-----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, C78RqA52R0c50boqaG0OrL2cHr9irP7JenXZcjhPVjjcYmAc/FYdynJIXlOP3g/I sXYMZP/Tv3O4SdYnQUpVlg== 0000891618-97-004674.txt : 19971117 0000891618-97-004674.hdr.sgml : 19971117 ACCESSION NUMBER: 0000891618-97-004674 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNERDYNE INC CENTRAL INDEX KEY: 0000822084 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 870431168 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19707 FILM NUMBER: 97719741 BUSINESS ADDRESS: STREET 1: 1244 REAMWOOD AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087456010 MAIL ADDRESS: STREET 1: 1244 REAMWOOD AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 FORMER COMPANY: FORMER CONFORMED NAME: CARDIOPULMONICS INC DATE OF NAME CHANGE: 19940429 10-Q 1 FORM 10-Q, PERIOD ENDED SEPTEMBER 30, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X} Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________________ to ________________ Commission file number 0-19707 INNERDYNE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 87-0431168 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation) 1244 REAMWOOD AVENUE, SUNNYVALE, CA 94089 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 745-6010 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 [ ] The number of shares of Registrant's Common Stock issued and outstanding as of September 30, 1997 was 21,687,078. ================================================================================ 2 6 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Balance Sheets........................................................... 3 Condensed Statements of Operations................................................. 4 Condensed Statements of Cash Flows................................................. 5 Notes to Condensed Financial Statements............................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 20 PART II. OTHER INFORMATION................................................................... 21
-2- 3 INNERDYNE, INC. CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1996 1996 ASSETS (UNAUDITED) (*SEE NOTE) ------------ ------------ Current assets: Cash and cash equivalents............................ $ 6,788,802 $7,270,285 Accounts receivable.................................. 1,665,634 1,290,805 Interest and other receivables....................... 455,871 283,913 Inventory............................................ 1,265,329 1,159,098 Prepaid expenses and other........................... 150,021 151,150 ------------ ------------ Total current assets.................................... 10,325,657 10,155,251 Equipment and leasehold improvements, net............... 953,890 1,159,309 Other assets............................................ 45,695 47,020 ------------ ------------ $ 11,325,242 $ 11,361,580 ============ ============ LIABILITIES & STOCKHOLDERS EQUITY Current liabilities: Line of credit....................................... $300,000 $300,000 Current installments of long-term debt............... 297,281 223,914 Accounts payable..................................... 451,073 301,946 Accrued liabilities.................................. 1,458,784 1,146,877 ------------ ------------ Total current liabilities......................... 2,507,138 1,972,737 Long-term debt, excluding current installments.......... 577,077 629,557 Stockholders' equity: Common stock......................................... 216,861 215,420 Additional paid-in capital........................... 59,887,002 59,818,445 Accumulated deficit.................................. (51,862,836) (51,274,579) ------------ ------------ Net stockholders' equity......................... 8,241,027 8,759,286 ------------ ------------ $ 11,325,242 $ 11,361,580 ============ ============
* Condensed from audited financial statements. See accompanying notes to condensed financial statements. -3- 4 INNERDYNE, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE-MONTH PERIODS NINE-MONTH PERIODS ENDED ENDED ------------------------------- -------------------------------- SEPTEMBER 30 SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 ---- ---- ---- ---- Product, licensing and contract revenue ...... $ 4,960,477 $ 2,458,449 $ 11,606,459 $ 6,096,240 Cost of sales ................................ 1,299,201 1,178,862 3,744,314 3,098,840 Research, development, regulatory and clinical 988,175 796,490 2,545,460 1,994,888 Sales and marketing .......................... 1,648,224 1,175,667 4,411,262 3,503,442 General and administrative ................... 579,876 452,030 1,653,673 1,491,180 ------------ ------------ ------------ ------------ Total costs and expenses ............. 4,515,476 3,603,049 12,354,709 10,088,350 ------------ ------------ ------------ ------------ Operating income (loss) .............. 445,001 (1,144,600) (748,250) (3,992,110) Interest/other income, net ................... 56,200 67,160 159,993 125,782 ------------ ------------ ------------ ------------ Net income (loss) .................... $ 501,201 $ (1,077,440) $ (588,257) $ (3,866,328) ============ ============ ============ ============ Net income (loss) per share .................. $ .02 $ (.05) $ (.03) $ (.19) ============ ============ ============ ============ Weighted average shares outstanding .......... 21,678,986 21,490,659 21,651,386 19,921,131 ============ ============ ============ ============
See accompanying notes to condensed financial statements. -4- 5 INNERDYNE, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE-MONTH PERIODS ENDED ------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ---- ---- Cash flows from operating activities: Net loss............................................................... $ (588,257) $(3,866,328) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of equipment and leasehold improvements.. 455,331 413,075 Decrease (increase) in receivables.................................. (546,787) (388,084) Decrease (increase) in inventories.................................. (106,231) (476,940) Decrease (increase) in prepaid expenses, and other assets........... 2,454 (86,699) Increase (decrease) in accounts payable............................. 149,127 63,999 Increase (decrease) in accrued expenses............................. 311,907 198,159 ---------- ----------- Net cash used in operating activities.................................. (322,456) (4,142,818) ---------- ----------- Cash flows from investing activities: Maturity of marketable investment securities........................ 0 997,604 Capital expenditures................................................ (249,912) (464,205) ---------- ----------- Net cash provided by (used in) investing activities.................... (249,912) 533,399 ---------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock, net......................... 69,998 9,321,517 Proceeds from long-term debt........................................ 103,115 396,560 Proceeds from short-term borrowings................................. 0 389,603 Principal payments on long-term debt, capital leases................ (82,228) (100,893) Principal payments on short-term debt............................... 0 (74,732) ---------- ----------- Net cash provided by financing activities.............................. 90,885 9,932,055 ---------- ----------- Net increase (decrease) in cash and cash equivalents................... (481,483) 6,322,636 Cash and cash equivalents at beginning of period....................... 7,270,285 1,720,814 ---------- ----------- Cash and cash equivalents at end of period............................. $6,788,802 $8,043,450 ========== ==========
See accompanying notes to condensed financial statements. -5- 6 INNERDYNE, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying interim condensed financial statements and notes are unaudited, but in the opinion of management reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of such periods. The results of operations for any interim period are not necessarily indicative of results for the respective full year. These condensed financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) for the three and nine month period ended September 30, 1997 should be read in conjunction with the audited financial statements and notes thereto and MD&A included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (2) INVENTORIES Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 1997 1996 ---- ---- Raw materials and supplies........................ $ 580,285 $ 657,735 Finished goods.................................... 685,044 501,363 ---------- ---------- Net inventory..................................... $1,265,329 $1,159,098 ---------- ----------
