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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 MARCH 31, 1998.
Commission file number: 0-28448
GENERAL SURGICAL INNOVATIONS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-3160456
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10460 BUBB ROAD, CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 863-2500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
There were approximately 13,420,642 shares of Registrant's Common Stock issued
and outstanding as of April 30, 1998.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated balance sheets at March 31, 1998
and June 30, 1997 .................................................... 3
Consolidated statements of operations and comprehensive loss
for the three and nine months ended March 31, 1998 and March 31,
1997 ................................................................. 4
Consolidated statements of cash flows for the nine months ended
March 31, 1998 and March 31, 1997 .................................... 5
Notes to consolidated financial statements ........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 21
Item 2. Changes in Securities and Use of Proceeds ............................ 22
Item 3. Defaults Upon Senior Securities ...................................... 23
Item 4. Submission of Matters to a Vote of Security Holders .................. 23
Item 5. Other Information .................................................... 23
Item 6. Exhibits and Reports on Form 8-K ..................................... 23
</TABLE>
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 18,706 $ 7,900
Available-for-sale securities ....................................................... 21,305 35,831
Accounts receivable, net of allowance for doubtful accounts of $46 on March 31,
1998 and $47 on June 30, 1997 ....................................................... 679 2,131
Inventories ......................................................................... 1,057 1,717
Prepaid expenses and other current assets ........................................... 969 971
-------- --------
Total current assets ......................................................... 42,716 48,550
Property and equipment, net ........................................................... 2,204 2,251
Intangible and other assets, net ...................................................... 211 261
-------- --------
Total assets ................................................................. $ 45,131 $ 51,062
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Accounts payable .................................................................... $ 645 $ 504
Accrued liabilities ................................................................. 922 1,044
Bank borrowings ..................................................................... 124 167
-------- --------
Total current liabilities .................................................... 1,691 1,715
Bank borrowings, less current portion ................................................. 103 185
Other long-term liabilities ........................................................... 193 175
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Total liabilities ............................................................ 1,987 2,075
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Contingencies (Note 6)
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value:
Authorized: 2,000,000 shares; issued and outstanding: none
Common stock, $.001 par value:
Authorized: 50,000,000 shares; issued and outstanding 13,420,642
on March 31, 1998 and 13,290,644 on June 30, 1997 ................................... 13 13
Additional paid-in capital ............................................................ 65,248 65,089
Notes receivable from shareholders .................................................... (87) (87)
Deferred compensation, net ............................................................ (194) (297)
Accumulated other comprehensive income (loss) ......................................... 13 (38)
Accumulated deficit ................................................................... (21,849) (15,693)
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Total shareholders' equity ................................................... 43,144 48,987
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Total liabilities and shareholders' equity ................................. $ 45,131 $ 51,062
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1998 1997 1998 1997
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SALES ........................................................... $ 894 $ 693 $ 3,869 $ 3,524
Guaranteed payments ............................................. - 1,480 1,635 2,980
------- ------- ------- -------
Total revenue ................................................... 894 2,173 5,504 6,504
Cost of sales ................................................... 602 397 2,744 1,749
------- ------- ------- -------
Gross profit .................................................. 292 1,776 2,760 4,755
------- ------- ------- -------
Operating Expenses:
Research and development ...................................... 651 581 2,074 1,527
Sales and marketing ........................................... 1,297 1,216 3,591 3,419
General and administrative .................................... 1,906 1,044 4,990 2,597
------- ------- ------- -------
Total operating expenses ................................... 3,854 2,841 10,655 7,543
------- ------- ------- -------
Operating loss .......................................... (3,562) (1,065) (7,895) (2,788)
Interest income ................................................. 571 637 1,768 1,940
Interest expense ................................................ (8) (11) (29) (34)
Other expense ................................................... - - - (23)
------- ------- ------- -------
Net loss ................................................ (2,999) (439) (6,156) (905)
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-for-sale
securities .................................................. 18 (97) 51 (127)
------- ------- ------- -------
Comprehensive loss .......................................... $(2,981) $ (536) $(6,105) $(1,032)
------- ------- ------- -------
------- ------- ------- -------
Net loss per common share and per common share -
assuming dilution ............................................. $ (0.22) $ (0.03) $ (0.46) $ (0.07)
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing net loss per common share and
per common share - assuming dilution .......................... 13,401 13,211 13,356 13,181
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
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NINE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................................... $ (6,156) $ (905)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation ............................................ 103 150
Depreciation and amortization .................................................... 820 630
Provision for uncollectable accounts ............................................. (1) (40)
Loss on write-off of fixed assets ................................................ - 26
Provision for excess and obsolete inventory ...................................... 10 181
Changes in operating assets and liabilities:
Accounts receivable ............................................................ 1,453 (1,146)
Inventory ...................................................................... 650 (1,057)
Prepaid expenses and other current assets ...................................... 2 (609)
Intangible and other assets .................................................... (4) (69)
Accounts payable ............................................................... 141 (403)
Accrued and other liabilities .................................................. (132) 107
Deferred revenue ............................................................... - (100)
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Net cash used in operating activities .......................... (3,114) (3,235)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities ......................................... (18,010) (54,666)
Proceeds from sales and maturities of available-for-sale securities ................ 32,292 32,500
Acquisition of property and equipment .............................................. (384) (214)
-------- --------
Net cash provided by (used in) investing activities activities . 13,898 (22,380)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ............................................. 159 125
Proceeds from payment on shareholder notes receivable .............................. - 24
Payments on capital lease obligations .............................................. (12) -
Principal payments on bank borrowings .............................................. (125) (93)
-------- --------
Net cash provided by financing activities ....................... 22 56
-------- --------
Net increase (decrease) in cash and cash equivalents ............................... 10,806 (25,559)
Cash and cash equivalents, beginning of period ..................................... 7,900 28,339
-------- --------
Cash and cash equivalents, end of period ........................................... $18,706 $ 2,780
-------- --------
-------- --------
Cash paid during the period for:
Interest ......................................................................... $ 30 $ 38
Taxes ............................................................................ $ - $ -
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for notes receivable ...................................... $ - $ 11
Change in unrealized gain (loss) on available-for-sale securities .................. $ 51 $ (127)
Property acquired under capital leases ............................................. $ 40 $ -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
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GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements as of March
31, 1998 of General Surgical Innovations, Inc. (the "Company") and subsidiary
have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal
year ended June 30, 1998, or any future interim period.
These financial statements and notes should be read in conjunction with
the Company's audited financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1997.
2. Reclassification:
Certain amounts in the financial statements have been reclassified to
conform with current year's presentation. These reclassifications had no
impact on previously reported working capital, operating income, or net
income.
3. Computation of Net Loss per Common Share and per Common Share-Assuming
Dilution:
The Company adopted Financial Accounting Standards Board No. 128
"Earnings Per Share", and the provisions of the Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 98, and accordingly all prior
periods have been restated. Net loss per common share and per common
share-assuming dilution are computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options are excluded from the computation of net loss per common
share-assuming dilution as their effect is antidilutive. The Company has
determined that no incremental shares should be included in the computation
of earnings per share in accordance with SAB No. 98.
Stock options to purchase 1,456,092 and 1,378,259 shares of common stock
at prices ranging from $0.09 to $9.75 per share were outstanding at March 31,
1998 and March 31, 1997, respectively, but were not included in the
computation of net loss per common share-assuming dilution because they were
antidilutive. The aforementioned stock options could potentially dilute
earnings per share in the future.
4. Adopted Accounting Pronouncement:
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a
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full set of general purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
5. Inventories:
Inventories comprise (IN THOUSANDS):
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Mar. 31, June 30,
1998 1997
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(unaudited)
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Raw materials $ 692 $ 706
Work in progress 73 43
Finished goods 292 968
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$ 1,057 $ 1,717
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</TABLE>
6. Contingencies:
On May 28, 1996, Origin MedSystems, Inc., ("Origin"), a unit of the
Guidant Corporation and a competitor of the Company, filed an action against
GSI in the United States District Court for the Northern District of
California, alleging patent infringement of its U.S. Patent No. 5,520,609
entitled "Apparatus and Methods for Peritoneal Retraction." On April 20,
1998 an order in GSI's favor in this case was filed by the Court granting
GSI's Motion for Summary Judgment of Unenforceability by Reason of
Inequitable Conduct in obtaining Patent No. 5,520,609. The Company expects
this decision to be appealed. GSI also filed an action against Origin in the
U.S. District Court for the Northern District of California alleging patent
infringement of its patent for a method of tissue plane dissection using
balloon systems. Management believes it has meritorious defenses in relation
to the action.
One of the patent applications filed by the Company, which is directed
to a surgical method using balloon dissection technology, has been placed in
interference with a patent application filed by Origin. The Company believes
that the inventor named in its patent application was the first to invent
this subject matter, and has asserted that the Origin patent application was
filed after a disclosure made by such inventor to employees of Origin. Origin
takes a contrary position. This interference is presently pending in the
United States Patent and Trademark Office ("USPTO") and, as permitted by the
rules of the USPTO, has been referred to an arbitrator for completion of the
interference proceeding. A decision is expected in this interference
proceeding in calendar year 1998.
No accrual for the above matters has been made in the accompanying
consolidated financial statements as the ultimate outcomes of the litigation
and dispute presently are not determinable. The litigation and dispute are
subject to inherent uncertainties and thus, there can be no assurance that
the litigation or dispute will be resolved favorably to the Company or that
they will not have a material adverse effect on the Company's financial
position or results of operations.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and notes thereto included in
part I, Item I of this Quarterly Report and with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that, except for the historical information
contained in this Quarterly Report on Form 10-Q, the matters discussed herein
are forward-looking statements that are subject to certain risks and
uncertainties that could cause the actual results to differ materially from
those projected. Factors that could cause actual results to differ materially
include, but are not limited to, market demand for the Company's products,
the Company's ability to shift market focus successfully, fluctuations in
revenues among different product lines and markets, the timing and number of
orders and shipments, distribution efforts by GSI distributors, key
distributors achieving certain levels of sales growth, the performance of the
Company's new corporate partnering relationships, the Company's ability to
establish and develop other new corporate partnering relationships, the
timely development and market acceptance of new products and surgical
procedures, the impact of competitive products and pricing, results of
ongoing litigation, the Company's ability to further expand into
international markets, approval of its products by government agencies such
as the United States Food and Drug Administration, and other risks detailed
below and included from time to time in the Company's other SEC reports and
press releases, copies of which are available from the Company upon request.
The Company assumes no obligation to update any forward-looking statements
contained herein. The factors listed below under "Factors Affecting Future
Results," as well as other factors, have in the past affected, and could in
the future affect, the Company's actual results and could cause the Company's
results for future quarters to differ materially from those expressed in any
forward-looking statements contained in the following discussion.
References made in this Quarterly Report on Form 10-Q to "General
Surgical Innovations, Inc.," the "Company" or the "Registrant" refer to
General Surgical Innovations, Inc. and its subsidiary. The following General
Surgical Innovations, Inc. trademarks are mentioned in this Quarterly Report:
SPACEMAKER-Registered Trademark-, registered trademark of the Company;
ENDOSAPH-TM-, SAPHtrak-TM- and SPACEKEEPER-TM-, trademarks 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 eight 510(k) clearances for
use of the Company's technology to perform dissection of tissue planes
anywhere in the body using a broad range of balloon sizes and shapes. The
Company currently sells products in the United States and certain other
countries in Europe, Asia and South America for selected applications, such
as hernia repair, subfascial endoscopic perforator surgery, saphenous vein
harvesting and breast reconstruction and augmentation surgery.
