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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 January 2, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934.
For the transition period from to .
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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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Preferred Share Purchase Rights
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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 $66,241,000 as of March 17, 1998 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 17, 1998, the Registrant had outstanding 13,783,686
shares of the Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Annual Report to stockholders for Registrant's 1997 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 1998 Annual
Meeting of Stockholders, to be filed with the Commission on or before 120
days after the end of the 1997 fiscal year, are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
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 this
section and in the section "Other Risk Factors".
CardioThoracic Systems Inc. ("CTS" or the "Company") develops,
manufactures, and markets proprietary, disposable instruments and systems
for performing minimally invasive cardiac surgery ("MICS"). The Company's
current products are designed to enable the majority of cardiothoracic
surgeons, using their existing skills coupled with Company sponsored
training, to perform MICS on a beating heart. The MIDCAB-TM- (Minimally
Invasive Direct Coronary Artery Bypass) and OPCAB-TM- (Off Pump Coronary
Artery Bypass) procedures eliminate the need for a heart-lung machine and
recent studies indicate that the MICS procedures reduce 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 ACCESS MV-TM- System include the ACCESS
PLATFORM, which is designed to maximize access to the chest cavity through a
mid-line or mini-thoracotomy incision and the STABILIZER, which is designed
to isolate and minimize the motion of the diseased artery. The main
components of the CTS ACCESS MP-TM- System includes the LIMA LIFT-TM-, 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) through a
mini-thoracotomy and the LIMA-LOOP-TM-, 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 the 1998 Heart and Stroke Statistical
Update that an estimated 13.9 million Americans have a history of coronary
artery or other heart disease. The report went on to project that in 1998 an
estimated 1.1 million Americans will have a new or recurrent coronary attack,
of whom about one third will die. 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
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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
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 or OPCAB 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
(going "on pump") 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
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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
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
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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, 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
A procedure known as Minimally Invasive Direct Coronary Artery Bypass
("MIDCAB") 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 (OFF PUMP). 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.
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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
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 regularly performed by only a limited number
of cardiothoracic surgeons. The Company believes that many cardiothoracic
surgeons have been reluctant to attempt or have stopped performing the MIDCAB
procedure because of, among other things, the difficulties of performing
surgery on the beating heart including harvesting the IMA and its perceived
limitation to single artery CABG surgery. 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.
THE OPCAB PROCEDURE
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A new procedure known as Off Pump Coronary Artery Bypass ("OPCAB") has
been developed that offers the same benefits of MIDCAB except that it is done
through a mid-line incision (mini-sternotomy or sternotomy). The Company
believes that this procedure will provide surgeons the ability to do more
multi-vessel bypass procedures on a beating heart since it allows greater
visualization of the heart and more freedom in lifting and rotating the
heart. In the fourth quarter of 1997 the Company believes that approximately
1,400 OPCAB multi-vessel procedures were performed using the Access MV System.
Despite the potential benefits of the OPCAB procedure for the treatment
of coronary heart disease, it is currently performed by only a limited number
of cardiothoracic surgeons. The Company believes that some cardiothoracic
surgeons maybe reluctant to attempt the OPCAB procedure because of, among
other things, the difficulties of performing surgery on the beating heart and
the difficulties of positioning the heart to bypass certain arteries. The
Company is unable to predict how quickly, if at all, the OPCAB procedure will
be adopted by the medical community or, if it is adopted, the number of OPCAB
procedures that will be performed.
Although the Company believes that the CTS OPCAB and MIDCAB procedures
have significant advantages over competing procedures, broad-based clinical
adoption of the procedures will not occur until physicians determine that the
procedures are an attractive alternative to current treatments for coronary
artery disease. The Company believes that physician endorsements will be
essential for clinical adoption of these procedures, 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 CABG on a beating
heart, and the willingness of such surgeons to perform such a procedure.
Patient acceptance of the procedures will depend in part upon physician
recommendations as well as other factors, including the degree of
invasiveness, the effectiveness of the procedures and rate and severity of
complications associated with the procedures as compared to other treatments.
Even if the clinical efficacy of the OPCAB and MIDCAB procedures are
established, physicians may elect not to recommend the procedures unless
acceptable reimbursement from health care payors is available. Health care
payor acceptance may require evidence of the cost effectiveness of the OPCAB
and MIDCAB procedures as compared to other currently available treatments.
There can be no assurance that the OPCAB or MIDCAB procedures will gain
clinical adoption. Failure of the OPCAB and MIDCAB procedures to achieve
significant clinical adoption would have a material adverse effect on the
Company's business, financial condition and results of operations.
THE CTS ACCESS MV AND MP SYSTEMS
The Company's ACCESS MV and MP Systems are comprised of proprietary
disposable surgical instruments designed to facilitate the MIDCAB and OPCAB
procedures. The Company expects to accelerate the adoption of the beating
heart CABG by marketing the CTS ACCESS MV and MP Systems that enables the
majority of cardiothoracic surgeons, using their existing skills coupled with
Company sponsored training, to perform the MIDCAB and OPCAB procedures. The
CTS ACCESS MV and MP Systems is designed to provide the necessary accesses
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 ACCESS MV and MP Systems include:
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THE ACCESS PLATFORM is designed to maximize access to the chest cavity
through a mini-thoracotomy or mid-line incision. The Access Platform creates
an operating window into the chest cavity by smoothly retracting tissue and
spreading the ribs or sternum for optimal exposure of the heart and arteries.
THE STABILIZER incorporates feet that are attached by a mounting system
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.
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 and OPCAB procedures and the CTS ACCESS MV and MP
Systems 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 Company-sponsored educational and training sessions, thereby
encouraging acceptance of the MIDCAB and OPCAB procedures among
cardiothoracic surgeons and the integration of the beating heart CABG into
their hospital and surgical practices.
The Company currently has a direct sales force of sixteen people in the
United States which are supported by nine clinical specialists. The Company
has CardioThoracic Systems, GmBH, a wholly owned subsidiary, in Dusseldorf
Germany which supports a direct sales and marketing organization for Germany.
In other markets, the Company sells its products through distributors.
CUSTOMER TRAINING
The Company believes that its CORriculum training and education program
plays a important role in the adoption of the MIDCAB and OPCAB procedures.
The CORriculum is a one-day, hands-on training workshop presented by
recognized authorities in minimally invasive cardiac surgery. The CORriculum
workshop teaches surgical teams key aspects of how to perform a MIDCAB or
OPCAB procedure using the Company's products. When the surgical team returns
to their own hospital the Company's clinical specialist provides additional
training as required.
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 January 2, 1998, the Company's
research and development staff consisted of 30 full-time engineers and
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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 roles in directing the
technical and medical research and development efforts at the Company.
Research and development expenses for the years ended January 2, 1998 and
December 31, 1996 were $10.8 million and $11.5 million, respectively.
Research and development expenses for the period June 15, 1995 (date of
inception) to December 31, 1995 was $488,000.
MANUFACTURING
To date, the Company's manufacturing activities have consisted of
assembling the CTS MIDCAB System and ACCESS MV and MP Systems and the Company
has no experience manufacturing its products in the volumes that would be
necessary for the Company to achieve profitable operations. 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 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 its products 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 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 four issued United States patents. None of the issued patents
contain claims that protect the Company's current products. The Company has
received a formal notice from the United States Patent and Trademark Office
("USPTO") indicating that all claims are allowable in its patent application
covering the mechanical stabilization aspects of the Company's products.
However, the USPTO also notified the Company that the prosecution of this
application is suspended for up to six months due to a potential interference
proceeding. The Company is the licensee of a United States patent for a
heart valve insertion and stapling device and a United States patent
application for bipolar electrosurgical scissors that are used in the CTS
Saphenous Vein Harvesting System. The Company also has options for two
patent applications covering methods and devices for vessel harvesting. The
Company has filed thirty-eight
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U.S. patent applications and various 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 applications or United States and
foreign 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 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 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 limitations on 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
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believes that the MIDCAB and OPCAB procedures performed with the Company's
products 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 ACCESS MV and MP Systems 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 its
products 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, 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 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 cardiac surgery is intense and is expected to increase. Heartport,
Inc., Medtronic, Inc., Johnson & Johnson, Guidant Corporation, Baxter
International, Inc. and United States Surgical Corp. are marketing or have
announced that they are developing products to be used in MICS procedures.
There can be no assurance that MICS will replace any current treatments.
Additionally, even if MICS is widely adopted, there can be no assurance that
the Company's competitors will not succeed in developing or marketing
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 MICS
procedures. Furthermore, sales of the Company's products could be adversely
affected by reuse, notwithstanding the instructions in the Company's clinical
protocols and product labeling indicating that each of the components of the
Company's products 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.
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
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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.
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
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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 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.
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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 under development are also subject to a variety
of state laws and regulations in those states or localities where its
products under development are or will be marketed. Any applicable state or
local regulations may hinder the Company's ability to market its products
under development 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 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
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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.
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.
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. Although the Company believes that the cost of a
MIDCAB or OPCAB procedure performed with the Company's products 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.
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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 insurance 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.
EMPLOYEES
As of January 2, 1998, the Company had 126 full-time employees. Thirty
persons are engaged in research and development and regulatory affairs
activities, fifty-one persons are engaged in sales and marketing activities,
thirty-three persons are engaged in manufacturing and quality assurance and
twelve 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 RISK 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. The Company began
commercial sales of its products in December 1996 and has limited experience
in manufacturing, marketing and selling the CTS MIDCAB System and ACCESS MV
and MP Systems. The Company has experienced operating losses since its
inception, and, as of January 2, 1998, the Company had an accumulated deficit
of approximately $39.4 million. The development and commercialization of the
Company's products will continue to require
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substantial development, regulatory, sales and marketing, manufacturing and
other expenditures. The Company expects its operating losses to continue at
least through 1999 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.
