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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 1996
OR
[ ] Transition report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-28266
HEARTPORT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3222307
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
200 CHESAPEAKE DRIVE, REDWOOD CITY, CA 94063
Address of Principal Executive Offices) (Zip Code)
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(415) 306-7900
Registrant's Telephone Number, Including Area Code
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Securities registered pursuant to Section 12(b) of the Act:NONE
Securities registered pursuant to Section 12(g) of the Act:COMMON STOCK
(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 filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure 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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 14, 1997: approximately $324 million (based on
the last reported sale price of $27.25 per share on March 14, 1997 on the
Nasdaq National Market).
The number of shares of Common Stock outstanding as of March 14, 1997
was 24,567,738.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K REFERENCE
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Proxy Statement for Registrant's Annual Meeting Part III, Items 11-13
to be held on May 28, 1997
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TABLE OF CONTENTS
PAGE
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Part I
Item 1. Business............................................... 1
Item 2. Properties............................................. 24
Item 3. Legal Proceedings...................................... 24
Part II
Item 4. Submission of Matters to a Vote of Security Holders.... 24
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................. 25
Item 6. Selected Financial Data................................ 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 27
Item 8. Financial Statements and Supplementary Data............ F-1
Part III
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. III-1
Item 10. Directors and Executive Officers of the Registrant..... III-1
Item 11. Executive Compensation................................. III-3
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... III-3
Item 13. Certain Relationships and Related Transactions......... III-4
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... IV-1
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PART I
ITEM 1.BUSINESS.
The discussion in this Item and elsewhere in this Annual Report on Form
10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors."
INTRODUCTION
Heartport, Inc. ("Heartport" or the "Company") has developed and is
marketing proprietary systems and novel procedures that are designed to
enable cardiac surgeons to perform a wide range of heart surgeries in a
minimally invasive manner through small incisions, or "ports," without the
need to crack open the chest as required in conventional heart surgery.
Although fundamentally changing the means of providing access to the heart,
the Company's Port-Access-TM- surgical procedures closely parallel the
conventional procedures that have been used in heart surgery since the
mid-1950s. The Company believes that its systems and procedures have the
potential to offer efficacy equal to that of conventional heart surgery, but
with the benefits of reduced trauma and complications, reduced pain and
suffering, shorter hospital stays, reduced convalescence time, and lower
overall cost. As of March 21, 1997, to the Company's knowledge, the Company's
systems have been used to complete 211 Port-Access coronary artery bypass
graft ("CABG") procedures (143 single vessel, 46 double vessel, 19
triple vessel and 3 quadruple vessel) and 176 Port-Access mitral valve
procedures (79 repairs and 97 replacements). The Company believes that
its Port-Access systems and procedures will have a significant impact on the
field of heart surgery in the same way that minimally invasive surgical
procedures such as laparoscopy impacted general surgery and arthroscopy
impacted orthopedic surgery.
The Company markets its Port-Access systems with a direct sales force
in the United States and Europe. Once a purchase order from a hospital or
medical center is received, the Company trains the surgical team in
Port-Access systems and procedures. As of March 21, 1997, 70 teams have
completed Port-Access training and 43 have initiated human cases. The
Company has a 50,000 sq. ft. cardiovascular research and training facility in
Salt Lake City, Utah for training U.S. surgical teams. European surgical
teams are trained at a contract facility near Uppsala, Sweden.
BACKGROUND
Cardiovascular disease is the leading cause of death in the United
States and many other developed countries. Two of the principal types of
cardiovascular disease are coronary artery disease ("CAD") and valvular heart
disease ("VHD"). In CAD, one or more coronary arteries are narrowed,
resulting in the risk of insufficient blood flow to the heart muscle. In VHD,
one or more heart valves are dysfunctional, resulting in suboptimal pumping
of blood. Conventional open-chest heart surgery (commonly referred to as
"open-heart" surgery) is one of the leading methods of treating CAD, VHD, and
other types of cardiovascular disease.
Heart surgery is widely regarded as one of the most important medical
advances of the twentieth century. This field of surgery was made possible
during the 1950s by the development of technology that enabled physicians to
perform cardiopulmonary bypass ("CPB") and stop the heart during surgery. CPB
protects the patient by taking over the function of the heart in circulating
oxygenated blood throughout the patient's organs and tissues, thereby
permitting the heart to be safely stopped. The procedure of placing the
patient on CPB and stopping the heart is the standard of care in heart
surgery because it offers several critical advantages. First, stopping the
heart allows the surgeon to achieve a high degree of surgical accuracy and
precision, which is directly related to the length and quality of the
patient's life following surgery. Second, stopping the heart protects the
heart muscle during surgery. The stopped heart requires virtually no blood
flow, whereas the beating heart requires a constant supply of oxygenated
blood and will sustain damage if that supply is interrupted. Third, the
majority of cardiac surgery procedures are extremely difficult to perform if
the heart is not stopped. For example, in most multi-vessel coronary artery
bypass surgeries, the heart must be turned and manipulated to access the
three major vascular beds of the heart and to operate upon the various
coronary arteries, a nearly impossible task while the heart is beating. In
valve repair and replacement, the heart itself must be opened to repair or
replace the diseased valve since the valves are located inside the heart.
Opening a beating heart poses a high risk of death. Thus, placing the patient
on CPB and stopping
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the heart is necessary to enable surgeons to safely and accurately perform
the full range of surgical procedures anywhere on the surface or the interior
of the heart.
Since heart surgery was pioneered in the mid-1950s, remarkable advances
have occurred in the surgical treatment of cardiovascular disease. CAD is
most effectively treated by CABG procedures, in which an artery or vein is
used to bypass the narrowing in a coronary artery and restore blood flow
downstream of the narrowing. The treatment for VHD involves either repairing
the diseased heart valve, most commonly with the implantation of a prosthetic
annuloplasty ring, or replacing it with a prosthetic mechanical or tissue
valve. Until the introduction of Heartport's technology, CABG and valve
repair and replacement procedures were virtually always performed in a highly
invasive surgery in which the patient's chest is opened widely to gain access
to the heart, the patient is placed on CPB, and the patient's heart is
stopped. Worldwide, approximately 800,000 CABG and valve procedures are
performed each year in this manner. The Company estimates that over 15
million open-chest heart surgeries of this type have been performed since the
advent of heart surgery in the 1950s.
Although highly efficacious, open-chest heart surgery is extremely
traumatic and painful, typically requires a lengthy period of convalescence,
and is expensive. The heart sits in the middle of the chest, protected by
skeletal armor consisting of the sternum or "breast bone," the rib cage, and
the spine. In conventional heart surgery, the heart is accessed by means of a
sternotomy, whereby a surgeon makes a 12- to 18-inch incision in the
patient's chest, the sternum is cut in half with a bone saw, and the rib cage
is then spread open with a steel retractor. The procedure is highly
traumatic, resulting in a lengthy and painful recovery period. In 1995,
open-chest heart surgery patients in the United States remained in the
hospital for an average of ten days and required a significant period of
convalescence following discharge. Conventional cardiac surgery is also
expensive, and in-patient costs on average for a CABG procedure are
approximately $40,000 per patient and for a valve procedure are approximately
$50,000 per patient. In addition, substantial costs are incurred during
convalescence. With approximately 400,000 open-chest heart surgeries
performed in the United States each year, the total cost to the U.S.
healthcare system is substantial.
The development and widespread adoption of minimally invasive surgical
approaches have revolutionized many surgical fields, including general
surgery, orthopedics, gynecology, urology, and neurosurgery. Notable examples
include laparoscopic procedures in the field of general surgery and
arthroscopic procedures in the field of orthopedic surgery. Such procedures
are designed to be as efficacious as conventional surgery, but with
substantially reduced trauma, thereby decreasing complications, reducing pain
and suffering, speeding recovery, and decreasing costs associated with many
aspects of patient care. This movement toward minimally invasive surgery has
been driven by advances in both device technology and surgical technique. A
minimally invasive approach is most advantageous in cases in which
significant trauma results from gaining surgical access to an affected organ
or site. Cardiac surgery represents a particularly significant opportunity
for a minimally invasive approach due to the extreme trauma associated with
opening the chest. Heartport has demonstrated that its Port-Access minimally
invasive surgical approach has the potential to significantly reduce
complications, pain and suffering, convalescence, and expense, while
maintaining the high efficacy of conventional open-chest surgery.
Less-invasive alternatives to conventional heart surgery began to
emerge in the early 1980s. For example, percutaneous transluminal coronary
angioplasty ("PTCA"), or balloon angioplasty, was developed as an alternative
to CABG surgery. In a PTCA procedure, the cardiologist inserts a small
balloon catheter into the narrowed coronary artery and inflates the balloon
to expand the narrowed section, thereby increasing the internal diameter of
the vessel to increase blood flow. A PTCA procedure is less traumatic,
requires less time in the hospital, and involves a shorter recuperation
period than a conventional open-chest CABG procedure. As a result, a PTCA
procedure in the United States is less expensive on a per-procedure basis,
with costs of approximately $16,000 in 1994. In 1995, 460,000 PTCA procedures
were performed in the United States, and an additional 275,000 such
procedures were performed elsewhere in the world.
Although PTCA is less invasive than conventional CABG, a major drawback
of PTCA is the high rate of restenosis, or renarrowing of the blood vessel at
the treatment site. Restenosis within six months following a PTCA procedure
occurs at rates ranging from 25% to 50%. The majority of PTCA patients
eventually undergo another PTCA procedure or require CABG surgery. Although
the cost of a single PTCA procedure may be substantially less than a
conventional CABG procedure, a recent study indicated that three years after
the procedure, PTCA has no cost advantage over conventional open-chest CABG
due to the need for subsequent interventions. Furthermore,
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another recent study concluded that the quality of life, post intervention,
is higher for conventional open-heart surgery patients because of the
follow-up interventions required in PTCA. The Company believes that the
dramatic reduction in trauma associated with the Port-Access approach will
magnify this advantage. More recently, clinicians have begun to employ
mechanical coronary artery stents, metal prostheses designed to hold open
arteries, as a means of preventing restenosis. Although long-term clinical
data is not yet available, stents appear to reduce but not eliminate the
problem of restenosis associated with non-surgical treatment of CAD.
Restenosis rates for conventional open-chest CABG are significantly
lower than those for non-surgical approaches. Studies indicate that
open-chest coronary artery bypass grafts have 17-year patency rates (the
maintenance of sufficient blood flow through the affected artery) of 92% when
the left internal mammary artery ("IMA") graft is used, 85% when the right
IMA graft is used, and 10-year patency rates of approximately 60% when a
saphenous vein graft from the patient's leg is used. In addition, a Duke
University study suggests that patients with three-vessel CAD and patients
with severe two-vessel CAD have improved survival after conventional
open-chest CABG surgery in comparison to PTCA and other medical treatments.
Thus, conventional open-chest CABG remains the preferred treatment for severe
CAD because of these higher long-term success rates.
Another less-invasive alternative to conventional open-chest CABG
surgery has recently been developed by a small number of cardiac surgeons. In
a limited number of cases, these surgeons have been using low-technology
surgical tools to perform minimally invasive CABG surgery on the beating
heart. This technique subjects the patient to the risk of several types of
cardiovascular stress. Open-chest CABG surgery without CPB on the beating
heart has been available since the advent of open-chest heart surgery forty
years ago, but has very rarely been practiced. Such beating heart surgery,
whether open-chest or minimally invasive, has generally been, and the Company
believes is likely to continue to be, limited to the small percentage of
cases in which the heart does not need to be opened, turned, or manipulated
and in which the patient is able to tolerate the stress of undergoing heart
surgery without the support of CPB and the benefits resulting from stopping
the heart.
The Company believes that to achieve the high efficacy and patient
safety and broad scope of conventional open-chest cardiac surgery, the
patient must be placed on CPB and the heart stopped. As a result,
conventional open-chest heart surgery represents the standard of care for the
treatment of CAD, VHD, and other cardiac conditions. To date, the only way to
place the patient on CPB and stop the heart has been to crack the patient's
chest. Heartport was formed with the objective of developing a minimally
invasive approach to cardiac surgery that would permit surgeons to perform
the full range of highly efficacious cardiac surgeries, with the patient on
CPB and the heart stopped, but without the trauma associated with a
sternotomy and reducing the complications associated with traditional CPB.
THE HEARTPORT SOLUTION
Heartport has developed proprietary systems for performing several
different types of minimally invasive heart surgery. These systems and
devices have been cleared or exempted by the Food and Drug Administration
("FDA") for commercial sale in the United States and by a Notified Body in
Europe. Heartport's core platform is an endovascular cardiopulmonary bypass
("EndoCPB") system, which allows surgeons to place the patient on CPB and
stop and protect the patient's heart without the need for a sternotomy. Using
the Company's EndoCPB-TM- platform and procedure-specific application
systems, the surgeon is able to perform cardiac surgery by accessing the
heart through one or more small incisions, or "ports," placed between the
patient's ribs. The Company's first several application systems comprise
reusable and disposable devices for Port-Access CABG and for Port-Access
mitral valve repair and mitral valve replacement (collectively, "MVR")
surgeries. Application systems for performing additional cardiac surgery
procedures, including Port-Access aortic valve replacement ("AVR"), are also
under development. These future systems will require regulatory clearances or
exemptions prior to commercial distribution. Although fundamentally changing
the means of providing access to the heart, the Port-Access surgical
procedures closely parallel the conventional procedures that have been used
in heart surgery since the mid-1950s. The Company believes that its systems
and procedures have the potential to offer efficacy equal to that of
conventional open-chest surgery, but with the benefits of reduced trauma and
complications, reduced pain and suffering, shorter hospital stays, reduced
convalescence time, and lower overall cost. See "Risk Factors -- No Assurance
of Market Acceptance" and "--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulation."
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MARKETS AND APPLICATIONS
Cardiovascular disease is the leading cause of death in the United
States and other developed countries. In the United States, it causes
approximately one million deaths per year, which represents over 40% of all
deaths. CAD is one of the most common forms of cardiovascular disease,
affecting more than 11 million people in the United States. If untreated, CAD
can cause a myocardial infarction or "heart attack." Each year, approximately
1.5 million people experience heart attacks in the United States, resulting
in approximately 500,000 deaths. Each year on a worldwide basis,
approximately 600,000 CAD patients undergo conventional open-chest CABG
surgery, over 700,000 CAD patients undergo PTCA or other non-surgical
interventions, and approximately 200,000 VHD patients undergo open-chest
valve repair or replacement procedures. MVRs represent approximately 40% and
AVRs represent approximately 60% of valve surgery procedures. The per-patient
cost of these heart surgery procedures in the United States averages
approximately $16,000 for PTCA, $40,000 for conventional CABG, and $50,000
for conventional valve surgery. The Company has demonstrated that its
Port-Access EndoCPB platform and procedure-specific Port-Access application
systems provide a minimally invasive surgical alternative for CABG and MVR
procedures.
CORONARY ARTERY BYPASS GRAFTING--CABG. Currently, the most efficacious
treatment for CAD is conventional open-chest CABG surgery. In a conventional
open-chest CABG, a 12- to 18-inch incision is made in the patient's chest,
the patient's sternum is cut in half with a bone saw, and the rib cage is
spread open with a steel retractor. Blood is re-routed past a narrowing in
one or more coronary arteries by either grafting an artery from the chest
wall to the coronary artery below the narrowing, or grafting a section of
artery or vein from another part of the body both to the aorta (which serves
as a source of oxygenated blood) and to a point below the narrowed segment on
the affected coronary artery, or both. Using the IMA from the chest wall is
the most efficacious procedure given its long term patency in such open-chest
procedures. The IMA is dissected free from the chest wall and prepared for
grafting to the coronary artery. Large tubes, or cannulae, are inserted
directly through the walls of the heart and the aorta in order to place the
patient on CPB, the aorta is compressed closed with an external cross-clamp,
and a catheter is used to administer the cardioplegic solution that stops the
heart. The artery from the chest wall is then sutured in place on the
affected coronary artery, which sits motionless atop the stopped heart,
enabling the highest degree of surgical accuracy and precision. The patient's
chest is closed and the sternum is held together with steel wire. Afterward,
the patient has a long and painful recovery. In the United States, open-chest
CABG patients spend an average of ten days in the hospital, and the Company
estimates that up to two or more days are spent in the intensive care unit
("ICU"). For some period following surgery, a ventilator breathes for the
patient because the trauma to the rib cage and sternum makes unassisted
breathing extremely painful.
Each step in the Company's Port-Access CABG procedure parallels a
corresponding step in conventional CABG. Instead of accessing the heart
through a 12- to 18-inch opening in the chest, however, the procedure is
accomplished through ports between the patient's ribs. During the procedure,
the Company's EndoCPB System, a series of proprietary catheters inserted via
certain of the patient's peripheral vessels, circulates oxygenated blood
throughout the body and stops and protects the heart. The Company's
Port-Access-TM- CABG System is designed to enable the surgeon to access the
heart and its associated vessels, visualize the interior of the thoracic
cavity, access and prepare the arterial or venous grafts, attach the grafts
to the diseased coronary artery resting motionless atop the stopped heart,
and do various other supporting activities. Upon completion of the surgical
procedure, the heart is allowed to spontaneously resume normal activity and
CPB is discontinued. The patient leaves the operating room with the heart
revascularized in the same manner as in a conventional open-chest CABG
procedure, but with the port incisions sutured closed rather than with the
chest held together with steel wire.
VALVE REPAIR AND REPLACEMENT. A leading treatment for VHD is the
surgical replacement or repair of the diseased heart valve. In conventional
open-chest MVR surgery, the heart is accessed via a sternotomy, the patient
is placed on CPB, the patient's heart is stopped, and the heart is drained of
blood. The diseased valve is then accessed through an incision in the left
atrium, one of the upper chambers of the heart, and the valve is either
repaired, most commonly with the implantation of a prosthetic annuloplasty
ring, or is removed and replaced with a mechanical or tissue prosthetic
valve.
Similar to Port-Access CABG, each step in the Company's Port-Access MVR
procedure closely parallels the corresponding step in a conventional MVR
procedure, but no sternotomy is required. The Company's Port-Access-TM- MVR
System utilizes the EndoCPB system to place the patient on CPB, stop and
protect the heart, and empty the
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heart of blood. The Company's Port-Access MVR System is designed to permit
the surgeon to visualize the interior of the thoracic cavity, open the left
atrium of the heart to gain access to the mitral valve, visualize the
interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis, close the heart, allow the heart to
spontaneously resume normal activity, and then discontinue CPB. The patient
leaves the operating room with the heart valve repaired or replaced in the
same manner as in a conventional, open-chest MVR procedure, but with the port
incisions sutured closed rather than the chest held together with steel wire.
OTHER PROCEDURES. The Company believes that its Port-Access technology
and approach to cardiac surgery may also enable it to develop systems to
treat a range of cardiovascular disease in addition to CAD and mitral valve
diseases. The Company is currently developing Port-Access systems to treat
aortic valve disease and other cardiac diseases.
STRATEGY
The Company's objective is to become the global leader in research,
development, and commercialization of systems for minimally invasive cardiac
surgery. Key elements of the Company's strategy include:
ESTABLISH PORT-ACCESS MINIMALLY INVASIVE CARDIAC SURGERY AS A STANDARD
OF CARE FOR CAD AND VHD. The Company believes that it is the first to
design, develop, and receive FDA-clearance for devices and systems for the
minimally invasive surgical treatment of CAD and VHD. The Company is
currently introducing its proprietary technology to leading cardiac surgery
centers in the United States and Europe. Prior to shipment, the Company
provides its customers with extensive training on the EndoCPB, Port-Access
CABG System and Port-Access MVR System and procedures at either the
Heartport Research and Training Center ("HRTC") in Salt Lake City, Utah or at
Assist Medical near Uppsala, Sweden. As of March 21, 1997, 70 surgical teams
have been through the Company's training program, of which 43 have begun
performing procedures. In addition, the Company intends to support clinically
driven research efforts to prove the efficacy and benefits of Port-Access
minimally invasive cardiac surgery.
MARKET TO HIGH VOLUME CARDIAC SURGERY CENTERS WITH DIRECT SALES FORCE.
The cardiac surgery market in the United States and Europe is highly
concentrated, with 300 centers responsible for over 50% of the more than
500,000 open-chest surgeries performed annually in the two geographies. The
Company believes that rapid penetration of these high volume centers is
achievable with a relatively small direct sales force. As of March 21, 1997
the Company has 12 cardiovascular sales specialists in the United States and
5 cardiovascular sales specialists in Europe with an average of over ten
years experience selling cardiac surgery and cardiology products.
PROMOTE PORT-ACCESS PARTNERSHIPS. The Company has developed a
procedural selling approach to market its systems to cardiac surgeons, called
the Port-Access Partnership-SM-. The Company intends to utilize its
Port-Access Partnership to promote customer loyalty. In the partnership, in
exchange for a substantial purchase order for Port-Access disposable
products, Heartport trains the center's surgical team, supplies patient and
referring physician educational materials, supports local-market media
efforts and furnishes proprietary reusable devices enabling Port-Access
procedures.
EXPAND PORT-ACCESS APPLICATIONS BY LEVERAGING CORE TECHNOLOGY. The
Company has developed its EndoCPB System to enable minimally invasive
Port-Access CABG, Port-Access MVR, Port-Access AVR, and other Port-Access
heart surgeries, with the patient on CPB and the heart stopped. The Company
intends to expand the use of its EndoCPB platform to address other types of
heart surgery. See "Risk Factors--No Assurance of Market Acceptance" and
"--No Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulation."
TARGET INTERNATIONAL MARKETS. The Company intends to continue to
devote resources to penetrate international markets given the substantial
size and economic attractiveness of these markets. The Company has received
the necessary regulatory approvals in Europe, and is pursuing approvals in
Canada, Australia, and Asia to market its EndoCPB and Port-Access systems. In
addition, the Company has trained surgical teams from leading centers in
England, Scotland, Germany, France, Spain, Belgium, Sweden, Canada,
Australia, and Malaysia in the use of Port-Access techniques.
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PROTECT AND ENHANCE PROPRIETARY POSITION. The Company currently holds
issued and allowed patents covering a number of fundamental aspects of the
Company's EndoCPB System and procedure-specific Port-Access systems. As of
March 14, 1997, the Company owns 25 issued or allowed United States patents,
and owns an exclusive field of use license on one issued United States patent
and on one issued foreign patent. In addition, as of March 14, 1997, the
Company has 84 pending United States patent applications and has filed 37
patent applications that are currently pending in Europe, Japan, Australia,
and Canada. In addition, in 1996, the Company acquired certain intellectual
property assets of Endosurgical Development Corporation ("EDC"). The Company
intends to continue to pursue its patent filing strategy and to vigorously
defend its intellectual property position against infringement. See "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation."
COMPLEMENT INTERNAL PRODUCT DEVELOPMENT WITH STRATEGIC ALLIANCES. The
Company intends to leverage its technology platform through strategic
alliances with corporate partners. In September, 1995, the Company formed a
strategic relationship with St. Jude Medical, Inc. ("St. Jude Medical"), the
world's leading producer of prosthetic heart valves, for the joint
development of prosthetic valve and annuloplasty ring delivery systems for
Port-Access procedures. Pursuant to the terms of this alliance, as amended in
January, 1997, the Company will receive royalties from St. Jude Medical when
valve/annuloplasty ring delivery systems incorporating Heartport technology
are sold. The Company expects to pursue additional strategic relationships
with corporations and research institutions with respect to the research,
development, regulatory approval, manufacturing and marketing of certain of
its potential products and procedures. See "Strategic Relationships."
TECHNOLOGY
The Company believes it is currently the only company marketing a
technology designed to permit minimally invasive cardiac surgery to be
performed on a stopped heart with CPB support. The Company's systems for
minimally invasive cardiac surgery consist of a common platform, the EndoCPB
System, and procedure-specific application systems comprising proprietary
reusable, disposable and implantable devices.
ENDOVASCULAR CARDIOPULMONARY BYPASS. The EndoCPB System is a series of
proprietary catheters used to place the patient on CPB and to stop and
protect the heart during cardiac surgery, without performing a sternotomy.
There are five key components: the Endoaortic Clamp-TM-, a saline-filled
balloon catheter, occludes the ascending aorta, stops and cools the heart via
delivery of cardioplegic solution, monitors aortic root pressures, and drains
excess blood from the heart; the Endovenous Drainage-TM- cannula removes
deoxygenated blood from the body; the Endoarterial Return-TM- cannula returns
oxygenated blood to the body; the Endopulmonary Vent-TM- drains excess blood
from the heart via the pulmonary artery; and the Endocoronary Sinus-TM-
Catheter provides an alternative route for delivery of cardioplegic solution.
Each component of the EndoCPB System is positioned within the vascular system
via peripheral vascular access.
PORT-ACCESS CORONARY ARTERY BYPASS GRAFTING. The Port-Access CABG
System currently consists of 25-30 reusable and disposable devices designed
to perform the entire CABG procedure in a minimally invasive manner. The
system includes devices for accessing the heart and its associated vessels,
visualizing the interior of the thoracic cavity, accessing and preparing the
arterial and venous grafts, attaching the grafts to the diseased coronary
artery, and various other supporting activities. The devices are designed to
permit the surgeon to operate through ports with the same surgical precision
and accuracy as is possible using conventional cardiac surgical instruments
through a sternotomy.
PORT-ACCESS MITRAL VALVE REPAIR AND MITRAL VALVE REPLACEMENT. The
Port-Access MVR System currently consists of 25-30 reusable and disposable
devices. This system is designed to be compatible with existing implantable
prosthetic heart valves and prosthetic annuloplasty rings. They permit the
surgeon to perform mitral valve surgery in a minimally invasive manner, and
offer the surgeon the ability to visualize the interior of the thoracic
cavity, open the left atrium of the heart to gain access to the mitral valve,
visualize the interior of the heart, assess valve function, repair or remove
the diseased valve, size the prosthesis (either a prosthetic heart valve or
annuloplasty ring), deliver and attach the prosthesis and close the heart.
The Port-Access MVR System is designed to permit precise and accurate surgery
to be performed through small ports.
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PORT-ACCESS AORTIC VALVE REPLACEMENT AND OTHER PROCEDURES. The Company
is in the process of developing a Port-Access AVR system. In addition, the
Company is actively developing systems for performing other Port-Access
cardiac surgery procedures. There can be no assurance, however, that any such
systems will be successfully developed, be granted required regulatory
clearances or approvals, or achieve any significant level of market
acceptance.
REGULATORY STATUS
UNITED STATES
In October, 1996, the Company received 510(k) clearance from the FDA to
market its EndoCPB system and several proprietary Class II disposable
surgical devices for its Port-Access surgery systems. In addition, the
Company received pre-market notification exemptions clearing its core
reusable and disposable surgical devices to be labeled and used for minimally
invasive cardiovascular surgery. These clearances and exemptions allowed the
Company to commercially launch its Port-Access CABG System and Port-Access
MVR System in early 1997.
The Company has also submitted 510(k) notifications for enhancements to
its EndoCPB System and for additional specialty disposable devices to further
enhance performance of the Port-Access CABG and MVR procedures. Additional
510(k) submissions are planned for 1997 for devices to facilitate Port-Access
procedures other than CABG and MVR. 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 these additional FDA clearances that could delay or
preclude the Company from marketing and selling products for additional
procedures. See "Risk Factors--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulations," and
"Government Regulation."
INTERNATIONAL
In January, 1997, the Company received CE Mark clearance for its
EndoCPB System which allows the sale of its Port-Access CABG and MVR systems
in all countries of the European Union. The Company has also submitted
amendments to its Product Dossiers for enhancements to its EndoCPB System to
further enhance performance of the Port-Access CABG and MVR procedures.
Additional CE Mark submissions are planned for 1997 for devices to facilitate
Port-Access procedures other than CABG and MVR. See "Risk Factors--No
Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulations," and "Government Regulation."
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SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board composed of
individuals with expertise in the field of cardiac surgery. The Scientific
Advisory Board periodically reviews the Company's clinical progress and
product development plans and identifies potential applications of the
Company's technology. In addition, members of the Scientific Advisory Board
will be available on an individual basis to consult with the Company as
needed. The members of the Scientific Advisory Board are consultants to the
Company and have substantial constraints on the amount of time they can
devote to Company matters. The members of the Scientific Advisory Board are
as follows:
NAME OCCUPATION/TITLE
William A. Baumgartner, M.D. Professor of Surgery, Cardiac Surgeon In-Charge,
Johns Hopkins Hospital
Lawrence H. Cohn, M.D. Professor of Surgery,
Harvard Medical School,
Chief, Division of Cardiac Surgery,
Brigham and Women's Hospital
Delos M. Cosgrove, M.D. Chairman, Department of Thoracic and
Cardiovascular Surgery,
The Cleveland Clinic Foundation
James L. Cox, M.D. Evarts C. Graham Professor of Surgery,
Vice-Chairman, Department of Surgery,
Chief, Division of Cardiothoracic Surgery,
Washington University School of Medicine
Bruce A. Reitz, M.D. Professor and Chairman,
Department of Cardiothoracic Surgery,
Stanford University School of Medicine
STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations
and research institutions with respect to the research, development,
regulatory approval, manufacturing, and marketing of certain of its potential
products and procedures. The Company has formed a strategic relationship with
St. Jude Medical, the world's leading producer of prosthetic heart valves,
for the joint development of prosthetic valve and annuloplasty ring delivery
systems for Port-Access MVR and a prosthetic valve system for Port-Access
AVR. Under the terms of an agreement entered into in September, 1995 and
amended in January, 1997, the Company granted St. Jude Medical a
non-exclusive, worldwide, royalty bearing license to make, use, and sell a
minimally invasive prosthetic valve system incorporating a Port-Access
delivery system and a St. Jude Medical valve or annuloplasty ring prosthesis
for use in Port-Access heart valve repair and replacement procedures. St.
Jude Medical has no minimum purchase obligations under the agreement. In
addition, the Company borrowed $3.0 million from St. Jude Medical. As of
December 31, 1996, the entire amount of the loan had been converted to
prepaid royalty payments. See Note 4 of Notes to Financial Statements.
