 30,460 square feet and the monthly rent is approximately
$47,000. There can be no guarantee that the Company will be able to establish
and certify adequate manufacturing capacity in a timely manner, or at all, in
the new space. Failure to establish and certify adequate manufacturing
capacity in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 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. Sales outside of the
United States accounted for approximately 3% and 4% of the Company's sales in
fiscal 1995 and 1996, respectively, and the Company
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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 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
common stock of many publicly held medical device companies have in the past
been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by the Company or
its competitors, 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 MedSystems, Inc.
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." GSI subsequently
filed a claim against Origin Medsystems, Inc. in the United States District
Court for the Northern District of California, alleging that the use of
Origin's balloon dissection products infringe its patent for a method of
tissue plane dissection using balloon systems. In addition, 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, a competitor of the Company. The Company
believes that the inventor named in its patent application was the first to
invent this subject matter, and the Company 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 could have a material adverse effect on the
Company business, financial
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condition or results of operation. A decision against the Company in either
of these actions could have a material adverse effect on the Company's
business, financial condition or results of operations.
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, expect for the patent interference proceedings discussed
herein.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
Holders
On November 19, 1996, the Company held its annual meeting of shareholders.
At the annual meeting, the Company's shareholders approved the following matters
by the following votes:
1. Election of the following directors of the Company:
NOMINEE FOR ABSTAIN
- -------------------------- ----------- --------------
Roderick A. Young 7,473,233 1,300
----------- --------------
Thomas J. Fogarty 7,454,233 20,300
----------- --------------
David W. Chonette 7,473,233 1,300
----------- --------------
Paul Goeld 7,454,233 20,300
----------- --------------
Mark A. Wan 7,472,933 1,600
----------- --------------
2. Amendments to the Company's 1992 Stock Option Plan to increase the number
of shares of Common Stock reserved for issuance thereunder by 400,000 shares to
an aggregate of 2,115,882 shares.
FOR 7,388,727 AGAINST 84,406 ABSTAIN 1,400
--------- ------ -----
3. Ratification of the appointment of Coopers & Lybrand L.L.P. as independent
accountants for the Company for the fiscal year ending June 30, 1997.
FOR 7,472,033 AGAINST 1,200 ABSTAIN 1,300
--------- ----- -----
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Description
------- -----------
10.20 (1)(2) OEM Supply Agreement (Expanded Field) dated
December 20, 1996, between Ethicon
Endo-Surgery, Inc. and the Company
("Expanded EES Agreement").
22
<PAGE>
10.21(2) Modification and Termination Agreement and
Mutual Release dated November 12, 1996,
between United States Surgical Corporation and the
Company.
10.22 Real Estate Lease between Berg & Berg Developers
and the Company.
11.1 Statement of Computation of Earnings (Net Loss)
Per Share
27.1 Financial Data Schedule
(1) This exhibit supercedes Exhibit 10.19.
(2) Confidential treatment has been requested with regard to
certain portions of this exhibit.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1996.
23
<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 Chief Financial Officer
Date: February , 1997
24
<PAGE>
EXHIBIT 10.20
OEM SUPPLY AGREEMENT (EXPANDED FIELD)
This is an Agreement dated and effective as of the last date of signature
below ("Effective Date") by and between Ethicon Endo-Surgery, Inc., a
corporation organized under the laws of the State of Ohio, having a business
address at 4545 Creek Road, Cincinnati, Ohio 45242 ("Ethicon"); and General
Surgical Innovations, Inc., a corporation organized under the laws of the
State of California, having a business address at 3172A Porter Drive, Palo
Alto, California 94304 ("GSI").
ARTICLE 1 - BACKGROUND
1.1 Ethicon manufactures and markets surgical instruments and accessories
for minimally invasive surgery, including trocars, staplers, ligation devices,
hand-held instruments, retractors, manipulation devices and electrosurgery
products. Prior to the Effective Date hereof, Ethicon had developed and began
marketing a balloon dissector to facilitate minimally invasive surgery for
hernia repair.
1.2 GSI has developed and patented an array of balloon dissectors and
their methods of use to facilitate minimally invasive surgery for hernia repair,
urinary stress incontinence ("USI"), plastic and reconstructive surgery,
vascular surgery, and other surgical methods.
1.3 Ethicon desires to qualify GSI as an original equipment manufacturer
("OEM") supplier for certain balloon dissectors, and to thereafter purchase from
GSI certain balloon dissectors meeting agreed-upon specifications for resale to
Ethicon's customers. Correspondingly, GSI desires to be qualified as an OEM
supplier of certain balloon dissectors to Ethicon, and to thereafter sell
certain balloon dissectors to Ethicon meeting agreed-upon specifications.
1.4 The parties entered into an OEM Supply Agreement dated as of June 25,
1996 (the "OEM Agreement"). The parties desire to expand the OEM Agreement to
include dissectors in the Expanded Field (defined below). Upon execution of
this Agreement for the Expanded Field, the OEM Agreement shall be terminated,
and this Agreement shall replace and supercede the OEM Agreement in its
entirety.
Therefore, GSI agrees to supply to Ethicon, and Ethicon agrees to purchase
from GSI, certain balloon dissectors upon the terms and conditions set forth
below.
ARTICLE 2 - DEFINITIONS
The following terms, when used with initial capital letters, shall have the
following meanings, whether used in the singular or the plural:
2.1 "Affiliate" is any entity that directly or indirectly controls, is
controlled by, or is under common control with a party, and for such purpose
"control" shall mean the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of the entity, whether
through the ownership of voting securities, by contract or otherwise.
2.2 A "Change of Control" shall be deemed to have occurred if any of the
following occurs: a) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or
PAGE 1
<PAGE>
indirectly, of securities of GSI representing thirty percent (30%) or more of
the combined voting power of GSI's then outstanding securities; b) the
stockholders of GSI approve a merger or consolidation of GSI with any other
corporation, other than a merger or consolidation which would result in the
voting securities of GSI outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least sixty percent (60%) of the
combined voting power of the voting securities of GSI or such surviving
entity outstanding immediately after such merger or consolidation, or c) or
the stockholders of GSI approve a plan of complete liquidation of GSI or an
agreement for the sale or disposition by GSI of all or substantially all of
GSI's assets.
2.3 "Bonutti Agreement" is an agreement between Apogee Medical Products,
Inc. and GSI, whose last date of signature therein is March 9, 1995, a copy of
which is provided by GSI to Ethicon as of the Effective Date.
2.4 "Calendar Quarter" is the usual and customary Ethicon calendar
quarter, used for internal accounting purposes, of approximately three (3)
months, in which each of the first two months consist of four weeks and the
third month consists of five weeks.
2.5 "Ethicon Balloon Dissector" is the balloon dissector Ethicon has
itself begun to manufacture and sell to its customers, identified as the
ENDOPATH TED 12 Balloon Dissector, or any substantially identical modifications
thereof.
2.6 "Existing OEM Supply Agreement" was an agreement between GSI and U.S.
Surgical Corporation effective March 9, 1994 and terminated November 12, 1996, a
redacted copy of which has been made publicly available and is on file with the
Securities and Exchange Commission ("SEC").
2.7 "Expanded Field" shall mean all Tissue Dissectors, inclusive of all
products covered under the Existing OEM Supply Agreement and the Spacemaker
Balloon Dissectors, in the field of hernia repair and USI.
2.8 "FDA" shall mean the U.S. Department of Health and Human Services,
Food and Drug Administration, or any successor governmental organization.
2.9 "First Accounting Quarter" is the first Calendar Quarter beginning on
or about July 1, 1997. The successive Calendar Quarters following the First
Accounting Quarter shall be referred to in their numerical order as, for
example, the "Second", "Third", "Fourth" and "Fifth" Accounting Quarter, until
the expiration or termination of this Agreement. For purposes of this
Agreement, the final Accounting Quarter shall extend from the end of its
preceding Accounting Quarter to the termination or expiration of this Agreement.
2.10 "First OEM Balloon Dissector" is the balloon dissector labeled under
the Ethicon name which GSI initially supplies to Ethicon hereunder in accordance
with and meeting the product and quality assurance specifications mutually
agreed to between the parties. The parties may hereinafter modify such
specifications upon mutual written consent.
2.11 "First Commercial Delivery" is the first delivery of the First OEM
Balloon Dissector from GSI to Ethicon, pursuant to Article 4.7 below, excluding
sales samples and training aids intended for promotional use only.
PAGE 2
<PAGE>
2.12 "510(k) Clearance" shall mean premarket concurrence of substantial
equivalence in accordance with Article 510(k) of the U.S. Food, Drug and
Cosmetic Act of 1938, as amended.
2.13 "GSI Patents" are each patent and patent application, U.S. and
foreign, which GSI owns or is empowered to grant a license to Ethicon prior to
or during the term of this Agreement or any extension thereof, the practice of
which is reasonably necessary for Ethicon to sell Tissue Dissectors.
2.14 "GSI Total Gross Margin" is the gross margin calculated according to
generally accepted accounting principles (GAAP) and attributable to GSI Sales,
OEM Purchases, and Royalty Payments.
2.15 "GSI Sales" shall mean sales from GSI to end users of Spacemaker
Balloon Dissectors pursuant to Article 9.1B below.
2.16 "Guaranteed Payment" shall mean a negotiated transfer price for the
Tissue Dissectors multiplied by a guaranteed minimum number of units of such
dissectors which a potential purchaser (either Ethicon or a third party)
would be obligated to purchase from GSI in a given [***********************
********************************]. In the case of Ethicon, such
negotiated transfer price will not exceed [****************************
****************************************************].
2.17 "Insolvency Event" shall mean the occurrence of any of the following
events:
(a) GSI shall admit in writing its inability, or be generally unable,
to pay its debts as such debts become due; or
(b) GSI shall (1) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property, (2) make a general assignment
for the benefit of its creditors, (3) commence a voluntary case under the United
States Bankruptcy Code, as now or hereafter in effect (the "Bankruptcy Code"),
(4) file a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or
readjustment of debts, (5) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in any
involuntary case under the Bankruptcy Code, or (6) take any corporate action for
the purpose of effecting any of the foregoing; or
(c) A proceeding or case shall be commenced against GSI in any court
of competent jurisdiction, seeking (1) its liquidation, reorganization,
dissolution or winding-up, or the composition or readjustment of its debts, (2)
the appointment of a trustee, receiver, custodian, liquidator or the like of GSI
or of all or any substantial part of its assets, or (3) similar relief in
respect of GSI under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, or an order, judgment or
decree approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect for a period of 90 days; or an order for relief against
GSI shall be entered in an insolvency case under the Bankruptcy Code.
2.18 "Kieturakis Agreements" are agreements between Thomas J. Fogarty, M.D.
or his designee (represented by GSI to be GSI) and Maciej Kieturakis, M.D., and
as filed with the SEC.
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 3
<PAGE>
2.19 "OEM Balloon Dissectors" are collectively the First OEM Balloon
Dissector and the Subsequent OEM Balloon Dissectors.
2.20 "OEM Purchases" shall mean Ethicon's purchases of OEM Balloon
Dissectors from GSI.
2.21 "Regulatory Compliance" shall mean compliance with (i) all applicable
statutes, laws, and regulations, including good manufacturing practices ("GMP");
(ii) Ethicon Endo-Surgery, Inc. Quality Assurance requirements, and (iii)
Johnson & Johnson Corporate Quality Assurance requirements generally applicable
to all suppliers of products to Johnson & Johnson companies in effect as of the
Effective Date, and as amended by Johnson & Johnson, so long as Ethicon uses
reasonable efforts to communicate such amendments to GSI.
2.22 "Royalty Payments" shall mean Ethicon's payment of earned royalties
to GSI pursuant to Article 9.1 below for the sale of the Ethicon Balloon
Dissector.
2.23 "Spacemaker Balloon Dissectors" are collectively the Spacemaker I and
II balloon dissectors and Spacemaker World balloon dissector each of which GSI
has made commercially available.
2.24 "Subsequent OEM Balloon Dissectors" are balloon dissectors labeled
under the Ethicon name which GSI subsequently supplies to Ethicon hereunder
following the initial supply of the First OEM Balloon Dissector, and supplied in
accordance with and meeting the product and quality assurance specifications
mutually agreed to between the parties and set forth hereinafter in successive
appendices to this Agreement. The parties may modify such specifications upon
mutual written consent.
2.25 "Tissue Dissectors" are surgical instruments or the use of such
instruments, which are covered by a Valid Claim of any of the GSI Patents for
separating adjacent tissue layers to create an operative space during or in
connection with a medical or surgical procedure, including but not limited to
the OEM Balloon Dissectors and the Ethicon Balloon Dissector, and whether for
open or endoscopic surgery.
2.26 "Trademarks" are (i) U.S. Trademark Registration No. 1,860,825,
"Spacemaker" and (ii) the "General Surgical Innovations, Inc." and "GSI" names,
unregistered.
2.27 "Valid Claim" means any claim of the issued GSI Patents.
Notwithstanding the foregoing, the term "Valid Claim" will not include (x) any
claims which have been declared or rendered invalid or otherwise become
unenforceable by reissue, disclaimer, or any unappealed or unappealable decision
or judgment of a court or governmental agency of competent jurisdiction, or (y)
any claims of the GSI Patents that have lapsed or become abandoned.
ARTICLE 3 - TERM
3.1 The term of this Agreement shall be for a period of five (5) years
from the Effective Date unless earlier terminated under Article 10 below. The
parties may extend the term of this Agreement for successive one (1) year
periods upon the terms and conditions set forth herein, provided the parties
mutually agree on a transfer price and minimum purchase requirements for the OEM
Balloon Dissectors. Unless terminated early pursuant to Article 4.6(a)(iii),
for a period of [**************] following the termination of this Agreement,
or any extension thereof, GSI shall not enter into any
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 4
<PAGE>
agreement with a single distributor or OEM for exclusive rights to supply
Tissue Dissectors for resale in the Expanded Field to such party upon terms
requiring such distributor or OEM to make a Guaranteed Payment less than the
midpoint of those terms last offered in writing by GSI and by Ethicon.
Ethicon's offer will be deemed to be zero if Ethicon fails to make an offer
in writing.
ARTICLE 4 - RESPONSIBILITIES OF THE PARTIES
4.1 The parties shall cooperate with each other to qualify GSI as an OEM
supplier of OEM Balloon Dissectors for Ethicon, and to ensure that GSI
satisfactorily meets Ethicon's requirements for Regulatory Compliance and
manufacturing capacity. Ethicon shall render assistance to GSI as necessary or
desirable to reasonably expedite the qualification process, without charge to
GSI. Any costs incurred by GSI to expedite the qualification process, and to
meet the requirements of Regulatory Compliance, shall be borne by GSI.
4.2 Once Ethicon has qualified GSI as an OEM supplier, and GSI is capable
of meeting Ethicon's requirements for Regulatory Compliance, GSI shall
manufacture and sell the OEM Balloon Dissectors exclusively to Ethicon in the
Expanded Field, and shall not sell the OEM Balloon Dissector to any third party
in the Expanded Field. After the date that (i) Ethicon has qualified GSI as an
OEM supplier, and (ii) GSI is capable of meeting Ethicon's requirements for
Regulatory Compliance, Ethicon will exclusively purchase Tissue Dissectors in
the Expanded Field from GSI, and will not manufacture or have manufactured for
it (except by GSI) such dissectors, except as permitted under Article 8 below.
Ethicon also agrees not to manufacture, have manufactured, sell or market Tissue
Dissectors, except for (a) the Ethicon Balloon Dissector manufactured prior to
GSI's qualification as an OEM supplier, (b) Tissue Dissectors purchased from
or on behalf of GSI, or (c) as permitted under Article 8 below. GSI shall not
change the form, fit, function, color, components or materials of the OEM
Balloon Dissectors, or the process by which the OEM Balloon Dissectors are
manufactured, without the prior written consent of Ethicon (which consent will
not be unreasonably withheld).
4.3 (a) During the term of this Agreement, Ethicon shall pay [*******
*************] for each unit of the First OEM Balloon Dissector as set forth
in Appendix 1.
(b) The parties shall negotiate in good faith the transfer price of
any Subsequent OEM Balloon Dissectors which GSI desires to supply to Ethicon and
Ethicon desires to purchase from GSI.
(c) During the term of this Agreement or any extension thereof, the
[*****************] for fully functional sample units of the First OEM Balloon
Dissector shall be set forth in Appendix 1. The [*****************] for fully
functional sample units of Subsequent OEM Balloon Dissectors shall be mutually
agreed upon.
4.3A (a) During the term of this Agreement, GSI shall pay [***********
*****] for each component or subassembly purchased from Ethicon for use in the
First OEM Balloon Dissector as set forth in Appendix 1.
(b) The parties shall negotiate in good faith the transfer price of
any components or subassemblies purchased from Ethicon for use in Subsequent OEM
Balloon Dissectors.
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 5
<PAGE>
(c) During the term of this Agreement or any extension thereof, the
[********************] for fully functional sample components or subassemblies
for the First OEM Balloon Dissector shall be set forth in Appendix 1. The
[**** ***********] for fully functional sample components or subassemblies of
Subsequent OEM Balloon Dissectors shall be mutually agreed upon.
4.4 Ethicon shall pay [***************] set forth in Article 4.3 above for
delivery of the OEM Balloon Dissectors within thirty (30) days from the date of
invoice, F.O.B. GSI's factory in Palo Alto, California, or other location
mutually agreed upon between the parties. The date of invoice shall not be
earlier than the date of shipment. GSI shall ship, at Ethicon's cost, to any
location chosen by Ethicon utilizing carriers chosen by Ethicon. The risk of
loss with respect to the OEM Balloon Dissectors shall remain with GSI until the
OEM Balloon Dissectors are loaded aboard the common carrier in Palo Alto, or
other location mutually agreed upon between the parties. GSI will pack the OEM
Balloon Dissectors in a manner suitable for shipment to enable the OEM Balloon
Dissectors to withstand the effects of shipping, including handling during
loading and unloading.
4.5 GSI shall provide the following information at no cost to Ethicon:
(a) necessary data, descriptions, processes, photographs and
statements of claims for safety, efficacy or performance so that Ethicon may
prepare, at its cost, labeling, inserts and sales literature relating to the OEM
Balloon Dissectors;
(b) technical data to allow Ethicon to prepare up-to-date customer
instruction for the OEM Balloon Dissectors;
(c) a copy of the Device Master Record and the Device History Record,
as defined in 21 Code of Federal Regulations 800, for the OEM Balloon Dissectors
and components thereof; and
(d) copies of all U.S. and foreign regulatory submissions, including
the 510(k) submission, for the OEM Balloon Dissectors.
4.5A Ethicon shall provide the following information at no cost to GSI:
(a) Any information reasonably necessary for GSI to meet the
requirements of Regulatory Compliance for the purchase by or on behalf of
Ethicon of the OEM Balloon Dissectors, including but not limited to, reasonable
efforts to provide copies of U.S. and foreign regulatory submissions for OEM
Balloon Dissectors (such copies to be deemed confidential by GSI).
