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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 13,478,910 shares of Registrant's Common Stock
issued and outstanding as of January 31, 1999.
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GENERAL SURGICAL INNOVATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed balance sheets at December 31, 1998
and June 30, 1998............................................... 3
Condensed statements of operations and comprehensive loss
for the three and six months ended December 31, 1998 and
December 31, 1997............................................... 4
Condensed statements of cash flows for the six months ended
December 31, 1998 and December 31, 1997 ........................ 5
Notes to condensed financial statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 20
Item 2. Changes in Securities and Use of Proceeds....................... 21
Item 3. Defaults Upon Senior Securities ............................... 22
Item 4. Submission of Matters to a Vote of Security Holders............. 22
Item 5. Other Information .............................................. 22
Item 6. Exhibits and Reports on Form 8-K ............................... 22
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GENERAL SURGICAL INNOVATIONS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
December 31, June 30,
1998 1998
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ASSETS
Current assets:
Cash and cash equivalents..................................... $ 14,501 $ 17,954
Available-for-sale securities................................. 8,323 10,743
Accounts receivable, net...................................... 991 1,043
Inventories................................................... 2,836 1,284
Prepaid expenses and other current assets..................... 671 733
---------- ----------
Total current assets............................... 27,322 31,757
Available-for-sale securities, non-current......................... 6,768 8,772
Property and equipment, net........................................ 2,434 2,101
Other assets....................................................... 375 194
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Total assets....................................... $ 36,899 $ 42,824
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---------- ----------
LIABILITIES
Current liabilities:
Accounts payable.............................................. $ 2,015 $ 910
Accrued liabilities........................................... 1,320 1,316
Capital leases................................................ 14 14
Bank borrowings............................................... 82 103
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Total current liabilities.......................... 3,431 2,343
Other long-term liabilities........................................ 75 149
Capital leases, less current portion............................... 5 12
Bank borrowings, less current portion.............................. 41 82
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Total liabilities.................................. 3,552 2,586
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Contingencies (Note 4)
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value................................... - -
Common stock, $.001 par value...................................... 13 13
Additional paid-in capital......................................... 65,369 65,290
Notes receivable from shareholders................................. (84) (87)
Deferred compensation, net......................................... (91) (159)
Accumulated other comprehensive income............................. 50 16
Accumulated deficit................................................ (31,910) (24,835)
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Total shareholders' equity......................... 33,347 40,238
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Total liabilities and shareholders' equity....... $ 36,899 $ 42,824
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED FINANCIAL STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------
1998 1997 1998 1997
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Sales................................................................... $ 926 $ 1,408 $ 2,947 $ 2,975
Guaranteed payments..................................................... - 860 - 1,635
---------- ---------- ---------- ----------
Total revenue........................................................... 926 2,268 2,947 4,610
Cost of sales........................................................... 731 1,186 1,815 2,142
---------- ---------- ---------- ----------
Gross profit..................................................... 195 1,082 1,132 2,468
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Operating expenses:
Research and development............................................ 934 658 1,678 1,423
Sales and marketing................................................. 1,836 1,168 3,154 2,294
General and administrative.......................................... 2,359 1,738 4,310 3,084
---------- ---------- ---------- ----------
Total operating expenses.......................................... 5,129 3,564 9,142 6,801
---------- ---------- ---------- ----------
Operating loss................................................... (4,934) (2,482) (8,010) (4,333)
Interest income......................................................... 450 594 953 1,197
Interest expense........................................................ (4) (9) (10) (21)
Other expense, net...................................................... (8) - (8) -
---------- ---------- ---------- ----------
Net loss......................................................... (4,496) (1,897) (7,075) (3,157)
Other comprehensive income (loss):
Change in unrealized gain or loss on available-for-sale securities (34) (18) 34 33
---------- ---------- ---------- ----------
Comprehensive loss............................................... $ (4,530) $ (1,915) $ (7,041) $ (3,124)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share and per common share-assuming
dilution............................................................ $ (0.33) $ (0.14) $ (0.53) $ (0.23)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing net loss per common share and per
common share-assuming dilution...................................... 13,446 13,355 13,442 13,334
---------- ---------- ---------- ----------
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED FINANCIAL STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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Six Months Ended
December 31,
-----------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $ (7,075) $ (3,157)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation........................................... 68 69
Depreciation and amortization................................................... 412 567
Provision for uncollectible accounts............................................ 61 7
Provision for excess and obsolete inventory..................................... 50 (4)
Changes in operating assets and liabilities:
Accounts receivable........................................................ (9) (91)
Inventories................................................................ (1,602) 705
Prepaid expenses and other current assets.................................. 62 (153)
Other assets............................................................... (217) (2)
Accounts payable........................................................... 1,105 75
Accrued liabilities........................................................ (70) (267)
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Net cash used in operating activities............................ (7,215) (2,251)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities........................................... (2,795) (15,800)
Proceeds from sales and maturities of available-for-sale securities.................. 7,200 17,792
Acquisition of property and equipment................................................ (656) (304)
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Net cash provided by investing activities........................ 3,749 1,688
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................................... 79 130
Proceeds from payment on notes receivable from shareholders.......................... 3 -
Payments on capital lease obligations................................................ (7) (9)
Principal payments on bank borrowings................................................ (62) (84)
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Net cash provided by financing activities......................... 13 37
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Net decrease in cash and cash equivalents............................................ (3,453) (526)
Cash and cash equivalents, beginning of period....................................... 17,954 7,900
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Cash and cash equivalents, end of period............................................. $ 14,501 $ 7,374
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED FINANCIAL STATEMENTS.
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GENERAL SURGICAL INNOVATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying unaudited condensed financial statements as of December
31, 1998 of General Surgical Innovations, Inc. (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1999, 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, 1998.
2. Computation of Net Loss per Common Share and per Common Share-Assuming
Dilution:
Effective December 15, 1997, the Company adopted Financial Accounting
Standards Board ("FASB") No. 128 "Earnings Per Share", and the provisions of the
Securities and Exchange Commission Staff Accounting Bulletin ("SAB 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 computations in
accordance with SAB 98.
Stock options to purchase 1,858,034 and 1,285,732 shares of common stock
at prices ranging from $0.09 to $9.75 per share were outstanding at December 31,
1998 and December 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.
3. Inventories:
Inventories comprise (IN THOUSANDS):
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Dec. 31, June 30,
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1998 1998
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(unaudited)
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Raw materials................................... $ 1,323 $ 910
Work in progress................................ 38 -
Finished goods.................................. 1,475 374
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$ 2,836 $ 1,284
--------------- ---------------
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4. Contingencies:
In May 1996, Origin Medsystems, Inc. ("Origin"), a unit of Guidant
Corporation, filed suit against GSI for infringement of U.S. Patent No.
5,520,609 in the United States District Court for the Northern District of
California. That suit was resolved in GSI's favor by judgment entered on
May 15, 1998, finding Origin's patent unenforceable. Origin's appeal of that
judgment is pending and is expected to be decided in 1999. The District
Court has also awarded $990,000 in attorneys' fees to GSI and Origin has
appealed that ruling as well.
In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging that use of Origin's
products infringes GSI's U.S. Patent 5,514,153. The court agreed with this
allegation in a summary judgment ruling in GSI's favor. On February 8, 1999,
a jury found the patent to be valid, that infringement was willful, and
granted GSI approximately $12.9 million in damages. GSI is seeking an
injunction against further infringements.
A second action was filed similarly in September 1997, alleging that
use of Origin's Vasoview product infringes U.S. Patent 5,667,520. Discovery
is near completion in this case.
GSI is also involved in an interference proceeding in the U.S. Patent
Office to determine whether certain subject matter was first invented by
GSI's inventor. The priority portion of this interference has been decided in
GSI's favor by an arbitrator to whom this issue was referred. The
patentability portion of this interference was decided in GSI's favor by the
United States Patent and Trademark Office ("PTO"). Origin is expected to
appeal the PTO's decision, but GSI believes that the arbitrator's priority
decision is not appealable.
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
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, 1998.
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. The following General Surgical
Innovations, Inc. trademarks are mentioned in this Quarterly Report:
ENDOSAPH-Registered Trademark-, SPACEMAKER-Registered Trademark-,
SAPHtrak-Registered Trademark-, registered trademarks of the Company;
SPACEKEEPER-TM-, and Total Solution-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 seven 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, Europe, Asia and South America for selected
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applications, such as hernia repair, subfascial endoscopic perforator surgery,
saphenous vein harvesting and breast augmentation and reconstruction surgery.
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- surgical balloon
dissectors in the laparoscopic hernia repair and stress urinary incontinence
("SUI") markets. In February 1998, the Company and EES signed a non-exclusive
distribution agreement for the laparoscopic hernia repair and SUI markets.
This agreement supersedes the December 1996 Expanded EES Agreement.
