<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934.
For the quarterly period ended June 27, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934.
For the transition period from ______________ to _________________.
Commission File Number
0-27880
CardioThoracic Systems, Inc.
----------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3228757
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10600 N. Tantau Ave., Cupertino, CA 95014-0739
----------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (408) 342-1700
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes X No
----- -----
As of July 24, 1997, there were 13,514,282 shares of the Registrant's Common
Stock outstanding.
1
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of June 27, 1997 and
December 31, 1996 3
Consolidated Condensed Statements of Operations for the three
and six months ended June 27, 1997 and June 30, 1996 4
Consolidated Condensed Statements of Cash Flows for the three
and six months ended June 27, 1997 and June 30, 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 20
SIGNATURES 24
EXHIBIT INDEX 25
2
<PAGE>
Item 1. Financial Statements
CARDIOTHORACIC SYSTEMS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
June 27, December 31,
1997 1996
----------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,492,000 $ 5,184,000
Available-for-sale securities 37,185,000 42,608,000
Trade accounts receivable, net 1,843,000 133,000
Notes receivable from officers 115,000 115,000
Inventories, net 1,130,000 220,000
Interest receivable 912,000 946,000
Prepaid expenses and other current assets 487,000 124,000
------------ -------------
Total current assets 47,164,000 49,330,000
Property and equipment, net 2,856,000 2,494,000
Available-for-sale securities 27,113,000 30,665,000
Notes receivable from officers 1,101,000 1,157,000
Other assets 52,000 45,000
------------ -------------
Total assets $ 78,286,000 $ 83,691,000
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Equipment note, current portion $ 279,000 $ 136,000
Accounts payable 1,021,000 831,000
Accrued liabilities 2,754,000 2,343,000
------------ -------------
Total current liabilities 4,054,000 3,310,000
Bank borrowings 1,625,000 425,000
Equipment note, less current portion 1,194,000 703,000
------------ -------------
Total liabilities 6,873,000 4,438,000
------------ -------------
Stockholders' equity:
Common stock, par value $0.001 13,000 13,000
Additional paid-in capital 103,270,000 102,040,000
Deferred compensation (5,227,000) (5,742,000)
Unrealized gain (loss) on
available-for-sale securities (49,000) 17,000
Accumulated deficit (26,594,000) (17,075,000)
------------ -------------
Total stockholders' equity 71,413,000 79,253,000
------------ -------------
Total liabilities and stockholders' equity $ 78,286,000 $ 83,691,000
------------ -------------
------------ -------------
See accompanying notes.
3
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 27, 1997 June 30, 1996 June 27, 1997 June 30, 1996
---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 2,836,000 $ 4,948,000
Cost of sales 1,744,000 3,216,000
------------ ------------
Gross profit 1,092,000 1,732,000
------------ ------------
Operating expenses:
Research and development 2,396,000 $ 2,518,000 4,447,000 $ 5,149,000
Sales, marketing, general and administrative 4,497,000 1,507,000 8,806,000 2,588,000
------------ ------------ ------------ ------------
Total operating expenses 6,893,000 4,025,000 13,253,000 7,737,000
------------ ------------ ------------ ------------
Loss from operations (5,801,000) (4,025,000) (11,521,000) (7,737,000)
Interest income, net 986,000 854,000 2,002,000 892,000
------------ ------------ ------------ ------------
Net loss $ (4,815,000) $ (3,171,000) $ (9,519,000) $ (6,845,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share $ (0.36) $ (0.27) $ (0.71) $ (0.64)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computing
net loss per share 13,480,000 11,937,000 13,419,000 10,706,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes.
