<PAGE>
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 June 30, 1996 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
0-27880
CardioThoracic Systems, Inc.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3228757
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10600 N. Tantau Ave., Cupertino, CA 95014-0739
----------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (408) 342-1700
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 requirements for the past 90 days.
(Item 1) Yes X No
---------- ----------
(Item 2) Yes No X
---------- ----------
As of July 26, 1996, there were 12,949,163 shares of the Registrant's Common
Stock outstanding.
Exhibit Index on page: 31
Total number of pages: 46
1
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
CARDIOTHORACIC SYSTEMS, INC.
Balance Sheets as of June 30, 1996 and
December 31, 1995 3
Statements of Operations for the three and six months ended June 30,
1996 and the cumulative period from June 15, 1995 (date of
of inception) through June 30, 1996 4
Statements of Cash Flows for the six months ended June 30,
1996 and the cumulative period from June 15, 1995 (date of
of inception) through June 30, 1996 5
Notes to Financial Statements 6
INFORMED CREATION
Balance Sheets as of June 14, 1995 and
December 31, 1994 8
Statements of Operations for the three and six months ended June 14,
1995 and the cumulative period from November 3, 1993
(date of inception) through June 14, 1995 9
Statements of Cash Flows for the six months ended June 14,
1995 and the cumulative period from November 3, 1993
(date of inception) through June 14, 1995 10
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION 27
SIGNATURES 30
EXHIBIT INDEX 31
2
<PAGE>
Item 1. Financial Statements
CARDIOTHORACIC SYSTEMS, INC.
(a company in the development stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 84,957,967 $ 711,620
Available-for-sale securities - 2,582,782
Notes receivable from officers 115,000 -
Prepaid expenses and other current assets 391,112 30,571
------------ -------------
Total current assets 85,464,079 3,324,973
Property and equipment 452,260 66,244
Less accumulated depreciation (28,752) (1,781)
------------ -------------
423,508 64,463
Notes receivable from officers 275,000 -
Other assets 48,409 -
------------ -------------
Total assets $ 86,210,996 $ 3,389,436
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 443,452 $ 87,260
Accrued liabilities 770,593 88,499
------------ -------------
Total current liabilities 1,214,045 175,759
Stockholders' equity:
Convertible preferred stock, par value $0.001 - 4,025
Common stock, par value $0.001 12,949 2,800
Additional paid-in capital 103,184,818 6,006,335
Accumulated deficit (7,842,345) (997,213)
Deferred compensation (10,358,471) (1,802,270)
------------ -------------
Total stockholders' equity 84,996,951 3,213,677
------------ -------------
Total liabilities and stockholders' equity $ 86,210,996 $ 3,389,436
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
3
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
(a company in the development stage)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Period from
June 15, 1995
Three Months Ended Six Months Ended (date of inception) to
June 30, 1996 June 30, 1996 June 30, 1996
------------------ ---------------- ----------------------
<S> <C> <C> <C>
Operating expenses:
Research and development $ 2,518,141 $ 5,148,772 $ 5,637,319
Marketing, general, and administrative 1,506,398 2,588,417 3,144,090
------------ ------------- ------------
Total operating expenses 4,024,539 7,737,189 8,781,409
------------ ------------- ------------
Loss from operations (4,024,539) (7,737,189) (8,781,409)
Interest income 853,619 892,057 939,064
------------ ------------- ------------
Net loss $ (3,170,920) $ (6,845,132) $ (7,842,345)
------------ ------------- ------------
------------ ------------- ------------
Net loss per share $ (0.27) $ (0.64) $ (0.78)
------------ ------------- ------------
------------ ------------- ------------
Shares used in computing
net loss per share 11,937,336 10,705,813 10,042,865
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying notes.
4
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
(a company in the development stage)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Period from
June 15, 1995
Six Months Ended (date of inception) to
June 30, 1996 June 30, 1996
---------------- -----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,845,132) $ (7,842,345)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 26,971 28,752
Amortization of deferred compensation 3,393,996 3,654,181
Changes in operating assets and liabilities:
Notes receivable from officers (390,000) (390,000)
Prepaid expenses and other current assets (360,541) (391,112)
Accounts payable 356,192 443,452
Accrued liabilities 682,094 770,593
------------- -------------
Net cash used in operating activities (3,136,420) (3,726,479)
INVESTING ACTIVITIES
Purchases of property and equipment (386,016) (452,260)
Purchase of available-for-sale securities - (2,582,782)
Proceeds from maturities of available-for-sale securities 2,582,782 2,582,782
Increase in other assets (48,409) (48,409)
------------- -------------
Net cash used in investing activities 2,148,357 (500,669)
FINANCING ACTIVITIES
Proceeds from issuance of promissory note - 100,000
Repayment of promissory note - (100,000)
Proceeds from issuance of convertible promissory notes, net - 196,173
Proceeds from issuance of convertible preferred stock 995,750 4,748,010
Proceeds from issuance of common stock 84,238,660 84,240,932
------------- -------------
Net cash provided by financing activies 85,234,410 89,185,115
Net increase in cash and cash equivalents 84,246,347 84,957,967
Cash and cash equivalents at beginning of period 711,620 -
------------- -------------
Cash and cash equivalents at end of period $ 84,957,967 $ 84,957,967
------------- -------------
------------- -------------
Supplemental schedule of non cash investing and financing activities:
Conversion of promissory notes for Series A preferred stock $ 200,000
</TABLE>
See accompanying notes.
5
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with 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 accruals) considered necessary for a
fair presentation have been included.
The operating results of the interim periods presented are not necessarily
indicative of the results for the year ending December 31, 1996 or for any other
interim period. The accompanying financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 1995 included in the Company's Registration Statement on Form
S - 1 (No. 333-1840) filed with the Securities and Exchange Commission.
Note 2. Formation and Business of the Company
CardioThoracic Systems, Inc. (the Company) was incorporated in the state of
California on June 15, 1995 and subsequently acquired all of the intellectual
property assets from its predecessor, Informed Creation, a sole proprietorship,
and expensed the purchase price to research and development as purchased in
process research and development technology. The Company designs, develops,
manufactures and markets surgical products and systems for minimally invasive
cardiothoracic surgery. The Company is in the development stage and since
inception has devoted substantially all of its efforts to develop its product,
raise capital and recruit personnel.
Note 3. Available-for-Sale Securities
The Company has adopted the provisions of Financial Accounting Standard No.
115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No.115"). Under the provisions of SFAS No. 115, the Company has classified its
investments as of December 31, 1995 as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The amortized
cost of available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in interest income. The cost of securities sold is based on the specified
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
6
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
At December 31, 1995, available-for-sale securities consist of the
following:
<TABLE>
<CAPTION>
Unrealized Accrued Estimated
Cost Gain Interest Fair Value
-------------- -------------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Government Securities $2,561,854 $ - $20,928 $2,582,782
</TABLE>
All available-for-sale securities had maturity dates of less than one year
from December 31, 1995. There were no realized gains or losses for 1995 or for
the six months ended June 30, 1996.
Note 4. Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares from
stock options and convertible preferred stock are excluded from the computation
as their effect is antidilutive except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued during the period beginning twelve months prior to the Company's
April 1996 initial public offering at prices substantially below the initial
public offering price have been included in the calculation as if they were
outstanding for all periods presented prior to the effective date of the
Company's initial public offering (using the treasury stock method at the
initial offering price for stock options and the if-converted method for
convertible preferred stock).
Note 5. Initial Public Offering
The Company sold 5,117,500 shares of common stock (including 667,500 shares
from the exercise of the underwriter's over-allotment option) at $18.00 per
share through an initial public offering in April 1996. Net proceeds (after
underwriter's commissions and fees along with other costs associated with the
offering) totaled approximately $84,229,000. Upon completion of the offering,
all outstanding shares of Preferred Stock ( a total of 5,025,000 shares) were
converted into shares of Common Stock on a one-for-one basis.
