CONFIDENTIAL
TERM SHEET
LICENSE AND DISTRIBUTION AGREEMENT
BETWEEN XOMED AND ARTHROCARE
June 25, 1998
1. License Grant: ArthroCare shall grant to Xomed an exclusive,
worldwide, non-transferable, license, without the right of sublicense or
right to manufacture,under the Intellectual Property Rights, with the
right to use, market, sell and distribute ArthroCare's Products (as
defined in section 3) solely for use in the Field ("License Rights").
The Field shall mean the use of Coblation TM technology in
Otorhinolaryngology and head and neck procedures, and ENT surgeons in
the AAFPRS that practice facial plastic surgery.
The Intellectual Property Rights shall include all of ArthroCare's
patents and patent applications in the Field and all of ArthroCare's
registered trademarks and trademark applications in the Field.
ArthroCare will have direct access to Xomed accounts to gain market and
clinical feedback.
Under the License Rights, ArthroCare will have the initial right, but
not the obligation, to enforce the Intellectual Property Rights
including the right to sue for patent infringement. In the event
ArthroCare chooses not to initiate any Action involving the License
Rights, Xomed shall have the right, but not the obligation, to enforce
these rights.
2. License Consideration: In consideration for the exclusive nature of
the license and distribution agreement, Xomed will pay ArthroCare a
License Fee of [*****] shall be non-refundable even in the event of a
Xomed termination as outlined in section 11. During the period between
the execution of the term sheet and the execution of the definitive
agreement, the parties will rely upon and operate in good faith under
this term sheet as outlined in section 14.
The remaining [*****] of the License Fee shall be payable to ArthroCare
based upon the first achievement of each of the following milestones:
[*****]
*Conversion Units will allow ArthroCare and ENTec Model 2000 Controllers
to be used for dermatology and cosmetic surgery.
In addition to the License Fee, Xomed will pay running royalties on
ArthroCare Disposable Wands sold by Xomed. The running royalties shall
be [*****]of the Net Sales of Disposable Wands, payable on a quarterly
basis.
"Net Sales" shall mean revenues on an accrual basis, in accordance with
U.S. generally accepted accounting principles, as follows: the invoice
price of ArthroCare Disposable Wands sold by Xomed to third parties
(including sales made in connection with clinical trials), less, to the
extent included in such invoice price the total of: (a) ordinary and
customary trade discounts actually allowed; (b) credits, rebates and
returns (including, but not limited to, wholesaler and retailer
returns); (c) freight, postage, insurance and duties paid for and
separately identified on the invoice or other documentation maintained
in the ordinary course of business, and (d) excise taxes, other
consumption taxes, customs duties and compulsory payments to
governmental authorities actually paid and separately identified on the
invoice or other documentation maintained in the ordinary course of
business. Net Sales shall also include the fair market value of all
other consideration received by Xomed in respect of ArthroCare
Disposable Wands, whether such consideration is in cash, payment in
kind, exchange or another form.
3. Product Manufacture and Sale: ArthroCare will agree to manufacture
and sell to Xomed, and Xomed will agree to exclusively purchase from
ArthroCare, Xomed's requirements for Products in the Field. Products
shall include Controllers, Conversion Units, Cables (standard cable and
handpiece cable) and Disposable Wands, and ArthroCare will supply
Products to Xomed at the following prices:
System 2000 Controllers (incl.1 standard cable): [*****]
VisageT Conversion Units: [*****]
Disposable Wands: See Section 4
Rep. Cables: [*****]
[*****]
ArthroCare and Xomed recognize that the manufacturing cost of
Controllers may change as volumes increase, and as new models are
introduced. Accordingly, ArthroCare and Xxxxx agree to meet and discuss
new Controller pricing as ArthroCare introduces new models, and as
ArthroCare realizes manufacturing efficiencies.
4. Disposable Wand Transfer Price: ArthroCare will sell the
Disposable Wands identified below at the prices set forth below.
ArthroCare may add to this list from time to time as new products are
developed.
AccESST wands(9, 12 channel): [*****]
Plasma ScalpelT: [*****]
HummingbirdO Tip: [*****]
CollagENTO: [*****]
ReFLEXO: [*****]
Visage Stylet: [*****]
5. Forecasts and Stocking Order: : Xomed will make an initial stocking
order of [*****] upon the signing of the term sheet. [*****].
ArthroCare will agree to relabel these Controllers, at its expense, once
the Xomed labels are available, and the payment terms for these initial
[*****] Controllers shall be net 60 days. The mix of wands may be
selected by Xomed. During the course of the Agreement, Xomed shall
furnish ArthroCare with a 6-month forecast with estimated purchase dates
and quantities of Products, and shall deliver an updated forecast on a
monthly basis. The first two months of each forecast will
be binding on Xomed. ArthroCare agrees to use its best efforts to
support any demand that is higher than the forecast.
6. Product Development: ArthroCare, at its expense and initiative,
will continue to pursue clinical studies and product development efforts
in collaboration with Xomed. If Xomed requests additional product
development beyond ArthroCare's planned efforts, ArthroCare will provide
a budget for such product development based on its direct cost plus
[*****] for overhead.