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In December 1996, the Company entered into a five year OEM supply
agreement (the "Expanded EES Agreement") with Ethicon Endo-Surgery, Inc.
("EES"), pursuant to which GSI granted EES worldwide sales and marketing
rights to sell the SPACEMAKER-Registered Trademark- Balloon Dissection
Systems in the laparoscopic hernia repair and urinary stress incontinence
("USI") markets. EES made guaranteed payments pursuant to the agreement of
$4.9 million in fiscal year 1997, and additional payments in lieu of product
purchases pursuant to a mutual agreement in the amount of $775,000 in the
first quarter of fiscal year 1998 and $860,000 in the second quarter of
fiscal year 1998.
In February 1998, the Company and EES signed a non-exclusive
distribution agreement for the laparoscopic hernia repair and urinary stress
incontinence ("USI") markets. This agreement supersedes the December 1996
"Expanded EES Agreement".
Additional sales of the Company's products in the United States are
currently made through distributors and a small direct sales force. The
Company currently sells its products (other than for hernia and USI
applications) in international markets through distributors, which resell to
surgeons and hospitals.
To date, almost all of the sales to distributors and by the Company's
direct sales force have been for use in hernia repair procedures. While the
Company has developed or is developing balloon dissection systems for
vascular, urinary stress incontinence and plastic surgery, sales of products
for hernia repair are expected to provide a majority of the Company's
revenues at least through calendar year 1998.
The Company has acquired rights to a significant number of patents from
third parties, including rights that apply to the Company's current balloon
dissection systems. The Company has historically paid and is obligated to pay
in the future to such third parties royalties equal to 4% of sales of such
products. The Company has also acquired patent rights under royalty-bearing
agreements with respect to certain surgical instruments, including the
balloon valve trocar. The payment of such royalty amounts will have an
adverse impact on the Company's gross profit and results of operations.
The Company has a limited history of operations and has experienced
significant operating losses since inception. The Company expects such
operating losses to continue at least through calendar year 1998. In order to
support increased levels of sales in the future and to augment its long-term
competitive position, including the development of balloon dissection systems
for other applications, the Company anticipates that it will be required to
make significant additional expenditures in sales and marketing and research
and development (including marketing-related clinical evaluations). In
addition, the Company has experienced higher administration expenses since
its initial public offering resulting from its obligations as a public
reporting company and defense of its patents.
The Company anticipates that its results of operations may fluctuate for
the foreseeable future due to several factors, including fluctuations in
purchases of the Company's products by its distributors, its distributors'
ability to achieve certain levels of sales growth, the Company's ability to
sell its line of cardiovascular products, fluctuations in revenues among
different product lines and markets, the mix of sales among the distributors
and the Company's direct sales force, timing of new product introductions or
transitions to new products, the margins recognized from products for various
surgical procedures, the progress of marketing-related clinical evaluations,
sales of competitive products and the introduction of new products from
competitors (including pricing pressures), activities related to patents and
patent approvals (including litigation), regulatory and third-party
reimbursement matters, reliability of suppliers, and the timing of research
and development expenses (including marketing-related clinical evaluations).
In addition, the Company's results of operations could be affected by the
expansion of the
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Company's distributor network and the ability of the Company's distributors
to effectively promote the Company's products. 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.
During the quarter ended March 31, 1998, the Company signed exclusive
distribution agreements with eight international distributors, including
Baxter International, to distribute its cardiovascular products in 18
European countries.
RESULTS OF OPERATIONS
REVENUE. Total revenue decreased by 59% to approximately $894,000 for
the quarter ended March 31, 1998 from $2.2 million for the same period in
1997. This decrease was primarily due to the conversion of EES to a
non-exclusive distributor and the anticipated end of payments from EES that
had been made in lieu of product purchases. Product sales for the quarter
rose 29% to approximately $894,000 from $693,000 for the quarter ended March
31, 1997. Revenue for the nine months ended March 31, 1998 decreased 15% to
approximately $5.5 million from $6.5 million for the nine months ended March
31, 1997.
COST OF SALES. Cost of sales increased by 52% to approximately $602,000
for the quarter ended March 31, 1998 from $397,000 for the same period in
1997. Cost of sales increased as a percentage of sales to 67% for the quarter
ended March 31, 1998 from 57% for the quarter ended March 31, 1997. This
increase in absolute dollars was primarily related to increased unit sales to
GSI distributors, as compared to the previous period. Cost of sales for the
nine months ended March 31, 1998 increased as a percent of sales to 71%, or
approximately $2.7 million, as compared to 50% of sales, or approximately
$1.8 million, for the nine months ended March 31, 1997. This increase as a
percent of sales is due to increased sales to distributors and increased
capacity as a result of relocating its manufacturing facility during April
1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses,
which include expenditures for regulatory expenses, increased by 12% to
approximately $651,000 in the quarter ended March 31, 1998 from $581,000 for
the same period in 1997. R&D expenses for the nine months ended March 31,
1998 increased 36% to approximately $2.1 million as compared to $1.5 million
for the same period of the prior fiscal year. These increases are a result
of the company dedicating more resources during the past nine months to
developing its cardiovascular products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 42% to approximately $3.2 million for
the quarter ended March 31, 1998 from $2.3 million for the quarter ended
March 31, 1997. For the nine months ended March 31, 1998, SG&A expenses were
$8.6 million compared to $6.0 million for the same period in 1997. These
increases are primarily due to increased legal expenses related to
intellectual property litigation.
INTEREST INCOME, INTEREST EXPENSE AND OTHER EXPENSE. Interest income (net
of expense) decreased to approximately $563,000 for the quarter ended March 31,
1998 from $626,000 for the quarter ended
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March 31, 1997. For the nine months ended March 31, 1998 interest income
(net of expense) decreased to $1.7 million from $1.9 million for the same
period in 1997. Decreases are due mainly to lower 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 approximately
$21.9 million at March 31, 1998. The Company has funded its operations
primarily through the sale of equity securities. From its inception through
March 31, 1998 the Company raised approximately $62 million through the sale
of equity securities.
As of March 31, 1998 the Company's principal source of liquidity
consists of cash, cash equivalents and available-for-sale securities of $40.0
million, as compared to $43.7 million at June 30, 1997. The Company has
negotiated an increase in its current bank line of credit to $5,000,000. As
of March 31, 1998, the Company has no amounts outstanding under its prior
$1,500,000 line of credit. The Company also has an equipment loan with an
outstanding balance of approximately $227,000.
The Company expects to incur substantial additional costs, including
costs related to patent litigation, increased sales and marketing activities,
increased research and development, expenditures in connection with seeking
regulatory approvals and conducting additional marketing-related clinical
evaluations, and other costs associated with expansion of the Company's
manufacturing capabilities. The Company believes that its current cash
balances and short-term investments along with cash generated from the future
sales of products will be sufficient to meet the Company's operating and
capital requirements through at least calendar 1999. The Company may seek
additional equity or debt financing to address its working capital needs or
to provide funding for capital expenditures. There can be no assurance that
additional financing, if sought, will be available on satisfactory terms or
at all.
ADOPTED ACCOUNTING PRONOUNCEMENT
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources.
FACTORS AFFECTING FUTURE RESULTS
LIMITED OPERATING HISTORY; ANTICIPATED FUTURE LOSSES. The Company has a
limited operating history upon which an evaluation of the Company and its
prospects can be based. As of March 31, 1998, the Company had an accumulated
deficit of $21.9 million. The Company's net operating losses for the fiscal
years ending June 30, 1995, 1996 and 1997 and for the quarters ended
September 30, 1997, December 31, 1997 and March 31, 1998 and were $4.1
million, $5.5 million, $1.9 million, $1.3 million, $1.9 million and $3.0
million, respectively. The Company expects to continue to incur operating
losses on a quarterly and annual basis through at least calendar year 1998.
Due to the Company's limited operating history, there can be no assurance of
sales growth or profitability in the future. The Company
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intends to increase its investments in research and development, sales and
marketing, marketing-related clinical evaluations and related infrastructure.
Due to the anticipated increases in the Company's operating expenses, the
Company's operating results will be adversely affected if sales do not
increase. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in rapidly evolving markets. To
address these risks, the Company must respond to competitive developments,
continue to attract, retain and motivate qualified persons and successfully
commercialize products incorporating advanced technologies. There can be no
assurance that the Company will be successful in addressing such risks.
DEPENDENCE UPON BALLOON DISSECTION PRODUCTS; RISK OF TECHNOLOGICAL
OBSOLESCENCE. Nearly all of the Company's sales since inception have been
derived from sales of its balloon dissection products, with a substantial
portion derived from sales for hernia repair procedures. Failure of the
Company to develop and successfully commercialize balloon dissection products
for applications other than hernia repair could have a material adverse
effect on the Company's business, financial condition and results of
operations. The success of the Company's products depends on the market
acceptance of and demand for the Company's products and related procedures,
the nature of the technological advances inherent in the product designs,
reduction in patient trauma or other benefits provided by such products,
results of marketing-related clinical evaluations, continued adoption of
minimally invasive surgery ("MIS") procedures by surgeons, reimbursement for
the Company's products by health care payors and the Company's receipt of
regulatory approvals. There can be no assurance that the Company's products
will have the required technical characteristics, that the Company's products
will provide adequate patient benefits, that marketing-related clinical
evaluations results will be favorable, that surgeons will continue to adopt
MIS procedures, that recently-introduced products or future products of the
Company or related procedures will gain market acceptance, or that required
regulatory approvals will be obtained. The failure to achieve any of the
foregoing could have a material adverse effect on the Company's business,
financial condition and results of operations. To the extent demand for the
Company's balloon dissection systems for hernia repair declines and the
Company's newly-introduced products are not commercially accepted or its
existing products are not developed for new procedures, there could be a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON DISTRIBUTORS. In February 1998, the Company replaced its
five year OEM supply agreement with EES with a non-exclusive distribution
agreement which granted EES worldwide sales and marketing rights to sell the
SPACEMAKER-Registered Trademark- Balloon Dissection Systems in the
laparoscopic hernia repair and urinary stress incontinence ("USI") markets.
This new EES agreement does not provide for any minimum payments from EES to
the Company. In December 1997, the Company entered into a four year
distribution agreement with Genzyme Surgical Products Corporation
("Genzyme"). Under the agreement, Genzyme has exclusive rights to market and
distribute GSI's surgical balloon dissectors worldwide for use in plastic
surgery (reconstructive and aesthetic) procedures.
The Company's products are sold internationally to hospitals, surgeons
and specialists through EES and independent distributors in Europe, Asia,
Latin America and the Middle East. In June 1997, GSI entered into an
exclusive agreement with Japan Lifeline to market and distribute in Japan
GSI's balloon dissection systems for use in vascular procedures. Japan
Lifeline is expected to begin distribution of the GSI balloon dissection
systems following receipt of the Japanese Ministry of Health and Welfare
approval, which the Company expects to occur in calendar 1998.
