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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
___X___Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended December 31, 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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3228757
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10600 N. Tantau Ave., Cupertino, CA 95014-0739
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (408) 342-1700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
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. Yes ___X___ No_______
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate value of voting stock held by nonaffiliates of the Registrant was
approximately $166,549,000 as of March 13, 1997 based upon the closing price of
the Registrant's common stock reported for such date on the Nasdaq National
Market. Shares of common stock held by each executive officer and director and
by each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed affiliates. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 13, 1997, the Registrant had outstanding 13,395,755
shares of the Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Annual Report to shareholders for Registrant's 1996 fiscal year,
filed as an exhibit hereto, are incorporated by reference into Parts II and IV
hereof; and parts of the Proxy Statement for Registrant's 1997 Annual Meeting of
Shareholders, to be filed with the Commission on or before 120 days after the
end of the 1996 fiscal year, are incorporated by reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
CardioThoracic Systems Inc. ("CTS" or the "Company") develops,
manufactures, and markets proprietary, disposable instruments and systems
for performing minimally invasive cardiothoracic surgery. The Company's
products are designed to enable the majority of cardiothoracic surgeons,
using their existing skills coupled with Company sponsored training, to
perform Minimally Invasive Direct Coronary Artery Bypass ("MIDCAB-TM-")
surgery, an emerging minimally invasive revascularization procedure performed
on a beating heart. The MIDCAB procedure eliminates the need for a heart-lung
machine and recent studies indicate that the MIDCAB procedure reduces the
trauma, procedural costs and post-surgical complications associated with
coronary artery bypass graft ("CABG") surgery while providing long-term
procedural success rates comparable to CABG surgery.
The main components of the CTS MIDCAB-TM- System include: the ACCESS
PLATFORM, which is designed to maximize access to the chest cavity through a
mini-thoracotomy; the STABILIZER, which is designed to isolate and minimize
the motion of the diseased artery; the LIMA LIFT, which is designed to offset
the ribs to provide a window into the chest cavity so the surgeon can harvest
the internal mammary artery (IMA); and the LIMA-LOOP, which is designed to
enable the surgeon to reach into the chest cavity through the
mini-thoracotomy and help isolate the IMA for harvest.
BACKGROUND
Heart disease is the leading cause of death in America, with the
American Heart Association reporting in 1995 that an estimated 11.2 million
Americans have a history of coronary artery or other heart disease. Each
year, approximately 1.4 million patients undergo a revascularization
procedure to treat coronary artery disease. Coronary artery disease
(atherosclerosis) is caused by cholesterol and other fatty materials becoming
deposited on the walls of blood vessels, which form a build-up known as
plaque. The heart needs a constant supply of oxygen and nutrients, which are
carried by the blood in the coronary arteries. The accumulation of plaque
narrows the interior of the blood vessels, thereby reducing blood flow to the
heart muscle (the myocardium). When blood flow to the heart muscle becomes
insufficient, an injury occurs, which may result in a heart attack
(myocardial infarction) and often death.
The heart has three main branches of coronary arteries: the left
anterior descending artery ("LAD"), which descends from the left across the
heart; the right coronary artery ("RCA"), which extends from the right of the
heart around to the back of the heart; and the left circumflex artery, which
extends from the left of the heart around to the back of the heart. The LAD
is the primary blood supply to the heart and supplies blood to a large amount
of the myocardium. Studies indicate that restoring blood flow to the LAD is
the single most important determinant of long-term, event-free survival.
Traditional treatments for coronary artery disease include drug therapy,
coronary artery bypass graft ("CABG") surgery and catheter-based treatments,
including balloon angioplasty, atherectomy and coronary stenting. CABG bypass
surgery is highly invasive and traumatic to the patient, but is considered
the most effective and long-lasting treatment for severe coronary artery
disease. While catheter-based treatments are less invasive, the procedures
are limited by high rates of restenosis, a renarrowing of the treated
coronary artery, which generally requires reintervention. Catheter-based
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treatments have been increasingly adopted because they are a less invasive
treatment alternative. There are approximately 800,000 catheter-based
procedures performed annually worldwide. Notwithstanding the introduction of
less invasive catheter-based treatments, the Company believes that the number
of patients treated by CABG surgery has continued to grow each year and that
more than 600,000 CABG procedures are performed annually worldwide. The
Company believes that many of the patients currently undergoing CABG surgery
or catheter-based treatments are candidates for the MIDCAB procedure.
DRUG THERAPY
Drug therapy is a non-invasive treatment to improve blood flow and
alleviate some of the symptoms associated with angina (chest pain). However,
while some drug therapies may inhibit continued plaque build-up in the
arteries, drug therapy is not a cure for heart disease. The various drugs
utilized include nitroglycerin, beta blockers, calcium channel blockers and
cholesterol lowering drugs. Although drug therapy is the least invasive
treatment currently available, it is typically expensive because it must be
chronically administered. Some patients suffer from side effects as well as
require future interventional procedures.
CORONARY ARTERY BYPASS GRAFT SURGERY
CABG surgery is a treatment for severe cases of coronary artery disease
in which blood vessel grafts are used to bypass the site of the blocked
artery. This procedure restores blood flow by routing around a blockage using
a healthy blood vessel from another part of the body. Although CABG surgery
is highly effective in treating coronary artery disease, it is a highly
invasive, traumatic and expensive procedure. In the United States the cost of
undergoing CABG is approximately $36,000. The average post-operative hospital
stay for a person undergoing a CABG procedure in the United States in 1994
was five to seven days, and the average recuperation period following
discharge from the hospital was approximately eight to ten weeks.
The CABG procedure involves sawing the patient's sternum or breast bone
in half, creating a twelve inch incision (sternotomy) for the purpose of
exposing the patient's heart. The two halves are spread approximately six
inches apart with a steel sternal retractor, and the heart is exposed. With a
sternotomy, the heart is not directly under the incision and must be stopped
prior to being moved into position for the procedure. Cannulae (plastic
tubes) are inserted into the aorta and right atrium of the heart, a clamp is
placed on the aorta to stop blood flow, and the heart is connected to a
heart-lung machine to be slowly cooled and eventually stopped before the
grafting can occur. The heart-lung machine is a series of interconnected
specialty medical devices that together function as the patient's heart and
lungs by temporarily circulating and oxygenating blood while the patient's
own heart and lungs are rendered inactive. The patient's blood is circulated
through plastic tubes to reservoirs in the heart-lung machine where carbon
dioxide is removed, oxygen is replaced, and temperature is controlled. The
patient's circulation is maintained on the external equipment throughout much
of the CABG procedure, which averages three to six hours, depending on the
patient's condition and number of grafts that must be created. Often patients
undergo multiple vessel procedures, which may involve harvesting a saphenous
vein from the leg and bypassing several blockages to achieve
revascularization. When a saphenous vein is used as a graft, a continuous
incision is often made from the ankle to the thigh of a patient's leg, the
saphenous vein is dissected and removed, and the wound is sutured closed. A
study involving over 1,000 patients indicates that the open harvesting of the
saphenous vein (saphenectomy) results in wound healing impairment in
approximately 24% of patients. As an
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alternative to bypassing the blockage with a saphenous vein graft, an
internal mammary artery ("IMA"), can be grafted directly on the coronary
artery, bypassing the blocked section. At the conclusion of the CABG
procedure, cannulae and the heart-lung machine are removed, the sternal
halves are tied together with steel wire, and the skin is closed with suture
material.
Despite the invasiveness and trauma of the procedure, CABG is considered
the most effective and long lasting treatment for severe coronary artery
disease. Over 85% of bypass grafts formed from saphenous veins are patent
(open) one year after surgery and over 60% are patent ten years after
surgery. Grafts using the internal mammary arteries have patency rates of
over 85% ten years after surgery and are well documented as being highly
resistant to atherosclerosis.
While every effort is made to minimize potential adverse effects from a
procedure as traumatic as CABG surgery, published studies have shown that
approximately 68% of all CABG surgeries have some complications. Some of the
most severe complications can be attributed to the heart-lung machine
including strokes, multiple organ dysfunction, inflammatory complications,
respiratory failure and post-operative internal bleeding complications. It is
estimated that stroke, which can have devastating functional consequences,
occurs in approximately 5% of all CABG procedures. Another common
complication of the use of the heart-lung machine is cognitive dysfunction,
with patients experiencing significant loss of memory, attention span, verbal
fluency, and psychomotor speed, even as long as six months after CABG
surgery, regardless of attempts to mitigate or decrease the heart-lung
machine time and trauma.
Severe complications related to CABG procedures can also result from the
sternotomy. Significant post-operative sternal infection usually requires
reoperation and excision of the sternum and muscle flap. The rate of wound
complications after sternotomy in a major study was 1.1% overall (72 patients
out of 6,504), with 10 of those 72 dying before being discharged from the
hospital. The patients with wound complications had a median length of
hospital stay of 43 days, and triple the hospital costs of patients without
such complications.
CATHETER-BASED THERAPIES
Catheter-based therapies, such as balloon angioplasty, atherectomy and
coronary stenting, have become increasingly popular and effective over the
last ten years. Balloon angioplasty is a procedure in which a balloon-tipped
intravascular catheter is inserted into the femoral artery through a small
incision in the upper thigh, is guided to the lesion (site of plaque) and
then inflated and deflated several times to reshape the plaque and increase
blood flow. Additional interventional devices for coronary artery disease
include atherectomy devices (devices that cut or ablate and remove plaque
from the arterial wall), laser catheter devices (devices that use laser
energy to reduce plaque in arteries) and coronary stents (expandable metal
frames that are positioned within the diseased area in the coronary artery to
maintain the vessel opening). These treatments occur in a catheterization
laboratory and are performed on a beating heart so they do not require a
heart-lung machine. As a result, the length of stay and recuperation period
are substantially less than those required with CABG. Currently, a common
form of catheter-based treatment involves the use of balloon angioplasty
followed by the placement of a coronary stent in the diseased artery. As a
result of these minimally invasive approaches, patients are typically
discharged within 24 to 48 hours and can return to a normal lifestyle within
several days.
While less invasive and traumatic than CABG, catheter-based therapies
may not offer prolonged efficacy. Studies have indicated that within three to
six months after a balloon angioplasty,
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between 25% and 45% of patients experience restenosis (a renarrowing of the
treated coronary artery). In addition, 5% to 7% of coronary balloon
angioplasty patients experience abrupt reclosure of the treated vessel, which
may be caused in part by flaps or tears of plaque that occur in the course of
such treatment. In patients with multi-vessel coronary artery disease, a
randomized study has shown that within three years of receiving treatment,
only 7% of patients receiving CABG surgery required reintervention while 40%
of patients receiving balloon angioplasty required reintervention. Additional
studies have confirmed that approximately 20% of balloon angioplasty patients
with multi-vessel disease will undergo CABG surgery within one year of
receiving balloon angioplasty. However, the efficacy of catheter-based
treatments may be improving. Recent multi-center studies indicated that
restenosis rates after treatment with stents can be reduced by approximately
30% as compared to balloon angioplasty alone. Future advancements in stents
or other catheter-based treatments may further reduce restenosis rates.
The average cost of a balloon angioplasty procedure in the United States
is approximately $15,000 or less than one-half of the average cost of CABG
surgery. In a recent study, the cost of balloon angioplasty was equivalent to
that of CABG three years after the procedure, primarily due to the expense of
reintervention for the balloon angioplasty patient. In addition, the use of
stenting greatly increases the cost of a catheter-based procedure. One study
indicated that the average cost per procedure for elective stenting was
approximately twice the cost of balloon angioplasty treatment without
stenting (or nearly equal to the cost of CABG surgery).
THE MIDCAB PROCEDURE
Recently, a new procedure known as Minimally Invasive Direct Coronary
Artery Bypass ("MIDCAB") has been developed that applies the techniques of
minimally invasive intervention to CABG surgery. The Company believes that
this procedure will provide patients with minimally invasive advantages
similar to those of catheter-based procedures and clinical benefits
comparable to those of CABG procedures. The Company believes the MIDCAB
procedure offers the following benefits:
ELIMINATES HEART-LUNG MACHINE. Surgery is performed upon the beating
heart, eliminating the need for a heart-lung machine. The heart-lung machine
is a major contributing factor to the post-operative complications of CABG,
which include stroke, bleeding and respiratory complications.
MINIMALLY INVASIVE. Access to the heart is provided through a small
incision called a mini-thoracotomy, eliminating the need for a sternotomy, in
which a twelve inch incision is made by sawing through the sternum or
breastbone and spreading the ribcage apart to expose the heart. The healing
of the sternum adds significantly to the recovery time for a CABG procedure,
even in procedures without complications.
PROVIDES DIRECT ACCESS. Placement of the mini-thoracotomy provides
access to the heart and the internal mammary arteries, permitting grafts to
be performed under the surgeon's direct vision without the need for
endoscopic equipment.
REDUCES COSTS. Studies indicate that fewer complications result in
shorter hospital stays (approximately two days), less recuperation time
(approximately two weeks) and reduced patient trauma relative to CABG
surgery. The Company believes that the MIDCAB procedure represents a
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significant advancement in the delivery of coronary revascularization and
will provide patients, payors and providers with a cost-effective alternative
to existing interventional procedures.
In the CTS MIDCAB procedure, the patient is placed under general
anesthesia and a mini-thoracotomy is made just below the patient's breast,
between the ribs. The procedure takes advantage of the fact that the heart
and the arteries are located directly under the incision, unlike a
conventional CABG procedure where the heart must be moved into position
during the procedure. The LIMA Lift is inserted into the mini-thoracotomy and
expanded to create an opening and offset the ribs. Under direct vision,
without the need for endoscopic equipment, the surgeon then dissects the IMA
from the chest wall. The IMA branches are gently exposed and are then clipped
and cauterized. After the IMA is harvested to a satisfactory length the LIMA
Lift is removed and the Access Platform is inserted into the chest opening. A
small incision is then made in the pericardium (a fibrous, fluid filled sac
that holds the heart in place in the chest cavity) and the coronary artery is
exposed. The CTS MIDCAB procedure requires only a small pericardial incision,
which allows the pericardium to continue to provide some support to the
heart. The surgeon positions the Stabilizer at the grafting site isolating it
and rendering it motionless. A small incision is made in coronary artery at
the site of the grafting, and the IMA artery is grafted, under the surgeon's
direct vision, onto the beating heart. After the grafting is complete, the
pericardium and the chest are sewn shut and the procedure is complete.
Despite the potential benefits of the MIDCAB procedure for the treatment
of coronary heart disease, it is currently performed by only a small number
of cardiothoracic surgeons. The Company believes that most cardiothoracic
surgeons have been reluctant to attempt the MIDCAB procedure because of,
among other things, the difficulties of performing surgery on the beating
heart. Of the procedures performed to date, the vast majority have been
performed on a single artery, typically the LAD or, in substantially fewer
instances, the RCA, and an extremely limited number have been performed on
the circumflex artery. The LAD is the primary blood supply to the heart and
supplies a large amount of the myocardium. Studies indicate that restoring
blood flow to the LAD is the single most important factor in predicting
long-term, event-free survival. As a result, the Company believes that many
of the patients currently undergoing CABG surgery or catheter-based
treatments are candidates for the MIDCAB procedure. 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.
Although the Company believes that the CTS MIDCAB procedure has
significant advantages over competing procedures, broad-based clinical
adoption of the 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 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
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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 CTS MIDCAB SYSTEM
The Company's MIDCAB System is comprised of proprietary disposable
surgical instruments designed to facilitate the MIDCAB procedure. The Company
expects to accelerate the adoption of the MIDCAB procedure by marketing the
CTS MIDCAB System that enables the majority of cardiothoracic surgeons, using
their existing skills coupled with Company sponsored training, to perform the
MIDCAB procedure. The CTS MIDCAB System is designed to provide the necessary
access to the chest cavity, simplify the harvesting of the internal mammary
artery, and optimize the conditions necessary for a quality graft to be
performed on a beating heart. Key components of the CTS MIDCAB System include:
THE ACCESS PLATFORM is designed to maximize access to the chest cavity
through a mini-thoracotomy. The Access Platform creates an operating window
into the chest cavity by smoothly retracting tissue and spreading the ribs
for optimal exposure of the heart and arteries with minimal patient trauma.
THE STABILIZER incorporates feet that are attached by a radial arm to
the Access Platform. The Stabilizer is designed to apply slight pressure to
the myocardium and thereby isolate the diseased artery, minimize the motion
of the beating heart and permit the surgeon to complete the graft.
THE LIMA-LIFT is a unique spreading system that offsets the ribs to
provide a window into the chest cavity so the surgeon can harvest the IMA
without using an endoscope.
THE LIMA-LOOP enables a surgeon to reach into the chest to help isolate
the IMA for harvest.