During the first six months of fiscal 1999, the Company added eight
direct sales personnel and realigned its regional distribution in the United
States from one consisting primarily of third-party distributors to a
combination of distributors and a GSI direct sales force. The Company plans to
continue its direct sales force expansion, which the Company believes will
create a more balanced approach to distribution, throughout the remainder of the
fiscal year. Any increase in the Company's direct sales force will require
significant expenditures and additional management resources.
In September 1998, the Company signed two non-exclusive, three-year
agreements with United States Surgical Corporation ("USSC"). Under the terms
of the first agreement, USSC has obtained non-exclusive rights to market and
distribute GSI's SPACEMAKER-Registered Trademark- surgical balloon dissectors
worldwide for use in hernia repair and incontinence procedures. Under the
terms of the second agreement, GSI has secured non-exclusive worldwide rights
to market and distribute several products, including USSC's 5mm mesh fixation
device, the ProTack(TM), which is offered with GSI's balloon dissectors in a
Total Solution-TM- hernia repair kit.
In October 1998, GSI entered into non-exclusive agreements with seven
leading surgical suppliers to distribute its SPACEMAKER-Registered Trademark-
surgical balloon dissector kits used for hernia repair in the United States.
Currently, domestic distribution of GSI's products is made through ten
independent distributors covering 45 states for Subfascial Endoscopic
Perforator Surgery ("SEPS") and saphenous vein harvest products, and nine
independent distributors covering 41 states for hernia and SUI products. The
Company currently has a direct sales force distributing products in the
remaining portion of the United States as well as managing distributor
relationships.
In addition, the Company has agreements with USSC and EES to
distribute hernia repair and SUI products worldwide. GSI also sells its
products (other than for hernia and SUI applications) in international
markets through other distributors, which resell to surgeons and hospitals.
At present, the Company has exclusive distribution agreements with eight
international distributors, including Baxter International, to distribute
GSI's cardiovascular products in Europe and the Company has employees located
in Europe to manage those distributors.
To date, the majority of the sales to distributors and by the
Company's direct sales force have been of products for use in hernia repair
procedures. The Company's initial market focus was the application of its
SPACEMAKER-Registered Trademark- balloon dissection technology for hernia
repair. Subsequent to this, the Company has developed additional products for
use in general surgery, as well as products for plastic surgery and
cardiovascular applications. The Company has completed marketing-related
clinical evaluations of, and has introduced products for, saphenous vein
harvesting, SEPS, breast augmentation and reconstruction procedures and SUI.
The Company is currently conducting additional marketing-related clinical
evaluations for products for use in tissue dissection/expansion.
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While the Company has developed or is developing balloon dissection
systems for stress urinary incontinence, vascular and plastic surgery, sales of
products for hernia repair are expected to provide a majority of the Company's
revenues at least through calendar 1999.
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 between one and four percent
of sales of such products, which payments are expected to exceed certain minimum
royalty payments due under the agreements with such parties. The payment of such
royalty amounts will have an adverse impact on the Company's gross profit and
results of operations.
The Company has experienced significant operating losses since
inception. The Company expects such operating losses to continue at least
through fiscal 1999. The Company's sales to date have consisted primarily of
surgical balloon dissectors for hernia repair. In order to support increased
levels of sales in the future and to augment its long-term competitive
position, including the development of surgical balloon dissectors for other
applications, the Company anticipates that it will be required to make
significant additional expenditures in sales and marketing, and in research
and development (including marketing-related clinical evaluations).
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.
RESULTS OF OPERATIONS
REVENUE. Total revenue, including product sales and guaranteed payments,
decreased by 59% to $926,000 for the quarter ended December 31, 1998 from $2.3
million for the same period in 1997. Revenue for the six months ended December
31, 1998 decreased 36% to approximately $2.9 million from $4.6 million for the
six months ended December 31, 1997. Revenues in fiscal 1999 consisted entirely
of product sales, while revenues for the three and six months ended December 31,
1997 consisted of $860,000 and $1.6 million, respectively, in guaranteed
payments from EES. The Company believes that its sales results will fluctuate
from quarter to quarter during at least the next several quarters.
COST OF SALES. Cost of sales decreased by 38% to $731,000 for the quarter
ended December 31, 1998 from approximately $1.2 million for the same period in
1997. This decrease in absolute dollars was due to a decrease in product sales
over this same period. As a percentage of product sales, cost of sales decreased
from 84% in the second quarter of fiscal 1998 to 79% in the second quarter of
fiscal 1999. Cost of sales for the six months ended December 31, 1998 decreased
as a percent of sales to 62%, or approximately $1.8 million, as compared to 72%
of sales, or approximately $2.1 million, for the six months ended December 31,
1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses,
which include expenditures for marketing-related clinical evaluations and
regulatory expenses, increased 42% to $934,000 in the quarter ended December 31,
1998 from $658,00 for the same period in 1997. R&D expenses for the six months
ended December 31, 1998 were approximately $1.7 million as compared to $1.4
million for the same period of the prior fiscal year, which represented an 18%
increase. Increases are due to new general and vascular surgical product
development expenditures.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 44% to approximately $4.2 million for
the quarter ended December 31, 1998 from $2.9 million for the quarter ended
December 31, 1997. For the six months ended December 31, 1998, SG&A expenses
were $7.5 million compared to $5.4 million for the same period in 1997. These
increases are primarily due to increased legal expenses related to
intellectual property litigation, as well as increased labor and labor
related expenses as the Company expands its sales and marketing
infrastructure.
INTEREST INCOME, INTEREST EXPENSE, AND OTHER EXPENSE. Interest and other
income (net of expense) decreased to $438,000 for the quarter ended December 31,
1998 from $585,000 for the quarter ended December 31, 1997. For the six months
ended December 31, 1998, interest and other income (net of expense) decreased to
$935,000 from $1.2 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 $31.9
million at December 31, 1998. The Company has funded its operations primarily
through the sale of equity securities. From its inception through December 31,
1998 the Company raised approximately $15.5 million through the private
placement of equity securities and approximately $46.9 million (net of
underwriting discounts and commissions) in an initial public offering.
As of December 31, 1998 the Company's principal source of liquidity
consists of cash, cash equivalents and available-for-sale securities of $29.6
million. In addition, the Company has a bank line of credit available for $5.0
million. As of December 31, 1998, the Company has no amounts outstanding under
this line. The Company also has an equipment loan with an outstanding balance of
approximately $123,000.
The Company expects to continue to incur costs over the next fiscal year,
including costs related to increased sales and marketing activities, increased
research and development, additional marketing-related clinical evaluations, and
costs to defend its patent positions. The Company believes that its current cash
balances and short-term investments along with cash generated from the future
sales of products will be sufficient to meet the Company's operating and capital
requirements through calendar year 2000. 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.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue arises from computer programs using two
digits rather than four to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions or
delays in the Company's activities and operations. If the Company, its key
customers or suppliers fail to make necessary modifications to their information
technology or non-information technology systems on a timely basis, the
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Y2K issue could have a material adverse effect on Company operations.
However, the impact cannot be quantified at this time.
In January 1998, the Company began to evaluate and assess the
Company's information technology and non-information technology systems for
compliance with the Y2K issue. The Company is in the process of fixing or
replacing noncompliant software and systems and intends to have this process
completed by June 30, 1999, but there can be no assurance that such fixes or
replacements will occur by such date. The Company is currently conducting
testing and remediation activities on its systems, and intends to survey
major customers and suppliers to assess their systems' compliance as well as
their systems' compatibility with the Company's existing or projected
compliant systems. There can be no assurance that there will not be an
adverse material effect on the Company's business, financial condition or
results of operations if the Company or its suppliers or customers do not
convert or replace their systems in a timely manner to comply with the Y2K
issue.
The Company's costs related to the Y2K issue are funded through
operating cash flows. Through December 31, 1998, the Company expended
approximately $15,000 in evaluating and planning. The Company estimates total
costs to be between $50,000 and $100,000 for fixing and replacing
noncompliant systems, including the cost of new software and modifying the
applicable code of existing software. The Company currently believes that the
total cost of achieving Y2K compliant systems will not be material to its
business, financial condition or results of operations. In the event that the
Company will be unable to achieve Y2K compliance in a timely manner with
existing personnel, as a contingency the Company expects to hire outside Y2K
solution providers to assist in achieving such compliance.
Time and cost estimates are based on currently available information.
Factors that could affect these estimates include, but are not limited to, the
availability and cost of trained personnel to evaluate and implement the
changes, the ability to locate and correct all noncompliant systems, and the
ability of the Company's customers and suppliers to successfully implement Y2K
compliant systems or fixes.
FACTORS AFFECTING FUTURE RESULTS
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto included herein.
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 timing of orders
and shipments, the timely development and market acceptance of new products and
surgical procedures, the impact of performance of the Company's distributors,
the Company's ability to further expand into international markets, public
policy relating to health care reform in the United States and other countries,
approval of 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 periods to differ
materially from those expressed in any forward-looking statements contained in
the following discussion.
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HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES. The Company has
experienced significant operating losses since inception and as of
December 31, 1998, the Company had an accumulated deficit of $31.9 million.