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During the quarter, the Company expanded its international distribution
network by adding eight international distributors, including Baxter
International, to distribute its cardiovascular products, and although the
Company intends to continue to establish additional distributorships in the
United States and internationally for products in areas other than certain
plastic surgery procedures, there can be no assurance that recently appointed
distributors will be successful, or that efforts to establish additional
distributors will be successful. Failure of current distributors to succeed,
or failure to add additional distributors to its distribution network, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
LIMITED MARKETING AND DIRECT SALES EXPERIENCE. The Company has only
limited experience marketing and selling its products through its direct
sales force, and has sold its products in commercial quantities through its
direct sales force to the hernia market and, to a lesser degree, to the
cardiovascular and cosmetic and reconstructive surgery markets. Establishing
marketing and sales capability sufficient to support sales in commercial
quantities for the cardiovascular market targeted by the Company will require
significant resources. There can be no assurance that the Company will be
able to recruit and retain additional qualified marketing or sales personnel,
or that future sales efforts of the Company will be successful. The Company
intends to establish partnership relationships with additional distribution
partners, and there can be no assurance that the Company will be successful
in establishing such partnership relationships on commercially reasonable
terms, if at all. The failure to establish and maintain an effective
distribution channel for the Company's products, or establish and retain
qualified and effective sales personnel to support commercial sales of the
Company's products, could have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE; NO ASSURANCE OF CLINICAL ADVANTAGE.
The Company's success is substantially dependent upon the success of its
SPACEMAKER-Registered Trademark- balloon dissection products. The Company
believes that market acceptance of the Company's products will depend on the
Company's ability to provide evidence to the medical community of the safety,
efficacy, clinical advantage and cost-effectiveness of its products and the
procedures in which these products are intended to be used. Market acceptance
is also dependent on the adoption of laparoscopic techniques generally and
the conversion of non-balloon dissection techniques to balloon dissection
techniques specifically. To date, the Company's products have only been used
to treat a limited number of patients and the Company has limited long-term
outcomes data. If the Company is not able to demonstrate consistent clinical
benefits resulting from the use of its products (including reduced procedure
time, reduced patient trauma and lower costs), the Company's business,
financial condition and results of operations could be materially and
adversely affected.
The Company further believes that the ability of health care providers
to obtain adequate third party reimbursement for procedures using the
Company's SPACEMAKER-Registered Trademark- balloon dissector products and
related instruments will be critical to market acceptance of the Company's
products. Although the Company believes that procedures using its balloon
dissection products currently may be reimbursed in the United States under
certain existing procedure codes, there can be no assurance that such
procedure codes will remain available or that reimbursement under these codes
will be adequate. The Company has limited experience in obtaining third-party
reimbursement, and the failure to obtain reimbursement for some or all of its
products could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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The Company introduced its balloon dissectors in late 1993 and to date
there has been limited education among surgeons about the benefits of balloon
dissection technology. Further, many surgeons and surgeons' assistants have
not yet developed the requisite skills to perform balloon dissection
procedures. To the extent that laparoscopic techniques are adopted slowly,
that balloon dissectors are incorporated into laparoscopic techniques less
often or that surgeons are unwilling or unable to develop the skills
necessary to utilize balloon dissectors, the Company's business, financial
condition and results of operations could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY RESULTS. Results of the Company's operations
may fluctuate significantly from quarter to quarter and will depend on
numerous factors, including (i) new product introductions by the Company and
its competitors and fluctuations in revenues among different product lines
and markets, (ii) purchases of the Company's products by its distributors,
(iii) the rate of adoption by surgeons of balloon dissection technology in
markets targeted by the Company, (iv) the sales efforts of the Company's
distributors, (v) the mix of sales among distributors and the Company's
direct sales force, (vi) timing of patent and regulatory approvals, if any,
(vii) timing and growth of operating expenditures, (viii) timing of research
and development expenses, including marketing-related clinical evaluation
expenditures, (ix) intellectual property litigation and (x) general market
conditions. In December 1996, the Company entered into the Expanded Ethicon
Agreement, pursuant to which EES made approximately $4.9 million in
guaranteed payments to the Company in fiscal year 1997, which constituted 54%
of revenues for fiscal year 1997 and payments by mutual consent of $775,000
in the first quarter of fiscal year 1998 and $860,000 in the second quarter
of fiscal 1998. The Company and EES entered into a nonexclusive distribution
agreement for the laparoscopic hernia repair and urinary stress incontinence
markets in February 1998, which supersedes the Expanded Ethicon Agreement.
The Company anticipates that sales to EES may decrease in the future. Failure
by EES to achieve certain levels of sales growth or purchases could adversely
affect the Company's operating results. In addition, announcements or
expected announcements by the Company, its competitors or its distributors of
new products, new technologies or pricing changes could cause existing or
potential customers of the Company to defer purchases of the Company's
existing products and could alter the mix of products sold by the Company,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
future products or product enhancements will be successfully introduced or
that such introductions will not adversely affect the demand for existing
products. As a result of these and other factors, the Company's quarterly
operating results have fluctuated in the past, and the Company expects that
such results may fluctuate in the future. Due to such quarterly fluctuations
in operating results, quarter-to-quarter comparisons of the Company's
operating results are not necessarily meaningful and should not be relied
upon as indicators of likely future performance or annual operating results.
In addition, the Company's limited operating history makes accurate
prediction of future operating results difficult or impossible to make. There
can be no assurance that in the future the Company will achieve sales growth
or become profitable on a quarterly or annual basis, if at all, or that its
growth, if any, will be consistent with predictions by securities analysts
and investors. In such event, the price of the Company's Common Stock would
likely be materially and adversely affected.
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.
On May 28, 1996, Origin MedSystems, Inc., ("Origin"), a unit of the
Guidant Corporation and a competitor of the Company, filed an action against
GSI in the United States District Court for the
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Northern District of California, alleging patent infringement of its U.S.
Patent No. 5,520,609 entitled "Apparatus and Methods for Peritoneal
Retraction." On April 20, 1998 an order in GSI's favor in this case was
filed by the Court granting GSI's Motion for Summary Judgment of
Unenforceability by Reason of Inequitable Conduct in obtaining Patent No.
5,520,609. The Company expects this decision to be appealed.
In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging patent infringement of
its patent for a method of tissue plane dissection using balloon systems. In
addition, on September 26, 1997, the Company filed another action against
Origin alleging patent infringement of its patent for a method of serial
inflation of tissue dissectors. A decision against the Company in any of
these actions could have a material adverse effect on the Company's business,
financial condition and results of operations.
One of the patent applications filed by the Company, which is directed
to a surgical method using balloon dissection technology, has been placed in
interference with a patent application filed by Origin. The Company believes
that the inventor named in its patent application was the first to invent
this subject matter, and has asserted that the Origin patent application was
filed after a disclosure made by such inventor to employees of Origin. Origin
takes a contrary position. This interference is presently pending in the
United States Patent and Trademark Office ("USPTO") and, as permitted by the
rules of the USPTO, has been referred to an arbitrator for completion of the
interference proceeding. A decision is expected in this interference
proceeding in calendar year 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 and infringement involve complex legal and factual
issues and are 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
or the USPTO. 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 successfully modify 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. As discussed above, the Company is defending itself, and may in
the future have to defend itself, against allegations of infringement of
third-party patents. Patent litigation is expensive, requires extensive
management time, and could subject the Company to significant liabilities,
require disputed rights to be licensed from third parties or require the
Company to cease selling its products.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
No assurance can be given that any patents based on pending patent
applications or any future patent applications will be issued, that the scope
of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents or patents to
which it has licensed rights will be held valid under current challenges or
if subsequently challenged or that persons or entities in addition to Origin
will not claim rights in or ownership of the patents and other proprietary
rights held or licensed by the Company or that the Company's existing patents
will cover the Company's future products. Furthermore, there can be no
assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any
patents issued to or licensed by the Company or that may be
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issued in the future to the Company. Since patent applications in the United
States are maintained in secrecy until patents issue, the Company also cannot
be certain that others did not first file applications for inventions covered
by the Company's pending patent applications, nor can the Company be certain
that it will not infringe any patents that may issue to others on such
applications.
Legislation has recently been enacted in Congress, the effect of which
tends to immunize physicians and their employers from liability 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 foreign
patent protection for its methods of tissue dissection may be significantly
limited. As a result, there can be no assurance that the Company will be able
to develop a patent portfolio in Europe or that the scope of any patent
protection will provide competitive advantages to the Company.
ROYALTY PAYMENT OBLIGATIONS. The Company has acquired a significant
number of patent rights from third parties, including rights that apply to
the Company's current balloon dissection systems. The Company has
historically paid and is obligated to pay in the future to such third parties
royalties equal to 4% of sales of such products. The Company has also
acquired patent rights under royalty-bearing agreements with respect to
certain surgical instruments. The payment of such royalty amounts will have
an adverse impact on the Company's gross profit and results of operations.
There can be no assurance that the Company will be able to continue to
satisfy such royalty payment obligations in the future, and a failure to do
so could have a material adverse effect on the Company's business, financial
condition and results of operations.
EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF
ABILITY TO MANAGE GROWTH. The Company has limited experience in
manufacturing, marketing and selling its products commercially. In addition,
in April 1997 the Company relocated its headquarters and manufacturing
operations to a new facility. Moreover, the Company has experienced rapid
growth in the number of products under development, the number and amount of
products manufactured, and the geographic scope of its sales. In order to
augment its long-term competitive position, the Company anticipates that it
will be required to make significant additional expenditures in research and
development and sales and marketing. The Company's inability to manage its
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. Competition in the
market for medical devices used in tissue dissection surgical procedures is
intense and is expected to increase. The Company competes primarily with
other producers of MIS tissue dissection instruments. Origin, a subsidiary of
Guidant Corporation, and others currently compete against the Company in the
development, production and marketing of MIS tissue dissection instruments
and tissue dissection technology. To the extent that surgeons elect to use
open surgical procedures rather than MIS, the Company also competes with
producers of tissue dissection instruments used in open surgical procedures,
such as blunt dissectors or graspers. A number of companies currently compete
against the Company in the development, production and marketing of tissue
dissection instruments and technology for open surgical procedures. In
addition, the Company indirectly competes with producers of therapeutic
drugs, when such drugs are used as an alternative to surgery. Many of the
Company's competitors have substantially greater capital resources, name
recognition and expertise in research and development, manufacturing,
marketing and obtaining regulatory approvals. There can be no assurance that
the Company's competitors will not succeed in
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developing balloon dissectors or competing technologies that are more
effective than products marketed by the Company or that render the Company's
technology obsolete. Additionally, even if the Company's products provide
performance comparable to competing products or procedures, there can be no
assurance that the Company will be able to obtain necessary regulatory
approvals or compete against competitors in terms of price, manufacturing,
marketing and sales.
Many of the alternative treatments for medical indications that can be
treated by balloon dissection products and laparoscopic surgery are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies could make such other
therapies more effective or cost-effective than balloon dissectors and
minimally invasive surgery, and could render the Company's technology
non-competitive or obsolete. There can be no assurance that surgeons will use
MIS to replace or supplement established treatments or that MIS will remain
competitive with current or future treatments. The failure of surgeons to
adopt MIS could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition to the Company's development of its balloon dissection
systems, the Company has also developed surgical instruments for use in MIS.