The CTS MIDCAB System is expected to account for the great majority of
the Company's revenue for the foreseeable future. The Company has sold very
little product in 1996, and there can be no assurance that the Company is
capable of manufacturing the CTS MIDCAB System in commercial quantities at
acceptable costs. Nor can there be any assurance that demand for the CTS
MIDCAB System will be sufficient to allow profitable operations. Failure of
the CTS MIDCAB System to be successfully commercialized would have a material
adverse effect on the Company's business, financial condition and results of
operations.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products principally to cardiac surgeons. The
Company's initial marketing strategy is to generate broad based market
acceptance of the MIDCAB procedure and the CTS MIDCAB System by sponsoring
educational programs, surgeon training programs and cultivating relationships
with opinion leaders in cardiac surgery. The Company has established a
Scientific Advisory Board comprised of cardiothoracic surgery opinion leaders,
prominent surgeons and leading interventional cardiologists. The members of the
Scientific Advisory Board participates in
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Company-sponsored educational and training sessions, thereby encouraging
acceptance of the MIDCAB procedure among cardiothoracic surgeons and the
integration of the MIDCAB procedure into their hospital and surgical
practices.
The Company currently has a direct sales force of eight people in the
United States which are supported by 6 clinical specialists. In December 1996
the Company established CardioThoracic Systems, GmBH, a wholly owned
subsidiary, in Dusseldorf Germany in order to build a direct sales and
marketing organization for Germany. In other markets, the Company will be
selling its products primarily through distributors.
CUSTOMER TRAINING
The Company believes that its Comprehensive Optimal Revascularization
(COR) training and education program plays a important role in the adoption
of the CTS MIDCAB procedure. The Company has entered into agreements with
three cardiac surgical centers in the United States and three in Europe to
become COR Institutes. The COR Institutes host a two-day, hands-on training
workshop presented by recognized authorities in minimally invasive cardiac
surgery. The COR program teaches surgical teams key aspects of how to
perform a MIDCAB procedure using the CTS MIDCAB System. When the surgical
team returns to their own hospital the Company's clinical specialist will
provide additional training as required. In 1997 the Company plans on
establishing regional COR training programs in major metropolitan areas
throughout the United States at non-hospital sites in order to increase the
Company's ability to train surgeons.
RESEARCH AND DEVELOPMENT
The Company is directing its research efforts toward development of
proprietary surgical instruments and systems for cardiothoracic minimally
invasive procedures, including coronary bypass, saphenous vein harvesting and
valve repair and reconstruction. In addition, the Company is researching
other methods of vessel attachment and stabilization of the beating heart.
Most of the products under development will require regulatory clearance or
approval prior to commercialization. As of December 31, 1996, the Company's
research and development staff consisted of 28 full-time engineers and
technicians who have substantial experience in the development of medical
devices, including expertise in the application of mechanical and electrical
design principles to devices for cardiovascular applications. In addition,
several of the Company's scientific advisors have prominent roles in
directing the technical and medical research and development efforts at the
Company. Research and development expenses for the year ended December 31,
1996 was $11.5 million.
MANUFACTURING
To date, the Company's manufacturing activities have consisted only of
building small quantities of the CTS MIDCAB System. As a result, the Company
has no experience manufacturing the CTS MIDCAB System in the volumes that
would be necessary for the Company to achieve significant commercial sales.
There can be no assurance that reliable, high-volume manufacturing can be
established or maintained at commercially reasonable costs.
The Company's manufacturing facilities will be subject to GMP regulations,
international quality standards and other regulatory requirements. Difficulties
encountered by the Company in
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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.
The Company purchases most of the components for the CTS MIDCAB System
from various independent suppliers that are either standard components or are
built or molded to the Company's proprietary specifications. In addition,
the Company contracts with third parties for the performance of certain
processes involved in the manufacturing cycle such as painting and finished
product sterilization. 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 adversely affect the Company's business, financial
condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
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 CTS MIDCAB System. The Company is the
licensee of a United States patent application for bipolar electrosurgical
scissors that may be used in the IMA Harvester and the Saphenous Vein
Harvesting System. The Company has filed twenty-one U.S. patent applications
and various corresponding foreign 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 subject to 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 "Legal Proceedings" 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
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certain markets, or at all. Although patent and intellectual property
disputes regarding medical devices have often been settled through licensing
or similar arrangements, costs associated with such arrangements may be
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.
Congress enacted legislation, which became effective October 1, 1996,
that places certain restrictions on the ability of medical device
manufacturers to enforce certain patent claims, relating to surgical and
medical methods, against medical practitioners. Such limitation in the
enforceability of patent claims, relating to medical and surgical methods,
against medical practitioners could have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures against
medical practitioners.
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.
COMPETITION
The Company believes that the principal competitive factors in the
market for treatment of cardiovascular disease are safety, efficacy, ease of
use, reliability and cost effectiveness. The Company believes that the MIDCAB
procedure performed with the CTS MIDCAB System will be substantially less
costly than highly-invasive, traditional surgical procedures and may
ultimately replace these procedures in some applications. The Company
believes that the CTS MIDCAB System will enable surgeons to perform coronary
bypass surgery less invasively, in a shorter period of time and with reduced
patient trauma, resulting in reduced recuperation time in the ICU, shorter
hospital stays and faster recovery, as well as lower complication rates. As a
result, the Company believes that the CTS MIDCAB System will compete
favorably with respect to each of these factors, although no assurance can be
given that it will compete favorably.
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 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. are marketing or 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
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will not succeed in developing alternative procedures and technologies,
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.
GOVERNMENT REGULATION
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA, and, in some instances, by
foreign governments. Pursuant to the Federal Food, Drug, and Cosmetic Act of
1976, as amended, and the regulations promulgated thereunder (the "FDC Act"),
the FDA regulates the clinical testing, manufacture, labeling, distribution,
and promotion of medical devices. Noncompliance with applicable requirements
can result in, among other things, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
failure of the government to grant premarket clearance or premarket approval
for devices, withdrawal of marketing approvals, and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
In the United States, medical devices are classified into three classes
(Class I, II or III), on the basis of the controls deemed necessary by the
FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing
practices ("GMPs")) and Class II devices are subject to general and special
controls (for example, performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, Class III devices are
those which must receive premarket approval by the FDA to ensure their safety
and effectiveness (for example, life-sustaining, life-supporting and
implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices).
Before a new device can be introduced into the United States market, the
manufacturer must generally obtain marketing clearance through either a
510(k) premarket notification or a premarket approval ("PMA") application. A
510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or II medical device, or to a Class III medical device for which the
FDA has not called for a PMA. The FDA may determine that a proposed device is
not substantially equivalent to a legally marketed device, or that additional
information or data are needed before a substantial equivalence determination
can be made. A request for additional data may require that clinical studies
of the device's safety and efficacy be performed.
Commercial distribution of a device for which a 510(k) premarket
notification is required can begin only after the FDA issues an order finding
the device to be "substantially equivalent" to a predicate device. The FDA
has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past. It generally takes from four to twelve months
from the date of submission to obtain a 510(k) clearance, but it may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device, or that additional information is
needed before a substantial equivalence determination can be made.
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A "not substantially equivalent" determination, or a request for
additional information, could delay the market introduction of new products
that fall into this category and could have a materially adverse effect on
the Company's business, financial condition and results of operations. For
any of the Company's products that were cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
efficacy of the device or that constitute a major change to the intended use
of the device will require new 510(k) submissions.
A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or
if it is a Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence which typically
includes extensive data, including human clinical trial data to demonstrate
the safety and effectiveness of the device. The PMA application must also
contain the results of all relevant bench tests, laboratory and animal
studies, a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to
manufacture the device. In addition, the submission must include the proposed
labeling, advertising literature and training methods (if required).
Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the PMA application
is sufficiently complete to permit a substantive review, the FDA will accept
the application for filing. Once the submission is accepted for filing, the
FDA begins an in-depth review of the PMA. An FDA review of a PMA application
generally takes one to two years from the date the PMA application is
accepted for filing, but may take significantly longer. The review time is
often significantly extended by the FDA asking for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, typically a panel of clinicians, will
likely be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. The
FDA is not bound by the recommendations of the advisory panel. Toward the end
of the PMA review process, the FDA generally will conduct an inspection of
the manufacturer's facilities to ensure that the facilities are in compliance
with applicable GMP requirements.
If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the PMA. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the
agency will issue a PMA approval letter, authorizing commercial marketing of
the device for certain indications. If the FDA's evaluation of the PMA
application or manufacturing facilities are not favorable, the FDA will delay
approval of the PMA application or issue a "not approvable letter." The FDA
may also determine that additional clinical trials are necessary, in which
case PMA approval may be delayed for several years while additional clinical
trials are conducted and submitted in an amendment to the PMA. The PMA
process is expensive, uncertain and lengthy and a number of devices for which
FDA approval has been sought by other companies have never been approved for
marketing. Modifications to a device that is the subject of an approved PMA,
its labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
If human clinical trials of a device are required in connection with either
a 510(k) premarket notification or a PMA, and the device presents a "significant
risk," the sponsor of the trial (usually the
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manufacturer or the distributor of the device) is required to file an
investigational device exemption ("IDE") application prior to commencing
human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is reviewed and approved by the FDA and one or more appropriate
Institutional Review Boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients,
as approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for
the study by one or more appropriate IRBs, but not the FDA. Sponsors of
clinical trials are permitted to sell those devices distributed in the course
of the study provided such compensation does not exceed recovery of the costs
of manufacture, research, development and handling. An IDE supplement must be
submitted to and approved by the FDA before a sponsor or an investigator may
make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects.
Any products manufactured or distributed by the Company pursuant to the
FDA clearances or approvals are subject to pervasive and continuing
regulation by the FDA, including record keeping requirements and reporting of
adverse experiences with the use of the device. Device manufacturers are
required to register their establishments and list their devices with the FDA
and certain state agencies, and are subject to periodic inspections by the
FDA and certain state agencies. The FDC Act requires devices to be
manufactured in accordance with GMP regulations which impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. The FDA has recently
finalized changes to the GMP regulations which will likely increase the cost
of complying with GMP requirements.
Labeling and promotion activities are subject to scrutiny by the FDA and
in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
The Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers
are also subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations
now or in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.
Exports of products that have market clearance from the FDA do not
require export approval. However, some foreign countries require
manufacturers to provide an FDA certificate for products for export ("CPE")
which requires the device manufacturer to certify to the FDA that the product
has been granted premarket clearance in the United States and that the
manufacturing facilities appeared to be in compliance with GMPs at the time
of the last GMP inspection. The FDA will refuse to issue a CPE if significant
outstanding GMP violations exist.
Exports of products subject to the 510(k) notification requirements, but
not yet cleared to market, are permitted without FDA export approval provided
certain requirements are met. Unapproved products subject to the PMA
requirements must be approved by FDA for export. To obtain FDA export
approval certain requirements must be met and information must be provided to
the FDA, including documentation demonstrating that the product is approved
for import into the country to which it is to be exported and, in some
instances, safety data from animal or human studies. There
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can be no assurance that the FDA will grant export approval when such
approval is necessary, or that countries to which the devices are to be
exported will approve the devices for import. Failure of the Company to
obtain CPEs, meet the FDA's export requirements, or obtain FDA export
approval when required to do so, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The introduction of the Company's products in foreign markets will also
subject the Company to foreign regulatory clearances, registrations or
approvals which may impose additional substantial costs and burdens.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from
country to country. Many countries also impose product standards, packaging
requirements, labeling requirements and import restrictions on devices. In
addition, each country has its own tariff regulations, duties and tax
requirements. The approval by the FDA and foreign government authorities is
unpredictable and uncertain, and no assurance can be given that the necessary
clearances, registrations or approvals will be granted on a timely basis or
at all. Delays in receipt of, or a failure to receive, such clearances,
registrations or approvals, or the loss of any previously received,
clearances, registrations or approvals, could have a material adverse effect
on the business, financial condition and results of operations of the Company.
The European Union has promulgated rules that require that medical
products receive the right to affix the CE mark by mid-1998. The CE mark is
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 current and future products, 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 current or future products in member
countries of the European Union after mid-1998. In January 1997 the Company
received ISO 9001 certification and CE Mark approval for the CTS MIDCAB
System.
In May 1996 the Company was notified by the FDA that it is exempted from
filing a premarket notification for the CTS Access Platform and the
Stabilizer. In September 1996 the Company filed 510(k) premarket
notifications for clearance to market additional components of the CTS MIDCAB
System and the bipolar electrosurgical scissors. In January 1997 the Company
received clearance to market the bipolar electrosurgical scissors. The
Company intends to seek clearance to market additional components of the
Saphenous Vein Harvesting System through 510(k) premarket notifications.
There can be no assurance that the FDA will act favorably or quickly on the
Company's 510(k) submissions, and significant difficulties and costs may be
encountered by the Company in its efforts to obtain FDA clearance that could
delay or preclude the Company from selling its potential products in the
United States. Failure to receive, or delays in the receipt of FDA clearances
or approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's products are subject to continued and pervasive
regulation by the FDA and other foreign and domestic regulatory authorities.
Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse
effect upon the Company's business, financial condition or results of
operations.
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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. Although the Company believes that
the cost of a MIDCAB procedure performed with the CTS MIDCAB System will be
reimbursable under the current diagnosis-related group ("DRG") system, the
Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. The Company anticipates
that in a prospective payment system, such as the DRG system utilized by
Medicare, and in many managed care systems used by private health care
payors, the cost of the Company's products would be incorporated into the
overall cost of the procedure and that there would be no separate, additional
reimbursement for the Company's products. The Company anticipates that
hospital administrators and physicians would justify the use of the Company's
products by the attendant cost savings and clinical benefits that the Company
believes would be derived from the use of its products. However, there can be
no assurance that this will be the case. Furthermore, 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 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, 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.
PRODUCT LIABILITY AND INSURANCE
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 as product sales increase. Product liability
insurance is expensive and in the future may not be available to the Company
on acceptable terms, if at all. A successful
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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.
EMPLOYEES
As of December 31, 1996, the Company had 71 full-time employees.
Twenty-eight persons are engaged in research and development and regulatory
affairs activities, Nineteen persons are engaged in sales and marketing
activities, fourteen persons are engaged in manufacturing and quality
assurance and ten persons are engaged in finance and administration. No
employees are covered by collective bargaining agreements, and the Company
believes it maintains good relations with its employees.
OTHER FACTORS
This annual report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities and Exchange Act of 1934. The Company's future 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 factors and elsewhere in this annual report on Form 10-K.
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
only recently generated revenues and has very limited experience in
manufacturing, marketing or selling the CTS MIDCAB System. The Company has
experienced operating losses since its inception, and, as of December 31,
1996, the Company had an accumulated deficit of approximately $17,075,000.
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
continue development of the Company's products, obtain additional 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 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 CTS
MIDCAB System is designed 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
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
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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 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 CTS MIDCAB System is expected to account for the great
majority of the Company's revenues for the foreseeable future. The Company
has only recently commenced sales of the CTS MIDCAB System, and there can be
no assurance that market acceptance and demand for the CTS MIDCAB System will
be sufficient to allow profitable operations. Failure of the CTS 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 certain components of the CTS 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 certain of 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 additional components of the CTS MIDCAB System and the bipolar
electrosurgical scissors 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. In September 1996 the Company
filed 510(k) premarket notifications for clearance to market additional
components of the CTS MIDCAB System and the bipolar scissors. In January 1997
the Company received clearance from the FDA to market the bipolar
electrosurgical scissors. There can be no assurance that the FDA will act
favorably or quickly on the Company's remaining or future 510(k) submissions,
or that significant difficulties and costs will not be
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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, there can be no assurance that the FDA
will not impose strict labeling or other requirements as a condition of its
510(k) clearance, any of which could limit the Company's ability to market
its products. 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 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 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, 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.
In January 1997 the Company received ISO 9001 certification and CE Mark
approval for the CTS MIDCAB System.
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
only undergone inspection for ISO 9001 certification. 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.
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HIGHLY COMPETITIVE MARKET; RISK OF ALTERNATIVE THERAPIES; RISK OF REUSE.
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 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. are marketing or 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 or marketing
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. Furthermore, sales of the CTS MIDCAB System could be adversely
affected by reuse of the Company's products, notwithstanding the instructions
in the Company's clinical protocols and product labeling indicating that each
of the components of the CTS MIDCAB System is a single-use device. Such
competition or reuse 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
Saphenous Vein Harvesting System. The Company has filed twenty-one 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-
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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 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.