4
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended Six Months Ended
June 27, 1997 June 30, 1996
---------------- ----------------
OPERATING ACTIVITIES
Net loss $ (9,519,000) $ (6,845,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 460,000 26,000
Amortization of notes receivable
from officer 56,000
Amortization of deferred compensation 1,135,000 3,394,000
Allowance for bad debts and
product returns 80,000
Changes in operating assets
and liabilities:
Notes receivable from officers (390,000)
Trade accounts receivable (1,790,000)
Inventory (910,000)
Interest receivable 34,000
Prepaid expenses and other
current assets (363,000) (361,000)
Other assets (7,000) (48,000)
Accounts payable 190,000 356,000
Accrued liabilities 411,000 683,000
------------- -------------
Net cash used in operating
activities (10,223,000) (3,185,000)
------------- -------------
INVESTING ACTIVITIES
Purchases of property and equipment (822,000) (386,000)
Purchase of available-for-sale securities (37,193,000)
Proceeds from maturities of
available-for-sale securities 46,102,000 2,583,000
------------- -------------
Net cash provided by investing
activities 8,087,000 2,197,000
------------- -------------
FINANCING ACTIVITIES
Proceeds from equipment note 850,000
Bank borrowings 1,200,000
Repayment of equipment note (216,000)
Proceeds from issuance of convertible
preferred stock 996,000
Proceeds from issuance of common stock 610,000 84,238,000
------------- -------------
Net cash provided by financing
activies 2,444,000 85,234,000
------------- -------------
Net increase in cash and cash equivalents 308,000 84,246,000
Cash and cash equivalents at
beginning of period 5,184,000 712,000
------------- -------------
Cash and cash equivalents at end of
period $ 5,492,000 $ 84,958,000
------------- -------------
------------- -------------
See accompanying notes.
5
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 27, 1997
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The operating results of the interim periods presented are not
necessarily indicative of the results for the year ending January 2, 1998 or
for any other interim period. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1996 included in the Company's Form
10-K filed with the Securities and Exchange Commission.
Note 2. Formation and Business of the Company
CardioThoracic Systems, Inc. (the Company) was incorporated on June 15,
1995 and subsequently acquired all of the intellectual property assets of its
predecessor, Informed Creation, a sole proprietorship which was formed on
November 3, 1993, 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.
Note 3. Change in Fiscal Year-End
In January 1997, the Company changed its financial reporting year from a
fiscal year of twelve calendar months ending on December 31 to a fiscal year
of 52 or 53 weeks ending on the Friday closest to December 31. Accordingly,
fiscal year 1997 will end on January 2, 1998.
6
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 27, 1997
(Unaudited)
Note 4. Available-for-Sale Securities
The Company has classified its investments as available-for-sale
securities. Available-for-sale securities are carried at fair value with
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. The amortized cost of available-for-sale debt
securities is adjusted for the amortization of premiums and the accretion of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income.
The cost of securities sold is based on the specific identification method.
At June 27, 1997, available-for-sale securities consist of the following:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Gov't notes and bonds $12,802,000 $ 19,000 $ (6,000) $12,815,000
Corporate notes and bonds 51,545,000 23,000 (85,000) 51,483,000
----------- ---------- ---------- -----------
$64,347,000 $ 42,000 $ (91,000) $64,298,000
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
At December 31, 1996, available-for-sale securities consist of the
following:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Gov't notes and bonds $15,710,000 $ 47,000 $ (3,000) $15,754,000
Gov't agency notes and bonds 12,032,000 1,000 (15,000) 12,018,000
Corporate notes and bonds 45,514,000 - (13,000) 45,501,000
----------- ---------- ---------- -----------
$73,256,000 $ 48,000 $ (31,000) $73,273,000
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
Available-for-sale securities by contractual maturity at June 27, 1997 are
shown below:
Amortized Estimated
Cost Fair Value
------------ ---------------
Less than one year $37,183,000 $37,185,000
Due in one to two years 27,164,000 27,113,000
----------- -----------
$64,347,000 $64,298,000
----------- -----------
----------- -----------
7
<PAGE>
CARDIOTHORACIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
June 27, 1997
(Unaudited)
Note 5. Inventories
Inventories, net consist of the following:
June 27, December 31,
1997 1996
----------- ------------
Raw materials $ 401,000 $ 87,000
Work-in-process 547,000 127,000
Finished goods 182,000 6,000
---------- ----------
$1,130,000 $ 220,000
---------- ----------
---------- ----------
Note 6. Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares from
stock options and convertible preferred stock are excluded from the
computation as their effect is antidilutive except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued during the period beginning twelve months
prior to the Company's April 1996 initial public offering at prices
substantially below the initial public offering price have been included in
the calculation as if they were outstanding for all periods presented prior
to the effective date of the Company's initial public offering (using the
treasury stock method at the initial offering price for stock options and the
if-converted method for convertible preferred stock).
Note 7. Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128) "Earnings Per Share", and in March 1997 issued
Statement No. 129 (SFAS 129) "Disclosures of Information about Capital
Structure", both of which specify the computation, presentation and
disclosure requirements for Earnings per Share. SFAS 128 and SFAS 129 will
become effective for the Company's 1998 fiscal year. The Company is
currently studying the implications of these statements and has not yet
determined the impact of adopting such statements on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 (SFAS 130) "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The impact of adopting SFAS No. 130,
which is effective for the Company in 1998, has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 (FASB 131) "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly-held companies to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts reported
in the financial statements would be provided. SFAS No. 131 is effective for
the Company in 1998 and the impact of adoption has not been determined.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 Financial Statements and the related Notes
thereto included herein. The following Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993
and Section 21E of the Securities and Exchange Act of 1934. The Company's
actual results of operations could differ materially from those anticipated
by such forward-looking statements as a result of certain factors, including
those set forth below and under "Factors Affecting Operating Results".
OVERVIEW
The business of the Company was commenced in November 1993 as a sole
proprietorship, Informed Creation, and to date the business has been engaged
primarily in organizational, research and product development efforts. In
June 1995, the business was incorporated and as part of the Company's initial
financing in September 1995 the Company acquired all intellectual property
assets of Informed Creation, the sole proprietorship. In April 1996, the
Company raised approximately $84.2 million through the initial public
offering of its Common Stock.
Since inception, the Company has been engaged in the development of
instruments and systems designed to allow the majority of cardiothoracic
surgeons, using their existing skills coupled with Company-sponsored
training, to perform Minimally Invasive Direct Coronary Artery Bypass
("MIDCAB") surgery, a revascularization procedure performed on a beating
heart. In December 1996, the Company held its first Comprehensive Optimal
Revascularization (COR) training program and commenced shipments of the CTS
MIDCAB System.
RESULTS OF OPERATIONS
Three and six months ended June 27, 1997 compared to the three and six months
ended June 30, 1996.
Net sales of $2.8 million and $4.9 million in the three and six months
ended June 27, 1997, respectively, were the result of shipments of the CTS
MIDCAB System as well as a modest amount of training revenue. There were no
sales in the three and six months ended June 30, 1996.
Cost of sales increased to $1.7 million and $3.2 million in the three and
six months ended June 27, 1997 compared to none in the same periods last
year. These increases are primarily the result of material costs associated
with products sold, a significant increase in personnel and other costs
associated with the commencement of manufacturing and assembly operations,
manufacturing engineering and support functions, and a materials procurement
and handling function.
Research and development expenses for the three and six months ended June
27, 1997 were $2.4 million and $4.4 million, respectively compared to $2.5
million and $5.1 million for the three and six months ended June 30, 1996,
respectively. These decreases were due to a reduction in the charge for
amortization of deferred compensation, offset somewhat by an increase in
research and development staff, patent legal costs, facility costs and
increased expenditures related to the continuing development of the
instruments associated with the ACCESS MV System, Saphenous Vein Harvesting
System and valve products. The Company expects that research and development
expenses will
9
<PAGE>
increase throughout 1997 as the Company expands its research and development
activities related to the ACCESS MV System, Saphenous Vein Harvesting System,
valve repair and replacement and other research efforts. The Company has
entered into development and licensing agreements, and expects to enter into
additional agreements in the future, that require milestone payments which
are tied to certain events. The timing of these milestone payments are
uncertain and could have a material impact on the operating results in the
quarter in which they are expensed.