There can be no assurance that the Company's surgical instruments will
successfully compete with those manufactured by other producers of such
surgical instruments. The failure to achieve commercial market acceptance of
such surgical instruments could have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT. The Company's
success will depend upon the ability of surgeons to obtain satisfactory
reimbursement from healthcare payors for the Company's products. In the
United States, hospitals, physicians and other healthcare providers that
purchase medical devices generally rely on third-party payors, such as
private health insurance plans, to reimburse all or part of the costs
associated with the treatment of patients. Reimbursement in the United States
for the Company's balloon dissection products is currently available from
most third-party payors, including most major private health care insurance
plans and Medicaid, under existing surgical procedure codes. The Company does
not expect that third-party reimbursement in the United States will be
available for use of its other products unless and until clearance or
approval is received from the federal Food and Drug Administration (the
"FDA"). If FDA clearance or approval is received, third-party reimbursement
for these products will depend upon decisions by individual health
maintenance organizations, private insurers and other payors. Many payors,
including the federal Medicare program, pay a preset amount for the surgical
facility component of a surgical procedure. This amount typically includes
medical devices such as the Company's. Thus, the surgical facility or surgeon
may not recover the added cost of the Company's products. In addition,
managed care payors often limit coverage to surgical devices on a preapproved
list or obtained from an exclusive source. If the Company's products are not
on the list or are not available from the exclusive source, the facility or
surgeon will need to obtain an exception from the payor or the patient will
be required to pay for some or all of the cost of the Company's product. The
Company believes that procedures using its balloon dissection products
currently may be reimbursed in the United States under certain existing
procedure codes. However, there can be no assurance that such procedure codes
will remain available or that the reimbursement under these codes will be
adequate. Given the efforts to control and decrease health care costs in
recent years, there can be no assurance that any reimbursement will be
sufficient to permit the Company to increase revenues or achieve or maintain
profitability. The unavailability of third party or other adequate
reimbursement could have a material adverse effect on the Company's business,
financial condition and results of operations.
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Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals
must be obtained on a country-by-country basis. Many international markets
have government-managed health care systems that govern reimbursement for new
devices and procedures. In most markets, there are private insurance systems
as well as government-managed systems. Large-scale market acceptance of the
Company's balloon dissection systems and other products will depend on the
availability and level of reimbursement in international markets targeted by
the Company. Currently, the Company has been informed by its international
distributors that the balloon dissectors have been approved for reimbursement
in many of the countries in which the Company markets its products. Obtaining
reimbursement approvals can require 12 to 18 months or longer. There can be
no assurance that the Company will obtain reimbursement in any country within
a particular time, for a particular amount, or at all. Failure to obtain such
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
Regardless of the type of reimbursement system, the Company believes
that surgeon advocacy of its products will be required to obtain
reimbursement. Availability of reimbursement will depend on the clinical
efficacy of the procedure and the utility and cost of the Company's products.
There can be no assurance that surgeons will support and advocate
reimbursement for use of the Company's systems for all applications intended
by the Company. Failure by surgeons, hospitals and other users of the
Company's products to obtain sufficient reimbursement from health care payors
or adverse changes in government and private third-party payors' policies
toward reimbursement for procedures employing the Company's products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION. The Company's SPACEMAKER-Registered Trademark-
balloon dissection systems and other products are subject to extensive and
rigorous regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies. Under the Federal Food, Drug, and Cosmetic Act and as
amended in the Safe Medical Devices Act of 1990, the FDA regulates the
pre-production design controls, 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 restrictions, refusal of the government to
approve product export applications or allow the Company to enter into supply
contracts, and criminal prosecution. Delays in receipt of, or failure to
obtain, regulatory clearances and approvals, if obtained, or any failure to
comply with regulatory requirements could have a material adverse effect on
the Company's business, financial condition and results of operations.
Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. The SPACEMAKER-Registered Trademark- I platform,
SPACEMAKER-Registered Trademark- II platform, SPACEMAKER-Registered
Trademark-serial platform, combined SPACEMAKER-Registered Trademark- surgical
balloon dissector/expander platform and KnotMaker-TM- product each have
received 510(k) clearance for use during general, endoscopic, laparoscopic
and cosmetic and reconstructive surgery, either when tissue dissection is
required or, with respect to the KnotMaker-TM- product, when a surgical knot
for suturing is
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required. The Company has promoted these products for surgical applications
(E.G., hernia repair, treatment of stress urinary incontinence, subfascial
endoscopic perforator surgery, saphenous vein harvesting, 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. a variety of orthopaedic procedures such as anterior
spinal fusion, and long bone plating). For any medical device cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require a
new 510(k) submission. The Company has made modifications to its products
which the Company believes do not affect the safety or effectiveness of the
device or constitute a major change to the intended use and therefore do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA will agree with any of the Company's determinations not
to submit a new 510(k) notice for any of these changes or will not require
the Company to submit a new 510(k) notice for any of the changes made to the
product. If such additional 510(k) clearances are required, there can be no
assurance that the Company will obtain them on a timely basis, if at all, and
delays in receipt of or failure to receive such approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the FDA requires the Company to submit a new 510(k)
notice for any product modification, the Company may be prohibited from
marketing the modified product until the 510(k) notice is cleared by the FDA.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. In
October 1997 the Company received its CE mark certification, pursuant to the
Medical Devices Directive, which enables the Company to affix CE marking on
its products and continue selling its products within the European Economic
Area. 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.
LIMITED MANUFACTURING EXPERIENCE; UNCERTAINTY REGARDING FUTURE
FACILITIES. The Company has only limited experience in manufacturing its
products in commercial quantities. The Company intends to scale up its
production of new products and to increase its manufacturing capacity for
existing and new products. However, manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
and shortages of qualified personnel. Difficulties experienced by the Company
in manufacturing scale-up and manufacturing difficulties (including, in the
event of low demand, over-capacity) could have a material adverse effect on
its business, financial condition and results of operations. There can be no
assurance that the Company will be successful in scaling up or that it will
not experience manufacturing difficulties or product recalls in the future.
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In April 1997, the Company relocated its headquarters and manufacturing
operations to a new location. The new facility's lease comprises
approximately 30,460 square feet, and the monthly rent is approximately
$52,000.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS; LACK OF CONTRACTUAL ARRANGEMENTS.
The Company currently relies upon single source suppliers for several
components of its balloon dissection products, and in most cases there are no
formal supply contracts. There can be no assurance that the component
materials obtained from single source suppliers will continue to be available
in adequate quantities or quality, if at all, or, if required, that the
Company will be able to locate alternative sources of such component
materials on a timely basis, if at all, to market its products. In addition,
there can be no assurance that the single source suppliers will meet the
Company's future requirements for timely delivery of products of sufficient
quality and quantity. The failure to obtain sufficient quantities and
qualities of such component materials, or the loss of any of the Company's
single source suppliers, could cause a delay in GSI's ability to fulfill
orders while it identifies and certifies a replacement supplier, if any, and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE.
The Company's business exposes it to potential product liability risks or
product recalls that are inherent in the design, development, manufacture and
marketing of medical devices, in the event the use of the Company's products
causes or is alleged to have caused adverse effects on a patient or such
products are believed to be defective. The Company's products are designed to
be used in certain procedures where there is a high risk of serious injury or
death. Such risks will exist even with respect to those products that have
received, or may in the future receive, regulatory clearance for commercial
sale. As a result, there can be no assurance that the Company's product
liability insurance is adequate or that such insurance coverage will continue
to be available on commercially reasonable terms or at all. Particularly
given the lack of data regarding the long-term results of the use of balloon
dissection products, there can be no assurance the Company will avoid
significant product liability claims. Consequently, a product liability claim
or other claim with respect to uninsured or underinsured liabilities could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. There were no international
sales in the first quarter of fiscal 1998, $5,000 in the second quarter of
fiscal 1998 and $68,000 in the third quarter of fiscal 1998. Sales outside
of the United States accounted for .5% and 4% of the Company's sales in
fiscal 1997 and 1996, respectively. The Company expects that international
sales will represent an increasing portion of revenue in the future. The
Company intends to continue to expand its sales outside of the United States
and to enter additional international markets, which will require significant
management attention and financial resources and subject the Company further
to the risks of selling internationally. These risks include unexpected
changes in regulatory requirements, tariffs and other barriers and
restrictions, reduced protection 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.
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DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is
dependent upon a limited number of key management and technical personnel.
The loss of the services of one or more of such key employees could have a
material adverse effect on the Company's business, financial condition, and
results of operations. In addition, the Company's success will be dependent
upon its ability to attract and retain additional highly qualified sales,
management, manufacturing and research and development personnel. The Company
faces intense competition in its recruiting activities and there can be no
assurance that the Company will be able to attract and/or retain qualified
personnel.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices of the Company's
common stock and the stock of many other publicly held medical device
companies have in the past been, and can in the future be expected to be,
especially volatile. Announcements regarding competitive developments,
product sales, clinical marketing trial results, release of reports by
securities analysts, developments or disputes concerning patents or
proprietary rights, regulatory developments, changes in regulatory or medical
reimbursement policies, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market price of the Common Stock. In addition, the
securities markets have from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies.
YEAR 2000 COMPLIANCE. The Company is aware of the issues associated
with the programming code in existing computer systems as the millennium
(year 2000) approaches. The "year 2000" problem is pervasive and complex, as
virtually every computer operation will be affected in some way by the
rollover of the two digit year value to 00. The issue is whether computer
systems will properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be
completed by December 31, 1998 allowing adequate time for testing.
Management believes that there will not be a material effect on the Company's
earnings as a result of this compliance. Failure of key business partners or
vendors to identify and correct year 2000 issues could have a material
adverse effect on the Company's operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 28, 1996, Origin MedSystems, Inc., ("Origin"), a unit of the
Guidant Corporation and a competitor of the Company, filed an action against
GSI in the United States District Court for the Northern District of
California, alleging patent infringement of its U.S. Patent No. 5,520,609
entitled "Apparatus and Methods for Peritoneal Retraction." On April 20,
1998 an order in GSI's favor in this case was filed by the Court granting
GSI's Motion for Summary Judgment of Unenforceability by Reason of
Inequitable Conduct in obtaining Patent No. 5,520,609. The Company expects
this decision to be appealed.
In June, 1996, GSI filed a claim against Origin in the United States
District Court for the Northern District of California, alleging patent
infringement of its patent for a method of tissue plane dissection using
balloon systems. In addition, on September 26, 1997, the Company filed
another action against Origin alleging patent infringement of its patent for
a method of serial inflation of tissue dissectors. A decision against the
Company in any of these actions would have a material adverse effect on the
Company's business, financial condition and results of operations. One of the
patent applications
21
<PAGE>
filed by the Company, which is directed to a surgical method using balloon
dissection technology, has been placed in interference with a patent
application filed by Origin. The Company believes that the inventor named in
its patent application was the first to invent this subject matter, and has
asserted that the Origin patent application was filed after a disclosure made
by such inventor to employees of Origin. Origin takes a contrary position.
This interference is presently pending in the United States Patent and
Trademark Office ("USPTO") and, as permitted by the rules of the USPTO, has
been referred to an arbitrator for completion of the interference proceeding.
A decision is expected in this interference proceeding in 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 or in either of the
lawsuits described above would have a material adverse effect on the
Company's business, financial condition and 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, except for the patent interference
and infringement proceedings discussed herein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-02774 (the
"REGISTRATION STATEMENT"), which was declared effective by the Commission on
May 9, 1996. Pursuant to the Registration Statement, the Company registered
and sold 3,450,000 shares of its Common Stock, $0.001 par value per share,
for its own account. The offering commenced on May 10, 1996 and terminated
when all of the registered shares had been sold. The aggregate offering
price of the registered shares was $51,750,000. The managing underwriters of
the offering were Cowen & Company and UBS Securities LLC.