Congress enacted legislation, which became effective October 1, 1996,
that places certain restrictions on the ability of medical device
manufacturers to enforce certain patent claims, relating to surgical and
medical methods, against medical practitioners. Such limitation in the
enforceability of patent claims, relating to medical and surgical methods,
against medical practitioners could have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures against
medical practitioners.
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 the CTS MIDCAB System
could address a large potential market. There can be no assurance that the
Company's marketing efforts will result in significant demand for the CTS
MIDCAB System , or that the initial demand for the Company's products 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.
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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 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 a small sales and marketing organization. The Company intends
to sell the CTS MIDCAB System in the United States and certain European
countries through a direct sales force. In other markets, the Company intends
to sell its products primarily through distributors or by means of
collaborative arrangements. There can be no assurance that the Company will
be able to build a larger direct sales force or marketing organization, that
maintaining 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
maintain agreements with distributors or collaborative arrangements, or that
such distributors or collaborators will devote adequate resources to selling
the Company's products under development. The Company has entered into
distribution agreements for the sale of its products in certain countries,
therefore the Company will be dependent upon the efforts of these 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.
NO MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company has no
experience manufacturing its products in the volumes that would be necessary
for the Company to achieve significant commercial sales. There can be no
assurance that reliable, high-volume manufacturing can be established or
22
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maintained at commercially reasonable costs. 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.
The Company contracts 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, 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 procedures 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, financial condition and results of operations.
Market acceptance of the Company's products in international markets
will 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. The Company plans to market
its products in international markets. Changes in overseas economic
conditions, currency exchange rates, foreign tax
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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 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 as
product sales increase. 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 larger 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
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.
SIGNIFICANT RESTRICTIONS ON CHANGE OF CONTROL. The Company has adopted
a number of anti-
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takeover measures. The Company has adopted a Preferred Shares Rights
Agreement, sometimes referred to as a poison pill, designed to prevent
hostile takeovers not approved by the Board of Directors. In addition, the
company is authorized to issue 5,100,000 shares of undesignated Preferred
Stock. Such shares of Preferred Stock may be issued by the Company without
stockholder approval upon such terms as the Company's Board of Directors may
determine. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage
bids for the Company's Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of and the voting and
other rights of, the holders of Common Stock, At present, the Company has no
plans to issue any of the Preferred Stock.
ITEM 2. PROPERTIES
The Company currently leases a 23,500 square foot facility in Cupertino,
California. It includes an environmentally controlled, Class 10,000 clean
room for assembly together with laboratory, machine shop, warehouse and
office space. The lease expires on June 1, 2001. The Company estimates this
space to be sufficient through 1997 and is currently evaluating its
requirements for 1998 and beyond.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently party to any legal proceeding.
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 claimed 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. The Company has
conducted a review of its technology in light of the claims of the former
employer and, after consultation with intellectual property counsel and with
Mr. Taylor, believes that Mr. Taylor and the Company should prevail if
litigation is commenced. However, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "CTSI". There were approximately 98 holders of record of the
Company's common stock on February 19, 1997. The table below provides
quarterly high/low prices on the Nasdaq National Market, as reported by
Nasdaq.
Quarter Ended High Low
----------------- ---------------------
June 30, 1996(1) $ 25 1/4 $12 1/2
September 30, 1996 21 1/4 9 3/4
December 31, 1996 22 1/8 16 1/2
(1) The Company completed its initial public offering of 5,117,500 shares
of common stock in April, 1996. Prior to the initial public offering,
the Company's common stock was not publicly traded.
No dividends have been paid on common stock to date, and the Company has
no current plans to do so.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Selected Financial Data" and included in Exhibit 13.1 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and included in Exhibit 13.1 to this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1996 annual report to stockholders entitled
"1996 Financial Review" and included in Exhibit 13.1 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement
within 120 days after the end of its fiscal year pursuant to Regulation 14A
with respect to the 1997 Annual Meeting of Stockholders (the "Proxy
Statement") to be held May 27, 1997 and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal
No. 1 -- Election of Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board
of directors, are as follows:
Name Age Position
- ------------------ --- --------------------------------------
Richard M. Ferrari 43 President, Chief Executive Officer and Director
Thomas A. Afzal 38 Vice President, Sales and Marketing
Michael J. Billig 46 Vice President, Regulatory, Quality and
Clinical Research
Christian Skieller 48 Vice President, Operations
Charles S. Taylor 42 Vice President and Chief Technical Officer
Steve M. Van Dick 42 Vice President, Finance and Administration and
Chief Financial Officer
RICHARD M. FERRARI joined CTS as Chief Executive Officer and a Director
in June 1995 and was elected President in August 1995. From January 1991
until joining the Company, he was President and Chief Executive Officer of
CardioVascular Imaging Systems, Inc. ("CVIS"), a manufacturer of
intravascular ultrasound systems, which is currently a subsidiary of Boston
Scientific Corporation. From March 1990 until joining CVIS, he served as
President and Acting Chief Executive Officer of Medstone International, Inc.,
a manufacturer of lithotripsy equipment for treatment of gall and kidney
stones. From 1981 to February 1990, he was employed with ADAC Laboratories,
a supplier of diagnostic imaging equipment, serving most recently as
Executive Vice President and General Manager responsible for the Nuclear
Medicine, Digital Cardiology, Information Management and Radiation Therapy
business units. Mr. Ferrari serves on the Board of Directors of FemRx, Inc.,
a publicly held company. He also serves on the boards of several privately
held companies. Mr. Ferrari holds an M.B.A. from the University of South
Florida.
THOMAS A. AFZAL joined the Company as Vice President of Sales and
Marketing in March 1996. From February 1992 until joining the Company, he
held various positions with Krauth Medical GmbH, a European medical device
distributor, most recently as President of its subsidiary, AD Krauth
Cardiovascular, GmbH. From January 1994 to February 1996 he also served on
the Board of Directors of Krauth Medical GmbH. From January 1989 to January
1992 he held various marketing and sales positions with subsidiaries of
Sulzermedica Company, a medical device manufacturer, including Carbomedics, a
heart valve manufacturer.
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<PAGE>
MICHAEL J. BILLIG joined CTS as Vice President of Regulatory, Quality
and Clinical Research in February 1996. From January 1989 until joining the
Company, Mr. Billig served as Vice President, Regulatory, Clinical and
Quality of Cardiometrics, Inc., a company that manufactures and markets
intravascular Doppler ultrasound systems for measuring blood flow. From June
1987 to February 1989, he served as Director, Regulatory Affairs and Quality
Assurance of Cardiometrics, Inc.
CHRISTIAN SKIELLER joined the Company as Vice President of Operations in
August 1996. From January 1992 until joining the Company, he was Vice
President of Manufacturing for Medtronic CardioRythm, a manufacturer of
electrophysiology catheter systems. From 1990 to 1991, Mr. Skieller served
as Vice President of Operations at Abaxis, a medical diagnostics systems
manufacturer. From 1987 to 1990 he was a manufacturing Consultant, assisting
companies with strategic and operational issues. Mr. Skieller holds an M.S.
in chemical engineering and an M.B.A from Stanford University.
CHARLES S. TAYLOR, the founder of CTS, has been with Informed Creation,
the predecessor company to CTS, since its inception in November 1993, and has
served as Vice President, Chief Technical Officer and Director since the
Company's incorporation in June 1995. From June 1992 until November 1993,
Mr. Taylor was a member of the research and development group at Stanford
Surgical Technologies, Inc., now Heartport, Inc., a public company that
develops and markets instruments for cardiac surgical procedures. From
January 1992 to May 1992, Mr. Taylor managed the establishment of a new
development group for Eli Lilly's Medical Instrument Systems division, the
Technology Development Center ("TDC"), which develops surgical devices for
vascular intervention procedures. From May 1986 to December 1991, he was an
Engineer and Manager for Advanced Cardiovascular Systems, Inc. where he
directed teams of engineers developing new manufacturing technologies and
custom research and development equipment.
STEVE M. VAN DICK joined the Company as Vice President of Finance and
Administration and Chief Financial Officer in April 1996. From March 1995
until April 1996, Mr. Van Dick was Vice President of Finance and
Administration and Chief Financial Officer of Perclose, Inc., a manufacturer
of minimally invasive systems for the surgical closure of arterial access
sites in catheterization procedures. From September 1993 until March 1995,
he was Vice President of Finance and Chief Financial Officer of CVIS. From
1992 until joining CVIS, Mr. Van Dick was Vice President, Finance and Chief
Financial Officer of Imatron, Inc., a manufacturer of specialized medical
equipment. From 1987 until joining Imatron, he held various positions with
ADAC Laboratories, serving as Vice President of Finance since 1988 and as
Chief Financial Officer since 1991. Mr. Van Dick holds an M.B.A. from Santa
Clara University and is a Certified Public Accountant.
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ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information under the caption "Record Date and Stock Ownership" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Certain Transactions" in the Proxy
Statement.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following Consolidated Financial Statements of
CardioThoracic Systems, Inc. and Report of Independent
Accountants are incorporated by reference in the respective
portions of the Registrant's 1996 annual report to
stockholders included in Exhibit 13.1 to the report:
Consolidated Balance Sheets; December 31, 1996 and 1995
Consolidated Statements of Operations; Year ended December 31,
1996 and the period from June 15, 1995 (date of inception) to
December 31, 1995
Consolidated Statement of Stockholders' Equity; Year ended
December 31, 1996 and the period from June 15, 1995 (date of
inception) to December 31, 1995
Consolidated Statements of Cash Flows; Year ended December 31,
1996 and the period from June 15, 1995 (date of inception) to
December 31, 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
The following Financial Statements of Informed Creation and Report
of Independent Accountants are incorporated by reference in the
respective portions of the Registrant's 1996 annual report to
stockholders included in Exhibit 13.1 to the report:
Balance Sheet; June 14, 1995
Statements of Operations; Period from January 1, 1995 to June 14,
1995, year ended December 31, 1994 and the period from November
3, 1993 (date of inception) to June 14, 1995
Statement of Sole Proprietorship Capital; Period from January 1,
1995 to June 14, 1995, year ended December 31, 1994 and the
period from November 3, 1993 (date of inception) to December 31,
1993
Statements of Cash Flows; Period from January 1, 1995 to June 14,
1995, year ended December 31, 1994 and the period from November
3, 1993 (date of inception) to June14, 1995
Notes to Financial Statements
Report of Independent Accountants
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<PAGE>
2. Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
Consolidated Financial Statements or the notes thereto.
3. Exhibits
Refer to (c) below.
(b) Reports on Form 8 - K.
The Company was not required to and did not file any reports on Form 8-K
during the three months ended December 31, 1996.
(c) Exhibits
EXHIBIT INDEX
Exhibit
No. Description
--------- ----------------------------------------------------------------
3.2(1) Restated Certificate of Incorporation.
3.3 Bylaws of Registrant (as amended).
3.4(5) Certificate of Designations of Rights, Preferences and Privileges
of Series A Participating Preferred Stock.
3.5(5) Preferred Shares Rights Agreement, dated as of February 14,
1997.
4.1(1) Specimen Common Stock Certificate.
10.1(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
(as amended).
10.3(1) Director Option Plan and form of Director Stock Option Agreement
thereunder.
10.4(1) Employee Stock Purchase Plan and form of agreements thereunder.
10.5 Nonstatutory Stock Option Plan and form of Nonstatutory Stock
Option Agreement thereunder (as amended).
10.6(1) Form of Employment, Confidential Information and Invention
Assignment Agrement.
10.8(1) Consulting Agreement, dated June 10, 1995, between the company and
Federico Benetti, MD.
10.9(1) 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(1) Employment Letter Agreement, dated September 5, 1995, between the
Company and Charles S. Taylor.
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<PAGE>
10.11(1) Assignment Agreement, dated September 7, 1995, between the Company
and Charles s. Taylor.
10.12(1) 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(1) Letter Agreement regarding Heartport trade secret allegations,
dated October 11, 1995, between the Company and Charles S. Taylor.
10.14(1) 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.
10.16(1) Promissory Note, dated December 4, 1995, between the Company and
Ivan Sepetka.
10.17(1) 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.
10.19(1) 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, California 94028.
10.21(1) Consulting Agreement, dated February 21, 1996, between the Company
and Thomas J. Fogarty, M.D.
10.22(1) Development and License Agreement, dated February 19, 1996,
between the Company and Enable Medical Corp.
10.23(1) Employemtn Letter Agreement, dated March 15, 1996, between the
Company and Steve M. Van Dick.
10.24(1) 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(2) Employment Letter Agreement, dated February 22, 1996, between the
Company and Thomas Afzal.
10.26(2) Employment Letter Agreement, dated March 13, 1996, between the
Company and Robert Rosenbluth.
10.27(3) Employment Letter Agreement, dated Aporil 19, 1996, between the
Company and Steve Van Dick.
10.28(3) Promissory Note for $300,000 dated April 29, 1996, between the
Company and Thomas Afzal.
10.29(3) Promissory Note for $35,000 dated May 20, 1996, between the
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Company and Michael J. Billig.
10.30(3) Promissory Note for $55,000 dated June 5, 1996, between the
Company and Thomas Afzal.
10.31(4) Promissory Note for $750,000 and Security Agreement dated
August 16, 1996, between the Company and Richard Ferrari.
10.32 Promissory Note for $200,000 dated December 3, 1996, between the
Company and Steve Van Dick.
11.1 Calculation of earnings per share
13.1 Portions of Annual Report to Stockholders incorporated by
reference.
23.1 Consents of Coopers & Lybrand L.L.P., Independent Accountants
27.1 Financial Data Schedule
- ---------------------------------------
(1) 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).
(2) Incorporated herein by reference to the same-numbered
exhibit previously filed with the Company's Form 10-Q
for the period ended March 31, 1996.
(3) Incorporated herein by reference to the same-numbered
exhibit previously filed with the Company's Form 10-Q
for the period ended June 30, 1996.
(4) Incorporated herein by reference to the same-numbered
exhibit previously filed with the Company's Form 10-Q
for the period ended September 10, 1996.
(5) Incorporated herein by reference to the Company's
Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on February 28, 1997.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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: March 27, 1997 CARDIOTHORACIC SYSTEMS, INC.
/S/ Richard M. Ferrari
-------------------------------------
Richard M. Ferrari
President and Chief Executive Officer
34
<PAGE>
KNOW ALL MEN AN WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Richard M. Ferrari and Steve
M. Van Dick, jointly and severally, his or her attorneys-in-fact, and each
with the power of substitution, for him or her in any and all capacities, to
sign any amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchanges Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/S/ Richard M. Ferrari President and Chief Executive March 27, 1997
- ---------------------------- Officer (Principal Executive
Richard M. Ferrari Officer)
/S/ Steve M. Van Dick Vice President of Finance and March 27, 1997
- ---------------------------- and Administration and Chief
Steve M. Van Dick Financial Officer (Principal
Financial and Accounting Officer)
/S/ Joseph A. Ciffolillo Director March 27, 1997
- ----------------------------
Joseph A. Ciffolillo
/S/ Thomas J. Fogarty, M.D. Director March 27, 1997
- ----------------------------
Thomas J. Fogarty
/S/ Jack W. Lasersohn Director March 27, 1997
- ----------------------------
Jack W. Lasersohn
/S/ Thomas C. McConnell Director March 27, 1997
- ----------------------------
Thomas C. McConnell
/S/ Robert C. Bellas, Jr. Director March 27, 1997
- ----------------------------
Robert C. Bellas, Jr.
/S/ Philip M. Young Director March 27, 1997
- ----------------------------
Philip M. Young
35
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Exhibit Description Number
- -------- ---------------------------------------- ------
3.2(1) Restated Certificate of Incorporation.
3.3 Bylaws of Registrant (as amended).
3.4(5) Certificate of Designations of Rights, Preferences and Privileges
of Series A Participating Preferred Stock.
3.5(5) Preferred Shares Rights Agreement, dated as of February 14,
1997.
4.1(1) Specimen Common Stock Certificate.
10.1(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
(as amended).
10.3(1) Director Option Plan and form of Director Stock Option Agreement
thereunder.
10.4(1) Employee Stock Purchase Plan and form of agreements thereunder.
10.5 Nonstatutory Stock Option Plan and form of Nonstatutory Stock
Option Agreement thereunder (as amended).
10.6(1) Form of Employment, Confidential Information and Invention
Assignment Agrement.
10.8(1) Consulting Agreement, dated June 10, 1995, between the company and
Federico Benetti, MD.
10.9(1) 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(1) Employment Letter Agreement, dated September 5, 1995, between the
Company and Charles S. Taylor.
36
<PAGE>
10.11(1) Assignment Agreement, dated September 7, 1995, between the Company
and Charles s. Taylor.
10.12(1) 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(1) Letter Agreement regarding Heartport trade secret allegations,
dated October 11, 1995, between the Company and Charles S. Taylor.
10.14(1) 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.