-6- 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for the historical information contained in this Quarterly Report on Form 10-Q, the matters discussed throughout this Quarterly Report on Form10-Q 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, the impact of intense competition in the Company's market, the extent of market acceptance of the Company's Step/oo family of products, the timely development and market acceptance of new products, the compliance of the Company's manufacturing facilities with Good Manufacturing Practices ("GMP") regulations, the continued acceptance of minimally invasive surgical procedures, the Company's ability to further expand into international markets, public policy relating to healthcare reform in the United States and other countries, approval of the Company's products by government agencies such as the United States Food and Drug Administration (the "FDA") and the risks set forth in greater detail below under the heading "Additional Factors that May Affect Future Results", as well as those set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and included from time to time in the Company's other Securities and Exchange Commission ("SEC") reports and press releases, copies of which are available from the Company upon request. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. INTRODUCTION InnerDyne, Inc. (the "Company" or "InnerDyne") is primarily focused upon the development and commercialization of access products used to perform minimally invasive surgical ("M.I.S.") procedures. The Company also intends to continue developing its radial dilation and biocompatible coating technologies, internally or through strategic alliances. In addition, United States Surgical Corporation ("U.S. Surgical") has been granted exclusive worldwide sales and marketing rights for the Company's proprietary EnAbl thermal ablation technology for the treatment of excessive uterine bleeding. Radial Dilation Technology The primary focus of the Company is the development and commercial application of its proprietary radial dilation technology. The key feature of this proprietary technology is the capability to enter the body of a patient by creating a small puncture wound, which can subsequently be dilated, or increased in size, to create a larger working channel. Employment of radial dilation within an expandable sheath permits the dilation to be accomplished in a manner that tends to minimize tissue trauma. Upon completion of a procedure, the dilation sequence is reversed, and the result is a smaller residual wound than would be experienced through the employment of similarly-sized conventional access devices. Potential benefits of radial dilation technology include reduced risk, less patient trauma and reduced procedure time. Step Product Line. The Company has developed a family of Step products utilizing InnerDyne's proprietary radial dilation technology. The initial Step products were introduced commercially in late 1994 and are designed to provide access to the abdominal cavity in order to facilitate the visualization and treatment of target areas within the cavity while minimizing the tissue trauma associated with such access. Step. The Step device incorporates the Company's proprietary radial dilation technology and is InnerDyne's first product to be launched on a commercial basis. The Company has received 510(k) clearances from the United States Food and Drug Administration (the "FDA") to market this device for laparoscopic and thorascopic M.I.S. procedures. With the Company's Step access device, a trocar does not need to be utilized, eliminating the risk of internal organ damage from contact with the sharp bladed trocar. In contrast to conventional trocars, the Step device utilizes a standard insufflation needle for the penetration through the abdominal wall at each site where it is utilized, creating only a small puncture wound. Following removal of the needle, the sheath that surrounds the needle is then dilated up to a larger working channel through the insertion of a dilator and cannula. Following dilation, the dilator is removed, leaving a rigid sheath -7- 8 that serves as a working channel with an integral insufflation valve at the proximal end. The radial dilation of the tissue into an appropriately sized working channel holds the cannula in place and obviates the need for an anchoring system. After completion of a procedure, the rigid cannula is removed, and the sheath retracts, permitting the opening in each of the muscular layers of the abdominal wall to recover, leaving a residual wound that is approximately half the size of that made using a conventional trocar of similar size. The Step is currently utilized in minimally invasive general, gynecological and pediatric surgical procedures. Management believes that positive attributes of the Step product could significantly affect health care system costs and patient satisfaction with MIS procedures in which trocars have traditionally been used. The results of a Company-sponsored retrospective comparative outcomes study examining this issue were released during late 1995. The study included 98 patients, and compared an almost equal number of procedures performed using Step devices and conventional trocars for access. Statistically significant results of that study indicated that Step reduced device-related complications during surgery by over 90% and resulted in an approximate 22% savings in surgery time. Based upon published operating room costs, this time savings would equate to dollar savings of $345 to $515 per procedure, a substantial outcome for a product that is believed to be competitively priced with conventional trocars. Management also believes that post-procedure complications, such as infection and incisional hernias at access sites, may be reduced with the use of the Step device as compared to conventional trocars. Prospective studies intended to corroborate and expand the findings of the published outcomes study are underway, and may be completed during 1997. Short Step. The Short Step is a conventional Step device that has been reduced in length and is particularly suitable for M.I.S. procedures involving smaller individuals, especially children and thin females. The Short Step was commercially introduced in 1995. Reposable Step(TM). Launched in 1996, the Reposable Step incorporates the radial dilation features of disposable Step devices in a partially reusable access device. A substantial market for reusable trocars exists, primarily outside the United States, where the pressures on cost and the recognition of the total costs involved in surgical procedures are perceived somewhat differently. Although there is substantial usage of reusable access devices in the U.S., and management expects a trend toward a somewhat more frequent usage of reusable devices, there are significant offsetting concerns relating to total health care system costs and safety involved with reusable devices. The Reposable Step includes a number of reusable components, consisting of a combination of metal and plastic parts that may be cleaned and sterilized by most conventional methods. The dilator, cannula and needle are reusable, while the sheath and valve are single use components, designed to be disposed of following surgery. Mini Step. The Mini Step is a small-diameter radially dilating access device designed for use in office micro-laparoscopic surgery utilizing small instruments, and in tubal ligation and pediatric procedures. The working diameter of the Mini Step ranges from a nominal 2mm to 8mm. Like the Step device, Mini Step is expected to offer clinicians the potential to reduce device-related surgical complications and surgery time. The Mini Step devices were commercially introduced in 1997. Distribution of