UNCERTAINTY OF CLINICAL ADOPTION OF MICS PROCEDURES. The Company's
current products are designed to enable the majority of cardiothoracic
surgeons to perform minimally invasive cardiac surgery on a beating heart.
Accordingly, the Company's success is dependent upon acceptance of these
procedures by the medical community as a reliable, safe and cost effective
alternative to existing treatments for revascularizing blocked coronary
arteries. To date, MICS has been performed on a limited basis by several
hundred 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 fewer instances, the right
coronary artery ("RCA"), and a very limited number have been performed on the
circumflex artery. Currently, a significant percentage of conventional CABG
procedures are performed on multiple vessels. To date, multiple vessel MICS
procedures have only been performed on a limited basis, and there can be no
assurance that MICS will be effectively utilized for multiple bypasses on a
more wide spread or more frequent basis. The Company is unable to predict how
quickly, if at all, MICS will be adopted by the medical community or, if it
is adopted, the number of MICS procedures that will be performed. The Company
believes that in 1997 approximately three percent of CABG surgery were done
via a MICS procedure. The medical conditions that can be treated with MICS
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 MICS
has significant advantages over competing procedures, broad-based clinical
adoption of MICS will not occur until physicians determine that the approach
is an attractive alternative to current treatments for coronary artery
disease. The Company believes that physician endorsements will be essential
for clinical adoption of MICS , 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 MICS, 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 MICS 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 MICS as
compared to other currently available treatments. There can be no assurance
that MICS will gain clinical adoption. Failure of MICS to achieve significant
clinical adoption would have a material adverse effect on the Company's
business, financial condition and results of operations.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company
currently has a small sales and marketing organization when compared to most
of its competitors. The Company sells its products in the United States and
in Germany through a direct sales force. In certain other international
markets, the Company sells its products through distributors. 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
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maintain agreements with distributors, or that such distributors will devote
adequate resources to selling the Company's products. Since the Company has
entered into distribution agreements for the sale of its products in certain
countries, it will be dependent upon the efforts of these third parties, and
there can be no assurance that such efforts will be successful. Failure to
maintain or grow an effective direct sales and marketing organization or to
maintain effective distributors 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 Company's 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.
EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF
ABILITY TO MANAGE GROWTH. The Company believes that the Company's products
could address a large potential market. There can be no assurance that the
Company's marketing efforts will result in significant demand for its
products, or that the current 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.
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
in late 1995 and again in September 1997 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.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY. The
Company
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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 until a new
source of supply is qualified. Many of the Company's components are molded
parts that requires custom tooling which is manufactured and maintained by
third party vendors. Should such custom tooling be damaged it could result in
a supply interruption that could have a material adverse effect on the
Company's ability to manufacture its products until a new tool is
manufactured. Also, the Company's new product development efforts and the
timeliness of new product launches can be significantly impacted by the
tooling vendor's ability to meet completion and quality commitments on the
manufacture of custom tooling. 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.
LIMITED 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 profitable operations. 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.
RISKS RELATING TO INTERNATIONAL OPERATIONS. The Company markets 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 international nature of
the Company's business is also expected to subject it and its 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.
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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 additional 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 continue to devote substantial
capital resources for research and development, to market and sell its
products 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-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 of 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 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 23,500 and 4,125 square foot facilities in
Cupertino, California. The facilities include an environmentally controlled,
Class 10,000 clean room for assembly together with laboratory, machine shop,
warehouse and office space. The leases expire on June 1, 2001. The Company
estimates this space to be sufficient through 1998 and is currently
evaluating its requirements for 1999 and beyond.
21
<PAGE>
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 in late 1995 and again in
September 1997 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The information required by this item is incorporated by reference to
the portion of the Registrant's 1997 annual report to stockholders entitled
"Market Price of Common Stock and Dividend Information" and included in
Exhibit 13.1 to this report.
The following information is provided as an amendment to the initial
report on Form SR, "Report of Sales and Securities and Use of Proceeds
Therefrom", regarding the use of proceeds from the sale of securities under
the Company's Registration Statement Form S-1 (333-1840), which was declared
effective on April 18, 1996 (CUSIP number 141907). The information provided
is for the period from April 18, 1996 through January 2, 1998.
<TABLE>
<CAPTION>
Use of Proceeds Amount
--------------- ------
<S> <C>
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment 4,760,000
Purchase of real estate 0
Acquisition of other businesses 0
Repayment of indebtedness 0
Working capital 2,334,000
Cost of operations 19,756,000
Temporary Investment
---------------------
Cash 1,158,000
Commercial paper, notes and bonds $56,153,000
</TABLE>
All amounts above represent estimates of direct or indirect payments to third
parties.
The amounts below were paid directly to officers of the Company.
Use of Proceeds Amount
--------------- ------
Loans to officers $ 770,000
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1997 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 1997 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.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the portion of the Registrant's 1997 annual report to stockholders entitled
"1997 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.
24
<PAGE>
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 1998 Annual Meeting of Stockholders (the "Proxy
Statement") to be held May 19, 1998 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:
<TABLE>
Name Age Position
- ------------------- ---- -----------------------------------------
<S> <C> <C>
Richard M. Ferrari 44 President, Chief Executive Officer and
Director
Jeffrey G. Gold 50 Executive Vice President and Chief Operating
Officer
Steve M. Van Dick 43 Vice President, Finance and Administration
and Chief Financial Officer
Michael J. Billig 47 Vice President, Regulatory, Quality and
Clinical Research
Geoffrey D. Dillon 43 Vice President, Sales and Marketing
Richard A. Lotti 41 Vice President, Business Development
Christian Skieller 49 Vice President, Operations
Charles S. Taylor 43 Vice President and Chief Technical Officer
</TABLE>
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 currently serves on the boards of several
privately held companies. Mr. Ferrari holds an M.B.A. from the University of
South Florida.
JEFFREY G. GOLD joined the Company as Executive Vice President in March
of 1997 and was elected Chief Operating Officer in July of 1997. From 1978
through 1996 he held various positions with Cordis Corporation, a
manufacturer of cardiovascular devices. From 1993 to 1996 Mr. Gold was
President of Cordis Endovascular Systems, Inc., a supplier of devices for
interventional neuroradiology. Mr. Gold served Cordis as Vice President of
Research & Development from 1991 to
25
<PAGE>
1993, and as Vice President of Manufacturing from 1986 to 1991. Mr. Gold
holds an Industrial Engineering degree from Northeastern University and an
MBA from the University of Florida.
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.
MICHAEL J. BILLIG joined CTS as Vice President of Regulatory, Clinical
and Quality 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.
GEOFFREY D. DILLON joined the Company as Vice President, Global Sales in
August 1997 and was made Vice President, Sales and Marketing in March 1998.
From February 1997 until joining the Company, Mr. Dillon was Vice President,
Sales and Marketing of Quest Medical Inc.'s Cardiovascular Systems Division,
a manufacturer of cardiac surgery specialty products. From May 1996 to
February 1997, Mr. Dillon was Vice President, Marketing of Quest Medical
Inc.'s Cardiovascular Systems Division. From May 1995 to May 1996, Mr.
Dillon was President of Dilstar, Inc., an exclusive sales and marketing
agency for H.D.N.A. of North America, a high definition television network.
From January 1994 to April 1995, Mr. Dillon was Director of Marketing for the
Micro-Endo Division of Sofamor-Danek Group, a manufacturer of spinal implants
and spinal endoscopy systems. From 1983 to December 1993, Mr. Dillon held
various positions with Storz Instrument Company, a manufacturer of various
medical devices, serving as Product Manager, Surgical Specialties Division
since 1990. Mr. Dillon holds a BA degree from Ashland University.
RICHARD A. LOTTI joined the Company as Vice President, Business
Development in December of 1997. From June 1994 to July 1997, Mr. Lotti was
a Vice President of the NeuroCare Group and the General Manager of Camino
NeuroCare, the market leader in intracranial neuromonitoring. From January
1990 to February 1994, Mr. Lotti held various product development management
positions with Sorin Biomedical, previously Pfizer-Shiley, a manufacturer of
cardiopulmonary bypass devices and heart valve implants. Mr. Lotti served as
director of the cardiopulmonary business since February 1992. Prior to 1990,
Mr. Lotti held positions in operations, product development and international
operations at Alcon Surgical and Johnson and Johnson. He holds a BSME and an
MBA from Rensselaer Polytechnic Institute.
CHRISTIAN SKIELLER joined the Company as Vice President of Operations in
August 1996. From 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.
26
<PAGE>
Skieller holds an M.S. in Chemical Engineering from Technical University of
Denmark 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.
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 "Share Ownership of Directors, Officers and
Certain Beneficial Owners" 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 Transaction" in the Proxy
Statement.
27
<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 1997 annual report to
stockholders included in Exhibit 13.1 to the report:
Consolidated Balance Sheets; January 2, 1998 and
December 31, 1996
Consolidated Statements of Operations; Years ended
January 2, 1998 and December 31, 1996 and the period
from June 15, 1995 (date of inception) to December 31,
1995
Consolidated Statement of Stockholders' Equity; Years
ended January 2, 1998 and December 31, 1996 and the
period from June 15, 1995 (date of inception) to
December 31, 1995
Consolidated Statements of Cash Flows; Years ended
January 2, 1998 and 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 1997 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
June14, 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
28
<PAGE>
Notes to Financial Statements
Report of Independent Accountants
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 January 2, 1998.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
-- -----------------------------------------
<S> <C>
3.2(1) Restated Certificate of Incorporation
3.3 Bylaws (as amended).
3.4(4) Certificate of Designations of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
3.5(4) Preferred Shares Rights Agreement, dated as of
February 14, 1997.