The Company's net operating losses for the quarters ended December 31, 1998
and September 30, 1998 were $4.5 million and $2.6 million, respectively. The
Company expects to continue to incur operating losses on a quarterly and
annual basis through at least calendar year 1999. The Company's limited
operating history makes accurate prediction of future operating results
difficult or impossible. There can be no assurance that the Company will ever
generate substantial revenue or achieve profitability. Failure by the Company
to generate substantial revenue would have a material adverse effect on the
Company's business, financial condition and results of operations.
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. 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, 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 surgical balloon dissectors 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 KEY 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- surgical balloon dissectors in the
laparoscopic hernia repair and stress urinary incontinence ("SUI") markets.
Unlike the prior EES OEM Agreement, this new EES non-exclusive 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 reconstructive and cosmetic plastic surgery
procedures. In September 1998, the Company signed a non-exclusive, three-year
agreement with United States Surgical Corporation ("USSC"). Under the terms
of the agreement, USSC has obtained non-exclusive rights to market and
distribute GSI's SPACEMAKER-Registered Trademark- surgical balloon dissectors
worldwide for use in hernia repair and incontinence procedures.
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LIMITED MARKETING AND DIRECT SALES EXPERIENCE. The Company has limited
experience marketing and selling its products through its direct sales force,
and has sold its products in commercial quantities through its direct sales
force only to the hernia market and, to a lesser degree, to the vascular surgery
markets. The Company intends to establish relationships with additional
distribution partners, and there can be no assurance that the Company will be
successful in establishing such 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
adoption of laparoscopic techniques generally and the conversion of
non-balloon dissection surgical techniques and treatments to balloon
dissection techniques specifically. To date, the Company has limited
long-term outcomes data regarding successful balloon dissection procedures.
If the Company is not able to demonstrate consistent clinical benefits
resulting from the use of its products (including reduced procedure time,
reduced patient trauma and lower costs), the Company's business, financial
condition and results of operations could be materially and adversely
affected.
The Company further believes that the ability of health care providers
to obtain adequate reimbursement for procedures using the Company's
SPACEMAKER-Registered Trademark- balloon dissection 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.
The Company introduced its surgical balloon dissectors in late 1993.
To the extent that laparoscopic techniques are adopted slowly, that surgical
balloon dissectors are not incorporated into laparoscopic techniques or that
surgeons are unwilling or unable to develop the skills necessary to utilize
surgical 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) fluctuations in purchases of the Company's
products by its distributors, (ii) the ability of the Company's distributors
to effectively promote and sell the Company's products, (iii) the rate of
adoption by surgeons of balloon dissection technology in markets targeted by
the Company, (iv) the mix of sales among distributors and the Company's
direct sales force, (v) new product introductions by the Company and its
competitors, (vi) fluctuations in revenues among different product lines and
markets, (vii) timing of patent and regulatory approvals, if any,
(viii) intellectual property litigation, (ix) timing and growth of operating
expenses and (x) general market conditions.
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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 stress urinary incontinence markets in February
1998, which supersedes the Expanded Ethicon Agreement and which does not include
a provision for minimum quarterly payments. 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 September 1998, the Company signed two non-exclusive, three-year
agreements with United States Surgical Corporation. Failure by the Company or
USSC 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
purchased from 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.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success
will depend on its ability to obtain patent protection for its products and
processes, to preserve its trade secrets and proprietary technology and to
operate without infringing upon the patents or proprietary rights of third
parties.
In May 1996, Origin Medsystems, Inc. ("Origin"), a unit of Guidant
Corporation, filed suit against GSI for infringement of U.S. Patent No.
5,520,609 in the United States District Court for the Northern District of
California. That suit was resolved in GSI's favor by judgment entered on
May 15, 1998, finding Origin's patent unenforceable. Origin's appeal of that
judgment is pending and is expected to be decided in 1999. The District
Court has also awarded $990,000 in attorneys' fees to GSI and Origin has
appealed that ruling as well.
In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging that use of Origin's
products infringes GSI's U.S. Patent 5,514,153. The court agreed with this
allegation in a summary judgment ruling in GSI's favor. On February 8, 1999,
a jury found the patent to be valid, that infringement was willful, and
granted GSI approximately $12.9 million in damages. GSI is seeking an
injunction against further infringements.
A second action was filed similarly in September 1997, alleging that
use of Origin's Vasoview product infringes U.S. Patent 5,667,520. Discovery
is near completion in this case.
GSI is also involved in an interference proceeding in the U.S. Patent
Office to determine whether certain subject matter was first invented by
GSI's inventor. The priority portion of this interference has been decided in
GSI's favor by an arbitrator to whom this issue was referred. The
patentability portion of this interference was decided in GSI's favor by the
United States Patent and Trademark Office ("PTO"). Origin is expected to
appeal the PTO's decision, but GSI believes that the arbitrator's priority
decision is not appealable.
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Patent interference or infringement involves complex legal and factual
issues and is highly uncertain, and there can be no assurance that any
conclusion reached by the Company regarding patent interference or infringement
will be consistent with the resolution of such issue by a court. In the event
the Company's products are found to infringe patents held by competitors, there
can be no assurance that the Company will be able to modify successfully its
products to avoid infringement, or that any modified products will be
commercially successful. Failure in such event to either develop a commercially
successful alternative or obtain a license to such patent on commercially
reasonable terms would have a material adverse effect on the Company's business,
financial condition and results of operations. As discussed above, the Company
is defending itself, and may in the future have to defend itself, in court
against allegations of infringement of third-party patents. Patent litigation is
expensive, requires extensive management time, and could subject the Company to
significant liabilities, require disputed rights to be licensed from third
parties or require the Company to cease selling its products.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any patents based on pending patent applications or
any future patent applications will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents or patents to which it has licensed
rights will be held valid under current challenges or if subsequently challenged
or that persons or entities in addition to Origin will not claim rights in or
ownership of the patents and other proprietary rights held or licensed by the
Company or that the Company's existing patents will cover the Company's future
products. Furthermore, there can be no assurance that others have not developed
or will not develop similar products, duplicate any of the Company's products or
design around any patents issued to or licensed by the Company or that may be
issued in the future to the Company. Since patent applications in the United
States are maintained in secrecy until patents issue, the Company also cannot be
certain that others did not first file applications for inventions covered by
the Company's pending patent applications, nor can the Company be certain that
it will not infringe any patents that may issue to others on such applications.
The patent laws of European and certain other foreign countries generally
do not allow for the issuance of patents for methods of surgery on the human
body. Accordingly, the ability of the Company to gain patent protection for its
methods of tissue dissection will be significantly limited. As a result, there
can be no assurance that the Company will be able to develop a patent portfolio
in Europe or that the scope of any patent protection will provide competitive
advantages to the Company.
ROYALTY PAYMENT OBLIGATIONS. The Company has acquired rights to patents
from third parties, including rights that apply to the Company's current
surgical balloon dissectors. The Company has historically paid and is obligated
to pay in the future to such third parties royalties equal to between one and
four percent of sales of such products, which payments are expected to exceed
minimum royalty payments due under agreements with such parties. The payment of
such royalty amounts will have an adverse impact on the Company's gross profit
and other results of operations. There can be no assurance that the Company will
be able to continue to satisfy such royalty payment obligations in the future,
and a failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
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COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. Competition in the
market for medical devices used in tissue dissection surgical procedures is
intense and is expected to increase. The Company competes primarily with other
producers of MIS tissue dissection instruments. Origin, a subsidiary of Guidant
Corporation, and others currently compete against the Company in the
development, production and marketing of MIS tissue dissection instruments and
tissue dissection technology. To the extent that surgeons elect to use open
surgical procedures rather than MIS, the Company also competes with producers of
tissue dissection instruments used in open surgical procedures, such as blunt
dissectors or graspers. A number of companies currently compete against the
Company in the development, production and marketing of tissue dissection
instruments and technology for open surgical procedures. In addition, the
Company indirectly competes with producers of therapeutic drugs, when such drugs
are used as an alternative to surgery. Many of the Company's competitors have
substantially greater capital resources, name recognition, expertise in research
and development, manufacturing and marketing and obtaining regulatory approvals.
There can be no assurance that the Company's competitors will not succeed in
developing surgical 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 surgical balloon dissectors 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 surgical 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 surgical balloon
dissectors, 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 some 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
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on the list or are not available from the exclusive source, the facility or
surgeon will need to obtain an exception from the payor or the patient will
be required to pay for some or all of the cost of the Company's product. The
Company believes that procedures using its balloon dissection products
currently may be reimbursed in the United States under certain existing
procedure codes. However, there can be no assurance that such procedure codes
will remain available or that the reimbursement under these codes will be
adequate. Given the efforts to control and decrease health care costs in
recent years, there can be no assurance that any reimbursement will be
sufficient to permit the Company to increase revenues or achieve or maintain
profitability. The unavailability of third-party or other adequate
reimbursement could have a material adverse effect on the Company's business,
financial condition and results of operations.
Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. Many international markets have
government-managed health care systems that govern reimbursement for new devices
and procedures. In most markets, there are private insurance systems as well as
government-managed systems. Large-scale market acceptance of the Company's
surgical balloon dissectors 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 surgical 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-
surgical balloon dissectors and other products are subject to extensive and
rigorous regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies. Under the federal Food, Drug, and Cosmetic Act, the FDA
regulates the clinical testing, manufacture, labeling, packaging, marketing,
distribution and record keeping for medical devices, in order to ensure that
medical devices distributed in the United States are safe and effective for
their intended use. Prior to commercialization, a medical device generally
must receive FDA and foreign regulatory clearance or approval, which can be
an expensive, lengthy and uncertain process. The Company is also subject to
routine inspection by the FDA and state agencies, such as the California
Department of Health Services ("CDHS"), for compliance with Good
Manufacturing Practice requirements, Medical Device Reporting requirements
and other applicable regulations. Noncompliance with applicable requirements
can result in warning letters, import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals, recall or seizure
of products, operating 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.
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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- Plastics platform, SPACEMAKER-Registered Trademark-
SAPHtrak-Registered Trademark- platform and KnotMakerTM- product each have
received 510(k) clearance for use during general, endoscopic, laparoscopic or
cosmetic and reconstructive surgery, and certain vascular surgery (including
saphenous vein procedures) when tissue dissection is required. The Company
has promoted these products for surgical applications (E.G., hernia repair,
subfascial endoscopic perforator surgery, breast augmentation and
reconstruction, treatment of stress urinary incontinence and saphenous vein
harvesting), and may in the future promote these products for the dissection
required for additional selected applications (E.G. tissue
dissection/expansion and a variety of orthopedic 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. 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 COMMERCIAL MANUFACTURING EXPERIENCE. The Company has only limited
experience in manufacturing its products in commercial quantities. Manufacturers
often encounter difficulties in scaling up for commercial production of new
products, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel. Difficulties
experienced by the Company in manufacturing scale-up and manufacturing
difficulties could have a material adverse effect on its business, financial
condition and results of operations. There can be no assurance that the Company
will be successful in scaling up or that it will not experience manufacturing
difficulties or product recalls in the future.
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
contracts with such suppliers. There can be no assurance that the component
materials obtained from single source suppliers will continue to be available in
adequate quantities or, if required, that
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the Company will be able to locate alternative sources of such component
materials on a timely basis to market its products, if at all. 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 attempts to identify and certify 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
cause or are 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.
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 Year 2000 ("Y2K") issue arises from computer
programs using two digits rather than four to define the applicable year. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations leading to
disruptions or delays in the Company's activities and operations. If the
Company, its key customers or suppliers fail to make necessary modifications to
their information technology or non-information technology systems on a timely
basis, the Y2K issue could have a material adverse effect on Company operations.
However, the impact cannot be quantified at this time.
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In January 1998 the Company began to evaluate and assess the Company's
information technology and non-information technology systems for compliance
with the Y2K issue. The Company is in the process of fixing or replacing
noncompliant software and systems and intends to have this process completed
by June 30, 1999, but there can be no assurance that such fixes or
replacements will occur by such date. The Company is currently conducting
testing and remediation activities on its systems, and intends to survey
major customers and suppliers to assess their systems' compliance as well as
their systems' compatibility with the Company's existing or projected
compliant systems. There can be no assurance that there will not be an
adverse material effect on the Company's business, financial condition or
results of operations if the Company or its suppliers or customers do not
convert or replace their systems in a timely manner to comply with the Y2K
issue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for disclosure about operating segments in annual financial statements
and selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
The new standard becomes effective for fiscal years beginning after December 15,
1997, and requires that comparative information from earlier years be restated
to conform to the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's current
reporting and disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no holdings of derivative financial or commodity
instruments at December 31, 1998. A review of the Company's other financial
instruments and risk exposures at that date revealed that the Company had
exposure to interest rate risk. At December 31, 1998 the Company performed
sensitivity analyses to assess the potential effect of this risk and concluded
that near-term changes in interest rates should not materially adversely affect
the Company's financial position, results of operations or cash flows.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1996, Origin Medsystems, Inc. ("Origin"), a unit of Guidant
Corporation, filed suit against GSI for infringement of U.S. Patent No.
5,520,609 in the United States District Court for the Northern District of
California. That suit was resolved in GSI's favor by judgment entered on
May 15, 1998, finding Origin's patent unenforceable. Origin's appeal of that
judgment is pending and is expected to be decided in 1999. The District
Court has also awarded $990,000 in attorneys' fees to GSI and Origin has
appealed that ruling as well.
In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging that use of Origin's
products infringes GSI's U.S. Patent 5,514,153. The court agreed with this
allegation in a summary judgment ruling in GSI's favor. On February 8, 1999,
a jury found the patent to be valid, that infringement was willful, and
granted GSI approximately $12.9 million in damages. GSI is seeking an
injunction against further infringements.
A second action was filed similarly in September 1997, alleging that
use of Origin's Vasoview product infringes U.S. Patent 5,667,520. Discovery
is near completion in this case.
GSI is also involved in an interference proceeding in the U.S. Patent
Office to determine whether certain subject matter was first invented by
GSI's inventor. The priority portion of this interference has been decided in
GSI's favor by an arbitrator to whom this issue was referred. The
patentability portion of this interference was decided in GSI's favor by the
United States Patent and Trademark Office ("PTO"). Origin is expected to
appeal the PTO's decision, but GSI believes that the arbitrator's priority
decision is not appealable.
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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. 333-2774 (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 December 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 December 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 $ 1,227,065
Purchase and installment of machinery and equipment $ 1,937,420
Repayment of indebtedness $ 898,811
Working capital $30,502,324
-----------
Total $34,565,620
</TABLE>
21
<PAGE>
This use of proceeds does not represent a material change in the use of
proceeds described in the prospectus of the Registration Statement.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 19, 1998 at the Company's Annual Meeting of Shareholders for
the Fiscal Year Ending June 30, 1998 the following matters were submitted and
voted on by securityholders and were adopted:
A. The election of Class I directors to serve until the Annual Meeting
of the shareholders for fiscal year 2000 or until their successors
are elected and qualified.
The results of the vote are as follows:
<TABLE>
<CAPTION>
Yes Abstain
---------- -------
<S> <C> <C>
Gregory D. Casciaro 12,725,913 50,907
Thomas J. Fogarty 12,694,090 82,730
Roderick A. Young 12,723,990 52,830
</TABLE>
The terms of office for the following individuals, who are Class II
directors, will continue until the Annual Meeting of Shareholders for fiscal
year 1999: David Chonette, Paul Goeld, James Sulat, and Mark Wan.
B. The approval of an amendment to the 1992 Stock Option Plan (i) to
increase the number of shares of Common Stock reserved for issuance
thereunder on the date of each annual meeting of the shareholders
during the period beginning on and including November 19, 1998 and
ending on September 14, 2002 by an amount equal to the lesser of:
(x) four percent (4%) of the total number of shares of the Company's
Common Stock issued and outstanding as of the last business day
immediately preceding the date of the annual meeting of the
shareholders each fiscal year, or (y) 600,000 shares, and (ii) to
increase the total maximum number of shares subject to options that
may be issued to any one employee during a fiscal year to 1,000,000
effective as of July 1, 1998.
The results of the vote are as follows:
<TABLE>
<CAPTION>
Yes No Abstain Broker Non-Vote
--------- ------- ------- ---------------
<S> <C> <C> <C>
7,292,379 642,631 906,723 3,935,087
</TABLE>
C. The ratification of PricewaterhouseCoopers, LLP as the Company's
independent accountants for the fiscal year ended June 30, 1999.
The results of the vote are as follows:
<TABLE>
<CAPTION>
Yes No Abstain
---------- ------ -------
<S> <C> <C>
12,750,326 18,236 8,258
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.2 1992 Stock Option Plan, as amended November 1997
and November 1998.
10.27 Written Compensation Agreement Dated April 6, 1998.
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 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: February 16, 1999
24
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC.
1992 STOCK OPTION PLAN
(AS AMENDED NOVEMBER 1997 AND NOVEMBER 1998)
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and
Consultants of the Company, and to promote the success of the Company's
business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Administrator and as
reflected in the terms of the written option agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" shall mean the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "APPLICABLE LAWS" shall have the meaning set forth in Section
4(a) below.
(c) "BOARD" shall mean the Board of Directors of the Company.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(e) "COMMON STOCK" shall mean the Common Stock of the Company.
(f) "COMMITTEE" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4(a) below, if one is appointed.
(g) "COMPANY" shall mean GENERAL SURGICAL INNOVATIONS, INC., a
California corporation.
(h) "CONSULTANT" shall mean (i) any person who is engaged by the
Company or any subsidiary to render consulting services and is compensated
for such consulting services, and (ii) any director of the Company whether
compensated for such services or not.
(i) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any
other leave of absence approved by the Administrator; provided, however,
either that such leave must be for a period of not more than ninety (90) days
or that re-employment upon the expiration of such leave must be guaranteed by
contract or by statute, or is provided pursuant to Company policy adopted
from time to time. For purposes of this Plan, a change in
<PAGE>
status from an Employee to a Consultant or from a Consultant to an Employee
shall not constitute an interruption of Continuous Status as an Employee or
Consultant.