Step Products. The Step family of products is distributed to health care professionals in both international and domestic markets. In selected foreign countries, local distributors purchase product from the Company, for subsequent resale to their respective countries' health care systems. This international distribution network normally involves one distributor per selected country. Distributors in selected foreign markets can and have been changed when the Company has deemed the performance of individual distributor organizations to be unsatisfactory. In the domestic market, the Company's MIS access product line is generally sold directly to health care professionals by a network of sales representatives, a limited number of which are employees of the Company. These sales representatives are managed on a regional basis by InnerDyne management employees. In order to attempt to enhance the effectiveness of these domestic sales activities, agreements with buying groups which represent multiple provider institutions have been pursued. InnerDyne signed two buying group agreements in the third quarter of 1997. -8- 9 These agreements cover approximately 1,350 hospitals across the United States and will allow the Company to compete for a portion of the minimally invasive surgical access business in these hospitals. R.E.D. The Radially Expanding Dilator ("R.E.D.") is the second product type based upon the Company's proprietary radial dilation technology. The R.E.D. is intended to enable access to organs deep within the abdominal cavity. The only current alternative for this type of access involves the insertion of a long flexible channel and scope through a natural body orifice such as the mouth or the rectum, and only limited procedures are possible due to the restricted size of the channel and the tortuous path that must be navigated by the scope. The R.E.D. is designed to provide access through the abdominal wall, across the peritoneal space, and into an internal organ. InnerDyne believes that with use of the R.E.D. product, substantial reductions in patient recovery times may be possible. The Company expects that the enhanced capabilities of the R.E.D. may enable additional surgical procedures to be performed through minimally invasive techniques. This product has been released only on a very limited basis, and feedback indicates it enables additional procedures to be performed endoscopically. However, initial experience indicates a relatively high surgeon skill level and advanced training is necessary to perform these intra-organ procedures successfully. Accordingly, widespread commercialization of the R.E.D. will require significant market development efforts and the Company has not established definitive plans for completion of development and commercialization Other Applications. InnerDyne has announced agreements for the use of its proprietary radial dilation technology for specialized vascular access with Endotex Interventional Systems and an agreement covering a less traumatic means of placing enteral feeding tubes with Sherwood Davis and Geck (SDG). The Company announced that it received the single regulatory milestone payment associated with the SDG agreement during the second quarter of 1997 and anticipates that SDG will require shipments of the specialized access devices for the placement of feeding tubes in 1998. InnerDyne also established a business unit during the second quarter of 1997 to better define the value radial dilation technology can bring to the estimated 4.7 million interventional cardiology procedures performed annually in the United States and to develop access products based on this assessment, if the value statement is positive. The Company proceeded with animal studies and device refinements in the third quarter and will continue testing the product concept in animals with cardiology advisors. If the animal trial results are positive and subsequent human use demonstrates clinical benefits, the Company expects to launch a radial dilation vascular access device in 1998. InnerDyne committed resources to an investigation of the potential market opportunity in arthroscopic procedures during the second quarter of 1997. Limited clinical usage of the initial design accompanied by substantial exposure and feedback from arthroscopic surgeons was completed during the third quarter. Product design revisions based upon this feedback are in process and may result in a limited launch of an advanced arthroscopic access product in 1998. In addition, the Company is exploring the potential use of its proprietary radial dilation technology in other applications, such as access for thoracic and tracheal procedures, and is likely to increase resources associated with the pursuit of one or more of these opportunities in the ensuing quarters. Developmental expenditures on new applications for the Company's proprietary radial dilation technology will impact the timing and achievement of sustained profitability. Thermal Ablation Technology The Company has developed proprietary technology that is intended to thermally ablate the lining of a body organ. The Company's EnAbl(TM) Thermal Ablation System (the "EnAbl System") is based on this proprietary technology and is designed to treat menorrhagia, or excessive uterine bleeding, by thermally ablating the endometrial lining of the uterus through the controlled introduction and heating of a normal saline solution in situ. The Company has completed initial safety and preliminary efficacy trials with a redesigned system. The results of these limited trials give preliminary indications that the EnAbl System represents a safe means of ablating uterine tissue. However, there can be no assurance that the feasibility of this technology will be satisfactorily demonstrated in expanded efficacy trials or that the system will be successfully commercialized. -9- 10 In December 1996, InnerDyne announced that it had signed an agreement which granted U.S. Surgical exclusive worldwide sales and marketing rights for the EnAbl System. Under the terms of the agreement, in exchange for initial license fees, milestone payments, and royalties based upon future sales, U.S. Surgical gained the rights to complete development, manufacture and market the technology on a worldwide basis. The agreement also provides U.S. Surgical with an option to purchase rights to the technology for defined applications. On July 25, 1997 the Company announced that the initial milestone under its licensing, development and commercialization agreement for this technology has been satisfied, with U.S. Surgical's receipt of conditional approval of its IDE application by the FDA. U.S. Surgical will be free to initiate planned U.S. clinical trials of the system as soon as the limited questions raised by the FDA have been addressed. This milestone payment was reflected in InnerDyne's third quarter results. Biocompatible Coating Technologies The Company possesses certain proprietary technologies in the area of biocompatible coatings. The technologies that comprise the Company's thromboresistant coating ("TRC") capability are believed to have application when foreign objects remain in contact with various areas of the body, particularly within the blood stream, for sustained periods of time. These technologies include the ability to deposit an extremely thin layer (approximately one micron) of siloxane on a surface and the ability to graft a bioactive substance, such as the drug heparin, to that siloxane layer. The Company's TRC utilizes a "tether" molecule to attach heparin or other bioactive molecules to the previously applied siloxane subsurface. One end of the tether molecule is covalently bonded to the siloxane coating, and the other end of the tether molecule is covalently bonded to the bioactive molecule. Because both points of attachment utilize covalent bonds, the Company believes that its coating process results in a stronger bonding of heparin or other bioactive molecules to the surface of the device than other methods presently in use, which it believes generally use a weaker ionic bond in at least one of the attachment points. TRC coatings, employed with the siloxane layer alone or in combination with bioactive substances, can extend the