7. Minimum Royalties: During each period specified below, in
addition to any payments of the License Fee in section 2, Xomed's
minimum running royalty payments for ENTec and Visage Disposable Wands
will total at least the following:
Q2-Q4 98: [*****]
Q1-Q4 99: [*****]
Q1-Q4 00: [*****]
Q1-Q4 01: [*****]
Q1-Q4 02: [*****]
[*****]
* Xomed is not required to actually sell the Disposable Wands during
this specified period. In this case, the parties can compute the
required minimum purchase based on average ASP during the specified
period.
8. Conflict of Interest: Xomed agrees that any efforts by Xomed
itself, or through its distributors, to sell Electrosurgical products
that compete with ArthroCare's products will constitute a breach of
Xomed's obligations to market ArthroCare's Products and consequently a
breach of this term sheet. ArthroCare recognizes that Xomed already
distributes RF products that are not competitive with ArthroCare's
products, and these existing products will be listed in the
definitive agreement and will be deemed non-competitive.
9. Visage: [*****]
10. Trademarks: ArthroCare has granted Xomed the right to use all of
ArthroCare's registered and pending trademarks and tradenames during the
term of this Agreement. In return, Xxxxx agrees to advertise and
promote the Products, where appropriate, under ArthroCare's trademarks
and tradenames. Notwithstanding the above, ArthroCare agrees to label
ENTec products sold to Xomed with the Xomed tradename.
11. Term and Termination: This agreement shall continue in full force
and effect for a period of five years from the effective date of this
term sheet, and will be automatically renewable on a yearly basis
thereafter provided that: [*****]
ArthroCare will have the right to terminate this agreement prior to that
time if Xomed fails to [*****]. If ArthroCare terminates this Agreement
for either of these reasons, ArthroCare shall [*****]. In addition,
ArthroCare shall [*****].
[*****]
12. Change of Control: Both parties agree not to acquire greater
than 15% of the other party's stock unless such acquisition is pursuant
to a friendly tender offer endorsed by the other party's board, or
unless such acquisition is in response to an unsolicited Change in
Control attempt by a third party. To the extent not prohibited under
applicable law, both parties shall use their best efforts to give the
other party not less than 30 days prior notice of any Change in
Control. All such information will be treated as confidential by the
receiving party. Notwithstanding any such Change in Control, both
parties shall continue to be obligated to perform its obligations under
this Agreement. However, both parties would have the option to
terminate this Agreement upon the Change in Control of either party, and
in such event, ArthroCare shall have the duty to buy back all
controllers owned by Xomed according to the formula in Section 11.
In addition, if ArthroCare terminates this agreement because of any such
change of control, ArthroCare shall be required to pay Xomed a
termination fee as described in section 11.
"Change in Control" means: (a) the sale, lease, exchange or other
transfer, directly or indirectly, of substantially all of the assets of
one of the parties (in one transaction or in a series of related
transactions) to one or more persons or entities that are not affiliates
of that party; (b) the approval by the shareholders of one of the
parties of any plan or proposal for its liquidation or dissolution; or
(c) a merger or consolidation of one of the parties if the shareholders
of that party immediately prior to the effective date of such merger or
consolidation have beneficial ownership, immediately following the
effective date of such merger or consolidation, of securities of
the surviving corporation representing 50% or less of the combined
voting power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors.
[*****]
13. Confidential Treatment: Other than disclosures that may be
required by securities or other applicable laws, both parties agree to
use reasonable efforts to maintain the confidentiality of the final
agreement and any other confidential information obtained from the other
party during the course of the agreement (e.g., sales forecasts,
proprietary information, etc). In addition, both parties agree to use
reasonable efforts to receive confidential treatment of the substantive
portions of this term sheet and the definitive agreement from the SEC.
Neither party shall issue any press release: (1) relating to this
term sheet or the definitive agreement; or (2) referring to the other
party, without providing the other party with the opportunity to review
and comment on the press release.
14. Effect of Term Sheet: This term sheet will be considered a binding
contract on the parties until the definitive agreement is executed.
* The parties shall rely upon and operate in good faith under the
terms of this term sheet, and shall attempt in good faith to negotiate a
definitive agreement reflecting the terms of this term sheet as well as
terms incorporating standard covenants, representations and warranties.
* Once the term sheet is executed by both parties, while the
definitive agreement is being drafted, Xomed shall: (1) pay the [*****]
license payment outlined in section 2 to ArthroCare; (2) shall make the
stocking order in section 5; and (3) will cease all discussions with
competitive RF companies. In exchange, ArthroCare shall: (1) cease all
discussions with other potential ENT distributors; (2) cease the sale of
ENT products; (3) cease the execution of any further agreements with
distributors for ENT products, and (4) shall not hire any direct sales
representatives for ENT.
ARTHROCARE CORPORATION XOMED SURGICAL PRODUCTS
By: By:
Print Name: Print Name:
Title: Title:
