-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DKb65ZhwjIkJpc7mdlKtKhLWDwe1iQIvCg3IybCFacCDQjeQ+ZWcoTTiQQzlahTa WiCewce24MjkD8GFX85hNA== 0001047469-98-020170.txt : 19980515 0001047469-98-020170.hdr.sgml : 19980515 ACCESSION NUMBER: 0001047469-98-020170 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL SURGICAL INNOVATIONS INC CENTRAL INDEX KEY: 0000890763 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 973170244 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28448 FILM NUMBER: 98620390 BUSINESS ADDRESS: STREET 1: 10460 BUBB RD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4158129740 MAIL ADDRESS: STREET 1: 3172A PORTER DRIVE CITY: PALO ALTO STATE: CA ZIP: 94304 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998. Commission file number: 0-28448 GENERAL SURGICAL INNOVATIONS, INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-3160456 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10460 BUBB ROAD, CUPERTINO, CALIFORNIA 95014 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 863-2500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO There were approximately 13,420,642 shares of Registrant's Common Stock issued and outstanding as of April 30, 1998. GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998 TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Consolidated balance sheets at March 31, 1998 and June 30, 1997 .................................................... 3 Consolidated statements of operations and comprehensive loss for the three and nine months ended March 31, 1998 and March 31, 1997 ................................................................. 4 Consolidated statements of cash flows for the nine months ended March 31, 1998 and March 31, 1997 .................................... 5 Notes to consolidated financial statements ........................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................ 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings .................................................... 21 Item 2. Changes in Securities and Use of Proceeds ............................ 22 Item 3. Defaults Upon Senior Securities ...................................... 23 Item 4. Submission of Matters to a Vote of Security Holders .................. 23 Item 5. Other Information .................................................... 23 Item 6. Exhibits and Reports on Form 8-K ..................................... 23
2 GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30, 1998 1997 ------------ --------- ASSETS Current assets: Cash and cash equivalents ........................................................... $ 18,706 $ 7,900 Available-for-sale securities ....................................................... 21,305 35,831 Accounts receivable, net of allowance for doubtful accounts of $46 on March 31, 1998 and $47 on June 30, 1997 ....................................................... 679 2,131 Inventories ......................................................................... 1,057 1,717 Prepaid expenses and other current assets ........................................... 969 971 -------- -------- Total current assets ......................................................... 42,716 48,550 Property and equipment, net ........................................................... 2,204 2,251 Intangible and other assets, net ...................................................... 211 261 -------- -------- Total assets ................................................................. $ 45,131 $ 51,062 -------- -------- -------- -------- LIABILITIES Current liabilities: Accounts payable .................................................................... $ 645 $ 504 Accrued liabilities ................................................................. 922 1,044 Bank borrowings ..................................................................... 124 167 -------- -------- Total current liabilities .................................................... 1,691 1,715 Bank borrowings, less current portion ................................................. 103 185 Other long-term liabilities ........................................................... 193 175 -------- -------- Total liabilities ............................................................ 1,987 2,075 -------- -------- Contingencies (Note 6) SHAREHOLDERS' EQUITY Preferred stock, $.001 par value: Authorized: 2,000,000 shares; issued and outstanding: none Common stock, $.001 par value: Authorized: 50,000,000 shares; issued and outstanding 13,420,642 on March 31, 1998 and 13,290,644 on June 30, 1997 ................................... 13 13 Additional paid-in capital ............................................................ 65,248 65,089 Notes receivable from shareholders .................................................... (87) (87) Deferred compensation, net ............................................................ (194) (297) Accumulated other comprehensive income (loss) ......................................... 13 (38) Accumulated deficit ................................................................... (21,849) (15,693) -------- -------- Total shareholders' equity ................................................... 43,144 48,987 -------- -------- Total liabilities and shareholders' equity ................................. $ 45,131 $ 51,062 -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3 GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------- ------- ------- SALES ........................................................... $ 894 $ 693 $ 3,869 $ 3,524 Guaranteed payments ............................................. - 1,480 1,635 2,980 ------- ------- ------- ------- Total revenue ................................................... 894 2,173 5,504 6,504 Cost of sales ................................................... 602 397 2,744 1,749 ------- ------- ------- ------- Gross profit .................................................. 292 1,776 2,760 4,755 ------- ------- ------- ------- Operating Expenses: Research and development ...................................... 651 581 2,074 1,527 Sales and marketing ........................................... 1,297 1,216 3,591 3,419 General and administrative .................................... 1,906 1,044 4,990 2,597 ------- ------- ------- ------- Total operating expenses ................................... 3,854 2,841 10,655 7,543 ------- ------- ------- ------- Operating loss .......................................... (3,562) (1,065) (7,895) (2,788) Interest income ................................................. 571 637 1,768 1,940 Interest expense ................................................ (8) (11) (29) (34) Other expense ................................................... - - - (23) ------- ------- ------- ------- Net loss ................................................ (2,999) (439) (6,156) (905) Other comprehensive income (loss): Change in unrealized gain (loss) on available-for-sale securities .................................................. 18 (97) 51 (127) ------- ------- ------- ------- Comprehensive loss .......................................... $(2,981) $ (536) $(6,105) $(1,032) ------- ------- ------- ------- ------- ------- ------- ------- Net loss per common share and per common share - assuming dilution ............................................. $ (0.22) $ (0.03) $ (0.46) $ (0.07) ------- ------- ------- ------- ------- ------- ------- ------- Shares used in computing net loss per common share and per common share - assuming dilution .......................... 13,401 13,211 13,356 13,181 ------- ------- ------- ------- ------- ------- ------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 4 GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
NINE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ........................................................................... $ (6,156) $ (905) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation ............................................ 103 150 Depreciation and amortization .................................................... 820 630 Provision for uncollectable accounts ............................................. (1) (40) Loss on write-off of fixed assets ................................................ - 26 Provision for excess and obsolete inventory ...................................... 10 181 Changes in operating assets and liabilities: Accounts receivable ............................................................ 1,453 (1,146) Inventory ...................................................................... 650 (1,057) Prepaid expenses and other current assets ...................................... 2 (609) Intangible and other assets .................................................... (4) (69) Accounts payable ............................................................... 141 (403) Accrued and other liabilities .................................................. (132) 107 Deferred revenue ............................................................... - (100) -------- -------- Net cash used in operating activities .......................... (3,114) (3,235) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities ......................................... (18,010) (54,666) Proceeds from sales and maturities of available-for-sale securities ................ 32,292 32,500 Acquisition of property and equipment .............................................. (384) (214) -------- -------- Net cash provided by (used in) investing activities activities . 13,898 (22,380) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock ............................................. 159 125 Proceeds from payment on shareholder notes receivable .............................. - 24 Payments on capital lease obligations .............................................. (12) - Principal payments on bank borrowings .............................................. (125) (93) -------- -------- Net cash provided by financing activities ....................... 22 56 -------- -------- Net increase (decrease) in cash and cash equivalents ............................... 10,806 (25,559) Cash and cash equivalents, beginning of period ..................................... 7,900 28,339 -------- -------- Cash and cash equivalents, end of period ........................................... $18,706 $ 2,780 -------- -------- -------- -------- Cash paid during the period for: Interest ......................................................................... $ 30 $ 38 Taxes ............................................................................ $ - $ - NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for notes receivable ...................................... $ - $ 11 Change in unrealized gain (loss) on available-for-sale securities .................. $ 51 $ (127) Property acquired under capital leases ............................................. $ 40 $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 5 GENERAL SURGICAL INNOVATIONS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: The accompanying unaudited consolidated financial statements as of March 31, 1998 of General Surgical Innovations, Inc. (the "Company") and subsidiary have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 31, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 1998, or any future interim period. These financial statements and notes should be read in conjunction with the Company's audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997. 2. Reclassification: Certain amounts in the financial statements have been reclassified to conform with current year's presentation. These reclassifications had no impact on previously reported working capital, operating income, or net income. 3. Computation of Net Loss per Common Share and per Common Share-Assuming Dilution: The Company adopted Financial Accounting Standards Board No. 128 "Earnings Per Share", and the provisions of the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 98, and accordingly all prior periods have been restated. Net loss per common share and per common share-assuming dilution are computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options are excluded from the computation of net loss per common share-assuming dilution as their effect is antidilutive. The Company has determined that no incremental shares should be included in the computation of earnings per share in accordance with SAB No. 98. Stock options to purchase 1,456,092 and 1,378,259 shares of common stock at prices ranging from $0.09 to $9.75 per share were outstanding at March 31, 1998 and March 31, 1997, respectively, but were not included in the computation of net loss per common share-assuming dilution because they were antidilutive. The aforementioned stock options could potentially dilute earnings per share in the future. 4. Adopted Accounting Pronouncement: The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a 6 full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. 5. Inventories: Inventories comprise (IN THOUSANDS):
Mar. 31, June 30, 1998 1997 ---- ---- (unaudited) Raw materials $ 692 $ 706 Work in progress 73 43 Finished goods 292 968 -------- -------- $ 1,057 $ 1,717 -------- -------- -------- --------