life of blood-gas exchange devices or provide the capability to extend the duration of contact of a coated device with blood or other body fluids while minimizing the physiological impacts of such contact. The Company has continued to pursue modifications of its proprietary coating technologies to simplify and expand the available means and potential applications of heparin attachment to the surfaces of medical devices. Based upon promising indications of initial feasibility of this effort, limited discussions with potential interested partners have been initiated. There can be no assurances that this additional heparin attachment technology will ultimately be proven to be feasible, or that it will be of interest to any potential partner. InnerDyne recently filed a provisional patent application covering improved methods for preparing and fabricating devices and substrates to deliver radioactivity to patients utilizing Company's proprietary biocompatible coatings technology. The process may be useful with both permanently implanted devices, such as vascular stents, grafts, and coils, as well as temporarily implanted devices, such as catheters, wires, and pellets. The Company recently filed a grant application with Oak Ridge National Laboratory and is working with George Washington University to demonstrate the feasibility of this technology. There can be no assurances that a proprietary position will successfully be established in this technology area, or that the Company's approach will prove to be feasible or of interest to potential partners. In 1994, the Company signed a license agreement with SENKO Medical Manufacturing Co., Ltd. ("SENKO"), a Japan-based manufacturer and marketer of membrane oxygenators used in open heart surgery, pursuant to which the Company licensed one of its TRC technologies to SENKO. In connection with this agreement, the Company transferred its siloxane coating technology to SENKO for the coating of microporous hollow fibers used in the production of oxygenators. The technology transfer was completed during the first quarter of 1995, at which time the Company received the balance of the initial payment from SENKO, and the royalty payment period commenced. In 1996, InnerDyne received an order from SENKO to build a second fiber coating system, which was delivered in March of 1997. In April 1996, the Company announced the signing of an agreement with Boston Scientific Corporation ("Boston Scientific") covering the potential application and use of InnerDyne's proprietary biocompatible coating technologies with Boston Scientific's stents, grafts, vena cava filters and other implantable medical devices. The agreement involves -10- 11 an equity investment by Boston Scientific in InnerDyne, initial research support and future license fees and royalty payments if Boston Scientific decides to proceed with a technology transfer. The Company believes that it has satisfied most of the key technical parameters associated with Boston Scientific's primary areas of product interest, and is awaiting a decision relative to technology transfer by Boston Scientific. The Company has undertaken a number of discussions with other potential licensees of the Company's biocompatible coating technologies, and samples of coated products have been provided to several companies. These discussions have been with parties interested in the use of the technologies to enhance gas exchange, as well as third parties interested in the possible coating of in-dwelling devices for various applications. To date, the Company has entered into one other development arrangement with a company in the cardiovascular arena and recognized initial revenue from this agreement in the third quarter. RESULTS OF OPERATIONS Total revenue for the three and nine month periods ended September 30, 1997 were $4,960,477 and $11,606,459, respectively, compared to $2,458,449 and $6,096,240 for the corresponding periods in 1996. Total revenue is comprised of revenue from product sales, and licensing and contract revenue. Product sales increased to $3,138,728 and $8,500,492 for the three and nine month periods ended September 30, 1997, from $2,048,045 and $5,486,849 for the corresponding periods in 1996, reflecting increased sales of the Company's Step devices. Licensing and contract revenue for the three and nine month periods ended September 30, 1997 were $1,821,749, and $3,105,967 compared to $410,404 and $609,3911 for the corresponding periods in 1996. These licensing and contract revenues for the 1996 periods included revenue earned related to licensing agreements for the Company's biocompatible coatings technology and to a license, development and manufacturing agreement for vascular access using the Company's radial dilation technology. The licensing and contract revenue for the three and nine month periods ended September 30, 1997 related to agreements with third parties covering the licensing and development of the Company's proprietary thermal ablation technology, the development of non-competing applications for the Company's radial dilation technology and the licensing of the Company's proprietary biocompatible coatings technology. On July 25, 1997 the Company announced that the initial milestone under its licensing, development and commercialization agreement with U.S. Surgical for its EnAbl thermal ablation technology has been satisfied, with U.S. Surgical's receipt of conditional approval of its IDE application by the FDA. U.S. Surgical will be free to initiate U.S. clinical trials of the system as soon as the limited questions raised by the FDA have been addressed. An associated milestone payment was reflected in InnerDyne's third quarter results. Licensing and contract revenue fluctuates from quarter to quarter, based upon the number of agreements in effect and the amount and timing of the payments to be made to InnerDyne pursuant to such agreements. Total cost of sales was $1,299,201 and $3,744,314 for the three and nine month periods ended September 30, 1997, compared to $1,178,862 and $3,098,840 for the same periods in 1996. The increase in cost of sales for the three and nine month periods ended September 30, 1997 is mainly attributable to the increase in production and sales volumes compared to the same periods in 1996. Research, development, regulatory and clinical expenses for the three and nine month periods ended September 30, 1997 were $988,175 and $2,545,460, compared to $796,490 and $1,994,888 for the corresponding periods in 1996. In the 1997 periods, a significant part of the R&D expenses were reimbursed by development partners, thereby generating license or contract revenue. The Company expects that internally funded research, development, regulatory and clinical expenditures will increase in absolute dollars in future periods. Research and development expenditures on new applications for the Company's proprietary radial dilation technology will impact the timing and achievement of sustained profitability. Reimbursed expenses associated with one or more research programs funded by outside development partners may decrease in future periods, thereby reducing expected research and development expenditures, and the corresponding license and contract revenue. -11- 12 Sales and marketing expenses were $1,648,224 and $4,411,262 for the three and nine month periods ended September 30, 1997, compared to $1,175,667 and $3,503,442 for the corresponding periods in 1996, reflecting the growth of the Company's sales and marketing functions to support commercialization of its M.I.S. products. InnerDyne expects that sales and marketing expenses will generally continue to increase in absolute dollars in future periods. General and administrative expenses were $579,876 and $1,653,673 for the three and nine month periods ended September 30, 1997, compared to $452,030 and $1,491,180 for the corresponding periods in 1996. The Company anticipates that general and administrative expenses will generally increase in absolute dollars in future periods to support expanding operations. Interest/other income decreased to $56,200 and increased to $159,993 for the three and nine month periods ended September 30, 1997, compared to $67,160 and $125,782 for the same periods in 