Although the Company intends to pursue additional strategic relationships in
the future, there can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such
relationship will be successful. See "Risk Factors--Reliance on Strategic
Relationships."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part
on its ability to develop and introduce clinically advanced Port-Access
minimally invasive cardiac surgery systems that are effective, easy to use,
safe, and reliable. The Company's research and development department focuses
upon the continued development and refinement of its existing Port-Access
devices, systems, and procedures as well as upon the development of new
devices, systems, and procedures for treating other cardiac diseases.
To date, the Company has developed systems for Port-Access CABG and
Port-Access MVR surgery. A system for Port-Access aortic valve replacement is
currently under development. In collaboration with its clinical
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advisory board and consultants, the Company is actively developing methods
and devices for future Port-Access surgical procedures, as well as continuing
development of reusable, disposable, and implantable devices to further
refine current Port-Access procedures. The Company believes that its EndoCPB
and Port-Access technologies are potentially applicable to a wide variety of
other cardiac surgical procedures. There can be no assurance, however, that
the Company will be successful in developing devices or systems for such
procedures, or that such devices or systems, if any, will be granted required
regulatory clearances or approvals, or achieve any significant level of
market acceptance. See "Risk Factors--No Assurance of Market Acceptance"
and "--Significant Competition; Rapid Technological Change."
MANUFACTURING
The Company is committed to producing high-quality products and expects
to internally manufacture the most proprietary, value-added components and
products and outsource less critical manufacturing jobs. The Company
manufactures its products at its Redwood City, California, facilities. The
Company believes that its facilities have sufficient capacity to meet the
Company's anticipated manufacturing needs through the end of 1997.
The Company manufactures its products based on forecasted product
orders, and purchases subassemblies and components prior to receipt of
purchase orders from customers. Lead times for materials and components
ordered by the Company vary significantly, and depend on factors such as the
business practices of the specific supplier, contract terms, and general
demand for a component at a given time. Certain components used in the
Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
To meet anticipated demand, the Company must increase the rate by which
it manufactures its products. Until recently, the Company's manufacturing
activities have consisted primarily of manufacturing limited quantities of
products for use in laboratory testing, clinical trials and initial low
volume commercial sales. The manufacture of the Company's products is
complex, involving a number of separate processes and components. The Company
does not have experience in manufacturing its products in commercial
quantities. Although the Company is scaling up its capacity to produce
products in volume to support its commercial launch, there can be no
assurance that it will be able to make the transition to commercial
production successfully. In addition, the Company believes that cost
reductions in its manufacturing operations will be required for it to
commercialize its systems on a profitable basis. Certain manufacturing
processes are labor-intensive, and achieving significant cost reductions will
depend, in part, upon reducing the time required to complete these processes.
Manufacturers often encounter difficulties in scaling up manufacturing of new
products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies
and procedures, lack of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes and
facilities. The Company has considered and will continue to consider as
appropriate the internal manufacture of components currently provided by
third parties, as well as the implementation of new production processes.
There can be no assurance that manufacturing yields or costs will not be
adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, or that FDA Good
Manufacturing Practices ("GMP") requirements can be met, and that such a
transition would not materially and adversely affect the Company's business,
financial condition, and results of operations.
The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition,
and results of operations. See "Risk Factors--Limited Manufacturing
Experience; Dependence on Key Suppliers."
The regulatory clearances received to date by the Company require
compliance with FDA regulations for GMP. Even after the FDA has cleared or
approved a device, it will periodically inspect the manufacturing facilities
and processes for compliance with GMP. In addition, in the event that
additional manufacturing sites are added or manufacturing processes are
changed, such new facilities and processes are also subject to FDA inspection
for compliance with GMP. The Company's manufacturing facilities and processes
have not yet been inspected by the
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FDA for compliance with GMP. See "Risk Factors--No Assurance of Regulatory
Clearance or Approval; Significant Domestic and International Regulation."
SALES, MARKETING, TRAINING, AND DISTRIBUTION
The Company's EndoCPB and Port-Access systems in the United States are
marketed both to cardiac surgeons and to cardiac surgery centers. In the
United States, there are approximately 900 cardiac surgery centers and
approximately 2,500 cardiac surgeons. The Company believes it can market its
products in the United States with a moderately sized direct sales
organization. Outside the United States, there are approximately 2,500
cardiac surgeons. In Europe, the Company is building a direct sales force,
and in other geographic regions the Company will evaluate direct and indirect
sales channels as appropriate. The Company currently has a limited sales and
marketing organization in the United States and Europe. Establishment of a
sales force capable of effectively commercializing the Company's EndoCPB and
Port-Access systems will require substantial efforts and require significant
management and financial resources. There can be no assurance that the
Company will be able to establish such a sales capability on a timely basis,
if at all. See "Risk Factors--Limited Sales, Marketing, and Distribution
Experience."
The Company has developed a procedural selling approach to market its
systems to cardiac surgeons, called the Port-Access Partnership-TM-. The
Company intends to utilize its Port-Access Partnership to promote customer
loyalty. In the partnership, in exchange for a substantial purchase order
for Port-Access disposable products, Heartport trains the center's surgical
team, supplies patient and referring physicians educational materials,
supports local-market media efforts and furnishes proprietary reusable
devices enabling Port-Access procedures.
The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to
assess and satisfy their needs for products and services. The Company intends
to meet with its Scientific Advisory Board and other clinical consultants
periodically to share ideas regarding the marketplace, existing products,
products under development, and existing or proposed research projects.
The effective and rapid training of surgical teams in the use of
Heartport's systems and devices is critical to the Company's efforts to
develop its business. To that end, in October, 1996 the Company acquired
substantially all of the assets of Utah Biomedical Test Laboratory ("UBTL").
UBTL's Salt Lake City facility was established in the early 1970s to be the
home of the United States government's artificial heart program. This 50,000
square foot facility, now called the Heartport Research and Training Center
("HRTC"), is currently in the process of being converted into a
state-of-the-art cardiovascular research and training center. Surgical teams
began training at HRTC in January, 1997. In addition, the Company has a
relationship with Assist Medical near Uppsala, Sweden where it trains
European surgical teams. The Company also plans to work with selected cardiac
surgery centers to enhance the Company's technology and broaden its
applicability to treat CAD, VHD, and other cardiovascular diseases. In
addition, the Company intends to support rigorous, clinically driven research
efforts to prove the efficacy and benefits of Port-Access minimally invasive
cardiac surgery. Finally, the Company anticipates there will be presentations
on Port-Access procedures by investigators at national and international
meetings and the publication of scholarly reports in peer-reviewed
publications.
COMPETITION
The Company expects that the market for minimally invasive cardiac
surgery, which is currently in the early stages of development, will become
intensely competitive. Competitors are likely to include a variety of
different companies that currently specialize in devices for conventional
cardiac surgery, as well as those that specialize in non-cardiac minimally
invasive surgery. The Company believes that a number of large companies,
including the Ethicon Endosurgery division of Johnson & Johnson, United
States Surgical Corporation, Medtronic, Inc., Baxter International, Genzyme
Corporation, Guidant Corporation and others with significantly greater
financial, manufacturing, marketing, distribution, and technical resources
and experience than the Company, may be focusing on the development of
minimally invasive cardiac surgery technology. In addition, new companies
have been and are likely to continue to be started to pursue opportunities in
this market. Several companies have announced interest in and development of
products for the minimally invasive cardiac surgery field. For example, there
are companies
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pursuing minimally invasive cardiac surgery on a beating heart, which, if
successful, could materially adversely affect the Company's ability to
establish a market for its technology.
Cardiovascular diseases that can be treated with the Company's
Port-Access systems can also be treated by pharmaceuticals or other medical
devices and procedures, including PTCA, intravascular stents, atherectomy
catheters and lasers. Many of these alternative treatments are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for heart disease such
as drugs or future innovations in cardiac surgery techniques could make such
other therapies more effective or lower in cost than the Company's
Port-Access procedures and could render the Company's technology obsolete.
There can be no assurance that physicians will use Port-Access procedures to
replace or supplement established treatments, such as conventional open-chest
heart surgery and PTCA, or that the Company's Port-Access systems will be
competitive with current or future technologies. Such competition could have
a material adverse effect on the Company's business, financial condition, and
results of operations. Any product developed by the Company that gains
regulatory approval will have to compete for market acceptance and market
share. An important factor in such competition may be the timing of market
introduction of competitive products. Accordingly, the relative speed with
which the Company can develop products, complete clinical testing and
regulatory approval processes, train physicians in the use of its products,
gain reimbursement acceptance, and supply commercial quantities of the
product to the market are expected to be important competitive factors. In
addition, the Company believes that the primary competitive factors in the
market for Port-Access systems will be safety, efficacy, ease of use, quality
and reliability, cost-effectiveness, training support, innovation, breadth of
product line, and price. The Company also believes that physician
relationships and customer support are important competitive factors. The
Company has experienced delays in completing the development and introduction
of new products, product variations and product features, and there can be no
assurance that such delays will not continue or recur in the future. Such
delays could result in a loss of market acceptance and market share. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors. Failure to do so would have a
material adverse effect upon the Company's business, financial condition, and
results of operations. See "Risk Factors--Significant Competition; Rapid
Technological Change."
GOVERNMENT REGULATION
UNITED STATES
The Company's Port-Access systems are regulated in the United States as
medical devices. As such, the Company is subject to extensive regulation by
the FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act of 1938, 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, a recommendation by the FDA that
the Company not be permitted to enter into government contracts 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 one of three
classes, Class I, II, or III, on the basis of the controls deemed by the FDA
to be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, premarket
notification and adherence to GMPs). Class II devices are subject to general
controls and to special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices), and require clinical testing to
ensure safety and effectiveness and FDA approval prior to marketing and
distribution. A PMA application must be filed if the proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
Class III device for which the FDA has called for such applications.
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket notification
under Section 510(k) of the FDC Act or a PMA application under
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Section 515 of the FDC Act. A 510(k) clearance typically will be granted if
the submitted information establishes that the 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 PMAs. A 510(k)
notification must contain information to support a claim of substantial
equivalence, which may include laboratory test results or the results of
clinical studies of the device in humans. Commercial distribution of a device
for which a 510(k) 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 and is more likely
to require the submission of human clinical trial data. It generally takes
from four to twelve months from the date of submission to obtain a 510(k)
notification, 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 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 that
typically includes extensive data, including preclinical and human clinical
trial data to demonstrate the safety and efficacy of the device. A "not
substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall
into this category. See "Risk Factors--No Assurance of Regulatory Clearance
or Approval; Significant Domestic and International Regulation."
If human clinical trials of a device are required in support of either
a 510(k) notification or a PMA application, 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 IDE application with the
FDA 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 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.
A 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 application. An FDA review of a PMA
application generally takes one to three years from the date the PMA
application is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the
submission. During the review period, an advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the
advisory panel. Toward the end of the PMA application review process, the FDA
generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with the 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" containing a number of conditions which must
be met in order to secure final approval of the PMA application. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the
agency will issue a PMA, authorizing commercial marketing of the device for
certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will deny 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 the
PMA could be delayed for several years while additional clinical trials are
conducted and submitted in an amendment to the PMA application. The PMA
process can be
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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.
Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA application, or a PMA application supplement. New 510(k)
notifications, PMA applications, or PMA supplements often require the
submission of the same type of information required for the original
submission except that it is generally limited to that information needed to
support the proposed change from the product covered by the original
submission.
Any products manufactured or distributed by the Company pursuant to 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 that impose certain procedural and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. Toward the end of the clearance or approval
process, the FDA generally will conduct an inspection of the manufacturer's
facilities to ensure that the facilities are in compliance with the
applicable GMP requirements. The FDA has proposed changes to the GMP
regulations that would, among other things, require design controls and
maintenance of service records, which, if finalized, would likely increase
the cost of complying with GMP requirements.
Labeling and promotion activities are subject to scrutiny by the FDA
and in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
The Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. The Company is
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.
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. See "Risk Factors--No Assurance of Regulatory
Clearance or Approval; Significant Domestic and International Regulation."
INTERNATIONAL
In order for the Company to market Port-Access systems in Europe and
certain other foreign jurisdictions, the Company must obtain required
regulatory approvals and clearances and otherwise comply with extensive
regulations regarding safety and manufacturing processes and quality. These
regulations, including the requirements for approvals or clearance to market
and the time required for regulatory review, vary from country to country.
There can be no assurance that the Company will obtain regulatory approvals
in such countries or that it will not be required to incur significant costs
in obtaining or maintaining its foreign regulatory approvals. Delays in
receipt of approvals to market the Company's products, failure to receive
these approvals or future loss of previously received approvals could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval, and the
requirements may differ. In addition, there may be foreign regulatory
barriers other than premarket approval, and the FDA must approve exports of
devices that require a PMA but are not yet approved domestically. The current
rules provide that, in order to obtain FDA export approval, the Company must
provide the
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FDA with documentation from the medical device regulatory authority of the
importing country stating that the import of the device is not a violation of
that country's medical device laws.
The European Community has promulgated rules that require that medical
products receive by mid-1998 the right to affix the CE Mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. The Company received the CE
Mark in January, 1997, which allows it to sell its Port-Access CABG System
and Port-Access MVR System in member countries of the European Union.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among
other methods, filing United States and foreign patent applications related
to its technology, inventions and improvements that are important to the
development of its business. As of March 14, 1997, the Company owns 25 issued
or allowed United States patents, and owns an exclusive field of use license
on one issued United States patent and on one issued foreign patent. In
addition, as of March 14, 1997 the Company has 84 pending United States
patent applications, and has filed 37 patent applications that are currently
pending in Europe, Japan, Australia, and Canada. There can be no assurance
that the Company's issued United States patents, or any patents that may be
issued in the future, will effectively protect the Company's technology or
provide a competitive advantage. There can be no assurance that any of the
Company's patents or patent applications will not be challenged, invalidated,
or circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantially more resources than the Company
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, or sell its products either in the
United States or internationally.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting, or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology,
or that the Company can meaningfully protect its rights in unpatented
proprietary technology.
Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period after filing. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries
and the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could divert the Company's technical and management personnel. The Company
may be involved in litigation to defend against claims of infringement by
other patent holders, to enforce patents issued to the Company, or to protect
trade secrets of the Company. If any relevant claims of third-party patents
are upheld as valid and enforceable in any litigation or administrative
proceeding, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the
patent owners
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of each such patent, or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be available on terms acceptable to the Company or
that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. Accordingly, an adverse determination 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. The Company intends
to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company 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. See "Risk Factors--Uncertainty Regarding
Patents and Protection of Proprietary Technology; Risks of Future
Litigation."
THIRD-PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's
products will be heavily dependent on the availability of reimbursement from
third-party payors and that individuals seldom, if ever, will be willing or
able to pay directly for the costs associated with the use of the Company's
products. The Company's products typically are purchased by doctors, clinics,
hospitals, and other users, which bill various third-party payors, such as
governmental programs and private insurance plans, for the healthcare
services provided to their patients. Third-party payors carefully review and
increasingly challenge the prices charged for medical products and services.
Reimbursement rates from private companies vary depending on the procedure
performed, the third-party payor, the insurance plan, and other factors.
Medicare reimburses hospitals a prospectively determined fixed amount for the
costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians a prospectively determined
fixed amount based on the procedure performed, regardless of the actual costs
incurred by the hospital or physician in furnishing the care and unrelated to
the specific devices used in that procedure. Medicare and other third-party
payors are increasingly scrutinizing the level of reimbursement for covered
products and whether to cover new products at all.
In foreign markets, reimbursement is obtained from a variety of
sources, including governmental authorities, private health insurance plans,
and labor unions. In most foreign countries, there are also private insurance
systems that may offer payments for alternative therapies. Although not as
prevalent as in the United States, health maintenance organizations are
emerging in certain European countries. The Company may need to seek
international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner or at all.
Failure to receive international reimbursement approvals could have an
adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
The Company believes that reimbursement in the future will be subject
to increased restrictions such as those described above, both in the United
States and in foreign markets. The Company believes that the overall
escalating cost of medical products and services has led to and will continue
to lead to increased pressures on the health care industry, both foreign and
domestic, to reduce the cost of products and services, including products
offered by the Company. There can be no assurance as to either United States
or foreign markets that third-party reimbursement and coverage will be
available or adequate, that current reimbursement amounts will not be
decreased in the future or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely
affect the demand for the Company's products or its ability to sell its
products on a profitable basis, particularly if the Company's systems are
more expensive than competing cardiac surgery procedures. If third-party
payor coverage or reimbursement is unavailable or inadequate, the Company's
business, financial condition, and results of operations could be materially
adversely affected. See "Risk Factors--Limitations on Third-Party
Reimbursement."
EMPLOYEES
As of December 31, 1996, the Company had a total of 275 employees,
including 56 in research and development, 70 in manufacturing, 63 in clinical
affairs, 19 in regulatory affairs and quality assurance, 31 in sales and
marketing, 5 in intellectual property and 31 in finance and administration.
The Company maintains compensation, benefit, equity participation, and work
environment policies intended to assist in attracting and retaining qualified
personnel. The Company believes that the success of its business will depend,
in significant part, on its ability to attract and retain such personnel.
None of the Company's employees is represented by a collective
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bargaining agreement, nor has the Company experienced any work stoppage. The
Company considers its relations with its employees to be good.
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may
differ materially from those discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
the following:
EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY
The Company's EndoCPB System, Port-Access CABG System, and Port-Access MVR
System and related devices are at an early stage of clinical utilization, and
there can be no assurance as to their clinical safety and efficacy. As of
March 21, 1997, to the Company's knowledge, clinicians have completed only
211 Port-Access CABG procedures and only 176 Port-Access MVR procedures using
Heartport's systems and devices. Port-Access minimally invasive cardiac
surgery has many of the risks of open-chest heart surgery, including bleeding
from the wound or internal organs, irregular heartbeat, formation of blood
clots and related complications, infection, heart attack, heart failure,
stroke, and death. Port-Access minimally invasive cardiac surgery also has
additional risks compared to open-chest surgery, including tearing or
splitting of major blood vessels, damage to blood vessels in the groin, and
groin pain. Although there can be no assurance in this regard, the Company
believes, based on the limited clinical experience to date, that mortality
and morbidity rates associated with Port-Access surgical procedures should be
comparable to mortality and morbidity rates experienced with conventional
open-chest procedures. If, with further experience, any of the Company's
systems do not prove to be safe and effective or if the Company is otherwise
unable to commercialize them successfully, the Company's business, financial
condition, and results of operations will be materially adversely affected
and the Company's business could cease.
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that the Company's EndoCPB and Port-Access
systems will gain any significant degree of market acceptance among
physicians, patients, and health care payors, even if necessary regulatory
and reimbursement clearances and approvals are obtained. The Company believes
that physicians' acceptance and healthcare payors' reimbursement of
Port-Access procedures will be essential for market acceptance of its
systems, and there can be no assurance that any such recommendations or
approvals will be obtained. Physicians will not recommend Port-Access
procedures unless they conclude, based on clinical data and other factors,
that Port-Access procedures are an attractive alternative to other treatments
for cardiovascular disease. Most patients with cardiovascular disease first
consult with a cardiologist, who may treat the patient with pharmaceuticals
or non-surgical interventions such as percutaneous transluminal coronary
angioplasty ("PTCA") and intravascular stents, or may refer the patient to a
cardiac surgeon for open-chest CABG surgery. Cardiologists may not recommend
Port-Access procedures until such time, if any, as Port-Access CABG can be
successfully demonstrated to be as safe and cost-effective as other accepted
treatments. In addition, cardiac surgeons may elect not to recommend
Port-Access procedures until such time, if any, as the efficacy of the
Company's Port-Access procedures can be successfully demonstrated as compared
to conventional, open-chest surgery methods, which have become widely adopted
by cardiac surgeons since the initial use of such surgery in the mid-1950s.
Even if the clinical efficacy of Port-Access procedures is established,
cardiologists, cardiac surgeons, and other physicians may elect not to
recommend the procedures for any number of other reasons. Failure of the
Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Results of operations may vary significantly from quarter to quarter
depending upon numerous factors, including the following: demand for the
Company's products; the number of cardiac surgery teams trained in the use
of the Company's systems; the number of hospitals that begin using the
Company's products; the ability of the
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Company to manufacture, test and deliver its products in commercial volumes;
health care reform and reimbursement policies; delays associated with the FDA
and other regulatory approval processes; changes in pricing policies by the
Company or its competitors; the number, timing, and significance of product
enhancements and new product announcements by the Company and its
competitors; the ability of the Company to develop, introduce, and market new
and enhanced versions of the Company's products on a timely basis; customer
order deferrals in anticipation of enhancements or new products offered by
the Company or its competitors; product quality problems; personnel changes;
and the level of international sales. In addition, the Company has begun to
develop both a domestic and an international direct sales force. The timing
of such development and the rate at which new sales people become productive
could also cause material fluctuations in the Company's quarterly operating
results.
Operating results have been and will continue to be difficult to
forecast. Future revenue, if any, is also difficult to forecast because the
market for minimally invasive cardiac surgery systems is rapidly evolving,
and due to the inherent risks associated with new medical device technology.
Accordingly, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied
upon as indications of future performance. Failure by the Company, for any
reason, to achieve additional regulatory approvals and to begin to generate
and increase revenue from sales of its products would have a material adverse
effect on the Company's business, operating results, and financial condition.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and "Research and Development," "Manufacturing," "Competition,"
"Government Regulation," and "Third-Party Reimbursement."
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; EXTENSIVE TRAINING REQUIREMENTS
Use of the Company's EndoCPB System, Port-Access CABG System, and
Port-Access MVR System to date has shown that, as with any novel surgical
procedure, there is a significant learning process involved for surgeons and
other members of the cardiac surgery team to become proficient. In addition,
certain patients requiring heart surgery cannot be treated with the present
Port-Access systems, depending upon what kind of condition they have and how
severe it is. These patients include people with severe peripheral vascular
disease (arteriosclerosis), a poorly functioning aortic valve, an enlarged
heart, or certain types of chest scarring. Broad use of the Company's systems
will require extensive training of numerous physicians, and the time required
to begin and complete such training could adversely affect market acceptance.
Although the Company has begun to train physicians at its Salt Lake City,
Utah facility and at its contract facility near Uppsala, Sweden, there can be
no assurance that the Company will be able to rapidly train physicians in
numbers sufficient to generate adequate demand for the Company's products and
systems. Any delay in training would have a material adverse effect on the
demand for the Company's products and systems and, therefore, a material
adverse effect on its business, financial condition, and results of
operations.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
To meet anticipated demand, the Company must increase the rate by which
it manufactures its products. To date, the Company's manufacturing activities
have consisted primarily of manufacturing limited quantities of products for
use in laboratory testing, clinical trials and initial low-volume commercial
sales. The manufacture of the Company's products is complex, involving a
number of separate processes and components. The Company does not have
experience in manufacturing its products in commercial quantities. Although
the Company is scaling up its capability to produce products in volume to
support its commercial launch, there can be no assurance that it will be able
to make the transition to commercial production successfully. In addition,
the Company believes that cost reductions in its manufacturing operations
will be required for it to commercialize its systems on a profitable basis.
Certain manufacturing processes are labor-intensive, and achieving
significant cost reductions will depend, in part, upon reducing the time
required to complete these processes. Manufacturers often encounter
difficulties in scaling up manufacturing of new products, including problems
involving product yields, quality control and assurance, component and
service availability, adequacy of control policies and procedures, lack of
qualified personnel,
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compliance with FDA regulations, and the need for further FDA approval of new
manufacturing processes and facilities. The Company has considered and will
continue to consider as appropriate the internal manufacture of components
currently provided by third parties, as well as the implementation of new
production processes. There can be no assurance that manufacturing yields or
costs will not be adversely affected by the transition to in-house production
or to new production processes when such efforts are undertaken, or that FDA
GMP requirements can be met, and that such a transition would not materially
and adversely affect the Company's business, financial condition, and results
of operations. See "Manufacturing."
The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition,
and results of operations.
The Company manufactures its products based on forecasted product
orders, and purchases subassemblies and components prior to receipt of
purchase orders from customers. Lead times for materials and components
ordered by the Company vary significantly, and depend on factors such as the
business practices of the specific supplier, contract terms, and general
demand for a component at a given time. Certain components used in the
Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
The Company expects that the market for minimally invasive cardiac
surgery, which is currently in the early stages of development, will be
intensely competitive. Competitors are likely to include a variety of
different companies that currently specialize in devices for conventional
cardiac surgery, as well as those that specialize in non-cardiac minimally
invasive surgery. The Company believes that a number of large companies,
including the Ethicon Endosurgery division of Johnson & Johnson, United
States Surgical Corporation, Medtronic, Inc., Baxter International, Genzyme
Corporation, Guidant Corporation and others with significantly greater
financial, manufacturing, marketing, distribution, and technical resources
and experience than the Company, may be focusing on the development of
minimally invasive cardiac surgery technology. In addition, new companies
have been and will continue to be started to pursue opportunities in this
market. Several companies have announced interest in and development of
products for the minimally invasive cardiac surgery field. For example, there
are companies pursuing minimally invasive cardiac surgery on a beating heart,
which, if successful, could materially adversely affect the Company's ability
to establish a market for its technology.
Cardiovascular diseases that can be treated with the Company's
Port-Access systems can also be treated by pharmaceuticals or other medical
devices and procedures including PTCA, intravascular stents, atherectomy
catheters and lasers. Many of these alternative treatments are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for heart disease such
as drugs or future innovations in cardiac surgery techniques could make such
other therapies more effective or lower in cost than the Company's
Port-Access procedures and could render the Company's technology obsolete.
There can be no assurance that physicians will use Port-Access procedures to
replace or supplement established treatments, such as conventional open-chest
heart surgery, PTCA, or intravascular stents, or that the Company's
Port-Access systems will be competitive with current or future technologies.
Such competition could have a material adverse effect on the Company's
business, financial condition, and results of operations. Any product
developed by the Company that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speeds with which the Company can develop
products, complete clinical testing and regulatory approval processes, train
physicians in the use of its products, gain reimbursement acceptance, and
supply commercial quantities of the product to the market are expected to be
important competitive factors. The Company has experienced delays in
completing the development and introduction of new products, product
variations and product features, and there can be no assurance that such
delays will not continue or recur in the future. Such delays could result in
a loss of market acceptance and market share. There can be no assurance that
the Company will be able to
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compete successfully against current and future competitors. Failure to do so
would have a material adverse effect upon the Company's business, financial
condition, and results of operations. See "Competition."
SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS
Since its inception in May, 1991, the Company has been engaged in the
research and development of minimally invasive cardiac surgery systems and
related technology. The Company only recently began to generate revenue from
the sale of products and has been unprofitable since inception. For the
period from inception to December 31, 1996, the Company has incurred
cumulative net losses of approximately $50.6 million. For at least the next
year, the Company expects to continue to incur substantial and increasing
losses. Furthermore, the Company expects its expenses to increase as its
product commercialization and other business activities expand. There can be
no assurance that the Company will achieve or sustain profitability in the
future. Failure to achieve significant commercial revenues or profitability
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
The Company believes that it may require additional financing. The
Company's future liquidity and capital requirements will depend upon numerous
factors, including the following: the extent to which the Company's products
gain market acceptance; the timing and costs of product introductions; the
extent of the Company's ongoing research and development programs; the costs
of training physicians to become proficient in the use of the Company's
products and procedures; the costs of expanding manufacturing capacity; the
costs of developing marketing and distribution capabilities; the progress and
scope of clinical trails required for any future products; the timing and
costs of filing future regulatory submissions; the timing and costs required
to receive both domestic and international governmental approvals for any
future products; and the costs of protecting and defending its intellectual
property. Issuance of additional equity securities could result in dilution
to stockholders. There can be no assurance that additional financing will be
available on terms acceptable to the Company, or at all. The Company's
inability to fund its capital requirements would have a material adverse
effect on the Company's business, financial condition, and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS
OF FUTURE LITIGATION
The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among
other methods, filing United States and foreign patent applications related
to its technology, inventions, and improvements that are important to the
development of its business. As of March 14, 1997, the Company owns 25 issued
or allowed United States patents, and owns an exclusive field of use license
on one issued United States patent and on one issued foreign patent. In
addition, as of March 14, 1997, the Company has 84 pending United States
patent applications and has filed 37 patent applications that are currently
pending in Europe, Japan, Australia, and Canada. There can be no assurance
that the Company's issued United States patents, or any patents that may be
issued in the future, will effectively protect the Company's technology or
provide a competitive advantage. There can be no assurance that any of the
Company's patents or patent applications will not be challenged, invalidated,
or circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantially more resources than the Company
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, or sell its products either in the
United States or internationally.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting, or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology,
or that the Company can meaningfully protect its rights in unpatented
proprietary technology.
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Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period after filing. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries
and the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could divert the Company's technical and management personnel. The Company
may be involved in litigation to defend against claims of infringement by
other patent holders, to enforce patents issued to the Company, or to protect
trade secrets of the Company. If any relevant claims of third-party patents
are upheld as valid and enforceable in any litigation or administrative
proceeding, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the
patent owners of each such patent, or to redesign its products or processes
to avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be available on terms acceptable to the
Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. Accordingly, an adverse
determination 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. The Company intends
to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company 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. See "Intellectual Property and Other
Proprietary Rights" and "Competition."