7
<PAGE>
INFORMED CREATION
(a development stage entity)
BALANCE SHEETS
June 14, December 31,
1995 1994
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,146 $ 3,333
----------- ------------
Total current assets 6,146 3,333
Property and equipment, net 9,707 11,266
----------- ------------
Total assets $ 15,853 $ 14,599
----------- ------------
----------- ------------
LIABILITIES AND SOLE PROPRIETORSHIP CAPITAL
Current liabilities:
Accounts payable $ 1,618 $ 1,105
----------- ------------
Total current liabilities 1,618 1,105
Sole proprietorship capital 14,235 13,494
----------- ------------
Total liabilities and sole proprietorship $ 15,853 $ 14,599
----------- ------------
----------- ------------
See accompanying notes. 8
<PAGE>
INFORMED CREATION
(a development stage entity)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Period from
November 3, 1993
Three Months Ended Six Months Ended (date of inception)
June 14, 1995 June 14, 1995 to June 14, 1995
--------------- --------------- ------------------
<S> <C> <C> <C>
Costs and expenses:
Research and development $ 2,414 $ 3,181 $ 29,649
General and administrative 3,702 5,164 28,820
---------- ---------- -----------
Total operating expenses 6,116 8,345 58,469
---------- ---------- -----------
Loss from operations (6,116) (8,345) $ (58,469)
Interest and other income, net 10 24 96
---------- ---------- -----------
Net loss $ (6,106) $ (8,321) $ (58,373)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes. 9
<PAGE>
INFORMED CREATION
(a development stage entity)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Period from
November 3, 1993
Six Months Ended (date of inception)
June 14, 1995 to June 14, 1995
---------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,321) $ (58,373)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,559 4,751
Changes in operating assets and liabilities:
Accounts payable 513 1,618
----------- ------------
Net cash used in operating activities (6,249) (52,004)
INVESTING ACTIVITIES
Purchases of property and equipment - (14,458)
----------- ------------
Net cash used in investing activities - (14,458)
FINANCING ACTIVITIES
Capital contributed 27,406 118,240
Distributions to sole proprietor (18,344) (45,632)
----------- ------------
Net cash provided by financing activities 9,062 72,608
Net increase in cash and cash equivalents 2,813 6,146
Cash and cash equivalents at beginning of period 3,333 -
----------- ------------
Cash and cash equivalents at end of period $ 6,146 $ 6,146
----------- ------------
----------- ------------
</TABLE>
See accompanying notes. 10
<PAGE>
INFORMED CREATION
(a development stage entity)
NOTES TO FINANCIAL STATEMENTS
June 14, 1995
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with 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 accruals) considered necessary for a fair presentation have
been included.
The accompanying financial statements should be read in conjunction with
the audited financial statements and notes thereto for the cumulative period
from November 3, 1993 (date of inception) to June 14, 1995 included in the
Company's Registration Statement on Form S - 1 (No. 333-1840) filed with the
Securities and Exchange Commission.
Note 2. Formation and Business of the Sole Proprietorship
Informed Creation (the Sole Proprietorship) designs and develops surgical
products and systems for minimally invasive surgery. The Sole Proprietorship
was formed on November 3, 1993 and since inception has devoted substantially all
of its efforts to develop its product, raise capital and recruit personnel.
In September 1995, Informed Creation sold all of its intellectual property
assets to CardioThoracic Systems, Inc.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The business of the Company was commenced in November 1993 as a sole
proprietorship, Informed Creation, and to date the business has been engaged
primarily in organizational, research and product development efforts. In June
1995, the business was incorporated and as part of the Company's initial
financing in September 1995 the Company acquired all intellectual property
assets of Informed Creation. The Company has a limited operating history upon
which evaluation of its prospects can be made. Such prospects must be considered
in light of the substantial risks, expenses and difficulties encountered by
entrants into the medical device industry, which is characterized by an
increasing number of participants, intense competition and a high failure rate.
The Company has never generated revenues and does not have experience in
manufacturing, marketing or selling its products under development. There can be
no assurance that the Company's development efforts will result in commercially
available products, that the Company will be successful in introducing its
products under development, or that required regulatory clearances or approvals
will be obtained in a timely manner, or at all. The Company has experienced
operating losses since its inception, and, as of June 30, 1996, the Company had
an accumulated deficit of $7,842,345. The development and commercialization of
the Company's products will require substantial development, regulatory, sales
and marketing, manufacturing and other expenditures. The Company expects its
operating losses to continue at least through 1997 as it continues to expend
substantial resources to complete development of the Company's products, obtain
regulatory clearances or approvals, build its marketing, sales, manufacturing
and finance organizations and conduct further research and development. There
can be no assurance that the Company's products under development will ever gain
commercial acceptance or that the Company will ever generate revenues or achieve
profitability.
The Company's MIDCAB System is being developed in order to enable the
majority of cardiothoracic surgeons to perform the MIDCAB procedure.
Accordingly, the Company's success is dependent upon acceptance of the MIDCAB
procedure by the medical community as a reliable, safe and cost effective
alternative to existing treatments for revascularizing blocked coronary
arteries. To date, the MIDCAB procedure has only been performed on a very
limited basis by a small number of highly skilled cardiothoracic surgeons. Of
the procedures performed to date, the vast majority have been performed on a
single artery, typically the left anterior descending artery ("LAD") or, in
substantially fewer instances, the right coronary artery ("RCA"), and an
extremely limited number have been performed on the circumflex artery. A
significant percentage of CABG procedures are performed on multiple vessels. To
date, multiple vessel MIDCAB procedures have only been performed on an extremely
limited basis, and there can be no assurance that the MIDCAB procedure will be
effectively utilized for multiple bypasses on a more frequent basis. The Company
is unable to predict how quickly, if at all, the MIDCAB procedure will be
adopted by the medical community or, if it is adopted, the number of MIDCAB
procedures that will be performed. The medical conditions that can be treated
with the MIDCAB procedure can also be treated by widely accepted surgical
procedures such as CABG surgery and catheter-based treatments, including balloon
angioplasty, atherectomy and coronary stenting. Although the Company believes
that the MIDCAB procedure has significant advantages over competing procedures,
broad-based clinical adoption of the MIDCAB procedure will not occur until
physicians determine that the procedure is an attractive alternative to current
treatments for coronary artery disease. The Company believes that physician
endorsements will be essential for clinical adoption of this procedure, and
there can be no assurance that any such endorsements will be obtained
12
<PAGE>
in a timely manner, if at all. Clinical adoption will also depend upon the
Company's ability to facilitate training of cardiothoracic surgeons to perform
minimally invasive bypass surgery on a beating heart, and the willingness of
such surgeons to perform such a procedure. Patient acceptance of the procedure
will depend in part upon physician recommendations as well as other factors,
including the degree of invasiveness, the effectiveness of the procedure and
rate and severity of complications associated with the procedure as compared to
other treatments. Even if the clinical efficacy of the MIDCAB procedure is
established, physicians may elect not to recommend the procedure unless
acceptable reimbursement from health care payors is available. Health care payor
acceptance may require evidence of the cost effectiveness of the MIDCAB
procedure as compared to other currently available treatments. There can be no
assurance that the MIDCAB procedure will gain clinical adoption. Failure of the
MIDCAB procedure to achieve significant clinical adoption would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The MIDCAB System is the Company's primary near-term product focus and is
expected to account for the great majority of the Company's revenues for the
foreseeable future. The components of the MIDCAB System are in the early stages
of development, and only certain of these instruments have been tested on humans
on a limited basis. Therefore, they will require further development, as
well as regulatory clearance, registration or approval, before they can be
marketed in the United States or internationally. Designs for certain of
these components have not yet been formalized, and final prototypes have not
yet been developed. The Company has never sold any products, and there can be
no assurance that the Company's development efforts will be successful or
that its products under development will be shown to be safe or effective,
capable of being manufactured in commercial quantities at acceptable costs,
registered, cleared or approved by regulatory authorities or successfully
marketed. Nor can there be any assurance that demand for the MIDCAB System
will be sufficient to allow profitable operations. Failure of the MIDCAB
System to be successfully commercialized would have a material adverse effect
on the Company's business, financial condition and results of operations.
Before the Company can market its products under development in the United
States, the Company must obtain clearance or approval from the FDA. The Company
has been notified by the FDA that it is exempted from filing a premarket
notification for the CTS Access Platform and the Stabilizer and is allowed to
market these products in the United States. The Company expects to file
510(k) premarket notifications for clearance to market additional components
of the MIDCAB System and Saphenous Vein Harvesting System by the end of 1996.
There can be no assurance that the Company will complete filings on this
schedule, that the FDA will act favorably or quickly on the Company's 510(k)
submissions, or that significant difficulties and costs will not be
encountered by the Company in its efforts to obtain FDA clearance. Any such
difficulties could delay or preclude obtaining regulatory clearance or
approval. In addition, particularly if the Company packages and labels the
components of the MIDCAB System as a surgical kit as currently planned, there
can be no assurance that the FDA will not request additional data, require
that the Company conduct clinical studies or require a more extensive
regulatory submission known as a premarket approval ("PMA") application,
causing the Company to incur substantial costs and delays. In addition, there
can be no assurance that the FDA will not impose strict labeling or other
requirements as a condition of its 510(k) clearance or PMA approval, any of
which could limit the Company's ability to market its products under
development. Further, if the Company wishes to modify a product after FDA
clearance of a 510(k) premarket notification or approval of a PMA, including
changes in indications or other modifications that could affect safety and
efficacy, additional clearances or approvals will be required from the FDA.
Failure to receive, or delays in receipt of, FDA clearances or approvals,
including delays resulting from an FDA request for clinical trials or
additional data as a prerequisite to clearance or approval, or any FDA
conditions that limit the ability of the Company to market its
13
<PAGE>
products under development, could have a material adverse effect on the
Company's business, financial condition and results of operations.
In order for the Company to market its products under development in Europe
and certain other international jurisdictions, the Company and its distributors
and agents must obtain required regulatory registrations or approvals and
otherwise comply with extensive regulations regarding safety, efficacy and
quality. These regulations, including the requirements for registrations or
approvals and the time required for regulatory review, vary from country to
country. There can be no assurance that the Company will obtain regulatory
registrations or approvals in such countries or that it will not be required to
incur significant costs in obtaining or maintaining its foreign regulatory
registrations or approvals. Delays in receipt of these registrations or
approvals to market its products under development, failure to receive these
clearances or approvals, or future loss of previously received registrations or
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
Forward-looking statements in this report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties, including, without limitation, risks disclosed under the caption
"Risk factors" beginning on page 16 of this report; and other risks detailed
from time to time in the Company's filings with the Securities and Exchange
Commission. The Company's actual results may differ materially from the results
discussed in the forward-looking statements.