From May 10, 1996 to March 31, 1998, the Company incurred the following
expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions $3,622,500
Other expenses $1,187,025
----------
Total Expenses $4,809,525
</TABLE>
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above were $46,940,475. From May 10, 1996 to March 31, 1998, the
Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
<TABLE>
<S> <C>
Construction of plant, building and facilities $1,192,238
Purchase and installment of machinery and equipment $1,241,544
Repayment of indebtedness $806,460
Working capital $28,853,554
-----------
Total $32,093,796
</TABLE>
This use of proceeds does not represent a material change in the use of
proceeds described in the prospectus of the Registration Statement.
22
<PAGE>
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.23 Form of Change of Control Agreement between the
Company and executive officers dated January 20,
1998.
10.24* Termination, Release and Distribution Agreement
between the Company and Ethicon Endo-Surgery, Inc.
dated February 23, 1998.
27.1 Financial Data Schedule
</TABLE>
* Confidential Treatment requested.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended March
31, 1998.
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 Administration
Principal and Chief Financial Officer
Date: May 14, 1998
24
<PAGE>
EXHIBIT 10.23
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of January 20, 1998, by and between [NAME] (the "Employee")
and General Surgical Innovations, Inc., a California corporation (the
"Company").
RECITALS
A. It is expected that another company or other entity may from time
to time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's
Board of Directors (the "Board"). The Board recognizes that such
consideration can be a distraction to the Employee, an executive corporate
officer of the Company, and can cause the Employee to consider alternative
employment opportunities. The Board has determined that it is in the best
interests of the Company and its shareholders to assure that the Company will
have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control
(as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company
and its shareholders to provide the Employee with an incentive to continue
his or her employment with the Company.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Change of Control and, under certain
circumstances, upon termination of the Employee's employment in connection
with a Change of Control, which benefits are intended to provide the Employee
with financial security and provide sufficient income and encouragement to
the Employee to remain with the Company notwithstanding the possibility of a
Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to
agree to the terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in
Section 4 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
<PAGE>
1. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as
defined under applicable law. If the Employee's employment terminates for
any reason, including (without limitation) any termination prior to a Change
of Control, the Employee shall not be entitled to any payments or benefits,
other than as provided by this Agreement, or as may otherwise be available in
accordance with the terms of the Employee's offer letter from the Company
dated (the "Offer Letter") and the Company's established employee plans and
written policies at the time of termination. The terms of this Agreement
shall terminate upon the earlier of (i) the date on which Employee ceases to
be employed as an executive corporate officer of the Company, other than as a
result of an involuntary termination by the Company without cause, (ii) the
date that all obligations of the parties hereunder have been satisfied, or
(iii) two (2) years after a Change of Control. A termination of the terms of
this Agreement pursuant to the preceding sentence shall be effective for all
purposes, except that such termination shall not affect the payment or
provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
2. STOCK OPTIONS AND RESTRICTED STOCK.
(a) EFFECTIVE DATE OF CHANGE OF CONTROL. Subject to Sections
5 and 6 below, in the event of a Change of Control and regardless of whether
the Employee's employment with the Company is terminated in connection with
the Change of Control, each stock option granted for the acquisition of the
Company's securities and all of the shares of Common Stock that are subject
to the terms of a Restricted Stock Purchase Agreement ("Restricted Stock")
held by the Employee shall become vested on the effective date of the
transaction as to fifty percent (50%) of the options and Restricted Stock,
respectively, that have not otherwise vested as the date of such Change of
Control. Each stock option shall be exercisable to the extent so vested in
accordance with the provisions of the Option Agreement and Plan pursuant to
which such option was granted, and each share of Restricted Stock shall be
freely transferable to the extent so vested in accordance with the provisions
of the Stock Purchase Agreement pursuant to which such stock was purchased by
Employee.
(b) SUBSEQUENT VESTING. Subject to Sections 5 and 6 below,
assuming the Employee remains employed by the Company (or a successor
company) after the Change in Control, the remaining fifty percent (50%) of
the stock options and Restricted Stock not vested as of the date of the
Change of Control shall vest as follows: (i) 25% of the stock options and
Restricted Stock, respectively, on the date twelve (12) months after the date
of the Change of Control, and (ii) 25% of the stock options and Restricted
Stock, respectively, on the date eighteen (18) months after the date of the
Change of Control.
3. CHANGE OF CONTROL.
(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. Subject to
Section 5 below, if the Employee's employment with the Company is terminated
at any time within two (2) years after a Change of Control, then the Employee
shall be entitled to receive severance benefits as follows:
-2-
<PAGE>
(i) VOLUNTARY RESIGNATION. If the Employee voluntarily
resigns from the Company (other than as an Involuntary Termination (as
defined below)) or if the Company terminates the Employee's employment for
Cause (as defined below), then the Employee shall not be entitled to receive
severance payments. The Employee's benefits will be terminated under the
terms of the offer letter, if applicable, and the Company's then-existing
benefit plans and policies in accordance with such plans and policies in
effect on the date of termination or as otherwise determined by the Board of
Directors of the Company.
(ii) INVOLUNTARY TERMINATION. If the Employee's
employment is terminated as a result of an Involuntary Termination other than
for Cause, the Employee shall be entitled to receive the following benefits:
(a) severance payments during the period from the
date of the Employee's termination until the date twelve (12) months after
the effective date of the termination (the "Severance Period") equal to the
salary that the Employee was receiving immediately prior to the Change of
Control, which payments shall be paid during the Severance Period in
accordance with the Company's standard payroll practices;
(b) a pro-rated amount of the Employee's "target
bonus" for the fiscal year in which the termination occurs, based on the
number of months such Employee was employed during the fiscal year in which
termination occurs, with such payment being made on the termination date,
PROVIDED, HOWEVER, that if the "target bonus" has not yet been determined for
the fiscal year in which the termination occurs, then Employee shall receive
such pro-rated amount based on such Employee's bonus actually received, if
any, for the prior fiscal year;
(c) continuation of all health and life insurance
benefits through the end of the Severance Period (or, if earlier, until the
date on which comparable coverage is made available by a new employer)
substantially identical in level and cost to those to which the Employee was
entitled immediately prior to the Change of Control, PROVIDED, however, that
if the benefits available to Officers of the Company (or successor
corporation) are changed after the Employee's termination date, then the
Employee's benefits shall be continued at the new level and cost;
(d) full and immediate vesting of each unvested
stock option granted for the Company's securities and each share of
Restricted Stock held by the Employee on the date of termination so that each
such option shall be exercisable in full on the termination date in
accordance with the provisions of the Option Agreement and Plan pursuant to
which such option was granted, and each such share of Restricted Stock shall
be freely transferable to the extent so vested in accordance with the
provisions of the Stock Purchase Agreement pursuant to which such stock was
purchased by Employee; and
(e) forgiveness of the principal and accrued
interest on any loans outstanding that were executed by Employee in
connection with the purchase of shares of the Company's Common Stock.
-3-
<PAGE>
For purposes of this Agreement, the term "target
bonus" shall mean the Employee's base salary immediately prior to the Change
of Control multiplied by that percentage of such base salary that is
prescribed by the Company under its Management Bonus Program as the
percentage of such base salary payable to the Employee as a bonus if the
Company pays bonuses at one-hundred percent (100%) of its operating plan.
(iii) INVOLUNTARY TERMINATION FOR CAUSE. If the
Employee's employment is terminated for Cause, then the Employee shall not be
entitled to receive severance payments. The Employee's benefits will be
terminated under the Company's then-existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination
or as otherwise determined by the Board of Directors of the Company.
(b) TERMINATION APART FROM A CHANGE OF CONTROL. In the event
the Employee's employment terminates for any reason, either prior to the
occurrence of a Change of Control or after the two (2) year period following
the effective date of a Change of Control, then the Employee shall not be
entitled to receive any severance payments under this Agreement. The
Employee's benefits will be terminated under the terms of the Offer Letter,
if applicable, and the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination
or as otherwise determined by the Board of Directors of the Company.
4. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing
twenty percent (20%) or more of the total voting power represented by the
Company's then outstanding voting securities WITHOUT the approval of the
Board of Directors of the Company, PROVIDED, however, that this Section
4(a)(i) shall not apply to the share holdings of Thomas J. Fogarty as a
result of his being, at any date, the Beneficial Owner of up to an aggregate
of 20% of the total outstanding Common Stock of the Company, plus that number
of shares that he is permitted to purchase in accordance with the provisions
of any plan, arrangement, agreement or transaction approved by the Board of
Directors of the Company or any committee of the Board of Directors; or
(ii) MERGER/SALE OF ASSETS. A merger or consolidation of
the Company whether or not approved by the Board of Directors of the Company,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least fifty percent (50%) of the total
voting power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation,
or the shareholders of the Company
-4-
<PAGE>
approve a plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the
Company's assets; or
(iii) CHANGE IN BOARD COMPOSITION. A change in the
composition of the Board of Directors of the Company, as a result of which
fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company
as of January [20], 1998 or (B) are elected, or nominated for election, to
the Board of Directors of the Company with the affirmative votes of at least
a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination
is in connection with an actual or threatened proxy contest relating to the
election of directors to the Company).
(b) CAUSE. "Cause" shall mean (i) gross negligence or
willful misconduct in the performance of the Employee's duties to the Company
where such gross negligence or willful misconduct has resulted or is likely
to result in substantial and material damage to the Company or its
subsidiaries, (ii) repeated unexplained or unjustified absence from the
Company, (iii) a material and willful violation of any federal or state law;
(iv) commission of any act of fraud with respect to the Company; or (v)
conviction of a felony or a crime involving moral turpitude causing material
harm to the standing and reputation of the Company, in each case as
determined in good faith by the Board of Directors of the Company.
(c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
include any termination by the Company other than for Cause and the
Employee's voluntary termination, upon 30 days prior written notice to the
Company, following (i) a material reduction or change in job duties,
responsibilities and requirements inconsistent with the Employee's position
with the Company and the Employee's prior duties, responsibilities and
requirements; (ii) any reduction of the Employee's base compensation (other
than in connection with a general decrease in base salaries for most officers
of the Company and any successor corporation); or (iii) the Employee's
refusal to relocate to a facility or location more than 50 miles from the
Company's current location.
5. LIMITATION ON PAYMENTS. In the event that the severance and
other benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section,
would be subject to the excise tax imposed by Section 4999 of the Code, then
the Employee's severance benefits under Sections 2(a), 2(b) and 3(a)(ii)
shall be payable either:
(a) in full, or
(b) as to such lesser amount which would result in no portion
of such severance benefits being subject to excise tax under Section 4999 of
the Code,
whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Employee on an after-tax basis, of the
greatest amount of severance benefits under Sections 2(a), 2(b) and
-5-
<PAGE>
3(a)(ii), notwithstanding that all or some portion of such severance benefits
may be taxable under Section 4999 of the Code. Unless the Company and the
Employee otherwise agree in writing, any determination required under this
Section 5 shall be made in writing by the Company's independent public
accountants (the "Accountants"), whose determination shall be conclusive and
binding upon the Employee and the Company for all purposes. For purposes of
making the calculations required by this Section 5, the Accountants may make
reasonable assumptions and approximations concerning applicable taxes and may
rely on reasonable, good faith interpretations concerning the application of
Section 280G and 4999 of the Code. The Company and the Employee shall
furnish to the Accountants such information and documents as the Accountants
may reasonably request in order to make a determination under this Section.