4.6 (a)(i) GSI Total Gross Margin Guarantee
For the time period from October 4, 1996, until June 30, 1997 (the
"Gross Margin Guarantee Period"), GSI shall be guaranteed a GSI Total Gross
Margin of Four Million Eight Hundred Thousand dollars ($4,800,000.00). The
minimum GSI Total Gross Margin on a quarterly basis shall be as follows:
QUARTERLY GSI TOTAL GROSS MARGIN
GSI CALENDAR QUARTER TRACKING DATE MINIMUM GSI TOTAL GROSS MARGIN
- -------------------- ------------- ------------------------------
4th Quarter '96 12/31/96 $1,500,000
1st Quarter '97 3/31/97 $1,600,000
2nd Quarter '97 6/30/97 $1,700,000
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 6
<PAGE>
If it is projected within fifteen (15) days prior to the end of any of the three
GSI Calendar Quarters set forth above that the actual GSI Total Gross Margin
through the end of such quarter is less than the Minimum GSI Total Gross Margin
for that quarter, then Ethicon shall pay GSI the difference between such actual
GSI Total Gross Margin and the Minimum GSI Total Gross Margin within ten (10)
days prior to the end of such quarter. The parties acknowledge that any
deficiencies or overpayments, if any, made as a result of GSI Total Gross Margin
projections (for example, as described in Article 9.1B below), shall be
reconciled during the subsequent calendar quarter. Until such time as Ethicon
has qualified GSI as an OEM supplier of Spacemaker Balloon Dissectors, GSI
shall use its reasonable commercial efforts to procure GSI sales.
(a)(ii) During each of the [**************] Accounting Quarters,
Ethicon shall purchase a minimum number of units qualifying as OEM Purchases as
follows:
ACCOUNTING QUARTER QUARTERLY MINIMUM UNIT PURCHASE REQUIREMENT
------------------ -------------------------------------------
HERNIA USI
------ ---
[*******] [*****] [*****]
[*******] [*****] [*****]
[*******] [*****] [*****]
[*******] [*****] [*****]
If the actual number of units of OEM Purchases for either procedural category
set forth above (Hernia or USI) in any Accounting Quarter exceeds the quarterly
minimum unit purchase requirement for such quarter, then such excess may be
applied as a credit to the other procedural category for such quarter in an
amount not exceeding [******************] of such minimum unit purchase
requirement for such other procedural category for such quarter.
During the Accounting Quarters following the [******] Accounting Quarter,
Ethicon's quarterly minimum unit purchase requirement shall be based on the
greater of (i) [****************] of the actual units of the OEM Balloon
Dissectors shipped by Ethicon to non-Affiliates in the preceding Accounting
Quarter, or (ii) [****************************************************
**********************]. Notwithstanding the preceding sentence, the
Minimums for the [****] Accounting Quarter shall not be less than [*******
*******************] units.
(a)(iii) QUARTERLY MINIMUM UNIT PURCHASE REQUIREMENTS ("MINIMUMS")
GSI shall consider satisfaction of the Minimums set forth in Article
4.6(a)(ii) and satisfaction of the mutual initiatives set forth in Article
13.12A (provided GSI satisfies such initiatives in cooperation with Ethicon)
herein as complete satisfaction of any duty, whether express or implied,
which could be imposed upon Ethicon to commercially exploit its rights under
this Agreement, and is accepted by GSI in lieu of any best efforts obligation
on the part of Ethicon. If Ethicon fails to make its Minimums to GSI, then
GSI may provide Ethicon with written notice of such failure. Ethicon shall
have thirty (30) days after receiving such written notice to deliver a
binding purchase order to GSI for the OEM Balloon Dissectors for delivery
within the applicable quarter or to make a
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 7
<PAGE>
payment to GSI in order to make up any deficiencies in its Minimums. Such
payment to make up any deficiences shall be calculated by multiplying any
unit deficiency times the average transfer price from GSI to Ethicon of OEM
Balloon Dissectors in the preceding quarter. If Ethicon fails to take this
action, then GSI may manufacture and sell the Tissue Dissectors to third
parties upon written notice, or otherwise terminate this Agreement upon
written notice to Ethicon; provided, however, that Ethicon will not be
relieved from its obligation to make the Minimums occurring prior to the
termination of this Agreement, or in the event the date of such termination
occurs prior to the First Accounting Quarter, Ethicon will not be relieved
from its obligation to make the Minimums for the First Accounting Quarter.
(b) The quarterly minimum gross margin requirements set forth under
4.6(a)(i) above, or the Minimums set forth under Article 4.6(a)(ii) above,
shall for any applicable quarter be changed in the following circumstances:
(i) If GSI fails for any reason within GSI's reasonable control
(other than (1) a Major Forces event under Article 13.8 below, (2) a failure by
Ethicon to supply components or subassemblies to GSI for use in OEM Balloon
Dissectors, or (3) breach by Ethicon) to deliver the OEM Balloon Dissectors to
Ethicon in accordance with the terms of this Agreement, or replace OEM Balloon
Dissectors which are defective under Article 5.1 below, then the Minimums or
gross margin requirements set forth under 4.6(a)(i) above for the applicable
quarter(s) shall be reduced. Such reduction shall be in an amount equal to a)
in the case of reductions to Minimums, [****************************] of the
units not delivered or replaced or b) in the case of reductions to quarterly
minimum gross margin requirements, the applicable [************] set forth in
Appendix 1 multiplied by [**************************] of the number of units
of OEM Balloon Dissectors not delivered or replaced.
(ii) If any of the OEM Balloon Dissectors are recalled from
market or withdrawn from sale for reason of safety, efficacy or quality
primarily due to GSI (and beyond Ethicon's reasonable control), (i)
involuntarily regardless of lot size, (ii) voluntarily and involving multiple
lots, or (iii) voluntarily and involving a single lot where such lot is not
immediately replaced; or if a Major Forces event under Article 13.8 occurs, then
the Minimums or gross profit requirements shall be waived until a period of [**
******] shall have elapsed after either market re-entry or the Major Forces
event is removed, whichever is applicable, and shall then be proportionately
reduced.
(iii) If GSI fails to meet its obligations under Article 9.2
below, then the Minimums or gross profit requirements shall be waived until such
time as GSI does, in fact, meet its obligation under such article.
(iv) If this Agreement is terminated pursuant to either Article
4.6(a)(iii) or Article 10 during any applicable quarter set forth in this
Article 4.6(a)(ii), then the Minimums shall be proportionately reduced for such
quarter, and Ethicon shall be relieved of Minimums thereafter.
(v) If the third party which GSI has sued prior to the Effective
Date for patent infringement voluntarily or involuntarily withdraws its Tissue
Dissectors from the marketplace and such withdrawal lasts longer than 30 days,
then the Hernia Minimums for that Accounting Quarter in which such withdrawal
occured and
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 8
<PAGE>
subsequent quarters of the Agreement shall be increased by [*****] units
provided such withdrawal continues.
4.7 Within thirty (30) days of the First Commercial Delivery, Ethicon
shall provide GSI with a forecast of its expected purchases of the OEM Balloon
Dissectors, including a schedule of desired delivery dates, for the following
[**********], and the [***************] of this forecast shall constitute
a binding purchase order. Thereafter, Ethicon shall update the forecast monthly
so that its expected purchases and schedule of desired delivery dates are
continually forecast for a [*******] time period, the [****************]
of such rolling forecasts constituting a binding purchase order. Unless both
parties otherwise agree, the [****] month of each binding purchase order will be
at least [************] or not more than [************************
*****] of the prior month's forecast for that same month. Furthermore,
Ethicon's forecasts and purchase orders must be consistent with reasonable
expected usage based on historical procedural volumes and shall also be
consistent with its practices with other suppliers.
4.8 Ethicon may adjust the total number of OEM Balloon Dissectors to be
delivered pursuant to Article 4.7 above upon thirty (30) days written notice,
provided however, that any such adjustment shall not serve to reduce Ethicon's
obligation to purchase the total number of OEM Balloon Dissectors indicated in
the binding purchase order. In any given month, if Ethicon wants GSI to deliver
more than [************************] of the total number of the OEM
Balloon Dissectors indicated in the binding purchase order, then GSI shall not
be obligated to supply the excess above [*********************************],
but GSI shall nevertheless use its reasonable commercial efforts to deliver to
Ethicon any such excess above [*******************************] on a
priority basis.
4.9 GSI shall use reasonable commercial efforts to deliver the OEM Balloon
Dissectors to Ethicon in accordance with the schedule of delivery dates
specified in the binding purchase orders set forth in Article 4.7 above.
4.9A Insofar as the terms and conditions of Ethicon's standard purchase
order (a copy of which is attached as Appendix 2) are contrary to or
inconsistent with the terms and conditions of this Agreement, the terms and
conditions of this Agreement shall control. The parties acknowledge that as of
the Effective Date there are existing terms and conditions of the Ethicon
standard purchase order that are contrary to or inconsistent with the terms and
conditions of this Agreement, and that the terms and conditions of this
Agreement shall control. Insofar as terms and conditions are added to such
purchase order after the Effective Date hereof, GSI shall not be subject to such
added terms and conditions unless specifically agreed to in writing.
4.9B All amounts due hereunder are payable in full to GSI without deduction
and are net of taxes (including any withholding tax) and custom duties.
4.9C Ethicon shall, at Ethicon's own expense, obtain and pay for import
and export licenses and permits, pay customs charges and duty fees, and take
all other actions required to accomplish the export and import of the OEM
Balloon Dissectors purchased by Ethicon. Ethicon understands that both
Ethicon and GSI are subject to regulation by agencies of the United States of
America government, including the United States of America Department of
Commerce, which prohibit export or diversion of certain technical products to
certain countries. Ethicon warrants that Ethicon will comply in all
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 9
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respects with all such export regulations to the extent they relate to the
OEM Balloon Dissector.
4.9D Ethicon shall provide GSI within ninety (90) days after the end of
each Calendar Quarter (for purposes of international information) and within
sixty (60) days after the end of each Calendar Quarter (for purposes of U.S.
information) the following information with respect to the term of this
Agreement: (i) a summary of the number of units of OEM Balloon Dissectors sold
(broken down (X) by the five digit customer's zip code (or as the Parties
otherwise mutually agree as necessary and reasonably available in order for GSI
to comply with its obligations to compensate its sales representatives and
employees), for sales in the United States and (Y) by country for sales
internationally), (ii) a copy of any market research which Ethicon has in its
discretion conducted regarding competition with respect to the OEM Balloon
Dissectors and changes in the market for the OEM Balloon Dissectors in the
United States or internationally, and (iii) a summary of the number of OEM
Balloon Dissectors held by Ethicon at the end of such quarter. Notwithstanding
whether Ethicon designates such information or any portion therof as
confidential, such information shall be deemed to be confidential and GSI shall
treat such information as confidential information in accordance with Article
9.4 below.
4.10 During the eighteen (18) months following the Effective Date,
Ethicon's president and members of his management team agree to meet quarterly
in Cincinnati, or elsewhere as mutually agreed to by the parties, and at a time
mutually agreed to by the parties, with the president of GSI and members of his
management team in order to discuss plans and results of the marketing by
Ethicon of GSI products.
4.11 During [********************] immediately following the Effective
Date, Ethicon agrees to compensate its sales representatives for the sales of
OEM Balloon Dissectors at the [****************************].
ARTICLE 5 - WARRANTY
5.1 GSI warrants during the warranty period set forth under Article 5.2
below that the OEM Balloon Dissectors delivered to Ethicon under this Agreement
shall be manufactured in accordance with the mutually agreed-upon
specifications, and that the OEM Balloon Dissectors so delivered shall be free
from material defects in design, construction, materials and workmanship (except
for components and design supplied solely by Ethicon). Ethicon may inspect the
OEM Balloon Dissectors within thirty (30) days of receipt of a shipment, on a
sample basis, to determine conformity with such specifications. If this
inspection shows a failure to meet such specifications, then Ethicon may return
the entire lot in question to GSI for a full credit, including credit for
freight and insurance costs incurred by Ethicon, with a written reasonably
detailed description of the reasons for rejection. Prior to issuing credit, GSI
shall have thirty (30) days to modify or correct the OEM Balloon Dissectors to
conform to such specification. Notwithstanding failure of Ethicon to inspect or
return any shipment, or its acceptance of any shipment, Ethicon shall be
entitled during the warranty period to return to GSI for exchange or full credit
at Ethicon's original cost, including incurred freight and insurance costs, OEM
Balloon Dissectors returned by a customer of Ethicon for material defects in
design, construction, materials or workmanship or failure to meet mutually
agreed upon specifications, except for components and designs provided by
Ethicon. Any inspection
[***] CONFIDENTIAL TREATMENT REQUESTED
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by Ethicon shall not relieve GSI of its obligation to manufacture OEM Balloon
Dissectors which meet the Specifications and comply with good manufacturing
practices. EXCEPT FOR THE EXPRESS LIMITED WARRANTY SET FORTH IN THIS ARTICLE
5.1, GSI GRANTS NO WARRANTIES FOR THE OEM BALLOON DISSECTORS, EXPRESS OR
IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND
GSI SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF QUALITY, WARRANTY OF
MERCHANTABILITY OR WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.
5.2 The warranty period shall be for a period of [*********] from the
date of GSI's shipment of an OEM Balloon Dissector to Ethicon. GSI shall
reasonably agree to extend this warranty period, up to an additional [****
****], based on applicable data generated by the parties during the term of this
Agreement or any extension thereof .
5.3 GSI agrees that Ethicon may pass the warranty given to Ethicon under
Article 5 above along to Ethicon's customers.
ARTICLE 6 - REGULATORY COMPLIANCE
6.1 GSI shall promptly file for 510(K) Clearance from the FDA to
manufacture and sell the First OEM Balloon Dissector as required by applicable
laws, rules and regulations, as soon as accurate and complete data and
information regarding the First OEM Balloon Dissector is made available to GSI
as required by applicable laws, rules and regulations. In addition, GSI shall
likewise file for 510(K) clearance for Subsequent OEM Balloon Dissectors which
GSI desires to sell to Ethicon and Ethicon desires to purchase from GSI. GSI
shall maintain and make available for Ethicon's review for the term of this
Agreement or any extension thereof all of the 510(K) Clearances for the OEM
Balloon Dissectors. Furthermore, GSI shall file, and maintain at its own cost,
all registrations for which GSI would be the appropriate party to so file and
maintain such registrations with the FDA and similar regulatory authorities in
the United States and in foreign countries which have the authority to approve
the sale of the OEM Balloon Dissectors for use in humans.
6.2 GSI represents and warrants that all OEM Balloon Dissectors sold or
delivered to Ethicon during the term of this Agreement or any extension thereof
shall be manufactured and delivered in accordance with Regulatory Compliance,
and that continually during the term of this Agreement or any extension thereof
no OEM Balloon Dissectors delivered by GSI to Ethicon will be adulterated or
misbranded at the time of delivery by GSI to Ethicon within the meaning of the
Federal Food, Drug and Cosmetic Act. GSI shall notify Ethicon as soon as
practicable after receiving notice of any claim or action by the FDA relating to
non-compliance with this Article or any notice with respect to any violation of
any applicable laws, rules or regulations. Both parties shall notify each other
of any adverse reaction, malfunction, injury or other similar claims with
respect to the OEM Balloon Dissectors of which either becomes aware.
6.3 GSI shall notify Ethicon of any FDA audit, or any audit from any other
regulatory body, of its factories for the manufacture of the OEM Balloon
Dissectors, or any request for information from the FDA or other regulatory body
related to the manufacture of the OEM Balloon Dissectors, as soon as practically
possible after GSI
[***] CONFIDENTIAL TREATMENT REQUESTED
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receives notice of such audit or such request. Ethicon shall make reasonable
efforts to provide copies of its customer inquiries related to OEM Balloon
Dissectors as well as the results of any related investigations which, in
Ethicon's sole determination, are deemed to be material.
6.4 Ethicon or its designated representative may, at its discretion and
upon ten (10) days written notice to GSI, conduct periodic GMP audits of GSI's
factories for the manufacture of the OEM Balloon Dissectors.
6.5 Upon mutual consent of the parties, which consent may not be
unreasonably withheld, or in the case of a recall required by an agency with
competent jurisdiction, GSI shall be required to institute and fund any recall,
field corrective action, or the like in circumstances relating to a breach by
GSI of the warranty set forth in Article 5 above or other breach of its
obligations hereunder. In such circumstances, the actual retrieval of the OEM
Balloon Dissectors and costs associated with that retrieval will be undertaken
and absorbed by Ethicon. The parties shall maintain adequate records concerning
traceability of the OEM Balloon Dissectors, and shall cooperate with each other
in the event that any procedures described in this paragraph are undertaken. In
the event of any such recall, GSI shall accept recalled OEM Balloon Dissectors
and deliver to Ethicon replacement OEM Balloon Dissectors at GSI's sole cost and
expense.
6.6 Because regulatory requirements vary throughout the world, the parties
agree to cooperate with one another to obtain regulatory approvals.
6.7 Both parties agree to comply with their state, federal, and
international regulatory requirements as are required for their status as a
medical device manufacturer or medical device distributor.
ARTICLE 7 - RESPONSIBILITY FOR CLAIMS
In order to distribute between themselves the responsibility for the
handling and expense of claims arising out of the manufacture, distribution,
sale or use of the OEM Balloon Dissectors, the parties agree as follows:
7.1 GSI shall be liable for and shall indemnify and hold Ethicon harmless
against any liability, damages or loss (other than loss of potential sales) and
from any claims, suits, proceedings, demands, recoveries or expenses, including
without limitation, expenses of total or partial device recalls, in connection
with the OEM Balloon Dissectors manufactured by GSI (other than (i) the Ethicon
Balloon Dissector which is manufactured by GSI or changes thereto requested
solely by Ethicon, and (ii) components or designs supplied solely by Ethicon)
arising out of, based on, or caused by:
(a) alleged defects in materials, workmanship or design of the OEM
Balloon Dissectors manufactured by or on behalf of GSI; or
(b) failure of the OEM Balloon Dissectors manufactured by or on
behalf of GSI to fulfill claims relating to safety, efficacy or performance
furnished by GSI under Article 4.5 above (excluding matters for which Ethicon is
responsible under Article 7.2 below); and
(c) claims of patent infringement made with respect to the OEM
Balloon Dissectors manufactured by or on behalf of GSI, or claims of trademark
infringement made with respect to Ethicon's use of GSI's Trademarks; and
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(d) a breach of the representations and warranties set forth in
Article 14.1 below.
GSI shall obtain and maintain in full force and effect valid and
collectible product liability insurance in respect of the OEM Balloon Dissectors
for death, illness, bodily injury and property damage in an amount not less than
$2 million per occurrence. Such policy shall name Ethicon as an insured or an
additional insured thereunder and GSI shall grant like coverage to Ethicon under
a standard broad form vendor's endorsement thereto. GSI shall within ten (10)
days of the Effective Date provide Ethicon with evidence of this coverage,
provided that the existence of such coverage shall in no way limit GSI's
liability or obligations hereunder. Such insurance policy shall provide that in
the event such insurance coverage should be materially adversely changed or
terminated for any reason, the insurer thereunder will give GSI and Ethicon ten
(10) days prior notice of such change or termination.
7.2 Ethicon shall be liable for and shall indemnify and hold GSI harmless
against any liability, damages or loss (other than loss of potential sales) and
from any claims, suits, proceedings, demands, recoveries or expenses, including
without limitation, expenses of total or partial device recalls, (i) in
connection with the OEM Balloon Dissectors, and/or the Ethicon Balloon
Dissectors sold by Ethicon, or (ii) arising out of, based on, or caused by
claims whether written or oral, made or alleged to be made, by Ethicon in its
advertising, publicity, promotion, or sale of the OEM Balloon Dissectors where
such claims were not substantially the same as those claims furnished by GSI
under Article 4.5 above, or (iii) arising out of, based on, or caused by the
Ethicon Balloon Dissector which is manufactured by GSI or changes thereto
requested solely by Ethicon, or (iv) arising out of, based on or caused by
components or designs supplied solely by Ethicon, or (v) arising out of, based
on, or caused by the labeling of the OEM Balloon Dissectors where such labeling
was not substantially the same labeling information furnished by GSI under
Article 4.5 above, or by negligent handling by Ethicon of the OEM Balloon
Dissectors (excluding matters for which GSI is responsible under Article 7.1
above).