MANAGEMENT OF EXPANDING OPERATIONS; ACQUISITIONS
The Company has recently experienced rapid expansion of its operations,
which has placed, and is expected to continue to place, significant demands
on the Company's administrative, operational and financial personnel and
systems. In this respect, the Company hired a significant number of new
employees in the second half of 1996 and expects to continue hiring during
1997. In order to compete effectively against current and future competitors,
the Company believes that it must continue to expand its operations,
particularly in the areas of research and development, clinical affairs,
manufacturing and sales and marketing. If the Company were to experience
significant growth in the future, such growth would likely result in new and
increased responsibilities for management personnel and place significant
strain upon the Company's management, operating, and financial systems and
resources. To accommodate such growth and compete effectively, the Company
must continue to implement and improve information systems, procedures, and
controls, and to expand, train, motivate, and manage its work force. The
Company is currently in the process of implementing an integrated financial,
manufacturing, and inventory information system. Implementing such a system
can be time-consuming and expensive and requires significant management
resources. There can be no assurance that such system will be implemented on
a timely basis. Although the Company has recently hired several new members
of management, all of the foregoing demands will require additional
management personnel as well. The Company's future success will depend to a
significant extent on the ability of its current and future management
personnel to operate effectively, both independently and as a group. There
can be no assurance that the Company's personnel, systems, procedures, and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial, and
management systems or to expand, train, motivate, or manage employees could
have a material adverse effect on the Company's business, financial
condition, and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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The Company may make acquisitions in the future, and the Company
regularly evaluates such opportunities. Product and technology acquisitions
entail numerous risks, including difficulties in the assimilation of acquired
operations and products, diversion of management's attention to other
business concerns, amortization of acquired intangible assets and potential
loss of key employees of acquired companies. The Company's management has had
limited experience in assimilating acquired organizations and products into
the Company's operations. No assurance can be given as to the ability of the
Company to integrate successfully any operations, personnel or products that
might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations
and research institutions with respect to the research, development,
regulatory approval, and marketing of certain of its potential products and
procedures. The Company's future success may depend, in part, on its
relationships with third parties, including, for example, the Company's
relationship with St. Jude Medical, Inc., their strategic interest in the
potential products or procedures under development and, eventually, their
success in marketing such products or procedures or willingness to purchase
any such products. The Company anticipates that these third parties may have
the unilateral right to terminate any such relationship without significant
penalty. There can be no assurance that the Company will be successful in
establishing or maintaining any such strategic relationships in the future or
that any such relationships will be successful. See "Strategic
Relationships."
RISK OF PRODUCT LIABILITY
The Company faces an inherent and significant business risk of exposure
to product liability claims in the event that the use of its products results
in personal injury or death and there can be no assurance that the Company
will not experience any material product liability losses in the future.
Also, in the event that any of the Company's products prove to be defective,
the Company may be required to recall or redesign such products. The Company
maintains limited insurance against certain product liability claims, but
there can be no assurance that such coverage will continue to be available on
terms acceptable to the Company or that such coverage will be adequate for
any liabilities actually incurred. A successful claim brought against the
Company in excess of available insurance coverage, or any claim or product
recall that results in significant adverse publicity against the Company, may
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 limited sales and marketing organization in
the United States and Europe. The Company plans to market its approved
systems through a direct sales force in the United States and through a
combination of direct and indirect sales channels internationally.
Establishment of a sales force capable of effectively commercializing the
Company's EndoCPB and Port-Access systems will require substantial efforts
and require significant management and financial resources. There can be no
assurance that the Company will be able to establish such a sales capability
on a timely basis, or at all. See "Sales, Marketing, Training, and
Distribution."
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in
significant part upon the continued contributions of its key technical and
senior management personnel, many of whom would be difficult to replace and
certain of whom perform important functions for the Company beyond those
functions suggested by their respective job titles or descriptions. The
Company's business and future operating results also depend in significant
part upon its ability to attract and retain qualified management,
manufacturing, technical, marketing, and sales and support personnel for its
operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of any key employee, the failure of any key employee to
perform in his or her current position, or the Company's inability to attract
and retain skilled employees, as needed, could materially adversely affect
the Company's business, financial condition, and results of operations.
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NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC AND
INTERNATIONAL REGULATION
The Company's individual devices are subject to regulatory clearances
or approvals by the FDA. The Company believes that most of its devices and
systems will be subject to United States regulatory clearance through the
510(k) premarket notification process rather than a more extensive pre-market
approval ("PMA") submission. Although the Company has received clearance from
the FDA to market the EndoCPB System in the United States, securing FDA
approvals and clearances for additional Port-Access devices and other
products under development by the Company will require submission to the FDA
of extensive technical information and may require submission of extensive
clinical data. There can be no assurance that the FDA will act favorably or
quickly on the Company's 510(k) or other 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 marketing
and selling its products in the United States. Furthermore, there can be no
assurance that the FDA will not request additional data, require that the
Company conduct further clinical studies, or require a more extensive PMA
submission, causing the Company to incur substantial costs and delays. The
Company's business, financial condition, and results of operations are
critically dependent upon FDA clearance or approval of the Company's systems.
Failure to obtain such clearance or approval, or to obtain such clearance or
approval on a timely basis, would have a material adverse effect on the
Company's business, financial condition, and results of operations, and could
result in postponement of the commercialization of the Company's products or
even cessation of the Company's business in the United States.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In addition, if the FDA were to require a PMA
submission for any of the Company's products, the Company would be required
to obtain FDA approval to export such devices and systems to international
markets prior to their approval by the FDA for commercialization in the
United States. Although the Company has received approval to market the
EndoCPB System in Europe, securing approvals for additional Port-Access
devices and other products under development by the Company will require
additional approvals and there can be no assurance that such approvals will
be received on a timely basis, or at all. Most other countries in which the
Company intends to operate either do not currently regulate medical systems
or have minimal regulatory requirements, although these countries may adopt
more extensive regulations in the future that could impact the Company's
ability to market its systems. In addition, significant costs and requests
for additional information may be encountered by the Company in its efforts
to obtain regulatory approvals. Any such events could substantially delay or
preclude the Company from marketing its systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must
comply. Product approvals can be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following
initial marketing. The Company will also be required to adhere to applicable
FDA regulations setting forth current Good Manufacturing Practices ("GMP")
requirements, which include testing, control, and documentation requirements.
Ongoing compliance with GMP and other applicable regulatory requirements is
monitored through periodic inspections by state and federal agencies,
including the FDA, and by comparable agencies in other countries. Failure to
comply with applicable regulatory requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, denial or withdrawal of premarket clearance or
premarket approval for devices, and criminal prosecution. Furthermore,
changes in existing regulations or adoption of new regulations or policies
could delay or even prevent the Company from obtaining future regulatory
approvals or clearances. For example, the FDA is currently considering major
revisions to its GMP regulations. Such revisions could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Government Regulation."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's
products will be heavily dependent on the availability of reimbursement from
third-party payors and that individuals seldom, if ever, will be willing or
able to pay directly for the costs associated with the use of the Company's
products. The Company expects that its products typically will be purchased
by doctors, clinics, hospitals, and other users, which bill various
third-party payors, such as governmental programs and private insurance
plans, for the healthcare services provided to their
22
<PAGE>
patients. Third-party payors carefully review and increasingly challenge the
prices charged for medical products and services. Reimbursement rates from
private companies vary depending on the procedure performed, the third-party
payor, the insurance plan, and other factors. Medicare reimburses hospitals
a prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians a prospectively determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital
or physician in furnishing the care and unrelated to the specific devices
used in that procedure. Medicare and other third-party payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
In foreign markets, reimbursement is obtained from a variety of
sources, including governmental authorities, private health insurance plans,
and labor unions. In most foreign countries, there are also private insurance
systems that may offer payments for alternative therapies. Although not as
prevalent as in the United States, health maintenance organizations are
emerging in certain European countries. The Company may need to seek
international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner or at all.
Failure to receive international reimbursement approvals could have an
adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.
The Company believes that reimbursement in the future will be subject
to increased restrictions such as those described above, both in the United
States and in foreign markets. The Company believes that the overall
escalating cost of medical products and services has led to and will continue
to lead to increased pressures on the health care industry, both foreign and
domestic, to reduce the cost of products and services, including products
offered by the Company. There can be no assurance as to either United States
or foreign markets that third-party reimbursement and coverage will be
available or adequate, that current reimbursement amounts will not be
decreased in the future or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely
affect the demand for the Company's products or its ability to sell its
products on a profitable basis, particularly if the Company's systems are
more expensive than competing cardiac surgery procedures. If third-party
payor coverage or reimbursement is unavailable or inadequate, the Company's
business, financial condition, and results of operations could be materially
adversely affected. See "Third-Party Reimbursement."
VOLATILITY OF STOCK PRICE
The Company's stock price has been, and is likely to continue to be,
highly volatile. The market price of the Company's Common Stock has
fluctuated substantially in recent periods, rising from $21.00 at the
Company's initial public offering on April 25, 1996, to a high of $43.75 on
May 15, 1996, and to a low of $18.375 on July 16, 1996. On March 14, 1997
the price of the Company's Common Stock was $27.25. The market price of the
shares of Common Stock may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results,
announcements of technological innovations, new products or new contracts by
the Company or its competitors, developments with respect to patents or
proprietary rights, conditions and trends in the medical device and other
technology industries, adoption of new accounting standards affecting the
medical device industry, changes in financial estimates by securities
analysts, general market conditions, and other factors. In addition, the
stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of early stage companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock, and there
can be no assurance that the market price of the Common Stock will not
decline below the public offering price. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that
company. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
The present directors, executive officers, and principal stockholders
of the Company and their affiliates beneficially own approximately 51.6% of
the outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.
23
<PAGE>
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RIGHTS PLAN,
CERTIFICATE OF INCORPORATION, BYLAWS, AND DELAWARE LAW
The Company's Board of Directors has the authority to issue up to
20,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting and conversion
rights of such shares, without any further vote or action by the Company's
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. Other than the
Series A Preferred Stock issuable under the stockholder rights plan, the
Company has no current plans to issue shares of Preferred Stock. In addition,
the Company's Certificate of Incorporation provides for a classified Board of
Directors such that approximately only one-third of the members of the Board
are elected at each annual meeting of stockholders. Classified Boards may
have the effect of delaying, deferring, or discouraging changes in control of
the Company. Further, the Company has adopted a stockholder rights plan that,
in conjunction with certain provisions of the Company's Certificate of
Incorporation and Bylaws and of Delaware law, could delay or make more
difficult a merger, tender offer, or proxy contest involving the Company.
ITEM 2.PROPERTIES.
The Company's principal administrative, sales, manufacturing, and
research and development facility occupies approximately 70,000 square feet
in three adjacent buildings in an office park in Redwood City, California,
pursuant to leases which expire between April, 1999 and July, 1999. The
Company is currently negotiating for approximately an additional 15,000
square feet of manufacturing and office space in another building in the same
office park. The Company believes its facilities will be adequate through
the end of 1997, but the Company will need additional space thereafter. The
Heartport Research and Training Center occupies approximately 50,000 square
feet in Salt Lake City, Utah. The initial term of the lease on this facility
expires in December, 2001.
ITEM 3.LEGAL PROCEEDINGS.
None.
PART II
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
24
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has traded publicly on the Nasdaq National
Market under the symbol "HPRT" since April 25, 1996. The Company's initial
public offering price was $21.00 per share. The following table sets forth,
for the periods indicated, the high and low closing sale prices for the
Company's Common Stock as reported by the Nasdaq National Market.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1996:
Second Quarter (from April 26, 1996, the first
trading date)..................................... $41.00 $26.875
Third Quarter....................................... 30.25 21.250
Fourth Quarter...................................... 36.50 22.875
YEAR ENDED DECEMBER 31, 1997:
First Quarter (through March 14, 1997).............. 32.69 21.375
On March 14, 1997, the last sale price of the Company's Common Stock as
reported by the Nasdaq National Market was $27.25 per share. There were
approximately 328 holders of record of the Company's Common Stock as of March
14, 1997. See "Risk Factors--Volatility of Stock Price."
The Company has never declared or paid cash dividends on its Common
Stock and currently does not anticipate paying cash dividends in the
foreseeable future. In addition, the Company's debt facility restricts the
ability to pay cash dividends.
25
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Company's financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The statement of operations data for
the three years in the period ended December 31, 1996, and the balance sheet
data at December 31, 1995 and 1996 are derived from the audited financial
statements included elsewhere herein. The statement of operations data for
the period from May 17, 1991 (inception) to December 31, 1992 and for the
year ended December 31, 1993, and the balance sheet data at December 31,
1992, 1993 and 1994 are derived from audited financial statements not
included herein.
<TABLE>
<CAPTION>
PERIOD FROM
1996 1995 1994 1993 MAY 17, 1991
---- ---- ---- ---- (INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31, 1992
------------------------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 624 $ -- $ -- $ -- $ --
Cost of goods sold............... 561 -- -- -- --
-------- ------- ------- ------- -----
Gross profit 63 -- -- -- --
Operating expenses:
Research and development....... 21,059 8,477 4,207 1,493 428
Selling, general and
administrative............... 11,223 1,229 734 364 210
Patent acquisition............... 5,216 -- -- -- --
-------- ------- ------- ------- -----
Loss from operations............. (37,435) (9,706) (4,941) (1,857) (638)
Interest income.................. 3,973 542 120 58 66
Interest expense................. (592) (189) -- -- --
-------- ------- ------- ------- -----
Net loss $(34,054) $(9,353) $(4,821) $(1,799) $(572)
-------- ------- ------- ------- -----
Pro forma net loss per share(1).. $ (1.50) $ (.47)
-------- ------- ------- -----
Shares used in calculation
of proforma net loss per
share(1)...................... 22,771 19,782
-------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................... $ 94,226 $ 12,692 $ 1,721 $ 696 $2,447
Working capital.................. 87,561 11,234 1,089 505 237
Total assets..................... 101,852 14,266 2,621 983 2,600
Long-term obligations, less
current portion............... 4,717 4,034 61 10 5
Accumulated deficit.............. (50,599) (16,545) (7,192) (2,371) (572)
Total stockholders' equity....... 90,470 8,775 1,928 781 2,517
</TABLE>
___________________
(1) Shares of Common Stock issuable upon exercise of outstanding options
and warrants are excluded from the computations as their effect is
antidilutive, except that such securities issued during the
twelve-month period prior to the Company's initial public offering
at prices below the initial public offering price have been included
in the calculation as if they were outstanding. See Note 1 of Notes to
Financial Statements.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Since its inception in May, 1991, the Company has been engaged in the
research and development of Port-Access minimally invasive cardiac surgery
systems and related technology. The Company only recently began to generate
revenue from the sale of products, and it has been unprofitable since
inception. For the period from inception to December 31, 1996, the Company
has incurred cumulative net losses of approximately $50.6 million. For at
least the next year, the Company expects to continue to incur substantial and
increasing losses. Over that period, the Company expects its expenses to
increase substantially, particularly its selling, general and administrative
expenses relating to training surgical teams and building a sales force.
The Company has hired a significant number of employees each year to
conduct and support its research and development and commercialization
activities. At December 31, 1996, 1995, and 1994, the Company had 275, 73,
and 44 employees, respectively. The Company anticipates that its workforce
will continue to grow rapidly in the next several years to support product
development, clinical affairs, manufacturing, and sales and marketing.
The research and development, manufacture, sale, and distribution of
the EndoCPB, Port-Access CABG, and Port-Access MVR systems are subject to
numerous regulations imposed by governmental authorities, principally the FDA
and corresponding state and foreign agencies. The regulatory process is
lengthy, expensive, and uncertain. Prior to commercial sale in the United
States, most medical devices must be approved or cleared by the FDA. In
October, 1996, the Company received clearance from the FDA to market the
EndoCPB System and also received pre-market notification exemptions clearing
its core reusable and disposable surgical devices to be labeled and used for
minimally invasive cardiac surgery. Securing FDA approvals and clearances for
additional Port-Access devices and other products under development by the
Company will require submission to the FDA of extensive technical information
and may require submission of extensive clinical data. There can be no
assurance that the Company will receive FDA clearance or approval of any such
additional devices or products. Many foreign governments and the European
Community also have review processes for medical devices.
There can be no assurance that the Company's research and development
efforts will be successfully completed, and there can be no assurance that
the EndoCPB, Port-Access CABG, and Port-Access MVR systems will prove to be
safe and effective. There can be no assurance that the Company's EndoCPB,
Port-Access CABG, or Port-Access MVR systems or any other product developed
by the Company will be successfully introduced or achieve market acceptance.
There can be no assurance that the Company will ever achieve significant
revenue from sales of the EndoCPB, Port-Access CABG, or Port-Access MVR
systems or any other potential products or will ever achieve profitability.
The foregoing and the discussion appearing elsewhere in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
RESULTS OF OPERATIONS
NET SALES. Net sales consist of initial sales of the Company's
EndoCPB, Port-Access CABG and Port-Access MVR systems. The Company
recognizes revenue upon product shipment. In 1996, net sales were $624,000,
all of which was recognized in the fourth quarter.
COST OF GOODS SOLD. Cost of goods sold of $561,000 in 1996 consisted
primarily of material, labor and overhead costs associated with
manufacturing the Company's EndoCPB, Port-Access CABG, and Port-Access MVR
systems sold.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel costs, consulting fees and other costs in
support of product development, clinical trials, physician training, and
27
<PAGE>
regulatory submissions, as well as costs incurred in producing products for
research and development activities, physician training, and clinical trials,
and the cost of prosecuting United States and foreign patent applications
relating to the Company's technology. Research and development expenses
increased to $21.1 million in 1996 from $8.5 million in 1995 and $4.2 million
in 1994. The increase in all periods was primarily attributable to the hiring
of additional personnel required to support expanded clinical trials,
physician training, and product development activities, and to the cost of
producing products for physician training and research and development
activities. The Company anticipates that it will continue to devote
substantial resources to research and development. However, the Company
anticipates that research and development expenses will remain flat in 1997
as start-up costs for manufacturing and physician training incurred during
the Company's development phase will not recur in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of costs for administrative, sales
and marketing personnel, as well as legal, accounting and other professional
fees. Selling, general and administrative expenses increased to $11.2 million
in 1996 from $1.2 million in 1995 and $734,000 in 1994. These increases were
primarily due to increased staffing and associated expenses necessary to
manage and support the Company's increased scale of operations and to prepare
for commercialization of certain products. The Company believes that its
selling, general and administrative expenses will continue to increase
substantially as it expands its physician training activities, builds its
sales force, marketing staff and administrative staff, and incurs other costs
in connection with commercialization of its products and the support of its
growing operations.
PATENT ACQUISITION EXPENSE. Patent acquisition expense of $5.2 million
consists of the cost to acquire a United States patent, several pending U.S.
patent applications, and related rights from Endosurgical Development
Corporation in July, 1996 for consideration consisting of shares of Common
Stock and cash.
INTEREST INCOME. Interest income primarily represents interest earned
by the Company on its cash and short-term investments. Interest income
increased to $4.0 million in 1996 from $542,000 in 1995 and $120,000 in 1994.
The increase in each period was primarily due to the Company's higher average
investment balances resulting from cash received in venture capital
financings in 1995 and the Company's initial public offering in 1996.
INTEREST EXPENSE. Interest expense represents interest on long-term
debt. Interest expense increased to $592,000 in 1996 from $189,000 in 1995.
INCOME TAXES. The Company has not generated any net income to date and
therefore has not paid any federal income taxes since its inception. The
provision for income taxes consists solely of state minimum taxes.
Realization of deferred tax assets is dependent on future earnings, if
any, the amount and timing of which are uncertain. Accordingly, a valuation
allowance has been established in an amount equal to the net deferred tax
assets of the Company to reflect these uncertainties.
At December 31, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $43.0 million for federal and $39.0
million for state, which will expire at various dates through 2011, if not
utilized. The principal differences between financial reporting losses and
losses for tax purposes are the result of capitalizing research and
development expenses and start-up costs for tax purposes. The Company also
has research and development credits available to reduce future federal and
state income taxes, if any, of approximately $550,000 and $500,000,
respectively. The Tax Reform Act of 1986 and state tax statutes contain
provisions that may limit the net operating loss carryforwards and research
and development credits available for use in any given year should certain
events occur, including additional sales of equity securities and other
changes in ownership. Such events could limit the eventual utilization of
these carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations and investments
in property and equipment primarily through the private sale of preferred
stock, totaling approximately $25.1 million, and through an initial public
offering of Common Stock in April, 1996, totaling approximately $110.8
million. The Company also has a $15.0 million debt facility with a commercial
bank. No amount was outstanding under this facility at December 31, 1996.
28
<PAGE>
Net cash used in operating activities was approximately $27.5 million,
$8.3 million, and $4.5 million in 1996, 1995, and 1994, respectively. For
such periods, net cash used in operating activities resulted primarily from
increasing net losses. Net cash used in investing activities was
approximately $58.3 million, $5.1 million, and $1.9 million in 1996, 1995,
and 1994, respectively. The net cash used in investing activities was
primarily attributable to the purchase of short-term investments and the
purchase of property and equipment. Net cash provided by financing activities
was approximately $111.9 million, $20.4 million, and $6.0 million in 1996,
1995, and 1994, respectively. The net cash provided in 1996 was primarily
attributable to the initial public offering of Common Stock and the net cash
provided in 1995 and 1994 was primarily attributable to the sale of preferred
stock and proceeds from long-term borrowings.
Capital expenditures for equipment and leasehold improvements to
support the Company's expanded operations were approximately $6.1 million,
$875,000, and $703,000 in 1996, 1995, and 1994, respectively. The Company
expects that its capital expenditures will continue to grow as the Company's
employee base and manufacturing operations expand. In addition, the Company
presently plans to spend approximately $5.0 million in 1997 renovating the
Heartport Research and Training Center, which was acquired in October 1996.
At December 31, 1996, the Company had approximately $89.9 million in cash,
cash equivalents, and short-term investments and approximately $87.6 million
in working capital.
The Company expects to continue to incur substantial expense to fund
additional research and development activities, clinical affairs, physician
training, manufacturing expansion, the expansion of its sales and marketing
organization, full-scale market launch of its Port-Access CABG and
Port-Access MVR systems in 1997, and ongoing administrative activities. The
Company believes that its existing cash, cash equivalents, and short-term
investments and borrowings available under its debt facility will be adequate
to meet its cash needs at least through 1997. Thereafter, the Company may
require additional funds to support its operating requirements or for other
purposes and may seek to raise such additional funds through public or
private equity financings or from other sources. There can be no assurance
that additional financing will be available at all or that, if available,
such financing would be obtainable on terms favorable to the Company and
would not be dilutive.
29
<PAGE>
HEARTPORT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Heartport, Inc.
We have audited the accompanying consolidated balance sheets of Heartport, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(d). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 financial position of Heartport, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 24, 1997
F-2
<PAGE>
HEARTPORT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................................... $ 33,445 $ 7,412
Short-term investments............................................................................ 56,407 5,198
Accounts receivable, net of allowance for doubtful accounts of $33 in 1996........................ 550 --
Inventories....................................................................................... 2,107 --
Prepaid expenses and other........................................................................ 1,717 82
------------- -------------
Total current assets................................................................................ 94,226 12,692
Property and equipment:
Equipment......................................................................................... 4,908 1,389
Furniture and fixtures............................................................................ 1,372 262
Leasehold improvements............................................................................ 1,699 224
------------- -------------
7,979 1,875
Accumulated depreciation and amortization......................................................... 1,584 507
------------- -------------
6,395 1,368
Deposits, intangibles and other assets, net......................................................... 1,231 206
------------- -------------
Total assets........................................................................................ $ 101,852 $ 14,266
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................................. $ 4,570 $ 812
Accrued compensation and related benefits......................................................... 1,433 173
Accrued clinical trial costs...................................................................... -- 79
Current portion of long-term debt................................................................. 662 394
------------- -------------
Total current liabilities........................................................................... 6,665 1,458
Noncurrent liabilities:
Long-term debt, less current portion.............................................................. 1,334 3,913
Other long-term liabilities....................................................................... 383 120
Deferred royalty income........................................................................... 3,000 --
------------- -------------
Total noncurrent liabilities........................................................................ 4,717 4,033
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value, issuable in series, 10,240 shares authorized
Issued and outstanding shares -- none in 1996, and 9,237 in 1995................................ -- 9
Preferred stock, $0.001 par value; 20,000 shares authorized, none issued and outstanding.......... -- --
Common stock, $0.001 par value:
Authorized shares -- 100,000
Issued and outstanding shares -- 24,415 in 1996, and 9,084 in 1995.............................. 24 9
Additional paid-in capital........................................................................ 142,018 26,395
Notes receivable from stockholders................................................................ (973) (1,093)
Accumulated deficit............................................................................... (50,599) (16,545)
------------- -------------
Total stockholders' equity.......................................................................... 90,470 8,775
------------- -------------
Total liabilities and stockholders' equity.......................................................... $ 101,852 $ 14,266
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Net sales................................................................................. $ 624 $ -- $ --
Cost of goods sold........................................................................ 561 -- --
----------- ----------- ------------
Gross profit.............................................................................. 63 -- --
Operating expenses:
Research and development................................................................ 21,059 8,477 4,207
Selling, general and administrative..................................................... 11,223 1,229 734
Patent acquisition...................................................................... 5,216 -- --
----------- ----------- ------------
Loss from operations...................................................................... (37,435) (9,706) (4,941)
Interest income........................................................................... 3,973 542 120
Interest expense.......................................................................... (592) (189) --
----------- ----------- ------------
Net loss.................................................................................. $ (34,054) $ (9,353) $ (4,821)
----------- ----------- ------------
----------- ----------- ------------
Pro forma net loss per share.............................................................. $ (1.50) $ (.47)
----------- -----------
----------- -----------
Shares used in calculation of pro forma net loss per share................................ 22,771 19,782
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN NOTES ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 5,080 $ 5 6,093 $ 6 $ 3,204 $ (63) $ (2,371)
Issuances of convertible
preferred stock............. 1,591 2 -- -- 5,947 -- --
Issuances of common stock..... -- -- 187 -- 15 (11) --
Exercises of common stock
options..................... -- -- 62 -- 11 (9) --
Payments of stockholders'
notes receivable............ -- -- -- -- -- 15 --
Repurchases of common stock... -- -- (383) -- (26) 24 --
Net loss...................... -- -- -- -- -- -- (4,821)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1994.... 6,671 7 5,959 6 9,151 (44) (7,192)
Issuances of convertible
preferred stock............. 2,566 2 -- -- 15,982 -- --
Issuances of preferred stock
warrants.................... -- -- -- -- 29 -- --
Exercises of common stock
options..................... -- -- 3,093 3 1,211 (1,049) --
Issuances of common stock..... -- -- 32 -- 22 -- --
Net loss...................... -- -- -- -- -- -- (9,353)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1995.... 9,237 9 9,084 9 26,395 (1,093) (16,545)
Conversion of convertible
preferred stock into common
stock....................... (9,237) (9) 9,237 9 -- -- --
Repurchases of common stock... -- -- (184) -- (69) 69 --
Payments of stockholders'
notes receivable............ -- -- -- -- -- 51 --
Exercises of common stock
options..................... -- -- 327 -- 67 -- --
Issuances of common stock..... -- -- 5,951 6 115,425 -- --
Issuances of warrants......... -- -- -- -- 200 -- --
Net loss...................... -- -- -- -- -- -- (34,054)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December 31, 1996.... -- $ -- 24,415 $ 24 $ 142,018 $ (973) $ (50,599)
----------- ----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1993.... $ 781
Issuances of convertible
preferred stock............. 5,949
Issuances of common stock..... 4
Exercises of common stock
options..................... 2
Payments of stockholders'
notes receivable............ 15
Repurchases of common stock... (2)
Net loss...................... (4,821)
-------------
Balance at December 31, 1994.... 1,928
Issuances of convertible
preferred stock............. 15,984
Issuances of preferred stock
warrants.................... 29
Exercises of common stock
options..................... 165
Issuances of common stock..... 22
Net loss...................... (9,353)
-------------
Balance at December 31, 1995.... 8,775
Conversion of convertible
preferred stock into common
stock....................... --
Repurchases of common stock... --
Payments of stockholders'
notes receivable............ 51
Exercises of common stock
options..................... 67
Issuances of common stock..... 115,431
Issuances of warrants......... 200
Net loss...................... (34,054)
-------------
Balance at December 31, 1996.... $ 90,470
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................................. $ (34,054) $ (9,353) $ (4,821)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 1,084 330 151
Common stock and warrants issued for services rendered and certain technology........... 4,355 -- 4
Compensation related to stock options................................................... 183 -- --
Changes in operating assets and liabilities:
Accounts receivable................................................................... (550) -- --
Inventories........................................................................... (2,107) -- --
Prepaid expenses and other............................................................ (1,635) 182 (243)
Accounts payable, accrued expenses, and deposit....................................... 5,201 541 443
----------- ----------- ------------
Net cash used in operating activities..................................................... (27,523) (8,300) (4,466)
INVESTING ACTIVITIES
Purchases of short-term investments....................................................... (120,629) (5,198) (1,092)
Maturities of short-term investments...................................................... 69,420 1,092 --
Purchases of property and equipment....................................................... (6,104) (875) (703)
Proceeds from sale of equipment........................................................... -- -- 18
Increase in deposits, intangibles and other assets........................................ (1,031) (79) (80)
----------- ----------- ------------
Net cash used in investing activities..................................................... (58,344) (5,060) (1,857)
FINANCING ACTIVITIES
Proceeds from issuances of preferred stock................................................ -- 15,984 5,949
Proceeds from issuances of common stock................................................... 111,159 165 2
Proceeds from payment of stockholders' notes receivable................................... 51 -- 15
Repurchase of common stock................................................................ -- -- (2)
Proceeds from long-term borrowings........................................................ 1,155 4,519 50
Repayment of long-term borrowings......................................................... (465) (261) (1)
----------- ----------- ------------
Net cash provided by financing activities................................................. 111,900 20,407 6,013
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents...................................... 26,033 7,047 (310)
Cash and cash equivalents at beginning of year............................................ 7,412 365 675
----------- ----------- ------------
Cash and cash equivalents at end of year.................................................. $ 33,445 $ 7,412 $ 365
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION
Cash paid for interest.................................................................... $ 346 $ 182 $ --
NONCASH FINANCING ACTIVITIES
Issuance of preferred stock warrants in connection with debt financing.................... $ -- $ 29 $ --
Issuance of common stock for notes receivable............................................. $ -- $ 1,049 $ 20
Issuance of common stock for technology................................................... $ 4,155 $ 22 $ --
Repurchase of common stock through forgiveness of notes receivable from stockholders...... $ 69 $ -- $ 24
Conversion of long-term debt to deferred royalty income................................... $ 3,000 $ -- $ --
Conversion of preferred stock to common stock............................................. $ 9 $ -- $ --
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Heartport, Inc. (the Company) is engaged principally in the research,
development, manufacturing and sale of minimally invasive cardiac surgery
systems and related technology. The Company's customers are cardiac surgery
centers in the United States and Europe. The consolidated accounts include the
accounts of Heartport, Inc. and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated. During 1996, the
Company determined that it is no longer in the development stage.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with insignificant
interest rate risk and with an original maturity of three months or less when
purchased to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment. Deferred royalty income
includes advances received but unearned under an agreement with St. Jude
Medical, Inc.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of cash, cash equivalents, and short-term investments. By policy,
the Company places its cash, cash equivalents, and short-term investments only
with high credit quality financial institutions and corporations and, other than
its investments in U.S. Government Treasury instruments, limits the amounts
invested in any one institution or type of investment. In addition, the Company
performs credit evaluations of its customers' financial condition and generally
requires no collateral. During 1996, three customers accounted for approximately
20%, 17%, and 11% of net sales. During 1996, sales to European customers were
approximately 25% of net sales. All sales are denominated in U.S. dollars.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values for short-term investments are based on quoted market prices
or pricing models using current market rates.