1996, reflecting interest income earned on average cash and cash equivalents balances following the Company's May 1996 secondary offering, and usage of cash and equivalents to support expanding operations. The Company earned net income of $501,201, or ($.02) per share and incurred a net loss of ($588,257) or ($.03) per share, for the three and nine month periods ended September 30, 1997, compared to a net loss of ($1,077,440) or $.05 per share and ($3,866,328) or ($.19) per share, for the same periods in 1996. Management believes that the Company is likely to incur operating losses for the balance of 1997, and at least a portion of 1998. -12- 13 LIQUIDITY AND CAPITAL RESOURCES From its inception to September 30, 1997, the Company has incurred a cumulative net loss of approximately $52 million. Since inception, the Company's cash expenditures have generally exceeded its revenues. Prior to 1992, the Company was funded primarily through private placements of equity securities. In 1992, the Company completed an initial public offering of 2,875,000 shares of its Common Stock at $11.00 per share, which raised approximately $28.8 million (net of underwriter's discounts and offering expenses). The 1994 acquisition of InnerDyne Medical, Inc. was accomplished through the issuance of additional Common Stock of the Company. In June 1995, the Company closed a private placement of 1,435,599 shares of the Company's Common Stock and warrants to purchase 287,200 additional shares of Common Stock, with gross proceeds to the Company of approximately $3.2 million. In March and April of 1996, holders of warrants to purchase an aggregate of 242,952 shares of Common Stock exercised such warrants, resulting in gross proceeds to the Company of $704,561. The Company concluded a public offering on May 20, 1996, with the sale of 2,650,000 shares of Common Stock at $3.50 per share, which raised $8,015,268 (net of underwriters commissions and issuance expenses). At September 30, 1997, cash and cash equivalents totaled $6,788,802 compared to a total cash and cash equivalents balance of $7,270,285 at December 31, 1996. The Company had $249,912 and $776,901 in capital expenditures in the nine months ended September 30, 1997 and the year ended December 31, 1996, respectively. Working capital totaled $7,818,519 at September 30, 1997, and the Company had long-term debt, excluding current installments, totaling $577,077 relating to financing of equipment. In June 1997, the Company renewed its credit facility with Silicon Valley Bank. Subject to certain covenants and conditions, the Company may borrow up to $2,000,000 on a revolving credit basis at prime plus 1% based on eligible receivables. The Company also has an equipment advance line of credit, which allows the Company to borrow up to $500,000 per year based on eligible equipment purchases. Amounts outstanding on this equipment advance line of credit are periodically converted to 48 month term loans bearing interest at prime plus 1%. As of September 30, 1997, the Company had drawn $300,000 for financing of working capital needs on the revolving line of credit, secured by certain accounts receivable, but had not borrowed under the current agreement with Silicon Valley Bank for the financing of capital expenditures. Debt balances as of September 30, 1997 on the Company's balance sheet were loaned to the Company under previous equipment lines of credit agreements with Silicon Valley Bank. In the future, the Company may incur additional substantial operating losses and have cash outflow requirements as a result of expenditures related to expansion of sales and marketing capability, expansion of manufacturing capacity, research and development activities, compliance with regulatory requirements, and possible investment in or acquisition of additional complementary products, technologies or businesses. The timing and amounts of these expenditures will depend upon many factors, such as the progress of the Company's research and development, and will include factors that may be beyond the Company's control, such as the results of product trials, the requirements for and the time required to obtain regulatory approval for existing products and any other products that may be developed or acquired, and the market acceptance of the Company's products. The Company's capital requirements will depend on numerous factors, including market acceptance and demand for its products; the resources the Company devotes to the development, manufacture and marketing of its products; the progress of the Company's clinical research and product development programs; the receipt of, and the time required to obtain regulatory clearances and approvals; the resources required to protect the Company's intellectual property; and other factors. The timing and amount of such capital requirements cannot be accurately predicted. Funds may also be used for the acquisition of businesses, products and technologies that are complementary to those of the Company. Consequently, although the Company believes that the proceeds of the public offering of shares of its Common Stock completed in May 1996, together with revenues, credit facilities and other sources of liquidity, will provide adequate funding for its capital requirements through 1998, the Company may be required to raise additional funds through public or private financings, collaborative relationships or other arrangements. There can be no assurance that the Company will not require additional funding or that such additional funding, if needed, will be available on terms attractive to the -13- 14 Company, or at all. Any additional equity financings may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. -14- 15 ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS History of Losses; Profitability Uncertain. InnerDyne has experienced operating losses in every quarter except the third quarter of 1997, since its inception in December 1985. InnerDyne reported net losses of $588,257on revenues of $11.6 million, $4.7 million on revenues of $9.1 million, $5.6 million on revenues of $5.3 million, and $9.9 million on revenues of $0.9 million for the nine months ended September 30, 1997, and the fiscal years ended December 31, 1996, 1995 and 1994, respectively. As of September 30, 1997, InnerDyne had an accumulated deficit of approximately $52 million. In the future, the Company may incur additional operating losses and have cash outflow requirements as a result of expenditures related to expansion of sales and marketing capability, expansion of manufacturing capacity, research and development activities, compliance with regulatory requirements, and possible investment in or acquisition of additional complementary products, technologies or businesses. The timing and amounts of these expenditures will depend upon many factors, such as the progress of the Company's research and development, and will include factors that may be beyond the Company's control, such as the results of product trials, the requirements for and the time required to obtain regulatory approval for existing products and any other products that may be developed or acquired, and the market acceptance of the Company's products. Management believes that the Company is likely to incur operating losses for at least the balance of 1997, and possibly for a significant portion of 1998. The cash needs of the Company have changed significantly as a result of the merger completed during 1994 and the support requirements of the added business focus areas. There can be no assurance that the Company will not incur future losses, that the Company will be able to raise cash as necessary to fund operations or that the Company will achieve sustained profitability. Intense Competition. The primary industry in which the Company competes, minimally invasive surgery, is dominated by two large, well-positioned entities that are intensely competitive and frequently offer substantial discounts as a competitive tactic. U.S. Surgical is primarily engaged in developing, manufacturing and marketing surgical wound management products, and has historically been the firm most responsible for providing products that have led to the growth of the industry. U.S. Surgical supplies a broad