7.3 (a) GSI is the "Indemnifying Party" and Ethicon is the "Indemnified
Party" for purposes of Section 7.1, and Ethicon is the "Indemnifying Party" and
GSI is the "Indemnified Party" for purposes of Section 7.2. In the event a
Claim is made upon the Indemnified Party, the Indemnified Party shall promptly
give notice of such Claim to the Indemnifying Party, and shall promptly deliver
to such Indemnifying party all information and written material available to the
indemnified Party relating to such Claim. If such Claim is first made upon the
Indemnifying Party, the Indemnifying Party shall promptly give notice of such
Claim to the Indemnified Party.
(b) The Indemnified Party will, if notified of the Indemnifying
Party's election to do so within fifteen (15) days of the date of notice of a
Claim, permit the Indemnifying Party to defend in the name of the Indemnified
Party any Claim in any appropriate administrative or judicial proceedings and
take whatever actions may be reasonably requested of the Indemnified Party to
permit the Indemnifying Party to make such defense and obtain an adjudication of
such Claim on the merits, including the signing of pleadings and other
documents, if necessary; provided that the Indemnifying Party shall defend the
Claim with counsel reasonably satisfactory to the Indemnified
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Party. In addition to the liability for the ultimate settlement or judgment,
if any, arising out of such Claim under this Agreement, the Indemnifying
Party shall be solely responsible for all the expenses incurred in connection
with such defense or proceedings, regardless of their outcome. However, the
Indemnifying Party shall not be responsible for any expenses, including
attorneys fees and costs, incurred by the Indemnified Party to monitor the
defense of the Claim by the Indemnifying Party.
(c) In the event the Indemnifying Party does not accept the defense
of such Claim under the terms hereof, the Indemnified Party shall be entitled to
conduct such defense and settle or compromise such Claim, and the Indemnifying
Party's indemnification obligation under this Agreement shall be absolute,
regardless of the outcome of such Claim. The Indemnified Party, at its option,
may elect not to permit the Indemnifying Party to control the defense against a
Claim. If the Indemnified Party so elects, then the Indemnifying Party shall
not be obligated to indemnify the Indemnified Party against any settlements,
judgments or other costs or obligations arising thereunder which the Indemnified
Party may make or incur relating to such Claim.
ARTICLE 8 - FAILURE TO SUPPLY, CHANGE OF CONTROL
OR INSOLVENCY EVENT
8.1 If GSI fails to supply the quantity of the OEM Balloon Dissectors on
a desired delivery date specified on a binding purchase order issued in
compliance with the terms of this Agreement (a "Failure to Supply Event")
for any reason other than those set forth under Article 13.8 below, and this
failure lasts longer than sixty (60) days from such desired delivery date,
then so long as (i) Ethicon is then in compliance with Articles 4.7 and 4.8
above at the time of such Failure to Supply Event, and (ii) at such time,
such event has not been caused by Ethicon's failure to supply or have
supplied components to GSI, Ethicon shall thereafter have the right to
immediately terminate this Agreement upon written notice to GSI and to
manufacture or have manufactured the Tissue Dissectors. During such sixty
(60) days, Ethicon agrees to cooperate with GSI in any commercially
reasonable manner in an effort to cure such event. Additionally, if a Failure
to Supply Event occurs following a Change of Control or an Insolvency Event,
and such failure lasts longer than thirty (30) days from the date specified
on the binding purchase order, then immediately upon written notice to GSI,
Ethicon shall have the right to immediately terminate this Agreement and to
manufacture or have manufactured the Tissue Dissectors. If Ethicon exercises
its rights under this Article 8.1, GSI grants Ethicon an exclusive worldwide
license in the Expanded Field under the GSI Patents to make, have made, use
or sell the Tissue Dissectors, rights under GSI's regulatory clearances in
the Expanded Field, including 510(K) Clearances, to market the Tissue
Dissectors, and all know-how necessary to make, have made, use or sell the
Tissue Dissectors in the Expanded Field, such license and rights to expire
upon the date when this Agreement would have expired without the intervention
of this paragraph (the "Default License"). In consideration for the grant of
the Default License, Ethicon shall pay GSI an earned royalty of
[**************]per unit sold of the Tissue Dissectors (the "Default
Royalty"). The royalty and accounting provisions for paying such earned
royalty are set forth in Appendix 3 attached to this Agreement. In the event
Ethicon exercises its rights under this Article 8.1, GSI shall make available
to Ethicon all of the information then in GSI's possession or at its free
disposal relating to the
[***] CONFIDENTIAL TREATMENT REQUESTED
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manufacture of the Tissue Dissectors (including information placed in escrow
pursuant to Article 14.2 below).
8.1A If a Failure to Supply Event occurs for any reason set forth in
Article 13.8 below, then GSI shall have the option, upon written notice within
forty five (45) days of such event, to inform Ethicon of its inability to cure
such event within ninety (90) days of the desired delivery date specified on the
binding purchase order, and to agree to fully reimburse Ethicon for its costs in
connection with the manufacture of the Tissue Dissectors by or on behalf of
Ethicon for resale to its customers to satisfy forecasted demand (the "Default
Option"). If GSI elects the Default Option, and Ethicon correspondingly is
therefore capable of providing its customers with forecasted requirements, then
GSI may thereafter renew its exclusive distributorship arrangement with Ethicon
provided GSI once again satisfactorily meets Ethicon's requirements for
Regulatory Compliance and manufacturing capacity. If GSI does not elect the
Default Option, and such Failure to Supply Event lasts longer than ninety (90)
days from such desired delivery date, then upon written notice to GSI, Ethicon
may terminate this Agreement, and GSI thereafter grants Ethicon the Default
License to immediately manufacture or have manufactured the Tissue Dissectors.
During such ninety (90) days, Ethicon agrees to cooperate with GSI in any
commercially reasonable manner in an effort to cure such event. In
consideration of the Default License, Ethicon shall pay GSI the Default Royalty
for any units sold of the Tissue Dissectors. The royalty and accounting
provisions for paying such earned royalty are set forth in Appendix 3 attached
to this agreement. In the event Ethicon exercises its rights under this
Article 8.1A, GSI shall make available to Ethicon all of the information then in
GSI's possession or at its free disposal related to the manufacture of the
Tissue Dissectors including information placed in escrow pursuant to
Article 14.2 below.
8.2 The remedy provided in Article 8.1 and 8.1A above for failure to
supply shall be in addition to and not in lieu of Ethicon's other remedies under
applicable law. However, notwithstanding the foregoing, in the event of such
failure to supply, Ethicon shall not be entitled to recover its lost profits or
other incidental or consequential damages from GSI.
ARTICLE 9 - PATENTS, TRADEMARKS AND SECRETS
9.1 PATENTS. Subject to Article 9.1B below, during the time period
preceding GSI's qualification as Ethicon's OEM supplier of OEM Balloon
Dissectors pursuant to Article 4.1 above, Ethicon and its Affiliates shall
have a worldwide, exclusive license in the Expanded Field under the GSI
Patents to make, have made, use or sell the Ethicon Balloon Dissector (the
"Pre-Qualification License"). During such time period, Ethicon shall pay GSI
an earned royalty of [********************] per unit sold of the Ethicon
Balloon Dissector. The royalty and accounting provisions for paying such
earned royalty are set forth in Appendix 3 attached to this Agreement.
Following such time period, and when GSI becomes qualified, the
Pre-Qualification License shall expire, and subject to Articles 9.1B and 9.1C
below, Ethicon and its Affiliates shall thereafter have a worldwide,
exclusive license in the Expanded Field under the GSI Patents to use or sell
the Tissue Dissectors purchased from GSI for the remainder of the term of
this Agreement or any extension thereof (the Post-Qualification License).
The parties acknowledge that the Pre-Qualification License and the
Post-Qualification License are
[***] CONFIDENTIAL TREATMENT REQUESTED
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subject to as of the Effective Date hereof certain GSI International
Distributorship Agreements, a list of which, if any, is attached in Appendix
4, and GSI shall use its best efforts to either terminate such agreements or
allow such agreements to expire as promptly as possible after the Effective
Date hereof.
9.1A Ethicon grants GSI a nonexclusive, worldwide license (to the extent
such license is available) outside the Expanded Field under any patents which it
owns or is empowered to grant a license thereunder to make, have made, use or
sell Tissue Dissectors. GSI will pay Ethicon an earned royalty of [********
****] per unit sold of such dissectors. The royalty and accounting provisions
for paying such earned royalties are set forth in Appendix 3A attached to this
Agreement.
9.1B Until such time as Ethicon has qualified GSI as an OEM supplier of
Spacemaker Balloon Dissectors, GSI may make and sell to end users the Spacemaker
Balloon Dissectors, GSI shall provide Ethicon with written projections as soon
as practically possible before the end of each calendar quarter, of the number
of units of such dissectors sold, and the gross profit anticipated to be
received, for such calendar quarter. As promptly as practically possible
thereafter, GSI shall provide Ethicon with actual numbers of units sold and
gross profit received for such quarter.
9.1C Once GSI has become qualified as an OEM Supplier of Spacemaker Balloon
Dissectors, GSI may, upon Ethicon's written consent (which shall not be
unreasonably withheld), make and sell to certain targeted end users the
Spacemaker Balloon Dissectors under limited circumstances and for limited time
periods as the parties may mutually agree. Any such sales shall be credited
against the quarterly minimums set forth under Article 4.6(a)(ii) above, and GSI
shall provide Ethicon with an accounting in writing of such sales as soon as
practically possible following the Accounting Quarter in which such sales were
made.
9.2 PATENT ENFORCEMENT. The parties acknowledge that prior to the
Effective Date hereof, GSI has sued a third party having a significant presence
in the marketplace for Tissue Dissectors. GSI shall diligently prosecute such
suit until the litigation upon which such suit is founded results in such third
party voluntarily or involuntarily withdrawing such dissectors from the
marketplace in the Expanded Field. Furthermore, upon resolution of such suit,
if another third party is then or thereafter offers Tissue Dissectors for sale
in the Expanded Field, and such dissectors have a market share in the Expanded
Field in the United States of [*******************************************
****], then GSI shall promptly sue such other third party for patent
infringement if such third party does not cease or continue to cease its
infringing activities, and GSI shall diligently prosecute such infringement
suit in the same manner as described in the preceding sentence. GSI does not
have any obligation to diligently prosecute more than one patent infringement
suit at any one time. If GSI fails to meet its obligations pursuant to this
Article 9.2 after thirty days written notice from Ethicon, then the minimums
set forth in Article 4.6 above will be waived until such time as GSI once
again fulfills its obligations hereunder.
9.3 TRADEMARKS. Ethicon shall have the right to promote and sell the OEM
Balloon Dissectors under any trademark selected by Ethicon which trademark shall
be and shall remain the property of Ethicon. Ethicon agrees to indicate on its
packaging for the OEM Balloon Dissectors that such dissectors are manufactured
by GSI. In addition,
[***] CONFIDENTIAL TREATMENT REQUESTED
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Ethicon shall label the OEM Balloon Dissectors with the Spacemaker tm logo.
Nothing herein shall be deemed to give one party, either during the term of
this Agreement or thereafter, any right to trademarks or copyrights of the
other party or to their use except that Ethicon shall have the right to use
GSI's name in association with the marketing and sale of the OEM Balloon
Dissectors during the term of this Agreement or any extension thereof if it
chooses to do so, but such use by Ethicon shall be for the benefit of GSI and
Ethicon shall acquire no ownership rights to the GSI Trademarks.
9.4 CONFIDENTIAL INFORMATION. All written information designated as
confidential and exchanged between GSI and Ethicon while this Agreement is, or
the OEM Agreement was, in effect shall be treated as confidential information.
Neither party shall for three (3) years after such exchange, use (other than in
the performance of its obligations hereunder) or disclose such information to
any third party without the prior written approval of the other party (other
than in the performance of its obligations hereunder), unless such information
has become public knowledge through no fault of the party receiving such
information, or comes to such party from a third party under no obligation of
confidentiality with respect to such information, or was in the possession of
such party prior to the date of disclosure, or is developed by or on behalf of
such party without reliance on confidential information received hereunder, or
is requested to be disclosed in compliance with applicable laws or regulations
in connection with the sale of the OEM Balloon Dissectors, or is otherwise
required to be disclosed in compliance with applicable law, an order by a court
or other regulatory body having competent jurisdiction, or is product-related
information which is reasonably required to be disclosed in connection with
marketing the OEM Balloon Dissectors. The obligations imposed by this section
shall not limit any rights provided to Ethicon pursuant to Article 8.1 above to
manufacture or have manufactured the OEM Balloon Dissectors following GSI's
failure to supply pursuant to this Agreement; provided that the disclosure of
confidential information to a third party (except as may be reasonably required
in preliminary discussions with such third party) for the purpose of enabling
such party to manufacture or distribute the OEM Balloon Dissectors shall be
conditioned upon such third party signing a confidentiality agreement
prohibiting the disclosure of such information to any other party and limiting
the use of such information to the manufacturing or distribution of the OEM
Balloon Dissectors.
ARTICLE 10 - TERMINATION
10.1 Except as stated in Article 4.6(a)(iii), this Agreement may be
terminated by either party in the event the other substantially fails to perform
or otherwise substantially breaches any of its obligations under this Agreement
by giving written notice of its intent to terminate and stating the grounds for
termination. The party receiving the notice shall have three (3) months from
the date of receipt of the notice to cure the failure or breach. In the event
it is cured, the notice shall be of no effect. In the event it is not cured,
this Agreement then shall, without any further action, terminate at the end of
such three (3) month period. If the failure to perform or other breach is due
to circumstances covered under Article 13.8 below, then this subsection shall
not apply until such circumstances have ceased.
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10.2 If Ethicon discovers a patent of a third party which Ethicon
reasonably believes, upon advice of patent counsel, covers in whole or in part
any aspect of the OEM Balloon Dissector or the Ethicon Balloon Dissector which
is then offered for sale by or for Ethicon, and if the parties are unable to
either design around such patent to the satisfaction of patent counsel for
Ethicon, or to obtain a license to such patent, within three months of Ethicon's
notice of such discovery to GSI, Ethicon may automatically terminate this
Agreement upon notice to GSI.
10.3 Ethicon may terminate this Agreement upon written notice pursuant to
the conditions set forth under Articles 8.1 and 8.1A above.
10.4 Termination of this Agreement for any reason shall not affect rights
and obligations of the parties accrued through the effective date of
termination, including without limitation indemnification provisions relating to
the OEM Balloon Dissectors manufactured or distributed by or on behalf of GSI
during the term of this Agreement or any extension thereof.
10.5 In the event of a termination of this Agreement by GSI pursuant to
Article 4.6(a)(iii), Ethicon shall use reasonable efforts to facilitate GSI in
becoming part of JJHCS corporate account programs and eligible for inclusion in
J&J corporate contracts with large buying institutions.
ARTICLE 11 - ARBITRATION OF DISPUTES
11.1 Any controversy or claim arising out of or relating to this Agreement,
except for any controversy regarding the validity of a patent licensed hereunder
by either party to the other, any claim seeking injunctive relief based on or
related to a claim of patent infringement, and the decision to enter into this
Agreement, shall be settled exclusively by binding arbitration by a single
arbitrator chosen by agreement of the parties, which agreement shall not be
unreasonably withheld. The law of the state where the arbitration is conducted
pursuant to Article 11.2 below shall apply to the arbitration proceeding
(without regard to its conflict of law principles). Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction over
the matter. In connection with any such arbitration, the prevailing party shall
be entitled to recover from the non-prevailing party reasonable expenses,
including, without limitation, reasonable attorneys' fees and reasonable
accountants' fees. If the arbitrator is unable to designate a prevailing party,
the arbitration award shall so state and the expenses shall be split equally
between the parties.
11.2 If Ethicon submits a claim or controversy to arbitration pursuant to
Article 11.1 above, then such arbitration shall be conducted in Palo Alto,
California. If GSI submits a claim or controversy to arbitration, then such
arbitration shall be conducted in Cincinnati, Ohio.
11.3 Notwithstanding any other provision hereof, any arbitration conducted
pursuant to this Article 11 shall adopt the procedural rules of the Federal
Rules of Civil Procedure and the evidentiary rules of the Federal Rules of
Evidence. The parties and the arbitrator shall use all reasonable efforts to
conclude arbitration proceedings within six (6) months from the date of
selection of the arbitrator. The arbitrator shall render a decision, setting
forth findings and conclusions of law, within thirty (30) days after completion
of hearing the arbitration evidence on the merits.
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11.4 The arbitrator shall be bound by the express terms of this Agreement
and may not amend or modify such terms in any manner. Any award rendered by the
arbitrator shall be consistent with the terms of this Agreement, and such terms
shall control the rights and obligations of the parties. Notwithstanding
anything to the contrary set forth in this Agreement, in no event shall the
arbitrator be empowered to award exemplary, consequential or punitive damages,
and the parties shall be deemed to have waived any right to such damages. The
proceedings shall be confidential and the arbitrator shall issue appropriate
protective orders to safeguard both parties confidential information.
11.5 From the date one party notifies the other it wishes to commence an
arbitration proceeding until such time as the matter has been finally settled by
arbitration, the running of the time period set forth in Article 10.1 above, as
to which a party must cure a breach, shall be suspended as to the subject matter
of the dispute.
ARTICLE 12 - DISCLAIMER
12.1 Ethicon makes no representation or warranty that it will market the
OEM Balloon Dissectors (or the Ethicon Balloon Dissector), or if it does market
the OEM Balloon Dissectors (or the Ethicon Balloon Dissector), that the OEM
Balloon Dissectors (or the Ethicon Balloon Dissector) shall be the exclusive
means by which Ethicon shall participate in the marketing of surgical devices
for hernia repair and USI. Furthermore, all business decisions, including
without limitation, the design, manufacture, sale, price and promotion of the
OEM Balloon Dissectors (or the Ethicon Balloon Dissector) marketed under this
Agreement and the decision whether to sell the OEM Balloon Dissectors (or the
Ethicon Balloon Dissector) shall be within the sole discretion of Ethicon. GSI
realizes that Ethicon already sells a line of surgical devices for hernia repair
and USI and that Ethicon may itself or with others develop new surgical devices
which may compete with the OEM Balloon Dissectors (or the Ethicon Balloon
Dissector) sold under this Agreement.