The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
SHORT-TERM INVESTMENTS
All investments are designated as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The amortized
cost of available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
F-7
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Materials and purchased parts.................................................. $ 1,625
Work in progress............................................................... 84
Finished goods................................................................. 398
------
Total inventories.............................................................. $ 2,107
------
------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, ranging from
three to five years, or over the term of the lease, if shorter. Amortization of
assets recorded under capital leases is included with depreciation expense.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, warrants and convertible preferred stock are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission (the SEC) Staff Accounting Bulletins, common
and common equivalent shares issued during the twelve-month period prior to the
Company's initial public offering in April, 1996, at prices below the initial
public offering price have been included in the calculation as if they were
outstanding for all periods presented prior to the offering (using the treasury
stock method and the public offering price for stock options and warrants and
the if-converted method for convertible preferred stock).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net loss per share............................................ $ (1.66) $ (.71) $ (.37)
------------ ------------ ------------
------------ ------------ ------------
Shares used in computing net loss per share................... 20,494,000 13,110,000 13,181,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed as described above and also
assumes the conversion of convertible preferred shares not included above that
automatically converted upon completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.
ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
The Company accounts for stock options using the intrinsic value method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees".
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has adopted the pro forma disclosure of accounting for options under the
fair value method.
2. COMMITMENTS
The Company leases its facilities under noncancelable operating leases that
expire in the years 1999 through 2001. The Company has various options on the
facilities leases that could extend them through 2010. Rental expense was
$959,000 (net of sublease income of $14,000), $435,000 (net of sublease income
F-8
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMITMENTS (CONTINUED)
of $161,000), and $246,000 (net of sublease income of $64,000) for the years
ended December 31, 1996, and 1995 and 1994, respectively.
The future minimum lease payments as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997..................................................................................... $ 1,154
1998..................................................................................... 1,167
1999..................................................................................... 891
2000..................................................................................... 318
2001..................................................................................... 328
------
$ 3,858
------
------
</TABLE>
3. INVESTMENTS
Investments as of December 31, including cash equivalents and short-term
investments, were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Money market funds..................................................... $ 7,959 $ 7,415
Commercial paper....................................................... 18,289 998
Auction rate preferred stock........................................... 8,000 4,200
Corporate notes........................................................ 35,462 --
U.S. government agency securities...................................... 12,945 --
--------- ----------
Total available-for-sale investments................................... 82,655 12,613
Amounts classified as cash equivalents................................. (26,248) (7,415)
--------- ----------
Amounts included in short-term investments............................. $ 56,407 $ 5,198
--------- ----------
--------- ----------
</TABLE>
There were no material realized or unrealized gains or losses in any
category of investment in 1996, 1995, or 1994.
4. DEBT AND DEFERRED ROYALTY INCOME
Debt at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Note payable due in 2000, at prime rate plus 1%............................ $ -- $ 3,000
Equipment financing........................................................ 1,966 1,267
Other debt................................................................. 30 40
--------- ---------
Total long-term debt....................................................... 1,996 4,307
Current portion of long-term debt.......................................... (662) (394)
--------- ---------
Long-term debt, less current portion....................................... $ 1,334 $ 3,913
--------- ---------
--------- ---------
</TABLE>
In 1995, the Company entered into an agreement with St. Jude Medical, Inc.
whereby the Company agreed to license certain patents to St. Jude Medical, Inc.
In connection with the agreement, the Company borrowed $3,000,000 from St. Jude
Medical, Inc. in the form of a note. During 1996, upon reaching certain
milestones contained in the agreement, the entire note balance automatically
converted into deferred royalty income.
F-9
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT AND DEFERRED ROYALTY INCOME (CONTINUED)
In 1995, the Company entered into a financing agreement with a leasing
company to finance up to $2,500,000 of fixed asset purchases. Borrowings under
the agreement are payable in monthly installments through 2001, bear interest at
rates from 11.8% to 14.3%, and are secured by the financed assets. The Company
issued the lender a warrant to purchase 18,800 shares of Series C convertible
preferred stock at $6.25 per share, which was exercised in 1996 in connection
with the initial public offering.
The carrying value of the Company's long-term debt approximates its fair value.
As of December 31, 1996, aggregate debt maturities were as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
1997..................................................................................... $ 662
1998..................................................................................... 805
1999..................................................................................... 407
2000..................................................................................... 110
Thereafter............................................................................... 12
------
$ 1,996
------
------
</TABLE>
As of December 31, 1996, the Company has an unused credit facility with a
commercial bank of $15,000,000.
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
DESIGNATED SHARES ISSUED AND
SERIES SHARES OUTSTANDING
- - -------------------------------------------------------------------------- ----------- -------------------
(IN THOUSANDS)
<S> <C> <C>
A........................................................................ 5,200 5,080
B........................................................................ 1,840 1,591
C........................................................................ 3,200 2,566
----------- -----
Total preferred stock..................................................... 10,240 9,237
----------- -----
----------- -----
</TABLE>
The preferred stock was converted to Common Stock in connection with the
Company's initial public offering.
COMMON STOCK
At December 31, 1996, 2,620,000 shares of outstanding common stock owned by
employees of and consultants to the Company were subject to repurchase, at the
option of the Company, at the original purchase price in the event of the
termination of their employment or consulting relationship.
STOCK OPTION PLANS
Under the 1993 Stock Option Plan (the 1993 Plan), the Company may grant
incentive and nonstatutory stock options to purchase up to 6,720,000 shares of
common stock to directors, employees and consultants. Options may be granted at
an exercise price of not less than 85% of the fair value of the stock at the
date of grant for nonstatutory stock options and 100% of the fair value of the
stock at the date of grant for incentive stock options as determined by the
Board of Directors. Generally, options vest under such conditions as determined
by the Board of Directors, typically over a five year period, and expire after
ten years. During 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan), under which the Company reserved 2,110,000 shares of common stock for
issuance to employees, consultants and directors of the Company in addition to
the 3,390,000 shares incorporated from the 1993 plan.
F-10
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Stock Option Plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------
SHARES AGGREGATE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE PER SHARE PRICE
----------- ----------- ------------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Balance at December 31, 1993..................... 850 430 $ 0.063 $ 27
Shares authorized.............................. 1,600 -- $ -- --
Options granted................................ (1,243) 1,243 $ 0.063 - $ 0.375 339
Options exercised.............................. -- (62) $ 0.063 - $ 0.375 (11)
Options canceled............................... 53 (53) $ 0.063 - $ 0.375 (16)
----------- ----------- -----------
Balance at December 31, 1994..................... 1,260 1,558 $ 0.063 - $ 0.375 339
Shares authorized.............................. 3,840 -- $ -- --
Options granted................................ (3,586) 3,586 $ 0.375 - $ 0.781 1,565
Options exercised.............................. -- (3,093) $ 0.063 - $ 0.781 (1,214)
Options canceled............................... 48 (48) $ 0.063 - $ 0.375 (10)
----------- ----------- -----------
Balance at December 31, 1995..................... 1,562 2,003 $ 0.063 - $ 0.781 680
Shares authorized.............................. 2,110 -- $ -- --
Options granted................................ (2,160) 2,160 $ 0.781 - $41.000 31,575
Options exercised.............................. -- (327) $ 0.063 - $29.25 (67)
Options canceled............................... 399 (399) $ 0.063 - $39.50 (1,045)
----------- ----------- -----------
Balance at December 31, 1996..................... 1,911 3,437 $ 0.063 - $41.00 $ 31,143
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
In addition, during 1996 the Company issued 940,000 nonstatutory options
outside of the plans to employees. These options have exercise prices ranging
from $21.75 to $25.625.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE PRICE OF SHARES PRICE
- - ----------------- ----------- --------------- ------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
$ 0.06 - $ 7.50 2,335 9.2 $ 2.834 736 $ 0.999
$ 7.51 - $15.00 245 9.2 $ 12.566 7 $ 11.786
$ 15.01 - $25.00 1,183 9.5 $ 21.813 56 $ 21.400
$ 25.01 - $35.00 542 9.7 $ 26.400 1 $ 29.826
$ 35.01 - $45.00 72 9.4 $ 38.826 1 $ 36.868
--
----- ------------- --- ---------
4,377 9.4 $ 12.021 801 $ 3.213
--
--
----- ------------- --- ---------
----- ------------- --- ---------
</TABLE>
At December 31, 1995, options to purchase 845,000 shares of common stock
were exercisable.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS 123)
requires use of option
F-11
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995: Expected dividend yield of 0%, expected stock price volatility of 67%,
risk-free interest rate of 5.97%, and the expected life of options of 3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had the
Company elected to recognize compensation expense based on the fair value of the
options granted at grant dates as prescribed by SFAS No. 123, net loss and loss
per share would have been increased to the pro forma amounts indicated in the
table below:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Net loss -- as reported.................................................. $ (34,054,000) $ (9,353,000)
Net loss -- pro forma.................................................... $ (38,166,000) $ (9,501,000)
Loss per share -- as reported............................................ $ (1.50) $ (.47)
Loss per share -- pro forma.............................................. $ (1.68) $ (.48)
</TABLE>
The weighted average fair value of options granted in 1996 and 1995 was
$7.41 and $0.22 per share, respectively. The weighted-average remaining
contractual life of all options outstanding at December 31, 1996 is 9.4 years.
The pro forma effect on net income for 1996 is not representative of the pro
forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995, and the compensation expense that will be recognized in future years as
the graded vesting periods become exercisable.
STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), employees
may purchase common stock at the lower of 85% of the fair market value of the
common stock at the beginning or end of each offering period of up to an
aggregate total of 240,000 shares of the Company's common stock. During the year
ended December 31, 1996, 19,000 shares were issued under the Purchase Plan.
SHAREHOLDER RIGHTS PLAN
On March 26, 1996, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
common stock outstanding on the effective date of the Offering. Each Right will
entitle stockholders to purchase 1/1000 of a share of Series A Junior
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000 of a share has economic attributes and voting rights
equivalent to one share of the Company's common
F-12
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
stock, at an exercise price of $0.001 per share. The Rights only become
exercisable in certain limited circumstances involving acquisitions of or tender
offers for 20% or more of the Company's capital stock. At any time prior to the
announcement of any such acquisition or offer, the Rights are redeemable by the
Company at a price of $0.001 per Right. For a limited period of time after the
announcement of any such acquisition or offer, each Right becomes exercisable
or, at the discretion of Board, may be exchanged for one share of common stock
per Right. The Rights expire in the year 2006.
COMMON STOCK RESERVED
At December 31, 1996, the Company has reserved shares of common stock for
future issuances as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Stock option plans............................................................. 5,348
Stock options outside the plans................................................ 940
Stock purchase plan............................................................ 221
Stock warrants................................................................. 18
-----
Total........................................................................ 6,527
-----
-----
</TABLE>
STOCK SPLIT
On April 25, 1996, the Company effected a 1.6-for-1 split of the Company's
common stock. All outstanding share and per share amounts have been
retroactively adjusted to reflect the stock split.
6. INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for 1996, 1995, or 1994.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................ $ 16,900 $ 5,400
Research credit carryforwards................................................... 900 430
Capitalized research and development............................................ 500 570
Acquired patent................................................................. 1,800 --
Other temporary differences..................................................... 600 430
---------- ---------
Total deferred tax assets..................................................... 20,700 6,830
Valuation allowance............................................................... (20,700) (6,830)
---------- ---------
Net deferred tax assets....................................................... $ -- $ --
---------- ---------
---------- ---------
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, the
timing and amount of which are uncertain. Accordingly, a valuation allowance, in
an amount equal to the net deferred tax asset as of December 31, 1996 and 1995
has been established to reflect these uncertainties. The change in the valuation
allowance was a net increase of $13,870,000, $3,905,000, and $1,900,000 for
fiscal years 1996, 1995, and 1994, respectively.
F-13
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had net operating loss carryforwards
for federal and California tax purposes of approximately $43,000,000 and
$39,000,000 respectively, which will expire from 1999 through 2011. As of
December 31, 1996, the Company also had research and development tax credit
carryforwards of approximately $550,000 and $500,000, respectively, for federal
and California tax purposes, which will expire in years 2007 through 2011, if
not used.
Utilization of net operating loss and credit carryforwards may be subject to
an annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
7. PATENT ACQUISITION
Patent acquisition expenses consist of the cost to acquire a United States
patent and related rights from Endosurgical Development Corporation for
consideration consisting of shares of Common Stock and cash, for a total expense
of $5,216,000.
8. EMPLOYEE BENEFIT PLAN
The Company has a savings plan, which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
15% of their pre-tax salary, up to statutory limits. The Company currently does
not match employee contributions made to the savings plan.
F-14
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages as of
December 31, 1996, are as follows:
NAME AGE POSITION
---- --- --------
Wesley D. Sterman, M.D. 36 President, Chief Executive Officer,
Director, and Co-Founder
Richard B. Brewer 45 Chief Operating Officer
David B. Singer 34 Senior Vice President, Finance and
Chief Financial Officer
Bradford J. Shafer 36 General Counsel and Secretary
Robert J. Chin, Ph.D. 51 Vice President of Regulatory Affairs
and Quality Assurance
Hanson S. Gifford, III 36 Vice President of Research and
Development
Timothy J. Haines 39 Vice President and Managing
Director, Europe
Steven E. Johnson 38 Vice President of Manufacturing
C. Richard Neely, Jr. 42 Vice President, Finance and
Controller
Lawrence C. Siegel, M.D. 39 Vice President of Clinical Affairs
Casey M. Tansey 39 Vice President of Sales and
Marketing
Frank M. Fischer(1) 55 Director
Robert V. Gunderson, Jr.(2) 45 Director
Joseph S. Lacob(2) 41 Director
John H. Stevens, M.D. 36 Director and Co-Founder
Petri T. Vainio, M.D.(1) 37 Director
Steven C. Wheelwright, Ph.D.(1)(2) 53 Director
_____________
(1) Member of Compensation Committee
(2) Member of Audit Committee
WESLEY D. STERMAN, M.D. founded the Company with Dr. Stevens in May,
1991, and has served as the Company's President and Chief Executive Officer
since that time. Prior to founding the Company, Dr. Sterman was founder,
President and Chief Executive Officer of EndoVascular Technologies, Inc., a
medical device manufacturer, from July, 1989 to September, 1991. Dr. Sterman
has B.S. degrees both in Biology and in Chemistry from Stanford University.
Dr. Sterman received an M.D. from the Stanford University School of Medicine
and an M.B.A. from the Graduate School of Business at Stanford University,
where he was an Arjay Miller Scholar.
RICHARD B. BREWER has been Chief Operating Officer of the Company since
January 22, 1997 and served as Executive Vice President of Operations of the
Company since February, 1996. Prior to joining the Company, Mr. Brewer served
in various capacities with Genentech, Inc., a biotechnology company, from
1984 to 1995, most recently as Senior Vice President, U.S. Sales and
Marketing, Genentech Europe Ltd., and Genentech Canada, Inc. Mr. Brewer
earned a B.S. from Virginia Polytechnic Institute and an M.B.A. from
Northwestern University.
DAVID B. SINGER has been Senior Vice President, Finance and Chief
Financial Officer of the Company since June, 1996. Prior to joining the
Company, Mr. Singer served as President, Chief Executive Officer and a
Director of Affymetrix, Inc., a genomics and diagnostic company. From
November, 1990 to February, 1993, Mr. Singer served in various senior
management roles of Affymax N.V., a biotechnology company, including Vice
President, Finance and Treasurer. From 1988 to 1990, Mr. Singer was an
assistant to various senior officers of Baxter Healthcare Corporation
("Baxter"), a medical supply company. Mr. Singer serves on the Board of
Directors of Affymetrix, Inc. Mr. Singer holds a B.A. from Yale University
and an M.B.A. from the Graduate School of Business at Stanford University.
III-1
<PAGE>
BRADFORD J. SHAFER has been General Counsel and Secretary of the
Company since July, 1996. From July, 1985 until July, 1996, he was an
attorney with the law firm of Brobeck, Phleger & Harrison LLP, where he was a
partner since January, 1993. Mr. Shafer holds a B.A. from the University of
the Pacific and a J.D. from the University of California, Hastings College of
the Law.
ROBERT J. CHIN has been Vice President of Regulatory Affairs and
Quality Assurance of the Company since January, 1995. He also served as Vice
President of Clinical Affairs of the Company from January 1995 until
November, 1996. From 1977 until April, 1994, Dr. Chin served in various
capacities with Baxter. His most recent position at Baxter was Vice
President, Quality Assurance and Regulatory Affairs for the Edwards C.V.S.
Division, a manufacturer and supplier of heart valve therapies. From April,
1994 until joining the Company in 1995, Dr. Chin served as Vice President,
Regulatory and Clinical Affairs and Quality Assurance of Imagyn Medical, a
medical device company. Dr. Chin earned a B.S. in Engineering, an M.S. in
Chemical Engineering and a Ph.D in Electrochemical Engineering all from the
University of California at Los Angeles. Dr. Chin is a Professional Engineer,
and has received Regulatory Affairs Certification by the Regulatory Affairs
Professional Society.
HANSON S. GIFFORD, III, has been Vice President of Research and
Development of the Company since February, 1996. Prior to that time, Mr.
Gifford served as the Company's Director of Research and Development
beginning in July, 1993. From 1992 to 1993, he served as Managing Director of
Bavaria Medizin Technologie, GmbH, a German medical device company. From 1990
to 1991, he served as President of Cardiovascular Therapeutic Technologies,
Inc., a medical device company. From 1985 to 1990, he served in various
research and development, clinical research, and marketing capacities at
Devices for Vascular Intervention, Inc., a medical device company. Mr.
Gifford earned a B.S. in Mechanical Engineering from Cornell University.
TIMOTHY J. HAINES has been the Managing Director, Europe since March,
1997. From July, 1993 until joining the Company, Mr. Haines was employed by
Datascope Corporation where he was President of Intravascular, Inc., a
vascular graft subsidiary, and subsequently President of the Patient
Monitoring Division. From September, 1990 until July, 1993 Mr. Haines was
Vice President, Operations of Telectronics Inc. Mr. Haines received a B.S. in
Economics from Exeter University (England) and an M.B.A. from INSEAD European
School of Management (France).
STEVEN E. JOHNSON has been Vice President of Manufacturing of the
Company since August, 1994. Prior to joining the Company, Mr. Johnson served
in various capacities with Advanced Cardiovascular Systems, Inc., a medical
device company, from 1983 to 1994, most recently as Vice President,
Manufacturing. Mr. Johnson earned a B.S. in Industrial Engineering from GMI
Engineering and Management Institute.
C. RICHARD NEELY, JR. has been Vice President, Finance and Controller
of the Company since December, 1996. Prior to joining the Company, Mr. Neely
served as Vice President and Chief Financial Officer of Sanmina Corporation,
an electronics manufacturing company, from April, 1996 to August, 1996. Mr.
Neely served in various capacities with Advanced Micro Devices, Inc., a
semiconductor company, from 1980 to April, 1996, most recently as Director
and Group Controller. Mr. Neely earned a B.A. in Economics from Whitman
College and a M.B.A. from the University of Chicago.
LAWRENCE C. SIEGEL, M.D. has been Vice President of Clinical Affairs of
the Company since November, 1996. Prior to joining the Company, Dr. Siegel
served in various capacities with the Stanford University School of Medicine
from 1986 to 1996, most recently as Associate Professor of Anesthesia and
Chief of Cardiovascular Anesthesiology. Dr. Siegel earned a B.S. in
Electrical Engineering from Massachusetts Institute of Technology and a M.D.
from Harvard Medical School. Dr. Siegel is a board certified
anesthesiologist.
CASEY M. TANSEY has been Vice President of Sales and Marketing of the
Company since December, 1995. From 1988 until joining the Company in 1995,
Mr. Tansey served in various capacities with the Edwards C.V.S. Division of
Baxter. Mr. Tansey's most recent position at Baxter/Edwards was Vice
President, North American Sales. Mr. Tansey earned a B.S. in Business
Administration and an M.B.A. from the College of Notre Dame.
FRANK M. FISCHER has been a Director of the Company since October,
1992. Mr. Fischer has been the President and Chief Executive Officer and a
Director of Ventritex, Inc., a manufacturer of implantable cardiac
defibrillators, since July, 1987. From May, 1977 until joining Ventritex, Mr.
Fischer held various positions with
III-2
<PAGE>
Cordis Corporation, a manufacturer of medical products, serving most recently
as President of the Implantable Products Division. Mr. Fischer serves on the
Board of Directors of Heartstream, Inc., a medical device company. Mr.
Fischer holds an M.S. in Management from Rensselaer Polytechnic Institute.
ROBERT V. GUNDERSON, JR. has been a Director of the Company since May,
1995. Mr. Gunderson has been a partner of the law firm of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, since its formation in
September, 1995. From May, 1988, until September, 1995, Mr. Gunderson was a
partner of the law firm of Brobeck, Phleger & Harrison, LLP. Mr. Gunderson
holds an M.A. from Stanford University, an M.B.A. in finance from the Wharton
School, University of Pennsylvania and a J.D. from the University of Chicago.
JOSEPH S. LACOB has been a Director of the Company since April, 1992.
Mr. Lacob is a general partner of Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), a venture capital firm he joined in 1987. Prior to joining Kleiner
Perkins, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Mr. Lacob serves as Chairman of the Board of Directors of CellPro,
Incorporated, and is a Director of Pharmacyclics, Inc. and eight privately
held companies. Mr. Lacob holds a B.S. in Biochemistry from the University of
California at Irvine, a Masters in Public Health from the University of
California at Los Angeles, and an M.B.A. from the Graduate School of Business
at Stanford University.
JOHN H. STEVENS, M.D. founded the Company with Dr. Sterman in May,
1991, and has been a Director of the Company since that time. Dr. Stevens is
a member of the Stanford University Medical Center team that performed the
ten Port-Access CABG Phase I clinical trial procedures and which has been
performing Port-Access CABG and MVR procedures on a regular basis since FDA
clearance was received in October, 1996. Formerly Chief Resident of the
Department of Cardiothoracic Surgery at the Stanford University School of
Medicine, and Senior Registrar in Cardiothoracic Surgery at the Great Ormond
Street Hospital for Sick Children in London, England, Dr. Stevens is now an
Associate Professor in the Department of Cardiothoracic Surgery at Stanford
University School of Medicine. Dr. Stevens earned B.U.S. and B.S. degrees in
Communications and Psychology from the University of Utah and an M.D. from
Stanford University.
PETRI T. VAINIO, M.D. has been a Director of the Company since April,
1992. Dr. Vainio is a general partner of Sierra Ventures, a venture capital
firm he joined in 1988. He currently serves on the Board of Directors of
Connective Therapeutics, Inc., a biotechnology company. Dr. Vainio holds M.D.
and Ph.D. degrees from the University of Helsinki, Finland, and an M.B.A.
from the Graduate School of Business at Stanford University.
STEVEN C. WHEELWRIGHT has been a Director of the Company since January,
1995. Dr. Wheelwright currently serves as a senior associate dean at the
Graduate School of Business, Harvard University, where he has been a
professor since July, 1988. Dr. Wheelwright additionally served in the same
position from August, 1985, to August, 1986. From August, 1986 to August,
1988, Dr. Wheelwright served as a professor at the Graduate School of
Business at Stanford University. Dr. Wheelwright is also a member of the
Board of Directors of Quantum Corporation, a mass storage device company,
T.J. International Corporation, an engineered wood products company, and
Alleghany-Ludlum Steel Corporation, a specialty steel company.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to
the Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to
the Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
III-3
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to
the Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
III-4
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
2.1+ Agreement and Plan of Merger dated April 3, 1995, for
the reincorporation merger of Stanford Surgical
Technology, Inc., a California corporation, into
Heartport, Inc., a Delaware corporation.
3.1+ Restated Certificate of Incorporation.
3.2+ Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Common Stock certificate.
4.3+ Third Amended and Restated Rights Agreement among
Registrant and the Founders and Investors specified
therein dated April 17, 1995.
4.4 Rights Agreement between the Registrant and the First
National Bank of Boston dated April 25, 1996.
10.1+ Form of Indemnification Agreement entered into by and
between Registrant and its officers and directors.
10.2+ 1993 Stock Option Plan and forms of agreements thereunder.
10.3 1996 Stock Option Plan as amended and restated
October 21, 1996.
10.4 Employee Stock Purchase Plan, as amended and restated
October 21, 1996.
10.5+ Real Property Lease between the Registrant and
Metropolitan Insurance Company dated September 21, 1992,
as amended.
10.6+ Equipment Financing Agreement between the Registrant and
Lease Management Services, Inc. dated February 23, 1995.
10.7+* Agreement between the Company and St. Jude Medical, Inc.
dated September 11, 1995.
10.8 Third Amendment to Lease Agreement between Heartport
Research and Training Center, Inc. and University of
Utah Research Foundation dated as of October 25, 1996.
10.9* Amendment to agreement between Registrant and St. Jude
Medical, Inc. dated January 31, 1997.
10.10 Loan and Security Agreement dated December 31, 1996
between the Registrant and Silicon Valley Bank.
11.1 Computation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule
___________
* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-1906)
IV-1
<PAGE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1996.
(c) EXHIBITS
See paragraph (a).
(d) The following financial statement schedules required by Regulation S-X
are filed herewith:
SCHEDULE NO. DESCRIPTION
------------ -----------
II Valuation and Qualifying Accounts
All other schedules are not applicable.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in Redwood City, California, on this 26th day of March, 1997.
HEARTPORT, INC.
By: /s/ Wesley D. Sterman, M.D.
---------------------------------
Wesley D. Sterman, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints jointly and severally, Wesley D.
Sterman and David B. Singer, and each one of them, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to
sign any and all amendments to this Annual 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 substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Wesley D. Sterman, M.D. President, Chief Executive March 26, 1997
- - ----------------------------- Officer and Director
Wesley D. Sterman, M.D. (Principal Executive
Officer)
/s/ David B. Singer Senior Vice President, March 26, 1997
- - ----------------------------- Finance and Chief Financial
David B. Singer Officer (Principal Financial
and Accounting Officer)
/s/ Frank M. Fischer Director March 26, 1997
- - -----------------------------
Frank M. Fischer
/s/ Robert V. Gunderson, Jr. Director March 26, 1997
- - -----------------------------
Robert V. Gunderson, Jr.
/s/ Joseph S. Lacob Director March 26, 1997
- - -----------------------------
Joseph S. Lacob
/s/ John H. Stevens, M.D. Director March 26, 1997
- - -----------------------------
John H. Stevens, M.D.
/s/ Petri T. Vainio, M.D. Director March 26, 1997
- - -----------------------------
Petri T. Vainio, M.D.
/s/ Steven C. Wheelwright Director March 26, 1997
- - -----------------------------
Steven C. Wheelwright
<PAGE>
SCHEDULE II
HEARTPORT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
Beginning Costs and End
of Period Expenses Deductions of Period
--------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for doubtful accounts $- $33 $- $33
Year Ended December 31, 1995
Allowance for doubtful accounts $- $- $- $-
Year Ended December 31, 1994
Allowance for doubtful accounts $- $- $- $-
</TABLE>
<PAGE>
________________________________________________________
HEARTPORT, INC.
and
FIRST NATIONAL BANK OF BOSTON
Rights Agent
Rights Agreement
Dated as of April 25, 1996.
________________________________________________________
<PAGE>
TABLE OF CONTENTS
PAGE
----
Section 1. Certain Definitions.............................................1
Section 2. Appointment of Rights Agent.....................................5
Section 3. Issue of Right Certificates.....................................5
Section 4. Form of Right Certificates......................................7
Section 5. Countersignature and Registration...............................8
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right
Certificates....................................................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights..........................................................9
Section 8. Cancellation and Destruction of Right Certificates.............11
Section 9. Status and Availability of Preferred Shares....................12
Section 10. Preferred Shares Record Date...................................12
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights...............................................13
Section 12. Certicate of Adjustment........................................23
Section 13. Consolidation, Merger or Sale or Transfer of Assets
or Earning Power...............................................23
Section 14. Fractional Rights and Fractional Shares........................25
Section 15. Rights of Action...............................................26
i
<PAGE>
Section 16. Agreement of Right Holders.....................................27
Section 17. Right Certificate Holder Not Deemed a Stockholder..............27
Section 18. Concerning the Rights Agent....................................28
Section 19. Merger or Consolidation or Change of Name of Rights Agent......28
Section 20. Duties of Rights Agent.........................................29
Section 21. Change of Rights Agent.........................................31
Section 22. Issuance of New Right Certificates.............................32
Section 23. Redemption.....................................................33
Section 24. Exchange.......................................................34
Section 25. Notice of Certain Events.......................................36
Section 26. Notices........................................................37
Section 27. Supplements and Amendments.....................................38
Section 28. Successors.....................................................38
Section 29. Benefits of this Agreement.....................................38
Section 30. Severability...................................................38
Section 31. Governing Law..................................................39
Section 32. Counterparts...................................................39
ii
<PAGE>
Section 33. Descriptive Headings...........................................39
Section 34. Administration.................................................39
Exhibit A Certificate of Designations of Series A Junior
Participating Prefund Stock...................................A-1
Exhibit B Form of Right Certificate.....................................B-1
Exhibit C Summary of Rights to Purchase Preferred Shares................C-1
iii
<PAGE>
RIGHTS AGREEMENT
Agreement, dated as of April 25, 1996, between Heartport, Inc., a
Delaware corporation (the "Company"), and The First National Bank of Boston (the
"Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each share of
Common Stock, par value $0.001 per share, of the Company (a "Common Share")
outstanding on the close of business April 25, 1996 (the "Record Date") and has
authorized the issuance of one Right with respect to each additional Common
Share that shall become outstanding between the Record Date and the earlier of
the Distribution Date, the Expiration Date or the Final Expiration Date (as such
terms are defined in Sections 3 and 7 hereof), each Right representing the right
to purchase one one-thousandth of a Preferred Share, as hereinafter defined, or
such different amount and/or kind of securities as shall be hereinafter
provided.