Marketing, general and administrative expenses increased to $4.5 million
and $8.8 million for the three and six months ended June 27, 1997,
respectively compared to $1.5 million and $2.6 million for the three and six
months ended June 30, 1996, respectively. These increases were due primarily
to the hiring of marketing and administrative personnel and consultants, the
Company's COR training programs, promotional efforts to increase market
awareness of the Company and the MIDCAB procedure, German sales and marketing
costs, higher facility costs and establishing the Company's administrative
infrastructure. The Company expects that sales and marketing and
administrative expenses will continue to increase throughout 1997 as the
Company builds its sales and marketing and administrative organizations,
develops and sponsors surgeon training programs, establishes financial and
management information and control systems, and makes expenditures to
increase market awareness of the MIDCAB procedure and the Company's products.
The Company has recorded deferred compensation of $14.0 million for the
difference between the option exercise price or restricted stock purchase
price and the deemed fair value of the Company's Common Stock for options
granted and restricted stock sold in 1995 and early 1996. The deferred
compensation is being amortized to operating expenses over the related
vesting period of the shares (one to four years) and will, therefore,
continue to have an adverse effect on the Company's results of operations.
Amortization of deferred compensation charged to operating expenses in the
three and six months ended June 27, 1997 totaled $573,000 and $1.1 million,
respectively compared to $1.7 million and $3.4 million for the same periods
last year, respectively.
Net interest income increased to $986,000 and $2.0 million for the three
and six months ended June 27, 1997, respectively compared to $853,000 and
$892,000 for the three and six months ended June 30, 1996. The increase was
primarily due to the interest received on higher average cash and investment
balances resulting from the completion of the Company's initial public
offering in April 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the
sale of equity securities. As of June 27, 1997, the Company had raised
approximately $89.9 million (net of stock issuance costs) from the sale of
equity securities. As of June 27, 1997, cash, cash equivalents and
available-for-sale securities totaled $69.8 million. The Company's cash used
in operations was $10.2 million for the six months ended June 27, 1997,
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 $822,000 for the purchases of
property and equipment in the six months ended June 27, 1997.
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 $3.5 million line of
credit fully secured by cash, cash equivalents and available-for-sale
securities, of which $1.9 million is available at June 27, 1997. The Company
also has a $2.5 million equipment loan credit facility
10
<PAGE>
available to finance the purchase of certain equipment, of which
approximately $800,000 is available at June 27, 1997. The Company believes
that its existing cash balances and available-for-sale securities and
interest thereon, credit lines and product revenues will be sufficient to
fund its operations through 1998. The Company's capital requirements, and
the availability of product revenues, 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 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 convenants.
At June 27, 1997, the Company had approximately $12.6 million in federal
and in state net operating loss carryforwards, which will expire beginning in
the years 2010 and 2003, 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.
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128) "Earnings Per Share", and in March 1997 issued
Statement No. 129 (SFAS 129) "Disclosures of Information about Capital
Structure", both of which specify the computation, presentation and
disclosure requirements for Earnings per Share. SFAS 128 and SFAS 129 will
become effective for the Company's 1998 fiscal year. The Company is currently
studying the implications of these statements and has not yet determined the
impact of adopting such statements on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 (SFAS 130) "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The impact of adopting SFAS No. 130,
which is effective for the Company in 1998, has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 (FASB 131) "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly-held companies to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operating decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts reported
in the financial statements would be provided. SFAS No. 131 is effective for
the Company in 1998 and the impact of adoption has not been determined.
FACTORS AFFECTING OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated by such forward-looking statements
as a result of certain factors including those set forth in the following
risk factors and elsewhere in this quarterly report on Form 10-Q.
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 June 27, 1997,
the Company had an accumulated deficit of approximately $26.6 million. The
development and commercialization of the Company's products will require
substantial development,
11
<PAGE>
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.
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, as well as coronary artery bypass graft ("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 than does the
Company. Furthermore, competition in the emerging market for minimally
invasive cardiothoracic surgery is expected to be intense and to increase.
Heartport, Inc., Medtronic, Inc., Baxter International, Guidant Corporation
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.