ARTICLE 13 - MISCELLANEOUS
13.1 REPRESENTATIONS AND WARRANTIES. GSI expressly warrants and represents
that (a) it owns all of the right, title and interest in and to the Tissue
Dissectors supplied by or on behalf of GSI under this Agreement; (b) it is
empowered to supply the OEM Balloon Dissectors to Ethicon in the Expanded Field;
(c) to the best of its knowledge, either actual or constructive, it has no
outstanding encumbrances or agreements, including but not limited to the
Existing OEM Supply Agreement, or arrangements of any kind pursuant to which any
entity is entitled to purchase from GSI, or has the right to sell or market, the
OEM Balloon Dissectors or any component thereof in the Expanded Field except for
Tissue Dissectors provided to U.S. Surgical Corporation prior to the Effective
Date hereof pursuant to the Existing OEM Supply Agreement; (d) it shall not
enter into any such agreements or arrangements during the term of this Agreement
or any extension thereof; (e) it is empowered to grant Ethicon an exclusive
license of the scope set forth in Article 8 above if Ethicon exercises its
rights to such a license; (f) it has the financial capacity to supply the OEM
Balloon Dissectors to Ethicon in view of the terms and conditions set forth in
this Agreement; (g) the "BONUTTI INVENTIONS" as defined in
PAGE 19
<PAGE>
the Bonutti Agreement have in fact been assigned to GSI; (h) any licenses
granted to Ethicon herein under the BONUTTI INVENTIONS survive an Insolvency
Event; (i) the BONUTTI INVENTIONS include all counterparts to the patents and
patent applications listed in the Bonutti Agreement, including all
continuations and divisionals thereof; (j) GSI owns all of the BONUTTI
INVENTIONS regardless whether GSI prosecutes or maintains patent applications
or patents thereon; (k) neither GSI nor Ethicon is required to credit Bonutti
on packaging inserts and labels which specify patent numbers for the BONUTTI
INVENTIONS; (l) any licenses or sublicenses granted to Ethicon herein under
the Kieturakis Agreement survive the termination of such agreement; (m) GSI
neither has been nor is, as of the Effective Date hereof, in material breach
of the Bonutti Agreement or the Kieturakis Agreement, and GSI shall not
materially breach such agreements prior to the expiration or termination of
this Agreement, including extensions thereof; (n) it has terminated the
Existing OEM Supply Agreement pursuant to Article 11.2 (Early Termination) of
such agreement; and (o) the terms of this Agreement are not more favorable to
Ethicon than those last offered by U.S. Surgical Corporation in writing to
GSI as prohibited in accordance with Article 11.5 (Renewal) of the Existing
OEM Supply Agreement.
13.2 ESCROW. GSI shall place with an escrow agent mutually acceptable to
GSI and Ethicon, a description of GSI's process for the manufacture of the OEM
Balloon Dissectors in sufficiently clear and detailed terms that it can be
readily followed and carried out by a trained scientist or engineer to make the
OEM Balloon Dissectors in the manner GSI considers most efficient. Furthermore,
should GSI alter, modify or change its process for manufacturing the OEM Balloon
Dissectors, GSI shall amend the description in escrow to include such
alteration, modification or change. The description held in escrow pursuant to
this Article 13.2, shall be available to Ethicon or its designee only in the
event GSI is unable to supply or fails to supply Ethicon with the OEM Balloon
Dissectors pursuant to this Agreement for any reason other than those set forth
under Article 13.8 below, or if a Change of Control or Insolvency Event occurs
and Ethicon exercises its rights under Article 8 above. Each party represents,
warrants and covenants, that it shall treat as confidential information in
accordance with Article 9.4 above any written information designated as
confidential concerning the other party disclosed in accordance with this Escrow
provision of this Agreement.
13.3 ASSIGNABILITY. Neither party shall transfer or assign this Agreement,
in whole or in part, without the prior written consent of the other party (which
shall not be unreasonably withheld); except that either party may, without such
consent, assign this Agreement to an Affiliate or with the sale of substantially
all of the assets of the business, including by way of merger, to which the OEM
Balloon Dissectors relates.
PAGE 20
<PAGE>
13.4 NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally, one day after delivery
to a nationally recognized overnight delivery service, charges prepaid, three
days after sent by registered or certified mail, postage prepaid, or when
receipt is confirmed if by telex, facsimile or other telegraphic means:
In the case of GSI:
General Surgical Innovations, Inc.
3172-A Porter Drive
Palo Alto, CA 94304
Attn: Roderick A. Young, President
With a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Tae Hea Nahm
In the case of Ethicon:
Ethicon Endo-Surgery, Inc.
4545 Creek Road
Cincinnati, Ohio 45242
With a copy to:
Chief Patent Counsel
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Such addresses may be altered by written notice given in accordance with
this Article 14.4.
13.5 RELATIONSHIP OF PARTIES. The parties hereto are entering into this
Agreement as independent contractors, and nothing herein is intended or shall be
construed to create between the parties a relationship of principal and agent,
partners, joint venturers or employer and employee. Neither party shall hold
itself out to others or seek to bind or commit the other party in any manner
inconsistent with the foregoing provisions of this Article.
13.6 WAIVER. The failure of either party to enforce at any time for any
period the provisions of this Agreement shall not be construed to be a waiver of
such provisions or of the right of such party thereafter to enforce each such
provision.
13.7 GOVERNING LAW. This Agreement and its performance are to be governed
by the laws of the state where the arbitration occurs, except that the
arbitration provisions set forth in Article 11 above shall be governed by the
provisions of the Federal Arbitration Act as well as the laws of the state where
the arbitration occurs.
13.8 MAJOR FORCES. Subject to Ethicon's rights set forth in Article 8
above, neither party shall be responsible for and the terms of this Agreement
shall be inapplicable to any defaults or delays which are due to unforeseen
causes beyond the parties control including, but without limitation, acts of God
or public enemy, acts or
PAGE 21
<PAGE>
other order of a government, particularly full market approval by the
United States Food and Drug Administration and any foreign government
equivalent approval, fire, flood or other natural disasters, embargoes,
accidents, explosions, strikes or other labor disturbances (regardless of the
reasonableness of the demands of labor), shortage of fuel, power or raw
materials, inability to obtain or delays of transportation facilities,
incidents of war, or other unforeseen events causing the inability of a
party, acting in good faith with due diligence, to perform its obligations
under this Agreement.
13.9 PUBLICITY. With respect to any other publicity, neither party shall
originate any such publicity, news release or public announcement, written or
oral, whether to the public or press, stockholders or otherwise, relating to
this Agreement, to any amendment or performances under the Agreement, save only
such announcements as in the opinion of counsel for the party making such
announcement is required by law to be made. If a party decides to make an
additional announcement required by law under this Agreement, it will give the
other party thirty (30) days advance written notice, or any shorter notice
period otherwise required by law, of the text of the announcement so that the
other party will have an opportunity to comment upon the announcement.
13.10 RELEASE FOR PAST INFRINGEMENT. GSI forever releases Ethicon from
any claims, liabilities, demands, damages, expenses and losses for patent
infringement which GSI may have had against Ethicon for the sale of the Ethicon
Balloon Dissector prior to the Effective Date hereof.
13.11 BANKRUPTCY. All rights and licenses granted under or pursuant to
this Agreement by GSI to Ethicon are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of Title 11, U.S. Code (the "Bankruptcy Code"),
licenses of rights to "intellectual property" as defined in the Bankruptcy Code.
The parties agree that Ethicon, as a licensee of such rights under this
Agreement, shall retain and may fully exercise all of its rights and elections
under the Bankruptcy Code. GSI agrees during the term of this Agreement to
create and maintain current copies or, if not amenable to copying, detailed
descriptions or other appropriate embodiments, of all such intellectual
property. The parties further agree that, in the event of the commencement of a
bankruptcy proceeding by or against GSI under the Bankruptcy Code, Ethicon
shall be entitled to a complete duplicate of (or complete access to, as
appropriate) any such intellectual property and all embodiments of such
intellectual property, and same, if not already in its possession, shall be
promptly delivered to Ethicon (i) upon any such commencement of a bankruptcy
proceeding upon Ethicon's written request, unless GSI elects to continue to
perform all of its obligations under this Agreement, or (ii) if not delivered
under (i) above, upon the rejection of this Agreement by or on behalf of GSI
upon Ethicon's written request. All rights, powers and remedies of Ethicon
provided under this Article are in addition to and not in substitution for any
and all other rights, powers and remedies now or hereafter existing at law or in
equity in the event of any such commencement of a bankruptcy proceeding by or
against GSI.
13.12 ENHANCEMENTS. The parties agree to meet periodically at their
respective facilities to discuss proposed enhancements to the OEM Balloon
Dissectors and other areas of potential cooperation. If Ethicon wishes to
engage GSI's services to develop an enhanced OEM Balloon Dissector, or other
products, and GSI wishes to perform such services, and Ethicon agrees to pay for
such services or any portion thereof, then Ethicon
PAGE 22
<PAGE>
and GSI shall enter into a development agreement in a form mutually
acceptable to both parties. As of this date, the parties wish to evaluate
the potential for development by GSI of a balloon blunt tip trocar.
13.12A USI INITIATIVES. As of the Effective Date hereof, the parties
will use their reasonable commercial efforts to develop and market a Tissue
Dissector in the Expanded Field only for USI. The parties agree to cooperate to
define the specifications for such dissector and, within 90 days after the
development of such dissector, the sales and marketing program to promote such
dissector. In addition, Ethicon will make available its Institute to train
surgeons to use such dissector in a minimum of twenty training sessions during
the term of this Agreement, the exact time and duration of which shall be
mutually agreed upon by the parties. Within 30 days after the development of
such dissector, the parties will mutually evaluate promotional efforts, such as
patient education, consumer awareness, education of referring doctors, and
comarketing programs with Affiliates. The parties shall use good faith efforts
to develop a procedural kit using such dissector promptly after the date such
dissector is first commercially available.
13.13 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY
CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY, WHETHER
CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT A PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
13.14 PRIOR UNDERSTANDINGS. The parties have, in this Agreement,
incorporated all representations, warranties, covenants, commitments and
understandings on which they have relied in entering into this Agreement and,
except as provided herein, the parties make no covenants or other commitments to
the other concerning their future actions. Accordingly, this Agreement:
(i) constitutes the entire agreement and understanding between the
parties, and there are no promises, representations, conditions, provisions or
terms relating to it other than as set forth in this Agreement, and
(ii) supersedes all previous understandings, agreements and
representations between the parties, written or oral, relating to the subject
matter of this Agreement. This Agreement may be altered or amended only upon
mutual written consent.
PAGE 23
<PAGE>
13.15 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be considered an original and all of which
taken together shall constitute one and the same instrument, provided that this
Agreement shall not become effective until each party has received the
counterparts executed by the other party.
The parties agree to the terms of this Agreement, as indicated by the
signatures of their respective corporate officers, duly authorized as of the
last date of signature below.
General Surgical Innovations, Inc. Ethicon Endo-Surgery, Inc.
By: /s/ Roderick A. Young By: /s/ Robert Salerno
-------------------------- -------------------------------
Roderick A. Young, President Robert Salerno, Vice President
Business Development & Strategic
Planning
Date: 12/20/96 Date: 12/20/96
------------------------ ----------------------------
PAGE 24
<PAGE>
APPENDIX 1
TRANSFER PRICES
First OEM Balloon Dissector for Resale [******]
First OEM Balloon Dissector for Samples [******]
Spacemaker, Distal 900 DBD-900 99-1140-01 [******]
Spacemaker, Distal 1500 DBD-1500 99-1141-01 [******]
Spacemaker II, with cann VSM-2900 99-1201-02 [******]
Spacemaker II, w/o cann VSM-2900-01 99-1202-01 [******]
Air Bulb, 2 pk AB-050 99-1301-01 [***]
COMPONENTS
[****************] [**********] [****************]
[**********************] [**********] [****************]
[**********************] [**********] [****************]
[***] CONFIDENTIAL TREATMENT REQUESTED
PAGE 25
<PAGE>
APPENDIX 2
ETHICON STANDARD PURCHASE ORDER
PAGE 26
<PAGE>
APPENDIX 3
ROYALTY AND ACCOUNTING PROVISIONS
Ethicon shall keep accurate books and records of all payments due GSI.
Ethicon shall deliver to GSI written reports of the number of units sold of the
Ethicon Balloon Dissector during the preceding Accounting Quarter, on or before
the sixtieth day following the end of each Accounting Quarter. Such report
shall include a calculation of the earned royalty due and the earned royalty
payment.
GSI shall have the right to nominate an independent accountant acceptable
to and approved by Ethicon (which approval shall not be unreasonably withheld)
who shall have access to Ethicon's records during reasonable business hours for
the purpose of verifying, at GSI's expense, the royalty payable as provided for
in this Agreement for the two preceding years, but this right may not be
exercised more than once in any year. GSI shall solicit or receive only
information relating to the accuracy of the royalty report and the royalty
payments made. Ethicon shall be entitled to withhold approval of an accountant
which GSI nominates unless the accountant agrees to sign a confidentiality
agreement with Ethicon which shall obligate such accountant to hold the
information he receives from Ethicon in confidence, except for information
necessary for disclosure to GSI necessary to establish the accuracy of the
royalty reports.
The remittance of royalties payable on sales outside the United States will
be payable to the GSI in United States Dollar equivalents at the official rate
of exchange of the currency of the country from which the royalties are payable
as quoted by The Wall Street Journal, New York Edition, for the day upon which
the transfer of funds for the royalty payment is made. If the transfer or the
conversion into United States Dollar equivalents in any such instance is not
lawful or possible, the payment of such part of the royalties as is necessary
shall be made by the deposit thereof, in the currency of the country where the
sales were made on which the royalty was based, to the credit and account of GSI
or its nominee in any commercial bank or trust company of its choice located in
that country, prompt notice of which shall be given by Ethicon to GSI. In order
to facilitate payments from countries other than the United States, GSI shall,
whenever requested by Ethicon, enter into a direct agreement in writing with a
foreign affiliate of Ethicon. Such shall be obligated to remit any earned
royalties due for sales in such country directly to GSI, and GSI shall execute
such direct agreement as Ethicon may request which may be necessary to effect
such purpose. Such direct agreement shall provide generally for the payment of
earned royalties under the same terms as provided for herein, insofar as such
terms are lawful under the applicable laws and regulations of the particular
country. Notwithstanding the provisions of this paragraph, Ethicon shall remain
primarily liable for all payments due GSI.
Any tax required to be withheld on royalties payable to GSI under the laws
of any country, shall be promptly paid by Ethicon on behalf of GSI to the
appropriate
PAGE 27
<PAGE>
governmental authority, and Ethicon shall furnish GSI with proof of
payment of such tax together with official or other appropriate evidence issued
by the appropriate governmental authority, sufficient to enable GSI to support a
claim for income tax credit for the sum withheld. Any such tax required to be
withheld shall be an expense of GSI.
Notwithstanding whether the Ethicon Balloon Dissector is covered by more than
one patent, only one royalty payment shall be payable to consultant for the
Ethicon Balloon Dissector.
PAGE 28
<PAGE>
APPENDIX 3A
ROYALTY AND ACCOUNTING PROVISIONS
GSI shall keep accurate books and records of all payments due Ethicon. GSI
shall deliver to Ethicon written reports of the number of units sold of Tissue
Dissectors during the preceding Accounting Quarter, on or before the sixtieth
day following the end of each Accounting Quarter. Such report shall include a
calculation of the earned royalty due and the earned royalty payment.
Ethicon shall have the right to nominate an independent accountant
acceptable to and approved by GSI (which approval shall not be unreasonably
withheld) who shall have access to GSI's records during reasonable business
hours for the purpose of verifying, at Ethicon's expense, the royalty payable as
provided for in this Agreement for the two preceding years, but this right may
not be exercised more than once in any year. Ethicon shall solicit or receive
only information relating to the accuracy of the royalty report and the royalty
payments made. GSI shall be entitled to withhold approval of an accountant which
Ethicon nominates unless the accountant agrees to sign a confidentiality
agreement with GSI which shall obligate such accountant to hold the information
he receives from GSI in confidence, except for information necessary for
disclosure to Ethicon necessary to establish the accuracy of the royalty
reports.
The remittance of royalties payable on sales outside the United States will
be payable to Ethicon in United States Dollar equivalents at the official rate
of exchange of the currency of the country from which the royalties are payable
as quoted by The Wall Street Journal, New York Edition, for the day upon which
the transfer of funds for the royalty payment is made. If the transfer or the
conversion into United States Dollar equivalents in any such instance is not
lawful or possible, the payment of such part of the royalties as is necessary
shall be made by the deposit thereof, in the currency of the country where the
sales were made on which the royalty was based, to the credit and account of
Ethicon or its nominee in any commercial bank or trust company of its choice
located in that country, prompt notice of which shall be given by GSI to
Ethicon. In order to facilitate payments from countries other than the United
States, Ethicon shall, whenever requested by GSI, enter into a direct agreement
in writing with a foreign affiliate of GSI. Such shall be obligated to remit
any earned royalties due for sales in such country directly to Ethicon, and
Ethicon shall execute such direct agreement as GSI may request which may be
necessary to effect such purpose. Such direct agreement shall provide generally
for the payment of earned royalties under the same terms as provided for herein,
insofar as such terms are lawful under the applicable laws and regulations of
the particular country. Notwithstanding the provisions of this paragraph, GSI
shall remain primarily liable for all payments due Ethicon.
PAGE 29
<PAGE>
Any tax required to be withheld on royalties payable to Ethicon under the
laws of any country, shall be promptly paid by GSI on behalf of Ethicon to the
appropriate governmental authority, and GSI shall furnish Ethicon with proof of
payment of such tax together with official or other appropriate evidence issued
by the appropriate governmental authority, sufficient to enable Ethicon to
support a claim for income tax credit for the sum withheld. Any such tax
required to be withheld shall be an expense of Ethicon.
Notwithstanding whether the Tissue Dissectors are covered by more than one
patent, only one royalty payment shall be payable to Ethicon for such
dissectors.
PAGE 30
<PAGE>
APPENDIX 4
LIST OF INTERNATIONAL DISTRIBUTORS
DISTRIBUTOR COUNTRY
------------- ---------
Blue Mountain International Korea
China
Hong Kong
Macau
Escor Oy Finland
PRIM Spain
Portugal
PAGE 31
<PAGE>
MODIFICATION AND TERMINATION AGREEMENT
AND MUTUAL RELEASE
This Agreement is made as of November 12, 1996 by and among General
Surgical Innovations, Inc., a California corporation ("GSI"), and United States
Surgical Corporation, a Delaware corporation ("USSC").
WHEREAS, GSI and USSC have entered into a certain Distributorship Agreement
dated as of March 9, 1994, as amended (the "Distributorship Agreement"); and
WHEREAS, GSI and USSC wish to modify and terminate the Distributorship
Agreement and agree to a mutual release as set forth below.
The parties agree that as of the date of this Agreement set forth above
(the "Effective Date"):
1.1 MODIFICATION AND TERMINATION. Subject to the provisions set forth
below, GSI and USSC hereby agree to terminate the Distributorship Agreement.
Upon execution of this Agreement, USSC shall not be obligated to purchase, and
GSI shall not be obligated to supply, any products, including, but not limited
to, the products set forth on EXHIBIT A hereto. The parties further agree to
amend Section 11.3 of the Distributorship Agreement such that USSC shall have
the right (to the extent permitted under applicable laws and regulations) to
sell its existing inventory of products purchased from GSI until [************
*********].
1.2 This Agreement will be effective on the date it is executed by both
parties (the "Termination Date"). Within [********] days after the Termination
Date, USSC shall pay in full the amount set forth in the EXHIBIT B and
thereafter shall no longer owe any amounts to GSI. USSC shall have no right to
[**********] under the Distributorship Agreement after the Termination Date.
2.0 ACKNOWLEDGMENT OF INTELLECTUAL PROPERTY RIGHTS . Each party
acknowledges that it has no rights, claims or interests in the other party's
intellectual property rights except as set forth in the Distributorship
Agreement.
3.0 MUTUAL RELEASE. Except for warranty and indemnity obligations of the
parties (as set forth in Articles 4.4 and 7 of the Distributorship Agreement,
respectively), GSI and USSC, on behalf of itself, each of its past and present
affiliates, representatives, successors, assigns and transferees does hereby
release, discharge and acquit forever such other party and such party's
affiliates, successors, assigns and transferees from any and all demands, claims
or other liabilities (or potential demands, claims or liabilities) of every kind
and character whatsoever, arising in connection with any rights, obligations,
duties or interests arising under the Distributorship Agreement occurring on or
prior to the date of this Agreement, whether known or unknown, suspected or
unsuspected and each expressly waives the benefits of Section 1542 of the
California Civil Code which provides that:
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
"A GENERAL RELEASE DOES NOT EXTEND THE RELEASE TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST
HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Each of GSI and USSC understands and acknowledges the significance and
consequences of such specific waiver of Section 1542, and hereby assumes full
responsibilities for any injuries, damages or losses that each may incur as a
result of such waiver.