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement,
the following terms have the meanings indicated:
"Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be, at any time following
the Initial Public Offering, the Beneficial Owner of 20% or more of the Common
Shares of the Company then outstanding, but shall not include (i) the Company,
(ii) any Subsidiary of the Company, (iii) any employee benefit plan of the
Company or any Subsidiary of the Company, or (iv) any entity holding Common
Shares for or pursuant to the terms of any such employee benefit plan.
Notwithstanding the foregoing, (1) no Person shall become an "Acquiring Person"
as the result of an acquisition of Common Shares by the Company which, by
reducing the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to 20% or more of the Common Shares of
the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall so
become the Beneficial Owner of 20% or more of the Common Shares of the
<PAGE>
Company then outstanding by reason of an acquisition of Common Shares by the
Company and shall, after such share purchases by the Company, become the
Beneficial Owner of an additional 1% of the outstanding Common Shares of the
Company, then such Person shall be deemed to be an "Acquiring Person"; and (2)
if the Board of Directors of the Company determines in good faith that a Person
who would otherwise be an "Acquiring Person," as defined pursuant to the
foregoing provisions of this paragraph, has become such inadvertently, and such
Person divests as promptly as practicable a sufficient number of Common Shares
so that such Person would no longer be an "Acquiring Person," as defined
pursuant to the foregoing provisions of this paragraph, then such Person shall
not be deemed to have become an "Acquiring Person" for any purposes of this
Agreement.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates
or Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates
or Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), written or otherwise, or upon the exercise of
conversion rights, exchange rights, rights (other than the Rights), warrants or
options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed to
be the Beneficial Owner of, or to beneficially own, securities tendered pursuant
to a tender or exchange offer made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act by or on
behalf of such Person or any of such Person's Affiliates or Associates until
such tendered securities are accepted for purchase or exchange; or (B) the right
to vote pursuant to any
2
<PAGE>
agreement, arrangement or understanding; PROVIDED, HOWEVER, that a Person shall
not be deemed the Beneficial Owner of, or to beneficially own, any security if
the agreement, arrangement or understanding to vote such security (1) arises
solely from a revocable proxy or consent given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in accordance with,
the applicable rules and regulations promulgated under the Exchange Act and (2)
is not also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with respect
to a bona fide public offering of securities), written or otherwise, for the
purpose of acquiring, holding, voting (except to the extent contemplated by the
proviso to section (B) of the immediately preceding paragraph (ii)) or disposing
of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which banking institutions in the State of California are authorized or
obligated by law or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M., Palo Alto,
California time, on such date; PROVIDED, HOWEVER, that if such date is not a
Business Day it shall mean 5:00 P.M., Palo Alto, California time, on the next
succeeding Business Day.
"Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $0.001 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity
3
<PAGE>
interest) with the greatest voting power of such other Person or, if such other
Person is a Subsidiary of another Person, the Person or Persons which ultimately
control such first-mentioned Person.
"Common Stock Equivalents" shall have the meaning set forth in section
11(a)(iii)(B)(3).
"Current Value" shall have the meaning set forth in Section
11(a)(iii)(A)(1) hereof.
"Distribution Date" shall have the meaning set forth in Section 3
hereof.
"Equivalent preferred shares" shall have the meaning set forth in
Section 11(b).
"Exchange Ratio" shall have the meaning set forth in Section 24(a).
"Final Expiration Date" shall mean April 25, 2006.
"Initial Public Offering" shall mean the closing of the initial public
offering of the Company's Common Shares pursuant to a Registration Statement
filed pursuant to the Securities Act of 1933.
"Person" shall mean any individual, firm, corporation, partnership,
limited partnership, limited liability partnership, business trust, limited
liability company, unincorporated association or other entity, and shall include
any successor (by merger or otherwise) of such entity.
"Purchase Price" shall have the meaning set forth in Section 7(b).
"Preferred Shares" shall mean shares of Series A Junior Participating
Preferred Stock, par value $0.001 per share, of the Company.
"Redemption Date" shall mean the date on which the Rights are redeemed
as provided in Section 23 hereof.
"Right Certificate" shall mean a certificate evidencing a Right in
substantially the form of Exhibit B hereto.
"Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof.
4
<PAGE>
"Shares Acquisition Date" shall mean the earlier of the date of (i)
the public announcement by the Company or an Acquiring Person that an Acquiring
Person has become such or (ii) the public disclosure of facts by the Company or
an Acquiring Person indicating that an Acquiring Person has become such.
"Spread" shall have the meaning set forth in Section 11(a)(iii)(A)(2)
hereof.
"Subsidiary" of any Person shall mean any Person of which a majority
of the voting power of the voting equity securities or equity interest is owned,
directly or indirectly, by such Person.
"Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Summary of Rights" shall mean the Summary of Rights to Purchase
Preferred Shares in substantially the form of Exhibit C hereto.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby
appoints the Rights Agent to act as agent for the Company and the holders of the
Rights (who, in accordance with Section 3 hereof, shall prior to the
Distribution Date also be the holders of the Common Shares) in accordance with
the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents as
it may deem necessary or desirable.
Section 3. ISSUE OF RIGHT CERTIFICATES.
(a) Until the earlier of (i) the tenth day after the Shares
Acquisition Date or (ii) the tenth Business Day (or such later date as may be
determined by action of the Board of Directors prior to such time as any Person
becomes an Acquiring Person) after the date of the commencement by any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company or any entity holding
Common Shares for or pursuant to the terms of any such plan) of, or of the first
public announcement of the intention of any Person (other than any of the
Persons referred to in the preceding parenthetical) to commence, a tender or
exchange offer the consummation of which would result in any Person becoming the
Beneficial Owner of Common Shares aggregating 15% or more of the then
outstanding Common Shares (such date being herein referred to as the
5
<PAGE>
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also be
deemed to be Right Certificates) and not by separate Right Certificates, and (y)
the right to receive Right Certificates will be transferable only in connection
with the transfer of Common Shares. As soon as practicable after the
Distribution Date, the Company will prepare and execute, the Rights Agent will
countersign, and the Company will send or cause to be sent (and the Rights Agent
will, if requested, send) by first-class, insured, postage-prepaid mail, to each
record holder of Common Shares as of the Close of Business on the Distribution
Date, at the address of such holder shown on the records of the Company, a Right
Certificate evidencing one Right for each Common Share so held. As of the
Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) On the Record Date, or as soon as practicable thereafter,
the Company will send a copy of the Summary of Rights by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the Close of
Business on the Record Date, at the address of such holder shown on the records
of the Company. With respect to certificates for Common Shares outstanding as
of the Record Date, until the Distribution Date, the Rights will be evidenced by
such certificates registered in the names of the holders thereof together with a
copy of the Summary of Rights attached thereto. Until the Distribution Date (or
the earlier of the Redemption Date or the Final Expiration Date), the surrender
for transfer of any certificate for Common Shares outstanding on the Record
Date, with or without a copy of the Summary of Rights attached thereto, shall
also constitute the transfer of the Rights associated with the Common Shares
evidenced thereby.
(c) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the earliest
of the Distribution Date, the Redemption Date or the Final Expiration Date shall
have impressed on, printed on, written on or otherwise affixed to them the
following legend:
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This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in a Rights Agreement
between Heartport, Inc. and First National Bank of Boston,
as Rights Agent, dated as of April 25, 1996 (the "Rights
Agreement"), the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the
principal executive offices of Heartport, Inc. Under
certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. Heartport,
Inc. will mail to the holder of this certificate a copy of
the Rights Agreement without charge after receipt of a
written request therefor. Under certain circumstances,
Rights that are or were acquired or beneficially owned by
Acquiring Persons (as defined in the Rights Agreement) may
become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
certificates shall be evidenced by such certificates alone, and the surrender
for transfer of any such certificate shall also constitute the transfer of the
Rights associated with the Common Shares represented thereby. In the event that
the Company purchases or acquires any Common Shares after the Record Date but
prior to the Distribution Date, any Rights associated with such Common Shares
shall be deemed canceled and retired so that the Company shall not be entitled
to exercise any Rights associated with the Common Shares which are no longer
outstanding.
Section 4. FORM OF RIGHT CERTIFICATES. The Right Certificates
(and the forms of election to purchase Preferred Shares and of assignment to be
printed on the reverse thereof) shall be substantially the same as Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the other provisions of this Agreement, the Right
Certificates shall entitle the holders thereof to purchase such number of one
one-thousandths of a Preferred Share as shall be set forth therein at the
Purchase Price, but the number of one one-thousandths of a Preferred Share and
the Purchase Price shall be subject to adjustment as provided herein.
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Section 5. COUNTERSIGNATURE AND REGISTRATION. The Right
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its Chief Executive Officer, its President, any of its Vice Presidents,
or its Treasurer, either manually or by facsimile signature, shall have affixed
thereto the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or any Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be countersigned by the
Rights Agent and shall not be valid for any purpose unless so countersigned,
either manually or by facsimile. In case any officer of the Company who shall
have signed any of the Right Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Right Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Right Certificates had not ceased to
be such officer of the Company; and any Right Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Right Certificate, shall be a proper officer of the Company to sign such
Right Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause
to be kept, at its principal office, books for registration of the transfer of
the Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES. Subject
to the provisions of Section 14 hereof, at any time after the Close of Business
on the Distribution Date, and at or prior to the Close of Business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Right
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<PAGE>
Certificate or Right Certificates, entitling the registered holder to purchase a
like number of one one-thousandths of a Preferred Share as the Right Certificate
or Right Certificates surrendered then entitled such holder to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Right
Certificate or Right Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Right Certificate or Right
Certificates to be transferred, split up, combined or exchanged at the principal
office of the Rights Agent. Thereupon the Rights Agent shall countersign and
deliver to the person entitled thereto a Right Certificate or Right
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient for any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) The registered holder of any Right Certificate (other
than a holder whose Rights have become void pursuant to Section 11(a)(ii) hereof
or have been exchanged pursuant to Section 24 hereof) may exercise the Rights
evidenced thereby in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
on the reverse side thereof duly executed, to the Rights Agent at its principal
office, together with payment of the Purchase Price for each one one-thousandth
of a Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the Close of Business
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<PAGE>
on the Final Expiration Date, (ii) the Redemption Date, or (iii) the time at
which such Rights are exchanged as provided in Section 24 hereof.
(b) The purchase price for each one one-thousandth of a
Preferred Share to be purchased upon the exercise of a Right shall initially be
forty-six dollars ($46.00) (the "Purchase Price"), shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in lawful money of the United States of America in accordance with
paragraph (c) below.
(c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase and certificate duly
executed, accompanied by payment of the Purchase Price for the number of one
one-thousandths of a Preferred Share to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by cash, certified check,
cashier's check or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent of
the Preferred Shares certificates for the number of one one-thousandths of a
Preferred Share to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests, or (B) requisition from any
depositary agent for the Preferred Shares depositary receipts representing such
number of one one-thousandths of a Preferred Share as are to be purchased (in
which case certificates for the Preferred Shares represented by such receipts
shall be deposited by the transfer agent with the depositary agent) and the
Company hereby directs the depositary agent to comply with such request, (ii)
when appropriate, requisition from the Company the amount of cash to be paid in
lieu of issuance of fractional Preferred Shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Right Certificate, registered in such name or names as may be designated by such
holder and (iv) when appropriate, after receipt, deliver such cash to or upon
the order of the registered holder of such Right Certificate.
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<PAGE>
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate following the form of
election to purchase set forth on the reverse side of the Right Certificate
surrendered for such exercise and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES.
All Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in canceled
form, or, if surrendered to the Rights Agent, shall be canceled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Rights Agreement. The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such canceled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. STATUS AND AVAILABILITY OF PREFERRED SHARES.
(a) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all Preferred Shares delivered
upon exercise of Rights shall, at the time of delivery of the certificates for
such Preferred Shares (subject to payment of the
11
<PAGE>
Purchase Price), be duly and validly authorized and issued and fully paid and
non-assessable shares.
(b) The Company further covenants and agrees that it will
pay when due and payable any and all federal and state transfer taxes and
charges which may be payable in respect of the issuance or delivery of the Right
Certificates or of any Preferred Shares upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Right Certificates to a person
other than, or the issuance or delivery of certificates or depositary receipts
for the Preferred Shares in a name other than that of, the registered holder of
the Right Certificate evidencing Rights surrendered for exercise or to issue or
to deliver any certificates or depositary receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's reasonable satisfaction that
no such tax is due.
(c) The Company covenants and agrees that it will cause to
be reserved and kept available, out of its authorized and unissued Preferred
Shares or any Preferred Shares held in its treasury, the number of Preferred
Shares that will be sufficient to permit the exercise in full of all outstanding
Rights in accordance with Section 7 hereof.
Section 10. PREFERRED SHARES RECORD DATE. Each person in whose
name any certificate for Preferred Shares is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of the
Preferred Shares represented thereby on, and such certificate shall be dated,
the date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made. Prior to the exercise of the Rights evidenced thereby, the
holder of a Right Certificate shall not be entitled to any rights of a holder of
Preferred Shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company, except as provided herein.
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<PAGE>
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR
NUMBER OF RIGHTS. The Purchase Price, the number of Preferred Shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into a smaller number of Preferred Shares or
(D) issue any shares of its capital stock in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective date of
such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date, he would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; PROVIDED, HOWEVER, that in no
event shall the consideration to be paid upon the exercise of one Right be less
than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right.
(i) Subject to the following paragraph of this
subparagraph (ii) and to Section 24 of this Agreement, in the event any Person
shall become an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-thousandths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-thousandths of a Preferred Share
for which a Right is then exercisable and dividing
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<PAGE>
that product by (y) 50% of the then current per share market price of the
Company's Common Shares (determined pursuant to Section 11(d) hereof) on the
date such Person became an Acquiring Person. In the event that any Person shall
become an Acquiring Person and the Rights shall then be outstanding, the Company
shall not take any action that would eliminate or diminish the benefits intended
to be afforded by the Rights.
From and after the occurrence of such an event, any Rights that are or
were acquired or beneficially owned by such Acquiring Person (or any Associate
or Affiliate of such Acquiring Person) on or after the earlier of (x) the date
of such event and (y) the Distribution Date shall be void and any holder of such
Rights shall thereafter have no right to exercise such Rights under any
provision of this Agreement. No Right Certificate shall be issued pursuant to
Section 3 that represents Rights beneficially owned by an Acquiring Person whose
Rights would be void pursuant to the preceding sentence or any Associate or
Affiliate thereof; no Right Certificate shall be issued at any time upon the
transfer of any Rights to an Acquiring Person whose Rights would be void
pursuant to the preceding sentence or any Associate or Affiliate thereof or to
any nominee of such Acquiring Person, Associate or Affiliate; and any Right
Certificate delivered to the Rights Agent for transfer to an Acquiring Person
whose Rights would be void pursuant to the preceding sentence or any Associate
or Affiliate thereof shall be canceled.
(ii) In the event that the number of Common Shares
which are authorized by the Company's certificate of incorporation and not
outstanding or subscribed for, or reserved or otherwise committed for issuance
for purposes other than upon exercise of the Rights, are not sufficient to
permit the holder of each Right to purchase the number of Common Shares to which
he would be entitled upon the exercise in full of the Rights in accordance with
the foregoing subparagraph (ii) of paragraph (a) of this Section 11, or should
the Board of Directors so elect, the Company shall: (A) determine the excess of
(1) the value of the Common Shares issuable upon the exercise of a Right
(calculated as provided in the last sentence of this subparagraph (iii))
pursuant to Section 11(a)(ii) hereof (the "Current Value") over (2) the Purchase
Price (such excess, the "Spread"), and (B) with respect to each Right, make
adequate
14
<PAGE>
provision to substitute for such Common Shares, upon payment of the applicable
Purchase Price, any one or more of the following having an aggregate value
determined by the Board of Directors to be equal to the Current Value: (1)
cash, (2) a reduction in the Purchase Price, (3) Common Shares or other equity
securities of the Company (including, without limitation, shares, or units of
shares, of preferred stock which the Board of Directors of the Company has
determined to have the same value as shares of Common Stock (such shares of
preferred stock, "common stock equivalents")), (4) debt securities of the
Company, or (5) other assets; PROVIDED, HOWEVER, if the Company shall not have
made adequate provision to deliver value pursuant to clause (B) above within
thirty (30) days following the first occurrence of an event triggering the
rights to purchase Common Shares described in Section 11(a)(ii) the "Section
11(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, upon
the surrender for exercise of a Right and without requiring payment of the
Purchase Price, shares of Common Stock (to the extent available) and then, if
necessary, cash, which shares and cash have an aggregate value equal to the
Spread. If the Board of Directors of the Company shall determine in good faith
that it is likely that sufficient additional Common Shares could be authorized
for issuance upon exercise in full of the Rights, the thirty (30) day period set
forth above may be extended to the extent necessary, but not more than ninety
(90) days after the Section 11(a)(ii) Trigger Date, in order that the Company
may seek stockholder approval for the authorization of such additional shares
(such period, as it may be extended, the "Substitution Period"). To the extent
that the Company determines that some action need be taken pursuant to the first
and/or second sentences of this Section 11(a)(iii), the Company (x) shall
provide, subject to Section 7(e) hereof and the last paragraph of Section
11(a)(ii) hereof, that such action shall apply uniformly to all outstanding
Rights, and (y) may suspend the exercisability of the Rights until the
expiration of the Substitution Period in order to seek any authorization of
additional shares and/or to decide the appropriate form of distribution to be
made pursuant to such first sentence and to determine the value thereof. In the
event of any such suspension, the Company shall make a public announcement, and
shall deliver to the Rights Agent a statement, stating that the exercisability
of the Rights has been temporarily suspended. At such time as the suspension is
no longer in effect,
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<PAGE>
the Company shall make another public announcement, and deliver to the Rights
Agent a statement, so stating. For purposes of this Section 11(a)(iii), the
value of the Common Shares shall be the current per share market price (as
determined pursuant to Section 11(d)(i) hereof) of the Common Shares on the
Section 11(a)(ii) Trigger Date and the value of any common stock equivalent
shall be deemed to have the same value as the Common Shares on such date.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Shares
entitling them (for a period expiring within 45 calendar days after such record
date) to subscribe for or purchase Preferred Shares (or shares having the same
rights, privileges and preferences as the Preferred Shares ("equivalent
preferred shares")) or securities convertible into Preferred Shares or
equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (or having a conversion price per share, if a security
convertible into Preferred Shares or equivalent preferred shares) less than the
then current per share market price of the Preferred Shares (as defined in
Section 11(d)) on such record date, the Purchase Price to be in effect after
such record date shall be adjusted by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Preferred Shares outstanding on such record date plus the
number of Preferred Shares which the aggregate offering price of the total
number of Preferred Shares and/or equivalent preferred shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price and the denominator
of which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); PROVIDED, HOWEVER, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. In case such subscription price may be
paid in a consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent. Preferred
16
<PAGE>
Shares owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed; and in the event that
such rights, options or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) In case the Company shall fix a record date for the
making of a distribution to all holders of the Preferred Shares (including any
such distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; PROVIDED, HOWEVER, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the purpose
of this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive Trading
Days (as such term is hereinafter defined) immediately prior to such
17
<PAGE>
date; PROVIDED, HOWEVER, that in the event that the current per share market
price of the Security is determined during a period following the announcement
by the issuer of such Security of (A) a dividend or distribution on such
Security payable in shares of such Security or securities convertible into such
shares, or (B) any subdivision, combination or reclassification of such Security
and prior to the expiration of 30 Trading Days after the ex-dividend date for
such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the current per
share market price shall be appropriately adjusted to reflect the current market
price per share equivalent of such Security. The closing price for each day
shall be the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Security is not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Security is listed or admitted to trading or,
if the Security is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use, or, if on any such date the
Security is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Security selected by the Board of Directors of the Company. The term
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Security is listed or admitted to trading is open for the
transaction of business or, if the Security is not listed or admitted to trading
on any national securities exchange, a Business Day.
(i) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be the current per
18
<PAGE>
share market price of the Common Shares as determined pursuant to Section
11(d)(i) (appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof), multiplied by 1000. If
neither the Common Shares nor the Preferred Shares are publicly held or so
listed or traded, "current per share market price" shall mean the fair value per
share as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent.
(e) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one ten-millionth
of a Preferred Share or one ten-thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than three years
from the date of the transaction which requires such adjustment.
(f) If as a result of an adjustment made pursuant to
Section 11(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Shares, the number of such other shares so receivable upon exercise of
any Right shall thereafter be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the
Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent
to any adjustment made to the Purchase Price hereunder shall evidence the right
to purchase, at the adjusted Purchase Price, the number of one one-thousandths
of a Preferred Share purchasable from time to time hereunder upon exercise of
the Rights, all subject to further adjustment as provided herein.
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<PAGE>
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a Preferred Share (calculated to the nearest one
ten-millionth of a Preferred Share) obtained by (i) multiplying (x) the number
of one one-thousandths of a share covered by a Right immediately prior to this
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights in substitution
for any adjustment in the number of one one-thousandths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one hundred-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Right Certificates have been distributed, shall be at least 10 days
later than the date of the public announcement. If Right Certificates have been
distributed, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date Right
Certificates evidencing, subject to Section 14 hereof, the additional Rights to
which such holders shall be entitled as a result of such adjustment, or, at the
option of the Company, shall cause to be distributed to such holders of record
in substitution and replacement
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for the Right Certificates held by such holders prior to the date of adjustment,
and upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates to be so distributed shall be issued, executed
and countersigned in the manner provided for herein and shall be registered in
the names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of one one-thousandths of a Preferred Share
issuable upon the exercise of the Rights, the Right Certificates theretofore and
thereafter issued may continue to express the Purchase Price and the number of
one one-thousandths of a Preferred Share which were expressed in the initial
Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-thousandth of the then par value of
the Preferred Shares issuable upon exercise of the Rights, the Company shall
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
non-assessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that
an adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED,
HOWEVER, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those
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adjustments expressly required by this Section 11, as and to the extent that it
in its sole discretion shall determine to be advisable in order that any (i)
consolidation or subdivision of the Preferred Shares, (ii) issuance wholly for
cash of any Preferred Shares at less than the current market price, (iii)
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, (iv) dividends on
Preferred Shares payable in Preferred Shares or (v) issuance of any rights,
options or warrants referred to hereinabove in Section 11(b), hereafter made by
the Company to holders of its Preferred Shares shall not be taxable to such
stockholders.
(n) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise other than by payment of dividends in Common
Shares) into a greater or lesser number of Common Shares, then in any such case
(i) the number of one one-thousandths of a Preferred Share purchasable after
such event upon proper exercise of each Right shall be determined by multiplying
the number of one one-thousandths of a Preferred Share so purchasable
immediately prior to such event by a fraction, the numerator of which is the
number of Common Shares outstanding immediately before such event and the
denominator of which is the number of Common Shares outstanding immediately
after such event, and (ii) each Common Share outstanding immediately after such
event shall have issued with respect to it that number of Rights which each
Common Share outstanding immediately prior to such event had issued with respect
to it. The adjustments provided for in this Section 11(n) shall be made
successively whenever such a dividend is declared or paid or such a subdivision,
combination or consolidation is effected.
Section 12. CERTIFICATE OF ADJUSTMENT. Whenever an adjustment is
made as provided in Sections 11 and 13 hereof, the Company shall promptly (a)
prepare a certificate setting forth such adjustment, and a brief statement of
the facts accounting for such adjustment, (b) file with the Rights Agent and
with each transfer agent for the Common Shares or the Preferred Shares a copy of
such certificate and (c) mail a brief summary thereof to each holder of
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a Right Certificate in accordance with Section 25 hereof. The Rights Agent
shall be fully protected in relying on any such certificate and on any
adjustment therein contained.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
In the event that, at any time after a Person becomes an Acquiring
Person, directly or indirectly, (i) the Company shall consolidate with, or merge
with and into, any other Person, (ii) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (A) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price equal
to the then current Purchase Price multiplied by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable and
dividing that product by (y) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (B) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (C) the
term "Company" shall thereafter be deemed to refer to such issuer; and (D) such
issuer shall take such steps
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(including, but not limited to, the reservation of a sufficient number of its
Common Shares in accordance with Section 9 hereof) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
Common Shares thereafter deliverable upon the exercise of the Rights. The
Company covenants and agrees that it shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto the Company and
such issuer shall have executed and delivered to the Rights Agent a supplemental
agreement so providing. The Company shall not enter into any transaction of the
kind referred to in this Section 13 if at the time of such transaction there are
any rights, warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. For purposes hereof, the
"earning power" of the Company and its Subsidiaries shall be determined in good
faith by the Company's Board of Directors on the basis of the operating earnings
of each business operated by the Company and its Subsidiaries during the three
fiscal years preceding the date of such determination (or, in the case of any
business not operated by the Company or any Subsidiary during three full fiscal
years preceding such date, during the period such business was operated by the
Company or any Subsidiary).
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of
Rights or to distribute Right Certificates which evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders of
the Right Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for any
day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in
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either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Rights are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or, if
the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by NASDAQ
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Rights
selected by the Board of Directors of the Company. If on any such date no such
market maker is making a market in the Rights, the fair value of the Rights on
such date as determined in good faith by the Board of Directors of the Company
shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-thousandth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
one-thousandth of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it; PROVIDED, that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one
one-thousandth of a Preferred Share, the Company shall pay to each registered
holder of Right Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of one Preferred Share as the fraction of one Preferred Share that such
holder would otherwise receive upon the exercise of the aggregate number of
rights exercised by such holder. For the purposes
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of this Section 14(b), the current market value of a Preferred Share shall be
the closing price of a Preferred Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
(c) The holder of a Right by the acceptance of the Right
expressly waives any right to receive fractional Rights or fractional shares
upon exercise of a Right (except as provided above).
Section 15. RIGHTS OF ACTION. All rights of action in respect of
this Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares) may, without the consent of the
Rights Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), on his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right,
by accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books maintained by the Rights Agent if
surrendered at the principal office
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of the Rights Agent, duly endorsed or accompanied by a proper instrument of
transfer with a completed form of certification; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this
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Agreement, including the costs and expenses of defending against any claim or
liability in connection therewith.
The Rights Agent shall be protected and shall incur no liability for
or in respect of any action taken, suffered or omitted by it in connection with
its administration of this Agreement in reliance upon any Right Certificate or
certificate for Preferred Stock or for other securities of the Company,
instrument of assignment or transfer, power of attorney, endorsement, affidavit,
letter, notice, direction, consent, certificate, statement, or other paper or
document believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper person or persons.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS
AGENT. Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21 hereof. In case
at the time such successor Rights Agent shall succeed to the agency created by
this Agreement, any of the Right Certificates shall have been countersigned but
not delivered, any such successor Rights Agent may adopt the countersignature of
the predecessor Rights Agent and deliver such Right Certificates so
countersigned; and in case at that time any of the Right Certificates shall not
have been countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights
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Agent may adopt the countersignature under its prior name and deliver Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, the Rights Agent may countersign
such Right Certificates either in its prior name or in its changed name; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes
the duties and obligations expressly set forth in this Agreement and no implied
duties or obligations shall be read into this Agreement against the Rights
Agent. The Rights Agent shall perform those duties and obligations upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
President, a Vice President, the Treasurer or the Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this Agreement or in
the Right Certificates (except as to
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its countersignature thereof) or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been made by the Company
only.
(e) The Rights Agent shall not be under any responsibility
in respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Rights Agent) or in respect of
the validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any adjustment required under the provisions of
Sections 11 or 13 hereof or responsible for the manner, method or amount of any
such adjustment or the ascertaining of the existence of facts that would require
any such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Preferred Stock to be issued
pursuant to this Agreement or any Right Certificate or as to whether any shares
of Preferred Stock will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged end
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the President, a Vice President, the
Secretary or the Treasurer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered to be taken by it in good faith in accordance
with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer
or employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be
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interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Rights Agent under this Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other capacity
for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent of the Common Shares and the Preferred Stock by registered or
certified mail, and to the holders of the Right Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Shares and
the Preferred Stock by registered or certified mail, and to the holders of the
Right Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
(who shall, with such notice, submit his Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the United
States or of any state of the United States, in good standing, having an office
in the State of California which is authorized under such laws to exercise
corporate trust powers and is subject to supervision or
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examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $100
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
and the Preferred Stock, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price and the number or kind or class of shares or
other securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. REDEMPTION.
(a) The Board of Directors of the Company may, at its
option, at any time prior to such time as any Person becomes an Acquiring
Person, redeem all but not less than all the then outstanding Rights at a
redemption price of $0.001 per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"). The redemption of the Rights by the Board of Directors may be made
effective at such time, on such basis and subject to such conditions as the
Board of Directors in its sole discretion may establish.
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(b) Immediately upon the action of the Board of Directors
of the Company ordering the redemption of the Rights pursuant to paragraph (a)
of this Section 23, and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price. The Company shall
promptly give public notice of any such redemption; PROVIDED, HOWEVER, that the
failure to give, or any defect in, any such notice shall not affect the validity
of such redemption. Within 10 days after such action of the Board of Directors
ordering the redemption of the Rights pursuant to paragraph (a), the Company
shall mail a notice of redemption to all the holders of the then outstanding
Rights at their last addresses as they appear upon the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
transfer agent for the Common Shares. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. If the payment of the Redemption Price is not included with such
notice, each such notice shall state the method by which the payment of the
Redemption Price will be made. Neither the Company nor any of its Affiliates or
Associates may redeem, acquire or purchase for value any Rights at any time in
any manner other than that specifically set forth in this Section 23 or in
Section 24 hereof, other than in connection with the purchase of Common Shares
prior to the Distribution Date.