10.16(1) Promissory Note, dated December 4, 1995, between the Company and
Ivan Sepetka.
10.17(1) 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.
10.19(1) 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, California 94028.
10.21(1) Consulting Agreement, dated February 21, 1996, between the Company
and Thomas J. Fogarty, M.D.
10.22(1) Development and License Agreement, dated February 19, 1996,
between the Company and Enable Medical Corp.
10.23(1) Employemtn Letter Agreement, dated March 15, 1996, between the
Company and Steve M. Van Dick.
10.24(1) 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(2) Employment Letter Agreement, dated February 22, 1996, between the
Company and Thomas Afzal.
10.26(2) Employment Letter Agreement, dated March 13, 1996, between the
Company and Robert Rosenbluth.
10.27(3) Employment Letter Agreement, dated Aporil 19, 1996, between the
Company and Steve Van Dick.
10.28(3) Promissory Note for $300,000 dated April 29, 1996, between the
Company and Thomas Afzal.
10.29(3) Promissory Note for $35,000 dated May 20, 1996, between the
37
<PAGE>
Company and Michael J. Billig.
10.30(3) Promissory Note for $55,000 dated June 5, 1996, between the
Company and Thomas Afzal.
10.31(4) Promissory Note for $750,000 and Security Agreement dated
August 16, 1996, between the Company and Richard Ferrari.
10.32 Promissory Note for $200,000 dated December 3, 1996, between the
Company and Steve Van Dick.
11.1 Calculation of earnings per share
13.1 Portions of Annual Report to Stockholders incorporated by
reference.
23.1 Consents of Coopers & Lybrand L.L.P., Independent Accountants
27.1 Financial Data Schedule
- ---------------------------------------
(1) Incorporated herein by reference to the same-numbered
exhibit previously filed with the Company's Registration
Statement Form S-1 (Registration No. 333-1840).
(2) Incorporated herein by reference to the same-numbered
exhibit previously filed with the Company's Form 10-Q
for the period ended March 31, 1996.
(3) Incorporated herein by reference to the same-numbered
exhibit previously filed with the Company's Form 10-Q
for the period ended June 30, 1996.
(4) Incorporated herein by reference to the same-numbered
exhibit previously filed with the Company's Form 10-Q
for the period ended September 10, 1996.
(5) Incorporated herein by reference to the Company's
Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on February 28, 1997.
38
<PAGE>
BYLAWS
OF
CARDIOTHORACIC SYSTEMS, INC.
(A DELAWARE CORPORATION)
(AS AMENDED JANUARY 28, 1997)
<PAGE>
BYLAWS
OF
CARDIOTHORACIC SYSTEMS, INC.
(A DELAWARE CORPORATION)
(AS AMENDED JANUARY 28, 1997)
TABLE OF CONTENTS
PAGE
ARTICLE I - CORPORATE OFFICES.................................................1
1.1 REGISTERED OFFICE.................................................1
1.2 OTHER OFFICES.....................................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS.........................................1
2.1 PLACE OF MEETINGS.................................................1
2.2 ANNUAL MEETING....................................................1
2.3 SPECIAL MEETING...................................................2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS..................................2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES
AND STOCKHOLDER BUSINESS..........................................2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE......................3
2.7 QUORUM............................................................4
2.8 ADJOURNED MEETING; NOTICE.........................................4
2.9 VOTING............................................................4
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING.................................................5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING........................5
2.12 PROXIES...........................................................6
2.13 ORGANIZATION......................................................6
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.............................6
2.15 WAIVER OF NOTICE..................................................7
ARTICLE III - DIRECTORS.......................................................7
3.1 POWERS............................................................7
3.2 NUMBER OF DIRECTORS...............................................7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS..........................7
3.4 RESIGNATION AND VACANCIES.........................................8
3.5 REMOVAL OF DIRECTORS..............................................9
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..........................9
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
PAGE
3.7 FIRST MEETINGS....................................................9
3.8 REGULAR MEETINGS..................................................9
3.9 SPECIAL MEETINGS; NOTICE..........................................9
3.10 QUORUM...........................................................10
3.11 WAIVER OF NOTICE.................................................10
3.12 ADJOURNMENT......................................................10
3.13 NOTICE OF ADJOURNMENT............................................10
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT
A MEETING........................................................11
3.15 FEES AND COMPENSATION OF DIRECTORS...............................11
3.16 APPROVAL OF LOANS TO OFFICERS....................................11
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE
OF INCORPORATION.................................................11
ARTICLE IV - COMMITTEES......................................................12
4.1 COMMITTEES OF DIRECTORS..........................................12
4.2 MEETINGS AND ACTION OF COMMITTEES................................12
4.3 COMMITTEE MINUTES................................................13
ARTICLE V - OFFICERS.........................................................13
5.1 OFFICERS.........................................................13
5.2 ELECTION OF OFFICERS.............................................13
5.3 SUBORDINATE OFFICERS.............................................13
5.4 REMOVAL AND RESIGNATION OF OFFICERS..............................13
5.5 VACANCIES IN OFFICES.............................................14
5.6 CHAIRMAN OF THE BOARD............................................14
5.7 PRESIDENT........................................................14
5.8 VICE PRESIDENTS..................................................14
5.9 SECRETARY........................................................15
5.10 CHIEF FINANCIAL OFFICER..........................................15
5.11 ASSISTANT SECRETARY..............................................15
5.12 ADMINISTRATIVE OFFICERS..........................................16
5.13 AUTHORITY AND DUTIES OF OFFICERS.................................16
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
PAGE
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEESAND OTHER AGENTS........................................16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................16
6.2 INDEMNIFICATION OF OTHERS........................................17
6.3 INSURANCE........................................................17
ARTICLE VII - RECORDS AND REPORTS............................................18
7.1 MAINTENANCE AND INSPECTION OF RECORDS............................18
7.2 INSPECTION BY DIRECTORS..........................................18
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.................................18
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...................18
7.5 CERTIFICATION AND INSPECTION OF BYLAWS...........................19
ARTICLE VIII - GENERAL MATTERS...............................................19
8.1 RECORD DATE FOR PURPOSES OTHER THAN
NOTICE AND VOTING................................................19
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS........................19
8.3 CORPORATE CONTRACTS AND INSTRUMENTS:
HOW EXECUTED.....................................................19
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES.................20
8.5 SPECIAL DESIGNATION ON CERTIFICATES..............................21
8.6 LOST CERTIFICATES................................................21
8.7 TRANSFER AGENTS AND REGISTRARS...................................21
8.8 CONSTRUCTION; DEFINITIONS........................................21
ARTICLE IX - AMENDMENTS......................................................22
-iii-
<PAGE>
BYLAWS
OF
CARDIOTHORACIC SYSTEMS, INC.
(a Delaware corporation)
(as amended January 28, 1997)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Thursday of May in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president. No
other person or persons are permitted to call a special meeting.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or
-2-
<PAGE>
more persons for election as directors at a meeting or propose business to be
brought before a meeting, or both, only if such stockholder has given timely
notice in proper written form of their intent to make such nomination or
nominations or to propose such business. To be timely, such stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than one hundred twenty (120) calendar days
in advance of the date specified in the corporation's proxy statement released
to stockholders in connection with the previous year's annual meeting of
stockholders; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received a reasonable time before the solicitation is made. To be in proper
form, a stockholder's notice to the secretary shall set forth:
(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to
be proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as director
of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice
-3-
<PAGE>
shall be deemed to have been given at the time when delivered personally or
deposited in the mail or sent by telegram or other means of written
communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
-4-
<PAGE>
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder and stockholders shall not be entitled to
cumulate their votes in the election of directors or with respect to any matter
submitted to a vote of the stockholders.
Notwithstanding the foregoing, if the stockholders of the corporation are
entitled, pursuant to Sections 2115 and 301.5 of the California Corporations
Code, to cumulate their votes in the election of directors, each such
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes that such stockholder normally
is entitled to cast) only if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the
voting, and the stockholder requesting cumulative voting has given notice prior
to commencement of the voting of the stockholder's intention to cumulate votes.
If cumulative voting is properly requested, each holder of stock, or of any
class or classes or of a series or series thereof, who elects to cumulate votes
shall be entitled to as many votes as equals the number of votes that (absent
this provision as to cumulative voting) he or she would be entitled to cast for
the election of directors with respect to his or her shares of stock multiplied
by the number of directors to be elected by him, and he or she may cast all of
such votes for a single director or may distribute them among the number to
be voted for, or for any two or more of them, as he or she may see fit.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the Certificate of Incorporation, any action
required or permitted to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Such consents shall be delivered to the corporation by delivery to it
registered office in the state of Delaware, its principal place of business, or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business
-5-
<PAGE>
on the business day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.13 ORGANIZATION
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
-6-
<PAGE>
2.15 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and to
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The board of directors shall be not less than four (4) nor more than eight
(8) members. The exact number of directors shall be eight (8) until changed,
within the limits specified above by a bylaw amending this Section 3.2 duly
adopted by the board of directors or by the stockholders. The indefinite number
of directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by an amendment to this bylaw, duly adopted by the
board of directors or by the stockholders, or by a duly adopted amendment to the
certificate of incorporation.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
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3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next annual meeting of the stockholders and until a successor has been
elected and qualified.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
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3.5 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, if and so
long as stockholders of the corporation are entitled to cumulative voting, if
less than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire board of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting. In the event of the failure of the stockholders to fix the time
or place of such first meeting of the newly elected board of directors, or in
the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting shall
be held at the same time and place on the next succeeding full business day.
3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
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Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
3.10 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.12
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of the minutes of the meeting. A waiver of notice need not specify
the purpose of any regular or special meeting of the board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be
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given before the adjourned meeting takes place, in the manner specified in
Section 3.9 of these bylaws, to the directors who were not present at the time
of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
In the event only one director is required by these bylaws or the
certificate of incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the directors
shall be deemed to refer to such notice, waiver, etc., by such sole director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to the board of directors.
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ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets,
(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the following provisions of Article III of these bylaws:
Section 3.6 (place of meetings; meetings by telephone), Section 3.8 (regular
meetings), Section 3.9 (special meetings; notice), Section 3.10 (quorum),
Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section 3.13
(notice of adjournment) and Section 3.14 (board action by written consent
without meeting), with such changes in the context of those bylaws as are
necessary to substitute the committee and its members for the board of directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
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4.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
5.1 OFFICERS
The Corporate Officers of the corporation shall be a president, a secretary
and a chief financial officer. The corporation may also have, at the discretion
of the board of directors, a chairman of the board, one or more vice presidents
(however denominated), one or more assistant secretaries, a treasurer and one or
more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
In addition to the Corporate Officers of the Company described above, there
may also be such Administrative Officers of the corporation as may be designated
and appointed from time to time by the president of the corporation in
accordance with the provisions of Section 5.12 of these bylaws.
5.2 ELECTION OF OFFICERS
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a Corporate Officer under any contract of
employment, any Corporate Officer may be removed, either with or without cause,
by the board of directors at any regular
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or special meeting of the board or, except in case of a Corporate Officer chosen
by the board of directors, by any Corporate Officer upon whom such power of
removal may be conferred by the board of directors.
Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president may be
removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, and if there is no chairman
of the board, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be
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prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director for a purpose reasonably related to
his position as a director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act,
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perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all officers of
the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
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The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
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ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised
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either by such person directly or by any other person authorized to do so by
proxy or power of attorney duly executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by
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any contract or engagement or to pledge its credit or to render it liable for
any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
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8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both an entity and a natural person.
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ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
CARDIOTHORACIC SYSTEMS, INC.
ADOPTION BY INCORPORATOR
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of CardioThoracic Systems, Inc. hereby adopts the foregoing
bylaws, comprising twenty-three (23) pages, as the Bylaws of the corporation.
Effective as of February 20, 1996.
------------------------------
Jason M. Brady
Incorporator
Certificate by Secretary of Adoption by Incorporator
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of CardioThoracic Systems, Inc. and that the foregoing
Bylaws, comprising twenty-three (23) pages, were adopted as the Bylaws of the
corporation effective as of February 20, 1996, by the person appointed in the
Certificate of Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this 20th day of February , 1996.
------------------------------
Susan W. Vican
Secretary
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CARDIOTHORACIC SYSTEMS, INC.
INCENTIVE STOCK PLAN
(AMENDED AND RESTATED EFFECTIVE OCTOBER 22, 1996)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are:
- to attract and retain the best available personnel for positions
of substantial responsibility,
- to provide additional incentive to Employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means CardioThoracic Systems, Inc., a Delaware
corporation.
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(h) "CONSULTANT" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the date of determination, as reported in THE WALL STREET JOURNAL or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the date of determination, as reported in THE
WALL STREET JOURNAL or such other source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
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(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "NOTICE OF GRANT" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(u) "OPTIONED STOCK" means the Common Stock subject to an Option or
Stock Purchase Right.
(v) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(x) "PLAN" means this Incentive Stock Plan.
(y) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 below.
(z) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
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(aa) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "SECTION 16(B)" means Section 16(b) of the Exchange Act.
(cc) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(dd) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,600,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); PROVIDED, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different groups of Service
Providers.
(ii) SECTION 162(M). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
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(iii) RULE 16B-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above,
the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws. In addition, the
Board or Committee may authorize the Chief Executive Officer of the Company to
grant Options to newly-hired employees to purchase up to 15,000 Shares (subject
to adjustment as provided in Section 13) per Optionee and to fix the terms of
such Options within the limitations imposed by this Plan, the form of option
agreement approved by the Committee, and by the authorizing resolutions, and
subject to the following conditions: (i) such Options must vest over four
years; and (ii) no such Options may be granted to an executive officer of the
Company or to an employee that reports directly to the Chief Executive Officer.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to
be covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
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(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary
or advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
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(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider may be granted Options to purchase up to an additional 500,000
Shares which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of
the Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of the
Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant or such shorter term
as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
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(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price of less than 100% of the Fair Market
Value per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
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(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of
payment; or
(viii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after
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termination, the Optionee does not exercise his or her Option within the time
specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise
his or her Option within such period of time as is specified in the Option
Agreement to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
-10-
<PAGE>
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the Stock Purchase Right is exercised, except as provided
in Section 13 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall
-11-
<PAGE>
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option or Stock Purchase Right becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully vested
and exercisable for a period of fifteen (15) days from the date of such notice,
and the Option or Stock Purchase Right shall terminate upon the expiration of
such period. For the purposes of this paragraph, the Option or Stock Purchase
Right shall be considered assumed if, following the merger or sale of assets,
the option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or
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<PAGE>
Stock Purchase Right, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each Optionee
within a reasonable time after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-13-
<PAGE>
19. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by
the shareholders of the Company within twelve (12) months after the date the
Plan is adopted. Such shareholder approval shall be obtained in the manner and
to the degree required under Applicable Laws.
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<PAGE>
INCENTIVE STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _______________________
Date of Grant _______________________
Vesting Commencement Date _______________________
Exercise Price per Share $_______________________
Total Number of Shares Granted _______________________
Total Exercise Price $_______________________
Type of Option: _______ Incentive Stock Option
_______ Nonstatutory Stock Option
Term/Expiration Date: _______________________
<PAGE>
VESTING SCHEDULE:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
[25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to the Optionee continuing to be a Service
Provider on such dates].
TERMINATION PERIOD:
This Option may be exercised for [days/months] after
Optionee ceases to be a Service Provider. Upon the death or Disability of the
Optionee, this Option may be exercised for such longer period as provided in the
Plan. In no event shall this Option be exercised later than the Term/Expiration
Date as provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Secretary of the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
<PAGE>
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. TAX CONSEQUENCES. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) EXERCISING THE OPTION.
(i) NONSTATUTORY STOCK OPTION. The Optionee may incur regular
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If
<PAGE>
the Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(ii) INCENTIVE STOCK OPTION. If this Option qualifies as an ISO,
the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) DISPOSITION OF SHARES.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
<PAGE>
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: CARDIOTHORACIC SYSTEMS, INC.
_______________________________
Signature By
_______________________________
Print Name Title
Residence Address
<PAGE>
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
_______________________________
Spouse of Optionee
<PAGE>
EXHIBIT A
INCENTIVE STOCK PLAN
EXERCISE NOTICE
CardioThoracic Systems, Inc.
10600 North Tantau Avenue
Cupertino, CA 95014
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, ______________, 199__, the
undersigned ("Purchaser") hereby elects to purchase _________________ shares
(the "Shares") of the Common Stock of CardioThoracic Systems, Inc. (the
"Company") under and pursuant to the Incentive Stock Plan (the "Plan") and the
Stock Option Agreement dated _____________, 19__ (the "Option Agreement"). The
purchase price for the Shares shall be $__________, as required by the Option
Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
<PAGE>
Submitted by: Accepted by:
PURCHASER: CARDIOTHORACIC SYSTEMS, INC.