3.6 Certificate of Amendment to Restated Certificate
of Incorporation
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 forms 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(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 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
</TABLE>
29
<PAGE>
<TABLE>
<S> <C>
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 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.
10.17(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.
Development and License Agreement, dated
10.22(1) 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.
10.27(2) Employment Agreement, dated April 19, 1996,
between the Company and Steve Van Dick.
10.28(2) Promissory Note for $300,000 dated April 29,
1996, between the Company and Thomas Afzal.
10.29(2) Promissory Note for $35,000 dated May 20, 1996,
between the Company and Michael Billig.
10.30(2) Promissory Note for $55,000 dated June 5, 1996,
between the Company and Thomas Afzal.
10.31(3) Promissory Note for $750,000 and Security
Agreement dated August 16, 1996, between the
Company and Richard Ferrari.
10.32(5) Promissory Note for $200,000 dated December 3,
1996, between the Company and Steve Van Dick.
10.33(6) Employment Letter Agreement, dated February 25,
1997, between the Company and Jeffrey Gold.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
10.34 Employment Letter Agreement, dated July 17,
1997, between the Company and Geoffrey Dillon.
10.35 Employment Letter Agreement, dated November 24,
1997, between the Company and Richard Lotti.
13.1 Portions of Annual Report to Stockholders
incorporated by reference.
23.1 Consent of Coopers & Lybrand L.L.P.,
Independent Accountants
27.1 Financial Data Schedule
</TABLE>
- -------------------
(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 June 30, 1996.
(3) 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.
(4) 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.
(5) 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.
(6) Incorporated herein by reference to the same-numbered exhibit previously
filed with the Company's Form 10-Q for the period ended June 27, 1997.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 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 30, 1998 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)
32
<PAGE>
KNOW ALL PERSONS 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
Exchange 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 and 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.
<TABLE>
<S> <C> <C>
/S/ Richard M. Ferrari President, Chief Executive March 30, 1998
- ------------------------------- Officer and Director (Chief
Richard M. Ferrari Executive Officer)
/S/ Steve M. Van Dick Vice President of Finance and March 30, 1998
- ------------------------------- and Administration and Chief
Steve M. Van Dick Financial Officer (Principal
Financial and Accounting Officer)
/S/ Charles S. Taylor Vice President and Chief Technical March 30, 1998
- ------------------------------- Officer and Director
Charles S. Taylor
/S/ Joseph A. Ciffolillo Director March 30, 1998
- -------------------------------
Joseph A. Ciffolillo
/S/ Thomas J. Fogarty, M.D. Director March 30, 1998
- -------------------------------
Thomas J. Fogarty, M.D.
/S/ Jack W. Lasersohn Director March 30, 1998
- -------------------------------
Jack W. Lasersohn
/S/ Thomas C. McConnell Director March 30, 1998
- -------------------------------
Thomas C. McConnell
/S/ Robert C. Bellas Director March 30, 1998
- -------------------------------
Robert C. Bellas, Jr.
/S/ Philip M. Young Director March 30, 1998
- -------------------------------
Philip M. Young
</TABLE>
33
<PAGE>
EXHIBIT INDEX
<TABLE>
Exhibit
No. Description
--- ------------------------------------------
<S> <C>
3.2(1) Restated Certificate of Incorporation
3.3 Bylaws (as amended).
3.4(4) Certificate of Designations of Rights,
Preferences and Privileges of Series A
Participating Preferred Stock
3.5(4) Preferred Shares Rights Agreement, dated as of
February 14, 1997.
3.6 Certificate of Amendment to Restated Certificate
of Incorporation
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 forms 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(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 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 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.
10.17(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.
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
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.
10.27(2) Employment Agreement, dated April 19, 1996,
between the Company and Steve Van Dick.
10.28(2) Promissory Note for $300,000 dated April 29,
1996, between the Company and Thomas Afzal.
10.29(2) Promissory Note for $35,000 dated May 20, 1996,
between the Company and Michael Billig.
10.30(2) Promissory Note for $55,000 dated June 5, 1996,
between the Company and Thomas Afzal.
10.31(3) Promissory Note for $750,000 and Security
Agreement dated August 16, 1996, between the
Company and Richard Ferrari.
10.32(5) Promissory Note for $200,000 dated December 3,
1996, between the Company and Steve Van Dick.
10.33(6) Employment Letter Agreement, dated February 25,
1997, between the Company and Jeffrey Gold.
10.34 Employment Letter Agreement, dated July 17,
1997, between the Company and Geoffrey Dillon.
10.35 Employment Letter Agreement, dated November 24,
1997, between the Company and Richard Lotti.
13.1 Portions of Annual Report to Stockholders
incorporated by reference.
23.1 Consent of Coopers & Lybrand L.L.P.,
Independent Accountants
27.1 Financial Data Schedule
</TABLE>
- ------------------
(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 June 30, 1996.
(3) 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.
(4) 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.
(5) 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.
35
<PAGE>
(6) Incorporated herein by reference to the same-numbered exhibit previously
filed with the Company's Form 10-Q for the period ended June 27, 1997
36
<PAGE>
EXHIBIT 3.3
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.
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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
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is otherwise proper business before such meeting. However, any such stockholder
may nominate one or 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
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on the books of the corporation or given by the stockholder to the corporation
for the purpose of notice. Notice 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 stock holders 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).
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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
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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
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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.
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 consist of eight (8) members. The number
of directors may be changed 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.
The directors shall be divided into three classes, with the term of
office of the first class, which class shall initially consist of two directors,
to expire at the 1998 annual meeting of stockholders; the term of office of the
second class, which class shall initially consist of three directors, to expire
at the 1999 annual meeting of stockholders; the term of office of the third
class, which class shall initially consist of three directors, to expire at the
2000 annual meeting of stockholders; and thereafter for each such term to expire
at each third succeeding annual meeting of stockholders held after such
election.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires."
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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.
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),
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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.
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
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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.
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.
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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
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.
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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.
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 tele phone), 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
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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.
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
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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 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
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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 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.
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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, 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.
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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.
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.
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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.
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
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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 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
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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 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.
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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.
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, how ever, 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
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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.
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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EXHIBIT 3.6
CERTIFICATE OF AMENDMENT
OF
THE RESTATED CERTIFICATE OF INCORPORATION OF
CARDIOTHORACIC SYSTEMS, INC.
CardioThoracic Systems, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: The name of this corporation is CardioThoracic Systems, Inc. This
corporation was originally incorporated under the same name, and the original
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on February 20, 1996.
SECOND: That at a meeting of the Board of Directors of CardioThoracic Systems,
Inc., resolutions were duly adopted setting forth proposed amendments of the
Restated Certificate of Incorporation of said corporation, declaring said
amendments to be advisable and calling for the submission thereof to the
stockholders of said corporation for adoption. The resolutions setting forth the
proposed amendments are as follows:
RESOLVED: That the first paragraph of Article IV of the Restated
Certificate of Incorporation of this corporation be amended and
restated to read in its entirety as follows:
The Corporation is authorized to issue two classes of
shares of stock to be designated, respectively, Common Stock,
$0.001 par value, and Preferred Stock, $0.001 par value. The
total number of shares that the Corporation is authorized to
issue is 65,100,000 shares. The number of shares of Common
Stock authorized is 60,000,000. The number of shares of
Preferred authorized is 5,100,000.
RESOLVED FURTHER: That Article X of the Restated Certificate of
Incorporation of this corporation be amended and restated to read in
its entirety as follows:
1. Number of Directors. The number of directors which
constitutes the whole Board of Directors of the corporation
shall be designated in the Bylaws of the corporation. The
directors shall be divided into three classes with the term of
office of the first class (Class I) to expire at the annual
meeting of stockholders held in 1998; the term of office of
the second class (Class II) to expire at the annual meeting of
stockholders held in 1999; the term of office of the third
<PAGE>
class (Class III) to expire at the annual meeting of
stockholders held in 2000; and thereafter for each such term
to expire at each third succeeding annual meeting of
stockholders after such election.
2. Election of Directors. Elections of directors need
not be by written ballot unless the Bylaws of the corporation
shall so provide.
THIRD: That thereafter, pursuant to resolution of its Board of Directors, the
approval of the stockholders of said corporation was duly obtained in accordance
with Section 242 of the General Corporation Law of the state of Delaware at
which time the necessary number of shares as required by statute were voted in
favor of the amendment.
FOURTH: That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, CardioThoracic Systems, Inc. has caused this
certificate to be signed by Richard M. Ferrari, its President, and J. Casey
McGlynn, its Secretary, this 27th day of May, 1997.
BY: /s/ RICHARD M. FERRARI
--------------------------------
Richard M. Ferrari, President
ATTEST: /s/ J. CASEY MCGLYNN
---------------------------------
J. Casey McGlynn, Secretary
<PAGE>
EXHIBIT 10.2
CARDIOTHORACIC SYSTEMS, INC.
INCENTIVE STOCK PLAN
(amended and restated effective August 12, 1996)
(and as amended January 28, 1997)
1. Purposes of the Plan. The purposes of this Stock Plan are:
o to attract and retain the best available personnel for
positions of substantial responsibility,
o to provide additional incentive to Employees, Directors
and Consultants, and
o 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.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
<PAGE>
(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.