4.0 SURVIVAL OF CERTAIN TERMS. USSC and GSI acknowledge and agree that
the following provisions survive the termination of the Distributorship
Agreement: Sections 2.1(e), 3.7, 3.8, 4.4, the last two sentences of 5.2, 5.3,
5.4, 5.5, 6.1, 6.4, 6.5, 6.6, 6.7, 6.8, 6.12, 7.1, 8.2, 8.3, 10.1, 10.2, 10.3,
11.3 [*******************************************************************
****] in Section 1.1 above), 13.1, 13.2, 13.3, 14.1, 14.2, 14.3, 14.4, 14.5,
14.6, 14.7, 14.8.
5.0 CLARIFICATION OF ARTICLE 11.2. USSC and GSI acknowledge and agree
that the Distribution Agreement is being terminated by mutual agreement and not
pursuant to Sections 11.2(e) or 11.2(f) and therefore the parties agree that the
restriction on USSC contained in the last unnumbered paragraph of Article 11.2
does not apply.
IN WITNESS WHEREOF, the undersigned GSI and USSC have duly executed this
Agreement as of the date first set forth above.
GENERAL SURGICAL INNOVATIONS, INC. UNITED STATES SURGICAL
CORPORATION
By:_______________________________ By:___________________________
Its:______________________________ Its:__________________________
[***] CONFIDENTIAL TREATMENT REQUESTED
-2-
<PAGE>
EXHIBIT A
(CANCELED USSC FINANCIAL OBLIGATIONS)
QUANTITY $
-------- -
[************] [************] [*****] [*******]
[************] [************] [*****] [*******]
[************] [************] [*****] [*******]
[************] [************] [*****] [*******]
[************] [************] [*****] [*******]
[************] [************] [*****] [*******]
[***********************************************]
QUANTITY $
-------- -
[************************] [*****] [*******]
[************************************]
QUANTITY $
-------- -
[***************************] [*****] [*******]
[***************************] [*****] [*******]
[***************************] [*****] [*******]
[***] CONFIDENTIAL TREATMENT REQUESTED
-3-
<PAGE>
EXHIBIT B
(USSC FINANCIAL OBLIGATIONS)
[*************************]
INVOICE NO. $
----------- -
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
[****] [**********]
----------
[**********]
[***] CONFIDENTIAL TREATMENT REQUESTED
-4-
<PAGE>
EXHIBIT 10.22
- -------------------------------------------------------------------------------
STANDARD FORM LEASE
- -------------------------------------------------------------------------------
PARTIES: This Lease, executed in duplicate at Cupertino, California, on
December__, 1996, by and between Berg & Berg Enterprises, Inc., a California
Corporation, and General Surgical Innovations Inc., a California Corporation,
hereinafter called respectively Lessor and Lessee, without regard to number or
gender.
USE: WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, for the purpose of conducting therein office, research and development,
light manufacturing, and warehouse activities, and any other legal activity;
and for no other purpose without obtaining the prior written consent of Lessor.
PREMISES: The real property with appurtenances as shown on Exhibit A.1 (the
"Premises") situated in the City of Cupertino, County of Santa Clara, State of
California, and more particularly described as follows:
A 30,460 square foot building including all improvements thereto and
the right to use up to 116 unreserved parking spaces as shown on
Exhibit A.2 ("Phase I") with the addition of approximately 15,000
square feet of building and improvements including the right to use
approximately 57 additional unreserved parking spaces at the Premises
effective September 1, 1998 as shown on Exhibit A.2 ("Phase II").
Phase I and Phase II are collectively referred to herein as the
Building (the "Building"). The address for the Building is 10460
Bubb Road, Cupertino, California. Lessee's pro-rata share of the
Building is 100%.
TERM: The term shall be for eighty-four (84) months unless extended pursuant to
Section 35 of this Lease (the "Lease Term"), commencing on the Commencement
Date as defined in Section 1, and ending on the day eighty-four (84) months
thereafter.
RENT: Base rent shall be payable in monthly installments as follows:
Base rent Estimated CAC* Total
--------- -------------- -----
Months 1 through 12 $46,895 $5,010* $51,905
Months 13 through 18 $48,302 $5,010* $53,312
Months 19 through 24 $72,100 $7,470* $79,570
Monthly base rent, net of CAC charges, shall increase by 3% on the annual
anniversary of the Commencement Date each year during the Lease Term over the
prior year's rent. The base rent starting on the 25th month of the Lease Term
shall be $74,263.
* CAC charges to be adjusted per Common Area Charges Section below.
Base rent as scheduled above shall be payable in advance on or before the first
day of each calendar month during the Lease Term. The term "Rent," as used
herein, shall be deemed to be and to mean the base monthly rent and all other
sums required to be paid by Lessee pursuant to the terms of this Lease. Rent
shall be paid in lawful money of the United States of America, without offset
or deduction, and shall be paid to Lessor at such place or places as may be
designated from time to time by Lessor. Rent for any period less than a
calendar month shall be a pro rata portion of the monthly installment. Upon
execution of this Lease, Lessee shall deposit with Lessor the first month's
rent.
SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of Fifty-One
Thousand Nine Hundred Five Dollars ($51,905) (the "Security Deposit"). The
Security Deposit shall be held by Lessor as security for the faithful
performance by Lessee of all of the terms, covenants, and conditions of this
Lease applicable to Lessee. If Lessee commits a default as provided for
herein, including but not limited to a default with respect to the provisions
contained herein relating to the condition of the Premises, Lessor may (but
shall not be required to) use, apply or retain all or any part of the Security
Deposit for the payment of any amount which Lessor may spend by reason of
default by Lessee. If any portion of the Security Deposit is so used or
applied, Lessee shall, within ten days after written demand therefor, deposit
cash with Lessor in an amount sufficient to restore the Security Deposit to its
original amount. Lessee's failure to do so shall be a default by Lessee. Any
attempt by Lessee to
<PAGE>
transfer or encumber its interest in the Security Deposit shall be null and
void. Upon execution of this Lease by Lessee and Lessor, Lessee shall deposit
with Lessor the Security Deposit. Provided Lessee meets all of its obligations
under this Lease, within 30 days after the termination of this Lease, Lessee
shall refund the Security Deposit less any amount properly applied under the
terms of this Lease.
LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee to
Lessor of Rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges, which may be imposed on Lessor
according to the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of Rent or any other sum due from Lessee is not
received by Lessor or Lessor's designee within ten (10) days after such amount
is due, Lessee shall pay to Lessor a late charge equal to five (5%) percent of
such overdue amount. The parties hereby agree that such late charge represents
a fair and reasonable estimate of the costs Lessor will incur by reason of late
payments made by Lessee. Acceptance of such late charges by Lessor shall in no
event constitute a waiver of Lessee's default with respect to such overdue
amount, nor shall it prevent Lessor from exercising any of the other rights and
remedies granted hereunder. Notwithstanding the above, Lessee shall not be
required to pay a late charge if it is the result of a non-recurring unusual
event such as a accounting error and not occurring more than five (5) times
during the Lease Term.
QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee
paying Rent and performing its covenants and conditions under this Lease,
Lessee shall and may peaceably and quietly have, hold and enjoy the Premises
for the Lease Term, subject, however, to the rights reserved by Lessor
hereunder.
COMMON AREA CHARGES: Lessee shall pay to Lessor, as additional Rent, an amount
equal to Lessee's prorata share of the total common area charges of the
Premises and Lessee's pro rata share of the total common area charges for the
Building as defined below (the common area charges for the Premises and the
common area charges for the Building collectively referred to herein as
("CAC")). Lessee shall pay to Lessor as Rent, on or before the first day of
each calendar month during the Lease Term, subject to adjustment and
reconciliation as provided hereinbelow, the sum of Five Thousand Ten Dollars
($5,010), said sum representing Lessee's estimated monthly payment of Lessee's
percentage share of CAC for 1997. It is understood and agreed that Lessee's
obligation under this paragraph shall be prorated to reflect the Commencement
Date and the end of the Lease Term.
Lessee's estimated monthly payment of CAC payable by Lessee during the calendar
year in which the Lease commences is set forth above. At or prior to the
commencement of each succeeding calendar year term (or as soon as practical
thereafter), Lessor shall provide Lessee with a description of Lessee's
estimated monthly payment for CAC which Lessee shall pay to Lessor as Rent.
Within 120 days of the end of the calendar year and the end of the Lease Term,
Lessor shall provide Lessee a statement of actual CAC incurred including
capital reserves for the preceding year or other applicable period in the case
of a termination year. If such statement shows that Lessee has paid less than
its actual percentage, then Lessee shall on demand pay to Lessor the amount of
such deficiency within 30 days after the receipt of the statement therefore. If
such statement shows that Lessee has paid more than its actual percentage, then
Lessor shall, at its option, promptly refund such excess to Lessee or credit
the amount thereof to the Rent next becoming due from Lessee. Lessor reserves
the right to revise any estimate of CAC if the actual or projected CAC show an
increase or decrease in excess of 10% from an earlier estimate for the same
period. In such event, Lessor shall provide a revised estimate to Lessee,
together with an explanation of the reasons therefor, and Lessee shall revise
its monthly payments accordingly. Lessor's and Lessee's obligation with
respect to adjustments at the end of the Lease Term or earlier expiration of
this Lease shall survive the Lease Term or earlier expiration. Notwithstanding
the above, CAC shall be limited to a maximum increase of 5% over the prior year
during the initial Lease Term except that this limitation shall not apply to
(i) tax increases and (ii) the increase resulting from the Substantial
Completion of the Phase II Improvements.
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As used in this Lease, CAC shall include, but are not limited to (i) items
specified as CAC items in Paragraphs 5(b), 6, 16 and 31; (ii) utility costs
related to the common areas of the Premises as shown on Exhibit A.1; (iii) all
costs and expenses including but not limited to supplies, materials, equipment
and tools used or required in connection with the operation and maintenance of
the Premises; (iv) licenses, permits and inspection fees; (v) all other costs
incurred by Lessor in maintaining and operating the Premises; (vi) all reserves
for capital replacements for HVAC, roof, parking lot and exterior painting
shall not exceed Twelve Thousand Eight Hundred Seventy-Two Dollars ($12,872)
per year prior to September 1, 1998 and Eighteen Thousand Five Hundred Dollars
per year after September 1, 1998 or upon Substantial Completion of the Phase II
Improvements plus annual increases equal to the consumer price index; and (vii)
an amount equal to five percent (5%) of the aggregate of all CAC, as
compensation for Lessor's accounting and processing services. Lessee shall
have the right to review the books or records related to the CAC applicable to
this Lease annually. CAC shall not include any cost related to: (a) hazardous
or toxic materials unless some type of area-wide assessment is made by a
government agency or commission; (b) structural defects or construction defects
or non-compliance with codes existing as of the Commencement Date with respect
to the Building Shell and Lessee Interior Improvements; (c) leasing and
marketing costs or costs incurred in enforcing or administering leases (except
for above accounting); (d) casualty damage covered by insurance or costs for
which Lessor obtains reimbursement from other sources; and (e) capital
improvement costs to the extent that Lessee has paid to Lessor reserve amounts
for such capital improvements. If Lessee's share of the cost of capital
improvements due to governmental regulations as provided in Section 9 exceeds
$5,000, and there are no reserves paid by Lessee to Lessor available for
Section 9 capital improvements, and the capital improvement is not required due
to Lessee's particular use of the Premises, such capital improvement cost shall
be amortized over the estimated useful life of the improvement, not to exceed
10 years at Wells Fargo prime rate plus one percent (1%). Lessee shall pay to
Lessor the amortized costs of such improvement on a monthly basis over the
Lease Term as part of the CAC. Notwithstanding the above exceptions to CAC,
Lessee shall not be relieved of any of Lessee's obligations under this Lease.
COMMENCEMENT DATE MEMORANDUM: When the actual Commencement Date is determined,
the parties shall execute a Commencement Date Memorandum setting forth the
Commencement Date, the expiration date of the Lease Term and any required
adjustments to base rent as provided in this Lease, but failure to do so shall
not affect the continuing validity and enforceability of this Lease, which
shall remain in full force and effect.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. POSSESSION: Possession shall be deemed tendered and the term shall commence
on the first to occur of the following (the "Commencement Date"): (i) the Phase
I Improvements are Substantially Complete or (ii) Lessee occupies Phase I and
commences to conduct business operations or (iii) if Lessor is prevented from
or delayed in completing its work under Section 2 of this Lease due to Lessee
Delays, such work will be deemed Substantially Complete as of the date on which
it would have been Substantially Complete had it not been for such Lessee
Delays. It is the intention of Lessee and Lessor that March 1, 1997 shall be
the Commencement Date.
"Substantially Complete" shall mean that: (i) Lessor has tendered possession of
Phase I to Lessee, (ii) Lessor has met all legal requirements for occupancy of
Phase I, (iii) the Lessee Interior Improvements for Phase I are materially
complete per the approved plans, exclusive of telephone or other communication
systems, punchlist items and there remains no incomplete or defective items of
work which would materially adversely affect Lessee's intended use of the
Premises and (iv) said interior of the building is in a "broom clean"
condition.
2. IMPROVEMENTS
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A. PHASE I IMPROVEMENTS: The "Phase I Improvements" shall be defined as all
items necessary for a turnkey remodel of Phase I. The Phase I Improvements
shall be constructed by independent contractors to be employed by and under
the supervision of Lessor in accordance with complete plans and
specifications prepared by Lessor for submission to the City of Cupertino
("Phase I Improvement Plans"), complete with all mechanical and electrical
design, approved by Lessee, and then attached hereto as Exhibit B.1. Lessee
and its designated representatives, shall at all times during the
construction of the Phase I Improvements have access to the building to
monitor the progress of construction and Lessor's compliance with its
obligations hereunder, provided however, that such access shall not
unreasonably interfere with the activities of Lessor or its contractors. If
Lessor notifies Lessee that any fittings, finishes, or other materials
included in the specifications for the Phase I Improvements cannot be
obtained within fifteen (15) days after an order therefor, Lessee shall be
responsible for selecting alternative fittings, finishes, or other materials
which can be obtained within said fifteen (15) day period including Rent for
each day of delay.
Lessor shall be responsible for ensuring that the Phase I Improvements
conform to the approved plans and all applicable statutes, rules,
regulations, ordinances, and City of Cupertino Building Department.
Lessor estimates the total cost of the turnkey Phase I Improvements will be
one million one hundred fifty thousand dollars ($1,150,000) including all
items shown on Exhibit B.
Lessor shall be responsible for and shall pay the cost of the Phase I
Improvements up to the amount of Two Hundred Thousand Dollars ($200,000) (the
"Phase I TI Allowance"). Lessee's cash budget for the Phase I Improvements
shall be Nine Hundred Fifty Thousand Dollars ($950,000) ("Lessee's Phase I
Costs"). Costs in excess of the Phase I TI Allowance and Lessee's Phase I
Costs shall not be incurred without the advance approval of Lessee. Any
approved cost over the Phase I TI Allowance shall be paid for by Lessee in
cash within fifteen (15) days after Lessor has provided Lessee with evidence
that the billed work is complete. Lessor shall be entitled to a construction
management fee covering its overhead and profit on the Phase I TI Allowance
and Lessee's Phase I Costs of six percent (6%). All costs for the Phase I
Improvements shall be documented and subject to verification by Lessee.
For any contract to be entered into between Lessor and any contractor
furnishing labor or materials in connection with the construction of the
Lessee Interior Improvements where the payment due under such contract is
estimated by Lessor to be in excess of One Hundred Thousand Dollars $100,000,
Lessor shall request bids from at least three (3) qualified contractors
selected by Lessor for bidding. Lessor will accept the lowest qualified bid.
Lessee shall have the opportunity to review the qualified bidders list and
may select a bidder of their choice for any bid provided the bidder meets
Lessor's reasonable requirements. Within five (5) business days after
approval by Lessee of Lessor's single line drawings depicting the Phase I
Improvements, together with specifications for HVAC and electrical
installations which will be included in the Phase I Improvements, Lessor
shall provide Lessee with a guaranteed maximum price for the construction of
the Phase I Improvements. Following approval of that amount by Lessee,
Lessee shall have no obligation to pay any costs in excess of the guaranteed
maximum price in connection with the construction of the Phase I
Improvements, except to the extent that the cost of such construction is
increased by changes approved by Lessee.
Lessor shall use its best efforts to cause the Commencement Date of the
initial term to occur not later than March 1, 1997. If the Commencement Date
has not occurred by April 1, 1997, Lessee shall receive one day of base rent
abatement for each day after April 1, 1997 until the Commencement Date.
Lessor and Lessee agree that having a Commencement Date after April 1, 1997
will cause Lessee and Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain.
Accordingly, the parties hereby agree that Lessee's right to the amount of
one day's rent for each day of delay after April 1, 1997 represents a fair
and reasonable settlement for both parties and neither party shall
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have further liability to the other for any damages. If the Commencement
Date has not occurred by April 30, 1997, Lessee may at its sole option, by
written notice to Lessor, have the right to terminate this Lease at any time
after April 30, 1997 until the Commencement Date. Notwithstanding anything
to the contrary herein, all dates stated herein shall be extended for the
number of days Lessor is unable to Substantially Complete the Building as a
result of delays (i) due to governmental actions (other than governmental
action of refusing to approve work which fails to comply with the law or the
building permit) which occurs after receipt of normal building permits, (ii)
due to acts of God, , and (iii) due to Lessee Delays. Items (i) and (ii) are
referred to herein as Third Party Delays ("Third Party Delays"). "Lessee
Delays" means a delay in Substantial Completion resulting from (a) Lessee's
failure to meet Lessee's deadlines for approval as shown on Exhibit E, (b)
delays due to change orders, (c) delays due to Lessee's failure to meet the
deadlines for approving any plans or change orders, and (d) delays because of
the inability to obtain any product, materials, design, color, fitting, or
finish pursuant to this Section 2. Lessee shall have a maximum of 3 business
days to approve or disapprove any preliminary plans or change orders and a
maximum of 10 business days to approve or disapprove any final plans. If
Lessee does not disapprove any plans or change orders within the time period
set forth herein in writing, Lessor may proceed on the basis that the plans
or change orders are approved by Lessee. If plans or change orders are
disapproved, Lessee shall state the reason for disapproval and Lessor and
Lessee shall act in good faith to resolve any issues. Lessor shall charge
Lessee $250 per change order after the fifth (5th) change order for
processing.
Notwithstanding any other provisions herein, Lessee shall during the Lease
Term own all Phase I Improvements paid for by Lessee. Ownership of these
improvements shall, for the sum of $1.00, the receipt of which is hereby
acknowledged, revert to Lessor at the end of the Lease Term or earlier
expiration of this Lease.
B. PHASE II BUILDING SHELL AND LESSEE'S INTERIOR IMPROVEMENTS: The "Building
Shell", as defined on the attached Exhibit C shall be constructed at Lessor's
sole cost and expense.
The "Phase II Lessee Interior Improvements" shall be defined as all items
that are not part of the Building Shell and shall be constructed by
independent contractors to be employed by and under the supervision of Lessor
in accordance with complete plans and specifications prepared by Lessor for
submission to the City of Cupertino ("Phase II Lessee Improvement Plans"),
complete with all mechanical and electrical design, approved by Lessee, and
then to be attached hereto as Exhibit D. Lessee and its designated
representatives, shall at all times during the construction of the Phase II
Lessee Interior Improvements have access to the building to monitor the
progress of construction and Lessor's compliance with its obligation
hereunder; provided however, that such access shall not unreasonably
interfere with the activities of Lessor or its contractors. If Lessor
notifies Lessee that any fittings, finishes or other materials included in
the specifications for the Lessee Interior Improvements cannot be obtained
within fifteen (15) days after placing an order therefor, Lessee shall be
responsible for selecting alternative fittings, finishes, or other materials
which can be obtained within said fifteen (15) day period, or, if Lessee does
not specify any alternative, Lessee shall be responsible for any delay beyond
said fifteen (15) day period including Rent for each day of delay.