________________________________
Signature By
________________________________
Print Name Its
ADDRESS: ADDRESS:
10600 North Tantau Avenue
Cupertino, CA 95014
________________________________
Date Received
<PAGE>
EXHIBIT B
SECURITY AGREEMENT
This Security Agreement is made as of ______________, 19____ between
CardioThoracic Systems, Inc., a Delaware corporation ("Pledgee"), and
____________________________ ("Pledgor").
RECITALS
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated _______________ (the "Option"), between Pledgor and Pledgee
under Pledgee's Incentive Stock Plan, and Pledgor's election under the terms of
the Option to pay for such shares with his promissory note (the "Note"), Pledgor
has purchased __________________ shares of Pledgee's Common Stock (the "Shares")
at a price of $ ____________ per share, for a total purchase price of $________.
The Note and the obligations thereunder are as set forth in Exhibit C to the
Option.
NOW, THEREFORE, it is agreed as follows:
1. CREATION AND DESCRIPTION OF SECURITY INTEREST. In consideration of
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ____________, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal sum of
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
(b) ENCUMBRANCES. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
(c) MARGIN REGULATIONS. In the event that Pledgee's Common Stock is
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations
<PAGE>
("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any
amendments to the Note or providing any additional collateral as may be
necessary to comply with such regulations.
3. VOTING RIGHTS. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. STOCK ADJUSTMENTS. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. OPTIONS AND RIGHTS. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be delinquent
for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. RELEASE OF COLLATERAL. Subject to any applicable contrary rules under
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
<PAGE>
9. TERM. The within pledge of Shares shall continue until the payment of
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. PLEDGEHOLDER LIABILITY. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. GOVERNING LAW. This Security Agreement shall be interpreted and
governed under the internal substantive laws, but not the choice of law rules,
of California.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR"
________________________________
Signature
________________________________
Print Name
Address:
________________________________
________________________________
"PLEDGEE" CardioThoracic Systems, Inc.
a Delaware corporation
________________________________
Signature
________________________________
Print Name
________________________________
Title
"PLEDGEHOLDER"
________________________________
Secretary of
CardioThoracic Systems, Inc.
<PAGE>
EXHIBIT C
NOTE
$__________ Cupertino, California
______________, 19__
FOR VALUE RECEIVED, _________________________ promises to pay to
CardioThoracic Systems, Inc., a Delaware corporation (the "Company"), or order,
the principal sum of _____________________ ($___________), together with
interest on the unpaid principal hereof from the date hereof at the rate of
____________________ percent (%) per annum, compounded semiannually.
Principal and interest shall be due and payable on ,
19 . Should the undersigned fail to make full payment of principal or
interest for a period of 10 days or more after the due date thereof, the whole
unpaid balance on this Note of principal and interest shall become immediately
due at the option of the holder of this Note. 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 owing hereunder.
This Note is subject to the terms of the Option, dated as of ____________.
This Note is secured in part by a pledge of the Company's Common Stock under the
terms of a Security Agreement of even date herewith and is subject to all the
provisions thereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
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.
________________________________
________________________________
<PAGE>
INCENTIVE STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's Repurchase Option and your ongoing status as a Service
Provider (as described in the Plan and the attached Restricted Stock Purchase
Agreement), as follows:
Grant Number
____________________
Date of Grant
____________________
Price Per Share $
____________________
Total Number of Shares Subject
to This Stock Purchase Right
____________________
Expiration Date:
____________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the Incentive Stock Plan and the Restricted Stock
Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a
part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this
Stock Purchase Right.
GRANTEE: CARDIOTHORACIC SYSTEMS, INC.
____________________________
Signature By
____________________________
Print Name Title
<PAGE>
EXHIBIT A-1
INCENTIVE STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is a
Service Provider, and the Purchaser's continued participation is considered by
the Company to be important for the Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser a Stock
Purchase Right subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and pursuant to this
Restricted Stock Purchase Agreement (the "Agreement").
NOW THEREFORE, the parties agree as follows:
1. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "Shares"), at the per Share purchase price and as otherwise described in
the Notice of Grant.
2. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares may be
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. REPURCHASE OPTION.
(a) In the event the Purchaser ceases to be a Service Provider for
any or no reason (including death or disability) before all of the Shares are
released from the Company's Repurchase Option (see Section 4), the Company
shall, upon the date of such termination (as reasonably fixed and determined by
the Company) have an irrevocable, exclusive option (the "Repurchase Option") for
a period of sixty (60) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "Repurchase Price"). The Repurchase
Option shall be exercised by the Company by delivering written notice to the
Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at
the Company's option, (i) by delivering to the Purchaser or the Purchaser's
executor a check in the amount of the aggregate Repurchase Price, or (ii) by
cancelling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price, the Company shall become the legal and beneficial owner of the
Shares being repurchased and all rights and interests therein or relating
thereto, and the Company shall have the right to retain and transfer to its own
name the number of Shares being repurchased by the Company.
<PAGE>
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares. If the Fair Market Value of the Shares
to be repurchased on the date of such designation or assignment (the "Repurchase
FMV") exceeds the aggregate Repurchase Price of such Shares, then each such
designee or assignee shall pay the Company cash equal to the difference between
the Repurchase FMV and the aggregate Repurchase Price of such Shares.
4. RELEASE OF SHARES FROM REPURCHASE OPTION.
(a) ___________________percent (_________%) of the Shares shall be
released from the Company's Repurchase Option ___[ONE YEAR]___ after the Date
of Grant and ________________ percent (_______%) of the Shares [AT THE END OF
EACH MONTH THEREAFTER], provided that the Purchaser does not cease to be a
Service Provider prior to the date of any such release.
(b) Any of the Shares that have not yet been released from the
Repurchase Option are referred to herein as "Unreleased Shares."
(c) The Shares that have been released from the Repurchase Option
shall be delivered to the Purchaser at the Purchaser's request (see Section 6).
5. RESTRICTION ON TRANSFER. Except for the escrow described in Section 6
or the transfer of the Shares to the Company or its assignees contemplated by
this Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
6. ESCROW OF SHARES.
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Repurchase
Option, the Purchaser shall, upon execution of this Agreement, deliver and
deposit with an escrow holder designated by the Company (the "Escrow Holder")
the share certificates representing the Unreleased Shares, together with the
stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The
Unreleased Shares and stock assignment shall be held by the Escrow Holder,
pursuant to the Joint Escrow Instructions of the Company and Purchaser attached
hereto as Exhibit A-3, until such time as the Company's Repurchase Option
expires. As a further condition to the Company's obligations under this
Agreement, the Company may require the spouse of Purchaser, if any, to execute
and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow while acting
in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises the Repurchase Option
hereunder, the Escrow Holder, upon receipt of written notice of such exercise
from the proposed transferee, shall take all steps necessary to accomplish such
transfer.
<PAGE>
(d) When the Repurchase Option has been exercised or expires
unexercised or a portion of the Shares has been released from the Repurchase
Option, upon request the Escrow Holder shall promptly cause a new certificate to
be issued for the released Shares and shall deliver the certificate to the
Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to
receive any cash dividends declared thereon. If, from time to time during the
term of the Repurchase Option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Repurchase Option.
7. LEGENDS. The share certificate evidencing the Shares, if any, issued
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
8. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
9. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of the transactions contemplated by this
Agreement. The Purchaser understands that Section 83 of the Internal Revenue
Code of 1986, as amended (the "Code"), taxes as ordinary income the difference
between the purchase price for the Shares and the Fair Market Value of the
Shares as of the date any restrictions on the Shares lapse. In this context,
"restriction" includes the right of the Company to buy back the Shares pursuant
to the Repurchase Option. The Purchaser understands that the Purchaser may
elect to be taxed at the time the Shares are purchased rather than when and as
the Repurchase Option expires by filing an election under Section 83(b) of the
Code with the IRS within 30 days from the date of purchase. The form for making
this election is attached as Exhibit A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER
<PAGE>
SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES
TO MAKE THIS FILING ON THE PURCHASER'S BEHALF.
10. GENERAL PROVISIONS.
(a) This Agreement shall be governed by the internal substantive
laws, but not the choice of law rules of California. This Agreement, subject to
the terms and conditions of the Plan and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of the Shares
by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and the terms and
conditions of this Agreement, the terms and conditions of the Plan shall
prevail. Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party hereto.
(c) The rights of the Company under this Agreement shall be
transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision, nor prevent
that party from thereafter enforcing any other provision of this Agreement. The
rights granted both parties hereunder are cumulative and shall not constitute a
waiver of either party's right to assert any other legal remedy available to it.
(e) The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
<PAGE>
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
DATED:
______________________
PURCHASER: CARDIOTHORACIC SYSTEMS, INC.
____________________________
Signature By
____________________________
Print Name Title
<PAGE>
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I,__________________, hereby sell, assign and transfer
unto _______________________________(_____________) shares of the Common Stock
of CardioThoracic Systems, Inc. standing in my name of the books of said
corporation represented by Certificate No. ___________ herewith and do hereby
irrevocably constitute and appoint ______________________ to transfer the said
stock on the books of the within named corporation with full power of
substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement (the "Agreement") between ___________________ and the
undersigned dated _____________________, 19___.
Dated: ___________, 19___
Signature:
____________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
__________ , 19___
Corporate Secretary
CardioThoracic Systems, Inc.
10600 North Tantau Avenue
Cupertino, CA 95014
Dear ______________:
As Escrow Agent for both CardioThoracic Systems, Inc., a Delaware
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's Repurchase Option has been exercised, you
shall deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's Repurchase Option.
Within 90 days after Purchaser ceases to be a Service Provider, you
<PAGE>
shall deliver to Purchaser a certificate or certificates representing the
aggregate number of shares held or issued pursuant to the Agreement and not
purchased by the Company or its assignees pursuant to exercise of the Company's
Repurchase Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized
<PAGE>
and directed to retain in your possession without liability to anyone all or any
part of said securities until such disputes shall have been settled either by
mutual written agreement of the parties concerned or by a final order, decree or
judgment of a court of competent jurisdiction after the time for appeal has
expired and no appeal has been perfected, but you shall be under no duty
whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: CardioThoracic Systems, Inc.
10600 North Tantau Ave.
Cupertino, CA 95014
PURCHASER:
____________________________
____________________________
____________________________
ESCROW AGENT: Corporate Secretary
CardioThoracic Systems, Inc.
10600 North Tantau Avenue
Cupertino, CA 95014
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of California.
Very truly yours,
CARDIOTHORACIC SYSTEMS, INC.
____________________________
By
____________________________
Title
PURCHASER:
<PAGE>
____________________________
Signature
____________________________
Print Name
ESCROW AGENT:
Corporate Secretary
<PAGE>
EXHIBIT A-4
CONSENT OF SPOUSE
I, __________________, spouse of___________________________, read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the Company's grant to my spouse of the right to purchase
shares of CardioThoracic Systems, Inc., as set forth in the Agreement, I hereby
appoint my spouse as my attorney-in-fact in respect to the exercise of any
rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.
Dated: ____________, 19__
____________________________
Signature of Spouse
<PAGE>
EXHIBIT A-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "Shares") of the Common Stock of
CardioThoracic Systems, Inc. (the "Company").
3. The date on which the property was transferred is: _____________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$______________.
6. The amount (if any) paid for such property is:
$ _____________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: ____________, 19___ ___________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ____________, 19___ ___________________________________
Spouse of Taxpayer
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
NONSTATUTORY STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Nonstatutory Stock Option
Plan (the "Plan") are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to
employees and consultants of CardioThoracic Systems, Inc. (the "Company") and
its subsidiaries and to promote the success of the Company's business.
2. STOCK SUBJECT TO THE PLAN. The maximum aggregate number of shares
under the Plan in 995,000 shares of Common Stock (as adjusted for stock splits,
reverse stock splits, recapitalizations, combinations and the like).
If an Option should expire or become unexercisable for any reason
without having been exercised in full, then the unpurchased shares which were
subject thereto shall become available for future grant under the Plan.
3. ADMINISTRATION OF THE PLAN; POWERS OF THE BOARD . The Plan shall be
administered by the Board of Directors of the Company. The Board shall have the
authority to grant stock options in the form of the attached nonstatutory stock
option agreement; provided, however, that the Board shall have the power to
determine the vesting provisions for each individual optionee (which need not be
identical).
<PAGE>
THE SECURITY REPRESENTED BY THIS AGREEMENT HAS BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO
SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
NONSTATUTORY STOCK OPTION AGREEMENT
1. OPTION GRANT. CardioThoracic Systems, Inc., a California corporation
(the "Company"), hereby grants to ____________________ (the "Optionee") an
Option to purchase a total of _____________ shares of Common Stock (the
"Shares") at _______ per share under the Company's Nonstatutory Option Plan.
This Option is intended by the Company and the Optionee to be a Nonstatutory
Stock Option, and does not qualify for any special tax benefits to the Optionee.
2. EXERCISE OF OPTION. This Option shall be exercisable during its term
as follows:
(i) RIGHT TO EXERCISE
(a) Subject to subsections 3(i)(b), (c) and (d) below, ________.
(b) This Option may not be exercised for a fraction of a Share.
(c) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below, subject to the limitations contained in
subsection 2(i)(d).
(d) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in Section 10 below.
(ii) METHOD OF EXERCISE. This Option shall be exercisable by written
notice which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company. Such written
notice shall be signed by Optionee and shall be delivered in person or by
certified mail to the President, Secretary or Chief Financial Officer of the
Company. The written notice shall be accompanied by payment of the exercise
price. The Option shall be deemed exercised upon receipt by the Company of such
written notice accompanied by the exercise price.
No shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange upon which the Shares may then be
listed. Assuming such compliance, for income tax
<PAGE>
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
3. INVESTMENT REPRESENTATIONS; RESTRICTIONS ON TRANSFER.
(i) By receipt of this Option, by its execution and by its exercise
in whole or in part, Optionee represents to the Company the following:
(a) Optionee understands that this Option and any Shares
purchased upon its exercise are securities, the issuance of which requires
compliance with federal and state securities laws.
(b) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities.
Optionee is acquiring these securities for investment only and not with a view
to, or for resale in connection with, any "distribution" thereof within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
(c) Optionee acknowledges and understands that the securities
constitute "restricted securities" under the Securities Act and must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. Optionee further acknowledges
and understands that the Company is under no obligation to register the
securities. Optionee understands that the certificate evidencing the securities
will be imprinted with a legend which prohibits the transfer of the securities
unless they are registered or such registration is not required in the opinion
of counsel satisfactory to the Company any other legend required under
applicable state securities laws.
(d) Optionee is familiar with the provisions of Rule 701 and
Rule 144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of exercise of the Option by the Optionee,
such exercise will be exempt from registration under the Securities Act. In the
event the Company later becomes subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days
thereafter the securities exempt under Rule 701 may be resold, subject to the
satisfaction of certain of the conditions specified by Rule 144, including among
other things: (1) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, and the amount of securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), if applicable.
Notwithstanding this paragraph 4(i)(d), the Optionee acknowledges and agrees to
the restrictions set forth in paragraph 4(ii).
-2-
<PAGE>
In the event that the Company does not qualify under Rule 701 at the
time of exercise of the Option, then the securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires
among other things: (1) the availability of certain public information about
the Company: (2) the resale occurring not less than two years after the party
has purchased, and made full payment for, within the meaning of Rule 144, the
securities to be sold; and (3) in the case of an affiliate, or of a
non-affiliate who has held the securities less than three years, the sale being
made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as that term is defined under the
Securities Exchange Act of 1934) and the amount of securities being sold during
any three month period not exceeding the specified limitations stated therein,
if applicable.
(ii) Optionee agrees, in connection with the initial underwritten
public offering of the Company's securities, (1) not to sell, make short sale
of, loan, grant any options for the purchase of, or otherwise dispose of any
shares of Common Stock of the Company held by Optionee (other than those shares
included in the registration) without the prior written consent of the Company
or the underwriters managing such initial underwritten public offering of the
Company's securities for one hundred eighty (180) days from the effective date
of such registration, and (2) further agrees to execute any agreement reflecting
(1) above as may be requested by the underwriters at the time of the public
offering.
4. METHOD OF PAYMENT. Payment of the purchase price shall be made by
cash or check.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations (Regulation G) as
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
6. TERMINATION OF EMPLOYMENT RELATIONSHIP. In the event of termination
of Optionee's employment with or services to the Company, Optionee may, but only
within thirty (30) days after the date of such termination (but in no event
later than the date of expiration of the term of this Option as set forth in
Section 10 below), exercise this Option to the extent that Optionee was entitled
to exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise this Option at the date of such termination, or if
Optionee does not exercise this Option within the time specified herein, this
Option shall terminate.