(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.
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(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.
(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.
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(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 2,200,000 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.
(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
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Applicable Laws. The Board or Committee may authorize the Chief Executive
Officer of the Company to grant Options to newly-hired Employees other than
Officers and Directors to purchase up to 15,000 Shares (subject to adjustment as
provided in Section 13) per Optionee (less the number of Shares covered by any
Options previously granted to such Optionee during the preceding 12 months) and
to fix the terms of such Options within the limitations imposed by this Plan,
the form of option agreement approved by the Board or Committee, and by the
authorizing resolutions.
(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;
(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;
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(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.
(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.
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(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
(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.
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(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;
(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
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(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 Stockholder. 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 stockholder 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 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.
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(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.
(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
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(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 Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder 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 stockholders 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 be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
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(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 Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the
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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) Stockholder Approval. The Company shall obtain stockholder
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.
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19. Stockholder Approval. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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CARDIOTHORACIC SYSTEMS, INC.
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: _________________________
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].
<PAGE>
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.
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.
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<PAGE>
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; or
(b) check[; or
(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
-3-
<PAGE>
Market Value of the Exercised Shares on the date of exercise over their
aggregate Exercise Price. If 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.
-4-
<PAGE>
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.
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.
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
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<PAGE>
- ------------------------------------
-6-
<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
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<PAGE>
EXHIBIT A
CARDIOTHORACIC SYSTEMS, INC.
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 Stockholder. 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 stockholder 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
<PAGE>
signed by the Company and Purchaser. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER: CARDIOTHORACIC SYSTEMS, INC.
- ---------------------------------- -------------------------------------
Signature By
- ---------------------------------- -------------------------------------
Print Name Its
Address: Address:
- --------------------------------- 10600 North Tantau Avenue
- --------------------------------- Cupertino, CA 95014
-------------------------------------
Date Received
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<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
Pledge holder 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.
<PAGE>
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 ("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
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<PAGE>
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.
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.
-3-
<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.
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<PAGE>
EXHIBIT C
NOTE
$_______________ Cupertino, CA
______________, 19___
FOR VALUE RECEIVED, _______________ promises to pay to CardioThoracic
Systems, Inc., a Delaware corporation (the "Company"), or order, the principal
sum of _______________________ ($_____________), 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>
CARDIOTHORACIC SYSTEMS, INC.
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
CARDIOTHORACIC SYSTEMS, INC.
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
an 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 Admin istrator 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
<PAGE>
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.
(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 stockholders 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 provi
sions 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
-3-
<PAGE>
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.
(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 stockholder 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 STOCKHOLDER, 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.
-4-
<PAGE>
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 contem plated 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 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
-5-
<PAGE>
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.
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
-6-
<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 stockholder of the Company while the
stock is held by you.
<PAGE>
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 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.
-2-
<PAGE>
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 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 Avenue
Cupertino, CA 95014
PURCHASER:
----------------------------------
----------------------------------
----------------------------------
ESCROW AGENT: Corporate Secretary
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.
-3-
<PAGE>
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:
-------------------------------------
Signature
-------------------------------------
Print Name
ESCROW AGENT:
- -------------------------------
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have 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>
July 17, 1997
Geoffrey Dillon
801 Legacy Drive, Apt. 1324
Plano, TX 75023
Dear Geoff:
I am pleased to offer you a position with CardioThoracic Systems, Inc. (the
"Company", "CTS") as Vice President, World Wide Sales. You will be paid an
annual salary of $135,000 which will be paid bi-weekly. As a Company
employee, you are also eligible to receive certain employee benefits
including: medical and dental insurance, life insurance, long-term disability
insurance, Employee Stock Purchase Plan, 401(k) Plan, vacation time, sick
time and holiday pay.
You will be eligible to participate in the Company's bonus program (beginning
Q4 1997) which is tied to both corporate and individual accomplishments. A
maximum annual bonus potential of 35% is available for your position.
You will be eligible for commission based on the attached Commission Plan.
You will receive a one-time signing bonus of $50,000 payable after you begin
employment with the Company.
You will receive an automobile allowance of $6,600 per year ($550 per month).
Pending approval, you will be granted an incentive stock option, priced at
the current fair market value, entitling you to purchase, over the next four
years, up to 90,000 shares of the Company's Common Stock. Such options shall
be subject to the terms and conditions of the Company's Stock Option Plan and
Stock Option Agreement.
CTS will reimburse you for the actual expenses associated with your physical
move to the Bay Area and for reasonable costs associated with a house hunting
trip. CTS will also pay for up to three months of interim living expenses
prior to your relocation to the Bay Area.
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
<PAGE>
statements or conduct and that, even if such statements or conduct occur,
your employment remains at will.
The first 90 days of employment will be an introductory period during which
you will be introduced to your job responsibilities, and you and CTS can
determine mutual suitability. If your performance is deemed to be
satisfactory you will continue with CTS as a regular employee. Please be
aware that you are not guaranteed employment for the full 90 day period.
Your employment during the 90 day introductory period and any further
employment period constitutes at will employment.
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.
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
<PAGE>
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___.
- ------------------------------
Geoffrey Dillon
Enclosures: Duplicate Original Letter
Employment, Confidential Information and
Invention Assignment Agreement
<PAGE>
ATTACHMENT A
GEOFFREY DILLON
1997 COMPENSATION PLAN
BASE: $135,000 (annualized)
DRAW @ 12M: $21,000
MIT BONUS POTENTIAL: $47,000 (annualized)
COMP PLAN AT 15M: $100,000
--------------------
TOTAL POTENTIAL: $303,000 (ANNUALIZED)
FY '97 GOAL 2ND HALF '97 GOAL COMPENSATION
12M 7.1M Paid as draw: $21K
13M 8.1M 2.0% Paid at +1M: $20K
14M 9.1M 3.5% Paid at +1M: $35K
15M 10.1M 4.5% Paid at +1M: $45K
Total 2nd half commission potential @ 15M is $121,000
<PAGE>
November 24, 1997
Richard A. Lotti
13983 Arbolitos Drive
Poway, CA 92064
Dear Rich:
I am pleased to offer you a position with CardioThoracic Systems, Inc. (the
"Company", "CTS") as Vice President, Business Development. You will be paid
an annual salary of $140,000 which will be paid bi-weekly. As a Company
employee, you are also eligible to receive certain employee benefits
including: medical and dental insurance, life insurance, long-term disability
insurance, Employee Stock Purchase Plan, 401(k) Plan, vacation time, sick
time and holiday pay.
You will be eligible to participate in the Company's bonus program (beginning
Q1 1998) which is tied to both corporate and individual accomplishments). A
maximum annual bonus potential of 35% is available for your position.
Pending approval, you will be granted an incentive stock option (up to the
maximum allowable by law, the remainder being non-qualified stock options),
priced at the current fair market value, entitling you to purchase, over the
next four years, up to 110,000 shares of the Company's Common Stock. Such
options shall be subject to the terms and conditions of the Company's Stock
Option Plan and Stock Option Agreement. If the Company were to be acquired,
any unvested shares would become immediately vested upon the change of
control.
CTS will loan you up to $80,000 for the purchase of a home. This loan and
interest (ie: 6.1% for the month of November) will be forgiven 1/4 per year
for 4 years as long as you remain employed by CTS. If the Company were to be
acquired and your position involuntarily terminated, the outstanding loan
balance and interest will be 100% forgiven.
CTS will reimburse you for the following relocation expenses:
- - Actual expenses associated with the physical move of your household
- - Closing costs on both homes
- - Interim housing expenses (as necessary through June 1998)
<PAGE>
You will receive, for the first three years of your employment, a graduating
housing differential as follows:
- - Year 1: $1,500/month
- - Year 2: $1,000/month
- - Year 3: $500/month
If your employment with the Company is involuntarily terminated for any
reason (other than cause), you will be given a severance package of six
months of base salary paid through CTS' normal payroll cycle.
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.
The first 90 days of employment will be an introductory period during which
you will be introduced to your job responsibilities, and you and CTS can
determine mutual suitability. If your performance is deemed to be
satisfactory you will continue with CTS as a regular employee. Please be
aware that you are not guaranteed employment for the full 90 day period.
Your employment during the 90 day introductory period and any further
employment period constitutes at will employment.
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,
Jeffrey G. Gold
Executive Vice President
Chief Operating Officer
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___.