The Company shall bear all costs the Accountants may reasonably incur in
connection with any calculations contemplated by this Section 5.
6. CERTAIN BUSINESS COMBINATIONS. In the event it is determined
by the Board, upon consultation with Company management and the Company's
independent auditors, that the enforcement of any Section of this Agreement,
including, but not limited to, Sections 2 and 3(a)(ii) hereof, which allows
for the acceleration of vesting of stock options granted for the Company's
securities and shares of Restricted Stock held by the Employee upon the
effective date of a Change of Control would preclude accounting for any
proposed business combination of the Company involving a Change of Control as
a pooling of interests, and the Board otherwise desires to approve such a
proposed business transaction which requires as a condition to the closing of
such transaction that it be accounted for as a pooling of interests, then any
such Section of this Agreement shall be null and void. For purposes of this
Section 6, the Board's determination shall require the unanimous approval of
the non-employee Board members.
7. SUCCESSORS. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly
to perform the obligations under this Agreement in the same manner and to the
same extent as the Company would be required to perform such obligations in
the absence of a succession. The terms of this Agreement and all of the
Employee's rights hereunder shall inure to the benefit of, and be enforceable
by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. Mailed notices
to the Employee shall be addressed to the Employee at the home address which
the Employee most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
-6-
<PAGE>
9. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Employee shall not be required
to mitigate the amount of any payment contemplated by this Agreement (whether
by seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that the Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge
is agreed to in writing and signed by the Employee and by an authorized
officer of the Company (other than the Employee). No waiver by either party
of any breach of, or of compliance with, any condition or provision of this
Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject
matter dated prior to the date of this Agreement, and by execution of this
Agreement both parties agree that any such predecessor agreement shall be
deemed null and void.
(d) CHOICE OF LAW. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws
of the State of California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement
or the application thereof to any circumstance shall, in any jurisdiction and
to any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the
remaining terms and provisions of this Agreement or the application of such
terms and provisions to circumstances other than those as to which it is held
invalid or unenforceable, and a suitable and equitable term or provision
shall be substituted therefor to carry out, insofar as may be valid and
enforceable, the intent and purpose of the invalid or unenforceable term or
provision.
(f) ARBITRATION. Any dispute or controversy arising under or
in connection with this Agreement may be settled at the option of either
party by binding arbitration in the County of Santa Clara, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Punitive damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The parties shall each bear
their own expenses, legal fees and other fees incurred in connection with
this Agreement.
-7-
<PAGE>
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment or
other creditor's process, and any action in violation of this subsection (h)
shall be void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment.
In the case of any such assignment, the term "Company" when used in a section
of this Agreement shall mean the corporation that actually employs the
Employee.
(k) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
[Signature page follow)
-8-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and
year first above written.
GENERAL SURGICAL INNOVATIONS, INC. [NAME]
By:________________________ By:___________________________
Title:_____________________ Title:________________________
-9-
<PAGE>
EXHIBIT 10.24
TERMINATION, RELEASE AND DISTRIBUTION AGREEMENT
This Termination, Release and Distribution Agreement (the "Agreement") is
entered into as of February 20, 1998, by and between General Surgical
Innovations, Inc., a corporation organized under the laws of California, having
a business address at 10460 Bubb Road, Cupertino, California 95014, United
States of America, ("GSI") and 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").
A. On or about December 20, 1996, GSI and Ethicon entered into an OEM
Supply Agreement (Expanded Field) (the "Expanded Agreement"). The Expanded
Agreement superseded and replaced an earlier OEM Supply Agreement between the
parties dated June 28, 1996 (the "Original Agreement") (the Original Agreement
and the Expanded Agreement together, the "Prior Agreements").
B. The parties now desire to supersede and replace the Expanded
Agreement with a non-exclusive distribution agreement.
C. GSI desires to appoint Ethicon to promote, sell and distribute
certain GSI products, worldwide (the "Territory") in accordance with the terms
and conditions stated herein.
AGREEMENT
A. IN CONSIDERATION OF THE FOREGOING, and the mutual agreements
contained herein, the sufficiency of which is acknowledged by both parties, it
is mutually agreed by and between the parties as follows:
1. REPLACE AND SUPERSEDE.
(a) Upon execution, this Distribution Agreement will replace
and supersede the Expanded Agreement which Agreement itself replaced and
superseded the Original Agreement.
(b) GSI and Ethicon, each being represented by Counsel, in
consideration of the mutual premises and covenants contained herein, the
sufficiency of which are hereby acknowledged, do hereby mutually and
unconditionally release and forever discharge each other, and their respective
agents, employees, officers, directors, shareholders, partners, affiliates,
successors and assigns, from any and all actions, causes of action, claims,
costs, damages, demands, expenses (including, without limitation, attorneys
fees and litigation costs), liabilities and obligations (collectively, the
"Claims") which either party had, now has or may hereafter have against the
other party arising out of or in any way connected with the Prior Agreements or
the termination of the Prior Agreements: provided, however, that Article 7 of
the
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-10-
<PAGE>
Expanded Agreement shall continue to apply in respect to any claims made by
third parties against the parties in respect of any products delivered under
the Prior Agreements. The foregoing mutual and general release shall apply,
without limitation, to all Claims of any kind or nature, past, present and
future, whether or not known, unknown, suspected, accrued, liquidated, fixed or
contingent and it constitutes a mutual and general release of the parties with
respect to the Prior Agreements. Each of the parties acknowledge that they
have been advised by legal counsel and are familiar with the provisions of
California Civil Code Section 1542, which provides as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have
materially affected his settlement with the debtor."
GSI and Ethicon, being aware of the said code section, agree to expressly waive
any rights they may have thereunder, as well as under any other statute or
common law principles of similar effect. The parties further acknowledge and
agree that these waivers of rights under Section 1542 of the Civil Code have
been separately bargained for and are essential and material terms of this
Agreement and, without such waivers, the parties would not have entered into
this Agreement.
2. GRANT OF DISTRIBUTORSHIP.
(a) APPOINTMENT. GSI appoints Ethicon as a nonexclusive
distributor in the Territory for the term of the Agreement to promote, sell,
market and distribute the Products set forth in Exhibit A (the "Products"), in
the fields of hernia repair and urinary stress incontinence (USI). Ethicon
agrees to refrain from promoting, selling, marketing and distributing hernia or
urinary stress incontinence balloons similar to the Products from any source
other than GSI as long as this agreement is in effect. It is expressly
acknowledged and agreed that the provisions of this Section 2(a) shall not
survive termination of this Agreement.
(b) PLACEMENT OF ORDERS. On or before the first day of the
month prior to the next calendar quarter, EES will place a non-cancelable
purchase order with GSI covering that next calendar quarter. During the term
of this Agreement, GSI shall supply Ethicon with those quantities of products
as ordered by Ethicon and Ethicon will purchase from GSI all Products so
ordered by it pursuant to this Agreement, it being understood that, except for
the non-cancelable purchase orders previously placed by Ethicon, nothing
contained herein shall require Ethicon to purchase any Products under this
Agreement. GSI will use reasonable commercial efforts to fulfill the purchase
orders of Ethicon in chronological order as placed and based on urgency needs
as advised by Ethicon; provided, however, that GSI shall not be held liable for
any amount of purchase order greater than one hundred and fifty percent (150%)
of the purchase orders made in the immediately preceding calendar quarter where
an order was placed and, in meeting any such order, GSI shall not be obligated
to fill more than twenty-five percent of such purchase order in the first month
of the applicable quarter and not more than thirty three percent of such
purchase order in the second month of the applicable quarter. In the event
that
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-11-
<PAGE>
GSI shall fail to meet its delivery obligations under this Agreement within a
period of 30 days after a mutually agreed upon delivery date, then, in
addition to any other remedies which Ethicon may have under this Agreement,
Ethicon shall be permitted (with no obligation or liability to GSI) to obtain
the Products in such purchase order from another source to satisfy the terms
of this order.
(c) DIRECT SALES. GSI shall have the right to promote, market
and sell the Products in the Territory directly itself, or indirectly through
affiliates, agents, distributors or otherwise.
(d) SUBSTITUTE PRODUCTS. If GSI offers for sale a product that
is in an alternative, improvement, replacement, substitute or addition to a
Product, an "Improvement," during the term of this Agreement, Ethicon will have
the option of evaluating the Improvement and, subject to reaching agreement
with GSI as to a new price and other terms, may amend this Agreement to
substitute or add the Improvements as a Product; provided, however, that if a
third party funds a change to a product, or if GSI relabels or repackages a
Product with a new trademark or new packaging or labeling then such product
shall not be considered an Improvement for purpose of this Section 2(d).
3. PRICES; PURCHASE ORDERS.
(a) PRICES. Prices to Ethicon shall be in United States
dollars and initially as set forth in Exhibit A. Changes in price may be
made by GSI after 1998, subject to ninety (90) day's notice in advance to
Ethicon. However, GSI agrees that [* * *]. All prices are calculated
F.O.B. GSI's distribution site, currently located in Cupertino, California.
Customs, duties and charges, if any, shall be borne by Ethicon. All import
or export licenses, approvals or both shall be obtained by Ethicon at its
cost. Prices to Ethicon do not include any federal, state or local taxes
that may be applicable to the Products. When GSI has the legal obligation to
collect such taxes, the appropriate amount shall be added to Ethicon's
invoice and paid by Ethicon unless Ethicon provides GSI with a valid tax
exemption certificate authorized by the appropriate taxing authority. In no
event will [* * *]. If GSI [* * *] the [* * *] effective as
of the date [* * *].
(b) PURCHASE ORDERS. Pursuant to this Agreement Ethicon will
submit purchase orders for the Products ("Purchase Orders") which include terms
and conditions as set forth in Exhibit B: "Purchase Order Terms and
Conditions." The Purchase Order Terms and Conditions are hereby incorporated
into and are part of this Agreement, except that (i) Section 7 regarding
branding and adulterated orders and compliance with all applicable laws, rules
and regulations shall be deemed by the parties to extend to the equivalent
rules of any foreign jurisdiction in which the products are sold (ii) the last
sentence of Section 3 does not apply and (iii) Section 26 does not apply. The
terms contained within this Agreement will control over the terms contained
within "Purchase Order Terms and Conditions" in the event of inconsistencies
between the two documents.
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-12-
<PAGE>
(c) REJECT/RETURN (i) Purchase shall inspect all products
promptly upon receipt thereof and may reject any product that fails in any
material way to meet the applicable mutually agreed upon specifications or any
requirements specified in the purchase order description. Any product not
properly rejected within thirty (30) days of receipt of that product by
Purchaser (the "Rejection Period") shall be deemed accepted. To reject a
Product, Purchase shall, within the Rejection Period, notify GSI of its
rejection and request a Material Return Authorization ("MRA") number. GSI
shall provide the MRA number to Purchaser within seven (7) days of receipt of
the request. Within seven (7) days of receipt of the MRA number, Purchaser
shall return to GSI the rejected product, freight prepaid, in its original
shipping carton with the MRA number displayed on the outside of the carton.