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
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,
12
<PAGE>
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 CTS MIDCAB SYSTEM; UNCERTAINTY OF MARKET ACCEPTANCE OF
THE CTS 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.
DEPENDENCE ON REGULATORY APPROVALS. The design, manufacturing, labeling,
distribution and marketing of the Company's products and products under
development 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"). There can be no assurance that the FDA will act
favorably or quickly on the Company's pending or future 510(k) submissions,
or that significant difficulties and costs will not be encountered by the
Company in its efforts to obtain FDA clearance or approval. Any such
difficulties could delay or preclude obtaining regulatory clearance or
approval. In addition, 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,
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.
13
<PAGE>
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 future products, the Company must maintain its
quality assurance system (i.e. ISO 9000 series). Certification to ISO 9001
was granted by a Notified Body after an inspection and audit of the Company's
quality system. Additionally, the Company may need to submit design dossiers
or technical files to the Notified Body and receive approval from the
Notified Body before affixing the CE mark to new products. Delays in receipt
of the CE mark for the Company's products, failure to receive the CE mark, or
future loss of previously received CE marks or ISO 9001 certification could
have a material adverse effect on the Company's business, financial condition
and 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, are 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.
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. 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-seven United States 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,
14
<PAGE>
use and sell its products either in the United States or in international
markets.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. There can be no assurance that
the Company will not become subject to patent infringement claims or
litigation or interference proceedings declared by the United States Patent
and Trademark Office ("USPTO") to determine the priority of inventions. The
defense and prosecution of intellectual property suits, USPTO interference
proceedings and related legal and administrative proceedings are both costly
and time-consuming. Litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. Any litigation or interference proceedings will result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party, including
any litigation that may arise against the Company as described in "Potential
Litigation" below, could subject the Company to significant liabilities to
third parties or require the Company to seek licenses from third parties or
prevent the Company from selling its products in certain markets, or at all.
Costs associated with settlements, licensing and similar arrangements, may be
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 has 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.
15
<PAGE>
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 increase, there can be
no assurance that the Company will be able to develop the necessary
manufacturing capability; build and train the necessary manufacturing, sales
and marketing teams; attract, retain and integrate the required key
personnel; or implement the financial and management systems to meet growing
demand for its products. Failure of the Company to successfully manage its
growth would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company's ability to operate
successfully depends in significant part upon the continued service of
certain key scientific, technical, managerial and finance personnel, and its
continuing ability to attract and retain additional highly qualified
scientific, technical, managerial and finance personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can
retain such personnel or that it can attract or retain other highly 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. The Company has entered into distribution agreements
for the sale of its products
16
<PAGE>
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 are only
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
17
<PAGE>
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 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,
18
<PAGE>
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-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.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was held on May 27, 1997.
(b) The matters voted upon at the meeting and results of the voting
with respect to those matters were as follows:
<TABLE>
<CAPTION>
(1) Election of Directors: For Withheld Abstain
---------- ------------ ---------
<S> <C> <C> <C>
Robert C. Bellas, Jr. 11,645,433 15,896 250
Joseph A. Ciffolillo 11,642,233 19,096 250
Richard M. Ferrari 11,645,433 15,896 250
Thomas J. Fogarty, M.D. 11,264,083 397,246 250
Jack W. Lasersohn 11,645,433 15,896 250
Thomas C. McConnell 11,645,433 15,896 250
Charles S. Taylor 11,645,433 15,896 250
Philip M. Young 11,645,433 15,896 250
</TABLE>
(2) Approve amendment to Company's Certificate of Incorporation
and Bylaws to establish a classified Board of Directors.
For 9,282,361 Against 699,835 Abstain 14,083
--------- ------- ------
(3) Approve amendment to the Incentive Stock Plan to increase
the number of shares of Common Stock reserved for issuance
thereunder by 600,000 shares to a new total of 2,200,000
shares.
For 10,467,349 Against 1,105,598 Abstain 35,329
---------- --------- ------
(4) Approve amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
Common Stock by 40,000,000 shares to a new total of
60,000,000 shares.