6. Contingencies: On May 28, 1996, Origin MedSystems, Inc., ("Origin"), a unit of the Guidant Corporation and a competitor of the Company, filed an action against GSI in the United States District Court for the Northern District of California, alleging patent infringement of its U.S. Patent No. 5,520,609 entitled "Apparatus and Methods for Peritoneal Retraction." On April 20, 1998 an order in GSI's favor in this case was filed by the Court granting GSI's Motion for Summary Judgment of Unenforceability by Reason of Inequitable Conduct in obtaining Patent No. 5,520,609. The Company expects this decision to be appealed. GSI also filed an action against Origin in the U.S. District Court for the Northern District of California alleging patent infringement of its patent for a method of tissue plane dissection using balloon systems. Management believes it has meritorious defenses in relation to the action. One of the patent applications filed by the Company, which is directed to a surgical method using balloon dissection technology, has been placed in interference with a patent application filed by Origin. The Company believes that the inventor named in its patent application was the first to invent this subject matter, and has asserted that the Origin patent application was filed after a disclosure made by such inventor to employees of Origin. Origin takes a contrary position. This interference is presently pending in the United States Patent and Trademark Office ("USPTO") and, as permitted by the rules of the USPTO, has been referred to an arbitrator for completion of the interference proceeding. A decision is expected in this interference proceeding in calendar year 1998. No accrual for the above matters has been made in the accompanying consolidated financial statements as the ultimate outcomes of the litigation and dispute presently are not determinable. The litigation and dispute are subject to inherent uncertainties and thus, there can be no assurance that the litigation or dispute will be resolved favorably to the Company or that they will not have a material adverse effect on the Company's financial position or results of operations. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in part I, Item I of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended June 30, 1997. The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Specifically, the Company wishes to alert readers that, except for the historical information contained in this Quarterly Report on Form 10-Q, the matters discussed herein are forward-looking statements that are subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include, but are not limited to, market demand for the Company's products, the Company's ability to shift market focus successfully, fluctuations in revenues among different product lines and markets, the timing and number of orders and shipments, distribution efforts by GSI distributors, key distributors achieving certain levels of sales growth, the performance of the Company's new corporate partnering relationships, the Company's ability to establish and develop other new corporate partnering relationships, the timely development and market acceptance of new products and surgical procedures, the impact of competitive products and pricing, results of ongoing litigation, the Company's ability to further expand into international markets, approval of its products by government agencies such as the United States Food and Drug Administration, and other risks detailed below and included from time to time in the Company's other SEC reports and press releases, copies of which are available from the Company upon request. The Company assumes no obligation to update any forward-looking statements contained herein. The factors listed below under "Factors Affecting Future Results," as well as other factors, have in the past affected, and could in the future affect, the Company's actual results and could cause the Company's results for future quarters to differ materially from those expressed in any forward-looking statements contained in the following discussion. References made in this Quarterly Report on Form 10-Q to "General Surgical Innovations, Inc.," the "Company" or the "Registrant" refer to General Surgical Innovations, Inc. and its subsidiary. The following General Surgical Innovations, Inc. trademarks are mentioned in this Quarterly Report: SPACEMAKER-Registered Trademark-, registered trademark of the Company; ENDOSAPH-TM-, SAPHtrak-TM- and SPACEKEEPER-TM-, trademarks of the Company. OVERVIEW Since its inception in April 1992, GSI has been engaged in the development, manufacturing and marketing of balloon dissection systems and related minimally invasive surgical instruments. The Company began commercial sales of its balloon dissection systems for hernia repair in September 1993. To date, the Company has received from the FDA eight 510(k) clearances for use of the Company's technology to perform dissection of tissue planes anywhere in the body using a broad range of balloon sizes and shapes. The Company currently sells products in the United States and certain other countries in Europe, Asia and South America for selected applications, such as hernia repair, subfascial endoscopic perforator surgery, saphenous vein harvesting and breast reconstruction and augmentation surgery. 8 In December 1996, the Company entered into a five year OEM supply agreement (the "Expanded EES Agreement") with Ethicon Endo-Surgery, Inc. ("EES"), pursuant to which GSI granted EES worldwide sales and marketing rights to sell the SPACEMAKER-Registered Trademark- Balloon Dissection Systems in the laparoscopic hernia repair and urinary stress incontinence ("USI") markets. EES made guaranteed payments pursuant to the agreement of $4.9 million in fiscal year 1997, and additional payments in lieu of product purchases pursuant to a mutual agreement in the amount of $775,000 in the first quarter of fiscal year 1998 and $860,000 in the second quarter of fiscal year 1998. In February 1998, the Company and EES signed a non-exclusive distribution agreement for the laparoscopic hernia repair and urinary stress incontinence ("USI") markets. This agreement supersedes the December 1996 "Expanded EES Agreement". Additional sales of the Company's products in the United States are currently made through distributors and a small direct sales force. The Company currently sells its products (other than for hernia and USI applications) in international markets through distributors, which resell to surgeons and hospitals. To date, almost all of the sales to distributors and by the Company's direct sales force have been for use in hernia repair procedures. While the Company has developed or is developing balloon dissection systems for vascular, urinary stress incontinence and plastic surgery, sales of products for hernia repair are expected to provide a majority of the Company's revenues at least through calendar year 1998. The Company has acquired rights to a significant number of patents from third parties, including rights that apply to the Company's current balloon dissection systems. The Company has historically paid and is obligated to pay in the future to such third parties royalties equal to 4% of sales of such products. The Company has also acquired patent rights under royalty-bearing agreements with respect to certain surgical instruments, including the balloon valve trocar. The payment of such royalty amounts will have an adverse impact on the Company's gross profit and results of operations. The Company has a limited history of operations and has experienced significant operating losses since inception. The Company expects such operating losses to continue at least through calendar year 1998. In order to support increased levels of sales in the future and to augment its long-term competitive position, including the development of balloon dissection systems for other applications, the Company anticipates that it will be required to make significant additional expenditures in sales and marketing and research and development (including marketing-related clinical evaluations). In addition, the Company has experienced higher administration expenses since its initial public offering resulting from its obligations as a public reporting company and defense of its patents. The Company anticipates that its results of operations may fluctuate for the foreseeable future due to several factors, including fluctuations in purchases of the Company's products by its distributors, its distributors' ability to achieve certain levels of sales growth, the Company's ability to sell its line of cardiovascular products, fluctuations in revenues among different product lines and markets, the mix of sales among the distributors and the Company's direct sales force, timing of new product introductions or transitions to new products, the margins recognized from products for various surgical procedures, the progress of marketing-related clinical evaluations, sales of competitive products and the introduction of new products from competitors (including pricing pressures), activities related to patents and patent approvals (including litigation), regulatory and third-party reimbursement matters, reliability of suppliers, and the timing of research and development expenses (including marketing-related clinical evaluations). In addition, the Company's results of operations could be affected by the expansion of the 9 Company's distributor network and the ability of the Company's distributors to effectively promote the Company's products. The Company's limited operating history makes accurate prediction of future operating results difficult or impossible. The Company currently manufactures and ships product shortly after the receipt of orders, and anticipates that it will do so in the future. Accordingly, the Company has not developed a significant backlog and does not anticipate that it will develop a material backlog in the future. During the quarter ended March 31, 1998, the Company signed exclusive distribution agreements with eight international distributors, including Baxter International, to distribute its cardiovascular products in 18 European countries. RESULTS OF OPERATIONS REVENUE. Total revenue decreased by 59% to approximately $894,000 for the quarter ended March 31, 1998 from $2.2 million for the same period in 1997. This decrease was primarily due to the conversion of EES to a non-exclusive distributor and the anticipated end of payments from EES that had been made in lieu of product purchases. Product sales for the quarter rose 29% to approximately $894,000 from $693,000 for the quarter ended March 31, 1997. Revenue for the nine months ended March 31, 1998 decreased 15% to approximately $5.5 million from $6.5 million for the nine months ended March 31, 1997. COST OF SALES. Cost of sales increased by 52% to approximately $602,000 for the quarter ended March 31, 1998 from $397,000 for the same period in 1997. Cost of sales increased as a percentage of sales to 67% for the quarter ended March 31, 1998 from 57% for the quarter ended March 31, 1997. This increase in absolute dollars was primarily related to increased unit sales to GSI distributors, as compared to the previous period. Cost of sales for the nine months ended March 31, 1998 increased as a percent of sales to 71%, or approximately $2.7 million, as compared to 50% of sales, or approximately $1.8 million, for the nine months ended March 31, 1997. This increase as a percent of sales is due to increased sales to distributors and increased capacity as a result of relocating its manufacturing facility during April 1997. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses, which include expenditures for regulatory expenses, increased by 12% to approximately $651,000 in the quarter ended March 31, 1998 from $581,000 for the same period in 1997. R&D expenses for the nine months ended March 31, 1998 increased 36% to approximately $2.1 million as compared to $1.5 million for the same period of the prior fiscal year. These increases are a result of the company dedicating more resources during the past nine months to developing its cardiovascular products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 42% to approximately $3.2 million for the quarter ended March 31, 1998 from $2.3 million for the quarter ended March 31, 1997. For the nine months ended March 31, 1998, SG&A expenses were $8.6 million compared to $6.0 million for the same period in 1997. These increases are primarily due to increased legal expenses related to intellectual property litigation. INTEREST INCOME, INTEREST EXPENSE AND OTHER EXPENSE. Interest income (net of expense) decreased to approximately $563,000 for the quarter ended March 31, 1998 from $626,000 for the quarter ended 10 March 31, 1997. For the nine months ended March 31, 1998 interest income (net of expense) decreased to $1.7 million from $1.9 million for the same period in 1997. Decreases are due mainly to lower average cash, cash equivalents and available-for-sale securities balances. Interest earned in the future will depend on the Company's funding cycles and prevailing interest rates. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company's cash expenditures have significantly exceeded its sales, resulting in an accumulated deficit of approximately $21.9 million at March 31, 1998. The Company has funded its operations primarily through the sale of equity securities. From its inception through March 31, 1998 the Company raised approximately $62 million through the sale of equity securities. As of March 31, 1998 the Company's principal source of liquidity consists of cash, cash equivalents and available-for-sale securities of $40.0 million, as compared to $43.7 million at June 30, 1997. The Company has negotiated an increase in its current bank line of credit to $5,000,000. As of March 31, 1998, the Company has no amounts outstanding under its prior $1,500,000 line of credit. The Company also has an equipment loan with an outstanding balance of approximately $227,000. The Company expects to incur substantial additional costs, including costs related to patent litigation, increased sales and marketing activities, increased research and development, expenditures in connection with seeking regulatory approvals and conducting additional marketing-related clinical evaluations, and other costs associated with expansion of the Company's manufacturing capabilities. The Company believes that its current cash balances and short-term investments along with cash generated from the future sales of products will be sufficient to meet the Company's operating and capital requirements through at least calendar 1999. The Company may seek additional equity or debt financing to address its working capital needs or to provide funding for capital expenditures. There can be no assurance that additional financing, if sought, will be available on satisfactory terms or at all. ADOPTED ACCOUNTING PRONOUNCEMENT The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. FACTORS AFFECTING FUTURE RESULTS LIMITED OPERATING HISTORY; ANTICIPATED FUTURE LOSSES. The Company has a limited operating history upon which an evaluation of the Company and its prospects can be based. As of March 31, 1998, the Company had an accumulated deficit of $21.9 million. The Company's net operating losses for the fiscal years ending June 30, 1995, 1996 and 1997 and for the quarters ended September 30, 1997, December 31, 1997 and March 31, 1998 and were $4.1 million, $5.5 million, $1.9 million, $1.3 million, $1.9 million and $3.0 million, respectively. The Company expects to continue to incur operating losses on a quarterly and annual basis through at least calendar year 1998. Due to the Company's limited operating history, there can be no assurance of sales growth or profitability in the future. The Company 11 intends to increase its investments in research and development, sales and marketing, marketing-related clinical evaluations and related infrastructure. Due to the anticipated increases in the Company's operating expenses, the Company's operating results will be adversely affected if sales do not increase. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in rapidly evolving markets. To address these risks, the Company must respond to competitive developments, continue to attract, retain and motivate qualified persons and successfully commercialize products incorporating advanced technologies. There can be no assurance that the Company will be successful in addressing such risks. DEPENDENCE UPON BALLOON DISSECTION PRODUCTS; RISK OF TECHNOLOGICAL OBSOLESCENCE. Nearly all of the Company's sales since inception have been derived from sales of its balloon dissection products, with a substantial portion derived from sales for hernia repair procedures. Failure of the Company to develop and successfully commercialize balloon dissection products for applications other than hernia repair could have a material adverse effect on the Company's business, financial condition and results of operations. The success of the Company's products depends on the market acceptance of and demand for the Company's products and related procedures, the nature of the technological advances inherent in the product designs, reduction in patient trauma or other benefits provided by such products, results of marketing-related clinical evaluations, continued adoption of minimally invasive surgery ("MIS") procedures by surgeons, reimbursement for the Company's products by health care payors and the Company's receipt of regulatory approvals. There can be no assurance that the Company's products will have the required technical characteristics, that the Company's products will provide adequate patient benefits, that marketing-related clinical evaluations results will be favorable, that surgeons will continue to adopt MIS procedures, that recently-introduced products or future products of the Company or related procedures will gain market acceptance, or that required regulatory approvals will be obtained. The failure to achieve any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. To the extent demand for the Company's balloon dissection systems for hernia repair declines and the Company's newly-introduced products are not commercially accepted or its existing products are not developed for new procedures, there could be a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON DISTRIBUTORS. In February 1998, the Company replaced its five year OEM supply agreement with EES with a non-exclusive distribution agreement which granted EES worldwide sales and marketing rights to sell the SPACEMAKER-Registered Trademark- Balloon Dissection Systems in the laparoscopic hernia repair and urinary stress incontinence ("USI") markets. This new EES agreement does not provide for any minimum payments from EES to the Company. In December 1997, the Company entered into a four year distribution agreement with Genzyme Surgical Products Corporation ("Genzyme"). Under the agreement, Genzyme has exclusive rights to market and distribute GSI's surgical balloon dissectors worldwide for use in plastic surgery (reconstructive and aesthetic) procedures. The Company's products are sold internationally to hospitals, surgeons and specialists through EES and independent distributors in Europe, Asia, Latin America and the Middle East. In June 1997, GSI entered into an exclusive agreement with Japan Lifeline to market and distribute in Japan GSI's balloon dissection systems for use in vascular procedures. Japan Lifeline is expected to begin distribution of the GSI balloon dissection systems following receipt of the Japanese Ministry of Health and Welfare approval, which the Company expects to occur in calendar 1998. 12 During the quarter, the Company expanded its international distribution network by adding eight international distributors, including Baxter International, to distribute its cardiovascular products, and although the Company intends to continue to establish additional distributorships in the United States and internationally for products in areas other than certain plastic surgery procedures, there can be no assurance that recently appointed distributors will be successful, or that efforts to establish additional distributors will be successful. Failure of current distributors to succeed, or failure to add additional distributors to its distribution network, could have a material adverse effect on the Company's business, financial condition and results of operations. LIMITED MARKETING AND DIRECT SALES EXPERIENCE. The Company has only limited experience marketing and selling its products through its direct sales force, and has sold its products in commercial quantities through its direct sales force to the hernia market and, to a lesser degree, to the cardiovascular and cosmetic and reconstructive surgery markets. Establishing marketing and sales capability sufficient to support sales in commercial quantities for the cardiovascular market targeted by the Company will require significant resources. There can be no assurance that the Company will be able to recruit and retain additional qualified marketing or sales personnel, or that future sales efforts of the Company will be successful. The Company intends to establish partnership relationships with additional distribution partners, and there can be no assurance that the Company will be successful in establishing such partnership relationships on commercially reasonable terms, if at all. The failure to establish and maintain an effective distribution channel for the Company's products, or establish and retain qualified and effective sales personnel to support commercial sales of the Company's products, could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY OF MARKET ACCEPTANCE; NO ASSURANCE OF CLINICAL ADVANTAGE. The Company's success is substantially dependent upon the success of its SPACEMAKER-Registered Trademark- balloon dissection products. The Company believes that market acceptance of the Company's products will depend on the Company's ability to provide evidence to the medical community of the safety, efficacy, clinical advantage and cost-effectiveness of its products and the procedures in which these products are intended to be used. Market acceptance is also dependent on the adoption of laparoscopic techniques generally and the conversion of non-balloon dissection techniques to balloon dissection techniques specifically. To date, the Company's products have only been used to treat a limited number of patients and the Company has limited long-term outcomes data. If the Company is not able to demonstrate consistent clinical benefits resulting from the use of its products (including reduced procedure time, reduced patient trauma and lower costs), the Company's business, financial condition and results of operations could be materially and adversely affected. The Company further believes that the ability of health care providers to obtain adequate third party reimbursement for procedures using the Company's SPACEMAKER-Registered Trademark- balloon dissector products and related instruments will be critical to market acceptance of the Company's products. Although the Company believes that procedures using its balloon dissection products currently may be reimbursed in the United States under certain existing procedure codes, there can be no assurance that such procedure codes will remain available or that reimbursement under these codes will be adequate. The Company has limited experience in obtaining third-party reimbursement, and the failure to obtain reimbursement for some or all of its products could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 13 The Company introduced its balloon dissectors in late 1993 and to date there has been limited education among surgeons about the benefits of balloon dissection technology. Further, many surgeons and surgeons' assistants have not yet developed the requisite skills to perform balloon dissection procedures. To the extent that laparoscopic techniques are adopted slowly, that balloon dissectors are incorporated into laparoscopic techniques less often or that surgeons are unwilling or unable to develop the skills necessary to utilize balloon dissectors, the Company's business, financial condition and results of operations could be materially adversely affected. FLUCTUATIONS IN QUARTERLY RESULTS. Results of the Company's operations may fluctuate significantly from quarter to quarter and will depend on numerous factors, including (i) new product introductions by the Company and its competitors and fluctuations in revenues among different product lines and markets, (ii) purchases of the Company's products by its distributors, (iii) the rate of adoption by surgeons of balloon dissection technology in markets targeted by the Company, (iv) the sales efforts of the Company's distributors, (v) the mix of sales among distributors and the Company's direct sales force, (vi) timing of patent and regulatory approvals, if any, (vii) timing and growth of operating expenditures, (viii) timing of research and development expenses, including marketing-related clinical evaluation expenditures, (ix) intellectual property litigation and (x) general market conditions. In December 1996, the Company entered into the Expanded Ethicon Agreement, pursuant to which EES made approximately $4.9 million in guaranteed payments to the Company in fiscal year 1997, which constituted 54% of revenues for fiscal year 1997 and payments by mutual consent of $775,000 in the first quarter of fiscal year 1998 and $860,000 in the second quarter of fiscal 1998. The Company and EES entered into a nonexclusive distribution agreement for the laparoscopic hernia repair and urinary stress incontinence markets in February 1998, which supersedes the Expanded Ethicon Agreement. The Company anticipates that sales to EES may decrease in the future. Failure by EES to achieve certain levels of sales growth or purchases could adversely affect the Company's operating results. In addition, announcements or expected announcements by the Company, its competitors or its distributors of new products, new technologies or pricing changes could cause existing or potential customers of the Company to defer purchases of the Company's existing products and could alter the mix of products sold by the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that future products or product enhancements will be successfully introduced or that such introductions will not adversely affect the demand for existing products. As a result of these and other factors, the Company's quarterly operating results have fluctuated in the past, and the Company expects that such results may fluctuate in the future. Due to such quarterly fluctuations in operating results, quarter-to-quarter comparisons of the Company's operating results are not necessarily meaningful and should not be relied upon as indicators of likely future performance or annual operating results. In addition, the Company's limited operating history makes accurate prediction of future operating results difficult or impossible to make. There can be no assurance that in the future the Company will achieve sales growth or become profitable on a quarterly or annual basis, if at all, or that its growth, if any, will be consistent with predictions by securities analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success will depend on its ability to obtain patent protection for its products and processes, to preserve its trade secrets and proprietary technology and to operate without infringing upon the patents or proprietary rights of third parties. On May 28, 1996, Origin MedSystems, Inc., ("Origin"), a unit of the Guidant Corporation and a competitor of the Company, filed an action against GSI in the United States District Court for the 14 Northern District of California, alleging patent infringement of its U.S. Patent No. 5,520,609 entitled "Apparatus and Methods for Peritoneal Retraction." On April 20, 1998 an order in GSI's favor in this case was filed by the Court granting GSI's Motion for Summary Judgment of Unenforceability by Reason of Inequitable Conduct in obtaining Patent No. 5,520,609. The Company expects this decision to be appealed. In June 1996, GSI filed an action against Origin in the U.S. District Court for the Northern District of California alleging patent infringement of its patent for a method of tissue plane dissection using balloon systems. In addition, on September 26, 1997, the Company filed another action against Origin alleging patent infringement of its patent for a method of serial inflation of tissue dissectors. A decision against the Company in any of these actions could have a material adverse effect on the Company's business, financial condition and results of operations. One of the patent applications filed by the Company, which is directed to a surgical method using balloon dissection technology, has been placed in interference with a patent application filed by Origin. The Company believes that the inventor named in its patent application was the first to invent this subject matter, and has asserted that the Origin patent application was filed after a disclosure made by such inventor to employees of Origin. Origin takes a contrary position. This interference is presently pending in the United States Patent and Trademark Office ("USPTO") and, as permitted by the rules of the USPTO, has been referred to an arbitrator for completion of the interference proceeding. A decision is expected in this interference proceeding in calendar year 1998. Failure of the Company to prevail in such interference proceeding could have a material adverse effect on the Company's business, financial condition and results of operations. Patent interference and infringement involve complex legal and factual issues and are highly uncertain, and there can be no assurance that any conclusion reached by the Company regarding patent interference or infringement will be consistent with the resolution of such issue by a court or the USPTO. In the event the Company's products are found to infringe patents held by competitors, there can be no assurance that the Company will be able to successfully modify its products to avoid infringement, or that any modified products will be commercially successful. Failure in such event to either develop a commercially successful alternative or obtain a license to such patent on commercially reasonable terms could have a material adverse effect on the Company's business, financial condition and results of operations. As discussed above, the Company is defending itself, and may in the future have to defend itself, against allegations of infringement of third-party patents. Patent litigation is expensive, requires extensive management time, and could subject the Company to significant liabilities, require disputed rights to be licensed from third parties or require the Company to cease selling its products. The validity and breadth of claims in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. No assurance can be given that any patents based on pending patent applications or any future patent applications will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to the Company, that any of the Company's patents or patents to which it has licensed rights will be held valid under current challenges or if subsequently challenged or that persons or entities in addition to Origin will not claim rights in or ownership of the patents and other proprietary rights held or licensed by the Company or that the Company's existing patents will cover the Company's future products. Furthermore, there can be no assurance that others have not developed or will not develop similar products, duplicate any of the Company's products or design around any patents issued to or licensed by the Company or that may be 15 issued in the future to the Company. Since patent applications in the United States are maintained in secrecy until patents issue, the Company also cannot be certain that others did not first file applications for inventions covered by the Company's pending patent applications, nor can the Company be certain that it will not infringe any patents that may issue to others on such applications. Legislation has recently been enacted in Congress, the effect of which tends to immunize physicians and their employers from liability for alleged infringement of patent claims directed to medical procedures. The patent laws of European and certain other foreign countries generally do not allow for the issuance of patents for methods of surgery on the human body. Accordingly, the ability of the Company to gain foreign patent protection for its methods of tissue dissection may be significantly limited. As a result, there can be no assurance that the Company will be able to develop a patent portfolio in Europe or that the scope of any patent protection will provide competitive advantages to the Company. ROYALTY PAYMENT OBLIGATIONS. The Company has acquired a significant number of patent rights from third parties, including rights that apply to the Company's current balloon dissection systems. The Company has historically paid and is obligated to pay in the future to such third parties royalties equal to 4% of sales of such products. The Company