Lessor shall be responsible for ensuring that the Phase II Lessee Interior
Improvements conform to the approved plans and all applicable statutes,
rules, regulations, ordinances, and City of Cupertino Building Department.
For any contract to be entered into between Lessor and any contractor
furnishing labor or materials in connection with the construction of the
Lessee Interior Improvements where the payment due under such contract is
estimated by Lessor to be in excess of One Hundred Thousand Dollars $100,000,
Lessor shall request bids from at least three (3) qualified contractors
selected by Lessor for bidding. Lessor will accept the lowest qualified bid.
Lessee shall have the opportunity to review the qualified bidders list and
may select a bidder of their choice for any bid provided the bidder meets
Lessor's
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reasonable requirements. Within five (5) business days after approval by
Lessee of Lessor's single line drawings depicting the Phase II Lessee
Interior Improvements, together with specifications for HVAC and electrical
installations which will be included in the Phase II Lessee Interior
Improvements, Lessor shall provide Lessee with a guaranteed maximum price
for the construction of the Phase II Lessee Interior Improvements.
Following approval of that amount by Lessee, Lessee shall have no obligation
to pay any costs in excess of the guaranteed maximum price in connection with
the construction of the Phase II Lessee Interior Improvements, except to the
extent that the cost of such construction is increased by changes approved by
Lessee.
Lessor shall be responsible for and shall pay the cost of the Phase II Lessee
Interior Improvements up to the amount of Five Hundred Thousand Dollars
($500,000) (the "Phase II TI Allowance"). In the event the approved cost of
the Phase II Lessee Interior Improvements is more than the Phase II TI
Allowance Lessee shall pay the excess cost in cash, as provided for herein.
Costs in excess of the Phase II TI Allowance, if any, will not be incurred
without advance approval of Lessee. Any approved cost over the Phase II TI
Allowance shall be paid in cash within fifteen (15) days after Lessor has
provided Lessee with any invoice for the portion of the work that has been
completed. Lessor shall be entitled to a construction management fee
covering its overhead and profit on the costs of the Phase II Lessee Interior
Improvements of six percent (6%). All costs for Phase II Lessee Interior
Improvements shall be documented and subject to verification by Lessee.
Lessor shall use its best efforts to cause the Substantial Completion of
Phase II to occur not later than September 1, 1998. All base rent related
to Phase II shall be adjusted for each day the Phase II Lessee Interior
Improvements are not Substantially Complete after September 1, 1998. Lessor
and Lessee agree that having a Substantial Completion date for Phase II after
September 1, 1998 will cause Lessee and Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Accordingly, the parties hereby agree that Lessee's
right to the abatement of base rent specified herein represents a fair and
reasonable settlement for both parties and neither party shall have further
liability to the other for any damages. If the Phase II Lessee Interior
Improvements are not Substantially Complete by October 1, 1998, Lessee may at
its sole option, by written notice to Lessor, have the right to terminate
this Lease for applicable to the Phase II space at any time after October 1,
1998 until the Commencement Date. Notwithstanding anything to the contrary
herein, all dates stated herein shall be extended for the number of days
Lessor is unable to Substantially Complete the Building as a result of delays
(i) due to governmental actions (other than governmental action of refusing
to approve work which fails to comply with the law or the building permit)
which occurs after receipt of normal building permits, (ii) due to acts of
God, , and (iii) due to Lessee Delays. Items (i) and (ii) are referred to
herein as Third Party Delays ("Third Party Delays"). "Lessee Delays" means a
delay in Substantial Completion resulting from (a) Lessee's failure to meet
Lessee's deadlines for approval as shown on Exhibit E, (b) delays due to
change orders, (c) delays due to Lessee's failure to meet the deadlines for
approving any plans or change orders, and (d) delays because of the inability
to obtain any product, materials, design, color, fitting, or finish pursuant
to this Section 2. Lessee shall have a maximum of 3 business days to approve
or disapprove any preliminary plans or change orders and a maximum of 10
business days to approve or disapprove any final plans. If Lessee does not
disapprove any plans or change orders within the time period set forth herein
in writing, Lessor may proceed on the basis that the plans or change orders
are approved by Lessee. If plans or change orders are disapproved, Lessee
shall state the reason for disapproval and Lessor and Lessee shall act in
good faith to resolve any issues. Lessor shall charge Lessee $250 per change
order after the fifth (5th) change order for processing.
Lessor further agrees, at its cost, to spend up to Fifty Thousand Dollars
($50,000) to upgrade the exterior of Phase I as part of the Phase II Lessee
Interior Improvements.
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Notwithstanding the above obligations with respect to the Building Shell and
the Phase II Lessee Interior Improvements, Lessor's obligation to proceed
with the indicated improvements shall be subject to Lessee having available
cash of a minimum of Ten Million Dollars ($10,000,000) as of the start of
the Phase II construction.
2.1 ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: Lessor represents that
the Premises shall be in good order and repair, and shall comply with all
requirements for occupancy as of the Commencement Date. Lessee agrees on the
last day of the Lease Term, or on the sooner termination of this Lease, to
surrender the Building to Lessor in Good Condition and Repair. Good
Condition and Repair ("Good Condition and Repair") shall not mean original
condition, but shall mean that the Building are in a commercially acceptable
condition suitable for occupancy by a reasonable lessee. The interior walls
of all office and warehouse areas, the floors of all office and warehouse
areas, all suspended ceilings and any carpeting are to be cleaned and in Good
Condition and Repair Lessee also agrees to surrender unto Lessor all
alterations, additions, and improvements which may have been made in, to, or
on the Building by Lessee. Lessor agrees to allow any reasonable alterations
and improvements and will notify Lessee at the time of approval if such
improvements or alterations are to be removed at the end of the Lease Term
or earlier termination of this Lease and the Building restored to its
condition as of the Commencement Date of the Lease. Lessee, on or before the
end of the Lease Term or sooner termination of this Lease, shall remove all
its personal property and trade fixtures from the Building, and all such
property not so removed shall be deemed to be abandoned by Lessee. Lessee
shall reimburse Lessor for all disposition costs incurred by Lessor relative
to Lessee's abandoned property. If the Building are not surrendered at the
end of the Lease Term or earlier termination of this Lease, Lessee shall
indemnify Lessor against loss or liability resulting from any delay caused by
Lessee in surrendering the Building including, without limitation, any claims
made by any succeeding Lessee founded on such delay.
3. USES PROHIBITED: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the buildings in
which the subject Premises are located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, or place any loads upon the floor, walls,
or ceiling which may endanger the structure, or use any machinery or
apparatus which will in any manner vibrate or shake the Building, or place
any harmful liquids in the drainage system of the building. No waste
materials or refuse shall be dumped upon or permitted to remain upon any part
of the Premises outside of the building proper. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain on any
portion of the Premises outside of the building structure, unless approved by
the local, state federal or other applicable governing authority. Lessor
consents to Lessee's use of materials which are incidental to the normal,
day-to-day operations of any office user, such as copier fluids, cleaning
materials, etc., but this does not relieve Lessee of any of its obligations
not to contaminate the Premises or related real property or violated any
Hazardous Materials Laws.
4. ALTERATIONS AND ADDITIONS: Lessee shall not make, or suffer to be made,
any alteration or addition to the Building, or any part thereof, without the
express, advance written consent of Lessor; any addition or alteration to
said Building, except movable furniture and trade fixtures, shall become at
once a part of the realty and belong to Lessor at the end of the Lease Term
or earlier termination of this Lease. Alterations and additions which are
not deemed as trade fixtures shall include HVAC systems, lighting systems,
electrical systems, partitioning, carpeting, or any other installation which
has become an integral part of the Building. Lessee agrees that it will not
proceed to make such alterations or additions until all required government
permits have been obtained and after having obtained consent from Lessor to
do so, until five (5) days from the receipt of such consent, so that Lessor
may post appropriate notices to avoid any liability to contractors or
material suppliers for payment for Lessee's improvements. Lessee shall at
all times permit such notices to be posted and to remain posted until the
completion of work. At the end of the Lease Term or earlier termination of
this Lease, Lessee shall remove and shall be required to remove its special
tenant improvements and all related equipment installed by Lessee at or
during the Lease Term and Lessee shall
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return the Building to the condition that existed before the installation of
the special tenant improvements. Notwithstanding the above, Lessor agrees to
allow any reasonable alterations and improvements and will notify Lessee at
the time of approval if such improvements or alterations are to be removed at
the end of the Lease Term or earlier termination of this Lease.
5. MAINTENANCE OF PREMISES:
(a) Lessee shall at its sole cost and expense keep and maintain the
interior of the Building, including, but not limited to, all lighting
systems, temperature control systems, all window washing, exterior and
interior, clean room systems other than base HVAC units and plumbing
systems, in Good Condition and Repair, including any required replacements.
Lessee shall maintain all wall surfaces and floor coverings in Good
Condition and Repair, free of holes, gouges, or defacements.
(b) Lessor shall keep and maintain in Good Condition and Repair including
replacements, at Lessee's expense, based on a pro-rata share of cost based
on square footage or costs directly related to Lessee's use of the Premises
the following, which shall be included in the monthly CAC:
1. The exterior of the building, any appurtenances and every part
thereof, including but not limited to, glazing, sidewalks, parking
areas, electrical systems, HVAC systems, roof membrane, and painting
of exterior walls.
2. The HVAC by a service contract with a licensed air conditioning
and heating contractor which contract shall provide for a minimum of
quarterly maintenance of all air conditioning and heating equipment
at the Building including HVAC repairs or replacements which are
either excluded from such service contract or any existing equipment
warranties.
3. The landscaping by a landscape contractor to water, maintain, trim
and replace, when necessary, any shrubbery and landscaping at the
Premises.
4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of semi-
annual maintenance, cleaning of storm gutters, drains, removing of
debris and trimming overhanging trees, repair of the roof and
application of a finish coat every five years at the Building.
5. Extermination services.
6. Fire monitoring services.
(c) Lessee hereby waives any and all rights to make repairs at the expense
of Lessor as provided in Section 1942 of the Civil Code of the State of
California, and all rights provided for by Section 1941 of said Civil Code.
Lessor shall assign any warranties, guaranties and similar rights which
would apply to the Building elements to be maintained by Lessee and shall
cooperate with Lessee as reasonably necessary to enforce such rights.
(d) Lessor shall be responsible and pay for the repair of any structural
defects in the Building including the roof structure (not membrane, except
as provided at Lessee's expense in 5(b) above), exterior walls and
foundation and to correct any condition which does not comply with
applicable laws after completion of the Phase I or Phase II Improvements.
6. HAZARD INSURANCE: Lessee shall not use, or permit said Premises, or any
part thereof, to be used, for any purpose other than that for which said
Premises are hereby leased; and no use shall be made or permitted to be made
of the Premises, nor acts done, which may cause a cancellation of any
insurance policy covering said building, or any part thereof, nor shall
Lessee sell or permit to be kept, used or sold, in or about said Premises,
any article which may be prohibited by a standard form fire insurance policy.
Lessee shall, at its sole cost and expense, comply with any and all
requirements, pertaining to said Premises, of any insurance organization or
company, necessary for the maintenance of reasonable fire and general
liability insurance,
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covering said building and appurtenances. Lessor agrees to purchase and keep
in force fire and extended coverage insurance covering loss or damage to the
Premises in amounts equal to the full replacement cost of the Premises as
determined by Lessor, with proceeds payable to Lessor. Lessee acknowledges
that the insurance referenced above does not include coverage for Lessee's
personal property. In the event of a loss per the insurance provisions of
this paragraph, Lessee shall be responsible for deductibles up to a maximum
of $5,000 per occurrence. Lessee agrees to pay to the Lessor as additional
Rent, on demand, the full cost of said insurance as evidenced by insurance
billings to the Lessor which shall be included in Lessee's monthly CAC. If
said insurance billings cover the Premises, and Lessee does not occupy the
entire Premises, the insurance premiums and deductibles shall be allocated to
the portion of the Premises occupied by Lessee on a pro-rata square footage
or other equitable basis, as determined by Lessor. It is understood and
agreed that Lessee's obligation under this paragraph will be prorated to
reflect the Commencement Date and the end of the Lease Term.
Lessor and Lessee hereby waive any rights each may have against the other
related to any loss or damage caused to Lessor or Lessee as the case may be,
or to the Premises, the Building, or its contents, and which may arise from
any risk generally covered by fire and extended coverage insurance. The
parties shall provide that their respective insurance policies insuring the
property or the personal property include a waiver of any right of
subrogation which said insurance company may have against Lessor or Lessee,
as the case may be. Lessor shall maintain in full force and effect, a policy
of rental loss insurance, in an amount equal to the amount of Rent payable by
Lessee commencing on the date of loss during the next ensuing one (1) year,
as reasonably determined by Lessor with proceeds payable to Lessor ("Loss of
Rents Insurance"). Lessee shall reimburse Lessor for Lessee's pro-rata share
of the cost of said rental loss insurance coverage.
7. ABANDONMENT: Lessee shall not vacate or abandon the Building at any time
during the Lease Term; and if Lessee shall abandon, vacate or surrender the
Building, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Building shall be deemed to be
abandoned, at the option of Lessor. Notwithstanding the above, the Building
shall not be considered vacated or abandoned if Lessee maintains the Building
in Good Condition and Repair, provides security and is not in default.
8. FREE FROM LIENS: Lessee shall keep the subject Premises and the property
in which the subject Premises are situated, free from any and all liens
including but not limited to liens arising out of any work performed,
materials furnished, or obligations incurred by Lessee. However, the Lessor
shall allow Lessee to contest a lien claim, so long as the claim is
discharged prior to any foreclosure proceeding being initiated against the
property and provided Lessee provides Lessor a bond if the lien exceeds
$5,000.
9. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Lessee shall, at its sole cost
and expense, comply with all of the requirements of all local, municipal,
state and federal authorities after the Commencement Date, or which may
hereafter be in force, pertaining to Lessee's use and occupancy of the said
Premises, and shall faithfully observe in the use of the Premises all local
and municipal ordinances and state and federal statutes in force after the
Commencement Date or which may hereafter be in force. Except as stated
above, Lessee shall not be required to pay for the construction of any single
improvement resulting from future government regulation under this paragraph
in excess of $5,000, unless such improvement is required to comply with
Lessee's particular use of the Premises; if such improvement is not required
due to Lessee's particular use of the Premises and such improvement cost
exceeds $5,000, such improvement cost shall be amortized over ten (10) years
at Wells Fargo prime rate plus one percent (1%). Lessee shall pay to Lessor
the amortized costs of such improvement on a monthly basis over the Lease
Term.
10. LESSEE'S INSURANCE: Lessee, as a material part of the consideration to be
rendered to Lessor, hereby waives all claims against Lessor and Lessor's
Agents for damages to goods, wares and merchandise, and all other personal
property in, upon or
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about said Premises, and for injuries to persons in, upon or about said
Premises, from any cause arising at any time, and Lessee will hold Lessor and
Lessor's Agents exempt and harmless from any damage or injury to any person,
or to the goods, wares and merchandise and all other personal property of any
person, arising from the use or occupancy of the Premises by Lessee, or from
the failure of Lessee to keep the Building in good condition and repair, as
herein provided. Lessee shall secure and keep in force a standard policy of
commercial general liability insurance and property damage policy covering
the Premises, including parking areas, insuring the Lessee. A certificate
of said policy naming Lessor as an additional insured shall be delivered to
Lessor and will have a combined single limit for both bodily injury, death
and property damage in an amount not less than five million dollars
($5,000,000.00). The limits of said insurance shall not, however, limit the
liability of Lessee hereunder. Lessee shall obtain a written obligation on
the part of the insurer to notify Lessor 30 days in advance in writing before
any cancellation thereof. Lessee shall obtain, at Lessee's sole cost and
expense, a policy of fire and extended coverage insurance including coverage
for direct physical loss special form, and a sprinkler leakage endorsement
insuring the personal property of Lessee. The proceeds from any personal
property damage policy shall be payable to Lessee. Lessee shall, at its sole
cost and expense, comply with all of the insurance requirements of all local,
municipal, state and federal authorities now in force, or which may hereafter
be in force, pertaining to Lessee's use and occupancy of the said Premises.
11. ADVERTISEMENTS AND SIGNS: Lessee shall not place or permit to be placed,
in, upon or about the Premises any unusual or extraordinary signs, or any
signs not approved by the city, local, state, federal or other applicable
governing authority. Lessee shall not place, or permit to be placed upon the
Premises, any signs, advertisements or notices without the written consent of
the Lessor, and such consent shall not be unreasonably withheld. A sign so
placed on the Premises shall be so placed upon the understanding and
agreement that Lessee will remove same at the end of the Lease Term or
earlier termination of this Lease and repair any damage or injury to the
Premises caused thereby, and if not so removed by Lessee, then Lessor may
have the same removed at Lessee's expense. Lessor hereby consents to the
placement of a monument sign identifying Lessee, subject to Lessor's
reasonable approval as to the placement and appearance of the signage, and
further subject to compliance with the requirements of applicable government
agencies.
12. UTILITIES: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Building. Any charges for
sewer usage or related fees shall be the obligation of Lessee and paid for by
Lessee. If any such services are not separately metered to Lessee, Lessee
shall pay a reasonable proportion of all charges which are jointly metered,
the determination to be made by Lessor acting reasonably and on any equitable
basis. Lessor shall not be liable to Lessee for any disruption in any of the
utility services to the Building or Premises.
13. ATTORNEY'S FEES: In case suit should be brought for the possession of the
Building or Premises, for the recovery of any sum due hereunder, or because
of the breach of any other covenant herein, the losing party shall pay to the
prevailing party reasonable attorney's fee which shall be deemed to have
accrued on the commencement of such action and shall be enforceable whether
or not such action is prosecuted to judgment.
14.1 DEFAULT: The occurrence of any of the following shall constitute a
default and breach of this Lease by Lessee: a) Any failure by Lessee to pay
Rent or to make any other payment required to be made by Lessee hereunder
when due if not cured within ten (10) days after written notice thereof by
Lessor to Lessee; b) The abandonment or vacation of the Premises by Lessee
except as provided in Section 7; c) A failure by Lessee to observe and
perform any other provision of this Lease to be observed or performed by
Lessee, where such failure continues for thirty days after written notice
thereof by Lessor to Lessee; provided, however, that if the nature of such
default is such that the same cannot be reasonably cured within such thirty
(30) day period, Lessee shall not be deemed to be in default if Lessee shall,
within such period, commence such cure and thereafter diligently prosecute
the same to completion; d) The making by Lessee of any general assignment for
the benefit of creditors; the filing by or against Lessee of a petition to
have Lessee adjudged a bankrupt or of a petition for reorganization or
arrangement under any
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law relating to bankruptcy; e) the appointment of a trustee or receiver to
take possession of substantially all of Lessee's assets or Lessee's interest
in this Lease, or the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease.