OPERATING DATA
The following table sets forth the operating data of CardioThoracic
Systems, Inc. and Informed Creation for the three and six months ended June 30,
1996 and June 14, 1995, respectively in order to facilitate management's
discussion of financial results. Certain costs and expenses presented in the
statements of operations of Informed Creation represent allocations and
management estimates. As a result, the statements of operations presented are
not strictly comparable.
<TABLE>
<CAPTION>
CardioThoracic Systems, Inc. | Informed Creation
Three Months Ended Six Months Ended | Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996 | June 14, 1995 June 14, 1995
------------- ------------- | ------------- -------------
|
<S> <C> <C> | <C> <C>
Operating Expenses: |
Research and development $ 2,518,141 $ 5,148,772 | $ 2, 414 $ 3,181
Marketing, general and |
administrative 1,506,398 2,588,417 | 3,702 5,164
----------- ----------- | -------- -------
Total operating expenses 4,024,539 7,737,189 | 6,116 8,345
|
Loss from operations (4,024,539) (7,737,189) | (6,116) (8,345)
|
Interest income, net 853,619 892,057 | 10 24
----------- ----------- | -------- -------
Net loss $(3,170,920) $(6,845,132) | $ (6,106) $(8,321)
----------- ----------- | -------- -------
----------- ----------- | -------- -------
</TABLE>
14
<PAGE>
RESULTS OF OPERATIONS
CardioThoracic Systems, Inc. for the three and six months ended June 30,
1996 compared to Informed Creation for the three and six months ended June
14, 1995
No revenues were recorded in either the three and six months ended June 30,
1996 or the three and six months ended June 14, 1995.
The research and development expenses for the three and six months ended
June 30, 1996 were $2,518,141 and $5,148,772, respectively compared to $2,414
and $3,181 for the three and six months ended June 14, 1995, respectively.
These increases were due in part to a $1,332,823 and $2,669,902 charge for
amortization of deferred compensation in the three and six months ended June 30,
1996, respectively, with no such charges in 1995. The remaining increases were
due to an increase in research and development staff and increased expenditures
related to the continuing development of the instruments associated with the
MIDCAB System and Saphenous Vein Harvesting System. The Company expects that
research and development expenses will continue to increase substantially in
1996 as the Company expands its research and development activities related to
the MIDCAB System, Saphenous Vein Harvesting System, valve repair and
replacement and other research efforts.
Marketing, general and administrative increased to $1,506,398 and
$2,588,417 for the three and six months ended June 30, 1996, respectively
compared to $3,702 and $5,164 for the three and six months ended June 14, 1995,
respectively. These increases were due in part to a $336,146 and $724,094
charge for amortization of deferred compensation in the three and six months
ended June 30, 1996, respectively, with no such charges in 1995. The remaining
increase was due primarily to the hiring of marketing and administrative
personnel and consultants, the Company's promotional efforts to increase market
awareness of the Company and the MIDCAB procedure and establishing the Company's
administrative infrastructure. The Company expects that sales and marketing and
administrative expenses will continue to increase substantially in 1996 as the
Company builds its sales and marketing and administrative organizations,
develops and sponsors surgeon training programs, puts in place financial and
management information and control systems, and makes expenditures to increase
market awareness of the MIDCAB procedure and the MIDCAB System.
The Company has recorded deferred compensation of $13,965,605 for the
difference between the option exercise price or restricted stock purchase price
and the deemed fair value of the Company's Common Stock for options granted and
restricted stock sold in 1995 and early 1996. The deferred compensation is
being amortized to operating expenses over the related vesting period of the
shares (one to four years) and will, therefore, continue to have an adverse
effect on the Company's results of operations. Amortization of deferred
compensation charged to operating expenses in the three and six months ended
June 30, 1996 totaled $1,668,969 and $3,393,996, respectively.
Interest income increased to $853,619 and $892,057 for the three and six
months ended June 30, 1996, respectively, compared to $10 and $24 for the three
and six months ended June 14, 1995, respectively. The increase was primarily
due to the interest received on higher average cash balances resulting from the
completion of the Company's initial public offering in April 1996 as described
in note 5 of the CardioThoracic Systems, Inc. Notes to Financial Statements.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of equity securities. As of June 30, 1996, the Company had raised
approximately $89.2 million (net of stock issuance costs) from the sale of
equity. As of June 30, 1996, cash and cash equivalents equaled $85.0 million.
The Company's cash used in operations was $3,136,420 for the six months ended
June 30, 1996, reflecting expenditures made primarily to increase research and
development, to commence marketing activities and to support its administrative
infrastructure.
The Company sold 5,117,500 shares of common stock (including 667,500 shares
from the exercise of the underwriter's over-allotment option) at $18.00 per
share through an initial public offering in April 1996. Net proceeds (after
underwriter's commissions and fees along with other costs associated with the
offering) totaled approximately $84,229,000.
The Company plans to finance its operations principally from the
approximately $84.2 million raised in its recent initial public offering and
interest thereon, its existing capital resources and, to the extent available,
lines of credit. The Company currently has no commitments for any credit
facilities, such as revolving credit agreements or lines of credit that could
provide additional working capital. The Company believes that the net proceeds
from the initial public offering, together with interest thereon and the
Company's existing cash balances, will be sufficient to fund its operations
through 1998. The Company's capital requirements depend on numerous factors,
including the progress of the Company's product development programs, the
receipt of and the time required to obtain regulatory clearances or approvals,
the resources the Company devotes to developing, manufacturing and marketing its
products, the extent to which the Company's products generate market acceptance
and demand, and other factors. The Company expects to devote substantial
capital resources to research and development, to hire and develop a direct
sales force in the United States and to expand manufacturing capacity and
facilities. The timing and amount of such capital requirements cannot be
accurately predicted. Consequently, the Company may be required to raise
additional funds through public or private financing, 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 Company, or at all, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
convenants.
At June 30, 1996, the Company had approximately $1,173,000 in federal and
$1,135,000 in state net operating loss carryforwards, which expire in the years
2010 and 2000, respectively. Utilization of federal income tax carryforwards is
subject to certain limitations under Section 382 of the Internal Revenue Code of
1986. These annual limitations may result in expiration of net operating losses
and research and development credits before they can be fully utilized.
RISK FACTORS
This quarterly report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated by such forward-looking statements as a
result of certain factors including those set forth in the following risk
factors and elsewhere in this quarterly report on Form 10-Q.
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LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE
LOSSES. The Company has a limited operating history upon which evaluation of
its prospects can be made. Such prospects must be considered in light of the
substantial risks, expenses and difficulties encountered by entrants into the
medical device industry, which is characterized by an increasing number of
participants, intense competition and a high failure rate. To date, the Company
has engaged primarily in organizational and research and product development
efforts, and a number of the Company's key management and technical personnel
have only recently joined the Company. The Company has never generated revenues
and does not have experience in manufacturing, marketing or selling its products
under development. There can be no assurance that the Company's development
efforts will result in commercially available products, that the Company will be
successful in introducing its products under development, or that required
regulatory clearances or approvals will be obtained in a timely manner, or at
all. The Company has experienced operating losses since its inception, and, as
of June 30, 1996, the Company had an accumulated deficit of $7,842,345. The
development and commercialization of the Company's products will require
substantial development, regulatory, sales and marketing, manufacturing and
other expenditures. The Company expects its operating losses to continue at
least through 1997 as it continues to expend substantial resources to complete
development of the Company's products, obtain regulatory clearances or
approvals, build its marketing, sales, manufacturing and finance organizations
and conduct further research and development. There can be no assurance that the
Company's products under development will ever gain commercial acceptance or
that the Company will ever generate revenues or achieve profitability.
UNCERTAINTY OF CLINICAL ADOPTION OF MIDCAB PROCEDURE. The Company's MIDCAB
System is being developed in order to enable the majority of cardiothoracic
surgeons, using their existing skills coupled with Company sponsored training,
to perform the Minimally Invasive Direct Coronary Artery Bypass ("MIDCAB")
procedure. Accordingly, the Company's success is dependent upon acceptance of
the MIDCAB procedure by the medical community as a reliable, safe and cost
effective alternative to existing treatments for revascularizing blocked
coronary arteries. To date, the MIDCAB procedure has only been performed on a
very limited basis by a small number of highly skilled cardiothoracic surgeons.