7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6
above, in the event of termination of Optionee's employment with or services to
as a result of Optionee's permanent and total disability (as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended), Optionee
may, but only within six (6) months from the date of such termination (but in no
event later than the date of expiration of the term of this Option as set forth
in Section 10 below),
-3-
<PAGE>
exercise this Option to the extent Optionee was entitled to exercise it at the
date of such termination. To the extent that Optionee was not entitled to
exercise this Option at the date of termination, or if Optionee does not
exercise such Option (which Optionee was entitled to exercise) within the time
specified herein, this Option shall terminate.
8. DEATH OF OPTIONEE. In the event of the death of Optionee:
(i) during the term of this Option while employed by or providing
services to the Company, this Option may be exercised, at any time within six
(6) months following the date of death (but in no event later than the date of
expiration of the term of this Option as set forth in Section 10 below), by
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent that Optionee was entitled to
exercise this Option at the date of death; or
(ii) within thirty (30) days after the termination of Optionee's
employment with or services to the Company, this Option may be exercised, at any
time within six (6) months following the date of death (but in no event later
than the date of expiration of the term of this Option as set forth in
Section 10 below), by Optionee's estate or by a person who acquired the right to
exercise this Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of termination.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
10. TERM OF OPTION. This Option will expire on ____________ and
accordingly may not be exercised after such date.
11. TAX CONSEQUENCES. Optionee has reviewed with Optionee's own tax
advisors the federal, state, local and foreign tax consequences of the
transactions contemplated by this Agreement. Optionee is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Optionee understands that Optionee (and not the Company) shall be
-4-
<PAGE>
responsible for Optionee's own tax liability that may arise as a result of the
transactions contemplated by this Agreement.
DATE OF GRANT:
VESTING COMMENCEMENT DATE:
CARDIOTHORACIC SYSTEMS, INC.
By:_____________________________
Title:__________________________
-5-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS
OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE
VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH
OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR
CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.
________________________________
Residence Address:
________________________________
________________________________
Social Security No._____________
-6-
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
PROMISSORY NOTE
$200,000 CUPERTINO, CA
DECEMBER 3, 1996
FOR VALUE RECEIVED, Steve Van Dick promises to pay to CardioThoracic Systems,
Inc. ("the Company"), a Delaware Corporation, on order, the principal sum of two
hundred thousand dollars ($200,000) plus accrued interest at an annual rate of
6.31%. The total amount plus any accrued interest will be paid in full by
December 31, 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.
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.
______________________
Steve Van Dick
<PAGE>
Exhibit 11.1
CardioThoracic Systems, Inc.
Statement Re: Computations of Earnings Per Share
<TABLE>
<CAPTION>
Period from
June 15, 1995
Year Ended (date of inception) to
December 31, 1996 December 31, 1996
--------------- ---------------
<S> <C> <C>
Net loss $ (16,077,413) $ (997,213)
----------------- ----------------
----------------- ----------------
Weighted average common
shares outstanding 5,143,319 2,782,857
Shares related to SAB No. 55,
64, and 83 6,666,197 6,666,197
----------------- ----------------
Total weighted average
common shares outstanding 11,809,516 9,449,054
----------------- ----------------
----------------- ----------------
Net loss per share $ (1.36) $ (0.11)
----------------- ----------------
----------------- ----------------
</TABLE>
<PAGE>
Exhibit 13.1
1996 FINANCIAL REVIEW
TABLE OF CONTENTS
CARDIOTHORACIC SYSTEMS, INC.
13 Selected Financial Data
14 Management's Discussion and Analysis of
Financial Condition and Results of Operations
20 Consolidated Balance Sheets
21 Consolidated Statements of Operations
22 Consolidated Statement of Stockholders' Equity
24 Consolidated Statements of Cash Flows
25 Notes to Consolidated Financial Statements
32 Report of Independent Accountants
INFORMED CREATION
33 Balance Sheet
33 Statements of Operations
34 Statement of Sole Proprietorship Capital
35 Statements of Cash Flows
36 Notes to Financial Statements
37 Report of Independent Accountants
12
<PAGE>
SELECTED FINANCIAL DATA
CardioThoracic Systems, Inc.
<TABLE>
<CAPTION>
COMPANY INFORMED CREATION
------------------------------------- -----------------------------------------------------
JUNE 15, 1995 NOVEMBER 3, 1993
YEAR ENDED (DATE OF INCEPTION) JANUARY 1, 1995 YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31, TO JUNE 14, DECEMBER 31, TO DECEMBER 31,
1996 1995(1) 1995(1) 1994 1993
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 140,900
Cost of sales and start-up
manufacturing costs 842,330
------------------
Gross profit (701,430)
Operating expenses:
Research and development 11,475,117 $ 488,547 $ 2,808 $ 20,154 $ 6,314
Sales, marketing, general and
administration 6,977,230 555,673 5,537 22,162 1,494
Interest income, net 3,076,364 47,007 24 63 9
----------------------------------------------------------------------------------------
Net loss $(16,077,413) $ (997,213) $(8,321) $(42,253) $(7,799)
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Net loss per share $ (1.36) $ (0.11)
----------------------------------
----------------------------------
Shares used in computing net
loss per share 11,809,516 9,449,054
----------------------------------
----------------------------------
COMPANY INFORMED CREATION
------------------------------------ ---------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 JUNE 14, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities $ 78,456,945 $3,273,474 $ 6,146 $ 3,333 $ 6,120
Working capital 46,020,073 3,149,214 4,528 2,228 1,212
Total assets 83,691,369 3,389,436 15,853 14,599 18,315
Accumulated deficit (17,074,626) (997,213)
Total sole proprietorship capital or
stockholders' equity 79,253,860 3,213,677 14,235 13,494 13,407
</TABLE>
(1) THE PERIODS BEGINNING ON OR AFTER JUNE 15, 1995 REFLECT THE DATA OF THE
COMPANY. THE PERIODS TO AND INCLUDING JUNE 14, 1995 REFLECT DATA OF INFORMED
CREATION. THE COMPANY ACQUIRED ALL OF THE INTELLECTUAL PROPERTY ASSETS OF
INFORMED CREATION FOR CASH ON SEPTEMBER 7, 1995.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CardioThoracic Systems, Inc.
The following discussion of the financial condition and results of operations
of CardioThoracic Systems, Inc. ("CTS" or the "Company") should be read in
conjunction with the Consolidated Financial Statements and the related Notes
thereto included herein.
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934. The Company's future results of operations could
vary significantly from those anticipated by such statements as a result of
factors described in the Management's Discussion and Analysis of Financial
Condition and Results of Operations and under "Factors Affecting 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, product development and
commercialization 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 only recently
generated revenues and has very limited experience in manufacturing,
marketing or selling the CTS MIDCAB-TM- System. The Company has experienced
operating losses since its inception, and, as of December 31, 1996, the
Company had an accumulated deficit of approximately $17,075,000. 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 expends substantial resources to continue
development of the Company's products, obtain additional 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 will ever gain wide spread
commercial acceptance or that the Company will ever generate enough revenues
to achieve profitability.
The CTS MIDCAB System is designed 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 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. Currently, 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 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 CTS 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 CTS MIDCAB System is in the early stage of
commercialization. The Company has manufactured and sold a very small number
of systems, and there can be no assurance that the Company is capable of
manufacturing the CTS MIDCAB System in commercial quantities at acceptable
costs. Nor can there be any assurance that demand for the CTS MIDCAB System
will be sufficient to allow profitable operations. Failure of the CTS 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 additional products in the United States,
the Company must obtain clearance or approval from the FDA. The Company has
filed a 510(k) premarket
<PAGE>
notification with the FDA for clearance to market additional components of
the CTS MIDCAB System and Saphenous Vein Harvesting System. There can be no
assurance 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, there can be no assurance that the FDA will not impose
strict labeling or other requirements as a condition of its 510(k) clearance,
any of which could limit the Company's ability to market additional products.
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 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. The Company has received ISO 9001 and the CE Mark
approval for use of its CTS MIDCAB System. The CE Mark provides the
regulatory approval necessary for commercialization in European Union
countries and eliminates having to obtain individual country approvals. There
can be no assurance that the Company will obtain future regulatory
registrations or approvals in other 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.
OPERATING DATA
The following table sets forth the operating data of Informed Creation for the
year ended December 31, 1994. In addition, the table combines the 1995 data for
Informed Creation (for the period January 1, 1995 to June 14, 1995) and the
Company (for the period June 15, 1995 to December 31, 1995) 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>
INFORMED CREATION
AND THE COMPANY CardioThoracic
INFORMED CREATION COMBINED Systems, Inc.
YEAR ENDED YEAR ENDED Year Ended
DECEMBER 31, 1994 DECEMBER 31, 1995 December 31, 1996
<S> <C> <C> <C>
Revenues $ 140,900
Cost of sales and start-up manufacturing costs 842,330
--------------------------------------------------------
Gross profit (701,430)
Operating expenses:
Research and development $ 20,154 $ 491,355 11,475,117
Sales, marketing, general and administrative 22,162 561,210 6,977,230
--------------------------------------------------------
Total operating expenses 42,316 1,052,565 18,452,347
--------------------------------------------------------
Operating loss (42,316) (1,052,565) (19,153,777)
Interest income, net 63 47,031 3,076,364
--------------------------------------------------------
Net loss $(42,253) $(1,005,534) $(16,077,413)
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
CARDIOTHORACIC SYSTEMS, INC. FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO
THE COMBINED YEAR ENDED DECEMBER 31, 1995.
Revenues were $141,000 in the year ended December 31, 1996 compared to no
revenues in the year ended December 31, 1995. The Company held its first COR
training and commenced shipments of the CTS MIDCAB System in December 1996.
The research and development expenses for the year ended December 31,
1996 were $11,475,000 compared to $491,000 for the year ended December 31,
1995. This increase was due in part to a $5,322,000 charge for amortization
of deferred compensation in the year ended December 31, 1996, compared with a
$132,000 charge in 1995. The remaining increase was due to an increase in
research and development staff and increased expenditures related to the
continuing development of the instruments associated with the CTS MIDCAB
System and Saphenous Vein Harvesting System. The Company
15
<PAGE>
expects that research and development expenses will continue to increase in
1997 as the Company expands its research and development activities related
to the CTS MIDCAB System, Saphenous Vein Harvesting System, valve repair and
replacement and other research efforts. This increase in costs will be offset
somewhat by a significant decrease in amortization of deferred compensation
in 1997.
Sales, marketing, general and administrative expenses increased to
$6,977,000 for the year ended December 31, 1996 compared to $561,000 for the
year ended December 31, 1995. This increase was due in part to a $1,410,000
charge for amortization of deferred compensation in the year ended December
31, 1996, compared with a $128,000 charge 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 CTS 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 1997
as the Company builds its sales and marketing and administrative
organizations, establishes a direct sales force in Germany, sponsors CTS COR
surgeon training programs, puts in place financial and management information
and control systems, and makes expenditures to increase market awareness of
the CTS MIDCAB procedure and the CTS MIDCAB System.
The Company has recorded deferred compensation of $12,734,000 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
year ended December 31, 1996 totaled $6,732,000.
Interest income increased to $3,103,000 for the year ended December 31,
1996 compared to $47,000 for the year ended December 31, 1995. 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 1 of the CardioThoracic Systems, Inc. Notes
to Consolidated Financial Statements.
Interest expense increased to $27,000 for 1996 compared to no expense in
1995. This increase is due to debt acquired during 1996 under an equipment
loan credit facility and a bank line of credit.
COMBINED YEAR ENDED DECEMBER 31, 1995 COMPARED TO INFORMED CREATION FOR THE YEAR
ENDED DECEMBER 31, 1994.
The combined research and development expenses for the year ended December
31, 1995 were $491,000 compared to $20,000 for the year ended December 31,
1994. This increase was due to an increase in research and development staff,
increased expenditures related to the continuing development of the
instruments associated with the CTS MIDCAB System and amortization of
deferred compensation incurred in 1995.
Sales, marketing, general and administration expenses increased to
$561,000 for the combined year ended December 31, 1995 from $22,000 for the
year ended December 31, 1994. This increase was due primarily to the hiring
of marketing and administration personnel and consultants, establishing the
Company's administration infrastructure, the Company's promotional efforts to
increase market awareness of the Company and the MIDCAB procedure and
amortization of deferred compensation incurred in 1995.
Interest income increased to $47,000 for the combined year ended
December 31, 1995 from $63 for the year ended December 31, 1994. The increase
was primarily due to the interest received on higher average cash balances
resulting from a private equity financing that closed in September 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the sale
of equity securities. As of December 31, 1996, the Company had raised
approximately $89,319,000 (net of stock issuance costs) from the sale of
equity securities. As of December 31, 1996, cash, cash equivalents and
available-for-sale securities totaled $78,457,000. The Company's cash used in
operations was $7,444,000 for the year ended December 31, 1996, reflecting
expenditures made primarily to increase research and development, to commence
marketing and sales activities and to support its administrative
infrastructure. The Company also spent $2,681,000 for the purchases of
property and equipment, the majority of which was related to leasehold
improvements and equipment required for the new facility the Company occupied
in August 1996. The Company also provided loans to certain officers totaling
$1,340,000 of which $68,333 has been amortized in 1996 (as described in note
10 of the Company's Notes to the Consolidated Financial Statements).
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 $84,223,000.
The Company plans to finance its operations principally from existing
cash, cash equivalents and available-for-sale securities and interest
thereon, product revenues and, to the extent available, lines of credit. The
Company currently has an agreement with a bank for a $3,500,000 million line
of credit, fully secured by cash, cash equivalents and available-for-sale
securities, of which $3,075,000 is available at December 31, 1996. The
Company also has a $2,500,000 equipment loan credit facility available to
finance the purchase of certain equipment, of which $1,662,000 is available
at December 31, 1996. The Company believes that the Company's existing cash
balances and available-for-sale securities and the interest thereon, credit
lines and product revenues 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
16
<PAGE>
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 receive market acceptance, 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 Germany 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 covenants.
At December 31, 1996, the Company had approximately $7,260,000 in
federal and state net operating loss carryforwards, which expire in the years
2011 and 2001, 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.
FACTORS AFFECTING RESULTS OF OPERATIONS
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 only undergone
inspection for ISO 9001 certification. 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; RISK OF REUSE.
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 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. are marketing or 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 or marketing
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. Furthermore, sales of the CTS MIDCAB System could be adversely
affected by reuse of the Company's products, notwithstanding the instructions
in the Company's clinical protocols and product labeling indicating that each
of the components of the CTS MIDCAB System is a single-use device. Such
competition or reuse 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 CTS MIDCAB System. The Company is the
licensee of a United States patent application for bipolar electrosurgical
scissors that are used in the Saphenous Vein Harvesting System. The Company
has filed twenty-one 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
17
<PAGE>
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 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
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.
Congress enacted legislation, which became effective October 1, 1996,
that places certain restrictions on the ability of medical device
manufacturers to enforce certain patent claims, relating to surgical and
medical methods, against medical practitioners. Such limitation in the
enforceability of patent claims, relating to medical and surgical methods,
against medical practitioners could have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures against
medical practitioners.
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.
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 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 such agreements will be renewed
upon expiration.
18
<PAGE>
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE.
The Company currently has a small sales and marketing organization. The
Company intends to sell the CTS MIDCAB System in the United States and
certain European countries through a direct sales force. In other markets,
the Company intends to sell its products primarily through distributors or by
means of collaborative arrangements. There can be no assurance that the
Company will be able to build a larger direct sales force or marketing
organization, that maintaining 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 maintain agreements with distributors or collaborative arrangements, or
that such distributors or collaborators will devote adequate resources to
selling the Company's products. The Company has entered into distribution
agreements for the sale of its products in certain countries. Therefore, the
Company will be dependent upon the efforts of these 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.
NO MANUFACTURING EXPERIENCE; SCALE-UP RISK.
The Company has no experience manufacturing its products in the volumes that
would be necessary for the Company to achieve significant commercial sales.
There can be no assurance that reliable, high-volume manufacturing can be
established or maintained at commercially reasonable costs. 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.
The Company contracts 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,
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 procedures in which the
Company's products are intended to be used. Failure by physicians, hospitals
and other potential users of the Company's products 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,
financial condition and results of operations.
Market acceptance of the Company's products in international markets
will 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.