has also acquired patent rights under royalty-bearing agreements with respect to certain surgical instruments. The payment of such royalty amounts will have an adverse impact on the Company's gross profit and results of operations. There can be no assurance that the Company will be able to continue to satisfy such royalty payment obligations in the future, and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF ABILITY TO MANAGE GROWTH. The Company has limited experience in manufacturing, marketing and selling its products commercially. In addition, in April 1997 the Company relocated its headquarters and manufacturing operations to a new facility. Moreover, the Company has experienced rapid growth in the number of products under development, the number and amount of products manufactured, and the geographic scope of its sales. In order to augment its long-term competitive position, the Company anticipates that it will be required to make significant additional expenditures in research and development and sales and marketing. The Company's inability to manage its growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. Competition in the market for medical devices used in tissue dissection surgical procedures is intense and is expected to increase. The Company competes primarily with other producers of MIS tissue dissection instruments. Origin, a subsidiary of Guidant Corporation, and others currently compete against the Company in the development, production and marketing of MIS tissue dissection instruments and tissue dissection technology. To the extent that surgeons elect to use open surgical procedures rather than MIS, the Company also competes with producers of tissue dissection instruments used in open surgical procedures, such as blunt dissectors or graspers. A number of companies currently compete against the Company in the development, production and marketing of tissue dissection instruments and technology for open surgical procedures. In addition, the Company indirectly competes with producers of therapeutic drugs, when such drugs are used as an alternative to surgery. Many of the Company's competitors have substantially greater capital resources, name recognition and expertise in research and development, manufacturing, marketing and obtaining regulatory approvals. There can be no assurance that the Company's competitors will not succeed in 16 developing balloon dissectors or competing technologies that are more effective than products marketed by the Company or that render the Company's technology obsolete. Additionally, even if the Company's products provide performance comparable to competing products or procedures, there can be no assurance that the Company will be able to obtain necessary regulatory approvals or compete against competitors in terms of price, manufacturing, marketing and sales. Many of the alternative treatments for medical indications that can be treated by balloon dissection products and laparoscopic surgery are widely accepted in the medical community and have a long history of use. In addition, technological advances with other therapies could make such other therapies more effective or cost-effective than balloon dissectors and minimally invasive surgery, and could render the Company's technology non-competitive or obsolete. There can be no assurance that surgeons will use MIS to replace or supplement established treatments or that MIS will remain competitive with current or future treatments. The failure of surgeons to adopt MIS could have a material adverse effect on the Company's business, financial condition and results of operations. In addition to the Company's development of its balloon dissection systems, the Company has also developed surgical instruments for use in MIS. There can be no assurance that the Company's surgical instruments will successfully compete with those manufactured by other producers of such surgical instruments. The failure to achieve commercial market acceptance of such surgical instruments could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT. The Company's success will depend upon the ability of surgeons to obtain satisfactory reimbursement from healthcare payors for the Company's products. In the United States, hospitals, physicians and other healthcare providers that purchase medical devices generally rely on third-party payors, such as private health insurance plans, to reimburse all or part of the costs associated with the treatment of patients. Reimbursement in the United States for the Company's balloon dissection products is currently available from most third-party payors, including most major private health care insurance plans and Medicaid, under existing surgical procedure codes. The Company does not expect that third-party reimbursement in the United States will be available for use of its other products unless and until clearance or approval is received from the federal Food and Drug Administration (the "FDA"). If FDA clearance or approval is received, third-party reimbursement for these products will depend upon decisions by individual health maintenance organizations, private insurers and other payors. Many payors, including the federal Medicare program, pay a preset amount for the surgical facility component of a surgical procedure. This amount typically includes medical devices such as the Company's. Thus, the surgical facility or surgeon may not recover the added cost of the Company's products. In addition, managed care payors often limit coverage to surgical devices on a preapproved list or obtained from an exclusive source. If the Company's products are not on the list or are not available from the exclusive source, the facility or surgeon will need to obtain an exception from the payor or the patient will be required to pay for some or all of the cost of the Company's product. The Company believes that procedures using its balloon dissection products currently may be reimbursed in the United States under certain existing procedure codes. However, there can be no assurance that such procedure codes will remain available or that the reimbursement under these codes will be adequate. Given the efforts to control and decrease health care costs in recent years, there can be no assurance that any reimbursement will be sufficient to permit the Company to increase revenues or achieve or maintain profitability. The unavailability of third party or other adequate reimbursement could have a material adverse effect on the Company's business, financial condition and results of operations. 17 Reimbursement systems in international markets vary significantly by country, and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed health care systems that govern reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. Large-scale market acceptance of the Company's balloon dissection systems and other products will depend on the availability and level of reimbursement in international markets targeted by the Company. Currently, the Company has been informed by its international distributors that the balloon dissectors have been approved for reimbursement in many of the countries in which the Company markets its products. Obtaining reimbursement approvals can require 12 to 18 months or longer. There can be no assurance that the Company will obtain reimbursement in any country within a particular time, for a particular amount, or at all. Failure to obtain such approvals could have a material adverse effect on the Company's business, financial condition and results of operations. Regardless of the type of reimbursement system, the Company believes that surgeon advocacy of its products will be required to obtain reimbursement. Availability of reimbursement will depend on the clinical efficacy of the procedure and the utility and cost of the Company's products. There can be no assurance that surgeons will support and advocate reimbursement for use of the Company's systems for all applications intended by the Company. Failure by surgeons, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors or adverse changes in government and private third-party payors' policies toward reimbursement for procedures employing the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION. The Company's SPACEMAKER-Registered Trademark- balloon dissection systems and other products are subject to extensive and rigorous regulation by the FDA and, to varying degrees, by state and foreign regulatory agencies. Under the Federal Food, Drug, and Cosmetic Act and as amended in the Safe Medical Devices Act of 1990, the FDA regulates the pre-production design controls, clinical testing, manufacture, labeling, packaging, marketing, distribution and record keeping for medical devices, in order to ensure that medical devices distributed in the United States are safe and effective for their intended use. Prior to commercialization, a medical device generally must receive FDA and foreign regulatory clearance or approval, which can be an expensive, lengthy and uncertain process. The Company is also subject to routine inspection by the FDA and state agencies, such as the California Department of Health Services ("CDHS"), for compliance with Good Manufacturing Practice requirements, Medical Device Reporting requirements and other applicable regulations. Noncompliance with applicable requirements can result in warning letters, import detentions, fines, civil penalties, injunctions, suspensions or losses of regulatory approvals, recall or seizure of products, operating restrictions, refusal of the government to approve product export applications or allow the Company to enter into supply contracts, and criminal prosecution. Delays in receipt of, or failure to obtain, regulatory clearances and approvals, if obtained, or any failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The SPACEMAKER-Registered Trademark- I platform, SPACEMAKER-Registered Trademark- II platform, SPACEMAKER-Registered Trademark-serial platform, combined SPACEMAKER-Registered Trademark- surgical balloon dissector/expander platform and KnotMaker-TM- product each have received 510(k) clearance for use during general, endoscopic, laparoscopic and cosmetic and reconstructive surgery, either when tissue dissection is required or, with respect to the KnotMaker-TM- product, when a surgical knot for suturing is 18 required. The Company has promoted these products for surgical applications (E.G., hernia repair, treatment of stress urinary incontinence, subfascial endoscopic perforator surgery, saphenous vein harvesting, and breast augmentation and reconstruction), and may in the future promote these products for the dissection or knotmaking required for additional selected applications (E.G. a variety of orthopaedic procedures such as anterior spinal fusion, and long bone plating). For any medical device cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness of the device or that constitute a major change to the intended use of the device will require a new 510(k) submission. The Company has made modifications to its products which the Company believes do not affect the safety or effectiveness of the device or constitute a major change to the intended use and therefore do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA will agree with any of the Company's determinations not to submit a new 510(k) notice for any of these changes or will not require the Company to submit a new 510(k) notice for any of the changes made to the product. If such additional 510(k) clearances are required, there can be no assurance that the Company will obtain them on a timely basis, if at all, and delays in receipt of or failure to receive such approvals could have a material adverse effect on the Company's business, financial condition and results of operations. If the FDA requires the Company to submit a new 510(k) notice for any product modification, the Company may be prohibited from marketing the modified product until the 510(k) notice is cleared by the FDA. Sales of medical devices outside of the United States are subject to foreign regulatory requirements that vary widely from country to country. In October 1997 the Company received its CE mark certification, pursuant to the Medical Devices Directive, which enables the Company to affix CE marking on its products and continue selling its products within the European Economic Area. The Company currently relies on its international distributors for the receipt of premarket approvals and compliance with clinical trial requirements in those countries that require them, and it expects to continue to rely on distributors in those countries where the Company continues to use distributors. In the event that the Company's international distributors fail to obtain or maintain premarket approvals or compliance in foreign countries where such approvals or compliance are required, the Company may be required to cause the applicable distributor to file revised governmental notifications, cease commercial sales of its products in the applicable countries or otherwise act so as to stop any ongoing noncompliance in such countries. Any enforcement action by regulatory authorities with respect to past or any future regulatory noncompliance could have a material adverse effect on the Company's business, financial condition and results of operations. LIMITED MANUFACTURING EXPERIENCE; UNCERTAINTY REGARDING FUTURE FACILITIES. The Company has only limited experience in manufacturing its products in commercial quantities. The Company intends to scale up its production of new products and to increase its manufacturing capacity for existing and new products. However, manufacturers often encounter difficulties in scaling up production of new products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel. Difficulties experienced by the Company in manufacturing scale-up and manufacturing difficulties (including, in the event of low demand, over-capacity) could have a material adverse effect on its business, financial condition and results of operations. There can be no assurance that the Company will be successful in scaling up or that it will not experience manufacturing difficulties or product recalls in the future. 