For 10,991,407 Against 637,291 Abstain 32,881
---------- ------- ------
20
<PAGE>
(5) Confirm appointment of Coopers & Lybrand L.L.P. as the
independent auditors of the Company for the fiscal year
ending December 31, 1997.
For 11,642,782 Against 10,757 Abstain 8,040
---------- ------ -----
The foregoing matters are described in detail in the Company's
definitive proxy statement dated April 21, 1997 for the Annual Meeting
of Shareholders held May 27, 1997.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K.
a) Exhibits
3.2(1) Restated Certificate of Incorporation.
3.3(6) 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(6) 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 forms of agreements
thereunder.
10.5(6) 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 Agreement.
10.8(1) Consulting Agreement, dated June 30, 1995, between the
Company and Federico Benetti, M.D.
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.
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
21
<PAGE>
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, Portola
Valley, 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) Employment 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 Agreement, dated April 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 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(6) Promissory Note for $200,000 dated December 3, 1996,
between the Company and Steve Van Dick.
10.33 Employment Letter Agreement, dated February 25, 1997,
between the Company and Jeffrey Gold.
11.1 Calculation of net loss per share.
27.1 Financial Data Schedule
22
<PAGE>
(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 30, 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.
(6) Incorporated herein by reference to the same-numbered exhibit
previously filed with the Company's Form 10-K for the period ended
December 31, 1996.
b) Reports on Form 8 - K
None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 8, 1997 CARDIOTHORACIC SYSTEMS, INC.
/S/ Richard M. Ferrari
---------------------------------------
Richard M. Ferrari
President and Chief Executive Officer
/S/ Steve Van Dick
---------------------------------------
Steve Van Dick
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
- ------- ----------------------------- ------
<S> <C> <C>
10.33 Employment Letter Agreement, dated February 25, 1997,
between the Company and Jeff Gold. 26
11.1 Calculation of net loss per share. 29
27.1 Financial Data Schedule 30
</TABLE>
25
<PAGE>
Exhibit 10.33
February 25, 1997
Jeffrey G. Gold
7420 Dover Lane
Parkland, FL 33067
Dear Jeff,
I am pleased to offer you a position with CardioThoracic Systems, Inc. (the
"Company", "CTS") as its Executive Vice President. You will be paid an
annual salary of $160,000, which will be paid semi-monthly. As a Company
employee, you are also eligible to receive certain employee benefits
including: medical, dental and vision insurance, life insurance, long-term
disability insurance, Employee Stock Purchase Plan, 401(k) Plan, vacation
time, sick time and holiday pay.
You will receive, for the first four years of your employment, a graduating
housing differential as follows:
- - Year 1: $2,800/month
- - Year 2: $2,600/month
- - Year 3: $2,200/month
- - Year 4: $1,800/month
You will be eligible to participate in the Company's bonus program which is
tied to both corporate and individual accomplishments. A maximum annual
bonus potential of 35% is available for your position.
Pending Board approval, you will be granted a non-qualified stock option,
entitling you to purchase, over the next four years, up to 92,500 shares of
the Company's Common Stock. These non-qualified stock options will be broken
down as follows: 50,000 options priced at $15.00 per share and the remaining
42,500 options priced at the fair market value on the date of Board approval.
Pending Board approval, you will also be granted an incentive stock option,
priced at the fair market value on the date of Board approval, entitling you
to purchase, over the next four years, up to 27,500 shares of the Company's
Common Stock. All options shall be subject to the terms and conditions of the
Company's Stock Option Plans and Stock Option Agreements. Additional stock
grants will be considered annually taking into consideration both performance
and equity position.
<PAGE>
CTS will reimburse you for the actual expenses associated with your physical
move from Florida to California and the closing costs on both homes. This
reimbursement will be structured as a loan not to exceed $100,000 and
forgiven at the rate of 25% per year on each of the first four anniversaries.
For any involuntary termination other than for cause, this loan will be
forgiven as of the employment termination date.
The Company will enter into a Change of Control Agreement with you. This
Change of Control Agreement will allow for forgiveness of all outstanding
debt and acceleration of the initial stock option grants for 120,000 shares
upon a change of control. Please see the attachment to this offer letter for
an example of typical definitions for change of control agreements.