- ------------------------------
Richard A. Lotti
Enclosures: Duplicate Original Letter
Employment, Confidential Information and
Invention Assignment Agreement
<PAGE>
SELECTED FINANCIAL DATA
-------------------------------------------
CARDIOTHORACIC SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Company Informed Creation
---------------------------------------------- ---------------------------------------
June 15, 1995 November 3,
(date of January 1, 1993 (date of
YEAR ENDED Year Ended inception) to 1995 to Year Ended inception) to
JANUARY 2, December 31, December 31, June 14, December 31, December 31,
1998 1996 1995(1) 1995 (1) 1994 1993 (1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 9,379,000 $ 141,000
Cost of sales and start-up
manufacturing costs 5,962,000 842,000
- --------------------------------------------------------------------
Gross profit (loss) 3,417,000 (701,000)
Operating expenses:
Research and development 10,806,000 11,475,000 $ 488,000 $ 2,808 $ 20,154 $ 6,314
Sales, marketing, general and
administration 18,620,000 6,977,000 556,000 5,537 22,162 1,494
Interest income, net 3,645,000 3,075,000 47,000 24 63 9
- ------------------------------------------------------------------------------------ ------------------------------------
Net loss $(22,364,000) $(16,078,000) $ (997,000) $ (8,321) $ (42,253) $ (7,799)
- ------------------------------------------------------------------------------------ ------------------------------------
- ------------------------------------------------------------------------------------ ------------------------------------
Net loss per common share
and per common share--
assuming dilution $ (1.66) $ (1.64) $ (0.36)
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Shares used in computing net
loss per common share
and per common share--
assuming dilution 13,505,000 9,794,000 2,783,000
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
Company Informed Creation
---------------------------------------------- ---------------------------------------
JANUARY 2, December 31, December 31, June 14, December 31, December 31,
1998 1996 1995 (1) 1995 (1) 1994 1993 (1)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale securities $ 60,834,000 $ 78,457,000 $3,273,000 $ 6,146 $ 3,333 $ 6,120
Working capital 54,871,000 54,512,000 3,149,000 4,528 2,228 1,212
Total assets 69,276,000 83,691,000 3,389,000 15,853 14,599 18,315
Accumulated deficit (39,439,000) (17,075,000) (997,000)
Total sole proprietorship capital
or stockholders' equity 60,134,000 79,253,000 3,214,000 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. AND SUBSIDIARY
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 this 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. 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
began commercial sales of its products in December 1996 and has limited
experience in manufacturing, marketing and selling the CTS MIDCAB System,-TM-
Access MV-TM- System and the CTS OPCAB-TM- System ("Company's products or
Company's current products"). The Company has experienced operating losses
since its inception, and, as of January 2, 1998, the Company had an
accumulated deficit of approximately $39,439,000. The development and
commercialization of the Company's products will continue to require
substantial development, regulatory, sales and marketing, manufacturing and
other expenditures. The Company expects its operating losses to continue at
least through 1999 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 Company's current products are designed to enable the majority of
cardiothoracic surgeons to perform minimally invasive cardiac surgery
("MICS") on a beating heart. Accordingly, the Company's success is dependent
upon acceptance of these procedures by the medical community as a reliable,
safe and cost effective alternative to existing treatments for
revascularizing blocked coronary arteries. To date, MICS has been performed
on a limited basis by several hundred 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
fewer instances, the right coronary artery ("RCA"), and a very limited number
have been performed on the circumflex artery. Currently, a significant
percentage of conventional coronary artery bypass graft ("CABG") procedures
are performed on multiple vessels. To date, multiple vessel MICS procedures
have only been performed on a limited basis, and there can be no assurance
that MICS will be effectively utilized for multiple bypasses on a more wide
spread or more frequent basis. The Company is unable to predict how quickly,
if at all, MICS will be adopted by the medical community or, if it is
adopted, the number of MICS procedures that will be performed. The Company
believes that in 1997 approximately three percent of CABG surgeries were done
via a MICS procedure. The medical conditions that can be treated with MICS
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 MICS
has significant advantages over competing procedures, broad-based clinical
adoption of MICS will not occur until physicians determine that the approach
is an attractive alternative to current treatments for coronary artery
disease. The Company believes that physician endorsements will be essential
for clinical adoption of MICS, 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 MICS, 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 MICS 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 MICS as
compared to other currently available treatments. There can be no assurance
that MICS will gain clinical adoption. Failure of MICS to achieve significant
clinical adoption would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's current products are designed for beating heart MICS and
are expected to account for the great majority of the Company's revenues in
1998. The Company's products are in the early stage of commercialization. The
Company manufactured and sold approximately 8,000 systems in 1997, but there
can be no assurance that demand for the Company's current or future products
will be sufficient to allow profitable operations. Failure of the Company's
current and future products to be successfully commercialized at
significantly higher volumes would have a material adverse effect on the
Company's business, financial condition and results of operations.
14
<PAGE>
Before the Company can market certain 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 has filed or will be
filing 510(k) premarket notifications or premarket approval applications
("PMA") with the FDA for clearance or approval to market certain products
under development. There can be no assurance that the FDA will act favorably
or quickly on the Company's 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 or PMA approval, any of which could
limit the Company's ability to market products under development. Further, if
the Company wishes to modify a product after FDA clearance or approval,
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 will have to 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 sale of its current products. The CE Mark evidences receipt of
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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a preliminary assessment, the Company believes that there will
be no material impact on the operations of the Company due to the Year 2000
Issue. In late 1996 the Company acquired its manufacturing, order entry,
finance and network software from third party vendors that have certified
such software to be Year 2000 compliant. The Company has no custom software
which requires modification. Virtually all of the computer hardware currently
owned by the Company is Year 2000 compliant and in any event will most likely
be replaced before the year 2000 in the normal course of business.
OPERATING DATA
The following table sets forth the operating data of the Company for the
years ended January 2, 1998 and December 31, 1996. 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 CARDIOTHORACIC
Combined Systems, Inc. SYSTEMS, INC.
Year Ended Year Ended YEAR ENDED
December 31, December 31, JANUARY 2,
1995 1996 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 141,000 $ 9,379,000
Cost of sales
and start-up
manufacturing costs 842,000 5,962,000
- -----------------------------------------------------------------------------
Gross profit (loss) (701,000) 3,417,000
Operating expenses:
Research and
development $ 491,355 11,475,000 10,806,000
Sales, marketing,
general and
administrative 561,210 6,977,000 18,620,000
- -----------------------------------------------------------------------------
Total operating
expenses 1,052,565 18,452,000 29,426,000
- -----------------------------------------------------------------------------
Operating loss (1,052,565) (19,153,000) (26,009,000)
Interest income, net 47,031 3,075,000 3,645,000
- -----------------------------------------------------------------------------
Net loss $(1,005,534) $(16,078,000) $(22,364,000)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
CARDIOTHORACIC SYSTEMS, INC. FOR THE YEAR ENDED JANUARY 2, 1998 COMPARED TO
THE YEAR ENDED DECEMBER 31, 1996:
Revenues were $9.4 million in the year ended January 2, 1998 compared to
$141,000 in the year ended December 31, 1996. The increase in revenues were
due primarily to the increase in shipments of the CTS MIDCAB System and
Access MV System. The year ended January 2, 1998 was the first full year of
product shipments, with shipments of the CTS MIDCAB System and Access MV
System beginning in December 1996 and September 1997, respectively.
Cost of sales increased to $6.0 million for the year ended January 2,
1998 compared to $842,000 in the same period last year. This increase is
primarily the result of material costs associated with
15
<PAGE>
products sold, a significant increase in personnel and other costs associated
with the scale-up of manufacturing and assembly operations, manufacturing
engineering and support functions, and a materials procurement and handling
function.
Research and development expenses for the year ended January 2, 1998
were $10.8 million compared to $11.5 million for the year ended December 31,
1996. This decrease was due to a reduction in the charge for amortization of
deferred compensation allocated to research and development from $5.3 million
in 1996 to $689,000 in 1997, offset by an increase in research and
development staff, patent-related costs, facility costs, costs associated
with acquiring certain intellectual property and increased expenditures
related to the continuing development of the instruments associated with the
Access MV-TM- System, CTS Saphenous Vein Harvesting System and valve
products. The Company expects that research and development expenses will
increase in1998 as the Company expands its research and development
activities related to these 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 and year in which they are expensed. During
1997 the Company expensed $1.3 million for the right to acquire certain
intellectual property and a milestone payment related to a development
agreement compared to $1.4 million in 1996 for milestone payments related to
development agreements.
Marketing, general and administrative expenses increased to $18.6
million for the year ended January 2, 1998 compared to $7.0 million for the
year ended December 31, 1996. This increase was due primarily to the hiring
of marketing and administrative personnel and consultants, the CTS
CORriculumSM training programs, promotional efforts to increase market
awareness of the Company and MICS, 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
increase modestly in 1998 as the cost structure put in place late 1997 is
carried out for all of 1998.
The Company has recorded deferred compensation of $14.6 million, less
cancellations of $1.8 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 and the deemed fair value of the Company's Common Stock for
options granted to non-employees since inception. 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 through 2000.
Amortization of deferred compensation charged to operating expenses in the
year ended January 2, 1998 totaled $2.2 million compared to $6.7 million for
the same period last year.
Net interest income increased to $3.7 million for the year ended January
2, 1998 compared to $3.1 million in the same period last year. The increase
is due to higher average cash and investment balances during 1997 compared to
1996 resulting from the Company's April 1996 initial public offering.
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 CTS
CORriculum 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 $11.5 million compared to $491,000 for the year ended December 31,
1995. This increase was due in part to a $5.3 million 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 CTS Saphenous Vein Harvesting System.
Sales, marketing, general and administrative expenses increased to $7.0
million 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 $1.4 million
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.
Interest income increased to $3.1 million 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has its financed operations primarily from the
sale of equity securities. As of January 2, 1998, the Company had raised
approximately $90.3 million (net of stock issuance costs) from the sale of
equity securities. As of January 2, 1998, cash, cash equivalents and
available-for-sale securities totaled $60.8 million. The Company's cash used
in operations was $19.1 million for the year ended January 2, 1998,
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 $2.3 million for the purchases of
property and equipment in the year ended January 2, 1998.
16
<PAGE>
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 $5.0 million line of
credit, fully secured by cash, cash equivalents and available-for-sale
securities, of which $3.4 million is available at January 2, 1998. The
Company believes that its existing cash balances and available-for-sale
securities and interest thereon, credit line and product revenues will be
sufficient to fund its operations through 1999. 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 support
a direct sales force and marketing operation in the United States and Germany
and to continue to support its manufacturing capacity and facilities.