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 as product sales increase. 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.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
CardioThoracic Systems, Inc. and Subsidiary
DECEMBER 31, 1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 5,183,694 $ 711,620
Available-for-sale securities 42,608,043 2,561,854
Trade accounts receivable, net 132,981
Notes receivable from officers 115,000
Inventories 220,171
Interest receivable 946,387 20,928
Prepaid expenses and other current assets 123,781 30,571
-----------------------------
Total current assets 49,330,057 3,324,973
Property and equipment, net 2,494,807 64,463
Available-for-sale securities 30,665,208
Notes receivable from officers 1,156,667
Other assets 44,630
-----------------------------
$83,691,369 $3,389,436
-----------------------------
-----------------------------
LIABILITIES
Current liabilities:
Equipment note, current portion $ 135,678
Accounts payable 831,294 $ 87,260
Accrued liabilities 2,343,012 88,499
-----------------------------
Total current liabilities 3,309,984 175,759
Bank borrowings 425,000
Equipment note, less current portion 702,525
-----------------------------
Total liabilities 4,437,509 175,759
-----------------------------
Commitments (Note 7)
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $0.001:
Authorized: 5,100,000 shares in 1996 and
in 1995
Issued and outstanding: none in 1996
and 4,025,000 shares in 1995 4,025
(Liquidation preference: $4,025,000 in 1995)
Common stock, par value $0.001:
Authorized: 20,000,000 shares in 1996 and
15,000,000 shares in 1995
Issued and outstanding: 13,114,472 shares
in 1996 and 2,800,121 shares in 1995 13,114 2,800
Additional paid-in capital 102,040,261 6,006,335
Deferred compensation (5,742,143) (1,802,270)
Unrealized gain on available-for-sale
securities 17,254
Accumulated deficit (17,074,626) (997,213)
-------------------------------
Total stockholders' equity 79,253,860 3,213,677
-------------------------------
$ 83,691,369 $ 3,389,436
-------------------------------
-------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CardioThoracic Systems, Inc. and Subsidiary
PERIOD FROM
JUNE 15, 1995
Year Ended (DATE OF INCEPTION)
December 31, 1996 TO DECEMBER 31, 1995
Net sales $ 140,900
Cost of sales and start-up
manufacturing costs 842,330
-------------------
Gross profit (701,430)
-------------------
Operating expenses:
Research and development 11,475,117 $ 488,547
Sales, marketing, general and
administrative 6,977,230 555,673
--------------------------------------
Total operating expenses 18,452,347 1,044,220
--------------------------------------
Operating loss (19,153,777) (1,044,220)
Interest income 3,103,200 47,007
Interest expense (26,836)
--------------------------------------
Net loss $(16,077,413) $ (997,213)
--------------------------------------
--------------------------------------
Net loss per share $ (1.36) $ (0.11)
--------------------------------------
--------------------------------------
Shares used in computing net loss
per share 11,809,516 9,449,054
--------------------------------------
--------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
21
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CardioThoracic Systems, Inc. and Subsidiary
For the period from June 15, 1995 (date of inception) to December 31, 1996
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Issuance of common stock at $.001 per share for cash in August 1995 2,800,121 $ 2,800
Issuance of Series A preferred stock in repayment of convertible
promissory notes at $1.00 per share in September 1995, net of
issuance costs of $3,827 200,000 $ 200
Issuance of Series A preferred stock for cash at $1.00 per share in
September 1995, net of issuance costs of $73,268 3,825,000 3,825
Deferred compensation related to issuance of common stock and
grants of stock options
Amortization of deferred compensation
Net loss
---------------------------------------------
Balance, December 31, 1995 4,025,000 4,025 2,800,121 2,800
Issuance of Series A preferred stock for cash at $1.00 per share in
January and February 1996, net of issuance costs of $526 1,000,000 1,000
Issuance of common stock through:
Initial public offering at $18.00 per share in April 1996, net of
issuance costs of $7,891,838 5,117,500 5,117
Conversion of preferred shares in connection with initial public
offering in April 1996 (5,025,000) (5,025) 5,025,000 5,025
Exercise of stock options 254,300 254
Exercise of purchase rights 6,009 6
Repurchase of common stock (88,458) (88)
Deferred compensation related to issuance of common stock and
grants of stock options
Deferred compensation adjustment for cancellation of stock options
Amortization of deferred compensation
Unrealized gain on available-for-sale securities
Net loss
---------------------------------------------
Balance, December 31, 1996 -- $ -- 13,114,472 $13,114
---------------------------------------------
---------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
22
<PAGE>
ADDITIONAL TOTAL
PAID-IN DEFERRED UNREALIZED ACCUMULATED STOCKHOLDERS
CAPITAL COMPENSATION GAIN DEFICIT EQUITY
$ 2,800
$ 195,973 196,173
3,747,907 3,751,732
2,062,455 $ (2,062,455) --
260,185 260,185
$ (997,213) (997,213)
- -------------------------------------------------------------------------------
6,006,335 (1,802,270) (997,213) 3,213,677
998,474 999,474
84,218,045 84,223,162
--
53,668 53,922
91,932 91,938
(88)
11,950,197 (11,950,197) --
(1,278,390) 1,278,390 --
6,731,934 6,731,934
$17,254 17,254
(16,077,413) (16,077,413)
- -------------------------------------------------------------------------------
$102,040,261 $ (5,742,143) $17,254 $(17,074,626) $ 79,253,860
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CardioThoracic Systems, Inc. and Subsidiary
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,077,413) $ (997,213)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 251,004 1,781
Amortization of notes receivable from officer 68,333
Amortization of deferred compensation 6,731,934 260,185
Changes in operating assets and liabilities:
Accounts receivable (157,981)
Allowance for product returns 25,000
Inventories (220,171)
Prepaid expenses and other current assets (93,210) (30,571)
Accrued interest on available-for-sale securities (925,459) (20,928)
Other assets (44,630)
Accounts payable 744,034 87,260
Accrued liabilities 2,254,513 88,499
-----------------------------------
Net cash used in operating activities (7,444,046) (610,987)
-----------------------------------
Cash flows from investing activities:
Purchases of property and equipment (2,681,348) (66,244)
Purchases of available-for-sale securities (78,265,702) (2,561,854)
Sales or maturities of available-for-sale securities 7,571,559
Issuance of notes receivable to officers (1,340,000)
-----------------------------------
Net cash used in investing activities (74,715,491) (2,628,098)
-----------------------------------
Cash flows from financing activities:
Bank borrowings 425,000
Proceeds from equipment note 848,847
Repayment of equipment note (10,644)
Issuance of convertible promissory notes, net of
issuance costs 196,173
Proceeds from issuance of Series A preferred stock,
net of issuance costs 999,474 3,751,732
Proceeds from issuance of common stock, net of issuance
costs 84,368,934 2,800
-----------------------------------
Net cash provided by financing activities 86,631,611 3,950,705
-----------------------------------
Net increase in cash and cash equivalents 4,472,074 711,620
Cash and cash equivalents, beginning of period 711,620 --
-----------------------------------
Cash and cash equivalents, end of period $ 5,183,694 $ 711,620
-----------------------------------
-----------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of promissory notes for Series A preferred stock $ 200,000
------------
------------
Conversion of preferred stock to common stock in
connection with the Company's initial public offering $ 5,025,000
-----------------
-----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CardioThoracic Systems, Inc. and Subsidiary
NOTE ONE
FORMATION AND BUSINESS OF THE COMPANY:
CardioThoracic Systems, Inc. (the Company) was incorporated in the state of
California on June 15, 1995. The Company 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's principal operations commenced in December
1996, at which time it emerged from the development stage.
On March 29, 1996, the Company was reincorporated in the state of
Delaware with the associated exchange of shares of each class and series of
stock of the predecessor company for one share of each identical class and
series of stock of the Delaware successor company having a par value of
$0.001 per share for both common stock and preferred stock.
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 $84,223,000. 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.
In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue through 1997. The
Company will finance its operations primarily through its cash, cash
equivalents and available-for-sale securities, together with existing credit
facilities and future revenues. There can be no assurance that the Company
will not require additional funding and should this prove necessary, the
Company may sell additional shares of its common or preferred stock through
private placement or further public offerings.
NOTE TWO
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION:
The Company has a wholly owned subsidiary in Germany, CardioThoracic Systems,
GmbH. This entity was formed in December 1996 but as of December 31, 1996,
had yet to commence operations. The consolidated financial statements include
the accounts of this wholly owned subsidiary. All intercompany balances and
transactions have been eliminated.
STOCK SPLIT:
On August 25, 1995, the Company effected a 1.0306-for-1 common stock split.
All common stock data in the accompanying financial statements has been
retroactively adjusted to reflect the stock split.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
The Company has classified its investments as "available-for-sale." Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with associated
premium or discount amortized to "investment income." The cost of securities
sold is based upon the specific identification method.
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in
first-out basis) or market value.
DEPRECIATION:
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
Leasehold improvements are amortized over their estimated useful lives, or
the lease term, if shorter.
REVENUE RECOGNITION:
The Company recognizes revenue upon shipment of product to the customer, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain outstanding.
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations as incurred.
CONCENTRATION OF CREDIT RISK:
The Company's cash and cash equivalents are maintained at four financial
institutions. Deposits in these institutions may exceed the amount of
insurance provided on such deposits.
For accounts receivable, management of the Company performs ongoing
credit evaluations of its customers. At December 31, 1996, one customer
accounted for 14% of net accounts receivable and 13% of total revenues,
respectively.
25
<PAGE>
The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to the
commencement commercialized sales. There can be no assurance that the
Company's products will receive any of these required approvals. If the
Company was denied such approvals, or such approvals were delayed, it would
have a materially adverse impact on the Company.
INCOME TAXES:
The Company accounts for income taxes under Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes," which prescribes the
use of the liability method whereby deferred tax asset or liability account
balances are calculated at the balance sheet date using current tax laws and
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
RECLASSIFICATION:
Certain amounts in the financial statements have been reclassified to conform
with the current year's presentation. The reclassification had no impact on
previously reported net loss.
NET LOSS PER SHARE:
The net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and preferred stock are excluded from the computation as their effect
is anti-dilutive, except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin, common and common equivalent shares
issued at prices below the public offering price during the 12 months
immediately preceding the initial filing date have been included in the
calculation as if they were outstanding during all periods prior to the
initial filing date (using the treasury stock method and the initial public
offering price).
NOTE THREE
AVAILABLE-FOR-SALE SECURITIES:
The following summarizes the Company's available-for-sale securities:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET VALUE
<S> <C> <C> <C> <C>
December 31, 1996:
U.S. government notes and bonds $15,710,855 $46,928 $ (3,699) $15,754,084
Government agency notes and bonds 12,031,217 1,611 (14,979) 12,017,849
Corporate notes and bonds 45,513,925 -- (12,607) 45,501,318
---------------------------------------------------------------------------------
$73,255,997 $48,539 $(31,285) $73,273,251
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
December 31, 1995:
U.S. government notes and bonds $ 2,561,854 $ -- $ -- $ 2,561,854
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
Available-for-sale debt securities by contractual maturity
at December 31, 1996 are shown below:
AMORTIZED MARKET
COST VALUE
Less than one year $42,610,800 $42,608,043
Due in one to two years 30,645,197 30,665,208
------------------------------
$73,255,997 $73,273,251
------------------------------
------------------------------
26
<PAGE>
NOTE FOUR
INVENTORIES:
Inventories at December 31, 1996 comprise:
Raw material $ 87,259
Work in progress 126,707
Finished goods 6,205
---------
$220,171
---------
---------
NOTE FIVE
PROPERTY AND EQUIPMENT:
Property and equipment comprise:
DECEMBER 31, 1996 1995
Furniture and fixtures $ 302,813
Leasehold improvements 1,127,245
Computer and office equipment 783,656 $20,855
Machinery and equipment 533,878 45,389
-------------------------------
2,747,592 66,244
Less accumulated depreciation
and amortization (252,785) (1,781)
-------------------------------
$2,494,807 $64,463
-------------------------------
-------------------------------
NOTE SIX
ACCRUED LIABILITIES:
Accrued liabilities comprise:
DECEMBER 31, 1996 1995
Accrued payables $1,464,325
Accrued compensation 667,323 $39,148
Other accrued liabilities 211,364 49,351
-------------------------------
$2,343,012 $88,499
-------------------------------
-------------------------------
NOTE SEVEN
COMMITMENTS:
OPERATING LEASES:
In March 1996, the Company entered into an operating lease which expires in
May 2001. The Company's previous premises were subleased starting August
1996. Total future minimum rental income under this noncancelable sublease is
$301,824. Total future minimum facility lease and sublease payments are as
follows:
1997 $ 562,339
1998 498,362
1999 492,271
2000 489,748
2001 192,645
-------------
$2,235,365
-------------
-------------
Rent expense for the year ended December 31, 1996 and for the period
from June 15, 1995 (date of inception) to December 31, 1995 was $330,787 (net
of sublease income of $55,584) and $2,059, respectively.
In July 1996, the Company entered into a development and license
agreement with a company currently developing several minimally invasive
cardiothoracic surgical products. Under the development program agreement,
the Company will make development payments totaling $3,400,000 upon the
completion of certain milestones, $1,400,000 of which has been charged to
research and development expense during fiscal 1996.
NOTE EIGHT
BORROWINGS:
The Company has a $3.5 million line of credit agreement, the proceeds of
which shall be used for leasehold improvements and equipment purchases.
Borrowings under this line of credit agreement are collateralized by funds
held in the Company's liquidity management account with the same financial
institution (which totaled $41,269,860 at December 31, 1996) and shall not at
any time exceed the collateral value. The principal, plus any accrued
interest, advanced against this line of credit shall be converted to a term
loan on October 1, 1997 and is to be amortized over a four year period. Both
the line of credit and term loan bear interest at a rate of prime minus 0.25%
(8.0% at December 31, 1996).
In addition the Company maintains a $2,500,000 equipment loan credit
facility (equipment facility) with another financial institution which
expires on December 31, 1997. Borrowings under this agreement are
collateralized by the assets purchased under this equipment facility and bear
interest at 11.97% per annum. The loan outstanding is repaid in monthly
installments of $18,502. This equipment facility agreement contains certain
financial covenants, including a requirement for the Company to maintain
minimum liquid assets of $30,000,000.
27
<PAGE>
NOTE NINE
STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
Under the Company's Articles of Incorporation, the Company's preferred stock
is issuable in series. As of December 31, 1996, 5,100,000 shares of preferred
stock were authorized and no preferred stock was issued or outstanding. The
previously outstanding preferred stock was converted into common stock in
connection with the Company's initial public offering.
INCENTIVE STOCK PLANS:
In December 1995, the Company approved the 1995 Incentive Stock Plan (the
Plan) under which the officers of the Company are authorized and directed to
enter into stock option agreements with selected individuals. At December
31, 1996, 1,600,000 shares of common stock are reserved for issuance under
this plan. In February 1996, the Company adopted the Nonstatutory Stock
Option Plan and reserved 900,000 shares of common stock for issuance. In
March 1996, the Company increased the shares reserved for the Nonstatutory
Stock Option Plan from 900,000 shares to 995,000 shares. Options granted
under these plans generally become exercisable 12/48 at the end of one year
following date of grant and additional 1/48 of the shares shall become
exercisable on the monthly anniversary of the grant date thereafter until all
of the shares have become exercisable.
Activity under the Incentive Stock Plans is as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING OPTIONS
AVAILABLE --------------------------------------------------------
FOR NUMBER EXERCISE AGGREGATE
GRANT OF SHARES PRICE PRICE
<S> <C> <C> <C> <C>
Options reserved at Plan inception 1,200,000
Options granted (460,000) 460,000 $0.10 $ 46,000
-------------------------------------------------------------------------------------------
Balances, December 31, 1995 740,000 460,000 $0.10 46,000
Additional shares authorized 1,395,000
Options granted (2,096,750) 2,096,750 $ 0.10-$21.13 10,141,703
Options canceled 149,167 (149,167) $ 0.10-$21.13 (341,605)
Options exercised (254,300) $ 0.10-$11.00 (53,922)
-------------------------------------------------------------------------------------------
Balances, December 31, 1996 187,417 2,153,283 $ 0.10-$21.13 $9,792,176
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, 349,344 options are exercisable under the above plans.
DIRECTOR OPTION PLAN:
In February 1996, the Company approved the Director Option Plan and reserved
200,000 shares of common stock for issuance. Options to purchase 12,000
shares of the Company's common stock were granted during fiscal 1996 with an
exercise price of $13.75 per share. No options are exercisable at December
31, 1996.
EMPLOYEE STOCK PURCHASE PLAN:
In February 1996, the Company approved the Employee Stock Purchase Plan and
reserved 150,000 shares of common stock for issuance. As of December 31,
1996, 6,009 shares of common stock had been purchased under this plan at
$15.30 per share.