19 In April 1997, the Company relocated its headquarters and manufacturing operations to a new location. The new facility's lease comprises approximately 30,460 square feet, and the monthly rent is approximately $52,000. DEPENDENCE ON SINGLE SOURCE SUPPLIERS; LACK OF CONTRACTUAL ARRANGEMENTS. The Company currently relies upon single source suppliers for several components of its balloon dissection products, and in most cases there are no formal supply contracts. There can be no assurance that the component materials obtained from single source suppliers will continue to be available in adequate quantities or quality, if at all, or, if required, that the Company will be able to locate alternative sources of such component materials on a timely basis, if at all, to market its products. In addition, there can be no assurance that the single source suppliers will meet the Company's future requirements for timely delivery of products of sufficient quality and quantity. The failure to obtain sufficient quantities and qualities of such component materials, or the loss of any of the Company's single source suppliers, could cause a delay in GSI's ability to fulfill orders while it identifies and certifies a replacement supplier, if any, and could have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE. The Company's business exposes it to potential product liability risks or product recalls that are inherent in the design, development, manufacture and marketing of medical devices, in the event the use of the Company's products causes or is alleged to have caused adverse effects on a patient or such products are believed to be defective. The Company's products are designed to be used in certain procedures where there is a high risk of serious injury or death. Such risks will exist even with respect to those products that have received, or may in the future receive, regulatory clearance for commercial sale. As a result, there can be no assurance that the Company's product liability insurance is adequate or that such insurance coverage will continue to be available on commercially reasonable terms or at all. Particularly given the lack of data regarding the long-term results of the use of balloon dissection products, there can be no assurance the Company will avoid significant product liability claims. Consequently, a product liability claim or other claim with respect to uninsured or underinsured liabilities could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH INTERNATIONAL SALES. There were no international sales in the first quarter of fiscal 1998, $5,000 in the second quarter of fiscal 1998 and $68,000 in the third quarter of fiscal 1998. Sales outside of the United States accounted for .5% and 4% of the Company's sales in fiscal 1997 and 1996, respectively. The Company expects that international sales will represent an increasing portion of revenue in the future. The Company intends to continue to expand its sales outside of the United States and to enter additional international markets, which will require significant management attention and financial resources and subject the Company further to the risks of selling internationally. These risks include unexpected changes in regulatory requirements, tariffs and other barriers and restrictions, reduced protection for intellectual property rights, and the burdens of complying with a variety of foreign laws. In addition, because all of the Company's sales are denominated in U.S. dollars, fluctuations in the U.S. dollar could increase the price in local currencies of the Company's products in foreign markets and make the Company's products relatively more expensive than competitors' products that are denominated in local currencies. There can be no assurance that regulatory, currency and other factors will not adversely impact the Company's operations in the future or require the Company to modify its current business practices. 20 DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is dependent upon a limited number of key management and technical personnel. The loss of the services of one or more of such key employees could have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, the Company's success will be dependent upon its ability to attract and retain additional highly qualified sales, management, manufacturing and research and development personnel. The Company faces intense competition in its recruiting activities and there can be no assurance that the Company will be able to attract and/or retain qualified personnel. POTENTIAL VOLATILITY OF STOCK PRICE. The market prices of the Company's common stock and the stock of many other publicly held medical device companies have in the past been, and can in the future be expected to be, especially volatile. Announcements regarding competitive developments, product sales, clinical marketing trial results, release of reports by securities analysts, developments or disputes concerning patents or proprietary rights, regulatory developments, changes in regulatory or medical reimbursement policies, economic and other external factors, as well as period-to-period fluctuations in the Company's financial results, may have a significant impact on the market price of the Common Stock. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. YEAR 2000 COMPLIANCE. The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The "year 2000" problem is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems for the year 2000 compliance. It is anticipated that all reprogramming efforts will be completed by December 31, 1998 allowing adequate time for testing. Management believes that there will not be a material effect on the Company's earnings as a result of this compliance. Failure of key business partners or vendors to identify and correct year 2000 issues could have a material adverse effect on the Company's operations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 28, 1996, Origin MedSystems, Inc., ("Origin"), a unit of the Guidant Corporation and a competitor of the Company, filed an action against GSI in the United States District Court for the Northern District of California, alleging patent infringement of its U.S. Patent No. 5,520,609 entitled "Apparatus and Methods for Peritoneal Retraction." On April 20, 1998 an order in GSI's favor in this case was filed by the Court granting GSI's Motion for Summary Judgment of Unenforceability by Reason of Inequitable Conduct in obtaining Patent No. 5,520,609. The Company expects this decision to be appealed. In June, 1996, GSI filed a claim against Origin in the United States District Court for the Northern District of California, alleging patent infringement of its patent for a method of tissue plane dissection using balloon systems. In addition, on September 26, 1997, the Company filed another action against Origin alleging patent infringement of its patent for a method of serial inflation of tissue dissectors. A decision against the Company in any of these actions would have a material adverse effect on the Company's business, financial condition and results of operations. One of the patent applications 21 filed by the Company, which is directed to a surgical method using balloon dissection technology, has been placed in interference with a patent application filed by Origin. The Company believes that the inventor named in its patent application was the first to invent this subject matter, and has asserted that the Origin patent application was filed after a disclosure made by such inventor to employees of Origin. Origin takes a contrary position. This interference is presently pending in the United States Patent and Trademark Office ("USPTO") and, as permitted by the rules of the USPTO, has been referred to an arbitrator for completion of the interference proceeding. A decision is expected in this interference proceeding in calendar year 1998, and, while the Company believes it will be successful in this interference proceeding, there can be no assurance of such success. Failure of the Company to prevail in such interference proceeding or in either of the lawsuits described above would have a material adverse effect on the Company's business, financial condition and results of operations. From time to time the Company may be exposed to litigation arising out of its products or operations. The Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company, except for the patent interference and infringement proceedings discussed herein. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In connection with its initial public offering in 1996, the Company filed a Registration Statement on Form S-1, SEC File No. 333-02774 (the "REGISTRATION STATEMENT"), which was declared effective by the Commission on May 9, 1996. Pursuant to the Registration Statement, the Company registered and sold 3,450,000 shares of its Common Stock, $0.001 par value per share, for its own account. The offering commenced on May 10, 1996 and terminated when all of the registered shares had been sold. The aggregate offering price of the registered shares was $51,750,000. The managing underwriters of the offering were Cowen & Company and UBS Securities LLC. From May 10, 1996 to March 31, 1998, the Company incurred the following expenses in connection with the offering: Underwriting discounts and commissions $3,622,500 Other expenses $1,187,025 ---------- Total Expenses $4,809,525
All of such expenses were direct or indirect payments to others. The net offering proceeds to the Company after deducting the total expenses above were $46,940,475. From May 10, 1996 to March 31, 1998, the Company used such net offering proceeds, in direct or indirect payments to others, as follows: Construction of plant, building and facilities $1,192,238 Purchase and installment of machinery and equipment $1,241,544 Repayment of indebtedness $806,460 Working capital $28,853,554 ----------- Total $32,093,796
This use of proceeds does not represent a material change in the use of proceeds described in the prospectus of the Registration Statement. 22 ITEM 3. DEFAULTS IN SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Description ------- ----------- 10.23 Form of Change of Control Agreement between the Company and executive officers dated January 20, 1998. 10.24* Termination, Release and Distribution Agreement between the Company and Ethicon Endo-Surgery, Inc. dated February 23, 1998. 27.1 Financial Data Schedule
* Confidential Treatment requested. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended March 31, 1998. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAL SURGICAL INNOVATIONS, INC. By: /s/ STEPHEN J. BONELLI Stephen J. Bonelli Vice President, Finance and Administration Principal and Chief Financial Officer Date: May 14, 1998 24 EX-10.23 2 EXHIBIT 10.23 EXHIBIT 10.23 CHANGE OF CONTROL AGREEMENT This Change of Control Agreement (the "Agreement") is made and entered into effective as of January 20, 1998, by and between [NAME] (the "Employee") and General Surgical Innovations, Inc., a California corporation (the "Company"). RECITALS A. It is expected that another company or other entity may from time to time consider the possibility of acquiring the Company or that a change in control may otherwise occur, with or without the approval of the Company's Board of Directors (the "Board"). The Board recognizes that such consideration can be a distraction to the Employee, an executive corporate officer of the Company, and can cause the Employee to consider alternative employment opportunities. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is in the best interests of the Company and its shareholders to provide the Employee with an incentive to continue his or her employment with the Company. C. The Board believes that it is imperative to provide the Employee with certain benefits upon a Change of Control and, under certain circumstances, upon termination of the Employee's employment in connection with a Change of Control, which benefits are intended to provide the Employee with financial security and provide sufficient income and encouragement to the Employee to remain with the Company notwithstanding the possibility of a Change of Control. D. To accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided in this Agreement. E. Certain capitalized terms used in the Agreement are defined in Section 4 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Company, the parties agree as follows: 1. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge that the Employee's employment is and shall continue to be at-will, as defined under applicable law. If the Employee's employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, the Employee shall not be entitled to any payments or benefits, other than as provided by this Agreement, or as may otherwise be available in accordance with the terms of the Employee's offer letter from the Company dated (the "Offer Letter") and the Company's established employee plans and written policies at the time of termination. The terms of this Agreement shall terminate upon the earlier of (i) the date on which Employee ceases to be employed as an executive corporate officer of the Company, other than as a result of an involuntary termination by the Company without cause, (ii) the date that all obligations of the parties hereunder have been satisfied, or (iii) two (2) years after a Change of Control. A termination of the terms of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 2. STOCK OPTIONS AND RESTRICTED STOCK. (a) EFFECTIVE DATE OF CHANGE OF CONTROL. Subject to Sections 5 and 6 below, in the event of a Change of Control and regardless of whether the Employee's employment with the Company is terminated in connection with the Change of Control, each stock option granted for the acquisition of the Company's securities and all of the shares of Common Stock that are subject to the terms of a Restricted Stock Purchase Agreement ("Restricted Stock") held by the Employee shall become vested on the effective date of the transaction as to fifty percent (50%) of the options and Restricted Stock, respectively, that have not otherwise vested as the date of such Change of Control. Each stock option shall be exercisable to the extent so vested in accordance with the provisions of the Option Agreement and Plan pursuant to which such option was granted, and each share of Restricted Stock shall be freely transferable to the extent so vested in accordance with the provisions of the Stock Purchase Agreement pursuant to which such stock was purchased by Employee. (b) SUBSEQUENT VESTING. Subject to Sections 5 and 6 below, assuming the Employee remains employed by the Company (or a successor company) after the Change in Control, the remaining fifty percent (50%) of the stock options and Restricted Stock not vested as of the date of the Change of Control shall vest as follows: (i) 25% of the stock options and Restricted Stock, respectively, on the date twelve (12) months after the date of the Change of Control, and (ii) 25% of the stock options and Restricted Stock, respectively, on the date eighteen (18) months after the date of the Change of Control. 