Section 24. EXCHANGE.
(a) The Board of Directors of the Company may, at its
option, at any time after any Person becomes an Acquiring Person, exchange all
or part of the then outstanding and exercisable Rights (which shall not include
Rights that have become void pursuant to the provisions of Section 11(a)(ii)
hereof) for Common Shares at an exchange ratio of one Common Share per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the
foregoing, the Board of Directors shall not be empowered to effect such exchange
at any time after any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or any such Subsidiary, or any
entity holding Common Shares for or pursuant to the terms of any such plan),
together
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with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of a majority of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors
of the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of Common Shares equal to
the number of such Rights held by such holder multiplied by the Exchange Ratio.
The Company shall promptly give public notice of any such exchange; PROVIDED,
HOWEVER, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange
will state the method by which the exchange of the Common Shares for Rights will
be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged. Any partial exchange shall be effected PRO RATA based
on the number of Rights (other than Rights which have become void pursuant to
the provisions of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the
Company, at its option, may substitute Preferred Shares or common stock
equivalents for Common Shares exchangeable for Rights, at the initial rate of
one one-thousandth of a Preferred Share (or an appropriate number of common
stock equivalents) for each Common Share, as appropriately adjusted to reflect
adjustments in the voting rights of the Preferred Shares pursuant to the terms
thereof, so that the fraction of a Preferred Share delivered in lieu of each
Common Share shall have the same voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common
Shares, Preferred Shares or common stock equivalents authorized by the Company's
certificate of incorporation and not outstanding or subscribed for, or reserved
or otherwise committed for
34
<PAGE>
issuance for purposes other than upon exercise of Rights, to permit any exchange
of Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares,
Preferred Shares or common stock equivalents for issuance upon exchange of the
Rights.
(e) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current per share market value of a whole Common Share.
For the purposes of this paragraph (e), the current per share market value of a
whole Common Share shall be the closing price of a Common Share (as determined
pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of exchange pursuant to this Section 24.
Section 25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall after the Distribution Date
propose (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the
35
<PAGE>
Company shall give to each holder of a Right Certificate, in accordance with
Section 26 hereof, a notice of such proposed action, which shall specify the
record date for the purposes of such stock dividend, or distribution of rights
or warrants, or the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of the Common Shares and/or
Preferred Shares, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least 10
days prior to the record date for determining holders of the Preferred Shares
for purposes of such action, and in the case of any such other action, at least
10 days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, whichever shall be the earlier.
(b) In case any event set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.
36
<PAGE>
Section 26. NOTICES. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Heartport, Inc.
200 Chesapeake Drive
Redwood City, California 94063
Attention: Secretary
Copy to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
600 Hansen Way, Second Floor
Palo Alto, California 94304
Attention: Jay K. Hachigian
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
First National Bank of Boston
150 Royall Street
Canton, Massachusetts 02021
Mail Stop: 45-02-62
Attention: Client Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
37
<PAGE>
Section 27. SUPPLEMENTS AND AMENDMENTS. The Company may from time
to time, and the Rights Agent shall, if the Company so directs, supplement or
amend this Agreement without the approval of any holders of Right Certificates
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
or to make any change to or delete any provision hereof or to adopt any other
provisions with respect to the Rights which the Company may deem necessary or
desirable; PROVIDED, HOWEVER, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended or supplemented
in any manner which would adversely affect the interests of the holders of
Rights (other than an Acquiring Person and its Affiliates and Associates). Any
supplement or amendment authorized by this Section 27 will be evidenced by a
writing signed by the Company and the Rights Agent.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Rights Agent and the registered holders of the Right Certificates (and,
prior to the Distribution Date, the Common Shares) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 30. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. GOVERNING LAW. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for
38
<PAGE>
all purposes shall be governed by and construed in accordance with the laws of
such State applicable to contracts to be made and performed entirely within such
State.
Section 32. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. DESCRIPTIVE HEADINGS. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 34. ADMINISTRATION. The Board of Directors of the Company
shall have the exclusive power and authority to administer and interpret the
provisions of this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors or the Company or as may be necessary or
advisable in the administration of this Agreement. All such actions,
calculations, determinations and interpretations which are done or made by the
Board of Directors in good faith shall be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties and
shall not subject the Board of Directors to any liability to the holders of the
Rights.
39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and their respective corporate seals to be
hereunder affixed and attested, all as of the day and year first above written.
Attest: HEARTPORT, INC.
/s/ Robert V. Gunderson, Jr. /s/ Wesley D. Sterman
____________________________________ By:____________________________________
Attest: FIRST NATIONAL BANK OF BOSTON
/s/ Norris L. Richardson, III /s/ Laura A. Welch
____________________________________ By:____________________________________
<PAGE>
EXHIBIT A
FORM
of
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
_______________________________________________
(Pursuant to Section 151 of the
Delaware General Corporation Law)
________________________________________________
Heartport, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on March 29, 1996:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Restated
Certificate of Incorporation of the Corporation, the Board of Directors hereby
creates a series of Preferred Stock, par value $0.001 per share (the "Preferred
Stock"), of the Corporation and hereby states the designation and number of
shares, and fixes the relative rights, preferences, and limitations thereof as
follows:
Section 1. DESIGNATION AND AMOUNT. The shares of this series
shall be designated as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting the Series A
Preferred Stock shall be 50,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; PROVIDED, that no decrease
shall reduce the number of shares of Series A Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the
A-1
<PAGE>
exercise of outstanding options, rights or warrants or upon the conversion of
any outstanding securities issued by the Corporation convertible into Series A
Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares
of any series of Preferred Stock (or any other stock) ranking prior and superior
to the Series A Preferred Stock with respect to dividends, the holders of shares
of Series A Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last day of March, June,
September and December in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount (if any) per share (rounded to the
nearest cent), subject to the provision for adjustment hereinafter set forth,
equal to 1000 times the aggregate per share amount of all cash dividends, and
1000 times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in shares of
Common Stock, par value $0.001 per share (the "Common Stock"), of the Company or
a subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under the preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in paragraph (A) of
this Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock).
(C) Dividends due pursuant to paragraph (A) of this
Section shall begin to accrue and be cumulative on outstanding shares of Series
A Preferred Stock from the Quarterly Dividend Payment Date next preceding the
date of issue of such shares, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of
A-2
<PAGE>
which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred Stock shall entitle the
holder thereof to 1000 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the number of votes per share
to which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided the Restated
Certificate of Incorporation of the Company, including any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise
required by law, holders of Series A Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the extent they
are entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
A-3
<PAGE>
(i) declare or pay dividends, or make any
other distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock;
(ii) declare or pay dividends, or make any
other distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled; or
(iii) redeem or purchase or otherwise acquire
for consideration shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Corporation ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Series A Preferred Stock.
(B) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. REACQUIRED SHARES. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock subject to the conditions and restrictions on issuance set forth
herein, in the Restated Certificate of Incorporation of the Company, including
any Certificate of Designations creating a series of Preferred Stock or any
similar stock or as otherwise required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation the holders of shares
of Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1000 times the aggregate amount to be distributed per share to holders of shares
of Common Stock plus an amount equal to any accrued and unpaid dividends. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of
A-4
<PAGE>
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each share
of Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. AMENDMENT. The Certificate of Incorporation of the
Corporation shall not be amended in any manner, including in a merger or
consolidation, which would alter, change, or repeal the powers, preferences or
special rights of the Series A Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock, voting together as a single
class.
Section 9. RANK. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and upon liquidation, dissolution and
winding up, junior to all series of Preferred Stock.
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Chief Executive Officer this 18th day of
July, 1996.
HEARTPORT, INC.
/s/ Wesley D. Sterman
By:______________________________________
A-5
<PAGE>
EXHIBIT B
Form of Right Certificate
Certificate No. R- _______ Rights
NOT EXERCISABLE AFTER APRIL __, 2006 OR EARLIER IF REDEMPTION OR EXCHANGE
OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.001 PER RIGHT AND TO
EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS THAT ARE OR WERE ACQUIRED OR BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR ANY ASSOCIATES OR AFFILIATES THEREOF (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS
MAY BECOME NULL AND VOID.
Right Certificate
HEARTPORT, INC.
This certifies that _______________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of ____________ ___, 1996 (the "Rights Agreement"), between
Heartport, Inc., a Delaware corporation (the "Company"), and ___________
____________________________ (the "Rights Agent"), to purchase from the Company
at any time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., Palo Alto, California time, on April __,
2006, at the principal office of the Rights Agent, or at the office of its
successor as Rights Agent, one one-thousandth of a fully paid non-assessable
share of Series A Junior Participating Preferred Stock, par value $0.001 per
share (the "Preferred Shares"), of the Company, at a purchase price of $0.001
per one one-thousandth of a Preferred Share (the "Purchase Price"), upon
presentation and surrender of this Right Certificate with the certification and
the Form of Election to Purchase duly executed. The number of Rights evidenced
by this Right Certificate (and the number of one one-thousandths of a Preferred
Share which may be purchased upon exercise hereof) set forth above, and the
Purchase Price set forth above, are the number and Purchase Price as of April
__, 1996, based on the Preferred Shares as constituted at such date. As
provided in the Rights Agreement, the Purchase Price and the number of one
one-thousandths of a Preferred Share which may be purchased upon the exercise of
the Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.
From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the Rights
Agreement) acquired or beneficially owned by an Acquiring Person or an
B-1
<PAGE>
Associate or Affiliate of an Acquiring Person (as such terms are defined in the
Rights Agreement), such Rights shall become void, and any holder of such Rights
shall thereafter have no right to exercise such Rights.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, at the Company's
option, the Rights evidenced by this Certificate (i) may be redeemed by the
Company at a redemption price of $0.001 per Right or (ii) may be exchanged in
whole or in part for shares of the Company's Common Stock, par value $0.001 per
share, or Preferred Shares.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
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<PAGE>
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of _______________, ____.
Attest: HEARTPORT, INC.
___________________________________ By:____________________________________
Countersigned:
___________________________________
Rights Agent
By: _______________________________
Authorized Signature
B-3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED _________________________________ hereby sells,
assigns and transfers unto_________________________________________________
_____________________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ____________________________,
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _____________ ___, _____
________________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a financial institution that is a
member of the Stock Transfer Association's approved medallion program (such as
STAMP, SEMP, or MSP) having an office or correspondent in the United States:
- - --------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
________________________________________
Signature
- - --------------------------------------------------------------------------------
B-4
<PAGE>
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate.)
To HEARTPORT, INC.:
The undersigned hereby irrevocably elects to exercise ________________
Rights represented by this Right Certificate to purchase the Preferred Shares
issuable upon the exercise of such Rights and requests that certificates for
such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number_____________________________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number_____________________________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
Dated: _____________ ___, _____
________________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a financial institution that is a
member of the Stock Transfer Association's approved Medallion program (such as
STAMP, SEMP or MSP) having an office or correspondent in the United States.
B-5
<PAGE>
Form of Reverse Side of Right Certificate -- continued
- - --------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
_________________________________
Signature
- - --------------------------------------------------------------------------------
NOTICE
The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
B-6
<PAGE>
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On March 29, 1996, the Board of Directors of Heartport, Inc. (the
"Company") declared a dividend of one preferred share purchase right (a "Right")
for each outstanding share of common stock, par value $0.001 per share (the
"Common Shares") outstanding on April __, 1996 (the "Record Date") to the
stockholders of record on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock, par value $0.001 per share (the "Preferred
Shares"), of the Company, at a price of $0.001 per one one-thousandth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement (the "Rights
Agreement") between the Company and First National Bank of Boston, as Rights
Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 20% or more of the
outstanding Common Shares (following the closing of the Company's Initial Public
Offering of Common Shares), or (ii) 10 business days (or such later date as may
be determined by action of the Board of Directors prior to such time as any
Person becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of such outstanding Common Shares (the earlier of such
dates being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the Common Share certificates outstanding as of the Record
Date, by such Common Share certificate with a copy of this Summary of Rights
attached thereto.
The Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Share certificates issued after the Record Date or upon transfer or new
issuance of Common Shares will contain a notation incorporating the Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Shares
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Shares as of the Close of Business on the Distribution Date and
such separate Right Certificates alone will evidence the Rights.
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The Rights are not exercisable until the Distribution Date. The
Rights will expire on April __, 2006 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed by
the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a quarterly dividend
payment of 1000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to an
aggregate payment of 1000 times the aggregate payment made per Common Share.
Each Preferred Share will have 1000 votes, voting together with the Common
Shares. In the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
1000 times the amount received per Common Share. These rights are protected by
customary anti-dilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the Rights
Agreement) acquired or beneficially owned by an Acquiring Person or an Associate
or Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.
In the event that, at any time after a Person becomes an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
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<PAGE>
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market value
of two times the exercise price of the Right. In the event that any person
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person and its
Affiliates and Associates (which will thereafter be void), will thereafter have
the right to receive upon exercise that number of Common Shares having a market
value of two times the exercise price of the Right. If the Company does not
have sufficient Common Shares to satisfy such obligation to issue Common Shares,
or if the Board of Directors so elects, the Company shall deliver upon payment
of the exercise price of a Right an amount of cash or securities equivalent in
value to the Common Shares issuable upon exercise of a Right; provided that, if
the Company fails to meet such obligation within 30 days following the later of
(x) the first occurrence of an event triggering the right to purchase Common
Shares and (y) the date on which the Company's right to redeem the Rights
expires, the Company must deliver, upon exercise of a Right but without
requiring payment of the exercise price then in effect, Common Shares (to the
extent available) and cash equal in value to the difference between the value of
the Common Shares otherwise issuable upon the exercise of a Right and the
exercise price then in effect. The Board of Directors may extend the 30-day
period described above for up to an additional 60 days to permit the taking of
action that may be necessary to authorize sufficient additional Common Shares to
permit the issuance of Common Shares upon the exercise in full of the Rights.
At any time after any Person becomes an Acquiring Person and prior to
the acquisition by any person or group of a majority of the outstanding Common
Shares, the Board of Directors of the Company may exchange the Rights (other
than Rights owned by such person or group which have become void), in whole or
in part, at an exchange ratio of one Common Share per Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the time any Person becomes an Acquiring Person,
the Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $0.001 per Right (the "Redemption Price"). The redemption
of the Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of
the Company without the consent of the holders of the Rights, except that from
and after such time as any person becomes an Acquiring Person no such amendment
may adversely affect the
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<PAGE>
interests of the holders of the Rights (other than the Acquiring
Person and its Affiliates and Associates).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on S-1 dated
___________ __, 1996. A copy of the Agreement is available free of charge from
the Company. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Agreement, which
is hereby incorporated herein by reference.
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HEARTPORT, INC.
1996 STOCK OPTION PLAN
(Restated October 21, 1996)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Option Plan is intended to promote the interests of
Heartport, Inc., a Delaware corporation, by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock, and
(ii) the Automatic Option Grant Program under which
Eligible Directors shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Four shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have authority to administer the
Discretionary Option Grant Program with respect to Section 16 Insiders.
Administration of the Discretionary Option Grant Program with respect to all
other persons eligible to participate in that program may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee. In
addition, the Board may retain the power to administer the Plan with respect to
all persons. The members of the Secondary Committee may be Board members who
are Employees eligible to receive discretionary option grants under the Plan or
any stock option, stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary).
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and shall be subject to
removal by the Board at
<PAGE>
any time. The Board may also at any time terminate the functions of any
committee and reassume all powers and authority previously delegated to such
committee.
C. The Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority to establish such rules
and regulations as it may deem appropriate for proper administration of the
Discretionary Option Grant Program and to make such determinations under, and
issue such interpretations of, the provisions of such program and any
outstanding options thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant Program under its jurisdiction or any option
thereunder.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants made under the Plan.
E. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program. However, the Plan
Administrator (other than the Secondary Committee) shall exercise any
discretionary functions with respect to option grants made thereunder as it
deems advisable.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option Grant
Program are as follows:
(i) Employees,
(ii) non-employee members of the Board or of the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Subsidiary).
B. The Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority (subject to the provisions of
the Plan) to determine, with respect to the option grants under the
Discretionary Option Grant Program, which eligible persons are to receive option
grants, the time or times when such option grants are to be made, the number of
shares to be covered by each such grant, the status of the granted option as
either an Incentive Option or a Non-Statutory Option, the time or times at which
each option is to become exercisable and the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to
remain outstanding.
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<PAGE>
C. The individuals eligible to receive option grants under the Automatic
Option Grant Program shall be (i) those individuals who are serving as
non-employee Board members on the Automatic Option Grant Program Effective Date
or who are first elected or appointed as non-employee Board members after such
date, whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members after one or more Annual Stockholders Meetings held after the
Automatic Option Grant Program Effective Date. A non-employee Board member who
has previously been in the employ of the Corporation (or any Parent or
Subsidiary) shall not be eligible to receive an option grant under the Automatic
Option Grant Program on the Automatic Option Grant Program Effective Date or at
the time he or she first becomes a non-employee Board member, but such
individual shall be eligible to receive periodic option grants under the
Automatic Option Grant Program upon his or her continued service as a
non-employee Board member following one or more Annual Stockholders Meetings.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 5,500,000 shares.
B. No one person participating in the Plan may receive options or
separately exercisable stock appreciation rights for more than One Million
(1,000,000) shares of Common Stock over the term of the Plan, exclusive of any
option grants received prior to January 1, 1996.
C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
(including any options incorporated from the Predecessor Plan) expire or
terminate for any reason prior to exercise in full or (ii) the options are
canceled in accordance with the cancellation-regrant provisions of Article Two.
All shares issued under the Plan (including shares issued upon exercise of
options incorporated from the Predecessor Plan), whether or not those shares are
subsequently repurchased by the Corporation pursuant to its repurchase rights
under the Plan, shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan. In addition,
should the exercise price of an option under the Plan (including any option
incorporated from the Predecessor Plan) be paid with shares of Common Stock or
should shares of Common Stock otherwise issuable under the Plan be withheld by
the Corporation in satisfaction of the withholding taxes incurred in connection
with the exercise of an option under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised, and not by the net number of
shares of Common Stock issued to the holder of such option.
D. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of
3
<PAGE>
securities issuable under the Plan, (ii) the number and/or class of securities
for which any one person may be granted options and separately exercisable stock
appreciation rights per calendar year or over the term of the Plan, (iii) the
number and/or class of securities for which automatic option grants are to be
subsequently made per Eligible Director under the Automatic Option Grant Program
and (iv) the number and/or class of securities and the exercise price per share
in effect under each outstanding option (including any option incorporated from
the Predecessor Plan) in order to prevent the dilution or enlargement of
benefits thereunder. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive.
4
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable written instructions to
(a) a Corporation-designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
5
<PAGE>
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable
for such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by
the Optionee at the time of death may be subsequently exercised by
the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date of
the Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent it is not exercisable for vested shares on
the date of such cessation of Service.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(v) In the event of a Corporate Transaction, the
provisions of Section III of this Article Two shall govern the period for
which the outstanding options are to remain exercisable following the
Optionee's cessation of Service and shall supersede any provisions to the
contrary in this section.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service from
the period otherwise in effect for that option to such greater period of
time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's
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<PAGE>
cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested under the option had
the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of record
of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option
may be assigned (i) to a member of the immediate family of the optionee or to a
trust established for the benefit of one or more members of the immediate family
of the optionee, provided that the assignment shall not be effective until
written notice of the assignment is received by the Plan Administrator, or (ii)
in accordance with terms approved in advance by the Plan Administrator. The
terms applicable to the assigned option (or portion thereof) shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall NOT be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. EXERCISE PRICE. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
C. DOLLAR LIMITATION. To the extent required by Code Section 422, the
aggregate Fair Market Value of the shares of Common Stock (determined as of the
respective date or dates of grant) for which one or more options granted to any
Employee under the Plan (or any other option plan of the Corporation or any
Parent or Subsidiary) may for the first time become exercisable as Incentive
Options during any one (1) calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more
such options which become exercisable for the first time in the same calendar
year, the foregoing
7
<PAGE>
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, to the extent required by Code Section 422, then
the exercise price per share shall not be less than one hundred ten percent
(110%) of the Fair Market Value per share of Common Stock on the option grant
date, and the option term shall not exceed five (5) years measured from the
option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall NOT so accelerate if and to the extent:
(i) such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall
be made by the Plan Administrator, and its determination shall be final, binding
and conclusive.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction, whether
or not those options are to be assumed or replaced (or those repurchase rights
are to be assigned) in the Corporate Transaction.
D. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
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<PAGE>
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan on both an aggregate and per
Optionee basis following the consummation of such Corporate Transaction and (ii)
the exercise price payable per share under each outstanding option, PROVIDED the
aggregate exercise price payable for such securities shall remain the same.
F. Any options which are assumed or replaced in the Corporate Transaction
and do not otherwise accelerate at that time, shall automatically accelerate
(and any of the Corporation's outstanding repurchase rights which do not
otherwise terminate at the time of the Corporate Transaction shall automatically
terminate and the shares of Common Stock subject to those terminated rights
shall vest) in the event the Optionee's Service should subsequently terminate by
reason of an Involuntary Termination within twelve (12) months following the
effective date of such Corporate Transaction. Any options so accelerated (and
any of the Corporation's outstanding repurchase rights so terminated) shall
vest, as if the Optionee's Service continued for an additional twelve (12)
months following the Involuntary Termination and shall remain exercisable for
all of the shares which are then exercisable and/or vested until the EARLIER of
(i) the expiration of the option term or (ii) the expiration of the one (1)-year
period measured from the effective date of the Involuntary Termination.
G. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Change in Control or (ii)
condition any such option acceleration (and the termination of any outstanding
repurchase rights) upon the subsequent Involuntary Termination of the Optionee's
Service within a specified period following the effective date of such Change in
Control. Any options accelerated in connection with a Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.
H. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
I. The grant of options under the Discretionary Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
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IV. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (A) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (B) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless
it is approved by the Plan Administrator. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is rejected by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time prior
to the LATER of (A) five (5) business days after the receipt of the
rejection notice or (B) the last day on which the option is otherwise
exercisable in accordance with the terms of the documents evidencing such
option, but in no event may such rights be exercised more than ten (10)
years after the option grant date.
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ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
below:
1. Each Eligible Director who is first elected or appointed as a
non-employee Board member after the Automatic Option Grant Program Effective
Date shall automatically be granted on the date of such initial election or
appointment (as the case may be), a Non-Statutory Option to purchase thirty-two
thousand (32,000) shares of Common Stock.
2. On the date of each Annual Stockholders Meeting, beginning with
the first Annual Meeting after the Corporation's initial public offering, each
individual who was an Eligible Director on the Automatic Option Grant Program
Effective Date and continues to serve as an Eligible Director after such
meeting, shall automatically be granted, whether or not such individual is
standing for re-election as a Board member at that Annual Meeting, a
Non-Statutory Option to purchase an additional six thousand four hundred (6,400)
shares of Common Stock. On the date of each Annual Stockholders Meeting, each
Eligible Director who is elected or appointed as a non-employee Board member
after the Automatic Option Grant Program Effective Date and continues to serve
as an Eligible Director after such meeting, shall automatically be granted,
whether or not such individual is standing for re-election as a Board member at
that Annual Meeting, a Non-Statutory Option to purchase an additional six
thousand four hundred (6,400) shares of Common Stock, beginning on the first
anniversary of the grant date of such Eligible Director's initial automatic
option grant. There shall be no limit on the number of such 6,400-share option
grants any one Eligible Director may receive over his or her period of Board
service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years measured
from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each initial option granted after
October 21, 1996 shall become exercisable in a series of five (5) equal and
successive annual installments over the Optionee's period of continued service
as a Board member, with the first such installment to become exercisable upon
the Optionee's completion of one (1) year of Board service measured from the
option grant date. Each subsequent annual automatic option grant
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shall become fully exercisable on the fifth anniversary of the date on which
such annual grant was made.
E. EFFECT OF TERMINATION OF BOARD SERVICE. The following provisions
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the person
or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution) shall have
a twelve (12)-month period following the date of such cessation of Board
service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then the option shall
become exercisable and shares at the time subject to the option shall
immediately vest as if the Optionee had continued to serve as a Board
member for an additional twelve (12) month period following the Optionee's
cessation of Board service, so that such option may, during the twelve
(12)-month exercise period following such cessation of Board service, be
exercised for all or any portion of such shares of Common Stock to the
extent so vested and exercisable.
(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for any
vested shares for which the option has not been exercised. However, the
option shall, immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding to the extent it is not exercisable
for vested shares on the date of such cessation of Board service.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically vest so that each such option shall, immediately prior to the
effective date of the Corporate Transaction, be exercisable for an additional
number of vested shares of Common Stock subject to such option as if the Board
member continued to serve as a Board member for an additional twelve (12) months
and may be exercised for all or any portion of such shares of Common Stock to
the extent so vested. Immediately following the consummation of the Corporate
Transaction, each automatic
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option grant shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common Stock
at the time subject to each outstanding option but not otherwise vested shall
automatically vest so that each such option shall, immediately prior to the
effective date of the Change in Control, be exercisable for an additional number
of vested shares of Common Stock as if the Board member continued to serve as a
Board member for an additional twelve (12) months and may be exercised for all
or any portion of such shares of Common Stock to the extent so vested. Each
such option shall remain exercisable for such option shares so vested until the
expiration or sooner termination of the option term or the surrender of the
option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, each automatic option
granted before October 21, 1996 and held by the Optionee for a period of at
least six (6) months shall be automatically canceled. The Optionee shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock at
the time subject to the canceled option (to the extent such option is vested)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the cancellation of
the option by the Corporation. No approval or consent of the Board shall be
required in connection with such option cancellation and cash distribution.
D. The grant of options under the Automatic Option Grant Program shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
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ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee to pay the option
exercise price under the Plan by delivering a promissory note payable in one or
more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. Promissory notes may be authorized with
or without security or collateral. In all events, the maximum credit available
to the Optionee may not exceed the sum of (i) the aggregate option exercise
price payable for the purchased shares plus (ii) any Federal, state and local
income and employment tax liability incurred by the Optionee in connection with
the option exercise.
B. The Plan Administrator may, in its discretion, determine that one or
more such promissory notes shall be subject to forgiveness by the Corporation in
whole or in part upon such terms as the Plan Administrator may deem appropriate.
II. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan (including
outstanding options incorporated from the Predecessor Plan) and to grant in
substitution new options covering the same or different number of shares of
Common Stock but with an exercise price per share based on the Fair Market Value
per share of Common Stock on the new option grant date.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or stock appreciation rights under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options under the Plan with the right to use shares of
Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options. Such right may be
provided to any such holder in either or both of the following formats:
(i) STOCK WITHHOLDING: The election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such Non-Statutory Option, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
(ii) STOCK DELIVERY: The election to deliver to the
Corporation, at the time the Non-Statutory Option is exercised, one or more
shares of Common Stock
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previously acquired by such holder (other than in connection with the
option exercise triggering the Taxes) with an aggregate Fair Market Value
equal to the percentage of the Taxes (not to exceed one hundred percent
(100%)) designated by the holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Discretionary Option Grant Program became effective on April 25,
1996, the Plan Effective Date and options may be granted under the Discretionary
Option Grant Program from and after the Plan Effective Date. The Automatic
Option Grant Program became effective on April 25, 1996, the Automatic Option
Grant Program Effective Date and the initial option grants under the Automatic
Option Grant Program shall be made to the Eligible Directors at that time. On
October 21, 1996, the Plan was amended to increase the number of shares issuable
thereunder to 5,500,000 shares and to make certain other amendments and to
delete provisions no longer required by Section 16 of the 1934 Act as a result
of the SEC's revision of Rule 16b-3. However, no options granted under the Plan
on the basis of such increase may be exercised until the Plan amendment is
approved by the Corporation's stockholders. If such stockholder approval is not
obtained within twelve (12) months after the date of Board approval of the
amendment, then all options previously granted under this Plan on the basis of
such increase shall terminate and cease to be outstanding, and no further
options shall be granted and no shares shall be issued under the Plan on the
basis of such increase.
B. The Plan shall serve as the successor to the Predecessor Plan, and no
further option grants shall be made under the Predecessor Plan after the Plan
Effective Date. All options outstanding under the Predecessor Plan as of such
date shall, immediately upon approval of the Plan by the Corporation's
stockholders, be incorporated into the Plan and treated as outstanding options
under the Plan. However, each outstanding option so incorporated shall continue
to be governed solely by the terms of the documents evidencing such option, and
no provision of the Plan shall be deemed to affect or otherwise modify the
rights or obligations of the holders of such incorporated options with respect
to their acquisition of shares of Common Stock.
C. The option/vesting acceleration provisions of Article Two relating to
Corporate Transactions and Changes in Control may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise provide for such acceleration.
D. The Plan shall terminate upon the EARLIEST of (i) February 28, 2006,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued pursuant to the exercise of the options under the Plan or (iii)
the termination of all outstanding options in connection with a Corporate
Transaction. Upon such Plan termination, all options outstanding on such date
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such options.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall
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adversely affect the rights and obligations with respect to options or stock
appreciation rights at the time outstanding under the Plan unless the Optionee
consents to such amendment or modification. Notwithstanding the foregoing
clause, the Plan Administrator may amend an outstanding option to reduce the
number of option shares previously granted to an optionee provided the reduction
applies solely to unvested shares or shares which have not yet become
exercisable as of the date of the amendment. In addition, the Board shall not,
without the approval of the Corporation's stockholders, (i) materially increase
the maximum number of shares issuable under the Plan, the number of shares for
which options may be granted under the Automatic Option Grant Program or the
maximum number of shares for which any one person may be granted options or
separately exercisable stock appreciation rights in the aggregate over the term
of the Plan, except for permissible adjustments in the event of certain changes
in the Corporation's capitalization, or (ii) materially modify the eligibility
requirements for Plan participation.
B. Options to purchase shares of Common Stock may be granted under the
Plan that are in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under the Plan are
held in escrow until there is obtained stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees the exercise price paid for any excess shares issued
under the Plan and held in escrow, together with interest (at the applicable
Short Term Federal Rate) for the period the shares were held in escrow, and such
shares shall thereupon be automatically canceled and cease to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option or stock
appreciation right under the Plan and the issuance of any shares of Common Stock
upon the exercise of any option or stock appreciation right shall be subject to
the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options and stock
appreciation rights granted under it and the shares of Common Stock issued
pursuant to it.