line of products to the M.I.S. industry, including products which facilitate access, assessment and treatment. Ethicon Endo-Surgery ("Ethicon"), a Johnson & Johnson company, has made a major investment in the M.I.S. field in recent years and is one of the leading suppliers of hospital products in the world. Furthermore, U.S. Surgical and Ethicon each utilize purchasing contracts that link discounts on the purchase of one product to purchases of other products in their broad product lines. Substantially all of the hospitals in the United States have purchasing contracts with one or both of these entities. Accordingly, customers may be dissuaded from purchasing access products from the Company rather than U.S. Surgical or Ethicon to the extent it would cause them to lose discounts on products that they regularly purchase from U.S. Surgical or Ethicon. The Company faces a formidable task in successfully gaining significant revenues within the M.I.S. access market. In order to succeed, management believes that the Company will need to objectively demonstrate substantial product benefits, and its sales effort must be able to effectively present such benefits to both clinicians and health care administrators. The M.I.S. access market is dominated by U.S. Surgical and Ethicon. Both entities introduced new access devices, trocars with added features, during the past two years. A number of other entities participate in various segments of the M.I.S. access market. There can be no assurance that the Company will be able to successfully compete in the M.I.S. access market, and failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. In the thermal ablation market, primary competition for the EnAbl System is current therapies for the treatment of excessive menstrual bleeding, including drug therapy, dilatation and curettage, surgical endometrial ablation and hysterectomy. The EnAbl System will also compete against other techniques under development for the treatment of excessive menstrual bleeding, including endometrial ablation techniques that employ radio frequency ("RF") energy or freezing techniques ("cryoablation") and the uterine balloon therapy system being commercialized by GyneCare, Inc. -15- 16 Additionally, there are other companies developing alternative methods of uterine tissue ablation that compete with the Company and U.S. Surgical. There can be no assurance that these companies will not succeed in developing technologies and products that are more effective than any which have been or are being developed by the Company and U.S. Surgical or that would render the Company's technologies or products obsolete or not competitive. Such competition could have a material adverse effect on the Company's business, financial condition and results of operations. As a result of the entry of large and small companies into the market, the Company expects competition for devices and systems used to treat excessive menstrual bleeding to increase. Continued Dependence on Step Products. To date, substantially all of the Company's revenues from product sales are attributable to Step products and InnerDyne currently anticipates that sales of Step products will represent substantially all of the Company's revenues in the immediate future. Accordingly, the success of the Company is largely dependent upon increased market acceptance of its Step product line by the medical community as a reliable, safe and cost-effective access product for minimally invasive surgery. InnerDyne commenced commercial sales of its Step product in the fourth quarter of 1994, and to date sales have been made to a relatively limited number of physicians and hospitals. Recommendations and endorsements by influential members of the medical community are important for the increased market acceptance of the Company's Step products, and there can be no assurance that existing recommendations or endorsements will be maintained or that new ones will be obtained. Failure to increase market acceptance of the Company's Step products would have a material adverse effect upon the Company's business, financial condition and results of operations. Reliance on Future Products and New Applications; Uncertainty of Technology Changes. The medical device industry is characterized by innovation and technological change. The Company has made significant investments in researching and developing its proprietary technologies, including radial dilation, thermal ablation and biocompatible coatings. The future success of the Company will depend in part on the timely commercial introduction and market acceptance of these products. There can be no assurance that these products will be timely introduced in commercial quantities, if at all, or that such products will achieve market acceptance. A failure by the Company to timely introduce such products or a failure of such products to achieve market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. The future success of the Company will also depend upon, among other factors, its ability to develop and gain regulatory clearance for new and enhanced versions of products in a timely fashion, including, but not limited to, the EnAbl Thermal Ablation System being developed with U.S. Surgical. There can be no assurance that the Company will be able to successfully develop new products or technologies, manufacture new products in commercial volumes, obtain regulatory approvals on a timely basis or gain market acceptance of such products. Delays in development, manufacturing, regulatory approval or market acceptance of new or enhanced products could have a material adverse impact on the Company's business, financial condition and results of operations. Limited Manufacturing Experience; Compliance with Good Manufacturing Practices; Dependence on Limited Sources of Supply. The Company initiated manufacture of commercial quantities of its Step access device in its Salt Lake City, Utah facility during late 1994. Accordingly, the Company has limited experience in manufacturing M.I.S. access products or other products in commercial quantities at acceptable costs. The Company's success will depend in part on its ability to manufacture its products in compliance with the FDA's Good Manufacturing Practices ("GMP") regulations and other regulatory requirements in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. 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. The materials utilized in the Company's M.I.S. products consist of both standard and custom components that are purchased from a variety of independent sources. A number of materials are available only from a limited number of sources at the present time. Although InnerDyne believes that alternative sources of these components can be obtained, internal testing and qualification of substitute vendors could require significant lead times and additional regulatory submissions. There can be no assurance that such internal testing and qualification or additional regulatory approvals would be obtained in a timely fashion, if at all. Failure to maintain production volumes or increase production volumes in a timely or cost-effective manner would have a material adverse effect on the Company's business, financial -16- 17 condition and results of operations. Failure to maintain satisfactory GMP compliance could have a significant impact on the Company's ability to continue to manufacture and distribute its products and, in the most serious cases, result in the seizure or recall of products. Any interruption of supply of raw materials could have a material adverse effect on the Company's ability to manufacture its products and, therefore, on its business, financial condition and results of operations. Potential Fluctuations in Operating Results. The Company's quarterly operating results have in the past fluctuated and will continue to fluctuate significantly in the future depending on the timing and shipment of product orders, new product introductions and changes in pricing policies by the Company or its competitors, the timing and market acceptance of the Company's new products and product enhancements, the continued market acceptance of InnerDyne's Step product line by the medical community, the Company's product mix, the