Of the procedures performed to date, the vast majority have been performed on a
single artery, typically the left anterior descending artery ("LAD") or, in
substantially fewer instances, the right coronary artery ("RCA"), and an
extremely limited number have been performed on the circumflex artery. A
significant percentage of coronary artery bypass graft ("CABG") procedures are
performed on multiple vessels. To date, multiple vessel MIDCAB procedures have
only been performed on an extremely limited basis, and there can be no assurance
that the MIDCAB procedure will be effectively utilized for multiple bypasses on
a more frequent basis. The Company is unable to predict how quickly, if at all,
the MIDCAB procedure will be adopted by the medical community or, if it is
adopted, the number of MIDCAB procedures that will be performed. The medical
conditions that can be treated with the MIDCAB procedure can also be treated by
widely accepted surgical procedures such as CABG surgery and catheter-based
treatments, including balloon angioplasty, atherectomy and coronary stenting.
Broad-based clinical adoption of the MIDCAB procedure will not occur until
physicians determine that the procedure is an attractive alternative to current
treatments for coronary artery disease. The Company believes that physician
endorsements will be essential for clinical adoption of this procedure, and
there can be no assurance that any such endorsements will be obtained in a
timely manner, if at all. Clinical adoption will also depend upon the Company's
ability to facilitate training of cardiothoracic surgeons to perform minimally
invasive bypass surgery on a beating heart, and the willingness of such surgeons
to perform such a procedure. Patient acceptance of the procedure will depend in
part upon physician recommendations as well as other factors, including the
degree of invasiveness, the effectiveness of the procedure and rate and severity
of complications associated with
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the procedure as compared to other treatments. Even if the clinical efficacy of
the MIDCAB procedure is established, physicians may elect not to recommend the
procedure unless acceptable reimbursement from health care payors is available.
Health care payor acceptance may require evidence of the cost effectiveness of
the MIDCAB procedure as compared to other currently available treatments. There
can be no assurance that the MIDCAB procedure will gain clinical adoption.
Failure of the MIDCAB procedure to achieve significant clinical adoption would
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON THE MIDCAB SYSTEM; UNCERTAINTY OF MARKET ACCEPTANCE OF THE
MIDCAB SYSTEM. The MIDCAB System is the Company's primary near-term product
focus and is expected to account for the great majority of the Company's
revenues for the foreseeable future. The components of the MIDCAB System are in
the early stages of development, and only certain of these instruments have been
tested on humans on a limited basis. Therefore, they will require further
development, as well as regulatory clearance or approval, before they can be
marketed in the United States or internationally. Designs for certain of these
components have not yet been formalized, and final prototypes have not yet been
developed. The Company has never sold any products, and there can be no
assurance that the Company's development efforts will be successful or that its
products under development will be shown to be safe or effective, capable of
being manufactured in commercial quantities at acceptable costs, cleared or
approved by regulatory authorities or successfully marketed. Nor can there be
any assurance that demand for the MIDCAB System will be sufficient to allow
profitable operations. Failure of the MIDCAB System to be successfully
commercialized would have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF REGULATORY APPROVALS. The design, manufacturing, labeling,
distribution and marketing of the components of the MIDCAB System and the
Saphenous Vein Harvesting System will be subject to extensive and rigorous
government regulation in the United States and certain other countries where the
process of obtaining and maintaining required regulatory clearance or approvals
is lengthy, expensive and uncertain. In order for the Company to market its
products under development in the United States, the Company must obtain
clearance or approval from the United States Food and Drug Administration
("FDA"). The Company intends to seek clearance to market each of the components
of the MIDCAB System and the Saphenous Vein Harvesting System through a 510(k)
premarket notification. The Company has been notified by the FDA that it is
exempted from filing a premarket notification for the CTS Access Platform and
the Stabilizer and is allowed to market these products in the United States. The
Company expects to file 510(k) premarket notifications for clearance to market
additional components of the MIDCAB System and Saphenous Vein Harvesting System
by the end of 1996. There can be no assurance that the Company will complete
filings on this schedule, that the FDA will act favorably or quickly on the
Company's 510(k) submissions, or that significant difficulties and costs will
not be encountered by the Company in its efforts to obtain FDA clearance or
approval. Any such difficulties could delay or preclude obtaining regulatory
clearance or approval. In addition, particularly if the Company packages and
labels the components of the MIDCAB System as a surgical kit as currently
planned, there can be no assurance that the FDA will not request additional
data, require that the Company conduct clinical studies or require a more
extensive regulatory submission known as a premarket approval ("PMA")
application, causing the Company to incur substantial costs and delays. In
addition, there can be no assurance that the FDA will not impose strict labeling
or other requirements as a condition of its 510(k) clearance or PMA approval,
any of which could limit the Company's ability to market its products under
development. Further, if the Company wishes to modify a product after FDA
clearance of a 510(k) premarket notification or approval of a PMA, including
changes in indications or other modifications that could affect safety and
efficacy, additional clearances
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or approvals will be required from the FDA. Failure to receive, or delays in
receipt of, FDA clearances or approvals, including delays resulting from an FDA
request for clinical trials or additional data as a prerequisite to clearance or
approval, or any FDA conditions that limit the ability of the Company to market
its products under development, could have a material adverse effect on the
Company's business, financial condition and results of operations.
In order for the Company to market its products under development in Europe
and certain other international jurisdictions, the Company and its distributors
and agents must obtain required regulatory registrations or approvals and
otherwise comply with extensive regulations regarding safety, efficacy and
quality. These regulations, including the requirements for registrations or
approvals and the time required for regulatory review, vary from country to
country. There can be no assurance that the Company will obtain regulatory
registrations or approvals in such countries or that it will not be required to
incur significant costs in obtaining or maintaining its foreign regulatory
registrations or approvals. Delays in receipt of registrations or approvals to
market the Company's products under development, failure to receive these
registrations or approvals, or future loss of previously received registrations
or approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
The European Union has promulgated rules that require that medical products
receive by mid-1998 the right to affix the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. In order to obtain the right to affix the CE mark to
its products under development, the Company will need to obtain certification
that its processes meet ISO 9000 quality standards. Failure to receive the right
to affix the CE mark will prohibit the Company from selling its products in
member countries of the European Union after mid-1998. There can be no assurance
that the Company will be successful in meeting ISO 9000 quality standards or
other certification requirements.
CONTINUING GOVERNMENT REGULATION. Regulatory clearances or approvals, if
granted, may include significant limitations on the indicated uses for which the
products may be marketed. FDA enforcement policy strictly prohibits the
marketing of FDA cleared or approved medical devices for unapproved uses. In
addition, the Company's manufacturing processes will be required to comply with
the Good Manufacturing Practices ("GMP") regulations of the FDA. These
regulations include design, testing, production, control, documentation and
other requirements. Enforcement of GMP regulations has increased significantly
in the last several years, and the FDA has publicly stated that compliance will
be more strictly scrutinized. The Company's facilities and manufacturing
processes, as well as those of any future third-party suppliers, will be subject
to periodic inspection by the FDA, the California Department of Health Services
and other agencies. To date, the Company has not undergone such an inspection.
Failure to comply with these and other applicable regulatory requirements could
result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant premarket clearance or premarket
approval for devices, withdrawal of clearances or approvals and criminal
prosecution, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
HIGHLY COMPETITIVE MARKET; RISK OF ALTERNATIVE THERAPIES. The medical
device industry and the market for treatment of cardiovascular disease, in
particular, are characterized by rapidly evolving technology and intense
competition. A number of competitors, including Johnson & Johnson, Boston
Scientific Corporation, Cordis Corporation, Guidant Corporation and Medtronic,
Inc., are currently
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marketing stents, catheters, lasers, drugs and other less invasive means of
treating cardiovascular disease. Many of these less invasive treatments and CABG
surgery are widely accepted in the medical community and have a long history of
safe and effective use. Many of the Company's competitors have substantially
greater capital resources, name recognition and expertise in and resources
devoted to research and development, manufacturing and marketing and obtaining
regulatory clearances or approvals. Furthermore, competition in the emerging
market for minimally invasive cardiothoracic surgery is expected to be intense
and to increase. Heartport, Inc., Medtronic, Inc., Research Medical Inc. and
United States Surgical Corp. have announced that they are developing products to
be used in minimally invasive coronary procedures. There can be no assurance
that the MIDCAB procedure will replace any current treatments. Additionally,
even if it is widely adopted, there can be no assurance that the Company's
competitors will not succeed in developing alternative procedures and
technologies or competing devices to perform the same procedure or therapeutic
drugs that are more effective than the Company's products or that render the
Company's products or technologies obsolete or not competitive. In addition,
there can be no assurance that existing products for other surgical uses will
not be used in MIDCAB procedures. Such competition could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY. The Company's
ability to compete effectively will depend in part on its ability to develop and
maintain proprietary aspects of its technology. The Company owns two issued
United States patents. The issued patents do not contain any claims that protect
the Company's products that are currently under development. The Company is the
licensee of a United States patent application for bipolar electrosurgical
scissors that are used in the IMA Harvester and the Saphenous Vein Harvesting
System. The Company has recently filed eight patent applications. There can be
no assurance that any issued patents or any patents which may be issued as a
result of the Company's licensed patent application or United States and
international patent applications will provide any competitive advantages for
the Company's products or that they will not be successfully challenged,
invalidated or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use and sell its products either in the United States or in
international markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation or interference
proceedings declared by the United States Patent and Trademark Office ("USPTO")
to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time-consuming. Litigation
may be necessary to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings will result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. An adverse determination in litigation or interference proceedings to
which the Company may become a party, including any litigation that may arise
against the Company as described in "Potential Litigation" below, could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties or prevent the Company from selling its
products in certain markets, or at all. Costs associated with settlements,
licensing and similar arrangements, may be
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substantial and could include ongoing royalties. Furthermore, there can be no
assurance that the necessary licenses would be available to the Company on
satisfactory terms, if at all. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Legislation is pending in Congress that, if enacted in its present form,
would limit the ability of medical device manufacturers in the future to obtain
patents on surgical and medical procedures that are not performed by, or as part
of, devices or compositions which are themselves patentable. While the Company
cannot predict whether the legislation will be enacted, or precisely what
limitations will result from the law if enacted, any limitation or reduction in
the patentability of medical and surgical methods and procedures could have a
material adverse effect on the Company's ability to protect its proprietary
methods and procedures.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through confidentiality and
proprietary information agreements. There can be no assurance that such
confidentiality or proprietary information agreements will not be breached, that
the Company would have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or be independently developed
by competitors.