B. No shares of Common Stock or other assets shall be issued or delivered
under the Plan unless and until there shall have been compliance with all
applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
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VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee, which rights
are hereby expressly reserved by each, to terminate such person's Service at any
time for any reason, with or without cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.
B. AUTOMATIC OPTION GRANT PROGRAM EFFECTIVE DATE shall mean the Section
12(g) Registration Date.
C. BOARD shall mean the Corporation's Board of Directors.
D. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority
of the Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (A)
who were still in office at the time the Board approved such election or
nomination.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
F. COMMON STOCK shall mean the Corporation's common stock.
G. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction; or
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(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
H. CORPORATION shall mean Heartport, Inc., a Delaware corporation.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under the Plan.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on the
Nasdaq National Market or any successor system. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for
the Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of option grants made on the date the
Underwriting Agreement is executed and the initial public offering price of
the Common Stock is established, the Fair Market Value shall be deemed to
be equal to the established initial offering price per share. For purposes
of option grants made prior to such date, the Fair Market Value shall be
determined by the Plan Administrator after taking into account such factors
as the Plan Administrator shall deem appropriate.
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N. HOSTILE TAKE-OVER shall mean a change in ownership of the
Corporation effected through the following transaction:
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept, AND
(ii) more than fifty percent (50%) of the securities so
acquired are accepted from persons other than Section 16 Insiders.
O. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive programs)
by more than fifteen percent (15%) or (C) a relocation of such individual's
place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected by the Corporation without
the individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or
disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The
foregoing definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary) may consider as
grounds for the dismissal or discharge of any Optionee or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
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T. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more.
W. PLAN shall mean the Corporation's 1996 Stock Option Plan, as set forth
in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant Program with respect to one or more
classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.
Y. PLAN EFFECTIVE DATE shall mean the Section 12(g) Registration Date.
Z. PREDECESSOR PLAN shall mean the Corporation's existing 1993 Stock
Option Plan.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant Program with respect to Section 16 Insiders.
BB. SECONDARY COMMITTEE shall mean a committee of one (1) or more Board
members appointed by the Board or Primary Committee to administer the
Discretionary Option Grant Program with respect to eligible persons other than
Section 16 Insiders.
CC. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
DD. SECTION 12(g) REGISTRATION DATE shall mean the first date on which the
Common Stock is registered under Section 12(g) of the 1934 Act.
EE. SERVICE shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
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FF. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
GG. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
HH. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
II. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
JJ. STOCKHOLDER shall mean the owner of stock (as determined under Code
Section 424(d)) possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Corporation (or any Parent or
Subsidiary).
KK. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
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HEARTPORT, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Amended and Restated as of October 21, 1996)
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests of
Heartport, Inc. by providing eligible employees with the opportunity to acquire
a proprietary interest in the Corporation through participation in a
payroll-deduction based employee stock purchase plan designed to qualify under
Section 423 of the Code. This Restatement shall be effective for the first
Offering Period beginning November 1, 1996.
Capitalized terms herein shall have the meanings assigned to such terms in
the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and construe
any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed Two Hundred Forty
Thousand (240,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date and (iii) the number and class of
securities and the price per share in effect under each outstanding Purchase
Right in order to prevent the dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive or overlapping Offering Periods until such
time as (i) the maximum number of shares of Common Stock available for issuance
under the Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
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B. Each Offering Period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date. The initial Offering Period shall commence on November 1, 1996 and
terminate on the last business day in October 1998. The next Offering Period
shall commence on June 1, 1997, the next Offering Period shall commence on
November 3, 1997 and subsequent Offering Periods shall commence every six (6)
months thereafter on the first business day in May and November each year unless
otherwise designated by the Plan Administrator. The Plan Administrator shall
have complete discretion to change the start date and the duration of an
Offering Period provided Eligible Employees are notified prior to the start date
of any Purchase Period within an Offering Period for which such change is to be
effective and provided, further, that no Offering Period shall have a duration
exceeding twenty-seven (27) months.
C. Each Offering Period shall be comprised of a series of one or
more successive Purchase Periods. Each Purchase Period shall be of such
duration (generally not to exceed six (6) months) as determined by the Plan
Administrator prior to the start date. However, the initial Purchase Period
shall commence on November 1, 1996 and terminate on May 30, 1997. The next
Purchase Period shall commence on June 1, 1997, and subsequent Purchase Periods
shall commence on the first business day of November and May each calendar year
thereafter unless otherwise designated by the Plan Administrator.
V. ELIGIBILITY
A. Each Eligible Employee shall be eligible to participate in the
Plan in accordance with the following provisions:
- An individual who is an Eligible Employee on the start date of
any Offering Period under the Plan shall be eligible to commence participation
in that Offering Period on such start date.
- An individual who first becomes an Eligible Employee after the
start date of any Offering Period under the Plan may enter any subsequent
Offering Period on which he/she remains an Eligible Employee.
B. To participate in the Plan for a particular Offering Period,
the Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization form) and file such forms with the Plan Administrator (or its
designate) on or before the start date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock under the Plan may be any multiple
of one percent (1%) of the Cash Compensation paid to the Participant during each
Purchase Period within the Offering Period, up to a maximum of fifteen percent
(15%). However, if a Participant is participating in more than one Offering
Period at any one time, the maximum authorized payroll deduction
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remains fifteen percent (15%). The deduction rate so authorized shall continue
in effect for the remainder of the Offering Period, except to the extent such
rate is changed in accordance with the following guidelines:
(i) The Participant may, at any time during the Ofering
Period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Period.
(ii) The Participant may, prior to the commencement of any new
Purchase Period within the Offering Period, increase the rate of his or her
payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent
(15%) maximum) shall become effective as of the start date of the Purchase
Period following the filing of such form.
B. Payroll deductions shall begin on the first pay day following
the start date for the Offering Period and shall (unless sooner terminated by
the Participant) continue through the pay day ending with or immediately prior
to the last day of that Offering Period. The amounts so collected shall be
credited to the Participant's book account under the Plan, but no interest shall
be paid on the balance from time to time outstanding in such account. The
amounts collected from the Participant shall not be held in any segregated
account or trust fund and may be commingled with the general assets of the
Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's Purchase Right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different Offering Period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
separate Purchase Right for each Offering Period in which he or she
participates. The Purchase Right shall be granted on the start date of the
Offering Period and shall provide the Participant with the right to purchase
shares of Common Stock, in a series of successive installments over the
remainder of such Offering Period, upon the terms set forth below. Each
Participant may participate in more than one (1) Offering Period at any one
time. Accordingly, a Participant may continue to participate in one Offering
Period and also enroll in subsequent Offering Periods. The Purchase Right shall
be granted on the date such individual first joins an Offering Period, shall
continue until the end of the Offering Period, and shall be automatically
exercised in successive semi-annual installments on the last business day of the
Purchase Period each year (the last business day of April and October each year
or such other date selected by the Plan Administrator as the ending date for the
Purchase Period) until the Offering Period ends.
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Accordingly, each Purchase Right may be exercised up to two (2) times each year
it remains outstanding. The Participant shall execute a stock purchase
agreement embodying such terms and such other provisions (not inconsistent with
the Plan) as the Plan Administrator may deem advisable
Under no circumstances shall Purchase Rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each Purchase Right shall be
automatically exercised in installments on each successive Purchase Date within
the Offering Period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than any Participant whose payroll
deductions have previously been refunded in accordance with the Termination of
Purchase Right provisions below) on each such Purchase Date. The purchase shall
be effected by applying the Participant's payroll deductions for the Purchase
Period ending on such Purchase Date (together with any carryover deductions from
the preceding Purchase Period) to the purchase of whole shares of Common Stock
(subject to the limitation on the maximum number of shares purchasable per
Participant on any one Purchase Date) at the purchase price in effect for the
Participant for that Purchase Date.
C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the Offering Period shall be equal to eighty-five percent (85%) of the LOWER of
(i) the Fair Market Value per share of Common Stock on the start date for the
Offering Period or (ii) the Fair Market Value per share of Common Stock on that
Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the Offering
Period shall be the number of shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Period
ending with that Purchase Date (plus any carryover deductions from the preceding
Purchase Period) by the purchase price in effect for the Participant for that
Purchase Date. However, the maximum number of shares of Common Stock purchasable
per Participant on any one Purchase Date shall not exceed ONE THOUSAND (1,000)
shares, subject to periodic adjustments in the event of certain changes in the
Corporation's capitalization.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied
to the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable by the Participant on the
Purchase Date shall be promptly refunded.
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F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding Purchase Rights:
(i) A Participant may, at any time prior to the next
Purchase Date within the Offering Period, terminate his or her outstanding
Purchase Right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated Purchase Right. Any
payroll deductions collected during the Purchase Period in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such Purchase Right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such Purchase Right shall be
irrevocable, and the Participant may not subsequently rejoin the Purchase
Period for which the terminated Purchase Right was granted. In order to
resume participation in any subsequent Offering Period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the start date for that Offering Period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her Purchase Right remains outstanding, then that Purchase
Right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Period in which the Purchase Right so
terminates (plus any carryover amounts) shall be immediately refunded.
However, should the Participant cease to remain in active service by reason
of an approved unpaid leave of absence, then the Participant shall have the
election, exercisable up until the last business day of the Purchase Period
in which such leave commences, to (a) withdraw all the funds in the
Participant's payroll account at the time of the commencement of such leave
or (b) have such funds held for the purchase of shares at the end of such
Purchase Period. In no event, however, shall any further payroll
deductions be added to the Participant's account during such leave. Upon
the Participant's return to active service, his or her payroll deductions
under the Plan shall automatically resume at the rate in effect at the time
the leave began, provided the Participant returns to service prior to the
expiration date of the offering period in which such leave began.
G. CORPORATE TRANSACTION. Each outstanding Purchase Right shall
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Period in which such Corporate Transaction occurs to the
purchase of shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the LOWER of (i) the Fair Market Value per share of
Common Stock on the start date for the Offering Period in which such Corporate
Transaction occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Corporate Transaction. However,
the applicable limitation on the number
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<PAGE>
of shares of Common Stock purchasable per Participant shall continue to apply to
any such purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding Purchase Rights prior to the effective date of the
Corporate Transaction.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
of Common Stock which are to be purchased pursuant to outstanding Purchase
Rights on any particular date exceed the number of shares then available for
issuance under the Plan, the Plan Administrator shall make a pro-rata allocation
of the available shares on a uniform and nondiscriminatory basis, and the
payroll deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. During the Participant's lifetime, the Purchase
Right shall be exercisable only by the Participant and shall not be assignable
or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding Purchase
Right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any Purchase Right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other Purchase Right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value of such stock on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations, the
following provision shall be in effect:
(i) No right to acquire Common Stock under any
outstanding Purchase Right shall accrue to the extent the Participant has
already accrued in the same calendar year the right to acquire Common Stock
under one (1) or more other Purchase Rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common
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Stock (determined on the basis of the Fair Market Value of such stock on
the date or dates of grant) for each calendar year such rights were at any
time outstanding.
C. If by reason of such accrual limitations, any Purchase Right of
a Participant does not accrue for a particular Purchase Period, then the payroll
deductions which the Participant made during that Purchase Period with respect
to such Purchase Right shall be promptly refunded.
D. In the event there is any conflict between the provisions of
this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on February 26, 1996 and
approved by the stockholders on April 10, 1996. The Plan was subsequently
amended and restated on October 21, 1996 to increase the maximum deduction and
to permit 24-month Offering Periods to become effective at the November 1, 1996
Offering Period, PROVIDED that if stockholder approval of the October 21, 1996
amendment is not obtained before May 30, 1997, then the amendment shall not be
implemented and all outstanding Purchase Rights shall be governed by the terms
of the Plan without giving effect to the October 21, 1996 amendment. Purchase
Rights granted under the Plan on the basis of the October 21, 1996 amendment
shall be exercised, and no Purchase Rights shall be exercised and no shares of
Common Stock shall be issued hereunder until the Corporation shall have complied
with all applicable requirements of the 1933 Act (including the registration of
the shares of Common Stock issuable under the Plan on a Form S-8 registration
statement filed with the Securities and Exchange Commission), all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock is listed for trading and all other
applicable requirements established by law or regulation.
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in October, 2006, (ii) the date
on which all shares available for issuance under the Plan shall have been sold
pursuant to Purchase Rights exercised under the Plan or (iii) the date on which
all Purchase Rights are exercised in connection with a Corporate Transaction. No
further Purchase Rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following its termination.
X. AMENDMENT OF THE PLAN
The Board may alter, amend, suspend or discontinue the Plan at any
time to become effective immediately following the close of any Purchase Period.
However, the Board may not, without the approval of the Corporation's
stockholders, (i) materially increase the number of shares of Common Stock
issuable under the Plan or the maximum number of shares purchasable per
Participant on any one Purchase Date, except for permissible adjustments in the
event of certain changes in the Corporation's capitalization, (ii) alter the
purchase price formula
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<PAGE>
so as to reduce the purchase price payable for the shares of Common Stock
purchasable under the Plan, or (iii) materially increase the benefits accruing
to Participants under the Plan or materially modify the requirements for
eligibility to participate in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the
Plan shall be paid by the Corporation.
B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
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<PAGE>
SCHEDULE A
CORPORATIONS PARTICIPATING IN EMPLOYEE
STOCK PURCHASE PLAN AS OF THE EFFECTIVE TIME:
HEARTPORT, INC.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH COMPENSATION shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in the Plan, plus (ii) any pre-tax contributions made by
the Participant to any Code Section 401(k) salary deferral plan or any Code
Section 125 cafeteria benefit program now or hereafter established by the
Corporation or any Corporate Affiliate, plus (iii) all of the following amounts
to the extent paid in cash: overtime payments, bonuses, commissions,
profit-sharing distributions and other incentive-type payments. However,
Eligible Earnings shall not include any contributions (other than Code Section
401(k) or Code Section 125 contributions) made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any deferred compensation plan or
welfare benefit program now or hereafter established.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE AFFILIATE shall mean any parent or subsidiary corporation
of the Corporation (as determined in accordance with Code Section 424), whether
now existing or subsequently established.
F. CORPORATE TRANSACTION shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean Heartport, Inc., a Delaware corporation, and
any corporate successor to all or substantially all of the assets or voting
stock of Heartport, Inc. which shall by appropriate action adopt the Plan.
H. EFFECTIVE TIME, for purposes of the initial purchase period, shall
mean the time at which the Underwriting Agreement is executed and finally
priced. Any Corporate Affiliate which becomes a Participating Corporation after
such Effective Time shall designate a
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subsequent Effective Time with respect to its employee-Participants. The
Effective Time for purposes of the restated Plan is November 1, 1996. Any
Corporate Affiliate which becomes a Participating Corporation after the
applicable Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is engaged, on a
regularly-scheduled basis of more than twenty (20) hours per week for more than
five (5) months per calendar year, in the rendition of personal services to any
Participating Corporation as an employee for earnings considered wages under
Code Section 3401(a).
J. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(iii) For purposes of the initial Purchase Period which
begins at the Effective Time, the Fair Market Value shall be deemed to
be equal to the price per share at which the Common Stock is sold in
the initial public offering pursuant to the Underwriting Agreement.
K. 1933 ACT shall mean the Securities Act of 1933, as amended.
L. OFFERING PERIOD means a period of approximately twenty-four (24)
months that commences on the first business day following each semi-annual
Purchase Date, during which a Participant may be granted a Purchase Right.
M. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits
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of the Plan to their Eligible Employees. The Participating Corporations in the
Plan as of the Effective Time are listed in attached Schedule A.
O. PLAN shall mean the Corporation's Employee Stock Purchase Plan, as
set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more Board
members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each Purchase
Period. The initial Purchase Date shall be October 31, 1996.
R. PURCHASE PERIOD shall mean the approximately six (6) month period
commencing on the first business day after a Purchase Date and ending with the
next Purchase Date, except that the first Purchase Period shall commence on the
Effective Time and end on October 31, 1996.
S. PURCHASE RIGHT shall mean the right granted to each Participant who
enrolls on the start date for a Purchase Period and which provides the
Participant with the right to purchase shares of Common Stock on the Purchase
Date for such Purchase Period, upon the terms set forth herein.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
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THIRD AMENDMENT TO LEASE AGREEMENT
[University of Utah Research Foundation/
Heartport Research and Training Center, Inc.]
THIS AMENDMENT (this "AMENDMENT") is entered into as of the 25th day of
October, 1996, between the UNIVERSITY OF UTAH RESEARCH FOUNDATION, a Utah
nonprofit corporation ("LANDLORD"), whose address is 209 Park Building, Salt
Lake City, Utah 84112, and HEARTPORT RESEARCH AND TRAINING CENTER, INC., a
Delaware corporation ("TENANT"), whose address is 200 Chesapeake Drive,
Redwood City, California 94063.
FOR THE SUM OF TEN DOLLARS ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged,
Landlord and Tenant agree as follows:
1. DEFINITIONS. As used in this Amendment, each of the following terms
shall have the indicated meaning:
1.1. "BUILDING" means the building located on the Land.
1.2. "LAND" means the land located in Salt Lake County, Utah,
described as follows:
Beginning at a point which lies South 49DEGREE00'00" East 93.11 feet
from the point No. 7 B.L.M. survey of Parcel No. 1 of Tract D in Section
3, Township 1 South, Range 1 East, Salt Lake Base & Meridian (said point
of No. 7 being 1,464 feet North and 4,643 feet West, more or less, from the
Southeast corner of said Section 3), and running thence South
41DEGREE00'00" West 325.686 feet; thence South 49DEGREE00'00" East 463
feet; thence North 41DEGREE00'00" East 325.686 feet; thence North
49DEGREE00'00" West 463.0 feet to the point of beginning. Containing
3.462 acres, more or less, including a ten foot utility easement within
and around the boundary of the described property.
1.3. "LEASE" means the Lease Agreement, dated December 30, 1983, as
previously amended by the Exercise of Option for Renewal Term, dated August
29, 1991, and the Extension of Lease, dated April 22, 1996, each entered into
between Landlord, as landlord, and Deseret Research Company, a Utah
corporation, the predecessor in interest to Tenant, as tenant, covering the
Premises.
1.4. "PREMISES" means the Land and the Building and other
improvements located on the Land.
2. INITIAL TERM. Paragraph 2 of the Lease is deleted in its entirety and
is replaced with the following new Paragraph 2:
2. INITIAL TERM
The initial term of this lease shall expire on December 31, 2010.
<PAGE>
3. OPTIONS FOR RENEWAL TERMS. Paragraph 3 of the Lease is deleted in its
entirety and is replaced with the following new Paragraph 3:
3. OPTIONS FOR RENEWAL TERMS
Tenant shall have options to renew this lease for three (3)
additional, consecutive terms of five (5) years each, the first of such
renewal terms being January 1, 2011 to December 31, 2015, inclusive, the
second of such renewal terms being January 1, 2016 to December 31, 2020,
inclusive, and the third of such renewal terms being January 1, 2021 to
December 31, 2025, inclusive. Exercise of any such options shall be made
by Tenant giving Landlord written notice thereof at least one hundred
eighty (180) days prior to the expiration of the initial term or any
renewal term then in effect. Tenant shall have the right to exercise any
such option only if at the time of such exercise this lease is in full
force and effect and no event of default by Tenant hereunder shall have
occurred and be continuing beyond any applicable cure period. All of the
terms and provisions of this lease shall apply to any renewal term except
that rent shall be determined as outlined in paragraph 5(d) below.
4. RENT. Paragraphs 5(b), (c) and (d) of the Lease are deleted in their
entirety and are replaced with the following new Paragraphs 5(b), (c) and (d):
(b) The rent for that portion of the initial term through and
including December 31, 2001 is as follows:
PERIOD RENT
------ ----
Current through $18,083.33 per month
December 31, 1996
January 1, 1997 through $25,000.00 per month
December 31, 1998, inclusive
January 1, 1999 through $25,750.00 per month
December 31, 1999, inclusive
January 1, 2000 through $26,522.50 per month
December 31, 2000, inclusive
January 1, 2001 through $27,318.18 per month
December 31, 2001, inclusive
(c) The rent for that portion of the initial term from January 1, 2002
through December 31, 2010, inclusive, and the rent during any renewal term,
shall be determined in accordance with paragraph 5(d). As used in paragraph
5(d), the following terms shall have the meanings indicated:
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<PAGE>
(i) "ADJUSTMENT DATE" means January 1, 2002 and each subsequent
January 1st.
(ii) "BASE RENT" means the greater of the following:
(A) $27,318.18 per month; or
(B) seventy-five percent (75%) of the then-prevailing average
rental rate, per rentable square foot, for laboratory office space leased in
Research Park that is comparable to the Premises, multiplied by the total
rentable square feet of the Building, all as mutually agreed on between
Landlord and Tenant. The parties believe that the Building has approximately
50,878 square feet; however, for purposes of the foregoing calculation, at
Tenant's request, the rentable square feet of such comparable laboratory
office space and the Building shall be measured using the American National
Standard Method for Measuring Floor Space in Office Buildings (or other
appropriate standard method), as then most recently published by the Building
Owners and Managers Association International. Such measurements shall be
made by an architect licensed in Utah with at least ten (10) years
experience, mutually selected by Landlord and Tenant. The measurements of
such architect, if completed accurately in accordance with such standard,
shall be binding on Landlord and Tenant. If Landlord and Tenant disagree with
respect to whether any particular laboratory office space is compatable, or
with respect to the actual rent paid for any such particular space, or with
respect to any other matter regarding the calculation made pursuant to this
Paragraph 5(c)(ii)(B) (other than the measurement to be done by and
architect, asset forth above), Landlord and Tenant shall mutually select a
certified MAI appraiser who is a member of the American Institute of Real
Estate Appraisers to resolve such disagreement. The determination of such
appraiser as to any such matters, if not negligent and if made in good faith,
shall be binding on Landlord and Tenant. Landlord shall provide Tenant with
all relevant information used in making the calculations under this Paragraph
5(c)(ii)(B). Tenant may, with Landlord's assistance, contact any tenant
concerned to independently verify such information. The cost of of the
services of any architect or appraiser used under this Paragraph 5(c)(ii)(B)
shall be equally divided between, and timely paid by, Landlord and Tenant.
Landlord and Tenant shall act reasonably and in good faith in the discharge
of all of their respective obligations under this Paragraph 5(c)(ii)(B).
(iii) "CONSUMER PRICE INDEX" "Consumer Price Index--U.S. City Average
For All Items For All Urban Consumers (1982-84=100)" (the "CPI-U") published
monthly in the "Monthly Labor Review" or other publication by the Bureau of
Labor Statistics, United States Department of Labor (the "LABOR BUREAU");
provided however, that:
(A) if the CPI-U is discontinued, "Consumer Price Index" shall
mean "Consumer Price Index--U.S. City Average For All Items For Urban Wage
Earners and Clerical Workers (1982-84=100)" (the "CPI-W") published monthly
in the "Monthly Labor Review" or other publication by the Labor Bureau;
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<PAGE>
(B) if the CPI-W is discontinued, "CONSUMER PRICE INDEX" shall
refer to comparable statistics on the purchasing power of the consumer dollar
published by the Labor Bureau or by another agency of the United States
mutually agreed to by Landlord and Tenant;
(C) if the Labor Bureau or another agency of the United States
no longer publishes comparable statistics on the purchasing power of the
comsumer dollar, "CONSUMER PRICE INDEX" shall refer to comparable statistics
published by a responsible financial periodical or recognized authority
mutually agreed to by Landlord and Tenant, and adjustments shall be made in
the computation set forth in paragraph 5(d) as the circumstances may require
in order to carry out the intent of this paragraph 5; and
(D) if the base year "(1982-84=100)" or other base year used in
computing the CPI-U or the CPI-W is changed, the figures used in making the
adjustments in paragraph 5(d) shall be changed accordingly so that all
increases in the CPI-U and CPI-W are taken into account notwithstanding any
such change in the base year.
(d) The Base Rent shall be increased during the term of this lease
(including any renewal terms) as of each Adjustment Date to the product
obtained by multiplying the Base Rent by a fraction, the numerator of which
is the Consumer Price Index for the third month preceding the Adjustment Date
concerned, and the denominator of which is the Consumer Price Index for
October, 2000; provided, however, that such increase shall not be less than
three percent (3%) nor more than eight percent (8%) of the Base Rent. The
amount of such increase shall be determined by Landlord as soon as reasonably
practicable after the Consumer Price Index for the third month preceding each
such Adjustment Date becomes available. Tenant shall pay such increased Base
Rent until the later of the next Adjustment Date or the date on which
Landlord provides to Tenant the amount of the next increase in the Base Rent,
accompanied by a reasonable detailed explanation setting forth the
calculations on which such increase is based. Landlord may invoice Tenant
retroactively for the increased portion of the Base Rent due for the period
between any such Adjustment Date and the date of such invoice.
5. CERTAIN REMODELING. Landlord has reviewed and approved the
conceptual drawings submitted to Landlord for the remodeling of the Premises
intended to be undertaken by Tenant. Landlord hereby agrees in principle
to the remodeling described in such drawings.
6. RIGHT OF FIRST REFUSAL. The first sentence in Paragraph 37 of the
Lease is deleted in its entirety and is replaced with the following new first
sentence:
As long as Tenant or any other entity controlled by Heartport,
Inc. or by any successor or assign or Heartport, Inc. remains the
tenant under this lease, it shall have a right of first refusal in
the event of a proposed sale of the premises by Landlord or its
successors.
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<PAGE>
7. ENVIRONMENTAL MATTERS.
7.1. EXISTING ENVIRONMENTAL MATTERS.
7.1.1. INDEMNITY. As between Landlord and Tenant, Landlord
shall be solely responsible for, and shall indemnify, defend and hold
harmless Tenant from and against, all losses, damages (including, without
limitation, losses of, or damages to, the Premises), claims, actions, causes
of action, demands, penalties, fines, assessments, settlements, obligations,
suits, proceedings, controversies, fees, costs (including, without
limitation, response, remediation, inspection and other costs relating to
hazardous substances, hazardous wastes, pollutants or contaminants), expenses
(including, without limitation, litigation expenses and attorneys' fees,
whether incurred with or without the filing of suit, on appeal or otherwise,
and consultant fees, investigation expenses and laboratory expenses),
liabilities, judgments, charges, debts and liens, of whatever nature, kind or
character, including, without limitation, those arising under any applicable
federal, state or local statute, law, ordinance, rule or regulation, whether
known or unknown, suspected or unsuspected, foreseeable or unforeseeable, or
direct, consequential, fixed, contingent or otherwise, which are suffered,
incurred, sustained or paid by Tenant by Tenant or Tenant's officers,
directors, employees, agents, successors or assigns, or any one or more of
them, and which arise from or relate to, in any way, directly or indirectly,
any hazardous substances, hazardous wastes, pollutants or contaminants
located on, under or about the Premises (including, without limitation, in
the Building) as of December 30, 1983, including, without limitation, any
asbestos-related insulation or other construction material, underground tank,
polychlorinated biphenyl (PCB) or urea formaldehyde.
7.1.2. REIMBURSEMENT. In addition to Landlord's obligations
under Paragraph 7.1.1, Landlord shall promptly reimburse Tenant for all
losses, damages (including, without limitation, losses of, or damages to, the
Premises), claims, actions, causes of action, demands, penalties, fines,
assessments, settlements, obligations, suits, proceedings, controversies,
fees, costs (including, without limitation, response, remediation, inspection
and other costs), expenses (including, without limitation, litigation
expenses and attorneys' fees, whether incurred with or without the filing of
suit, on appeal or otherwise, and consultant fees, investigation expenses and
laboratory expenses), liabilities, judgments, charges, debts and liens, of
whatever nature, kind or character, including, without limitation, those
arising under any applicable federal, state or local statute, law, ordinance,
rule or regulation, whether known or unknown, suspected or unsuspected,
foreseeable or unforeseeable, or direct, consequential, fixed, contingent or
otherwise, which are suffered, incurred, sustained or paid by Tenant or
Tenant's officers, directors, employees, agents, successors or assigns, or
any one or more of them, and which arise from or related to, in any way,
directly or indirectly, any asbestos or asbestos-related insulation or other
construction material or underground tank located on, under or about the
Premises (including, without limitation, in the Building) as of the date of
this Amendment.
7.1.3. CERTAIN ACTIONS. Any action (including, without
limitation, remodeling or other construction) taken at any time by Tenant
which causes any asbestos to become friable or results in any removal
required by law of such asbestos or any underground tank shall be covered by,
and shall not in any way limit Landlord's obligation under, Paragraph 7.1.2.
Any such removal shall be performed by contractors approved in advance by
Landlord, such approval not to be unreasonably withheld, conditioned or
delayed. Any invoice from Tenant to Landlord, accompanied by a reasonably
detailed explanation, for any amount which Landlord is obligated to pay
pursuant
-5-
<PAGE>
to this Paragraph 7.1 shall be paid by Landlord to Tenant within thirty (30)
days after the receipt by Landlord of such invoice.
7.2 ENVIRONMENTAL MATTERS CAUSED BY TENANT.
7.2.1. INDEMNITY. Subject to all of Landlord's obligations under
Paragraph 7.1, as between Landlord and Tenant, Tenant shall be solely
responsible for, and shall indemnify, defend and hold harmless Landlord from
and against, all losses, damages (including, without limitation, losses of,
or damages to, the Premises), claims, actions, causes of action, demands,
penalties, fines, assessments, settlements, obligations, suits, proceedings,
controversies, fees, costs (including, without limitation, response,
remediation, inspection and other costs relating to hazardous substances,
hazardous wastes, pollutants or contaminants), expenses (including, without
limitation litigation expenses and attorneys' fees, whether incurred with or
without the filing of suit, on appeal or otherwise, and consultant fees,
investigation expenses and laboratory expenses), liabilities, judgments,
charges, debts and liens, of whatever nature, kind or character, including,
without limitation, those arising under any applicable federal, state or
local statute, law, ordinance, rule or regulation, whether known or unknown,
suspected or unsuspected, foreseeable or unforeseeable, or direct,
consequential, fixed, contingent or otherwise, which are suffered, incurred,
sustained or paid by Landlord or Landlord's officers, directors, employees,
agents, successors or assigns, or any one or more of them, and which arise
from or relate to, in any way, directly or indirectly, any hazardous
substances, hazardous wastes, pollutants or contaminants released or
deposited by Tenant on, under or about the Premises (including, without
limitation, in the Building) after the date of this Amendment.