3. CHANGE OF CONTROL. (a) TERMINATION FOLLOWING A CHANGE OF CONTROL. Subject to Section 5 below, if the Employee's employment with the Company is terminated at any time within two (2) years after a Change of Control, then the Employee shall be entitled to receive severance benefits as follows: -2- (i) VOLUNTARY RESIGNATION. If the Employee voluntarily resigns from the Company (other than as an Involuntary Termination (as defined below)) or if the Company terminates the Employee's employment for Cause (as defined below), then the Employee shall not be entitled to receive severance payments. The Employee's benefits will be terminated under the terms of the offer letter, if applicable, and the Company's then-existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination or as otherwise determined by the Board of Directors of the Company. (ii) INVOLUNTARY TERMINATION. If the Employee's employment is terminated as a result of an Involuntary Termination other than for Cause, the Employee shall be entitled to receive the following benefits: (a) severance payments during the period from the date of the Employee's termination until the date twelve (12) months after the effective date of the termination (the "Severance Period") equal to the salary that the Employee was receiving immediately prior to the Change of Control, which payments shall be paid during the Severance Period in accordance with the Company's standard payroll practices; (b) a pro-rated amount of the Employee's "target bonus" for the fiscal year in which the termination occurs, based on the number of months such Employee was employed during the fiscal year in which termination occurs, with such payment being made on the termination date, PROVIDED, HOWEVER, that if the "target bonus" has not yet been determined for the fiscal year in which the termination occurs, then Employee shall receive such pro-rated amount based on such Employee's bonus actually received, if any, for the prior fiscal year; (c) continuation of all health and life insurance benefits through the end of the Severance Period (or, if earlier, until the date on which comparable coverage is made available by a new employer) substantially identical in level and cost to those to which the Employee was entitled immediately prior to the Change of Control, PROVIDED, however, that if the benefits available to Officers of the Company (or successor corporation) are changed after the Employee's termination date, then the Employee's benefits shall be continued at the new level and cost; (d) full and immediate vesting of each unvested stock option granted for the Company's securities and each share of Restricted Stock held by the Employee on the date of termination so that each such option shall be exercisable in full on the termination date in accordance with the provisions of the Option Agreement and Plan pursuant to which such option was granted, and each such share of Restricted Stock shall be freely transferable to the extent so vested in accordance with the provisions of the Stock Purchase Agreement pursuant to which such stock was purchased by Employee; and (e) forgiveness of the principal and accrued interest on any loans outstanding that were executed by Employee in connection with the purchase of shares of the Company's Common Stock. -3- For purposes of this Agreement, the term "target bonus" shall mean the Employee's base salary immediately prior to the Change of Control multiplied by that percentage of such base salary that is prescribed by the Company under its Management Bonus Program as the percentage of such base salary payable to the Employee as a bonus if the Company pays bonuses at one-hundred percent (100%) of its operating plan. (iii) INVOLUNTARY TERMINATION FOR CAUSE. If the Employee's employment is terminated for Cause, then the Employee shall not be entitled to receive severance payments. The Employee's benefits will be terminated under the Company's then-existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination or as otherwise determined by the Board of Directors of the Company. (b) TERMINATION APART FROM A CHANGE OF CONTROL. In the event the Employee's employment terminates for any reason, either prior to the occurrence of a Change of Control or after the two (2) year period following the effective date of a Change of Control, then the Employee shall not be entitled to receive any severance payments under this Agreement. The Employee's benefits will be terminated under the terms of the Offer Letter, if applicable, and the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of termination or as otherwise determined by the Board of Directors of the Company. 4. DEFINITION OF TERMS. The following terms referred to in this Agreement shall have the following meanings: (a) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of the following events: (i) OWNERSHIP. Any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities WITHOUT the approval of the Board of Directors of the Company, PROVIDED, however, that this Section 4(a)(i) shall not apply to the share holdings of Thomas J. Fogarty as a result of his being, at any date, the Beneficial Owner of up to an aggregate of 20% of the total outstanding Common Stock of the Company, plus that number of shares that he is permitted to purchase in accordance with the provisions of any plan, arrangement, agreement or transaction approved by the Board of Directors of the Company or any committee of the Board of Directors; or (ii) MERGER/SALE OF ASSETS. A merger or consolidation of the Company whether or not approved by the Board of Directors of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company -4- approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; or (iii) CHANGE IN BOARD COMPOSITION. A change in the composition of the Board of Directors of the Company, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of January [20], 1998 or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company). (b) CAUSE. "Cause" shall mean (i) gross negligence or willful misconduct in the performance of the Employee's duties to the Company where such gross negligence or willful misconduct has resulted or is likely to result in substantial and material damage to the Company or its subsidiaries, (ii) repeated unexplained or unjustified absence from the Company, (iii) a material and willful violation of any federal or state law; (iv) commission of any act of fraud with respect to the Company; or (v) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company, in each case as determined in good faith by the Board of Directors of the Company. (c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall include any termination by the Company other than for Cause and the Employee's voluntary termination, upon 30 days prior written notice to the Company, following (i) a material reduction or change in job duties, responsibilities and requirements inconsistent with the Employee's position with the Company and the Employee's prior duties, responsibilities and requirements; (ii) any reduction of the Employee's base compensation (other than in connection with a general decrease in base salaries for most officers of the Company and any successor corporation); or (iii) the Employee's refusal to relocate to a facility or location more than 50 miles from the Company's current location. 5. LIMITATION ON PAYMENTS. In the event that the severance and other benefits provided for in this Agreement to the Employee (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee's severance benefits under Sections 2(a), 2(b) and 3(a)(ii) shall be payable either: (a) in full, or (b) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis, of the greatest amount of severance benefits under Sections 2(a), 2(b) and -5- 3(a)(ii), notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 5 shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. 6. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by the Board, upon consultation with Company management and the Company's independent auditors, that the enforcement of any Section of this Agreement, including, but not limited to, Sections 2 and 3(a)(ii) hereof, which allows for the acceleration of vesting of stock options granted for the Company's securities and shares of Restricted Stock held by the Employee upon the effective date of a Change of Control would preclude accounting for any proposed business combination of the Company involving a Change of Control as a pooling of interests, and the Board otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then any such Section of this Agreement shall be null and void. For purposes of this Section 6, the Board's determination shall require the unanimous approval of the non-employee Board members. 7. SUCCESSORS. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. The terms of this Agreement and all of the Employee's rights hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. NOTICE. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. Mailed notices to the Employee shall be addressed to the Employee at the home address which the Employee most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. -6- 9. MISCELLANEOUS PROVISIONS. (a) NO DUTY TO MITIGATE. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor, except as otherwise provided in this Agreement, shall any such payment be reduced by any earnings that the Employee may receive from any other source. (b) WAIVER. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) WHOLE AGREEMENT. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement supersedes any agreement of the same title and concerning similar subject matter dated prior to the date of this Agreement, and by execution of this Agreement both parties agree that any such predecessor agreement shall be deemed null and void. (d) CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without reference to conflict of laws provisions. (e) SEVERABILITY. If any term or provision of this Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining terms and provisions of this Agreement or the application of such terms and provisions to circumstances other than those as to which it is held invalid or unenforceable, and a suitable and equitable term or provision shall be substituted therefor to carry out, insofar as may be valid and enforceable, the intent and purpose of the invalid or unenforceable term or provision. (f) ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement may be settled at the option of either party by binding arbitration in the County of Santa Clara, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Punitive damages shall not be awarded. (g) LEGAL FEES AND EXPENSES. The parties shall each bear their own expenses, legal fees and other fees incurred in connection with this Agreement. -7- (h) NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (h) shall be void. (i) EMPLOYMENT TAXES. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (j) ASSIGNMENT BY COMPANY. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (k) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. [Signature page follow) -8- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. GENERAL SURGICAL INNOVATIONS, INC. [NAME] By:________________________ By:___________________________ Title:_____________________ Title:________________________ -9- EX-10.24 3 EXHIBIT 10.24 EXHIBIT 10.24 TERMINATION, RELEASE AND DISTRIBUTION AGREEMENT This Termination, Release and Distribution Agreement (the "Agreement") is entered into as of February 20, 1998, by and between General Surgical Innovations, Inc., a corporation organized under the laws of California, having a business address at 10460 Bubb Road, Cupertino, California 95014, United States of America, ("GSI") and Ethicon Endo-Surgery, Inc., a corporation organized under the laws of the state of Ohio, having a business address at 4545 Creek Road, Cincinnati, Ohio 45242 ("Ethicon"). A. On or about December 20, 1996, GSI and Ethicon entered into an OEM Supply Agreement (Expanded Field) (the "Expanded Agreement"). The Expanded Agreement superseded and replaced an earlier OEM Supply Agreement between the parties dated June 28, 1996 (the "Original Agreement") (the Original Agreement and the Expanded Agreement together, the "Prior Agreements"). B. The parties now desire to supersede and replace the Expanded Agreement with a non-exclusive distribution agreement. C. GSI desires to appoint Ethicon to promote, sell and distribute certain GSI products, worldwide (the "Territory") in accordance with the terms and conditions stated herein. AGREEMENT A. IN CONSIDERATION OF THE FOREGOING, and the mutual agreements contained herein, the sufficiency of which is acknowledged by both parties, it is mutually agreed by and between the parties as follows: 1. REPLACE AND SUPERSEDE. (a) Upon execution, this Distribution Agreement will replace and supersede the Expanded Agreement which Agreement itself replaced and superseded the Original Agreement. (b) GSI and Ethicon, each being represented by Counsel, in consideration of the mutual premises and covenants contained herein, the sufficiency of which are hereby acknowledged, do hereby mutually and unconditionally release and forever discharge each other, and their respective agents, employees, officers, directors, shareholders, partners, affiliates, successors and assigns, from any and all actions, causes of action, claims, costs, damages, demands, expenses (including, without limitation, attorneys fees and litigation costs), liabilities and obligations (collectively, the "Claims") which either party had, now has or may hereafter have against the other party arising out of or in any way connected with the Prior Agreements or the termination of the Prior Agreements: provided, however, that Article 7 of the * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -10- Expanded Agreement shall continue to apply in respect to any claims made by third parties against the parties in respect of any products delivered under the Prior Agreements. The foregoing mutual and general release shall apply, without limitation, to all Claims of any kind or nature, past, present and future, whether or not known, unknown, suspected, accrued, liquidated, fixed or contingent and it constitutes a mutual and general release of the parties with respect to the Prior Agreements. Each of the parties acknowledge that they have been advised by legal counsel and are familiar with the provisions of California Civil Code Section 1542, which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." GSI and Ethicon, being aware of the said code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect. The parties further acknowledge and agree that these waivers of rights under Section 1542 of the Civil Code have been separately bargained for and are essential and material terms of this Agreement and, without such waivers, the parties would not have entered into this Agreement. 2. GRANT OF DISTRIBUTORSHIP. (a) APPOINTMENT. GSI appoints Ethicon as a nonexclusive distributor in the Territory for the term of the Agreement to promote, sell, market and distribute the Products set forth in Exhibit A (the "Products"), in the fields of hernia repair and urinary stress incontinence (USI). Ethicon agrees to refrain from promoting, selling, marketing and distributing hernia or urinary stress incontinence balloons similar to the Products from any source other than GSI as long as this agreement is in effect. It is expressly acknowledged and agreed that the provisions of this Section 2(a) shall not survive termination of this Agreement. (b) PLACEMENT OF ORDERS. On or before the first day of the month prior to the next calendar quarter, EES will place a non-cancelable purchase order with GSI covering that next calendar quarter. During the term of this Agreement, GSI shall supply Ethicon with those quantities of products as ordered by Ethicon and Ethicon will purchase from GSI all Products so ordered by it pursuant to this Agreement, it being understood that, except for the non-cancelable purchase orders previously placed by Ethicon, nothing contained herein shall require Ethicon to purchase any Products under this Agreement. GSI will use reasonable commercial efforts to fulfill the purchase orders of Ethicon in chronological order as placed and based on urgency needs as advised by Ethicon; provided, however, that GSI shall not be held liable for any amount of purchase order greater than one hundred and fifty percent (150%) of the purchase orders made in the immediately preceding calendar quarter where an order was placed and, in meeting any such order, GSI shall not be obligated to fill more than twenty-five percent of such purchase order in the first month of the applicable quarter and not more than thirty three percent of such purchase order in the second month of the applicable quarter. In the event that * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -11- GSI shall fail to meet its delivery obligations under this Agreement within a period of 30 days after a mutually agreed upon delivery date, then, in addition to any other remedies which Ethicon may have under this Agreement, Ethicon shall be permitted (with no obligation or liability to GSI) to obtain the Products in such purchase order from another source to satisfy the terms of this order. (c) DIRECT SALES. GSI shall have the right to promote, market and sell the Products in the Territory directly itself, or indirectly through affiliates, agents, distributors or otherwise. (d) SUBSTITUTE PRODUCTS. If GSI offers for sale a product that is in an alternative, improvement, replacement, substitute or addition to a Product, an "Improvement," during the term of this Agreement, Ethicon will have the option of evaluating the Improvement and, subject to reaching agreement with GSI as to a new price and other terms, may amend this Agreement to substitute or add the Improvements as a Product; provided, however, that if a third party funds a change to a product, or if GSI relabels or repackages a Product with a new trademark or new packaging or labeling then such product shall not be considered an Improvement for purpose of this Section 2(d). 