14.2 SURRENDER OF LEASE: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity,
Lessor shall have the immediate option to terminate this Lease before the end
of the Lease Term and all rights of Lessee hereunder, by giving written
notice of such intention to terminate. In the event that Lessor terminates
this Lease due to a default of Lessee, then Lessor may recover from Lessee:
a) the worth at the time of award of any unpaid Rent which had been earned at
the time of such termination; plus b) the worth at the time of award of
unpaid Rent which would have been earned after termination until the time of
award exceeding the amount of such rental loss that the Lessee proves could
have been reasonably avoided; plus c) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Lease Term after the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; plus d) any other amount necessary to
compensate Lessor for all the detriment proximately caused by Lessee's
failure to perform his obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom; and e) at Lessor's
election, such other amounts in addition to or in lieu of the foregoing as
may be permitted from time to time by applicable California law. As used in
(a) and (b) above, the "worth at the time of award" is computed by allowing
interest at the rate of Wells Fargo's prime rate plus two percent (2%) per
annum. As used in (c) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).
14.3 RIGHT OF ENTRY AND REMOVAL: In the event of any such default by Lessee,
Lessor shall also have the right, with or without terminating this Lease, to
re-enter the Building and remove all persons and property from the Building;
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Lessee.
14.4 ABANDONMENT: In the event of the vacation or abandonment, except as
provided in Section 7, of the Building by Lessee or in the event that Lessor
shall elect to re-enter as provided in paragraph 14.3 above or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, and Lessor does not elect to terminate this Lease as
provided in paragraph 14.2 above, then Lessor may from time to time, without
terminating this Lease, either recover all Rent as it becomes due or relet
the Building or any part thereof for such term or terms and at such rental
rates and upon such other terms and conditions as Lessor, in its sole
discretion, may deem advisable with the right to make alterations and repairs
to the Building. In the event that Lessor elects to relet the Building, then
Rent received by Lessor from such reletting shall be applied; first, to the
payment of any indebtedness other than Rent due hereunder from Lessee to
Lessor; second, to the payment of any cost of such reletting; third, to the
payment of the cost of any alterations and repairs to the Building; fourth,
to the payment of Rent due and unpaid hereunder; and the residue, if any,
shall be held by Lessor and applied to the payment of future Rent as the same
may become due and payable hereunder. Should that portion of such Rent
received from such reletting during any month, which is applied by the
payment of Rent hereunder according to the application procedure outlined
above, be less than the Rent payable during that month by Lessee hereunder,
then Lessee shall pay such deficiency to Lessor immediately upon demand
therefor by Lessor. Such deficiency shall be calculated and paid monthly.
Lessee shall also pay to Lessor, as soon as ascertained, any costs and
expenses incurred by Lessor in such reletting or in making such alterations
and repairs not covered by the rentals received from such reletting.
14.5 NO IMPLIED TERMINATION: No re-entry or taking possession of the Building
by Lessor pursuant to 14.3 or 14.4 of this Article 14 shall be construed as
an election to terminate this Lease unless a written notice of such intention
is given to Lessee or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without
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termination by Lessor because of any default by Lessee, Lessor may at any
time after such reletting elect to terminate this Lease for any such default.
15. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of Lessor, terminate all or any existing subleases or sub
tenancies, or may, at the option of Lessor, operate as an assignment to him
of any or all such subleases or sub tenancies.
16. TAXES: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, all real estate taxes, personal
property taxes, taxes based on vehicles utilizing parking areas in the
Premises, taxes computed or based on rental income (other than federal, state
and municipal net income taxes), Environmental Surcharges, privilege taxes,
excise taxes, business and occupation taxes, school fees or surcharges, gross
receipts taxes, sales and/or use taxes, employee taxes, occupational license
taxes, water and sewer taxes, assessments (including, but not limited to,
assessments for public improvements or benefit), assessments for local
improvement and maintenance districts, and all other governmental impositions
and charges of every kind and nature whatsoever, regardless of whether now
customary or within the contemplation of the parties hereto and regardless of
whether resulting from increased rate and/or valuation, or whether
extraordinary or ordinary, general or special, unforeseen or foreseen, or
similar or dissimilar to any of the foregoing (all of the foregoing being
hereinafter collectively called "Tax" or "Taxes") which, at any time during
the Lease Term, shall be applicable or against the Premises, or shall become
due and payable and a lien or charge upon the Premises under or by virtue of
any present or future laws, statutes, ordinances, regulations, or other
requirements of any governmental authority whatsoever. The term
"Environmental Surcharge" shall include any and all expenses, taxes, charges
or penalties imposed by the Federal Department of Energy, Federal
Environmental Protection Agency, the Federal Clean Air Act, or any
regulations promulgated thereunder, or any other local, state or federal
governmental agency or entity now or hereafter vested with the power to
impose taxes, assessments or other types of surcharges as a means of
controlling or abating environmental pollution or the use of energy (i)
generally imposed on similar properties in a wide geographic area without
regard to whether the properties are subject to the tax are contaminated by
Hazardous Materials and which is part of a comprehensive plan imposed by a
governmental unit or (ii) imposed with respect to the Premises as the result
of presence of Hazardous Materials for which Lessee is required to indemnify
Lessor under Section 33.The term "Tax" shall include, without limitation, all
taxes, assessments, levies, fees, impositions or charges levied, imposed,
assessed, measured, or based in any manner whatsoever (i) in whole or in part
on the Rent payable by Lessee under this Lease, (ii) upon or with respect to
the use, possession, occupancy, leasing, operation or management of the
Premises, (iii) upon this transaction or any document to which Lessee is a
party creating or transferring an interest or an estate in the Premises, (iv)
upon Lessee's business operations conducted at the Premises, (v) upon,
measured by or reasonably attributable to the cost or value of Lessee's
equipment, furniture, fixtures and other personal property located on the
Premises or the cost or value of any leasehold improvements made in or to the
Premises by or for Lessee, regardless of whether title to such improvements
shall be in Lessor or Lessee, or (vi) in lieu of or equivalent to any Tax set
forth in this Section 16. In the event any such Taxes are payable by Lessor
and it shall not be lawful for Lessee to reimburse Lessor for such Taxes,
then the Rent payable thereunder shall be increased to net Lessor the same
net rent after imposition of any such Tax upon Lessor as would have been
payable to Lessor prior to the imposition of any such Tax. It is the
intention of the parties that Lessor shall be free from all such Taxes and
all other governmental impositions and charges of every kind and nature
whatsoever. However, nothing contained in this Section 16 shall require
Lessee to pay any Federal or State income, franchise, estate, inheritance,
succession, transfer or excess profits tax imposed upon Lessor. If any
general or special assessment is levied and assessed against the Premises,
Lessor agrees to use its best reasonable efforts to cause the assessment to
become a lien on the Premises securing repayment of a bond sold to finance
the improvements to which the assessment relates which is payable in
installments of principal and interest over the maximum term allowed by law.
It is understood and agreed that Lessee's obligation under this paragraph
will be prorated to reflect the Commencement Date and the end of the Lease
Term. It is further understood that if Taxes cover the Premises and Lessee
does not occupy the entire Premises, the Taxes will be
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allocated to the portion of the Premises occupied by Lessee based on a
pro-rata square footage or other equitable basis. Taxes billed by Lessor to
Lessee shall be included in the monthly CAC.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall
have the right to contest or review the amount or validity of any Tax by
appropriate legal proceedings but which is not to be deemed or construed in
any way as relieving, modifying or extending Lessee's covenant to pay such
Tax at the time and in the manner as provided in this Section 16. However,
as a condition of Lessee's right to contest, if such contested Tax is not
paid before such contest and if the legal proceedings shall not operate to
prevent or stay the collection of the Tax so contested, Lessee shall, before
instituting any such proceeding, protect the Premises and the interest of
Lessor and of the beneficiary of a deed of trust or the mortgagee of a
mortgage affecting the Premises against any lien upon the Premises by a
surety bond, issued by an insurance company acceptable to Lessor and in an
amount equal to one and one-half (1 1/2) times the amount contested or, at
Lessor's option, the amount of the contested Tax and the interest and
penalties in connection therewith. Any contest as to the validity or amount
of any Tax, whether before or after payment, shall be made by Lessee in
Lessee's own name, or if required by law, in the name of Lessor or both
Lessor and Lessee. Lessee shall defend, indemnify and hold harmless Lessor
from and against any and all costs or expenses, including attorneys' fees, in
connection with any such proceedings brought by Lessee, whether in its own
name or not. Lessee shall be entitled to retain any refund of any such
contested Tax and penalties or interest thereon which have been paid by
Lessee. Nothing contained herein shall be construed as affecting or limiting
Lessor's right to contest any Tax at Lessor's expense.
17. NOTICES: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in
connection with this Lease shall be given in writing and shall be given by
personal delivery, facsimile transmission or by mailing by registered or
certified mail with postage thereon or recognized overnight courier, fully
prepaid, in a sealed envelope addressed to the intended recipient as follows:
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax No: (408) 725-1626
(b) to the Lessee at: 3172 A Porter Drive
Palo Alto, California 94304
Attention: CFO
Fax No: (415) 812-9731
or such other addresses, facsimile number or individual as may be designated
by a Communication given by a party to the other parties as aforesaid. Any
Communication given by personal delivery shall be conclusively deemed to have
been given and received on a date it is so delivered at such address provided
that such date is a business day, otherwise on the first business day
following its receipt, and if given by registered or certified mail, on the
day on which delivery is made or refused or if given by recognized overnight
courier, on the first business day following deposit with such overnight
courier and if given by facsimile transmission, on the day on which it was
transmitted provided such day is a business day, failing which, on the next
business day thereafter.
18. ENTRY BY LESSOR: Lessee shall permit Lessor and its agents to enter into
the Building at all reasonable times using the minimum amount of interference
and inconvenience to Lessee and Lessee's business, subject to any security
regulations of Lessee, for the purpose of inspecting the same or for the
purpose of maintaining the Building, or for the purpose of making
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repairs, alterations or additions to any other portion of said Building,
including the erection and maintenance of such scaffolding, canopies, fences
and props as may be required, without any rebate of Rent and without any
liability to Lessee for any loss of occupation or quiet enjoyment of the
Premises; and shall permit Lessor and his agents, at any time within ninety
(90) days prior to the end of the Lease Term, to place upon said Premises any
usual or ordinary "For Sale" or "For Lease" signs and exhibit the Premises
and the Building to prospective tenants at reasonable hours.
19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the
said Premises during the Lease Term from any cause which is covered by
Lessor's property insurance, Lessor shall forthwith repair the same, provided
such repairs can be made within ninety (90) days after the issuance of a
building permit under the laws and regulations of State, Federal, County, or
Municipal authorities, but such partial destruction shall in no way annul or
void this Lease, except that Lessee shall be entitled to a proportionate
reduction of Rent while such repairs are being made to the extent of payments
received by Lessor under its Loss of Rents Insurance coverage. With respect
to any partial destruction which Lessor is obligated to repair or may elect
to repair under the terms of this paragraph, the provision of Section 1932,
Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the
State of California are waived by Lessee. In the event that the Building is
destroyed to an extent greater than thirty-three and one-third (33 1/3%) of
the replacement cost thereof, Lessor may, at its sole option, elect to
terminate this Lease, whether the subject Premises is insured or not. A
total destruction of the Building shall terminate this Lease.
Notwithstanding the above, Lessor is only obligated to repair or rebuild to
the extent of any available insurance proceeds including any deductible
amount. Should Lessor determine that insufficient or no insurance proceeds
are available for repair or reconstruction of Premises, Lessor, at its sole
option, may terminate the Lease. Lessee shall have the option of continuing
this Lease by agreeing to pay all repair costs which are not covered by
insurance available to Lessor. If Lessor reasonably estimates that the repair
of any damage or destruction to the Premises will require in excess of 120
days to repair from the date of damage, Lessee shall be entitled to terminate
this Lease effective upon written notice to Lessor delivered within 15 days
of receipt of such notice that repairs will exceed 120 days.
20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Building or any part thereof,
or any right or privilege appurtenant thereto, or cause any other person or
entity (a bona fide subsidiary or affiliate of Lessee, any entity which
controls Lessee and any entity which results from the merger, consolidation
or reorganization of Lessee excepted ("Lessee Affiliate")) to occupy or use
the Building, or any portion thereof, without the advance written consent of
Lessor. Any such assignment or subletting without such consent shall be
void, and shall, at the option of the Lessor, terminate this Lease. This
Lease shall not, or shall any interest therein, be assignable, as to the
interest of Lessee, by operation of law, without the written consent of
Lessor. Notwithstanding Lessor's obligation to provide reasonable approval,
Lessor reserves the right to withhold its consent for any proposed sublessee
or assignee of Lessee if the proposed sublessee or assignee is a user or
generator of Hazardous Materials. If Lessee desires to assign its rights
under this Lease or to sublet, all or a portion of the subject Building to a
party other than a Lessee Affiliate, Lessee shall first notify Lessor of the
proposed terms and conditions of such assignment or subletting. Lessor and
Lessee shall split any net proceeds of any sublease other than to a Lessee
Affiliate 50/50 after deducting amortized leasing costs, the amortization of
Lessee's TI Allowance, tenant improvements for the subtenant and reasonable
legal fees in conjunction with securing the subtenant. Notwithstanding the
foregoing, Lessee may assign this Lease to a successor in interest, whether
by merger or acquisition, provided there is no substantial reduction in the
net worth of the resulting entity and the resulting entity is not a user or
generator of Hazardous Materials. Whether or not Lessor's consent to a
sublease or assignment is required, in the event of any sublease or
assignment, Lessee shall be and shall remain primarily liable for the
performance of all conditions, covenants, and obligations of Lessee hereunder
and, in the event of a default by an assignee or sublessee, Lessor may
proceed directly against the original Lessee hereunder and/or any other
predecessor of such assignee or sublessee without the necessity of exhausting
remedies against said assignee or sublessee.
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21. CONDEMNATION: If any part of the Building shall be taken for any public
or quasi-public use, under any statute or by right of eminent domain or
private purchase in lieu thereof, and a part thereof remains which is
susceptible of occupation hereunder, this Lease shall as to the part so
taken, terminate as of the date title vests in the condemnor or purchaser,
and the Rent payable hereunder shall be adjusted so that the Lessee shall be
required to pay for the remainder of the Lease Term only that portion of Rent
as the value of the part remaining. The rental adjustment resulting will be
computed at the same Rental rate for the remaining part not taken; however,
Lessor shall have the option to terminate this Lease as of the date when
title to the part so taken vests in the condemnor or purchaser. If all of
the Building, or such part thereof be taken so that there does not remain a
portion susceptible for occupation hereunder, this Lease shall thereupon
terminate. If a part or all of the Building be taken, all compensation
awarded upon such taking shall be payable to the Lessor. Lessee may file a
separate claim and be entitled to any award granted to Lessee.
22. EFFECTS OF CONVEYANCE: The term "Lessor" as used in this Lease, means
only the owner for the time being of the land and building constituting the
Premises, so that, in the event of any sale of said land or building, or in
the event of a Lease of said building, Lessor shall be and hereby is entirely
freed and relieved of all covenants and obligations of Lessor hereunder, and
it shall be deemed and construed, without further agreement between the
parties and the purchaser of any such sale, or the Lessor of the building,
that the purchaser or lessor of the building has assumed and agreed to carry
out any and all covenants and obligations of the Lessor hereunder. If any
security is given by Lessee to secure the faithful performance of all or any
of the covenants of this Lease on the part of Lessee, Lessor may transfer and
deliver the security, as such, to the purchaser at any such sale of the
building, and thereupon the Lessor shall be discharged from any further
liability.
23. SUBORDINATION: This Lease, in the event Lessor notifies Lessee in
writing, shall be subordinate to any ground lease, deed of trust, or other
hypothecation for security now or hereafter placed upon the real property at
which the Premises are a part and to any and all advances made on the
security thereof and to renewals, modifications, replacements and extensions
thereof. Lessee agrees to promptly execute any documents which may be
required to effectuate such subordination. Notwithstanding such
subordination, if Lessee is not in default and so long as Lessee shall pay
the Rent and observe and perform all of the provisions and covenants required
under this Lease, Lessee's right to quiet possession of the Premises shall
not be disturbed or effected by any subordination.
24. WAIVER: The waiver by Lessor of any breach of any term, covenant or
condition, herein contained shall not be construed to be a waiver of such
term, covenant or condition or any subsequent breach of the same or any other
term, covenant or condition therein contained. The subsequent acceptance of
Rent hereunder by Lessor shall not be deemed to be a waiver of Lessee's
breach of any term, covenant, or condition of the Lease.
25. HOLDING OVER: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which,
notwithstanding any other provisions of this Lease, Lessor may withhold and
shall be construed to be a tenancy at sufferance from month to month. Lessee
shall pay to Lessor monthly base rent equal to one and one-quarter (1.25)
times the monthly base rent installment due in the last month of the Lease
Term and all other additional rent and all other terms and conditions of the
Lease shall apply, so far as applicable. Holding over by Lessee without
written approval of Lessor shall subject Lessee to the liabilities and
obligations provided for in this Lease and by law, including, but not limited
to those in Section 2.1 of this Lease. Lessee shall indemnify and hold
Lessor harmless against any loss or liability resulting from any delay caused
by Lessee in surrendering the Building, including without limitation, any
claims made or penalties incurred by any succeeding lessee or by Lessor. No
holding over shall be deemed or construed to exercise any option to extend or
renew this Lease in lieu of full and timely exercise of any such option as
required hereunder.
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26. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
27. ESTOPPEL CERTIFICATES: Lessee shall at any time during the Lease Term, upon
not less than ten (10) days prior written notice from Lessor, execute and
deliver to Lessor a statement in writing certifying that, this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification) and the dates to which the Rent and other charges have been
paid in advance, if any, and acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder or specifying
such defaults if they are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Lessee's failure to deliver such a statement within such time shall be
conclusive upon the Lessee that (a) this Lease is in full force and effect,
without modification except as may be represented by Lessor; (b) there are no
uncured defaults in Lessor's performance.
28. TIME: Time is of the essence of the Lease.
29. CAPTIONS: The headings on titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed
by all of the parties hereto or their respective successors in interest.
30. PARTY NAMES: Landlord and Tenant may be used in various places in this
Lease as a substitute for Lessor and Lessee respectively.
31. EARTHQUAKE INSURANCE: As a condition of Lessor agreeing to waive the
requirement for earthquake insurance, Lessee agrees that it will pay, as
additional Rent, which shall be included in the monthly CAC, an amount not to
exceed eighteen thousand two hundred dollars ($18,200) per year for earthquake
insurance if Lessor desires to obtain some form of earthquake insurance in the
future, if and when available, on terms acceptable to Lessor.
32. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have defaulted
in the payment of Rent for three or more times during any twelve month period
during the Lease Term, then such conduct shall, at the option of the Lessor,
represent a separate event of default which cannot be cured by Lessee. Lessee
acknowledges that the purpose of this provision is to prevent repetitive
defaults in the payment of Rent by the Lessee under the Lease, which constitute
a hardship to the Lessor and deprive the Lessor of the timely performance by
the Lessee hereunder.