GSI reserves the right to refuse to accept any rejected products that do not
bear an MRA number on the outside of the carton. As promptly as possible, but
not later than thirty (30) working days after receipt of properly rejected
products, GSI shall, at its expense, replace the products. GSI shall pay the
shipping charges back to Purchaser for property rejected products; otherwise,
Purchaser shall be responsible for the shipping charges. (ii) After the
Rejection Period, Purchaser may not return a product to GSI for any reason
without GSI's prior written consent. Purchaser shall be responsible for all
shipping charges for returns after the rejection period.
(d) STANDARD LIMITED WARRANTY. Ethicon shall pass on to its
customers GSI's standard limited warranty for Products including the
limitations set forth in Sections 3(e) below. This warranty is contingent upon
proper use of a Product in the application for which such Product was intended
and does not cover Products that were modified without GSI's approval, that
have expired or that were subjected by the customer to unusual physical,
chemical or electrical stress.
(e) NO OTHER WARRANTY. EXCEPT FOR THE EXPRESS LIMITED WARRANTY
SET FORTH ABOVE AND THE WARRANTIES AND GUARANTEES SET FORTH IN THE PURCHASE
ORDER, GSI GRANTS NO WARRANTIES FOR THE PRODUCTS, 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. 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.
(f) THIRD PARTY CLAIMS. Article 7 of the Expanded Agreement is
hereby incorporated into and becomes part of this Agreement in respect to any
claims made by third parties against the parties in connection with any
Products delivered under this Agreement.
4. PAYMENT. Full payment of Ethicon's purchase price (including
any freight, taxes or other applicable costs initially paid by GSI but to be
borne by Ethicon) shall be in United States of America dollars. All exchange,
interest, banking, collection, and other charges shall be at Ethicon's expense.
Payment terms shall be net forty-five (45) days upon receipt of the
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-13-
<PAGE>
Product, and payment shall be made by wire transfer, check or other
instrument approved by GSI. Any invoiced amount not paid when due shall be
subject to a service charge at the lower of the rate of one and one-half
percent (1.5%) per month or the maximum rate permitted by law. If Ethicon
fails to make any payment to GSI when due, GSI may, without affecting its
rights under this Agreement, cancel or delay any future shipments to.
5. TERM AND TERMINATION.
(a) TERMINATION FOR CONVENIENCE. This Agreement may be
terminated at any time after the date set forth on the first page of this
agreement by either party by giving the other party written notice thirty (30)
days in advance.
(b) EFFECT OF TERMINATION; LIMITATION OF LIABILITY. In the
event of termination by either party in accordance with any of the provisions
of this Agreement, neither party shall be liable to the other, because of such
termination, for compensation, reimbursement or damages on account of the loss
of prospective profits or anticipated sales or on account of expenditures,
inventory, investments, leases or commitments in connection with the business
or goodwill of GSI or Ethicon. Termination shall not, however, relieve either
party of obligations incurred prior to the termination. Ethicon shall be
entitled to receive from GSI Products necessary to fulfill valid and binding
purchase orders accepted by GSI prior to notification of termination of this
Agreement. GSI shall be entitled to receive from ETHICON payments necessary to
fulfill valid and binding purchase orders submitted by Ethicon prior to
notification of termination of this Agreement.
6. NOTICES.
(a) ADDRESSES. All notices given under this Agreement shall be
sufficient if in writing and delivered by messenger or sent by postage prepaid
mail or by facsimile to the address of the recipients set forth below:
In the case of GSI:
To: General Surgical Innovations, Inc.
10460 Bubb Road
Cupertino, California 95014
Attn: President
Fax: (408) 863-1101
With a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Mark E. Weeks
Fax: (650) 233-8386
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-14-
<PAGE>
In the Case of Ethicon:
To: Ethicon Endo-Surgery, Inc.
4545 Creek Road
Cincinnati, Ohio 45242
Attention: President
Fax: (513) 483-8945
With a copy to:
Office of General Counsel
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
Fax: (732) 524-2788
(b) DELIVERY. Notice shall be effective when received by or
otherwise known to the receipt or its legal representative. This provision is
not intended to be exclusive and any notice actually received shall be
sufficient.
7. MISCELLANEOUS.
(a) COUNTERPARTS. This agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(b) PARTIAL INVALIDITY. If any provision of this Agreement,
including any provision set forth in the "Purchase Order Terms and Conditions"
attached as Exhibit B hereto, is held to be invalid, then the remaining
provisions shall nevertheless remain in full force and effect. The parties
agree to renegotiate in good faith any term held invalid and to be bound by the
mutually agreed substitute provision.
(c) 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 that directly
controls, is controlled by, or is under common control with a party; provided
such affiliate has the equivalent resources and capacity to carry out the
assignee's obligations under this Agreement, and the assigning party remains
responsible for all its obligations under this Agreement.
(d) PUBLICITY. If a party decides to make a written press release
relating to this Agreement, or to any amendment or performances under this
Agreement, it will give the other party, and the other party's general counsel,
forty-eight (48) hours 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.
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-15-
<PAGE>
(e) ENTIRE AGREEMENT. This Agreement and the exhibits hereto which
form a part hereof constitute the entire understanding of the parties with
respect to its subject matter and supersedes all prior negotiations, agreements
and understandings among the parties, including without limitation the Prior
Agreements, with respect to its subject matter. There are no representations,
promises, warranties, covenants or understandings other than those expressly
set forth herein or therein. This Agreement may be modified or amended only by
a writing signed by the party against whom such modification or amendment is
asserted; provoked, that the terms of any purchase order, invoice or similar
document used to implement this Agreement shall not modify or amend but shall
be subject to this Agreement.
(f) 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 to bind or commit the other party in any manner
inconsistent with the foregoing provisions of this Article.
(g) NOTIFICATION OF REGULATORY AGENCY CONTACT. Parties agree that
if either of them is contacted by a regulatory agency, whether in the US or
outside the US, in connection with the Products, such contacted party shall
immediately notify the other party of the form and content of such contact,
including delivery of a copy of any written material received from the
regulatory agency. This provision shall survive termination of this agreement.
(h) NOTIFICATION OF ANTICIPATED CHANGE. GSI provide Ethicon with
written notice at least 60 days prior to any change of the form, fit, function,
components or material of the Products, the site at which the Products are
manufactured, packaged, or sterilized or the process by which the Products are
manufactured, packaged, sterilized, or labeled when any such change could
potentially affect the safety, efficacy, qualify, or stability of the Products.
(i) NOTIFICATION OF CLAIMS. Ethicon will notify GSI of any adverse
reaction, malfunction, injury or other similar claims with respect to the GSI
Products of which they become aware. Ethicon shall make reasonable efforts to
provide copies of its customer inquiries related to GSI Products as well as the
results of any related investigation including returned product.
(j) MAINTENANCE OF RECORDS. The parties shall maintain adequate
records concerning traceability of GSI Products, and shall cooperate with each
other in the event that any recall, field corrective action, or the like in
circumstances occurring related to any GSI Products.
(k) COMPLIANCE WITH LAWS AND REGULATIONS. Both parties agree to
comply with applicable state, federal and international regulatory requirements
in connection with their status as, respectively, a medical device manufacturer
or medical device distributor.
(l) SHELF LIFE EXTENSION. GSI shall cooperate with Ethicon in an
effort to extend the shelf-life of GSI "Products" in Ethicon's inventory up to
a total of three (3) years GSI's obligation to cooperate with Ethicon shall
survive termination of this agreement for any reason, including, but not
limited, to termination under Section 5 above.
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-16-
<PAGE>
IN WITNESS WHEREOF, this Distribution Agreement has been executed as
of the day and year first above written.
GENERAL SURGICAL INNOVATIONS, INC. ETHICON ENDO-SURGERY, INC.
By: /s/ Gregory D. Casciaro By: /s/ Robert Salerno
------------------------------- -----------------------------
Print Name: Gregory D. Casciaro Print Name: Robert Salerno
----------------------- ---------------------
Title: President & C.O.O. Title: VP Business Development
---------------------------- --------------------------
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
-17-
<PAGE>
EXHIBIT A: TRANSFER PRICES
<TABLE>
<CAPTION>
PRODUCT MODEL P/N PRICE
<S> <C> <C> <C>
Spacemaker, Distal 900 DBD-900 99-1140-05 [***]
Spacemaker, Distal 1500 DBD-1500 99-1141-05 [***]
Spacemaker II, w/Cannula VSM-2900 99-1201-05 [***]
Spacemaker II, w/o Cannula VSM-2900 99-1202-05 [***]
Air Bulb, 2pk. AB-050 99-1301-05 [***]
Spacemaker II, 650 cc. w/Cannula VSM-2950 99-1212-05 [***]
Spacemaker II, 650 cc. w/o Cannula VSM-2950-01 99-1203-05 [***]
5mm Reducer, 10pk CR-050 99-1300-05 [***]
</TABLE>
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
<PAGE>
EXHIBIT B: PURCHASE ORDER TERMS AND CONDITIONS
This agreement to conditions of Purchase is by and between GSI
(hereinafter referred to as "Seller") and ETHICON ENDO-SURGERY, INC. having a
business address at 4545 Creek Road, Cincinnati, Ohio 45242 (hereinafter
referred to as "Purchaser").
1. INSPECTION. All goods are subject to final inspection and acceptance
by Purchaser at destination notwithstanding any payment or prior inspection at
source. Final inspection will be made within a reasonable time after receipt
of goods.
2. REJECT/RETURN. Purchaser reserves the right to refuse any goods and
to cancel all or any part of an order for goods not conforming to applicable
specifications, drawings, samples or descriptions. Acceptance of any part of
the order shall not bind Purchaser to accept future shipments of nonconforming
goods, not deprive it of the right to return nonconforming goods already
accepted.
3. CANCELLATION ON LATENESS. Shipments or deliveries (as specified in
the order) shall be strictly in accordance with the quantities and schedule
specified in the order. If at any time it appears Seller will not meet such
schedule, Seller shall promptly notify Purchaser in writing of reasons for the
estimated duration of the delay and, if requested by Purchaser, ship via air or
other fast transportation to avoid or minimize delay to the maximum extent
possible, the added cost to be borne by Seller. This is in addition to
Purchaser's other remedies, such as cancellation after a reasonable time (not
to exceed 30 days) for non-compliance, cover and incidental and consequential
damages.
4. INVOICE. A separate invoice shall be issued in triplicate for each
shipment. Unless otherwise specified in the order, no invoice shall be issued
prior to shipment of goods and no payment will be made prior to receipt of
goods and current invoice. Payment due dates, including discount periods, will
be computed from date of receipt of goods or date of receipt of current invoice
(whichever is later) to date Purchaser's check is mailed. Unless freight and
other charges are itemized, any discount taken will be taken on full amount of
invoice.
5. ACKNOWLEDGMENT. Seller will acknowledge receipt and acceptance of
the order confirming price and arrival date by returning a counterpart of the
order initialed on behalf of Seller.
6. ASSIGNMENT. This Purchaser Order shall not be assignable by Seller
without the prior written consent of the Purchaser, which consent may be
withheld in the sole discretion of the Purchaser.