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 January 2, 1998, the Company had approximately $26.8 million in
federal and state net operating loss carryforwards, which will expire in the
year 2001 through 2012, if not utilized. 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 loss carryforwards and research and development
credits before they can be fully utilized.
In 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 were
adopted by the Company for its year ended January 2, 1998. All prior period
earnings per share amounts have been restated to comply with the SFAS 128.
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 fiscal 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 is also required. SFAS No. 131 is effective for
the Company in fiscal 1998 and the impact of adoption has not been determined.
FACTORS AFFECTING 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, 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 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 cardiac surgery is intense and is expected to increase. Heartport,
Inc., Medtronic, Inc., Johnson & Johnson, Guidant Corporation, Baxter
International, Inc. and United States Surgical Corp. are marketing or have
announced that they are developing products to be used in MICS procedures.
There can be no assurance that MICS will replace any current treatments.
Additionally, even if MICS is widely adopted, there can be no assurance that
the Company's competitors will not succeed in developing or marketing
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 MICS
procedures. Furthermore, sales of the Company's products could be adversely
affected by reuse, notwithstanding the instructions in the Company's clinical
protocols and product labeling indicating that each of the components of the
Company's products 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.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE: The Company currently
has a small sales and marketing organization when compared to most of its
competitors. The Company sells its products in the United States and in
Germany through a direct sales force. In certain other international markets,
the Company sells its products through distributors. 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
17
<PAGE>
sales and marketing efforts will be successful. There can be no assurance
that the Company will be able to maintain agreements with distributors, or
that such distributors will devote adequate resources to selling the
Company's products. Since the Company has entered into distribution
agreements for the sale of its products in certain countries, it will be
dependent upon the efforts of these third parties, and there can be no
assurance that such efforts will be successful. Failure to maintain or grow
an effective direct sales and marketing organization or to maintain effective
distributors 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 four issued United States patents. None of the issued patents
contain claims that protect the Company's current products. The Company has
received a formal notice from the United States Patent and Trademark Office
("USPTO") indicating that all claims are allowable in its patent application
covering the mechanical stabilization aspects of the Company's products.
However, the USPTO also notified the Company that the prosecution of this
application is suspended for up to six months due to a potential interference
proceeding. The Company is the licensee of a United States patent for a heart
valve insertion and stapling device and a United States patent application
for bipolar electrosurgical scissors that are used in the CTS Saphenous Vein
Harvesting System. The Company also has options for two patent applications
covering methods and devices for vessel harvesting. The Company has filed
thirty-eight U.S. patent applications and various 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
applications or United States and foreign 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 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 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 limitations on 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.
CONTINUING GOVERNMENT REGULATION:
Regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which the Company's 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.
18
<PAGE>
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 in late 1995 and again in
September 1997 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.
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 until a new source of supply is qualified. Many of the Company's
components are molded parts that requires custom tooling which is
manufactured and maintained by third party vendors. Should such custom
tooling be damaged it could result in a supply interruption that could have a
material adverse effect on the Company's ability to manufacture its products
until a new tool is manufactured. Also, the Company's new product development
efforts and the timeliness of new product launches can be significantly
impacted by the tooling vendor's ability to meet completion and quality
commitments on the manufacture of custom tooling. 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.
LIMITED 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 profitable operations. 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.
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 procedures 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 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 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
insurance 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
<TABLE>
<CAPTION>
JANUARY 2, 1998 December 31, 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,681,000 $ 5,184,000
Available-for-sale securities 52,105,000 51,100,000
Trade accounts receivable, net of
allowances of $225,000 in 1997 and
$25,000 in 1996 1,369,000 133,000
Notes receivable from officers 87,000 115,000
Inventories 641,000 220,000
Interest receivable 1,158,000 946,000
Prepaid expenses and other current assets 449,000 124,000
- -------------------------------------------------------------------------------------
Total current assets 60,490,000 57,822,000
Property and equipment, net 3,613,000 2,494,000
Available-for-sale securities 4,048,000 22,173,000
Notes receivable from officers 1,073,000 1,157,000
Other assets 52,000 45,000
- -------------------------------------------------------------------------------------
$ 69,276,000 $ 83,691,000
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Equipment note, current portion $ 410,000 $ 136,000
Accounts payable 779,000 855,000
Accrued liabilities 4,430,000 2,319,000
- -------------------------------------------------------------------------------------
Total current liabilities 5,619,000 3,310,000
Bank borrowings 1,557,000 425,000
Equipment note, less current portion 1,966,000 703,000
- -------------------------------------------------------------------------------------
Total liabilities 9,142,000 4,438,000
Commitments (Note 7)
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $0.001:
Authorized: 5,000,000 shares
Issued and outstanding: none in 1997 and 1996 -- --
Common stock, par value $0.001:
Authorized: 60,000,000 shares in 1997
and 20,000,000 shares in 1996
Issued and outstanding: 13,662,602 shares
in 1997 and 13,114,472 shares in 1996 14,000 13,000
Additional paid-in capital 103,156,000 102,040,000
Deferred compensation (3,614,000) (5,742,000)
Unrealized gain on available-for-sale securities 17,000 17,000
Accumulated deficit (39,439,000) (17,075,000)
- -------------------------------------------------------------------------------------
Total stockholders' equity 60,134,000 79,253,000
- -------------------------------------------------------------------------------------
$ 69,276,000 $ 83,691,000
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CARDIOTHORACIC SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Period from
Year Ended June 15, 1995
----------------------------------- (date of inception) to
JANUARY 2, 1998 December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 9,379,000 $ 141,000
Cost of sales and start-up manufacturing costs 5,962,000 842,000
- -------------------------------------------------------------------------------------------------------------
Gross profit (loss) 3,417,000 (701,000)
Operating expenses:
Research and development 10,806,000 11,475,000 $ 488,000
Sales, marketing, general and administrative 18,620,000 6,977,000 556,000
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 29,426,000 18,452,000 1,044,000
- -------------------------------------------------------------------------------------------------------------
Operating loss (26,009,000) (19,153,000) (1,044,000)
Interest income 3,976,000 3,103,000 47,000
Interest expense (290,000) (28,000)
Other expense (41,000)
- -------------------------------------------------------------------------------------------------------------
Net loss $(22,364,000) $(16,078,000) $ (997,000)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Net loss per common share and per common share--
assuming dilution $ (1.66) $ (1.64) $ (0.36)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Shares used in computing net loss per common
share and per common share--assuming dilution 13,505,000 9,794,000 2,783,000
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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 January 2, 1998
<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 2,800,000 $ 3,000
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 $4,000 200,000
Issuance of Series A preferred stock for cash
at $1.00 per share in September 1995, net
of issuance costs of $74,000 3,825,000 $ 4,000
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 4,000 2,800,000 $ 3,000
- --------------------------------------------------------------------------------------------------------------
Issuance of Series A preferred stock for
cash at $1.00 per share in January and
February 1996, net of issuance
costs of $1,000 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 $7,892,000 5,118,000 5,000
Conversion of preferred shares in
connection with initial
public offering in April 1996 (5,025,000) (5,000) 5,025,000 5,000
Exercise of stock options 254,000
Exercise of purchase rights 6,000
Repurchase of common stock (89,000)
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
Change in unrealized gain on available-
for-sale securities
Net loss
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 13,114,000 13,000
- --------------------------------------------------------------------------------------------------------------
Issuance of common stock through:
Exercise of stock options 504,000 1,000
Exercise of purchase rights 45,000
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
Net loss
- --------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 2, 1998 -- $ -- 13,663,000 $14,000
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
22
<PAGE>
<TABLE>
<CAPTION>
Additional Total
Paid-In Deferred Unrealized Accumulated Stockholders'
Capital Compensation Gain Deficit Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock at $.001 per
share for cash in August 1995 $ 3,000
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 $4,000 $ 196,000 196,000
Issuance of Series A preferred stock for cash
at $1.00 per share in September 1995, net
of issuance costs of $74,000 3,748,000 3,752,000
Deferred compensation related to issuance of
common stock and grants of stock options 2,062,000 $ (2,062,000) --
Amortization of deferred compensation 260,000 260,000
Net loss $ (997,000) (997,000)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 6,006,000 (1,802,000) (997,000) 3,214,000
Issuance of Series A preferred stock for
cash at $1.00 per share in January and
February 1996, net of issuance
costs of $1,000 998,000 999,000
Issuance of common stock through:
Initial public offering at $18.00 per
share in April 1996,
net of issuance costs of $7,892,000 84,223,000 84,223,000
Conversion of preferred shares in
connection with initial
public offering in April 1996 --
Exercise of stock options 54,000 54,000
Exercise of purchase rights 92,000 92,000
Repurchase of common stock
Deferred compensation related to issuance
of common stock and grants of
stock options 11,950,000 (11,950,000) --
Deferred compensation adjustment for
cancellation of stock options (1,278,000) 1,278,000 --
Amortization of deferred compensation 6,732,000 6,732,000
Change in unrealized gain on available-
for-sale securities $ 17,000 17,000
Net loss (16,078,000) (16,078,000)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 102,040,000 (5,742,000) 17,000 (17,075,000) 79,253,000
Issuance of common stock through:
Exercise of stock options 649,000 650,000
Exercise of purchase rights 375,000 375,000
Deferred compensation related to issuance
of common stock and grants of
stock options 621,000 (621,000) --
Deferred compensation adjustment for
cancellation of stock options (529,000) 529,000 --
Amortization of deferred compensation 2,220,000 2,220,000
Net loss (22,364,000) (22,364,000)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 2, 1998 $103,156,000 $ (3,614,000) $ 17,000 $(39,439,000) $ 60,134,000
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CARDIOTHORACIC SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
Period from
Year Ended June 15, 1995
---------------------------------- (date of inception) to
JANUARY 2, 1998 December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(22,364,000) $(16,078,000) $ (997,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,144,000 251,000 2,000
Amortization of notes receivable from officer 112,000 68,000
Amortization of deferred compensation 2,220,000 6,732,000 260,000
Allowances for product returns 140,000 25,000
Allowances for doubtful accounts 60,000
Changes in operating assets and liabilities:
Accounts receivable (1,436,000) (158,000)
Inventories (421,000) (220,000)
Prepaid expenses and other current assets (325,000) (93,000) (30,000)
Accrued interest on available-for-sale securities (212,000) (925,000) (21,000)
Other assets (7,000) (45,000)
Accounts payable (52,000) 744,000 87,000
Accrued liabilities 2,087,000 2,255,000 88,000
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (19,054,000) (7,444,000) (611,000)
Cash flows from investing activities:
Purchases of property and equipment (2,263,000) (2,682,000) (66,000)
Purchases of available-for-sale securities (73,105,000) (78,266,000) (2,562,000)
Sales or maturities of available-for-sale securities 90,225,000 7,572,000
Issuance of notes receivable to officers (1,339,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 14,857,000 (74,715,000) (2,628,000)
Cash flows from financing activities:
Bank borrowings 1,200,000 425,000
Proceeds from equipment note 1,785,000 849,000
Repayment of bank borrowings (68,000)
Repayment of equipment note (248,000) (11,000)
Issuance of convertible promissory notes, net of issuance costs 196,000
Proceeds from issuance of Series A preferred stock,
net of issuance costs 999,000 3,752,000
Proceeds from issuance of common stock 1,025,000 84,369,000 3,000
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,694,000 86,631,000 3,951,000
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (503,000) 4,472,000 712,000
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 5,184,000 712,000 --
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,681,000 $ 5,184,000 $ 712,000
- ----------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 290,000 $ 27,000
- ----------------------------------------------------------------------------------------------------------------------------
</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
1. 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 cardiac 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 $84.2 million. 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 1999. The
Company plans to continue to finance its operations with proceeds from the
sale of capital stock, such as its initial public offering, borrowings, and
revenues from product sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 ended on January 2, 1998.