33. HAZARDOUS MATERIALS
33.1 DEFINITIONS: As used in this Lease, the following terms shall have the
following meaning:
a. The term "Hazardous Materials" shall mean (i) polychlorinated
biphenyls; (ii) radioactive materials and (iii) any chemical, material or
substance now or hereafter defined as or included in the definitions of
"hazardous substance" "hazardous water", "hazardous material", "extremely
hazardous waste", "restricted hazardous waste" under Section 25115, 25117
or 15122.7, or listed pursuant to Section 25140 of the California Health
and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law),
(ii) defined as "hazardous substance" under Section 25316 of the
California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-
Presley-Tanner Hazardous Substances Account Act), (iii) defined as
"hazardous material", "hazardous substance", or "hazardous waste" under
Section 25501 of the California Health and Safety Code, Division 20,
Chapter 6.95 (Hazardous Materials Release, Response,
Page 16
<PAGE>
Plans and Inventory), (iv) defined as a "hazardous substance" under
Section 25181 of the California Health and Safety Code, Division 20l,
Chapter 6.7 (Underground Storage of Hazardous Substances), (v) petroleum,
(vi) asbestos, (vii) listed under Article 9 or defined as "hazardous" or
"extremely hazardous" pursuant to Article II of Title 22 of the California
Administrative Code, Division 4, Chapter 20, (viii) defined as "hazardous
substance" pursuant to Section 311 of the Federal Water Pollution Control
Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section 1004 of the
Federal Water Pollution Control Act (33 U.S.C. 1317), (ix) defined as a
"hazardous waste", pursuant to Section 1004 of the Federal Resource
Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined as
"hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responsibility Compensations, and Liability Act, 42 U.S.C.
9601 et seq., or (xi) regulated under the Toxic Substances Control Act,
156 U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation, release,
discharge, storage or disposal of Hazardous Material.
c. The term "Lessor's Agents" as used herein shall mean Lessor's agents,
representatives, employees, contractors, subcontractors, directors,
officers and partners.
d. The term "Lessee's Agents" as used herein shall mean Lessee's agents,
representatives, employees, contractors, subcontractors, directors,
officers, partners, invitees or any other person in or about the Premises.
33.2 LESSEE'S RIGHT TO INVESTIGATE: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to Lessee's employees and other persons to any Hazardous Materials
used and stored by previous occupants in or about the Premises. Lessee shall
provide Lessor with copies of all inspections, tests and evaluations. Lessee
shall indemnify, defend and hold Lessor harmless from any cost, claim or
expense arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.
33.3 LESSOR'S REPRESENTATIONS: Lessor hereby represents and warrants to the
best of Lessor's knowledge that the Premises are, as of the date of this Lease,
in compliance with all Hazardous Material Laws.
33.4 LESSEE'S OBLIGATION TO INDEMNIFY: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all cost or expenses, including those described under
subparagraphs i, ii and iii herein below set forth, arising from or caused in
whole or in part, directly or indirectly by:
a. Lessee's or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of
Hazardous Material to, in, on, under, about or from the Premises; or
b. Lessee's or Lessee's Agents failure to comply with Hazardous Material
laws; or
c. Any release of Hazardous Material to, in, on, under, about, from or
onto the Premises caused by or occurring as a result of acts or omissions
of Lessee or Lessee's Agents, except ground water contamination from other
parcels where the source is from off the Premises not arising from or
caused by Lessee or Lessee's Agents.
The cost and expenses indemnified against include, but are not limited to the
following:
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive
damages, cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury (including
sickness, disease, or death), tangible or intangible property damage,
compensation for lost wages, business income, profits or other economic
loss, damage to the natural resources of the environment, nuisance,
pollution, contamination, leaks, spills, release or other adverse effects
on the environment;
Page 17
<PAGE>
iii. The cost of any repair, clean-up, treatment or detoxification of the
Premises necessary to bring the Premises into compliance with all
Hazardous Material Laws, including the preparation and implementation of
any closure, disposal, remedial action, or other actions with regard to
the Premises, and expenses (including, without limitation, reasonable
attorney's fees and consultants fees, investigation and laboratory fees,
court cost and litigation expenses).
33.5 LESSEE'S OBLIGATION TO REMEDIATE CONTAMINATION: Lessee shall, at its sole
cost and expense, promptly take any and all action necessary to remediate
contamination of the Premises by Hazardous Materials arising or occurring as a
result of acts or omissions of Lessee or Lessee's Agents during the Lease Term.
Lessee shall not be responsible to remediate contamination of the Premises
caused by acts or omissions of adjoining tenants or from groundwater
contamination from sources off the Premises not caused by or arising from
Lessee or Lessee's Agents. If Lessee desires, Lessee may obtain, at its sole
cost and expense, obtain insurance coverage for "midnight dumping" and similar-
type events if available on terms acceptable to Lessee.
33.6 OBLIGATION TO NOTIFY: Lessor and Lessee shall each give written notice to
the other as soon as reasonably practical of (i) any communication received
from any governmental authority concerning Hazardous Material which related to
the Premises and (ii) any contamination of the Premises by Hazardous Materials
which constitutes a violation of any Hazardous Material Laws.
33.7 SURVIVAL: The obligations of Lessee under this Section 33 shall survive
the Lease Term or earlier termination of this Lease.
33.8 CERTIFICATION AND CLOSURE: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or
federal law, Lessee is required, at the expiration of the Lease Term, to submit
a closure plan for the Premises to a local, state or federal agency, then
Lessee shall furnish to Lessor a copy of such plan.
33.9 PRIOR HAZARDOUS MATERIALS: Notwithstanding anything contained to the
contrary herein, Lessee shall have no obligation to clean up or to hold Lessor
harmless or make any payment with respect to: (i) any Hazardous Material or
wastes discovered on the Premises which were not introduced into, in, on,
about, from or under the Premises during the Lease Term; or (ii) ground water
contamination from other parcels where the source is from off the Premises not
arising from or caused by Lessee or Lessee's Agents.
34. BROKERS: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease other than
Cornish & Carey ("CC") and Lessee agrees to indemnify and hold Lessor harmless
against any claim, cost, liability or cause of action asserted by any broker or
finder claiming through Lessee other than CC. Lessor shall at its sole cost
and expense pay the brokerage commission per Lessor's standard commission
schedule to CC in connection with this transaction. Lessor represents and
warrants that it has not utilized or contacted a real estate broker or finder
with respect to this Lease other than CC and Lessor agrees to indemnify and
hold Lessee harmless against any claim, cost, liability or cause of action
asserted by any broker or finder claiming through Lessor.
35. OPTION TO EXTEND
A. OPTION: Lessor hereby grants to Lessee two (2) options to extend the Lease
Term, with each extended term to be for a period of five (5) years, on the
following terms and conditions, which shall apply separately to each option to
extend:
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<PAGE>
(i) Lessee shall give Lessor written notice of its exercise of one of its
options to extend no earlier than twenty-four (24) calendar months, nor
later than six (6) calendar months before the Lease Term would end but for
said exercise. Time is of the essence. Lessee may withdraw from its
option at any time prior to six (6) months before the end of the Lease
Term and therefore must give notice in sufficient time to complete all
lease negotiations and appraisal six (6) months before the end of the
Lease Term.
(ii) Lessee may not extend the Lease Term pursuant to any option granted
by this section 35 if Lessee is in default as of the date of the exercise
of one of its options. If Lessee has committed a default by Lessee as
defined in Section 14 or 32 that has not been cured or waived by Lessor in
writing by the date that any extended term is to commence, then Lessor may
elect not to allow the Lease Term to be extended, notwithstanding any
notice given by Lessee of an exercise of this option to extend.
(iii) Lessee must exercise each option consecutively, and if it fails to
exercise any one option, it waives the right to exercise the subsequent
option and the Lease Term shall not be extended further.
(iv) All terms and conditions of this Lease shall apply during each
extended term, except that the Base Rent and rental increases for each
extended term shall be determined as provided in Section 35 (B) below
(v) Once Lessee delivers a notice of exercise of one of its options to
extend the Lease Term, Lessee may not withdraw such exercise and subject
to the provisions of this Section 35, such notice shall operate to extend
the Lease Term. Upon any extension of the Lease Term pursuant to this
Section 35, the term "Lease Term" as used in this Lease shall thereafter
include the then extended term.
(v) The option rights of General Surgical Innovations Corporation granted
under this Section 35 may not be assigned or transferred by General
Surgical Innovations Corporation other than to an entity which controls,
is controlled by, or is under common control with Lessee, or which results
from a merger, consolidation, or reorganization of Lessee, to whom such
option may be assigned in connection with an assignment of this Lease,
provided the assignment otherwise complies with the requirements of
Section 20.
B. EXTENDED TERM RENT - OPTION PERIOD: The monthly Rent for the Building during
the extended term(s) shall equal ninety-five percent (95%) of the fair market
monthly Rent for the Building as of the commencement date of the extended term,
but in no case (i) less than the Rent during the last month of the prior lease
term and (ii) greater than one hundred five percent (105%) of the Rent during
the last month of the prior lease term. Promptly upon Lessee's exercise of the
option to extend, Lessee and Lessor shall meet and attempt to agree on the fair
market monthly Rent for the Building as of the commencement date of the
extended term. In the event the parties fail to agree upon the amount of the
monthly Rent for the extended term prior to commencement thereof, the monthly
Rent for the extended term shall be determined by appraisal in the manner
hereafter set forth; provided, however, that in no event shall the monthly Rent
for the extended term be less than in the immediate preceding period. Annual
base rent increases during the extended term shall be 3% per year. In the
event it becomes necessary under this paragraph to determine the fair market
monthly Rent of the Building by appraisal, Lessor and Lessee each shall appoint
a real estate appraiser who shall be a member of the American Institute of Real
Estate Appraiser ("AIREA") and such appraisers shall each determine the fair
market monthly Rent for the Building taking into account the value of the
Premises and the amenities provided by the outside areas, the common areas, and
the Building, and prevailing comparable Rentals in the area. Such appraisers
shall, within twenty (20) business days after their appointment, complete their
appraisals and submit their appraisal reports to Lessor and Lessee. If the
fair market monthly Rent of the Building established in the two (2) appraisals
varies by five percent (5%) or less of the higher Rent, the average of the two
shall be controlling. If said fair market monthly
Page 19
<PAGE>
Rent varies by more than five percent (5%) of the higher Rental, said
appraisers, within ten (10) days after submission of the last appraisal, shall
appoint a third appraiser who shall be a member of the AIREA and who shall also
be experienced in the appraisal of Rent values and adjustment practices for
commercial properties in the vicinity of the Building. Such third appraiser
shall, within twenty (20) business days after his appointment, determine by
appraisal the fair market monthly Rent of the Building taking into account the
same factors referred to above, and submit his appraisal report to Lessor and
Lessee. The fair market monthly Rent determined by the third appraiser for the
Building shall be controlling, unless it is less than that set forth in the
lower appraisal previously obtained, in which case the value set forth in said
lower appraisal shall be controlling, or unless it is greater than that set
forth in the higher appraisal previously obtained in which case the Rent set
for in said higher appraisal shall be controlling. If either Lessor or Lessee
fails to appoint an appraiser, or if an appraiser appointed by either of them
fails, after his appointment to submit his appraisal within the required period
in accordance with the foregoing, the appraisal submitted by the appraiser
properly appointed and timely submitting his appraisal shall be controlling.
If the two appraisers appointed by Lessor and Lessee are unable to agree upon a
third appraiser within the required period in accordance with the foregoing,
application shall be made within twenty (20) days thereafter by either Lessor
or Lessee to AIREA, which shall appoint a member of said institute willing to
serve as appraiser. The cost of all appraisals under this subparagraph shall
be borne equally be Lessor and Lessee.
36. APPROVALS: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that the Lessor or Lessee does not respond to a request
for any consents which may be required of it in this Lease within ten business
days of the request of such consent in writing by the Lessee or Lessor, such
consent shall be deemed to have been given by the Lessor or Lessee.
37. AUTHORITY: Each party executing this Lease represents and warrants that he
or she is duly authorized to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the by-
laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and
that the Lease is binding upon said individual, corporation (or partnership) as
the case may be in accordance with its terms.
38. INDEMNIFICATION OF LESSOR: Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's Agents, Lessee shall
defend, indemnify and hold Lessor harmless from and against any and all
obligations, losses, costs, expenses, claims, demands, attorney's fees,
investigation costs or liabilities on account of, or arising out of the use,
condition or occupancy of the Premises or any act or omission to act of Lessee
or Lessee's Agents or any occurrence in, upon, about or at the Premises,
including, without limitation, any of the foregoing provisions arising out of
the use, generation, manufacture, installation, release, discharge, storage, or
disposal of Hazardous Materials by Lessee or Lessee's Agents. It is understood
that Lessee is and shall be in control and possession of the Premises and that
Lessor shall in no event be responsible or liable for any injury or damage or
injury to any person whatsoever, happening on, in, about, or in connection with
the Premises, or for any injury or damage to the Premises or any part thereof.
This Lease is entered into on the express condition that Lessor shall not be
liable for, or suffer loss by reason of injury to person or property, from
whatever cause, which in any way may be connected with the use, condition or
occupancy of the Premises or personal property located herein. The provisions
of this Lease permitting Lessor to enter and inspect the Premises are for the
purpose of enabling Lessor to become informed as to whether Lessee is complying
with the terms of this Lease and Lessor shall be under no duty to enter,
inspect or to perform any of Lessee's covenants set forth in this Lease.
Lessee shall further indemnify, defend and hold harmless Lessor from and
against any and all claims arising from any breach or default in the
performance of any obligation to Lessee's part to be performed under the terms
of this Lease. The provisions of Section 38 shall survive the Lease Term or
earlier termination of this Lease with respect to any damage, injury or death
occurring during the Lease Term.
Page 20
<PAGE>
39. LESSOR'S LIABILITY: If Lessee should recover a money judgment against
Lessor arising in connection with this Lease, the judgment shall be satisfied
only out of the Lessor's interest in the Building and neither Lessor or any of
its partners shall be liable personally for any deficiency.
40. INTENTIONALLY OMITTED.
41. LESSEE'S RIGHT OF OFFER: Lessor hereby agrees to telephone and fax notice
to Lessee of any available space owned by Lessor on Bubb Road. This notice
shall be subordinate to any existing rights of any existing tenants on Bubb
Road.
42. ARBITRATION OF DISPUTES: If the parties are unable to resolve any dispute
regarding the terms of this Lease or Lessor or Lessee's rights hereunder,
except money to be paid, within 30 days after commencement of good faith
negotiations, any such dispute may be referred to arbitration by either party.
Any unresolved dispute as to any amount or sum of money to be paid by one party
to the other party under the provisions hereof, the party against whom the
obligation to pay the money is asserted shall have the right to make payment
"under protest," such payment not being regarded as voluntary payment and there
shall survive the right on the part of said party to request that the matter be
submitted to arbitration as provided below concerning the recovery of such sum.
Notwithstanding the above, this provision shall not apply to payments of the
base rent or to the initial CAC payable under this Lease or any amount based on
Lessee's pro rata share. If it shall be adjudged that there was no legal
obligation on the part of said party to pay such sum or any part thereof, said
party shall be entitled to recover such sum or so much thereof as it was not
legally required to pay under the provisions of this Lease. In the event of
such dispute between Lessor and Lessee regarding the terms of this Lease, or
Lessor and Lessee's rights and obligations hereunder, such dispute shall be
resolved by binding arbitration pursuant to California Code of Civil Procedure
Sections 1280 through 1294.2 or successor stature. Any such arbitration shall
be held and conducted in San Jose, California. The prevailing party in such
arbitration shall be entitled to recover its reasonable attorneys' fees and
costs.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR
JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL
RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED
IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT
TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO
ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR
AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO
NEUTRAL ARBITRATION.
LESSOR:____________ LESSEE:____________
43. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law and are in addition to all
other rights or remedies in law and in equity.
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<PAGE>
44. CHOICE OF LAW: This lease shall be construed and enforced in accordance
with the substantive laws of the State of California. The language of all
parts of this lease shall in all cases be construed as a whole according to its
fair meaning and not strictly for or against either Lessor or Lessee.
45. ENTIRE AGREEMENT: This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided for herein, no subsequent
change or addition to this Lease shall be binding unless in writing and signed
by the parties hereto.
IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the day and
year first above written.
LESSOR LESSEE
BERG & BERG DEVELOPERS GENERAL SURGICAL INNOVATIONS CORPORATION
By:___________________________________ By:___________________________________
signature of authorized representative signature of authorized representative
______________________________________ ______________________________________
printed name printed name
______________________________________ ______________________________________
title title
______________________________________ ______________________________________
date date
Page 22
<PAGE>
Exhibit A.1
Site plan to be attached with 30,460 square foot building to be attached.
Page 23
<PAGE>
Exhibit A.2
Site plan to be attached with 30,460 square foot building and 15,000 square
foot addition to be attached.
Page 24
<PAGE>
Exhibit B
Phase I Improvements Listing to be attached.
Page 25
<PAGE>
Exhibit B.1
Phase I Improvement Plans to be attached.
Page 26
<PAGE>
Exhibit C
Berg & Berg ("Building Shell") includes the following items in customary
quantities and quality. All items not listed are part of Lessee Interior
Improvements.
Exterior walls
Foundation
Floor slabs
Roof structure and membrane
Glazing
Exit doors
Truck doors
Landscaping
Parking and paving
Storm sewer line to building
Sanitary sewer line to building
Water line to building
Paint of exterior walls
Shell architecture and engineering
All permits for the above items
Page 27
<PAGE>
Exhibit D
Phase II Lessee Interior Improvement plans to be attached.
Page 28
<PAGE>
Exhibit E
Lessee Approval Deadlines
Lease signed 01/03/97
Approval of Phase I floor plan and single line drawing Approved
Approval of Phase II site plan Approved
Final selection of all material and interior finishes
for construction such as carpet, ceramic tile, paint and
any other lessee selected materials & finishes for Phase I 01/15/97
Approval of Building Shell and Upgrades 02/01/97
Approval of Phase II floor plan and single line drawing 06/30/97
Final selection of all material and interior finishes for
construction such as carpet, ceramic tile, paint and any
other lessee selected materials & finishes for Phase I 09/30/97
Lessee shall not unreasonably withhold approval of any plans requiring Lessee
approval if they conform in general to the floor plans, single line drawings
or site plan.
Notwithstanding any other provisions of this Lease, Lessee shall be allowed
five (5) business days after Substantial Completion at no rent to install
furniture and may have it's network installed during the construction of the
Lessee Interior Improvements provided Lessee's installation does not
interfere with Lessor's installation of the Lessee Interior Improvements and
Lessee meets the approval deadlines set forth above.
Page 29
<PAGE>
EXHIBIT 11.1
GENERAL SURGICAL INOVATIONS, INC. AND SUBSIDIARY
COMPUTATION OF NET LOSS PER SHARE (1)
(In thousands, expect per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
December 31, December 31,
------------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primarily and Fully Diluted:
Weighted average common shares 13,183 3,355 13,165 3,354
Common and common equivalent shares
pursuant to Staff Accounting
Bulletin No. 83...................... 3,201 3,201
---------- --------- ---------- --------
Shares used in per share calculation.... 13,183 6,556 13,165 6,555
---------- --------- ---------- --------
---------- --------- ---------- --------
Net loss................................ $ (237) $(1,015) $ (466) $(2,063)
---------- --------- ---------- --------
---------- --------- ---------- --------
Net loss per share...................... $ (0.02) $ (0.15) $ (0.04) $ (0.31)
---------- --------- ---------- --------
---------- --------- ---------- --------
</TABLE>
- -------------------
(1) There is no difference between primary and fully diluted net loss per share
for all periods presented.
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,483
<SECURITIES> 36,412
<RECEIVABLES> 1,714
<ALLOWANCES> 94
<INVENTORY> 1,379
<CURRENT-ASSETS> 51,148
<PP&E> 632
<DEPRECIATION> 591
<TOTAL-ASSETS> 52,027
<CURRENT-LIABILITIES> 1,356
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 50,189
<TOTAL-LIABILITY-AND-EQUITY> 52,027
<SALES> 361
<TOTAL-REVENUES> 1,861
<CGS> 359
<TOTAL-COSTS> 359
<OTHER-EXPENSES> 2,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 670
<INCOME-PRETAX> (237)
<INCOME-TAX> 0
<INCOME-CONTINUING> (237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (237)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