7. NOT MISBRANDED/ADULTERATED. The Seller guarantees that no article
shipped pursuant to the order is adulterated or misbranded within the meaning
of the Federal Food, Drug and Cosmetic Act, or is an article which may not
under the provisions of Sec. 404 or 505 of that Act be introduced into
interstate commerce; that no article shipped pursuant to the order is produced
in violation of any provisions of the Fair Labor Standards Act; and further
guarantees full compliance with all provisions from time to time applicable of
any other Federal
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
<PAGE>
and all state and municipal laws, and agrees to defend Purchaser and hold
harmless from all liability resulting from failure of such compliance.
8. QUALITY, USE FOR INTENDED PURPOSE. In accepting this purchase order,
the Seller unconditionally represents and warrants, any other representation or
agreement to the contrary notwithstanding, that the material supplied pursuant
to the purchase order is of merchantable quality, conforms to the detailed
specifications as stated on the form and is suitable for the Purchaser's
intended uses and purposes in the ordinary course of his business to the extent
that such intended uses and purposes are known or reasonably should be known to
the Seller; and the Seller agrees to hold the Purchaser harmless against any
liability, judgment, damages, loss or expense, including reasonable counsel
fees, resulting from Seller's failure to meet the requirements of this
condition. All warranties herein stated shall run to the Purchaser, its
customers and the users of the products, or products into which they may be
incorporated.
9. PATENT HOLD HARMLESS. In accepting the purchase order, the Seller
agrees to hold the Purchaser harmless against any liability, judgment, damages,
loss or expense, including without limitation reasonable counsel fees,
resulting from any claim or any suit against the Purchaser charging
misappropriation of trade secrets, breach of a confidential relationship, by
the making of the purchase under the purchase order, or charging infringement
of a United States or foreign patent by any product sold under the purchase
order, or any element of such product, or by the use of such product, or by
material resulting from such use where the use is known to the Seller. If the
product listed in the purchase order is a material whose composition and
ingredients are not disclosed by the Seller to the Purchaser, then the Seller's
agreement to hold the Purchaser harmless, as stated in the foregoing sentence
shall extend to all uses of such product for which the product is sold by the
Seller, to all uses for which the product is recommended by the Seller to the
Purchaser, and to all intended uses by the Purchaser which are known to the
Seller.
10. COPYRIGHT MARKING. Seller agrees that any copyrightable material
prepared for Purchaser shall carry on the face thereof in legible form the
following copyright notice: -C- Ethicon Endo-Surgery followed by the last two
digits of the year of production.
11. GOVERNMENT CEILING PRICE/NO GREATER THAN OFFERED FOR SIMILAR. The
Seller in accepting the purchase order represents that the price charged is not
in excess of the ceiling price, if any, established by any Government Agency
nor those quoted for others for the same products and similar quantities.
12. TRANSPORTATION LIABILITY. With respect to any goods permitted to be
sold F.O.B. Seller's plant, Seller agrees that in any case where freight
regulations covering goods transported by common carrier establish a maximum
limit on the carrier's liability for loss or damage suffered in transit, Seller
will be liable to Purchaser for any loss or damage in excess of such maximum
limit up to the full price of the goods.
13. COMPLETE AGREEMENT. Acceptance of the order is expressly limited to
the terms hereof. If the Seller objects to any of the terms hereof, it shall
notify Purchaser in writing within ten days of the date of the order, and
withhold shipments of the purchase order
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
<PAGE>
and shipment of the goods listed therein until such objection is settled by
written agreement of the parties. Any oral or written acknowledgment or
confirmation of this purchase order, any shipment of the goods ordered
thereby, or the furnishing of any services pursuant to this purchase order,
shall, notwithstanding the terms of such acknowledgment or confirmation,
constitute acceptance by the Seller of each and all of the terms and
conditions stated herein. The Purchaser will not be bound to any additional
or different terms hereafter transmitted by Seller except by a signed
consent, and will in no event be bound by silence, course of dealing, usage
of the trade or any acceptance of the goods listed herein to any terms and
conditions other than those stated herein. This purchase order and this
document contain all the terms and conditions of the purchase agreement
between Purchaser and Seller and shall constitute the complete and exclusive
agreement between Seller and Purchaser, and expressly supersedes any prior or
contemporaneous oral or written representation or agreement. Headings used
herein are for the convenient reference of the parties and are not intended
to amend, modify or limit to any extent the express terms of this agreement.
No modification, amendment or waiver of any term or condition of this
agreement shall be effective unless set forth in writing signed by the party
against whom enforcement is sought. This agreement shall be governed by and
construed in accordance with the laws of the State in which Purchaser's
headquarters is located.
14. COMPLIANCE FEDERAL, STATE, MUNICIPAL NON-DISCRIMINATION LAWS. The
Seller agrees to comply with the applicable provisions of any Federal or State
Law and all executive orders, rules and regulations issued thereunder, whether
now or hereafter in force; and, any provisions, representations or agreements
required thereby to be included in the contract resulting from acceptance of
the order are hereby incorporated by reference, including but not limited to,
Executive Order 11246, as amended, Chapter 60 of Title 41 of the Code of
Federal Regulations, as amended prohibiting discrimination against any employee
or applicant for employment because of race, color, religion, sex, or national
origin; Section 60-741.1 as amended, Chapter 60 of Title 41 Code of Federal
Regulations prohibiting discrimination against any employee or applicant for
employment because of physical or mental handicap; and Section 60.250.4 of
Chapter 60 of Title 41 Code of Federal Regulations, as amended, providing for
the employment of disabled veterans and veterans of the Vietnam era.
15. OSHA REQUIREMENTS. Seller warrants that the product sold or service
rendered to Purchaser shall conform to the standards and/or regulations
promulgated by the U.S. Department of Labor under the Occupational Safety and
Health Act of 1970 (29 U.S. Code Section 651 et seq.) ("OSHA"). In the event
the product sold does not conform to the OSHA standards and/or regulations,
Purchaser may return the product for correction or replacement at Seller's
option and at Seller's expense. Services performed by the Seller which do not
conform to the OSHA standards and/or regulations must be corrected by Seller at
Seller's expense or may be corrected by Purchaser at Seller's expense in the
event Seller fails to make the appropriate correction within a reasonable time.
16. INDEMNIFY PURCHASER FOR SERVICES RENDERED. In the event that the
purchase order contract is accepted for services to be rendered, Seller agrees
to defend, indemnify and hold harmless the Purchaser, its parents, subsidiaries
and affiliates, and their
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
<PAGE>
respective directors, officers, employees and agents from any liability,
claims, causes of action or other legal action and any costs or expense
arising therefrom (including without limitation reasonable attorney's fees)
arising from any wrongful act or omission of the service company, its
employees, contract labor, or subcontractors.
17. SMALL BUSINESS CLAUSE. The clause, "Utilization of Small Business
Concerns and Small Business Concerns Owned and Controlled by Socially and
Economically Disadvantaged Individuals" (as amended in a portion of Public Law
95-507), is hereby made a part of this agreement. This clause is aimed at
fully utilizing minority-owned businesses where appropriate and is intended for
subcontractors who offer further subcontracting opportunities. When these
conditions exist, the Seller agrees to use his best efforts to carry out this
policy in the award of his subcontracts to the fullest extent consistent with
the efficient performance of the contract.
18. IF UNDER GOVERNMENT CONTRACTS. If the products or services covered
by this Purchase Order are ordered by Purchaser under United States government
contracts, Seller agrees that applicable Federal statutes and regulations
applying to the Purchaser as a contractor are accepted and binding on Seller
insofar as Seller may be a subcontractor.
19. FORCE MAJEURE. A party shall be excused for delays in performance or
failure of performance hereunder to the extent arising from causes beyond such
party's control, including without limitation strikes, wars, fire, flood,
earthquake, or other Act of God. In the event of any such event or condition,
the party whose performance is excused hereunder shall notify the other
promptly thereof and shall make diligent efforts to perform at its earliest
opportunity. During any such period of non-performance by one party, the other
party shall be permitted to suspend its performance hereunder.
20. CORRESPONDENCE ADDRESS/PERSON. Any notice or other correspondence
required or permitted to be provided hereunder shall be sent by first class
mail, postage prepaid, directed to the attention of the Purchasing Department,
at the address shown in the correspondence address designation block on the
reverse of the purchase order.
21. SHIPPING TERMS. Unless otherwise specified, delivery is to be F.O.B.
Purchaser's plant. If goods are to be shipped F.O.B. shipping point, and
Purchaser has not designated routing, ship via cheapest way that will meet
delivery date.
22. CONFIDENTIALITY. Any information supplied by Purchaser in the
purchase order or in connection with this purchase order is confidential.
Seller shall not use or disclose any such information or any data, designs, or
other information belonging to or supplied by or on behalf of Purchaser or
developed by Seller in the performance of this purchase order, except to the
extent necessary to perform the terms of the purchase order and this agreement.
Upon Purchaser's request such information, data, designs, or other information
and any copies thereof shall be returned to Purchaser. Where Purchaser's data,
designs, or other information are furnished to Seller's suppliers for
procurement of supplies by Seller for use in the performance of Purchaser's
orders, Seller shall insert the substance of this provision in its orders.
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
<PAGE>
23. PURCHASER'S PROPERTY. Unless otherwise agreed in writing, all tools,
equipment or material of every description furnished to Seller by Purchaser or
specifically paid for by Purchaser, and any replacement thereof, or any
materials affixed or attached thereto, shall be and remain the personal
property of Purchaser, and shall be safely stored separate and apart from
Seller's property. Seller shall not substitute any property for Purchaser's
property and shall not use such property except in filling Purchaser's orders.
Such property while in Seller's custody or control shall be held at Seller's
risk, shall be kept insured by Seller at Seller's expense in an amount equal to
the replacement cost with loss payable to Purchaser and shall be subject to
removal at Purchaser's written request, in which event Seller shall prepare
such property for shipment and shall redeliver to Purchaser in the same
condition as originally received by Seller, reasonable wear and tear excepted.
24. MATERIAL SAFETY DATA SHEETS. Material Safety Data Sheets are
required for all items in the order. Please ship with the order or mail before
shipment to the address for notice as provided above.
25. NO DRAFTS. Purchaser does not honor drafts for bills contracted.
All accounts are paid by remittance through mail.
26. Any inventions, improvements, or ideas made or conceived by Seller in
connection with or during the performance of services to be rendered for
Purchaser shall be the property of the Purchaser. Seller, without charge to
Purchaser other than reasonable payment for time involved in the event this
Agreement shall have terminated, by at Purchaser's expense, shall execute,
acknowledge, and deliver to Purchaser all further papers, including
applications for patents, as may be necessary to enable Purchaser to publish or
protect such inventions, improvements, and ideas by patent or otherwise in all
countries and to vest title to said patents, inventions, improvements, and
ideas in Purchaser or its nominees, their successors or assigns. Seller shall
tender assistance as Purchaser may require in any patent Office proceeding or
litigation involving said inventions, improvements, or ideas. Seller as part
of the services to be performed below, shall keep written notebook records of
its work, property witnessed for use as invention records, and shall submit
such records to Purchaser when requested or at the termination of the work.
ETHICON ENDO-SURGERY, INC. SELLER
By: _______________________________ By: _______________________________
Title: ____________________________ Title:_____________________________
Date: _____________________________ Date:______________________________
* Material has been omitted pursuant to a request for confidential treatment.
Such material has been filed separately with the Securities and Exchange
Commission.
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