BASIS OF CONSOLIDATION:
The Company has a wholly owned subsidiary in Germany, CardioThoracic Systems,
GmbH. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All intercompany balances and
transactions have been eliminated.
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 three 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 January 2, 1998 no individual
customer accounted for more than 10% of net accounts receivable or total
revenues. At December 31, 1996, one customer accounted for 14% of net
accounts receivable and 13% of total revenues, respectively.
The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to the
commencement of 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.
FOREIGN CURRENCY TRANSLATION:
The Company's international subsidiary uses its local currency as its
functional currency. Assets and liabilities are translated at exchange rates
in effect at the balance sheet date and income and expense accounts at
average exchange rates during the year. Resulting translation adjustments are
recorded directly to a separate component of stockholders' equity, if
material.
25
<PAGE>
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 reclassifications had no impact on
previously reported net loss.
NET LOSS PER SHARE:
The Company adopted the Financial Accounting Standards Board No. 128
"Earnings Per Share" and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98, and accordingly all prior periods have been
restated. Net loss per common share and per common share-assuming dilution,
are 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 of net loss per common share-assuming
dilution as their effect is antidilutive. No addi-tional shares are
considered to be outstanding for either calculation under the provisions of
Staff Accounting Bulletin No. 98.
RECENT ACCOUNTING PRONOUNCEMENTS:
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 fiscal 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 fiscal 1998 and the impact of adoption has not been
determined.
3. 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>
January 2, 1998
Government agencies' notes and bonds $10,759,000 $ 8,000 $ (1,000) $10,766,000
Corporate notes and bonds 45,377,000 12,000 (2,000) 45,387,000
- -------------------------------------------------------------------------------------------
$56,136,000 $20,000 $ (3,000) $56,153,000
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
December 31, 1996:
U.S. government notes and bonds $15,710,000 $47,000 $ (3,000) $15,754,000
Government agencies' 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>
26
<PAGE>
Available-for-sale debt securities by contractual maturities at January 2, 1998
are shown below.
<TABLE>
<CAPTION>
Amortized Market
Cost Value
- -------------------------------------------------------------------
<S> <C> <C>
Less than one year $52,092,000 $52,105,000
Due in one to two years 4,044,000 4,048,000
- -------------------------------------------------------------------
$56,136,000 $56,153,000
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
4. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
JANUARY 2, 1998 December 31, 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Raw materials $188,000 $ 87,000
Work in progress 203,000 127,000
Finished goods 250,000 6,000
- ---------------------------------------------------------------------
$641,000 $220,000
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment comprise:
<TABLE>
<CAPTION>
JANUARY 2, 1998 December 31, 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 475,000 $ 303,000
Leasehold improvements 1,228,000 1,127,000
Computer and office equipment 1,298,000 783,000
Machinery and equipment 2,009,000 534,000
- ----------------------------------------------------------------------
5,010,000 2,747,000
Less accumulated depreciation
and amortization (1,397,000) (253,000)
- ----------------------------------------------------------------------
$3,613,000 $2,494,000
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities comprise:
<TABLE>
<CAPTION>
JANUARY 2, 1998 December 31, 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Accrued payables $3,249,000 $1,641,000
Accrued compensation 1,181,000 678,000
- ---------------------------------------------------------------------
$4,430,000 $2,319,000
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
7. COMMITMENTS
OPERATING LEASES:
The Company leases its facilities under three separate operating leases,
which expire in August 2000, May 2001 and May 2001. In addition to the base
rentals, the Company is responsible for certain taxes, insurance and
maintenance costs. Two of the lease terms include annual rent adjustments
under which the base rent is increased in accordance with the published
Consumer Price Index for the area.
At January 2, 1998, future minimum facility lease payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 617,000
1999 635,000
2000 637,000
2001 243,000
----------------------------------------------
$2,132,000
----------------------------------------------
----------------------------------------------
</TABLE>
In August 1996, the Company entered into a noncancelable agreement to
assign the lease for one of its facilities. The minimum facility lease
payments, disclosed above, have not been reduced by minimum noncancelable
rentals of $174,000, due in the future under the sublease agreement.
Rent expense for the year ended January 2, 1998, December 31, 1996 and
for the period from June 15, 1995 (date of inception) to December 31, 1995
was $497,000, $387,000 and $2,000, respectively.
The Company received rental payments of $65,000 and $56,000 under subleases
for the years ended January 2, 1998 and December 31, 1996.
DEVELOPMENT AND LICENSE AGREEMENTS:
In February and March, 1996, the Company entered into a development and
license agreements with companies to develop minimally invasive
cardiothoracic surgical products. Under the development program agreements,
the Company will make development payments totaling $3.9 million upon the
completion of certain milestones. During fiscal 1997 and 1996, $1.0 million
and $1.4 million has been charged to research and development expense in
connection with these agreements, respectively.
8. BORROWINGS
BANK BORROWINGS:
The Company has a $5.0 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 $32.6 million at January 2, 1998) and shall not at
any time exceed the collateral value. The principal, plus any accrued
interest, advanced against this line of credit shall convert to a term loan
on September 30, 1998 and will be amortized over a four year period. Both the
line of credit and term loan bear interest at the prime rate minus 0.25%
(8.25% at January 2, 1998).
27
<PAGE>
EQUIPMENT NOTE:
The Company maintained a revolving $2.5 million equipment loan credit
facility with a financial institution which expired on December 31, 1997.
Borrowings under this agreement are collateralized by the assets purchased
under this equipment facility. As of January 2, 1998, three separate
equipment notes had been drawn against this facility for principal amounts of
$849,000, $851,000 and $934,000, bearing interest at 11.97%, 12.27% and
11.75%, respectively. As of January 2, 1998, principal outstanding under each
of these notes was $703,000, $763,000 and $910,000, and the final payment
date is November 8, 2001, June 4, 2002 and November 11, 2002, respectively.
At January 2, 1998, the future minimum payments under the equipment
facility are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 410,000
1999 495,000
2000 553,000
2001 599,000
2002 319,000
- --------------------------------------------------
$2,376,000
- --------------------------------------------------
- --------------------------------------------------
</TABLE>
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
Under the Company's Articles of Incorporation, the Company's preferred stock
is issuable in series. As of January 2, 1998, 5,000,000 shares of preferred
stock were authorized and no preferred stock was issued or outstanding. The
previously outstanding preferred stock was converted into common in
connection with the Company's initial public offering.
COMMON STOCK:
On August 25, 1995, the Company effected a 1.03606-for-1 common stock split.
All common stock data in the accompanying financial statements has been
retroactively adjusted to reflect the stock split.
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 January 2, 1998 and
December 31, 1996, 1,522,034 and 1,141,366 shares are subject to repurchase
under these stock purchase agreements, respectively.