STOCK-BASED COMPENSATION:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Had compensation cost for the Director Option
Plan, the Incentive Stock Plans and the Employee Stock Purchase Plan been
determined based on the fair value at the grant date for awards in 1996 and
1995, according to the provisions of SFAS No. 123, the Company's net loss and
net loss per share for the years ended December 1996 and 1995 would have been
increased to the pro forma amounts indicated below:
28
<PAGE>
1996 1995
Net loss--as reported $ (16,077,000) $(997,000)
--------------------------------
--------------------------------
Net loss--pro forma $ (16,180,000) $(997,000)
--------------------------------
--------------------------------
Net loss per share--as reported $ (1.36) $ (0.11)
--------------------------------
--------------------------------
Net loss per share--pro forma $ (1.37) $ (0.11)
--------------------------------
--------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following weighted average assumptions:
Risk-free interest rate 5.57%-6.44%
Expected life 2 years
Expected dividends --
Expected volatility 38.88%
The options outstanding and currently exercisable by exercise price at December
31, 1996 are as follows:
<TABLE>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
- ------------------------------------------------------------------------------------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$ 0.001 390,000 9.13 $ 0.001 190,000 $00.001
$ 0.100 829,033 9.05 $ 0.100 80,657 $00.100
$ 5.000 460,000 9.19 $ 5.000 70,000 $05.000
$11.000-$16.363 315,250 9.64 $13.907 8,687 $13.374
$17.000-$21.125 159,000 9.83 $18.033 -- --
</TABLE>
Deferred compensation to be recognized as a result of stock options
granted and common stock issued subject to repurchase provisions as of
December 31, 1996 totals $5,742,143. Amortization of deferred compensation is
generally over vesting periods of one to four years, with compensation
expense recognized in the year ended December 31, 1996 and the period from
June 15, 1995 (date of inception) to December 31, 1995 being $6,731,934 and
$260,185, respectively.
COMMON STOCK:
In connection with 2,800,121 shares of common stock issued in August 1995,
2,181,761 shares contain provisions for the repurchase of common stock by the
Company (at the Company's option) in the event of termination of employment
during the four years following the date of certain vesting dates. These
shares are generally released from the repurchase provision ratably over 48
months beginning on certain vesting dates. At December 31, 1996, 1,047,711
shares are subject to repurchase under these stock purchase agreements.
NOTE TEN
RELATED PARTIES:
In June 1995, the Company entered into a consulting and assignment agreement
with a surgeon who serves on the Company's Scientific Advisory Board. Under
the agreement, the surgeon will develop prototype instruments, participate in
developing any testing protocols, provide clinical input with respect to
current surgical procedures, provide evaluations of prototype products and
test prototype and production products. In consideration, the Company will
pay this surgeon $5,000 per month, with such payments retroactive to July 1,
1995. Payments under this agreement totaled $60,000 and $30,000 in 1996 and
1995, respectively. The assignment agreement assigned to the Company all this
surgeon's rights, title and interest in and to a U.S. patent application
entitled "Method For Coronary Artery Bypass." Concurrent with this agreement,
the Company sold 103,060 shares of common stock to the surgeon for cash at
$0.001 per share and will pay a 3% royalty on the first $10 million of net
sales, 2% on the next $15 million of net sales and 1.5% on net sales above
$25 million of future products covered by future potential patents on which
this surgeon is the sole inventor. No royalty payments were made in 1996 and
1995.
Also in June 1995, the Company entered into a consulting agreement with
a consulting company which is also a stockholder of the Company. Under the
agreement, the consulting company provides the Company with the appropriate
contacts to cardiac surgeons and other medical professionals for developing a
Scientific Advisory Board, planning clinical trials and for other business
purposes. In consideration, the Company sold 61,836 shares of common stock to
this consulting company at $0.001 per share.
In September 1995, the Company entered into an assignment agreement with
an officer and director, the sole proprietor of Informed Creation, whereby
the employee assigned to the Company all his right, title and interest in and
to any and all original work of authorship, concepts, copyrights,
copyrightable works, designs, developments, discoveries, formulae, ideas,
inventions, improvements, manufacturing techniques, patents, patent
applications, processes, trademarks and trade
29
<PAGE>
secrets, including all rights to obtain, register, perfect and enforce these
proprietary interests, which are related to or potentially useful in coronary
bypass procedures, including, without limitation, less-invasive direct
coronary artery bypass graft (CABG) procedures. In consideration of the
assignment, the Company paid this employee $1,000 and expensed the purchase
price to research and development as purchased in-process research and
development technology.
In February 1996, the company entered into a consulting agreement with a
board member. The agreement requires this board member to provide consulting
services with respect to the conception, development and clinical evaluation
of devices, instruments and techniques for minimally invasive coronary artery
bypass graft surgery (MIDCAB) for four years. In consideration for these
consulting services, the Company granted to partnerships of which this board
member is a general partner, nonstatutory options to purchase a total of
90,000 shares of common stock of the Company at an exercise price of $0.10
per share. The options were exercisable immediately, but subject to
repurchase at cost in the event that both the agreement is terminated in
accordance with its terms and this board member is no longer a member of the
Company's Board of Directors. The repurchase right will lapse at the rate of
1/48 of the shares each month beginning in March 1996. The Company will also
pay royalties of 4% on the aggregate net sales of certain products sold by
the Company until a total of $25,000,000 has been paid. Thereafter, the
Company will have no further royalty obligations under this agreement. The
partnerships exercised the stock options to purchase a total of 90,000 shares
in February 1996. No royalties were paid during 1996.
Also in February 1996, the Company entered into a development program
agreement with a medical device company. This company is currently developing
several minimally invasive cardiothoracic surgical products. Under the
development program agreement, the Company will issue a purchase order in the
amount of $30,000 to this company for their current prototype products. The
Company will make development payments totaling $500,000 and issued a
nonstatutory option to purchase 450,000 shares of common stock of the Company
at an exercise price of $0.001 per share. All of the shares subject to the
option will become exercisable on December 31, 1998 unless the development
program agreement is terminated in accordance with its terms. However, the
vesting of the options will be accelerated upon completion of certain
milestones. Also, the Company will pay certain royalties based on revenue
from certain product sales and sublicenses. The Company may terminate the
agreement without cause on 90 days notice by paying a termination fee to this
company in addition to all payments owed through the notice date. No royalty
payments were made during 1996.
NOTES RECEIVABLE FROM OFFICERS:
In April 1996, the Company loaned an officer $300,000 pursuant to a provision
in the officer's employment agreement. The resulting promissory note bears
interest at the rate of 5.88% per annum and is due and payable in 37
installments, the first of which shall be $75,000 due on April 29, 1997,
followed by 36 equal monthly installments of $6,250 beginning on May 29,
1997. Also, in June 1996, the Company loaned this officer an additional
$55,000. The resultant promissory note bears interest at the rate of 5.88%
per annum and is payable in two equal installments on January 5, 1997 and
January 5, 1998 or termination of employment, if earlier. Should the
officer's association with the Company continue through the due date of any
installment payment under these notes, then the Company agrees to forgive all
principal and interest due by the terms of the note for such installment. The
Company amortizes the loan over the term of the notes on a straight line
basis. As of December 31, 1996, principal and interest of $286,667 is
outstanding under these notes.
In May 1996, the Company loaned an officer $35,000. The resultant
promissory note bears interest at 6.36% per annum and is due on the earlier
of May 20, 2000 or termination of employment. At December 31, 1996, $35,000
of principal and interest is outstanding on this note. The loan is
collateralized by the officer's option to purchase common stock.
In August 1996, the Company loaned an officer $750,000 which is due and
payable on the earlier of August 16, 2000 or termination of employment. The
resultant promissory note does not bear interest and is collateralized by the
officer's holding of 75,000 shares of the Company's common stock. At December
31, 1996, principal of $750,000 is outstanding on this note.
In December 1996, the Company loaned an officer $200,000 pursuant to a
provision in the officer's employment agreement. The resultant promissory
note bears interest at 6.31% per annum and is due on the earlier of December
31, 2000 or termination of employment. At December 31, 1996, principal and
interest of $200,000 is outstanding on this note.
30
<PAGE>
NOTE ELEVEN
INCOME TAXES:
At December 31, 1996, the Company has approximately $7,260,000 in federal and
state net operating loss carryforwards to reduce future taxable income. These
carryforwards expire in the year 2011 for federal and 2001 for state, if not
utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in the case of an "ownership change" of a corporation.
Any ownership changes, as defined, may restrict utilization of carryforwards.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
DECEMBER 31, 1996 1995
Deferred tax assets:
Net operating loss carryforwards $ 1,457,000 $ 97,000
Capitalized research and
development costs 100,000 143,000
Capitalized start-up costs 2,404,000 49,000
Research and development credit 180,000 16,000
Other 25,000
Less: valuation allowance (4,166,000) (305,000)
------------------------------
Net deferred tax assets $ -- $ --
------------------------------
------------------------------
In Accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is more likely
than not that a tax benefit may not be realized from the asset in the future.
The Company has established a valuation allowance to the extent of its
deferred tax assets due to uncertainties that a benefit can be realized in
the future.
NOTE TWELVE
SUBSEQUENT EVENTS:
On January 28, 1997, the Board of Directors increased the number of common
shares authorized under the Articles of Incorporation to 60,000,000 and
increased the number of shares reserved for issuance under the Incentive
Stock Plan by 600,000; each of these increases is subject to shareholder
approval. In addition, the Board of Directors approved a shareholders rights
plan pursuant to which the Board of Directors declared a dividend
distribution of one preferred share purchase right on each outstanding share
of the Company's Common Stock. Each right will enable stockholders to buy one
one-thousandth of one share of the Company's Series A Participating Preferred
Stock, a designated series of Preferred Stock for which each one-thousandth
of a share has economic attributes and voting rights equivalent to one share
of the Company's Common Stock, at an exercise price of $150. The rights
become exercisable only in certain limited circumstances involving
acquisitions of, or tender offers for, 15% or more of the Company's capital
stock. For a limited period of time after the announcement of any such
acquisition or offer, the rights are redeemable at a price of $.01 per right.
After becoming exercisable, in certain more limited circumstances, each right
entitles its holder to purchase for $150 an amount of Common Stock of the
Company, or in certain circumstances, securities of the acquiror, having a
then current market value equal to $300. The rights expire on January 28,
2007.
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
CardioThoracic Systems, Inc.
To the Board of Directors
CardioThoracic Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
CardioThoracic Systems, Inc. and subsidiary as of December 31, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1996 and for the period from
June 15, 1995 (date of inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CardioThoracic Systems, Inc. and subsidiary as of December 31, 1996 and
1995 and the results of its operations and its cash flows for the year ended
December 31, 1996 and for the period from June 15, 1995 (date of inception)
to December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand LLP
San Jose, California
February 1, 1997
32
<PAGE>
BALANCE SHEET
Informed Creation (a development stage entity)
JUNE 14, 1995
ASSETS
Current assets
Cash and cash equivalents $ 6,146
-------------
Total current assets 6,146
Property and equipment, net 9,707
-------------
Total assets $15,853
-------------
-------------
LIABILITIES AND SOLE PROPRIETORSHIP CAPITAL
Current liabilities
Accounts payable $ 1,618
-------------
Total current liabilities 1,618
-------------
Sole proprietorship capital 14,235
-------------
Total liabilities and sole proprietorship capital $15,853
-------------
-------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
STATEMENTS OF OPERATIONS
Informed Creation (a development stage entity)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
JANUARY 1, 1995 NOVEMBER 3, 1993
TO YEAR ENDED (DATE OF INCEPTION) TO
JUNE 14, 1995 DECEMBER 31, 1994 JUNE 14, 1995
<S> <C> <C> <C>
Costs and expenses:
Research and development $ 2,808 $ 20,154 $ 29,276
General and administrative 5,537 22,162 29,193
------------------------------------------------------------------------------------
Operating loss (8,345) (42,316) (58,469)
Interest and other income, net 24 63 96
------------------------------------------------------------------------------------
Net loss $(8,321) $(42,253) $(58,373)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
33
<PAGE>
STATEMENT OF SOLE PROPRIETORSHIP CAPITAL
Informed Creation (a development stage entity)
Capital contributed $ 21,206
Net loss (7,799)
------------
Balance, December 31, 1993 13,407
Additional capital contributed 69,628
Distributions to sole proprietor (27,288)
Net loss (42,253)
------------
Balance, December 31, 1994 13,494
Additional capital contributed 27,406
Distributions to sole proprietor (18,344)
Net loss (8,321)
------------
Balance, June 14, 1995 $ 14,235
------------
------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
34
<PAGE>
STATEMENTS OF CASH FLOWS
Informed Creation (a development stage entity)
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
JANUARY 1, 1995 NOVEMBER 3, 1993
TO YEAR ENDED (DATE OF INCEPTION) TO
JUNE 14, 1995 DECEMBER 31, 1994 JUNE 14, 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,321) $(42,253) $ (58,373)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,559 3,090 4,751
Change in operating liabilities:
Accounts payable 513 (3,803) 1,618
-----------------------------------------------------------------------
Net cash used in operating activities (6,249) (42,966) (52,004)
-----------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment -- (2,161) (14,458)
-----------------------------------------------------------------------
Net cash used in investing activities -- (2,161) (14,458)
-----------------------------------------------------------------------
Cash flows from financing activities:
Capital contributed 27,406 69,628 118,240
Distributions to sole proprietor (18,344) (27,288) (45,632)
-----------------------------------------------------------------------
Net cash provided by financing activities 9,062 42,340 72,608
-----------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,813 (2,787) 6,146
Cash and cash equivalents, beginning of period 3,333 6,120 --
-----------------------------------------------------------------------
Cash and cash equivalents, end of period $ 6,146 $ 3,333 $ 6,146
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
35
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
Informed Creation (a development stage entity)
NOTE ONE
FORMATION AND BUSINESS OF THE COMPANY:
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.
NOTE TWO
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
BASIS OF ACCOUNTING:
The Sole Proprietorship uses the accrual method of accounting for financial
reporting purposes.
CASH AND CASH EQUIVALENTS:
The Sole Proprietorship considers all highly liquid investments purchased
with original maturities of three months or less to be cash equivalents. Cash
and cash equivalents include funds on deposit in a checking account.
DEPRECIATION:
Property and equipment are stated at cost and are depreciated on a
straight-line over their estimated useful lives of three to five years.
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations as incurred.
CONCENTRATION OF CREDIT RISK:
The Sole Proprietorship's cash and cash equivalents are maintained at one
financial institution.
INCOME TAXES:
Income taxes on Sole Proprietorship income are the responsibility of the Sole
Proprietor. Accordingly, no provision for income taxes is included in the
accompanying financial statements.
NOTE THREE
PROPERTY AND EQUIPMENT:
At June 14, 1995, property and equipment comprise:
Machinery and equipment $12,297
Office equipment 2,161
----------
14,458
Less accumulated depreciation (4,751)
----------
Total property and equipment $ 9,707
----------
----------
NOTE FOUR
SALE OF TECHNOLOGY:
On June 15, 1995, the Sole Proprietor received $1,000 from CardioThoracic
Systems, Inc. in exchange for all rights and patents and confidential
information relating to the Sole Proprietorship.
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Informed Creation (a development stage entity)
To the Sole Proprietor
Informed Creation:
We have audited the accompanying balance sheet of Informed Creation (a
development stage entity) as of June 14, 1995 and the related statements of
operations, sole proprietorship capital, and cash flows for the period from
January 1, 1995 to June 14, 1995, the year ended December 31, 1994 and the
cumulative period from November 3, 1993 (date of inception) to June 14, 1995.
These financial statements are the responsibility of the management of the
sole proprietorship. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Informed Creation
(a development stage entity) as of June 14, 1995 the statements of
operations, sole proprietorship capital and cash flows for the period from
January 1, 1995 to June 14, 1995, the year ended December 31, 1994 and the
cumulative period from November 3, 1993 (date of inception) to June 14, 1995
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
San Jose, California
February 12, 1996
37
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report on Form
10-K of our report dated February 1, 1997, on our audits of the financial
statements of Cardiothoracic Systems, Inc. as of December 31, 1996 and 1995
and for the year ended December 31, 1996 and the period from June 15, 1995
(date of inception) to December 31, 1995, which report is included in the
Company's Annual Report to Stockholders.
COOPERS & LYBRAND, L.L.P.
San Jose, California
March 26, 1997
1
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report on Form
10-K of our report dated February 12, 1996, on our audits of the financial
statements of Informed Creation as of June 14, 1995 and for the period from
January 1, 1995 to June 14, 1995, the year ended December 31, 1994, and the
cumulative period from November 3, 1993 (date of inception) to June 14, 1995,
which report is included in the Company's Annual Report to Stockholders.
COOPERS & LYBRAND, L.L.P.
San Jose, California
March 26, 1997
2
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