(j) "DIRECTOR" shall mean a member of the Board.
(k) "EMPLOYEE" shall mean any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a director's fee by the Company to a Director shall
not be sufficient to constitute "employment" of the Director by the Company.
(l) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
(m) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock as quoted on such exchange or system on
the date of determination as such price is reported in THE WALL STREET
JOURNAL or such other source as the Administrator deems reliable; provided,
however, that if no sales were reported on the date of determination, the
closing bid on that day shall be used, and that if the date of determination
falls on weekends or holidays, its Fair Market Value shall be the closing
sales price for such stock as quoted on such exchange or system on the last
market trading day prior to the date of determination.
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, as designated in the applicable written option agreement.
(o) "NAMED EXECUTIVE" shall mean any individual who, on the last
day of the Company's fiscal year, is the chief executive officer of the
Company (or is acting in such capacity) or among the four highest compensated
officers of the Company (other than the chief executive officer). Such
officer status shall be determined pursuant to the executive compensation
disclosure rules under the Exchange Act.
-2-
<PAGE>
(p) "NONSTATUTORY STOCK OPTION" shall mean an Option not intended
to qualify as an Incentive Stock Option, as designated in the applicable
written option agreement.
(q) "OFFICER" shall mean a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "OPTION" shall mean a stock option granted pursuant to the
Plan.
(s) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(t) "OPTIONEE" shall mean an Employee or Consultant who receives
an Option.
(u) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any
successor provision.
(v) "PLAN" shall mean this 1992 Stock Option Plan.
(w) "RULE 16b-3" shall mean Rule 16b-3 promulgated under the
Exchange Act as the same may be amended from time to time, or any successor
provision.
(x) "SHARE" shall mean a share of Common Stock, adjusted in
accordance with Section 12 below.
(y) "SUBSIDIARY" shall mean a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13
below, the maximum aggregate number of shares that may be sold under the Plan
is 2,615,895 shares of Common Stock, plus an automatic increase on the date
of each annual meeting of the shareholders during the period beginning (and
including) November 19, 1998 and ending September 14, 2002 (the date of the
termination of the Plan) (the "Increase Period") equal to the lesser of: (x)
four percent (4%) of the total number of shares of the Company's Common Stock
issued and outstanding as of the last business day immediately preceding the
date of the annual meeting of the shareholders each fiscal year, or (y)
600,000 shares, for a maximum aggregate of 5,015,895 shares that may be sold
under the Plan prior to its termination. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, then the unpurchased Shares that were
subject to the Option shall, unless the Plan has been terminated, become
available for future grant under the Plan. In addition, any Shares of Common
Stock which are retained by the Company upon exercise of an Option in order
to satisfy the exercise price for such Option or any withholding taxes due
with respect to such exercise, shall be treated as not issued and shall
continue to be available under the Plan.
Notwithstanding any other provision of the Plan, shares issued under
the Plan and later repurchased by the Company shall not become available for
future grant or sale under the Plan.
-3-
<PAGE>
4. ADMINISTRATION OF THE PLAN
(a) COMPOSITION OF ADMINISTRATOR.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3 promulgated under the Exchange Act or any successor rule thereto, as in
effect at the time that discretion is being exercised with respect to the
Plan ("Rule 16b-3"), and by the legal requirements relating to the
administration of incentive stock option plans, if any, of applicable
securities laws and the Code (collectively, the "Applicable Laws"), grants
under the Plan may (but need not) be made by different administrative bodies
with respect to Directors, Officers who are not Directors and Employees who
are neither Directors nor Officers.
(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS.
With respect to grants of Options to Employees or Consultants who are also
Officers or Directors of the Company, grants under the Plan shall be made by
(A) the Board, if the Board may make grants under the Plan in compliance with
Rule 16b-3 and Section 162(m) of the Code as it applies so as to qualify
grants of Options to Named Executives as performance-based compensation, or
(B) a Committee designated by the Board to make grants under the Plan, which
Committee shall be constituted in such a manner as to permit grants under the
Plan to comply with Rule 16b-3, to qualify grants of Options to Named
Executives as performance-based compensation under Section 162(m) of the Code
and otherwise so as to satisfy the Applicable Laws.
(iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With
respect to grants of Options to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A)
the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws.
(iv) GENERAL. If a Committee has been appointed pursuant to
subsection (ii) or (iii) of this Section 4(a), such Committee shall continue
to serve in its designated capacity until otherwise directed by the Board.
From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies (however
caused) and remove all members of a Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws and,
in the case of a Committee appointed under subsection (ii), to the extent
permitted by Rule 16b-3 and to the extent required under Section 162(m) of
the Code to qualify grants of Options to Named Executives as
performance-based compensation.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(m) of the Plan;
-4-
<PAGE>
(ii) to select the Employees and Consultants to whom Options
may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but
not limited to, the share price and any restriction or limitation, or any
vesting acceleration or waiver of forfeiture restrictions regarding any
Option and/or the shares of Common Stock relating thereto, based in each case
on such factors as the Administrator shall determine, in its sole
discretion); and
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) Options may be granted only to Employees and Consultants.
Incentive Stock Options may be granted only to Employees. An Employee or
Consultant who has been granted an Option may, if he or she is otherwise
eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of Stock Options are exercisable for the first time by an
Optionee during any calendar year (under all plans of the Company or any
Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated
as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair
Market Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in
-5-
<PAGE>
any way with his or her right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
Shareholders of the Company as described in Section 19 below. It shall
continue in effect for a term of ten (10) years unless sooner terminated
under Section 15 below.
7. TERM OF OPTION. The term of each option shall be the term stated in
the Option Agreement, PROVIDED, HOWEVER, that in the case of an Incentive
Stock Option, the term shall be no more than ten (10) years from the date of
grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Incentive Stock Option granted to an
Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter time as may be provided
in the Stock Option Agreement.
8. LIMITATION GRANTS TO EMPLOYEES. Subject to adjustment as provided
in this Plan, the maximum number of shares which may be subject to Options
granted to any one Employee under this Plan for any fiscal year of one
Company shall be 1,000,000.
9. EXERCISE PRICE AND CONSIDERATION
(a) EXERCISE PRICE. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than one
hundred ten percent (110%) of the Fair Market Value per Share on the date of
grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than one hundred percent (100%) of the Fair Market
Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per Share exercise
price shall be no less than one hundred percent (100%) of the Fair Market
Value on the date of grant.
-6-
<PAGE>
(B) granted to any person other than a Named Executive,
the per Share exercise price shall be no less than eighty-five percent (85%)
of the Fair Market Value per Share on the date of grant.
(b) PERMISSIBLE CONSIDERATION. The Administrator shall determine
the acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the
time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) any combination of the foregoing methods of payment; or
(vii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance criteria
with respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms
of the Option by the person entitled to exercise the Option and full payment
for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the
Administrator, consist of any consideration and method of payment allowable
under Section 9(b) above. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
Shareholder shall exist with
-7-
<PAGE>
respect to the Optioned Stock, notwithstanding the exercise of the Option.
No adjustment shall be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 13 below.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as to
which the Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, he or she may, but only within thirty (30) days (or such other
period of time not exceeding three (3) months in the case of an Incentive
Stock Option or six (6) months in the case of a Nonstatutory Stock Option, as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of the grant of the Option)
after the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise his or her Option to the extent that he or she was entitled to
exercise it at the date of such termination. To the extent that he or she
was not entitled to exercise the Option at the date of such termination, or
if he or she does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 10(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company as a result of his or
her total and permanent disability (as defined in Section 22(e)(3) of the
Code), then he or she may, but only within six (6) months (or such other
period of time not exceeding twelve (12) months as is determined by the
Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of the grant of the Option) from the date of
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option
to the extent he or she was entitled to exercise it at the date of
termination of employment or consulting. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she
does not exercise such Option (which he or she was entitled to exercise)
within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. Notwithstanding the provisions of Section
10(b) above, in the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his
or her death an Employee or Consultant of the Company and who shall have been
in Continuous Status as an Employee or Consultant since the date of grant of
the Option, the Option may be exercised, at any time within six (6) months
following the date of death (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
by the Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right to
exercise that would have accrued had the Optionee continued
-8-
<PAGE>
living and remained in Continuous Status as an Employee or Consultant three
(3) months after the date of death; or
(ii) within one (1) month (or such other period of time not
exceeding three (3) months as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time
of grant of the Option) after the termination of Continuous Status as an
Employee or Consultant, the Option may be exercised, at any time within three
(3) months following the date of death (but in no event later than the date
of expiration of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of termination.
(e) EXTENSION OF EXERCISE PERIOD. Notwithstanding the limitations
set forth in Sections 10(b), (c) and (d) above, the Administrator has full
power and authority to extend the period of time for which any Option granted
under the Plan is to remain exercisable following termination of an
Optionee's Continuous Status as an Employee or Consultant from the limited
period set forth in the written option agreement to such greater period of
time as the Administrator shall deem appropriate; provided, however, that in
no event shall such Option be exercisable after the specified expiration date
of the Option term.