POTENTIAL LITIGATION. Heartport, Inc. (formerly Stanford Surgical
Technologies, Inc.), the former employer of the Company's founder and Chief
Technical Officer, Charles S. Taylor, has alleged in certain correspondence that
Mr. Taylor and the Company may have misappropriated trade secrets of the former
employer and breached confidentiality obligations to the former employer. The
former employer also claims an ownership interest in certain developments and
products of the Company. The Company has agreed to provide for the defense of
Mr. Taylor in the event that litigation is commenced. Litigation is subject to
inherent uncertainties, especially in cases where complex technical issues are
decided by a lay jury. Accordingly, no assurance can be given that if a lawsuit
is commenced it would not be decided against the Company. Such an adverse
determination could have a material adverse effect upon 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 believes that, if successfully developed, the
Company's products under development could address a large potential market.
There can be no assurance that the Company's development and marketing efforts
will result in commercially available products to address this market, or that
demand for the Company's products, once they are available, will grow. Even if
demand for the Company's products does grow, there can be no assurance that the
Company will be able to develop the necessary manufacturing capability; build
and train the necessary manufacturing, sales and marketing teams; attract,
retain and integrate the required key personnel; or implement the financial and
management systems to meet growing demand for its products. Failure of the
Company to successfully manage its growth would have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company's ability to operate
successfully depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel, and its continuing
ability to attract and retain additional highly qualified scientific, technical,
managerial and finance personnel. Competition for such personnel is intense, and
there can be no assurance that the Company can retain such personnel or that it
can attract or retain other highly
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qualified scientific, technical, managerial and finance personnel in the future,
including key manufacturing, sales and marketing personnel. The loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect upon the Company's business, financial condition and
results of operations. In addition, many employees of the Company, including a
number of its key scientific, technical and managerial personnel, are subject to
the terms of confidentiality agreements with respect to proprietary information
of their former employers. The failure of these employees to comply with the
terms of their agreements with, or other obligations to, such former employers
could result in assertion of claims against the Company and such employees,
which, if successful, could restrict their role with the Company and have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON SCIENTIFIC ADVISORS. The Company has established a
Scientific Advisory Board including cardiothoracic surgery opinion leaders,
prominent surgeons and leading interventional cardiologists who the Company
believes have performed the vast majority of MIDCAB procedures. Members of the
Scientific Advisory Board consult with the Company regarding research and
development efforts at the Company, but are employed elsewhere on a full-time
basis. As a result, they can only spend a limited amount of time on the
Company's affairs. Although the Company has entered into consulting agreements,
with terms ranging from six months to four years, and confidentiality agreements
with each of the members of its Scientific Advisory Board, there can be no
assurance that the consulting and confidentiality agreements between the Company
and each of the members of the Scientific Advisory Board will not be terminated
or breached, and there can be no assurance that any of such agreements will be
renewed upon expiration.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company
currently has no sales and only has a small sales and marketing organization. In
the event the Company is successful in developing its products, manufacturing
them in commercial quantities, and receiving necessary FDA clearances or
approvals and other regulatory registrations or approvals, the Company intends
to sell them in the United States and certain European countries through a
direct sales force. In other markets, the Company intends to sell its products
under development primarily through distributors or by means of collaborative
arrangements. There can be no assurance that the Company will be able to build a
direct sales force or marketing organization, that establishing a direct sales
force or marketing organization will be cost effective, or that the Company's
sales and marketing efforts will be successful. There can be no assurance that
the Company will be able to enter into agreements with distributors or
collaborative arrangements on a timely basis or at all, or that such
distributors or collaborators will devote adequate resources to selling the
Company's products under development. In addition, to the extent that the
Company enters into distribution agreements or collaborative arrangements for
the sale of its products under development, the Company will be dependent upon
the efforts of third parties, and there can be no assurance that such efforts
will be successful. Failure to build an effective sales and marketing
organization or to establish effective distribution or collaborative
relationships could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON THIRD-PARTY DEVELOPER. The Company has an agreement with
Enable Medical Corp. ("Enable"), which provides for the co-development by Enable
and the Company of the IMA Harvester and the Saphenous Vein Harvesting System.
The Company is the exclusive licensee of the Saphenous Vein Harvesting System
and has an exclusive license to the IMA Harvester in the area of minimally
invasive cardiothoracic surgery. The successful development of these products
will be largely dependent upon the efforts of Enable. The failure of Enable and
the Company to develop the
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licensed products successfully could have a material adverse effect upon the
Company's business, financial condition and results of operations.
NO MANUFACTURING EXPERIENCE; SCALE-UP RISK. To date, the Company's
manufacturing activities have consisted only of building certain prototype
devices. As a result, the Company has no experience manufacturing its products
under development in the volumes that would be necessary for the Company to
achieve significant commercial sales, if the necessary regulatory clearances,
registrations or approvals are obtained and the Company's products are
successfully introduced. There can be no assurance that reliable, high-volume
manufacturing can be established or maintained at commercially reasonable costs.
In the second half of 1996, the Company plans to relocate its operations to a
larger facility, which will be used to manufacture its products. The integration
of the Company's operations into a new facility may result in inefficiencies and
delays. Specifically, companies often encounter difficulties in scaling up
production, including problems involving production yield, quality control and
assurance, and shortages of qualified personnel. In addition, the Company's
manufacturing facilities will be subject to GMP regulations, international
quality standards and other regulatory requirements. Difficulties encountered by
the Company in manufacturing scale-up or failure by the Company to implement and
maintain its facilities in accordance with GMP regulations, international
quality standards or other regulatory requirements could entail a delay or
termination of production, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY. If
and when the Company begins to manufacture its products, it may contract with
third parties for the manufacture of certain components or the performance of
certain processes involved in the manufacturing cycle. Some of these components
and processes may only be available from single-source vendors. Any prolonged
supply interruption or yield problems experienced by the Company due to a
single-source vendor could have a material adverse effect on the Company's
ability to manufacture its products under development until a new source of
supply is qualified. As the Company increases production, it may from time to
time experience lower than anticipated yields or production constraints,
resulting in delayed product shipments, which could have a material adverse
effect on the Company's business, financial condition and results of operation.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. In the United States,
health care providers, such as hospitals and physicians, that purchase medical
devices, such as the Company's products under development, generally rely on
third-party payors, principally Medicare, Medicaid and private health insurance
plans, to reimburse all or part of the cost of the procedure in which the
medical device is being used. Reimbursement for cardiovascular surgery,
including CABG surgery, using devices that have received FDA approval has
generally been available in the United States. In addition, certain health care
providers are moving toward a managed care system in which such providers
contract to provide comprehensive health care for a fixed cost per person. The
Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. The Company could be
adversely affected by changes in reimbursement policies of government or private
health care payors, particularly to the extent any such changes affect
reimbursement for the procedure in which the Company's products are intended to
be used. Failure by physicians, hospitals and other potential users of the
Company's products under development to obtain sufficient reimbursement from
health care payors for the procedure in which the Company's products are
intended to be used or adverse changes in government and private third-party
payors' policies toward reimbursement for such procedures could have a material
adverse effect on the Company's business,
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financial condition and results of operations.
If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international markets
would be dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include both
government sponsored health care and private insurance. The Company intends to
seek international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner, if at all, and
failure to receive international reimbursement approvals could have a material
adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
RISKS RELATING TO INTERNATIONAL OPERATIONS. In the event the Company is
successful in developing its products, manufacturing them in commercial
quantities, and receiving necessary FDA and foreign regulatory registrations or
approvals, the Company plans to market its products in international markets.