Additionally, CTS will pay for reasonable costs associated with house hunting
trips for your family. CTS will also pay for up to six months of interim
living expenses prior to your relocation to California.
You should be aware that your employment with the Company is for no specified
period and constitutes at will employment. As a result, you are free to
resign at any time, for any reason or for no reason. Similarly, the Company
is free to conclude its employment relationship with you at any time, with or
without cause, and with or without notice. The at-will nature of your
employment cannot be altered by the statements or conduct of any person
affiliated with the Company. You expressly agree not to rely on any such
statements or conduct and that, even if such statements or conduct occur,
your employment remains at will.
Under federal immigration law, you will be required to provide the Company
with documentary evidence of your identity and eligibility for employment in
the United States. Such documentation must be provided to us within three
(3) business days of your date of hire, or our employment relationship may be
terminated.
I have enclosed our standard Employment, Confidential Information and
Invention Assignment Agreement as a condition of your employment. If you
accept this offer, please return to me a signed copy of that agreement.
In the event of any dispute or claim relating to or arising out of our
employment relationship, including the termination of the employment
relationship and disputes or claims based on harassment or discrimination of
any kind, you and the Company agree that all such disputes shall be fully and
finally resolved by binding arbitration conducted by the American Arbitration
Association of Palo Alto, California.
<PAGE>
To indicate your acceptance of the Company's offer, please sign and date this
letter in the space provided below and return it to me. A duplicate original
is enclosed for your records. This letter, along with the agreement relating
to proprietary rights between you and the Company, set forth the terms of
your employment with the Company and supersede any prior representations or
agreements, whether written or oral. This letter may not be modified or
amended except by a written agreement, signed by an officer of the Company
and by you.
We look forward to working with you at CTS.
Sincerely,
Richard M. Ferrari
President & CEO
BY SIGNING BELOW, YOU EXPRESSLY AGREE TO THE TERMS OF THIS LETTER, INCLUDING
BUT NOT LIMITED TO, YOUR AGREEMENT THAT EMPLOYMENT AT THE COMPANY IS AT THE
WILL OF YOU AND THE COMPANY AND THAT YOU WILL SUBMIT ALL DISPUTES ARISING OUT
OF THE EMPLOYMENT RELATIONSHIP TO BINDING ARBITRATION.
ACCEPTED AND AGREED TO this
_____ day of ________, 19___.
__________________________________
Jeffrey G. Gold
Enclosures: Duplicate Original Letter
Employment, Confidential Information and
Invention Assignment Agreement
<PAGE>
Exhibit 11.1
CardioThoracic Systems, Inc.
Statement Re: Computations of Net Loss Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 27, 1997 June 30, 1996 June 27, 1997 June 30, 1996
---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (4,815,000) $ (3,171,000) $ (9,519,000) $ (6,845,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 13,480,000 5,271,000 13,419,000 4,040,000
Shares related to SAB No. 55,
64, and 83 6,666,000 6,666,000
------------ ------------ ------------ ------------
Total weighted average
common shares outstanding 13,480,000 11,937,000 13,419,000 10,706,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share $ (0.36) $ (0.27) $ (0.71) $ (0.64)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-27-1997
<CASH> 5,492,000
<SECURITIES> 37,185,000
<RECEIVABLES> 1,948,000
<ALLOWANCES> (105,000)
<INVENTORY> 1,130,000
<CURRENT-ASSETS> 47,164,000
<PP&E> 3,569,000
<DEPRECIATION> (713,000)
<TOTAL-ASSETS> 78,286,000
<CURRENT-LIABILITIES> 4,054,000
<BONDS> 0
0
0
<COMMON> 103,283,000
<OTHER-SE> (31,870,000)
<TOTAL-LIABILITY-AND-EQUITY> 78,286,000
<SALES> 4,948,000
<TOTAL-REVENUES> 4,948,000
<CGS> 3,216,000
<TOTAL-COSTS> 13,253,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,519,000)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