mix of distribution channels through which the Company's products are sold, the extent to which the Company recognizes non-product revenues during a quarter, and the Company's ability to obtain sufficient supplies of sole or limited source components for its products. In particular, fluctuations in production volumes affect gross margins from quarter to quarter. Furthermore, gross margins can fluctuate from quarter to quarter to the extent the Company recognizes non-product revenue during a quarter because the Company generally derives higher gross margins from non-product revenue than from product sales. In response to competitive pressures or new product introductions, the Company may take certain pricing or other actions that could materially and adversely affect the Company's operating results. In addition, new product introductions by the Company could contribute to quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline. The Company's expense levels are based, in part, on its expectations of future revenues. Because a substantial portion of the Company's revenue in each quarter normally results from orders booked and shipped in the final weeks of that quarter, revenue levels are extremely difficult to predict. If revenue levels are below expectations, net income will be disproportionately affected because only a small portion of the Company's expenses varies with its revenue during any particular quarter. In addition, the Company typically does not operate with any material backlog as of any particular date. As a result of the foregoing factors and potential fluctuations in operating results, results of operations in any particular quarter should not be relied upon as an indicator of future performance. In addition, in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. Reliance on Collaborative Relationships; Restrictions on Activities. The Company has entered into, and intends to continue to pursue, collaborative arrangements with corporations and research institutions with respect to the research, development, regulatory approval and marketing of certain of its potential products. InnerDyne's future success may depend, in part, on its relationship with such third parties, their strategic interest in the potential products under development and, eventually, their success in marketing or willingness to purchase any such products. The Company's existing and anticipated contracts with such third parties restrict the rights of InnerDyne to engage in certain areas of product development, manufacturing and marketing. In addition, these third parties may have the unilateral right to terminate any such arrangement without significant penalty. There can be no assurance that InnerDyne will be successful in establishing or maintaining any such collaborative arrangements or that any such arrangements will be successful. Limited Sales, Marketing and Distribution Experience. InnerDyne began commercial sales of its first M.I.S. access product in the fourth quarter of 1994 and, therefore, has limited sales, marketing and distribution experience. The Company is marketing its M.I.S. access products mainly to general surgeons, gynecologists and pediatric laparoscopists. In the United States, InnerDyne markets its products primarily through a network of independent sales representatives who typically sell other complementary M.I.S. products to the same customer base and direct representatives who are employed by the Company within selected geographical areas. If the need arises, the Company may expand its sales force, which will require recruiting and training additional personnel. There can be no assurance that the Company will be able to recruit and train such additional personnel in a timely fashion. Loss of a significant number of InnerDyne's -17- 18 current sales personnel or independent sales representatives, or failure to attract additional personnel, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects to market its products outside of the United States through international distributors in selected foreign countries after regulatory approvals, if necessary, are obtained. Although InnerDyne currently has relationships with a limited number of international distributors, there can be no assurance that the Company will be able to build a network of international distributors capable of effectively marketing its M.I.S. access products or that such distributors will generate significant sales of such products. The Company has limited experience in marketing its products, and faces substantial competition from well-entrenched and formidable competitors. As a result, there can be no assurance that the Company will successfully achieve acceptable levels of product sales at prices which provide an adequate return. Failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. Patents and Proprietary Rights. The Company's success will depend in large part on its ability to obtain patent protection for products and processes, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Although InnerDyne has obtained certain patents and applied for additional United States and foreign patents covering certain aspects of its technology, no assurance can be given that any additional patents will be issued or that the scope of any patent protection will exclude competitors or provide a competitive advantage, or that any of the Company's patents will be held valid if subsequently challenged. The validity and breadth of claims covered in medical technology patents involves complex legal and factual questions and therefore may be highly uncertain. InnerDyne also relies upon unpatented trade secrets, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent trade secrets. In addition, whether or not the Company's patents are issued, others may hold or receive patents that contain claims having a scope that covers products developed by InnerDyne. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry and companies in the medical device industry have used litigation to gain competitive advantage. Litigation involving the Company would result in substantial cost to and diversion of management attention from the day-to-day operation of the business, but could be necessary to enforce patents issued to the Company, to protect trade secrets and other specialized knowledge unknown to outside parties, to defend the Company against claimed infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. An adverse determination in litigation could subject the Company to significant liabilities to third parties, could require the Company to seek licenses from third parties under less favorable terms than might otherwise be possible and could prevent the Company from manufacturing, selling or using its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has in the past, and may in the future, receive correspondence from third parties claiming that the Company's products or technology infringe intellectual property rights of such third parties. The Company and its patent counsel thoroughly review such claims and no such outstanding claims currently exist. However, there can be no assurance that InnerDyne will not receive additional claims that its products or technology infringe third party rights or that third parties will not litigate such claims. Any such occurrence could have a material adverse effect on the Company's business, financial condition and results of operations. Government Regulation. Clinical testing, manufacture and sale of the Company's products, including the Step product line, the EnAbl System and the Company's biocompatible coatings technology, are subject to regulation by the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. -18- 19 Before a new device can be introduced in the market, the manufacturer must generally obtain FDA clearance of 510(k) notification or approval of a premarket approval ("PMA") application. A PMA application must be filed if a proposed device is not substantially equivalent to a legally marketed Class I or Class II device, or if it is a Class III device for which the FDA has called for PMAs. The PMA process can be expensive, uncertain and lengthy, and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. The EnAbl System will likely be