STOCK OPTION PLANS:
In December 1995, the Company approved the Incentive Stock Plan under which
the officers of the Company are authorized and directed to enter into stock
option agreements with selected individuals. 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 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 $ 0.001-$ 0.10 $46,000
- ------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 740,000 460,000 $ 0.001-$ 0.10 46,000
Additional shares authorized 1,395,000
Options granted (2,111,750) 2,111,750 $ 0.10-$21.13 10,141,703
Options canceled 149,167 (149,167) $ 17.00-$21.13 (341,605)
Options exercised (254,300) $ 0.10-$11.00 (53,922)
- ------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 172,417 2,168,283 $ 0.10-$21.13 9,792,176
Additional shares authorized 600,000
Options granted (1,634,450) 1,634,450 $ 4.78-$25.38 16,766,745
Options canceled 988,019 (988,019) $ 0.10-$25.38 (12,245,126)
Options exercised (503,504) $ 0.001-$11.00 (649,570)
- ------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 2, 1998 125,986 2,311,210 $ 0.001-$21.13 $13,664,225
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
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 18,000 and
12,000 shares of the Company's common stock were granted during fiscal 1997
and 1996 with an exercise price of $14.88 and $13.75 per share, respectively.
No options are exercisable at January 2, 1998.
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 January 2, 1998
and December 31, 1996, 44,626 and 6,009 shares of common stock had been
purchased under this plan at a weighted average of $8.42 and $15.30 per
share, respectively.
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 Plan, the Nonstatutory Stock Option Plan and the
Employee Stock Purchase Plan been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995, according to the provisions of
SFAS No. 123, the Company's net loss and net loss per share for the years
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
JANUARY 2, 1998 December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss--
as reported $(22,364,000) $(16,078,000) $(997,000)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Net loss--
pro forma $(24,868,000) $(16,180,000) $(997,000)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Net loss per share--
as reported $ (1.66) $ (1.64) $ (0.36)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Net loss per share--
pro forma $ (1.84) $ (1.65) $ (0.36)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Risk-free interest rate 5.71-6.81% 5.57-6.44% 5.56%
Expected life 4 years 4 years 4 years
Expected dividends -- -- --
Expected volatility 73.57% 38.88% --
</TABLE>
The expected life is based on the assumption that stock options on
average are exercised once they are fully vested. The risk-free interest rate
was calculated in accordance with the grant date and expected life.
The options outstanding and currently exercisable by exercise price at
January 2, 1998 are as follows:
<TABLE>
<CAPTION>
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>
$0.001-$ 8.10 290,000 8.1 $ 0.001 290,000 $0.001
$ 0.10-$ 8.10 484,840 8.1 $ 0.10 121,233 $ 0.10
$ 4.78-$ 8.00 1,179,662 9.6 $ 6.40 204,877 $ 5.98
$11.00-$15.00 289,708 8.9 $14.08 69,466 $13.64
$16.58-$21.13 85,000 9.2 $20.32 4,790 $16.58
- ----------------------------------------------------------------------------------------------------
</TABLE>
Deferred compensation to be recognized as a result of stock options
granted and common stock issued subject to repurchase provisions as of
January 2, 1998 totals $3.6 million. Amortization of deferred compensation is
generally over vesting periods of one to four years, with compensation
expense recognized in the years ended January 2, 1998 and December 31, 1996
and the period from June 15, 1995 (date of inception) to December 31, 1995
being $2.2 million, $6.7 million and $260,000, respectively.
29
<PAGE>
10. 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. Payments under this agreement totaled
$60,000, $60,000 and $30,000 in fiscal year 1997, 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 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 1997, 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 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 will be fully 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 $25.0 million 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 1997 and 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 1997 and 1996.
30
<PAGE>
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 forgiven 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 the installment. The
Company amortizes the loan over the term of the notes on a straight line
basis. As of January 2, 1998 principal and interest of $175,000 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 January 2, 1998 all
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 January
2, 1998 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 January 2, 1998 all principal and
interest is outstanding on this note.
11. INCOME TAXES
At January 2, 1998, the Company has approximately $26.8 million in federal
and state net operating loss carryforwards to reduce future taxable income.
These carryforwards expire in the years 2001 through 2012, 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:
<TABLE>
<CAPTION>
JANUARY 2, 1998 December 31, 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,724,000 $ 1,457,000
Capitalized research and
development costs 83,000 100,000
Capitalized start-up costs 1,267,000 2,404,000
Research and development credit 947,000 180,000
Other 381,000 25,000
Less: valuation allowance (13,402,000) (4,166,000)
- ----------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
CARDIOTHORACIC SYSTEMS, INC. AND SUBSIDIARY
To the Board of Directors
CardioThoracic Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
CardioThoracic Systems, Inc. and subsidiary as of January 2, 1998 and
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended January 2, 1998 and
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 January 2, 1998 and
December 31, 1996 and the results of its operations and its cash flows for
the year ended January 2, 1998 and 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 and Lybrand LLP
San Jose, California
January 23, 1998
32
<PAGE>
BALANCE SHEET
INFORMED CREATION (A DEVELOPMENT STAGE ENTITY)
<TABLE>
<CAPTION>
June 14, 1995
- -----------------------------------------------------------------------------
<S> <C>
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
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
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)
<TABLE>
<CAPTION>
<S> <C>
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
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INFORMED CREATION (A DEVELOPMENT STAGE ENTITY)
1. 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.
2. 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.
3. PROPERTY AND EQUIPMENT:
At June 14, 1995, property and equipment comprise:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment $12,297
Office equipment 2,161
- --------------------------------------------------------------
14,458
Less accumulated depreciation (4,751)
- --------------------------------------------------------------
Total property and equipment $ 9,707
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
4. 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.
REPORT OF INDEPENDENT ACCOUNTANTS
INFORMED CREATION (A DEVELOPMENT STAGE ENTITY)
To the Sole Proprietor
Informed Creation:
We have audited the accompanying balance sheets 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 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 and the statements of
operations, sole proprietorship capital and cash flows for the period from
January 1, 1995 to June 14, 1995 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
39
<PAGE>
CORPORATE INFORMATION
CARDIOTHORACIC SYSTEMS, INC.
CORPORATE OFFICES
CardioThoracic Systems, Inc.
10600 North Tantan Avenue
Cupertino, CA 95014
(408) 342-1700 phone
(408) 342-1717 fax
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, MN 55164
(612) 450-4084 or (800) 468-9716
(612) 450-4078 fax
GENERAL COUNSEL
Wilson Sonsini Goodrich & Rosati
Professional Corporation
Palo Alto, CA
AUDITORS
Coopers & Lybrand, L.L.P.
San Jose, CA
ANNUAL MEETING
The Annual Meeting of Shareholders will be held May 19, 1998 at 9:00 a.m. at
the Company's corporate offices.
FORM 10-K
A copy of the Company's Form 10-K is available without charge, upon written
request to the Company's Investor Relations department.
MARKET PRICE OF COMMON STOCK AND DIVIDEND INFORMATION
The Company's common stock is traded on the NASDAQ National Market under the
symbol "CTSI." There were approximately 332 holders of record of the
Company's common stock on February 18, 1998. The table below provides
quarterly high/low prices on the NASDAQ national market, as reported by
NASDAQ.
1997 1996
Quarter High Low High Low
- ----------------------------------------------------------
First $26 1/2 $18 5/8
Second* 21 5/8 10 3/4 $25 1/4 $12 1/2
Third 14 1/8 6 3/4 21 1/4 9 3/4
Fourth 9 3/8 4 5/8 22 1/8 16 1/2
- ----------------------------------------------------------
* The Company effected its initial public offering on April 18, 1996.
No dividends have been paid on common stock to date and the Company has no
current plans to do so.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
CardioThoracic Systems, Inc., on Form S-8 of our reports dated January 23,
1998 and February 12, 1996, on our audit of the consolidated financial
statements of CardioThoracic Systems, Inc. and subsidiary as of January 2,
1998 and December 31, 1996 and for the years then ended and for the period
from June 15, 1995 (date of inception) to December 31, 1995, and our audit of
the financial statements of Informed Creation (a development stage entity) 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, respectively, which reports are
included in the Company's Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> JAN-02-1998
<CASH> 4,681,000
<SECURITIES> 52,105,000
<RECEIVABLES> 1,594,000
<ALLOWANCES> 225,000
<INVENTORY> 641,000
<CURRENT-ASSETS> 60,490,000
<PP&E> 5,010,000
<DEPRECIATION> (1,397,000)
<TOTAL-ASSETS> 69,276,000
<CURRENT-LIABILITIES> 5,619,000
<BONDS> 0
0
0
<COMMON> 103,170,000
<OTHER-SE> (43,036,000)
<TOTAL-LIABILITY-AND-EQUITY> 69,276,000
<SALES> 9,379,000
<TOTAL-REVENUES> 9,379,000
<CGS> 5,962,000
<TOTAL-COSTS> 5,962,000
<OTHER-EXPENSES> 29,426,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290,000
<INCOME-PRETAX> (22,364,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,364,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,364,000)
<EPS-PRIMARY> (1.66)
<EPS-DILUTED> (1.66)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 SEP-30-1996
<CASH> 5,183,694 48,892,562 48,892,562
<SECURITIES> 42,608,043 32,408,328 32,408,328
<RECEIVABLES> 247,981 115,000 115,000
<ALLOWANCES> 0 0 0
<INVENTORY> 220,171 0 0
<CURRENT-ASSETS> 49,330,057 81,591,374 81,591,374
<PP&E> 2,747,592 2,221,153 2,221,153
<DEPRECIATION> (252,785) (116,159) (116,159)
<TOTAL-ASSETS> 83,691,369 84,732,610 84,732,610
<CURRENT-LIABILITIES> 3,309,984 2,386,800 2,386,800
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 102,053,375 103,195,187 103,195,187
<OTHER-SE> (22,799,515) (20,849,377) (20,849,377)
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