3. PRICES; PURCHASE ORDERS. (a) PRICES. Prices to Ethicon shall be in United States dollars and initially as set forth in Exhibit A. Changes in price may be made by GSI after 1998, subject to ninety (90) day's notice in advance to Ethicon. However, GSI agrees that [* * *]. All prices are calculated F.O.B. GSI's distribution site, currently located in Cupertino, California. Customs, duties and charges, if any, shall be borne by Ethicon. All import or export licenses, approvals or both shall be obtained by Ethicon at its cost. Prices to Ethicon do not include any federal, state or local taxes that may be applicable to the Products. When GSI has the legal obligation to collect such taxes, the appropriate amount shall be added to Ethicon's invoice and paid by Ethicon unless Ethicon provides GSI with a valid tax exemption certificate authorized by the appropriate taxing authority. In no event will [* * *]. If GSI [* * *] the [* * *] effective as of the date [* * *]. (b) PURCHASE ORDERS. Pursuant to this Agreement Ethicon will submit purchase orders for the Products ("Purchase Orders") which include terms and conditions as set forth in Exhibit B: "Purchase Order Terms and Conditions." The Purchase Order Terms and Conditions are hereby incorporated into and are part of this Agreement, except that (i) Section 7 regarding branding and adulterated orders and compliance with all applicable laws, rules and regulations shall be deemed by the parties to extend to the equivalent rules of any foreign jurisdiction in which the products are sold (ii) the last sentence of Section 3 does not apply and (iii) Section 26 does not apply. The terms contained within this Agreement will control over the terms contained within "Purchase Order Terms and Conditions" in the event of inconsistencies between the two documents. * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -12- (c) REJECT/RETURN (i) Purchase shall inspect all products promptly upon receipt thereof and may reject any product that fails in any material way to meet the applicable mutually agreed upon specifications or any requirements specified in the purchase order description. Any product not properly rejected within thirty (30) days of receipt of that product by Purchaser (the "Rejection Period") shall be deemed accepted. To reject a Product, Purchase shall, within the Rejection Period, notify GSI of its rejection and request a Material Return Authorization ("MRA") number. GSI shall provide the MRA number to Purchaser within seven (7) days of receipt of the request. Within seven (7) days of receipt of the MRA number, Purchaser shall return to GSI the rejected product, freight prepaid, in its original shipping carton with the MRA number displayed on the outside of the carton. GSI reserves the right to refuse to accept any rejected products that do not bear an MRA number on the outside of the carton. As promptly as possible, but not later than thirty (30) working days after receipt of properly rejected products, GSI shall, at its expense, replace the products. GSI shall pay the shipping charges back to Purchaser for property rejected products; otherwise, Purchaser shall be responsible for the shipping charges. (ii) After the Rejection Period, Purchaser may not return a product to GSI for any reason without GSI's prior written consent. Purchaser shall be responsible for all shipping charges for returns after the rejection period. (d) STANDARD LIMITED WARRANTY. Ethicon shall pass on to its customers GSI's standard limited warranty for Products including the limitations set forth in Sections 3(e) below. This warranty is contingent upon proper use of a Product in the application for which such Product was intended and does not cover Products that were modified without GSI's approval, that have expired or that were subjected by the customer to unusual physical, chemical or electrical stress. (e) NO OTHER WARRANTY. EXCEPT FOR THE EXPRESS LIMITED WARRANTY SET FORTH ABOVE AND THE WARRANTIES AND GUARANTEES SET FORTH IN THE PURCHASE ORDER, GSI GRANTS NO WARRANTIES FOR THE PRODUCTS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND GSI SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF QUALITY, WARRANTY OF MERCHANTABILITY OR WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY, WHETHER CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. (f) THIRD PARTY CLAIMS. Article 7 of the Expanded Agreement is hereby incorporated into and becomes part of this Agreement in respect to any claims made by third parties against the parties in connection with any Products delivered under this Agreement. 4. PAYMENT. Full payment of Ethicon's purchase price (including any freight, taxes or other applicable costs initially paid by GSI but to be borne by Ethicon) shall be in United States of America dollars. All exchange, interest, banking, collection, and other charges shall be at Ethicon's expense. Payment terms shall be net forty-five (45) days upon receipt of the * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -13- Product, and payment shall be made by wire transfer, check or other instrument approved by GSI. Any invoiced amount not paid when due shall be subject to a service charge at the lower of the rate of one and one-half percent (1.5%) per month or the maximum rate permitted by law. If Ethicon fails to make any payment to GSI when due, GSI may, without affecting its rights under this Agreement, cancel or delay any future shipments to. 5. TERM AND TERMINATION. (a) TERMINATION FOR CONVENIENCE. This Agreement may be terminated at any time after the date set forth on the first page of this agreement by either party by giving the other party written notice thirty (30) days in advance. (b) EFFECT OF TERMINATION; LIMITATION OF LIABILITY. In the event of termination by either party in accordance with any of the provisions of this Agreement, neither party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of GSI or Ethicon. Termination shall not, however, relieve either party of obligations incurred prior to the termination. Ethicon shall be entitled to receive from GSI Products necessary to fulfill valid and binding purchase orders accepted by GSI prior to notification of termination of this Agreement. GSI shall be entitled to receive from ETHICON payments necessary to fulfill valid and binding purchase orders submitted by Ethicon prior to notification of termination of this Agreement. 6. NOTICES. (a) ADDRESSES. All notices given under this Agreement shall be sufficient if in writing and delivered by messenger or sent by postage prepaid mail or by facsimile to the address of the recipients set forth below: In the case of GSI: To: General Surgical Innovations, Inc. 10460 Bubb Road Cupertino, California 95014 Attn: President Fax: (408) 863-1101 With a copy to: Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Attn: Mark E. Weeks Fax: (650) 233-8386 * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -14- In the Case of Ethicon: To: Ethicon Endo-Surgery, Inc. 4545 Creek Road Cincinnati, Ohio 45242 Attention: President Fax: (513) 483-8945 With a copy to: Office of General Counsel Johnson & Johnson One Johnson & Johnson Plaza New Brunswick, New Jersey 08933 Fax: (732) 524-2788 (b) DELIVERY. Notice shall be effective when received by or otherwise known to the receipt or its legal representative. This provision is not intended to be exclusive and any notice actually received shall be sufficient. 7. MISCELLANEOUS. (a) COUNTERPARTS. This agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (b) PARTIAL INVALIDITY. If any provision of this Agreement, including any provision set forth in the "Purchase Order Terms and Conditions" attached as Exhibit B hereto, is held to be invalid, then the remaining provisions shall nevertheless remain in full force and effect. The parties agree to renegotiate in good faith any term held invalid and to be bound by the mutually agreed substitute provision. (c) ASSIGNABILITY. Neither party shall transfer or assign this Agreement, in whole or in part, without the prior written consent of the other party (which shall not be unreasonably withheld); except that either party may, without such consent, assign this Agreement to an affiliate that directly controls, is controlled by, or is under common control with a party; provided such affiliate has the equivalent resources and capacity to carry out the assignee's obligations under this Agreement, and the assigning party remains responsible for all its obligations under this Agreement. (d) PUBLICITY. If a party decides to make a written press release relating to this Agreement, or to any amendment or performances under this Agreement, it will give the other party, and the other party's general counsel, forty-eight (48) hours advance written notice, or any shorter notice period otherwise required by law, of the text of the announcement so that the other party will have an opportunity to comment upon the announcement. * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -15- (e) ENTIRE AGREEMENT. This Agreement and the exhibits hereto which form a part hereof constitute the entire understanding of the parties with respect to its subject matter and supersedes all prior negotiations, agreements and understandings among the parties, including without limitation the Prior Agreements, with respect to its subject matter. There are no representations, promises, warranties, covenants or understandings other than those expressly set forth herein or therein. This Agreement may be modified or amended only by a writing signed by the party against whom such modification or amendment is asserted; provoked, that the terms of any purchase order, invoice or similar document used to implement this Agreement shall not modify or amend but shall be subject to this Agreement. (f) RELATIONSHIP OF PARTIES. The parties hereto are entering into this Agreement as independent contractors, and nothing herein is intended or shall be construed to create between the parties a relationship of principal and agent, partners, joint venturers or employer and employee. Neither party shall hold itself out to others to bind or commit the other party in any manner inconsistent with the foregoing provisions of this Article. (g) NOTIFICATION OF REGULATORY AGENCY CONTACT. Parties agree that if either of them is contacted by a regulatory agency, whether in the US or outside the US, in connection with the Products, such contacted party shall immediately notify the other party of the form and content of such contact, including delivery of a copy of any written material received from the regulatory agency. This provision shall survive termination of this agreement. (h) NOTIFICATION OF ANTICIPATED CHANGE. GSI provide Ethicon with written notice at least 60 days prior to any change of the form, fit, function, components or material of the Products, the site at which the Products are manufactured, packaged, or sterilized or the process by which the Products are manufactured, packaged, sterilized, or labeled when any such change could potentially affect the safety, efficacy, qualify, or stability of the Products. (i) NOTIFICATION OF CLAIMS. Ethicon will notify GSI of any adverse reaction, malfunction, injury or other similar claims with respect to the GSI Products of which they become aware. Ethicon shall make reasonable efforts to provide copies of its customer inquiries related to GSI Products as well as the results of any related investigation including returned product. (j) MAINTENANCE OF RECORDS. The parties shall maintain adequate records concerning traceability of GSI Products, and shall cooperate with each other in the event that any recall, field corrective action, or the like in circumstances occurring related to any GSI Products. (k) COMPLIANCE WITH LAWS AND REGULATIONS. Both parties agree to comply with applicable state, federal and international regulatory requirements in connection with their status as, respectively, a medical device manufacturer or medical device distributor. (l) SHELF LIFE EXTENSION. GSI shall cooperate with Ethicon in an effort to extend the shelf-life of GSI "Products" in Ethicon's inventory up to a total of three (3) years GSI's obligation to cooperate with Ethicon shall survive termination of this agreement for any reason, including, but not limited, to termination under Section 5 above. * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -16- IN WITNESS WHEREOF, this Distribution Agreement has been executed as of the day and year first above written. GENERAL SURGICAL INNOVATIONS, INC. ETHICON ENDO-SURGERY, INC. By: /s/ Gregory D. Casciaro By: /s/ Robert Salerno ------------------------------- ----------------------------- Print Name: Gregory D. Casciaro Print Name: Robert Salerno ----------------------- --------------------- Title: President & C.O.O. Title: VP Business Development ---------------------------- -------------------------- * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. -17- EXHIBIT A: TRANSFER PRICES
PRODUCT MODEL P/N PRICE Spacemaker, Distal 900 DBD-900 99-1140-05 [***] Spacemaker, Distal 1500 DBD-1500 99-1141-05 [***] Spacemaker II, w/Cannula VSM-2900 99-1201-05 [***] Spacemaker II, w/o Cannula VSM-2900 99-1202-05 [***] Air Bulb, 2pk. AB-050 99-1301-05 [***] Spacemaker II, 650 cc. w/Cannula VSM-2950 99-1212-05 [***] Spacemaker II, 650 cc. w/o Cannula VSM-2950-01 99-1203-05 [***] 5mm Reducer, 10pk CR-050 99-1300-05 [***]
* Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. EXHIBIT B: PURCHASE ORDER TERMS AND CONDITIONS This agreement to conditions of Purchase is by and between GSI (hereinafter referred to as "Seller") and ETHICON ENDO-SURGERY, INC. having a business address at 4545 Creek Road, Cincinnati, Ohio 45242 (hereinafter referred to as "Purchaser"). 1. INSPECTION. All goods are subject to final inspection and acceptance by Purchaser at destination notwithstanding any payment or prior inspection at source. Final inspection will be made within a reasonable time after receipt of goods. 2. REJECT/RETURN. Purchaser reserves the right to refuse any goods and to cancel all or any part of an order for goods not conforming to applicable specifications, drawings, samples or descriptions. Acceptance of any part of the order shall not bind Purchaser to accept future shipments of nonconforming goods, not deprive it of the right to return nonconforming goods already accepted. 3. CANCELLATION ON LATENESS. Shipments or deliveries (as specified in the order) shall be strictly in accordance with the quantities and schedule specified in the order. If at any time it appears Seller will not meet such schedule, Seller shall promptly notify Purchaser in writing of reasons for the estimated duration of the delay and, if requested by Purchaser, ship via air or other fast transportation to avoid or minimize delay to the maximum extent possible, the added cost to be borne by Seller. This is in addition to Purchaser's other remedies, such as cancellation after a reasonable time (not to exceed 30 days) for non-compliance, cover and incidental and consequential damages. 4. INVOICE. A separate invoice shall be issued in triplicate for each shipment. Unless otherwise specified in the order, no invoice shall be issued prior to shipment of goods and no payment will be made prior to receipt of goods and current invoice. Payment due dates, including discount periods, will be computed from date of receipt of goods or date of receipt of current invoice (whichever is later) to date Purchaser's check is mailed. Unless freight and other charges are itemized, any discount taken will be taken on full amount of invoice. 5. ACKNOWLEDGMENT. Seller will acknowledge receipt and acceptance of the order confirming price and arrival date by returning a counterpart of the order initialed on behalf of Seller. 6. ASSIGNMENT. This Purchaser Order shall not be assignable by Seller without the prior written consent of the Purchaser, which consent may be withheld in the sole discretion of the Purchaser. 7. NOT MISBRANDED/ADULTERATED. The Seller guarantees that no article shipped pursuant to the order is adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, or is an article which may not under the provisions of Sec. 404 or 505 of that Act be introduced into interstate commerce; that no article shipped pursuant to the order is produced in violation of any provisions of the Fair Labor Standards Act; and further guarantees full compliance with all provisions from time to time applicable of any other Federal * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. and all state and municipal laws, and agrees to defend Purchaser and hold harmless from all liability resulting from failure of such compliance. 8. QUALITY, USE FOR INTENDED PURPOSE. In accepting this purchase order, the Seller unconditionally represents and warrants, any other representation or agreement to the contrary notwithstanding, that the material supplied pursuant to the purchase order is of merchantable quality, conforms to the detailed specifications as stated on the form and is suitable for the Purchaser's intended uses and purposes in the ordinary course of his business to the extent that such intended uses and purposes are known or reasonably should be known to the Seller; and the Seller agrees to hold the Purchaser harmless against any liability, judgment, damages, loss or expense, including reasonable counsel fees, resulting from Seller's failure to meet the requirements of this condition. All warranties herein stated shall run to the Purchaser, its customers and the users of the products, or products into which they may be incorporated. 9. PATENT HOLD HARMLESS. In accepting the purchase order, the Seller agrees to hold the Purchaser harmless against any liability, judgment, damages, loss or expense, including without limitation reasonable counsel fees, resulting from any claim or any suit against the Purchaser charging misappropriation of trade secrets, breach of a confidential relationship, by the making of the purchase under the purchase order, or charging infringement of a United States or foreign patent by any product sold under the purchase order, or any element of such product, or by the use of such product, or by material resulting from such use where the use is known to the Seller. If the product listed in the purchase order is a material whose composition and ingredients are not disclosed by the Seller to the Purchaser, then the Seller's agreement to hold the Purchaser harmless, as stated in the foregoing sentence shall extend to all uses of such product for which the product is sold by the Seller, to all uses for which the product is recommended by the Seller to the Purchaser, and to all intended uses by the Purchaser which are known to the Seller. 10. COPYRIGHT MARKING. Seller agrees that any copyrightable material prepared for Purchaser shall carry on the face thereof in legible form the following copyright notice: -C- Ethicon Endo-Surgery followed by the last two digits of the year of production. 11. GOVERNMENT CEILING PRICE/NO GREATER THAN OFFERED FOR SIMILAR. The Seller in accepting the purchase order represents that the price charged is not in excess of the ceiling price, if any, established by any Government Agency nor those quoted for others for the same products and similar quantities. 12. TRANSPORTATION LIABILITY. With respect to any goods permitted to be sold F.O.B. Seller's plant, Seller agrees that in any case where freight regulations covering goods transported by common carrier establish a maximum limit on the carrier's liability for loss or damage suffered in transit, Seller will be liable to Purchaser for any loss or damage in excess of such maximum limit up to the full price of the goods. 13. COMPLETE AGREEMENT. Acceptance of the order is expressly limited to the terms hereof. If the Seller objects to any of the terms hereof, it shall notify Purchaser in writing within ten days of the date of the order, and withhold shipments of the purchase order * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. and shipment of the goods listed therein until such objection is settled by written agreement of the parties. Any oral or written acknowledgment or confirmation of this purchase order, any shipment of the goods ordered thereby, or the furnishing of any services pursuant to this purchase order, shall, notwithstanding the terms of such acknowledgment or confirmation, constitute acceptance by the Seller of each and all of the terms and conditions stated herein. The Purchaser will not be bound to any additional or different terms hereafter transmitted by Seller except by a signed consent, and will in no event be bound by silence, course of dealing, usage of the trade or any acceptance of the goods listed herein to any terms and conditions other than those stated herein. This purchase order and this document contain all the terms and conditions of the purchase agreement between Purchaser and Seller and shall constitute the complete and exclusive agreement between Seller and Purchaser, and expressly supersedes any prior or contemporaneous oral or written representation or agreement. Headings used herein are for the convenient reference of the parties and are not intended to amend, modify or limit to any extent the express terms of this agreement. No modification, amendment or waiver of any term or condition of this agreement shall be effective unless set forth in writing signed by the party against whom enforcement is sought. This agreement shall be governed by and construed in accordance with the laws of the State in which Purchaser's headquarters is located. 14. COMPLIANCE FEDERAL, STATE, MUNICIPAL NON-DISCRIMINATION LAWS. The Seller agrees to comply with the applicable provisions of any Federal or State Law and all executive orders, rules and regulations issued thereunder, whether now or hereafter in force; and, any provisions, representations or agreements required thereby to be included in the contract resulting from acceptance of the order are hereby incorporated by reference, including but not limited to, Executive Order 11246, as amended, Chapter 60 of Title 41 of the Code of Federal Regulations, as amended prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Section 60-741.1 as amended, Chapter 60 of Title 41 Code of Federal Regulations prohibiting discrimination against any employee or applicant for employment because of physical or mental handicap; and Section 60.250.4 of Chapter 60 of Title 41 Code of Federal Regulations, as amended, providing for the employment of disabled veterans and veterans of the Vietnam era. 15. OSHA REQUIREMENTS. Seller warrants that the product sold or service rendered to Purchaser shall conform to the standards and/or regulations promulgated by the U.S. Department of Labor under the Occupational Safety and Health Act of 1970 (29 U.S. Code Section 651 et seq.) ("OSHA"). In the event the product sold does not conform to the OSHA standards and/or regulations, Purchaser may return the product for correction or replacement at Seller's option and at Seller's expense. Services performed by the Seller which do not conform to the OSHA standards and/or regulations must be corrected by Seller at Seller's expense or may be corrected by Purchaser at Seller's expense in the event Seller fails to make the appropriate correction within a reasonable time. 16. INDEMNIFY PURCHASER FOR SERVICES RENDERED. In the event that the purchase order contract is accepted for services to be rendered, Seller agrees to defend, indemnify and hold harmless the Purchaser, its parents, subsidiaries and affiliates, and their * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. respective directors, officers, employees and agents from any liability, claims, causes of action or other legal action and any costs or expense arising therefrom (including without limitation reasonable attorney's fees) arising from any wrongful act or omission of the service company, its employees, contract labor, or subcontractors. 17. SMALL BUSINESS CLAUSE. The clause, "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" (as amended in a portion of Public Law 95-507), is hereby made a part of this agreement. This clause is aimed at fully utilizing minority-owned businesses where appropriate and is intended for subcontractors who offer further subcontracting opportunities. When these conditions exist, the Seller agrees to use his best efforts to carry out this policy in the award of his subcontracts to the fullest extent consistent with the efficient performance of the contract. 18. IF UNDER GOVERNMENT CONTRACTS. If the products or services covered by this Purchase Order are ordered by Purchaser under United States government contracts, Seller agrees that applicable Federal statutes and regulations applying to the Purchaser as a contractor are accepted and binding on Seller insofar as Seller may be a subcontractor. 19. FORCE MAJEURE. A party shall be excused for delays in performance or failure of performance hereunder to the extent arising from causes beyond such party's control, including without limitation strikes, wars, fire, flood, earthquake, or other Act of God. In the event of any such event or condition, the party whose performance is excused hereunder shall notify the other promptly thereof and shall make diligent efforts to perform at its earliest opportunity. During any such period of non-performance by one party, the other party shall be permitted to suspend its performance hereunder. 20. CORRESPONDENCE ADDRESS/PERSON. Any notice or other correspondence required or permitted to be provided hereunder shall be sent by first class mail, postage prepaid, directed to the attention of the Purchasing Department, at the address shown in the correspondence address designation block on the reverse of the purchase order. 21. SHIPPING TERMS. Unless otherwise specified, delivery is to be F.O.B. Purchaser's plant. If goods are to be shipped F.O.B. shipping point, and Purchaser has not designated routing, ship via cheapest way that will meet delivery date. 22. CONFIDENTIALITY. Any information supplied by Purchaser in the purchase order or in connection with this purchase order is confidential. Seller shall not use or disclose any such information or any data, designs, or other information belonging to or supplied by or on behalf of Purchaser or developed by Seller in the performance of this purchase order, except to the extent necessary to perform the terms of the purchase order and this agreement. Upon Purchaser's request such information, data, designs, or other information and any copies thereof shall be returned to Purchaser. Where Purchaser's data, designs, or other information are furnished to Seller's suppliers for procurement of supplies by Seller for use in the performance of Purchaser's orders, Seller shall insert the substance of this provision in its orders. * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. 23. PURCHASER'S PROPERTY. Unless otherwise agreed in writing, all tools, equipment or material of every description furnished to Seller by Purchaser or specifically paid for by Purchaser, and any replacement thereof, or any materials affixed or attached thereto, shall be and remain the personal property of Purchaser, and shall be safely stored separate and apart from Seller's property. Seller shall not substitute any property for Purchaser's property and shall not use such property except in filling Purchaser's orders. Such property while in Seller's custody or control shall be held at Seller's risk, shall be kept insured by Seller at Seller's expense in an amount equal to the replacement cost with loss payable to Purchaser and shall be subject to removal at Purchaser's written request, in which event Seller shall prepare such property for shipment and shall redeliver to Purchaser in the same condition as originally received by Seller, reasonable wear and tear excepted. 24. MATERIAL SAFETY DATA SHEETS. Material Safety Data Sheets are required for all items in the order. Please ship with the order or mail before shipment to the address for notice as provided above. 25. NO DRAFTS. Purchaser does not honor drafts for bills contracted. All accounts are paid by remittance through mail. 26. Any inventions, improvements, or ideas made or conceived by Seller in connection with or during the performance of services to be rendered for Purchaser shall be the property of the Purchaser. Seller, without charge to Purchaser other than reasonable payment for time involved in the event this Agreement shall have terminated, by at Purchaser's expense, shall execute, acknowledge, and deliver to Purchaser all further papers, including applications for patents, as may be necessary to enable Purchaser to publish or protect such inventions, improvements, and ideas by patent or otherwise in all countries and to vest title to said patents, inventions, improvements, and ideas in Purchaser or its nominees, their successors or assigns. Seller shall tender assistance as Purchaser may require in any patent Office proceeding or litigation involving said inventions, improvements, or ideas. Seller as part of the services to be performed below, shall keep written notebook records of its work, property witnessed for use as invention records, and shall submit such records to Purchaser when requested or at the termination of the work. ETHICON ENDO-SURGERY, INC. SELLER By: _______________________________ By: _______________________________ Title: ____________________________ Title:_____________________________ Date: _____________________________ Date:______________________________ * Material has been omitted pursuant to a request for confidential treatment. Such material has been filed separately with the Securities and Exchange Commission. EX-27.1 4 EXHIBIT 27.1
5 9-MOS JUN-30-1998 JAN-01-1998 MAR-31-1998 18,706 21,305 725 46 1,057 42,716 3,363 1,159 45,131 1,691 0 0 0 13 43,131 45,131 894 894 602 602 3,854 0 563 (2,999) 0 (2,999) 0 0 0 (2,999) (0.22) (0.22)
EX-27.2 5 EXHIBIT 27.2
5 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 28,339 21,451 873 78 700 51,801 702 454 52,767 1,733 0 0 0 13 50,461 52,767 6,165 6,165 (2,772) (2,772) 9,301 0 443 (5,465) 0 (5,465) 0 0 0 (5,465) (1.13) (1.13)
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