subject to the PMA approval process prior to marketing by U.S. Surgical within the United States. There can be no assurance that U.S. Surgical will be able to obtain the necessary regulatory approval on a timely basis, or at all, and a delay in receipt of or failure to receive such approval would have a material adverse effect on the Company's business, financial condition and results of operations. A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or a Class III medical device for which the FDA has not called for PMAs. For any of the Company's devices 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. There can be no assurance that the Company will obtain 510(k) clearance within a reasonable time frame, or at all, for any of the devices or modifications for which it may file a 510(k) notification. The Company has received clearance from the FDA for the marketing of its Step device for use in accessing the abdominal and thoracic cavities for the performance of minimally invasive surgical procedures. The Company has also received FDA clearance for the marketing of its R.E.D. product for use in the areas of gastrostomy, cystostomy, cholecystotomy, the dilation of biliary and urethral strictures, laparoscopy and enterostomy. The Company has also received market clearance for alternative versions of its Step and R.E.D. products, including products designed to employ its radial dilation technology in vascular and arthroscopic applications and for biliary indications. Although the Company has been successful in preparing requests for 510(k) clearance, there can be no assurance that 510(k) clearances for future products or product modifications can be obtained in a timely manner or at all, or that any existing clearance can be successfully maintained. A delay in receipt of, or failure to receive or maintain, such clearances would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company is strictly limited to marketing its products for the indications for which they were cleared, physicians are not prohibited by the FDA from using the products for indications other than those cleared by the FDA. There can be no assurance that the Company will not become subject to FDA action resulting from physician use of its products outside of their approved indications. The Company has made modifications to its cleared devices that the Company believes do not require the submission of new 510(k) notices. There can be no assurance, however, that the FDA would agree with any of the Company's determinations not to submit a new 510(k) notice for any of these changes or would not require the Company to submit a new 510(k) notice for any of the changes made to the device. If the FDA requires the Company to submit a new 510(k) notice for any device modification, the Company may be prohibited from marketing the modified device until the 510(k) notice is cleared by the FDA. Any devices manufactured or distributed by the Company pursuant to FDA clearance or approval are subject to pervasive and continuing regulation by the FDA and certain state agencies and various foreign governments. Manufacturers of medical devices for marketing in the United States are required to adhere to applicable regulations setting forth detailed GMP requirements, which include testing, control and documentation requirements. Manufacturers must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. The Company is registered as a manufacturer of medical devices with the FDA. The Company is subject to routine inspection by the FDA and certain state agencies for compliance with GMP requirements, MDR requirements and -19- 20 other applicable regulations. Failure of the Company to maintain satisfactory GMP compliance could have a significant adverse effect on the Company's ability to continue to manufacture and distribute its products and, in the most serious cases, could result in the seizure or recall of products, injunction and/or civil fines. Dependence on International Sales. In the future, the Company expects to derive an increasing portion of its revenue from international sales. To the extent that the Company's international sales increase in future periods, a significant portion of the Company's revenues could be subject to the risks associated with international sales, including economic or political instability, shipping delays, changes in applicable regulatory policies, fluctuations in foreign currency exchange rates and various trade restrictions, all of which could have significant impact on the Company's ability to deliver products on a competitive and timely basis. Future imposition of, or significant increases in the level of, customs duties, import quotas or other trade restrictions could have an adverse effect on the Company's business, financial condition and results of operations. The regulation of medical devices, particularly in the European Economic Community, continues to expand and there can be no assurance that new laws or regulations will not have an adverse effect on the Company. Stock Price Volatility. The stock market in general and stocks of medical device companies in particular, have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In addition, the market price of the Common Stock has been and is likely to continue to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, actions with respect to reimbursement matters, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in healthcare policy in the United States and internationally, changes in stock market analyst recommendations regarding the Company, other medical device companies or the medical device industry generally or general market conditions may have a significant effect on the market price of the Common Stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. -20- 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable. ITEM 2. CHANGES IN SECURITIES (a) Not Applicable. (b) Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION On September 19, 1997, the Company declared a dividend distribution of one Preferred Share Purchase Right (a "Right") on each outstanding share of the Company's Common Stock. Each Right will entitle stockholders to buy one one-thousandth of a share of the Company's Series A Participating Preferred Stock a an exercise price of $20.00 per share. The Rights will become exercisable at the close of business on the tenth day (or such later date as may be determined by a majority of the Continuing Directors, as defined in the Preferred Shares Rights Agreement dated as of September 19, 1997) after a person or group announces the acquisition of 15% or more of the Company's Common Stock or announces commencement of a tender offer or exchange offer, the consummation of which would result in ownership by the person or group of 15% or more of the Common Stock. The Company will be entitled to redeem the Rights at $0.01 per Right at any time prior to the close of business on the tenth day (or such later date as may be determined by a majority of the Continuing Directors) following acquisition by a person or group of 15% or more of the Company's Common Stock. The dividend distribution was made on October 15, 1997. The Rights will expire on September 19, 2007. For a more complete description of the Rights see the Company's Registration on Form 8-A filed with the Securities and Exchange Commission on September 23, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Number 27.01: Financial Data Schedule (b) Reports on Form 8-K: N/A -21- 22 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. INNERDYNE, INC. /s/ Robert A. Stern Robert A. Stern Vice President and Chief Financial Officer (Duly Authorized Signatory, Principal Financial and Accounting Officer) Date: November 14, 1997 -22- 23 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 27.01 Financial Data Schedule
EX-27.01 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER AND YEAR-TO-DATE ENDED SEPTEMBER 30, 1997. 1 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 6,788,802 0 1,665,634 0 1,265,329 10,325,657 953,890 0 11,325,242 2,507,138 577,077 0 0 216,861 8,024,166 11,325,242 8,500,492 11,606,459 3,744,314 12,354,708 0 0 0 (588,257) 0 (588,257) 0 0 0 (588,257) (.03) 0
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