(f) RULE 16b-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding
obligations as provided in this paragraph. When an Optionee incurs tax
liability in connection with an Option, which tax liability is subject to tax
withholding under applicable tax laws, and the Optionee is obligated to pay
the Company an amount required to be withheld under applicable tax laws, the
Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in
its discretion, by surrendering to the Company Shares that (i) in the case of
Shares previously acquired from the Company, have been owned by the Optionee
for more than six months on the date of surrender, and (ii) have a fair
market value on the date of surrender equal to or less than Optionee's
applicable withholding tax rate times the ordinary income recognized, or (d)
by electing to have the Company withhold from the Shares to be issued upon
exercise of the Option, if any, that number of Shares having a fair market
value equal to the amount required to be withheld. For this purpose, the
fair market value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined (the "Tax
Date").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to
such additional conditions or restrictions as may
-9-
<PAGE>
be required thereunder to qualify for the maximum exemption from Section 16
of the Exchange Act with respect to Plan transactions.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval
of the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election
is filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
12. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent or distribution. The
designation of a beneficiary by an Optionee does not constitute a transfer.
An Option may be exercised, during the lifetime of the Optionee, only by the
Optionee.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION CORPORATE TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the Shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option, the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have
yet been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, the maximum number of Shares of Common Stock for
which Options may be granted to any Employee under Section 8 of the Plan, as
well as the price per share of Common Stock covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Administrator, whose
determination in that respect shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an
Option.
-10-
<PAGE>
(b) CORPORATE TRANSACTIONS. In the event of the proposed
dissolution or liquidation of the Company, the Option will terminate
immediately prior to the consummation of such proposed action, unless
otherwise provided by the Administrator. The Administrator may, in the
exercise of its sole discretion in such instances, declare that any Option
shall terminate as of a date fixed by the Administrator and give each
Optionee the right to exercise his or her Option as to all or any part of the
Optioned Stock, including Shares as to which the Option would not otherwise
be exercisable. In the event of a proposed sale of all or substantially all
of the assets of the Company, or the merger of the Company with or into
another corporation, the Option shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary
of such successor corporation, unless the Administrator determines, in lieu
of such assumption or substitution, that the Optionee shall have the right to
exercise the Option as to some or all of the Optioned Stock, including Shares
as to which the Option would not otherwise be exercisable. If the
Administrator makes an Option exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee that the Option shall be exercisable for a period
of fifteen (15) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
14. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the
determination granting such Option or such other date as is determined by the
Administrator. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided, however, that the following revisions or amendments shall require
approval of the shareholders of the Company in the manner described in
Section 19 of the Plan:
(i) any increase in the number of Shares subject to the
Plan, other than in connection with an adjustment under Section 13 above;
(ii) any change in the designation of the class of persons
eligible to be granted Options; or
(iii) any change in the limitation on grants to Employees as
described in Section 8 of the Plan or other changes which would require
shareholder approval to qualify Options granted hereunder as
performance-based compensation under Section 162(m).
(b) SHAREHOLDER APPROVAL. If any amendment requiring shareholder
approval under Section 15(a) above is made subsequent to the first
registration of any class of equity security by the Company under Section 12
of the Exchange Act, then such Shareholder approval shall be solicited as
described in Section 19 below.
-11-
<PAGE>
(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto complies with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares
may then be listed. The exercise of such Option and the issuance and delivery
of such Shares pursuant thereto shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required by any of the aforementioned relevant provisions of law.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the
lawful issuance and sale of any Shares hereunder, shall relieve the Company
of any liability in respect of the failure to issue or sell such Shares as to
which such requisite authority shall not have been obtained.
18. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Administrator shall approve.
19. SHAREHOLDER APPROVAL.
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the
date the Plan is adopted. Such shareholder approval shall be obtained in the
manner and to the degree required under applicable federal and state law and
the rules of any stock exchange upon which the Shares are listed.
(b) If and in the event that the Company registers any class of
equity securities pursuant to Section 12 of the Exchange Act, any required
approval of the Shareholders of the Company obtained after such registration
shall be solicited substantially in accordance with Section 14(a) of the
Exchange Act and the rules and regulations promulgated thereunder.
(c) If any required approval by the Shareholders of the Plan
itself or of any amendment thereto is solicited at any time otherwise than in
the manner described in
-12-
<PAGE>
Section 19(b) hereof, then the Company shall, at or prior to the first annual
meeting of Shareholders held subsequent to the later of (1) the first
registration of any class of equity securities of the Company under Section
12 of the Exchange Act or (2) the granting of an Option hereunder to an
officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote for
the Plan substantially the same information which would be required (if
proxies to be voted with respect to approval or disapproval of the Plan or
amendment were then being solicited) by the rules and regulations in effect
under Section 14(a) of the Exchange Act at the time such information is
furnished; and
(ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is
first sent or given to Shareholders.
20. INFORMATION TO OPTIONEES. The Company shall provide to each
Optionee, not less frequently than annually, copies of annual financial
statements. The Company shall also provide such statements to each
individual who acquires Shares pursuant to the Plan while such individual
owns such Shares. The Company shall not be required to provide such
statements to key employees whose duties in connection with the Company
assure their access to equivalent information.
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<PAGE>
GENERAL SURGICAL INNOVATIONS, INC
1992 STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
Optionee's Name and Address:
< < Optionee > >
< < Optionee > >
< < Optionee > >
You have been granted an option to purchase Common Stock of General
Surgical Innovations, Inc., (the "Company") as follows:
Date of Grant: < < GrantDate > >
Exercise Price Per Share: < < ExercisePrice > >
Total Number of Shares Granted: < < SharesGranted > >
Total Price of Shares Granted: < < TotalExercisePrice > >
Type of Option: < < NoSharesISO > > Shares
Incentive Stock Option
< < Optionee > > Shares
Nonstatutory Stock Option
Term/Expiration Date: < < Optionee > >/< < Optionee > >
Vesting Commencement Date: < < VestingStartDate > >
Vesting Schedule: 25% of the Shares subject to the
Option on the first anniversary
of the Vesting Commencement
Date, and 1/48th of the Shares vest
on the monthly anniversary of the
Vesting Commencement Date thereafter.
<PAGE>
Termination Period: Option may be exercised for a
period of 30 days after
termination of employment or
consulting relationship except
as set out in Sections 7 and 8
of the Stock Option Agreement
(but in no event later than the
Expiration Date).
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and
governed by the terms and conditions of the General Surgical Innovations,
Inc. 1992 Stock Option Plan and the Stock Option Agreement, all of which are
attached and made a part of this document.
OPTIONEE: General Surgical Innovations, Inc.
_________________________________ By: _________________________________
Signature
_________________________________ Title: ______________________________
Print Name
-2-
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC.
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. General Surgical Innovations, Inc., a California
corporation (the "COMPANY"), hereby grants to the Optionee named in the
Notice of Stock Option Grant attached to this Agreement ("OPTIONEE"), an
option (the "OPTION") to purchase the total number of shares of Common Stock
(the "SHARES") set forth in the Notice of Stock Option Grant, at the exercise
price per share set forth in the Notice of Stock Option Grant (the "EXERCISE
PRICE") subject to the terms, definitions and provisions of the 1992 Stock
Option Plan (the "PLAN") adopted by the Company, which is incorporated in
this Agreement by reference. In the event of a conflict between the terms of
the Plan and the terms of this Agreement, the terms of the Plan shall govern.
Unless otherwise defined in this Agreement, the terms used in this Agreement
shall have the meanings defined in the Plan.
To the extent designated an Incentive Stock Option in the Notice of
Stock Option Grant, this Option is intended to qualify as an Incentive Stock
Option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "CODE") and, to the extent not so designated, this Option is
intended to be a Nonstatutory Stock Option.
2. EXERCISE OF OPTION. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant and with the provisions of Sections 9 and 10 of the Plan as
follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other termination
of employment, the exercisability of the Option is governed by Sections 6, 7
and 8 below, subject to the limitations contained in paragraphs (iii) and
(iv) below.
(iii) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Stock
Option Grant.
(iv) If designated an Incentive Stock Option in the Notice of Stock
Option Grant, in the event that the Shares subject to this Option (and all
other Incentive Stock Options granted to Optionee by the Company or any
Parent or Subsidiary) that vest in any calendar year have an aggregate fair
market value (determined for each Share as of the Date of Grant of the option
covering such Share) in excess of $100,000, the Shares in excess of $100,000
shall be treated as subject to a Nonstatutory Stock Option, in accordance
with Section 5 of the Plan.
(b) METHOD OF EXERCISE.