Changes in overseas economic conditions, currency exchange rates, foreign tax
laws, or tariffs or other trade regulations could have a material adverse effect
on the Company's business, financial condition and results of operations. The
anticipated international nature of the Company's business is also expected to
subject it and its representatives, agents and distributors to laws and
regulations of the foreign jurisdictions in which they operate or the Company's
products under development are sold. The regulation of medical devices in a
number of such jurisdictions, particularly in the European Union, continues to
develop and there can be no assurance that new laws or regulations will not have
an adverse effect on the Company's business, financial condition and results of
operations. In addition, the laws of certain foreign countries do not protect
the Company's intellectual property rights to the same extent as do the laws of
the United States.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The development,
manufacture and sale of medical products entail significant risk of product
liability claims and product recalls. The Company's current product liability
insurance coverage limits are $3,000,000 per occurrence and $3,000,000 in the
aggregate, and there can be no assurance that such coverage limits are adequate
to protect the Company from any liabilities it might incur in connection with
the development, manufacture and sale of its products. In addition, the Company
may require increased product liability coverage if any products are used in
clinical trials or successfully commercialized. Product liability insurance is
expensive and in the future may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage or a product
recall could have a material adverse effect on the Company's business, financial
condition and results of operations.
POSSIBLE FUTURE CAPITAL REQUIREMENTS. The Company's capital requirements
depend on numerous factors, including the progress of the Company's product
development programs, the receipt of and the time required to obtain regulatory
clearances or approvals, the resources the Company devotes to developing,
manufacturing and marketing its products, the extent to which the Company's
products generate market acceptance and demand, and other factors. The Company
expects to devote substantial capital resources for research and development, to
hire and develop a direct sales force in the United States and to expand
manufacturing capacity and facilities. The timing and amount of such capital
requirements cannot be accurately predicted. Consequently, the Company may be
required to raise additional funds through public or private financing,
collaborative relationships or other arrangements. There can be no assurance
that the Company will not require additional funding or that
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such additional funding, if needed, will be available on terms attractive to the
Company, or at all, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants.
POTENTIAL VOLATILITY OF STOCK PRICE. The stock markets have experienced
price and volume fluctuations that have particularly affected medical technology
companies, resulting in changes in the market prices of the stocks of many
companies that may not have been directly related to the operating performance
of those companies. Such broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Common Stock may be highly volatile. Factors such as variations in the Company's
financial results, comments by securities analysts, announcements of
technological innovations or new products by the Company or its competitors,
changing government regulations and developments with respect to FDA
submissions, patents, proprietary rights or litigation may have a significant
adverse effect on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON PRICE OF
COMMON STOCK. Sales of a substantial number of shares of the Company's Common
Stock in the public market could adversely affect the market price of the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and lock-up agreements under which all directors,
executive officers and certain other stockholders of the Company that
beneficially own or have dispositive power over substantially all of the shares
of Common Stock outstanding prior to the Company's initial public offering, have
agreed not to sell or otherwise dispose of any of their shares without the prior
written consent of UBS Securities LLC. However, UBS Securities LLC may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to such lock-up agreements. As a result of these
restrictions, based on shares outstanding and options granted as of April 1,
1996, the following shares of Common Stock will be eligible for future sale.
Upon expiration of the lock-up agreements on October 15, 1996, 1,740,470 shares
of Common Stock will become eligible for resale in the public market pursuant to
Rule 701 subject in some cases to volume restrictions. An additional 6,086,193
shares held by existing stockholders will become eligible for sale following the
expiration of the lock-up agreements at various times over a period of less than
two years following completion of the Company's initial public offering, subject
in some cases to volume restrictions. The Company intends to file a registration
statement on Form S-8 under the Securities Act to register the future issuance
of all shares of Common Stock reserved for issuance under the Company's
Incentive Stock Plan, Nonstatutory Stock Option Plan, Director Option Plan and
Employee Stock Purchase Plan. As of April 1, 1996, an aggregate of 1,971,500
shares of Common Stock were reserved for issuance pursuant to outstanding
options and 883,500 shares of Common Stock were reserved for future grant under
the Company's Incentive Stock Plan, Nonstatutory Stock Option Plan, Director
Option Plan and Employee Stock Purchase Plan. Such registration statement will
automatically become effective upon filing. Accordingly, shares registered
thereunder will, subject to Rule 144 limitations applicable to affiliates, be
available for sale in the public market, except to the extent that such shares
are subject to vesting restrictions with the Company or certain contractual
restrictions on sale or transfer. The holders of approximately 5,025,000 shares
of Common Stock are entitled to certain demand and piggyback rights with respect
to registration of such shares under the Securities Act. If such holders, by
exercising their demand registration rights, cause a large number of securities
to be registered and sold in the public market, such sales could have an adverse
effect on the market price of the Company's Common Stock. If the Company were to
initiate a registration and include shares held by such holders pursuant to the
25
<PAGE>
exercise of their piggyback registration rights, such sales could have an
adverse effect on the Company's ability to raise needed capital.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAWS PROVISIONS ON PRICE OF
COMMON STOCK. Certain provisions of the Company's Restated Certificate of
Incorporation and Bylaws may have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. Certain of these provisions allow the Company to issue
Preferred Stock without any vote or further action by the stockholders,
eliminate the right of stockholders to act by written consent without a meeting
and specify procedures for director nominations by stockholders and submission
of other proposals for consideration at stockholder meetings and may eliminate
cumulative voting in the election of directors. Certain provisions of Delaware
law applicable to the Company could also delay or make more difficult a merger,
tender offer or proxy contest involving the Company, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met. The possible issuance
of Preferred Stock, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITIES. The
Company's directors, executive officers and entities affiliated with them, in
the aggregate, beneficially own approximately 40.9% of the Company's outstanding
shares of Common Stock. These stockholders, if acting together, would be able to
significantly influence all matters requiring approval by the stockholders of
the Company, including the election of directors and the approval of mergers or
other business combination transactions.
26
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Upon the closing of the Company's initial public offering in
April 1996, all outstanding shares of preferred stock were
automatically converted into 5,025,000 shares of common stock.
Promptly following such closing, the Company filed a Restated
Certificate of Incorporation which eliminated the previously
authorized preferred stock, authorized 5,000,000 shares of
undesignated preferred stock and increased the authorized common stock
to 20,000,000 shares.
Item 3. Defaults upon 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
3.1* Restated Certificate of Incorporation, as in effect
prior to initial public offering.
3.2* Restated Certificate of Incorporation.
3.3* Bylaws of Registrant.
4.1* Specimen Common Stock Certificate.
10.1* Form of Indemnification Agreement between the Company
and each of its directors and officers.
10.2* Incentive Stock Plan and form of Agreements thereunder.
10.3* Director Option Plan and form of Director Stock Option
Agreement thereunder.
10.4* Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5* Nonstatutory Stock Option Plan and form of Nonstatutory
Stock Option Agreement thereunder.
10.6* Form of Employment, Confidential Information and
Invention Assignment Agreement.
27
<PAGE>
10.7* Consulting Letter Agreement, dated May 17, 1994,
between Informed Creation and Susan W. Vican.
10.8* Consulting Agreement, dated June 30, 1995, between the
Company and Federico Benetti, M.D.
10.9* Assignment Agreement, dated June 30, 1995 (as amended
by Amendment Agreement dated August 31, 1995), between
the Company and Federico Benetti, M.D.
10.10* Employment Letter Agreement, dated September 5, 1995,
between the Company and Charles S. Taylor.
10.11* Assignment Agreement, dated September 7, 1995, between
the Company and Charles S. Taylor.
10.12* Shareholder Rights Agreement dated September 8, 1995
(as amended January 3, 1996) between the Company and
certain holders of the Registrant's securities.
10.13* Letter Agreement regarding Heartport trade secret
allegations, dated October 11, 1995, between the
Company and Charles S. Taylor.
10.14* Assignment, Assumption of Lease and Consent, dated
November 9, 1995, between the Company and
Cardiovascular Concepts, Inc. ("CVC") for the premises
located at 3260 Alpine Road, Portola Valley, California
94028.
10.15* Assignment, Assumption of Lease and Consent, dated
November 9, 1995, between the Company and CVC for the
premises located at 3280 Alpine Road, Portola Valley,
California 94028.
10.16* Promissory Note, dated December 4, 1995, between the
Company and Ivan Sepetka.
10.17* Consent to Assignment, dated December 22, 1995, among
the Company, Viking Partners, Inc. ("Viking"), CVC and
Fogarty Engineering, Inc. for the premises located at
3260 Alpine Road, Portola Valley, California 94028.
10.18* Consent to Assignment, dated December 22, 1995, among
the Company, Viking, CVC and General Surgical
Innovations, Inc. for the premises located at 3280
Alpine Road, Portola Valley, California 94028.
10.19* First Amendment to Assignment, Assumption of Lease and
Consent, dated December 22, 1995, between the Company
and CVC for the premises located at 3260 Alpine Road,
Portola Valley, California 94028.
10.20* First Amendment to Assignment, Assumption of Lease and
Consent, dated December 22, 1995, between the Company
and CVC for the premises located at 3280 Alpine Road,
Portola Valley, California 94028.
10.21* Consulting Agreement, dated February 21, 1996, between
the Company and Thomas J. Fogarty, M.D.
10.22* Development and License Agreement, dated February 19,
1996, between the Company and Enable Medical Corp.
28
<PAGE>
10.23* Employment Letter Agreement, dated March 15, 1996,
between the Company and Steve M. Van Dick.
10.24* Lease dated March 29, 1996 for space located at 10600
North Tantau Avenue, Cupertino, California between the
Company and Spieker Properties, L.P.