(i) This Option shall be exercisable by delivering to the Company a
written notice of exercise (in the form attached as EXHIBIT A) which shall
state the election to exercise the Option,
<PAGE>
the number of Shares in respect of which the Option is being exercised, and
such other representations and agreements as to the holder's investment
intent with respect to such Shares of Common Stock as may be required by the
Company pursuant to the provisions of the Plan. Such written notice shall be
signed by Optionee and shall be delivered in person or by certified mail to
the Secretary of the Company. The written notice shall be accompanied by
payment of the Exercise Price. This Option shall be deemed to be exercised
upon receipt by the Company of such written notice accompanied by the
Exercise Price.
(ii) As a condition to the exercise of this Option, Optionee agrees to
make adequate provision for federal, state or other tax withholding
obligations, if any, which arise upon the exercise of the Option or
disposition of Shares, whether by withholding, direct payment to the Company,
or otherwise.
(iii) No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to Optionee on the date on which
the Option is exercised with respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable pursuant
to the exercise of this Option have not been registered under the Securities
Act of 1933, as amended (the "SECURITIES ACT"), at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the
following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6)
months on the date of surrender or were not acquired, directly or indirectly,
from the Company, and (ii) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised; (d) authorization from the Company to retain from the
total number of Shares as to which the Option is exercised that number of
Shares having a Fair Market value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised; or (e) if there is a public market for the Shares and they are
registered under the Securities Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly
to the Company the amount of sale or loan proceeds required to pay the
exercise price.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if
the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule
under Part 207 of Title 12 of the Code of Federal Regulations ("REGULATION
G") as
-2-
<PAGE>
promulgated by the Federal Reserve Board. As a condition to the
exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any
applicable law or regulation.
6. TERMINATION OF RELATIONSHIP. In the event of termination of Optionee's
Continuous Status as an Employee or Consultant, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "TERMINATION
DATE"), exercise this Option during the Termination Period set out in the
Notice of Stock Option Grant. To the extent that Optionee was not entitled
to exercise this Option at the date of such termination, or if Optionee does
not exercise this Option within the time specified in the Notice of Stock
Option Grant, the Option shall terminate.
7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6
above, in the event of termination of Optionee's Continuous Status as an
Employee or Consultant as a result of total and permanent disability (as
defined in Section 22(e)(3) of the Code), Optionee may, but only within six
(6) months from the date of termination of employment (but in no event later
than the date of expiration of the term of this Option as set forth in
Section 10 below), exercise the Option to the extent otherwise so entitled at
the date of such termination. To the extent that Optionee was not entitled
to exercise the Option at the date of termination, or if Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified in this Agreement, the Option shall terminate.
8. DEATH OF OPTIONEE. In the event of the death of Optionee:
(a) during the term of this Option and while an Employee of the
Company and having been in Continuous Status as an Employee or Consultant
since the date of grant of the Option, the Option may be exercised, at any
time within six (6) months following the date of death (but in no event later
than the date of expiration of the term of this Option as set forth in
Section 10 below), by Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent of
the right to exercise that would have accrued had Optionee continued living
and remained in Continuous Status as an Employee or Consultant three (3)
months after the date of death, subject to the limitation contained in
Section 2(i)(d) above in the case of an Incentive Stock Option; or
(b) within thirty (30) days after the termination of Optionee's
Continuous Status as an Employee or Consultant, the Option may be exercised,
at any time within six (6) months following the date of death (but in no
event later than the date of expiration of the term of this Option as set
forth in Section 10 below), by Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of termination.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution. The
designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon
the executors, administrators, heirs, successors and assigns of Optionee.
-3-
<PAGE>
10. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Stock Option Grant, and may be exercised during such
term only in accordance with the Plan and the terms of this Option.
11. NO ADDITIONAL EMPLOYMENT RIGHTS. Optionee understands and agrees that
the vesting of Shares pursuant to the Vesting Schedule is earned only by
continuing as an Employee or Consultant at the will of the Company (not
through the act of being hired, being granted this Option or acquiring Shares
under this Agreement). Optionee further acknowledges and agrees that nothing
in this Agreement, nor in the Plan which is incorporated in this Agreement by
reference, shall confer upon Optionee any right with respect to continuation
as an Employee or Consultant with the Company, nor shall it interfere in any
way with his or her right or the Company's right to terminate his or her
employment or consulting relationship at any time, with or without cause.
12. TAX CONSEQUENCES. Optionee acknowledges that he or she has read the
brief summary set forth below of certain federal tax consequences of exercise
of this Option and disposition of the Shares under the law in effect as of
the date of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option is an
Incentive Stock Option, there will be no regular federal income tax liability
upon the exercise of the Option, although the excess, if any, of the fair
market value of the Shares on the date of exercise over the Exercise Price
will be treated as an item of alternative minimum taxable income for federal
tax purposes and may subject Optionee to the alternative minimum tax in the
year of exercise.
(b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option does
not qualify as an Incentive Stock Option, Optionee may incur regular federal
income tax liability upon the exercise of the Option. Optionee will be
treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the fair market value of the
Shares on the date of exercise over the Exercise Price. In addition, if
Optionee is an employee of the Company, the Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(c) DISPOSITION OF SHARES. If this Option is an Incentive Stock
Option and if Shares transferred pursuant to the Option are held for more
than one year after exercise and more than two years after the Date of Grant,
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an
Incentive Stock Option are disposed of before the end of either of such two
holding periods, then any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of
the excess, if any, of the lesser of (i) the fair market value of the Shares
on the date of exercise, or (ii) the sales proceeds, over the Exercise Price.
If this Option is
-4-
<PAGE>
a Nonstatutory Stock Option, then gain realized on the disposition of Shares
will be treated as long-term or short-term capital gain depending on whether
or not the disposition occurs more than one year after the exercise date.
(d) NOTICE OF DISQUALIFYING DISPOSITION. If the Option granted to
Optionee in this Agreement is an Incentive Stock Option, and if Optionee
sells or otherwise disposes of any of the Shares acquired pursuant to the
Incentive Stock Option on or before the later of (i) the date two years after
the Date of Grant, or (ii) the date one year after transfer of such Shares to
Optionee upon exercise of the Incentive Stock Option, Optionee shall notify
the Company in writing within thirty (30) days after the date of any such
disposition. Optionee agrees that Optionee may be subject to income tax
withholding by the Company on the compensation income recognized by Optionee
from the early disposition by payment in cash or out of the current earnings
paid to Optionee.
13. SIGNATURE. This Stock Option Agreement shall be deemed executed by the
Company and Optionee upon execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.
-5-
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
To: General Surgical Innovations, Inc.
Attn: Stock Option Administrator
Subject: NOTICE OF INTENTION TO EXERCISE STOCK OPTION
This is official notice that the undersigned ("OPTIONEE") intends to
exercise Optionee's option to purchase __________ shares of General Surgical
Innovations, Inc. Common Stock, under and pursuant to the Company's 1992
Stock Option Plan and the Stock Option Agreement dated ___________, as
follows:
Grant Number: ________________________________
Date of Purchase: ________________________________
Number of Shares: ________________________________
Purchase Price: ________________________________
Method of Payment
of Purchase Price: ________________________________
Social Security No.: ________________________________
The shares should be issued as follows:
Name: ________________________________
Address: ________________________________
Signed: ________________________________
Date: ________________________________
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC.
NOTICE OF NONSTATUTORY STOCK OPTION GRANT
Optionee's Name and Address:
Gregory D. Casciaro
General Surgical Innovations, Inc.
10460 Bubb Road
Cupertino, CA 95014
You have been granted an option to purchase Common Stock of General
Surgical Innovations, Inc. (the "Company"), as follows:
Board Approval Date: April 6, 1998
Date of Grant (Later of Board
Approval Date or
Commencement of
Employment/Consulting): April 6, 1998
Exercise Price Per Share: $4.00
Total Number of Shares Granted: 25,000
Total Price of Shares Granted: $100,000
Term/Expiration Date: April 6, 2008
Vesting Commencement Date: October 6, 2001
Vesting Schedule: 4,166 of the shares subject
to the option shall become
exercisable each month
beginning on October 6,
2001 with all options
vested as of April 6, 2002.
Termination Period: Option may be exercised for
a period of 30 days after
termination of employment
or consulting relationship
with the Company except as
set out in Sections 7 and 8
of the Nonstatutory Stock
Option Agreement (but in
no event later than the
Expiration Date).
<PAGE>
By your signature and the signature of the Company's representative below, you
and the Company agree that this option is granted under and governed by the
terms and conditions of the Nonstatutory Stock Option Agreement attached and
made a part of this document.
GREGORY D. CASCIARO GENERAL SURGICAL INNOVATIONS,
INC.
By:
- ------------------------- -----------------------------
Signature
Title:
- ------------------------- ---------------------------
Print Name
-2-
<PAGE>
GENERAL SURGICAL INNOVATIONS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
1. GRANT OF OPTION. General Surgical Innovations, Inc., a
California corporation (the "COMPANY"), hereby grants to the Optionee named
in the Notice of Stock Option Grant attached to this Agreement ("OPTIONEE"),
an option (the "OPTION") to purchase the total number of shares of Common
Stock (the "SHARES") set forth in the Notice of Stock Option Grant, at the
exercise price per share set forth in the Notice of Stock Option Grant (the
"EXERCISE PRICE") subject to the terms, definitions and provisions of this
Nonstatutory Stock Option Agreement (the "Agreement").