10.25(1) Employment Letter Agreement, dated February 22, 1996,
between the Company and Thomas Afzal.
10.26(1) Employment Letter Agreement, dated March 13, 1996,
between the Company and Robert Rosenbluth.
10.27 Employment Agreement, dated April 19, 1996, between the
Company and Steve Van Dick.
10.28 Promissory Note for $300,000 dated April 29, 1996,
between the Company and Thomas Afzal.
10.29 Promissory Note for $35,000 dated May 20, 1996, between
the Company and Michael J. Billig.
10.30 Promissory Note for $55,000 dated June 5, 1996, between
the Company and Thomas Afzal.
11.1 Calculation of earnings per share.
- ---------------------
* Incorporated herein by reference to the same-numbered exhibit previously
filed with the Company's Registration Statement on Form S-1 (Registration
No. 333-1840).
(1) Incorporated herein by reference to the same-numbered exhibit previously
filed with the Company's Form 10Q for the period ended March 31, 1996.
b) Reports on Form 8 - K
None
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 7, 1996 CARDIOTHORACIC SYSTEMS, INC.
/S/ Richard M. Ferrari
-------------------------------------
Richard M. Ferrari
President and Chief Executive Officer
/S/ Steve Van Dick
-------------------------------------
Steve Van Dick
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
30
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Exhibit Description Number
- ------ --------------------------- ------
10.27 Employment Agreement, dated June 13, 1996, between
Company and Steve Van Dick. 32
10.28 Promissory Note for $300,000 dated April 29, 1996,
between the Company and Thomas Afzal. 40
10.29 Promissory Note for $35,000 dated May 20, 1996,
between the Company and Michael J. Billig. 43
10.30 Promissory Note for $55,000 dated June 5, 1996,
between the Company and Thomas Afzal. 44
11.1 Calculation of earnings per share. 46
31
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of April
19, 1996, by and between Steve M. Van Dick (the "Employee") and CardioThoracic
Systems, Inc., a Delaware corporation (the "Company").
R E C I T A L S
A. The Board of Directors of the Company ( the "Board") has determined
that it is in the best interests of the Company and its stockholders 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 imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control which provide the Employee with enhanced financial
security and provide sufficient incentive and encouragement to the Employee
to remain with the Company following a Change of Control.
C. In order 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 herein.
D. Certain capitalized terms used in the Agreement are defined in Section
6 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. DUTIES AND SCOPE OF EMPLOYMENT: CANCELLATION OF EXISTING CONTRACTS.
(a) POSITION. The Company shall employ the Employee in the position
of Vice President, as such position was defined in terms of responsibilities and
compensation as of the effective date of this Agreement; provided, however, that
the Board of Directors shall have the right, prior to the occurrence of a Change
of Control, to revise such responsibilities and compensation from time to time
as the Board of Directors may deem necessary or appropriate.
(b) OBLIGATIONS. The Employee shall devote his full business efforts
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from engaging in such activities and services as do not
interfere or conflict with his responsibilities to the Company.
<PAGE>
(c) EXISTING CONTRACTS. The Company and Employee agree that the
terms of any existing employment agreement will be superseded by the terms
herein at the time there is a Change of Control.
2. BASE COMPENSATION. The Company shall pay the Employee as compensation
for his services a base salary at the annualized rate of $140,000. Such salary
shall be reviewed at least annually and shall be increased from time to time
subject to accomplishment of such performance and contribution goals and
objectives as may be established from time to time by the Board of Directors.
Such salary shall be paid periodically in accordance with normal Company
payroll. The annual compensation specified in this Section 2, together with any
increases in such compensation that the Board of Directors may grant from time
to time, is referred to in this Agreement as "Base Compensation."
3. EMPLOYEE BENEFITS. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained by
the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans,
deferred compensation plans, supplemental retirement or excess-benefit plans,
stock option, incentive or other bonus plans, life, disability, health,
accident and other insurance programs, paid vacations, and similar plans
or programs, subject in each case to the generally applicable terms and
conditions of the plan or program in question and to the determination of any
committee administering such plan or program.
4. TERM OF EMPLOYMENT. The Company and the Employee acknowledge that the
Employee's employment is at will, as defined under applicable law. If the
Employee's employment terminates for any reason, the Employee shall not be
entitled to any payments, benefits, damages, awards or compensation other than
as provided by this Agreement, or as may otherwise be available in accordance
with the Company's established employee plans and policies at the time of
termination. The terms of this Agreement shall terminate upon the earlier of
(i) the date that all obligations of the parties hereunder have been satisfied,
(ii) March 25, 2001, or (iii) twelve (12) months 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.
5. SEVERANCE BENEFITS.
(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If the Employee's
employment terminates at any time within 12 months after a Change of Control,
then the Employee shall be entitled to receive severance benefits as follows:
(i) VOLUNTARY RESIGNATION: INVOLUNTARY TERMINATION. If the
Employee's employment terminates either by Employee's voluntary resignation or
as a result of Involuntary Termination other than for Cause, then the Employee
shall be entitled to receive (a) severance pay
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<PAGE>
equal to twelve months salary in the case of voluntary resignation and twelve
months salary in the case of Involuntary Termination other than for Cause, (b)
vacation pay equal to the amount of compensation for accrued but unused vacation
time, payable in a lump sum at the time of or prior to the Termination Date and
(c) life, medical, dental, accident and disability insurance and other similar
benefits as are provided by the Company to other key executives of the Company
for twelve months following the Termination Date in the case of voluntary
resignation and for twelve months following the Termination Date in the case of
Involuntary Termination without Cause. Any Severance Payment to which Employee
is entitled pursuant to this Section shall be paid on the Termination Date.
(ii) TERMINATION FOR CAUSE. If the Employee is terminated for
Cause, then the Employee shall not be entitled to receive severance or other
benefits except for those (if any) as may then be established under the
Company's then existing severance and benefits plans and policies at the time of
such termination.
(iii) DISABILITY; DEATH. If the Company terminates the
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established under the Company's then existing
severance and benefits plans and policies at the time of such Disability or
death.
(b) TERMINATION APART FROM CHANGE OF CONTROL. In the event the
Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the 12-month period following a
Change of Control, then the Employee shall be entitled to receive severance and
any other benefits only as may then be established under the Company's existing
severance and benefit plans and policies at the time of such termination.
(c) OPTIONS. Subject to Section 9 below, upon a Change of Control
100% of the unvested portion of any stock option held by the Employee under the
Company's stock option plans shall automatically be accelerated and the Employee
or the Employee's representative, as the case may be, shall have the right to
exercise all or any portion of such stock option, in addition to any portion of
the option exercisable prior to the Change of Control.
6. 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) 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 50% or more of the total
voting power represented by the Company's then outstanding voting securities; or
-3-
<PAGE>
(ii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, 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 stockholders
of the Company 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
the Company's assets.
(b) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean
(i) without the Employee's express written consent, the assignment to the
Employee of any duties or the significant reduction of the Employee's duties,
either of which is inconsistent with the Employee's position with the Company
and responsibilities in effect immediately prior to such assignment, or the
removal of the Employee from such position and responsibilities; (ii)without the
Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Employee immediately prior to such reduction; (iii) a
reduction by the Company in the Base Compensation of the Employee as in effect
immediately prior to such reduction; (iv) a material reduction by the Company in
the kind or level of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is significantly reduced; (v) the relocation of the Employee to
a facility or a location more than 25 miles from the Employee's then present
location, without the Employee's express written consent; (vi) any purported
termination of the Employee by the Company which is not effected for Disability
or for Cause, or any purported termination for which the grounds relied upon are
not valid; or (vii) the failure of the Company to obtain the assumption of this
agreement by any successors contemplated in Section 7 below.
(c) CAUSE. "Cause" shall mean (i) any act of personal dishonesty taken by
the Employee in connection with his responsibilities as an employee and intended
to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony, (iii) a willful act by the Employee which constitutes
gross misconduct and which is injurious to the Company, and (iv) continued
violations by the Employee of the Employee's obligations under Section 1 of this
Agreement which are demonstrably willful and deliberate on the Employee's part
after there has been delivered to the Employee a written demand for performance
from the Company which describes the basis for the Company's belief that the
Employee has not substantially performed his duties.
(d) DISABILITY. "Disability" shall mean that the Employee has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Employee's employment. In the event that the Employee resumes
the performance of substantially all of his duties hereunder before the
termination
-4-
<PAGE>
of his employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
(e) TERMINATION DATE. "Termination Date" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee shall
not have returned to the performance of the Employee's duties on a full-time
basis during such thirty (30) day period), (ii) if the Employee's employment
is terminated by the Company for any other reason, the date on which a notice
of termination is given, provided that if within thirty (30) days after the
Company gives the Employee notice of termination, the Employee notifies the
Company that a dispute exists concerning the termination, the Termination
Date shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected), or (iii)
if the Agreement is terminated by the Employee, the date on which the Employee
delivers the notice of termination to the Company.
7. SUCCESSORS.
(a) COMPANY'S 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. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) EMPLOYEE'S SUCCESSORS. The terms of this Agreement and all
rights of the Employee 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.