This Option is intended to be a Nonstatutory Stock Option.
2. EXERCISE OF OPTION. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant as follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of a
share.
(ii) In the event of Optionee's death, disability or
other termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below, subject to the limitations contained in paragraph
(iii) below.
(iii) In no event may this Option be exercised after the
date of expiration of the term of this Option as set forth in the Notice of
Stock Option Grant.
(b) METHOD OF EXERCISE.
(i) This Option shall be exercisable by delivering to
the Company a written notice of exercise (in the form attached as EXHIBIT A)
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised, and such other representations
and agreements as to the holder's investment intent with respect to such Shares
of Common Stock as may be required by the Company. Such written notice shall be
signed by Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The written notice shall be accompanied by payment of
the Exercise Price. This Option shall be deemed to be exercised upon receipt by
the Company of such written notice accompanied by the Exercise Price.
<PAGE>
(ii) As a condition to the exercise of this Option,
Optionee agrees to make adequate provision for federal, state or other tax
withholding obligations, if any, which arise upon the exercise of the Option or
disposition of Shares, whether by withholding, direct payment to the Company, or
otherwise.
(iii) No Shares will be issued pursuant to the exercise of
an Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), at the time this
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any
of the following, or a combination of the following, at the election of
Optionee: (a) cash; (b) check; (c) surrender of other Shares of Common Stock of
the Company that (i) either have been owned by Optionee for more than six (6)
months on the date of surrender or were not acquired, directly or indirectly,
from the Company, and (ii) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised; (d) authorization from the Company to retain from the total
number of Shares as to which the Option is exercised that number of Shares
having a Fair Market value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised; or (e) if
there is a public market for the Shares and they are registered under the
Securities Act, delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("REGULATION G") as
promulgated by the Federal Reserve Board. As a condition to the exercise
-2-
<PAGE>
of this Option, the Company may require Optionee to make any representation
and warranty to the Company as may be required by any applicable law or
regulation.
6. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's employment or consulting relationship with the Company, Optionee may,
to the extent otherwise so entitled at the date of such termination (the
"TERMINATION DATE"), exercise this Option during the Termination Period set out
in the Notice of Stock Option Grant. To the extent that Optionee was not
entitled to exercise this Option at the date of such termination, or if Optionee
does not exercise this Option within the time specified in the Notice of Stock
Option Grant, the Option shall terminate. The Optionee's employment or
consulting relationship shall not be considered terminated in the case of sick
leave, military leave, or any other leave of absence approved by the Company's
Board of Directors; provided, however, either that such leave must be for a
period of not more than ninety (90) days or that re-employment upon the
expiration of such leave must be guaranteed by contract or by statute, or is
provided pursuant to Company policy adopted from time to time. For purposes of
this Agreement, a change in status from an Employee to a Consultant or from a
Consultant to an Employee shall not constitute a termination of relationship.
7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 6 above, in the event of termination of Optionee's employment or
consulting relationship with the Company as a result of total and permanent
disability (as defined in Section 22(e)(3) of the Internal Revenue Code),
Optionee may, but only within six (6) months from the date of termination of
such relationship (but in no event later than the date of expiration of the term
of this Option as set forth in Section 10 below), exercise the Option to the
extent otherwise so entitled at the date of such termination. To the extent
that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time specified in this Agreement, the Option
shall terminate.
8. DEATH OF OPTIONEE. In the event of the death of Optionee:
(a) during the term of this Option and while an employee or
consultant of the Company and having been an employee or consultant of the
Company since the date of grant of the Option, the Option may be exercised, at
any time within six (6) months following the date of death (but in no event
later than the date of expiration of the term of this Option as set forth in
Section 10 below), by Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that would have accrued had Optionee continued living and
remained as a director of the Company three (3) months after the date of death,
subject to the limitation contained in Section 2(i)(d) above in the case of an
Incentive Stock Option; or
(b) within thirty (30) days after the termination of Optionee's
employment or consulting relationship with the Company, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the date of expiration of the term of this Option as set
forth in Section 10 below), by Optionee's estate or by a person who
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<PAGE>
acquired the right to exercise the Option by bequest or inheritance, but only
to the extent of the right to exercise that had accrued at the date of
termination.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or distribution.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
10. TERM OF OPTION. This Option may be exercised only within the term
set out in the Notice of Stock Option Grant, and may be exercised during such
term only in accordance with the terms of this Option.
11. NO ADDITIONAL EMPLOYMENT RIGHTS. Optionee understands and agrees
that the vesting of Shares pursuant to the Vesting Schedule is earned only by
continuing as an employee or consultant of the Company at the will of the
Company (not through the act of being hired, being granted this Option or
acquiring Shares under this Agreement). Optionee further acknowledges and
agrees that nothing in this Agreement shall confer upon Optionee any right with
respect to continuation as an employee or consultant of the Company, nor shall
it interfere in any way with his or her right or the Company's right to
terminate his or her employment or consulting relationship at any time, with or
without cause.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION CORPORATE TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the Shareholders of the Company, the number of shares of Common Stock covered
by the Option and the price per share of Common Stock covered by this
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board of Directors, whose determination in that
respect shall be final, binding, and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to this Option.
(b) CORPORATE TRANSACTIONS. In the event of the proposed
dissolution or liquidation of the Company, the Option will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Board of Directors. The Board of Directors may, in the exercise of its sole
discretion in such instances, declare that this Option shall terminate as of a
date fixed by the Board of Directors and give the Optionee the right to exercise
his Option as to all or any part of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable. In the event of a proposed
sale of all or substantially
-4-
<PAGE>
all of the assets of the Company, or the merger of the Company with or into
another corporation, the Option shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary
of such successor corporation, unless the Board of Directors determines, in
lieu of such assumption or substitution, that the Optionee shall have the
right to exercise the Option as to some or all of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable.
If the Board of Directors makes an Option exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Board of
Directors shall notify the Optionee that the Option shall be exercisable for
a period of fifteen (15) days from the date of such notice, and the Option
will terminate upon the expiration of such period.
13. TAX CONSEQUENCES. Optionee acknowledges that he or she has read
the brief summary set forth below of certain federal tax consequences of
exercise of this Option and disposition of the Shares under the law in effect as
of the date of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) EXERCISE OF NONSTATUTORY STOCK OPTION. Optionee may incur
regular federal income tax liability upon the exercise of the Option. Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the fair market value of the
Shares on the date of exercise over the Exercise Price. In addition, if
Optionee is an employee of the Company, the Company will be required to withhold
from Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
(b) DISPOSITION OF SHARES. Gain realized on the disposition of
Shares will be treated as long-term or short-term capital gain depending on
whether or not the disposition occurs more than one year after the exercise
date.
14. AMENDMENT OF OPTION. In addition to any changes or adjustments
that may be made pursuant to Section 12 above, the Company's Board of Directors
shall have the authority to make the following determinations with respect to,
and amendments to, the Option without the consent of Optionee: (a) waiver of
any restriction applicable to the Option or the Shares; (b) reduction in the
exercise price of the Option to the Fair Market Value of shares of the Company's
Common Stock as of the date of such reduction in price; (c) extension of the
exercise periods set forth in Section 5, 6 and 7 above; and (d) any other
amendment or adjustment that does not materially and adversely affect Optionee's
rights hereunder.
15. SIGNATURE. This Stock Option Agreement shall be deemed executed
by the Company and Optionee upon execution by such parties of the Notice of
Stock Option Grant attached to this Stock Option Agreement.
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<PAGE>
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
To: General Surgical Innovations, Inc.
Attn: Stock Option Administrator
Subject: NOTICE OF INTENTION TO EXERCISE NONSTATUTORY STOCK OPTION
This is official notice that the undersigned ("OPTIONEE") intends to
exercise Optionee's option to purchase __________ shares of General Surgical
Innovations, Inc. Common Stock, under and pursuant to the Nonstatutory Stock
Option Agreement dated ___________, as follows:
Grant Number: ________________________________
Date of Purchase: ________________________________
Number of Shares: ________________________________
Purchase Price: ________________________________
Method of Payment
of Purchase Price: ________________________________
Social Security No.: ________________________________
The shares should be issued as follows:
Name: ___________________________
Address: ____________________________
____________________________
____________________________
Signed: ____________________________
Date: ____________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,501
<SECURITIES> 15,091
<RECEIVABLES> 991
<ALLOWANCES> 163
<INVENTORY> 2,836
<CURRENT-ASSETS> 27,322
<PP&E> 2,434
<DEPRECIATION> 1,546
<TOTAL-ASSETS> 36,899
<CURRENT-LIABILITIES> 3,431
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 33,334
<TOTAL-LIABILITY-AND-EQUITY> 36,899
<SALES> 2,947
<TOTAL-REVENUES> 2,947
<CGS> (1,815)
<TOTAL-COSTS> (1,815)
<OTHER-EXPENSES> (9,142)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10)
<INCOME-PRETAX> (7,075)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,075)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,075)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