-5-
<PAGE>
8. NOTICE.
(a) GENERAL. 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. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he 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.
(b) NOTICE OF TERMINATION. Any termination by the Company for Cause
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8 of this Agreement. Such notice shall
indicate the specific termination provision in this Agreement relied upon, shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 30 days after the giving of such
notice). The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of the Employee hereunder or preclude the Employee from
asserting such fact or circumstance in enforcing his rights hereunder.
9. CERTAIN BUSINESS COMBINATIONS. In the event it is determined by the
Board of Directors, upon receipt of a written opinion of the Company's
independent public accountants, that the enforcement of any Section or
subsection of this Agreement, including, but not limited to , Section 5(c)
hereof, which allows for the acceleration of vesting of options to purchase
shares of the Company's common stock in connection with a Change of Control,
would preclude accounting for any proposed business combination of the
corporation 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, that any such Section or subsection of this
Agreement shall be null and void.
10. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor 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.
-6-
<PAGE>
(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.
(d) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration 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) 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 (g) shall be
void.
(h) EMPLOYMENT TAXES. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(i) 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.
(j) 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.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the date
hereof.
DATED:
COMPANY CARDIOTHORACIC SYSTEMS, INC.
By: /s/ Richard W. Ferrain
---------------------------------
Title: President & CEO
---------------------------------
EMPLOYEE
/s/ Steve M. Van Dick
---------------------------------
Steve M. Van Dick
-8-
<PAGE>
PROMISSORY NOTE
$300,000.00 Portola Valley, California 94028
April 29, 1996
For value received, the undersigned Thomas Afzal (Obligor) whose address is
32 Anderson Way, Menlo Park, California, hereby unconditionally promises to pay
to CardioThoracic Systems, Inc. (the Company) whose address is 3280 Alpine Road,
Portola Valley, CA 94028, or order, in lawful money of the United States, the
principal sum of Three Hundred Thousand Dollars ($300,000.00) together with
interest accrued from the date hereof on the unpaid principal at the rate of
5.88%.
PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be
due and payable in thirty-seven (37) installments. The first of which shall be
$75,000.00, due on April 29,1997, and then thirty-six (36) equal monthly
installments of $6,250 beginning on May 29, 1997 and ending on April 29, 2000.
Provided, however, that in the event that Obligor's employment by, or
association with, the Company is terminated for cause or by voluntary
resignation prior to payment in full of this Note, this Note shall be
accelerated and all remaining unpaid principal shall become due and payable
immediately upon such termination.
INTEREST PAYMENTS. Interest shall be calculated on the basis of a three
hundred and sixty (360) day year for the actual number of days elapsed and shall
be payable concurrently with the principal.
RIGHT OF SET-OFF. At such time as this Note is due and payable the Company
shall have the right to retain any amounts owing to Obligee in complete or
partial satisfaction of the obligation.
<PAGE>
CANCELLATION OF INDEBTEDNESS. Notwithstanding the above, should Obligor's
employment or association with the Company continue through the due date of any
installment payment under this Note, then the Company agrees to forgive all
principal and interest due by the terms of this Note for that installment.
INSOLVENCY AND/OR CHANGE OF CONTROL.
a. In the event that the Company shall file any petition or action for
relief under the U.S. Bankruptcy Code (Code) or an involuntary petition shall be
filed under the Code against the Company, or
b. 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 13-d under said Act), directly or indirectly, of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities; or the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, 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 stockholders of the Company 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 the Company's assets.
The Company agrees to forgive all remaining unpaid principal and interest
under the terms of this Note.
<PAGE>
This Note may be prepaid at any time without penalty. All money paid
toward the payment of this Note shall be applied first to the payment of
interest as required hereunder and then to the retirement of the principal.
Obligor hereby waives presentment, protest and notice of protest, demand
for payment, notice of dishonor and all other notices or demands in connection
with the delivery, acceptance, performance, default or endorsement of this Note.
The holder hereof shall be entitled to recover, and Obligor agrees to pay
when incurred, all costs and expenses of collection of this Note, including
without limitation, reasonable attorneys' fees.
This Note shall be governed by, and construed, enforced and interpreted in
accordance with, the laws of the State of California, excluding conflict of laws
principles that would cause the application of laws of any other jurisdiction.
OBLIGOR
/s/Thomas Afzal 4/29/96
-----------------------------------
Thomas Afzal
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
PROMISSORY NOTE
$35,000 Portola Valley, CA
May 20, 1996
FOR VALUE RECEIVED, Michael J. Billig promises to pay CardioThoracic Systems,
Inc. (the "Company"), a Delaware Corporation, on order, the principal sum of
thirty five thousand dollars ($35,000) plus accrued interest at an annual rate
of 6.36%. The total amount plus any accrued interest will be paid in full by
May 20, 2000.
Should the undersigned's employment relationship with the Company be terminated
for any reason, the whole unpaid balance of principal and interest of this Note
shall become immediately due upon such termination of employment. The
undersigned promises to sell a portion of his CardioThoracic Systems, Inc. stock
options to pay any unpaid balance and interest not paid prior to May 20, 2000.
Payments of principal and interest shall be made in lawful money of the United
States of America. The undersigned may at any time prepay all or any portion of
the principal or interest hereunder.
Should any action be instituted for the collection of this Note, the reasonable
costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed and
delivered as the date first above written.
/s/Michael J. Billig 5/20/96
- -----------------------------------
Michael J. Billig
<PAGE>
PROMISSORY NOTE
$55,000.00 Portola Valley, California 94028
June 5, 1996
For value received, the undersigned Thomas Afzal (Obligor) whose address is
32 Anderson Way, Menlo Park, California, hereby unconditionally promises to pay
to CardioThoracic Systems, Inc. (the Company) whose address is 3280 Alpine Road,
Portola Valley, CA 94028, or order, in lawful money of the United States, the
principal sum of Fifty-Five Thousand Dollars ($55,000.00) together with interest
accrued from the date hereof on the unpaid principal at the rate of 5.88%.
PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be
due and payable in two (2) installments of $27,500.00 on January 5, 1997 and
January 5, 1998. Provided, however, that in the event that Obligor's employment
by, or associated with, the Company is terminated for cause or by voluntary
resignation prior to payment in full of this Note, this Note shall be
accelerated and all remaining unpaid principal shall become due and payable
immediately upon such termination.
INTEREST PAYMENTS. Interest shall be calculated on the basis of a three
hundred and sixty (360) day year for the actual number of days elapsed and shall
be payable concurrently with the principal.
RIGHT OF SET-OFF. At such time as this Note is due and payable the Company
shall have the right to retain any amounts owing to Obligee in complete or
partial satisfaction of the obligation.
CANCELLATION OF INDEBTEDNESS. Notwithstanding the above, should Obligor's
employment or association with the Company continue through the due date of any
<PAGE>
installment payment under this Note, then the Company agrees to forgive all
principal and interest due by the terms of this Note for that installment.
This Note may be prepaid at any time without penalty. All money paid
toward the payment of this Note shall be applied first to the payment of
interest as required hereunder and then to the retirement of the principal.
Obligor hereby waives presentment, protest and notice of protest, demand
for payment, notice of dishonor and all other notices or demands in connection
with the delivery, acceptance, performance, default or endorsement of this Note.
The holder hereof shall be entitled to recover, and Obligor agrees to pay
when incurred, all costs and expenses of collection of this Note, including
without limitation, reasonable attorneys' fees.
This note shall be governed by, and construed, enforced and interpreted in
accordance with, the laws of the State of California, excluding conflict of laws
principals that would cause the application of laws of any other jurisdiction.
OBLIGOR
/s/Thomas Afzal
-----------------------------------
Thomas Afzal
<PAGE>
Exhibit 11.1
CardioThoracic Systems, Inc.
(a company in the development stage)
Statement Re: Computations of Earnings Per Share
<TABLE>
<CAPTION>
Period from
June 15, 1995
Three Months Ended Six Months Ended (date of inception) to
June 30, 1996 June 30, 1996 June 30, 1996
--------------- --------------- -----------------
<S> <C> <C> <C>
Net loss $ (3,170,920) $ (6,845,132) $ (7,842,345)
--------------- --------------- -----------------
--------------- --------------- -----------------
Weighted average common
shares outstanding 5,271,139 4,039,616 3,376,668
Shares related to SAB No. 55,
64, and 83 6,666,197 6,666,197 6,666,197
--------------- --------------- -----------------
Total weighted average
common shares outstanding 11,937,336 10,705,813 10,042,865
--------------- --------------- -----------------
--------------- --------------- -----------------
Net loss per share $ (0.27) $ (0.64) $ (0.78)
--------------- --------------- -----------------
--------------- --------------- -----------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 85,957,967
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 85,464,079
<PP&E> 452,260
<DEPRECIATION> 28,752
<TOTAL-ASSETS> 86,210,996
<CURRENT-LIABILITIES> 1,214,045
<BONDS> 0
0
0
<COMMON> 103,197,767
<OTHER-SE> (10,358,471)
<TOTAL-LIABILITY-AND-EQUITY> 86,210,996
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,737,189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,845,132)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,845,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,845,132)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