7.2.2. COMPLIANCE WITH LAW. In its operations on the Premises,
Tenant shall timely comply with all laws, ordinances, rules and regulations
relating to the storage, handling and disposal of hazardous substances,
hazardous wastes, pollutants or contaminants.
8. GENERAL PROVISIONS. Except as set forth in this Amendment, the
Lease is ratified and affirmed in its entirety. This Amendment shall inure to
the benefit of, and be binding on, Landlord and Tenant and their respective
successors and assigns. This Amendment shall be governed by, and construed
and interpreted in accordance with, the laws (excluding the choice of laws
rules) of the State of Utah. This Amendment may be executed in any number of
duplicate originals or counterparts, each of which when so executed shall
constitute in the aggregate but one and the same document. Each individual
executing this Amendment represents and warrants that such individual has been
duly authorized to execute and deliver this Amendment in the capacity and for
the entity set forth where such individual signs.
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<PAGE>
LANDLORD AND TENANT have executed this Amendment on the respective dates
set forth below, to be effective as of the date first set forth above.
LANDLORD:
UNIVERSITY OF UTAH RESEARCH FOUNDATION
By /s/ Arthur K. Smith
---------------------------------
Its Chairman
---------------------------------
Date Oct 25, 1996
---------------------------------
TENANT:
HEARTPORT RESEARCH AND TRAINING CENTER,
INC.
By /s/ Bradford J. Shafer
---------------------------------
Its Secretary
---------------------------------
Date 10/25/96
---------------------------------
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
The Company has requested confidential treatment of certain portions
of this exhibit on pages 1, 2, 3 and 4 of the Amendment between
St. Jude Medical, Inc. and Heartport, Inc. dated as of January 31, 1997.
*Confidential portion has been omitted and filed separately with the
Commission.
AMENDMENT
This Amendment (the "Amendment") is made effective the 31st day of January, 1997
(the "Amendment Date") by and between St. Jude Medical, Inc. ("SJM"), a
Minnesota corporation, whose principal offices are located at One Lillehei
Plaza, St. Paul, Minnesota 55117 and Heartport, Inc., a Delaware corporation,
whose principal offices are located at 200 Chesapeake Drive, Redwood City,
California 94063 ("Heartport"). This Amendment is the first amendment to that
certain Agreement by and between SJM and Heartport dated as of September 11,
1995 (the "Agreement"). All terms of such Agreement not modified hereby shall
remain in full force and effect. As set forth in Section 14.9 of the Agreement,
the Agreement as amended by this Amendment, together with the documents
mentioned in Section 14.9, shall constitute the entire agreement of the parties
relating to its subject matter. All capitalized terms not defined herein shall
have the meanings given them in the Agreement.
The parties, intending to be legally bound, agree to the following amendments to
the Agreement:
With respect to Section 2.1 regarding the Note dated September 11, 1995
executed by Heartport in favor of SJM and attached as Exhibit A to the
Agreement (the "Note"), the parties agree that all conditions under the
heading Reduction of Note were met on September 30, 1996 and the Note's
balance of [*] shall be deemed to be non-interest bearing, nonrefundable,
prepaid royalties of SJM to Heartport in accordance with the terms of the
Note, the Agreement and this Amendment.
With respect to Section 2.2, the parties agree that SJM shall not be obligated
to pay Heartport [*] as non-interest bearing, nonrefundable, prepaid
royalties.
Section 5.1 is deleted in its entirety and replaced with the following:
5. 1 MINIMUM ROYALTY. Notwithstanding any other sections of this
Agreement, in the event the royalty payment calculated under
Section 5.2 is less than the minimum royalty set forth in this
Section 5.1, SJM will pay Heartport a minimum royalty of [*] per
each CCVDS Transferred (defined below) to a third party worldwide
unless Heartport agrees in writing to a different minimum royalty
level. For each CCVDS Transferred to any third party worldwide,
[*].
Section 5.2 is deleted in its entirety and replaced with the following:
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
*Confidential portion has been omitted and filed separately with the
Commission.
5. 2 ROYALTY FORMULA. For each CCVDS Transferred to any third party
worldwide, SJM shall pay Heartport a royalty equal to the greater
of (i) [*] of [*] of each CCVDS sold in the country of
such third party and the [*] of the counterpart SJM Prosthesis
designed and intended for use in conventional open heart valve
replacement and repair procedures (a "Counterpart Conventional
Prosthesis") in that same country or (ii) where SJM does not
offer for sale a Counterpart Conventional Prosthesis in the
country of such third party, [*] of [*] of each CCVDS sold
in the country of such third party and the [*] of a Counterpart
Conventional Prosthesis last sold in that country adjusted by
the [*] of other SJM products in that country or, if no such
SJM products are sold in such country, the [*] of other SJM
products in a country with similar pricing. The total royalty
payment obligation for each CCVDS type (e.g., SJM-Registered
Trademark- Mechanical Heart Valve, SJM-Registered Trademark-
Master Series, SJM-Registered Trademark- Hemodynamic Plus Series,
SJM-Registered Trademark- Annuloplasty Ring, etc.) in each
country shall be calculated as follows:
[*]
Total royalty payments in each quarter will be calculated by
summing royalty payment obligations for all CCVDS types in all
countries in which CCVDSs are Transferred. [*] shall be
recalculated each calendar quarter. Example: The [*] of a
CCVDS incorporating an SJM-Registered Trademark- Masters
Series Mechanical Heart Valve in France during the third
calendar quarter of 1997 is [*]. The [*] of the counterpart
SJM-Registered Trademark- Masters Series Mechanical Heart
Valve intended for use in conventional open procedures in
France during that same quarter is [*]. The royalty payment
obligation for each CCVDS incorporating an SJM-Registered
Trademark- Masters Series Mechanical Heart Valve in France
during the third calendar quarter of 1997 is [*].
Section 5.3 is deleted in its entirety and is reserved.
Section 5.4 is deleted in its entirety and replaced with the following:
5. 4 The parties, after considering a number of alternatives, have
agreed that, for mutual convenience, and in lieu of negotiating
milestone payments, technology transfer fees and the like, that
subject to the suspension provision of Section 5.9, [*], as a
technology fee for sales [*], provided that if the sale were to
occur in the United States, a patent royalty would be owed and
that the duty to pay the technology fee (as opposed to the [*] in
each country [*] a) when a Licensed Patent issues covering such
sales in the country or b) when a [*] (i.e. a closed-chest
valve delivery system consisting of a prosthesis and a prosthesis
holder, each of which is manufactured and intended for use in a
closed-chest valve delivery system), manufactured and marketed
by [*] bound by agreement with Heartport to pay a comparable fee
meeting the standards of Section 5.10, becomes available in
that country.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
*Confidential portion has been omitted and filed separately with the
Commission.
Section 5.10 is deleted in its entirety and replaced with the following:
5.10 MOST FAVORED LICENSEE STATUS. (i) PRODUCTS NOT INCORPORATING A
[*]. Heartport will not grant to any other licensee receiving
a license to make, use or sell Less Invasive Prosthesis Holders
or closed-chest valve delivery systems (which shall be defined
as a CCVDS which includes a non-SJM Prosthesis that incorporates
a valve product other than a [*] instead of an SJM Prosthesis)
in the field of closed-chest valve repair or replacement a
license [*] than those extended to SJM in this Agreement or
under [*] less restrictive than those extended to SJM, unless
those terms are similarly extended to SJM with respect to [*]
granted to such other licensee. In the event Heartport grants
a license covered by this Section 5.10, Heartport shall provide
SJM written notice of such License within thirty (30) days of
grant. Such notice should include a certification that such
other agreement does not require Heartport to grant a [*]
to SJM under this Section 5.10. (ii) PRODUCTS INCORPORATING A
[*]. Notwithstanding the foregoing, the parties agree that
Heartport may, without restriction, grant licenses to make, use
or sell Less Invasive Prosthesis Holders or closed-chest valve
delivery systems that incorporate a [*]. In the event that
Heartport grants such a license with respect to [*] to one
or more third parties, Heartport agrees that, at such time as SJM
has completed the design and/or regulatory approval process for a
[*] to be utilized in a closed-chest valve delivery system in
any country, at the request of SJM Heartport must grant SJM
a license with respect to [*]
6. DELIVERY HANDLE.
All sections, Section 6.1 through Section 6.5 are deleted in their entirety
and are reserved.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
*Confidential portion has been omitted and filed separately with the
Commission.
Section 14.10 is added in its entirety:
14.10 RENEGOTIATION. After the [*] anniversary of the Amendment
Date, SJM shall have the right to request renegotiation of the
[*] set forth in [*]; provided, however, that any amendment
to the Agreement resulting from such negotiations shall be [*]
Section 15.1 is deleted in its entirety and replaced with the following:
15. 1 CCVDS. "CCVDS" shall consist of no more than one of each of the
following: an SJM Prosthesis and a Less Invasive Prosthesis
Holder.
Section 15.3 is deleted in its entirety and replaced with the following:
15. 3 HEARTPORT PORT-ACCESS DELIVERY HANDLE. "Heartport Port-Access
Delivery Handle" and the "Handle" shall mean a handle developed
and manufactured by Heartport or its designee.
Section 15.5 is deleted in its entirety and replaced with the following:
15. 5 LESS INVASIVE PROSTHESIS HOLDER. "Less Invasive Prosthesis
Holder" shall mean prosthesis holders compatible with a Heartport
Port-Access Delivery Handle or covered by Heartport patents,
including, but not limited to, prosthesis holders covered by
Heartport method patents when sale of the prosthesis holder in
the absence of a license would constitute contributory
infringement of such patents.
Section 15.14 is added in its entirety:
15.14 [*] shall mean a [*]. This includes, but is not limited to, [*].
Section 15.15 is added in its entirety:
15.15 [*] shall mean any [*] whose primary function is to [*].
Section 15.16 is added in its entirety:
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
15.16 TRANSFERRED OR TRANSFER. "Transferred" or "Transfer" shall mean
a transaction in which the title of a CCVDS is transferred for
compensation or as part of an agreement. Transfer includes, but
is not limited to, a valve transferred as part of a VIP
agreement. Transfer excludes consigned inventory and product
donated for humanitarian or scientific purposes.
[The remainder of this page is blank.]
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
IN WITNESS WHEREOF, authorized representatives of the parties have executed this
Amendment to the Agreement as of the Amendment Date.
HEARTPORT, INC. ST. JUDE MEDICAL, INC.
/s/ Wesley D. Sterman, M.D. /s/ Ronald A. Matricaria
- - ------------------------------------- ----------------------------------------
Wesley D. Sterman, M.D. Ronald A. Matricaria
President and Chief Executive Officer President and Chief Executive Officer
6
<PAGE>
HEARTPORT, INC.
LOAN AND SECURITY AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. DEFINITIONS AND CONSTRUCTION............................................ 1
1.1 Definitions........................................................ 1
1.2 Accounting Terms................................................... 7
2. LOAN AND TERMS OF PAYMENT............................................... 7
2.1 Term Facility...................................................... 7
2.2 Interest Rate Protection........................................... 8
2.3 Interest Rates, Payments, and Calculations......................... 8
2.4 Crediting Payments................................................. 9
2.5 Fees............................................................... 9
2.6 Additional Costs................................................... 9
2.7 Term............................................................... 10
3. CONDITIONS OF LOANS..................................................... 10
3.1 Conditions Precedent to Initial Advance............................ 10
3.2 Conditions Precedent to all Advances............................... 10
4. CREATION OF SECURITY INTEREST........................................... 11
4.1 Grant of Security Interest......................................... 11
4.2 Delivery of Additional Documentation Required...................... 11
4.3 Right to Inspect................................................... 11
5. REPRESENTATIONS AND WARRANTIES.......................................... 12
5.1 Due Organization and Qualification................................. 12
5.2 Due Authorization; No Conflict..................................... 12
5.3 No Prior Encumbrances.............................................. 12
5.4 Name; Location of Chief Executive Office........................... 12
5.5 Litigation......................................................... 12
5.6 No Material Adverse Change in Financial Statements................. 12
5.7 Solvency........................................................... 12
5.8 Regulatory Compliance.............................................. 12
5.9 Environmental Condition............................................ 13
5.10 Taxes.............................................................. 13
5.11 Subsidiaries....................................................... 13
5.12 Government Consents................................................ 13
5.13 Full Disclosure.................................................... 13
6. AFFIRMATIVE COVENANTS................................................... 13
6.1 Good Standing...................................................... 13
6.2 Government Compliance.............................................. 13
6.3 Financial Statements, Reports, Certificates........................ 14
6.4 Taxes.............................................................. 14
6.5 Insurance.......................................................... 14
6.6 Principal Depository............................................... 15
6.7 Debt-Net Worth Ratio............................................... 15
6.8 Tangible Net Worth................................................. 15
6.9 Minimum Liquidity and Debt Service Coverage........................ 15
6.10 Co-Borrowers; Further Assurances................................... 15
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7. NEGATIVE COVENANTS...................................................... 15
7.1 Dispositions....................................................... 15
7.2 Change in Business................................................. 16
7.3 Mergers or Acquisitions............................................ 16
7.4 Indebtedness....................................................... 16
7.5 Encumbrances....................................................... 16
7.6 Distributions...................................................... 16
7.7 Investments........................................................ 16
7.8 Transactions with Affiliates....................................... 16
7.9 Subordinated Debt.................................................. 16
7.10 Compliance......................................................... 16
8. EVENTS OF DEFAULT....................................................... 17
8.1 Payment Default.................................................... 17
8.2 Covenant Default................................................... 17
8.3 Material Adverse Change............................................ 17
8.4 Attachment......................................................... 17
8.5 Insolvency......................................................... 17
8.6 Other Agreements................................................... 17
8.7 Subordinated Debt.................................................. 18
8.8 Judgments.......................................................... 18
8.9 Misrepresentations................................................. 18
9. BANK'S RIGHTS AND REMEDIES.............................................. 18
9.1 Rights and Remedies................................................ 18
9.2 Power of Attorney.................................................. 19
9.3 Accounts Collection................................................ 19
9.4 Bank Expenses...................................................... 19
9.5 Bank's Liability for Collateral.................................... 19
9.6 Remedies Cumulative................................................ 20
9.7 Demand; Protest.................................................... 20
10. NOTICES................................................................. 20
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.............................. 20
12. GENERAL PROVISIONS...................................................... 21
12.1 Successors and Assigns............................................. 21
12.2 Indemnification.................................................... 21
12.3 Time of Essence.................................................... 21
12.4 Severability of Provisions......................................... 21
12.5 Amendments in Writing, Integration................................. 21
12.6 Counterparts....................................................... 21
12.7 Survival........................................................... 21
12.8 Confidentiality.................................................... 21
</TABLE>
ii
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of December 31, 1996,
by and between SILICON VALLEY BANK ("Bank") and HEARTPORT, INC. ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means an Advance under the Term Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents (including fees and expenses
of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A attached
hereto.
"Committed Line" means Fifteen Million Dollars ($15,000,000).
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<PAGE>
"Commitment Termination Date" means March 31, 1998.
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all net
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Daily Balance" means the principal amount of the Obligations
owed at the end of a given day.
"Debt Service Coverage" means, as measured quarterly as of the
last day of each fiscal quarter of Borrower, on a consolidated basis determined
in accordance with GAAP, the ratio of (a) an amount equal to the sum of (i) net
income, PLUS (ii) depreciation, amortization of intangible assets and other
non-cash charges to income to (b) an amount equal to the sum of all scheduled
repayments for such quarter and mandatory prepayments of principal on account of
long-term Debt.
"Effective Date" means the date on which Liquidity is less than
either (i) two and one-half (2.5) times the outstanding principal balance
hereunder or (ii) nine (9) times the Remaining Months Liquidity.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or
2
<PAGE>
informal moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"LIBOR Supplement" means the LIBOR Supplement to Agreement by and
between Bank and Borrower of even date herewith.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Liquidity" means, at any date of determination, the sum of
Borrower's cash, cash equivalents, and short term investments, less any cash and
cash equivalent balances that are held in a sinking fund for the retirement of
debt or capital stock or that are held in pledge for another creditor.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the date immediately preceding four (4)
years from the anniversary of the Commitment Termination Date.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Net Cash Losses" means, with respect to any period of
determination, determined on a consolidated basis in accordance with GAAP for
such period for Borrower and its consolidated Subsidiaries, the sum of (i) net
income (loss), PLUS (ii) non-cash expenses, depreciation and amortization, MINUS
(iii) increases in gross fixed assets, PLUS (iv) increases (decreases) in long
term debt or capital leases excluding changes in deferred revenue.
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"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business;
(e) Indebtedness secured by Permitted Liens;
(f) Indebtedness of any Subsidiary to Borrower and Contingent
Obligations of any Subsidiary with respect to obligations of Borrower (provided
that the primary obligations are not prohibited hereby); provided that the
incurrence of such Indebtedness or Contingent Obligations, as the case may be,
does not result in a violation of Section 7.7 as a consequence of the provisos
set forth in paragraph (d) of the definition of "Permitted Investments;"
(g) Indebtedness of Borrower to any Subsidiary and Contingent
Obligations of Borrower with respect to obligations of any Subsidiary (provided
that the primary obligations are not prohibited hereby), and Indebtedness of any
Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary
with respect to obligations of any other Subsidiary (provided that the primary
obligations are not prohibited hereby);
(h) Indebtedness in connection with capital leases:
(i) Extensions, renewals and refinancings of the Indebtedness of
the Borrower or any of its Subsidiaries of the type referred to in clause (b) or
(h) above, PROVIDED that the principal amount of such Indebtedness being
extended, renewed or refinanced does not increase; and
(j) Indebtedness consisting of guarantees resulting from
endorsement of negotiable instruments for collection by the Borrower or any such
Subsidiary in the ordinary course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
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(b) any investments selected by the Borrower in accordance with
its Investment Policy as adopted by the Borrower on December 19, 1996 (as the
same may be amended from time to time with the approval of the Bank); and
(c) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
(d) Investments (whether consisting of the purchase of
securities, loans, capital contributions or otherwise) of Borrower in or to
Subsidiaries and Investments by Borrower in or to companies which
simultaneously with such Investments become Subsidiaries, provided that the
sum of (i) all such Investments by Borrower in or to Subsidiaries, plus (ii)
Contingent Obligations by Borrower outstanding at any time with respect to
the obligations of Subsidiaries, minus the sum of (x) Investments by
Subsidiaries in or to Borrower, plus (y) payments to Borrower on account of
Investments of Borrower in or to Subsidiaries, plus (z) distributions or
dividends by Subsidiaries to Borrower, in each case, made, incurred or
arising on or after the date hereof, does not exceed Five Million Dollars
($5,000,000) outstanding at any time, provided an Event of Default does not
exist immediately before or would not exist after giving effect to such
Investments;
(e) Investments (whether consisting of the purchase of
securities, loans, capital contributions, or otherwise) of Subsidiaries in or to
other Subsidiaries or in Borrower;
(f) Investments consisting of receivables owing to Borrower or
its Subsidiaries by Persons and advances to customers or suppliers, in each
case, if created, acquired or made in the ordinary course of business; provided
that this paragraph (f) shall not apply to Investments owing by Subsidiaries to
Borrower;
(g) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or its Subsidiaries so long as the Board of
Directors of Borrower determines that such compensation is in the best interests
of Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business; (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower
or its Subsidiaries;
(h) Investments pursuant to or arising under currency agreements
or interest rate agreements entered into in the ordinary course of business for
bona fide hedging purposes and not for speculation;
(i) Investments permitted under Section 7.3;
(j) Investments consisting of deposit accounts of Borrower in
which Bank has a Lien prior to any other Lien;
(k) Investments consisting of deposit accounts of any
Subsidiaries maintained in the ordinary course of business;
(l) Investments accepted in connection with Transfers permitted
by Section 7.1; and
(m) Investments in an amount not to exceed an aggregate of
Twenty Million Dollars ($20,000,000) in Heartport Research and Training Center
Inc., provided an Event of Default does not exist immediately before or would
exist after giving effect to such Investments.
"Permitted Liens" means the following:
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(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, PROVIDED the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment or real property acquired
or held by Borrower or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase;
(e) Liens of materialmen, mechanics, warehousemen, carriers, or
other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(f) Liens in favor of customs and revenue authorities which
secure payment of customs duties in connection with the importation of goods;
(g) Liens which constitute rights of set-off of a customary
nature or banker's liens on amounts on deposit, whether arising by contract or
by operation of law, in connection with arrangements entered into with
depository institutions in the ordinary course of business; and
(h) Any judgment, attachment or similar lien in connection with
any event or circumstance described in Section 8.4 that is not an Event of
Default hereunder.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Remaining Months Liquidity" means, at any time of determination,
the ratio of (i) Unrestricted Cash Reserves at such time to (ii) the average of
Net Cash Losses for the immediately preceding six (6) months.
"Responsible Officer" means each of the Chief Executive Officer,
Executive Vice President of Operations, the Chief Financial Officer, the Vice
President of Finance and Controller and the Treasurer of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if
any.
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"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries MINUS, without duplication, (i) the sum of any amounts attributable
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, AND (ii) Total Liabilities.
"Term Facility" means the facility under which Borrower may
request Bank to issue cash advances, as specified in Section 2.1 hereof.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.
"Unrestricted Cash Reserves" means, at any time of determination,
the sum of Borrower's (i) cash balance of deposit accounts and investment
accounts, PLUS (ii) market value of all readily marketable securities
beneficially owned by Borrower, MINUS (iii) cash value of any certificates of
deposit or securities encumbered and/or restricted by any Bank or any other
Persons.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 TERM FACILITY.
(a) ADVANCES. Subject to and upon the terms and conditions of
this Agreement, Bank agrees at any time from the date hereof through the
Commitment Termination Date to make Advances to Borrower in an aggregate
principal amount of up to the Committed Loan Amount. Each Advance shall be in
an amount of no less than Five Hundred Thousand Dollars ($500,000). Amounts
borrowed pursuant to this Section 2.1 may not be reborrowed once repaid.
(b) PROCEDURES. When Borrower desires to obtain an Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time on the Business
Day on which the Advance is requested to be made or, in the case of a LIBOR Rate
Advance, no later than 11:00 a.m. California time three (3) Business Days before
the day on which the Advance is requested to be made. Such notice shall be in
substantially the form of EXHIBIT B hereto or a LIBOR Rate Advance Form as
attached to the LIBOR Supplement. Bank is authorized to make Advances under
this Agreement based upon instructions received from a Responsible Officer, or
without instructions if in Bank's discretion such Advances are necessary to
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meet Obligations which have become due and remain unpaid. The written notice
shall be signed by a Responsible Officer. Bank shall be entitled to rely on
any telephonic notice given by a person who Bank reasonably believes to be a
Responsible Officer, and Borrower shall indemnify and hold Bank harmless for
any loss suffered by Bank as a result of such reliance. Bank will credit the
amount of Advances made under this Section 2.1 to Borrower's deposit account.
(c) PAYMENTS/MATURITY. Interest shall accrue from the date of
each Advance at the rate specified in Section 2.3(b), and shall be payable
monthly on the thirtieth calendar day of the month (except for the month of
February for which payment shall be due on the twenty-eight calendar day of the
month) for each month through the month in which the Commitment Termination Date
falls. All Advances that are outstanding on the Commitment Termination Date
shall be payable in forty-eight (48) equal monthly installments of principal,
plus accrued interest, beginning on April 30, 1998. All amounts outstanding
under the Term Facility and all amounts due under this Agreement shall be paid
in full on the Maturity Date.
2.2 INTEREST RATE PROTECTION. Subject to the terms and condition of
this Agreement, Borrower may prepay outstanding Advances, in whole or in part,
only upon payment in full of (i) all accrued but unpaid interest and all
outstanding obligations hereunder (or, if partial prepayment, an applicable or
proportionate amount of such obligations), and (ii), if Borrower has elected the
fixed rate option set forth in Section 2.3(b), a fee as shall be determined by
Bank in its reasonable discretion to provide for interest rate protection in the
event the fixed interest rate set forth in Section 2.3(b) is lower than the then
current fixed rate for the Term Facility.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) LIBOR OPTION. Borrower shall be entitled to request
Advances in accordance with the LIBOR Supplement, which shall govern all LIBOR
Rate Advances, as defined therein.
(b) INTEREST RATE. Except as set forth in Section 2.3(c) and
subject to the following sentence, all outstanding Advances shall bear interest,
on the average Daily Balance thereof, at a rate equal to either (i) the Prime
Rate or (ii) the rate specified in the LIBOR Supplement. Except as set forth in
Section 2.3(c), Borrower shall have a one-time option, exercisable by written
notice to Bank on the Commitment Termination Date, to elect that all outstanding
Advances shall bear interest at a rate equal to two (2) percentage points above
the forty-eight (48) month Treasury Note Yield to maturity for four (4) year
treasury bills, as such rate is quoted by Bank. Such fixed rate option, once
elected, shall continue for the term of the Term Facility.
(c) DEFAULT RATE. All Obligations shall bear interest,
from and after the occurrence of an Event of Default, at a rate equal to four
(4) percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default.
(d) PAYMENTS. Interest hereunder shall be due and payable
on the thirtieth calendar day of each month (except for the month of February
for which payment shall be due on the twenty-eight calendar day) during the term
hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and
all Periodic Payments against any of Borrower's deposit accounts or against the
Committed Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(e) COMPUTATION. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime
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Rate. All interest chargeable under the Loan Documents shall be computed on
the basis of a three hundred sixty (360) day year for the actual number of
days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence and continuance of
an Event of Default, Bank shall credit a wire transfer of funds, check or
other item of payment to such deposit account or Obligation as Borrower
specifies. After the occurrence and during the continuance of an Event of
Default, the receipt by Bank of any wire transfer of funds, check, or other
item of payment shall be immediately applied to conditionally reduce
Obligations, but shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such
check or other item of payment is honored when presented for payment.
Notwithstanding anything to the contrary contained herein, any wire transfer
or payment received by Bank after 12:00 noon California time shall be deemed
to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the
Loan Documents would otherwise be due (except by reason of acceleration) on a
date that is not a Business Day, such payment shall instead be due on the
next Business Day, and additional fees or interest, as the case may be, shall
accrue and be payable for the period of such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. Facility fees equal to (i) Thirty Seven
Thousand Five Hundred Dollars ($37,500), which fee shall be due on the Closing
Date and shall be fully earned and nonrefundable and (ii) one quarter of one
percent (.25%) of the unused portion of the Committed Loan Amount per year
payable quarterly for each quarter until the Commitment Termination Date, which
fee, when paid, shall be fully earned and non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(c) BANK EXPENSES. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 ADDITIONAL COSTS. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to
its performance under this Agreement,
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and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 TERM. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect
for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Advances under this
Agreement immediately upon the occurrence and during the continuance of an
Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Bank
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect
to incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) negative pledge agreement in substantially the form of
EXHIBIT D hereto;
(d) the LIBOR Supplement;
(e) financing statements (Forms UCC-1);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof; and
(h) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank to
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form or
LIBOR Rate Advance Form as provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form or LIBOR Rate Advance Form and on the
effective date of each Advance as though made at and as of each such date, and
no Event of Default shall have occurred and be continuing, or would result from
such Advance. The making of each Advance shall be deemed to be a representation
and warranty by Borrower on the date of such Advance as to the accuracy of the
facts referred to in this Section 3.2(b).
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4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
(a) Borrower grants and pledges to Bank a continuing security
interest in all presently existing and hereafter acquired or arising
Collateral in order to secure prompt repayment of any and all Obligations and
in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule,
such security interest constitutes a valid, first priority security interest
in the presently existing Collateral, and will constitute a valid, first
priority security interest in Collateral acquired after the date hereof.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the grant of security interest contained herein shall not be effective
or otherwise deemed given until the Effective Date, at which date the terms of
this Sections 4.1 and 4.2 shall become immediately effective without notice or
action by Bank. Bank may file the financing statement referred to in Section
3.1(e) with the California Secretary of State on or after, but not before, the
Effective Date.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
4.4 REQUIREMENT FOR CASH COLLATERAL. Borrower shall pledge cash or a
certificate of deposit to Bank as follows:
(a) If Borrower does not comply with Section 6.9 herein (except
for the Debt Service Coverage covenant contained therein), then Borrower shall
pledge cash or a certificate of deposit to the Bank in an amount equal to eighty
percent (80%) of the outstanding loan balance hereunder. Bank agrees to release
the cash pledged pursuant to this Section 4.4(a) upon Borrower achieving
compliance with such Section 6.9. Notwithstanding anything to the contrary in
this Agreement, failure to comply with Section 6.9 shall not be a default or an
Event of Default so long as the Borrower complies with this Section 4.4 on the
next Business Day after the Borrower's becoming aware of the noncompliance with
Section 6.9.
(b) If at any time the Liquidity of Borrower is less than (i)
one and one-half (11/2) times the outstanding loan balance hereunder, or (ii)
four (4) times Remaining Months Liquidity, then Borrower shall pledge cash or a
certificate of deposit to the Bank in an amount equal to one hundred and five
percent (105%) of the outstanding loan balance. Bank agrees, subject to Section
4.4(a), to release the cash collateral pledged pursuant to this Section 4.4(b)
(or portion thereof in accordance with Section 4.4(a)) upon Borrower achieving
Liquidity greater than (i) one and one-half (11/2) times the outstanding loan
balance hereunder or (ii) four (4) times Remaining Months Liquidity.
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5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified, except to the extent that failure to
so qualify would not have a Material Adverse Effect on the Borrower.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.5 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.6 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.7 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.8 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act, and Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, noncompliance with which or violation of
which could have a Material Adverse Effect.
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5.9 ENVIRONMENTAL CONDITION. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release,
or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste
or hazardous substance disposal site, or a candidate for closure pursuant to
any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.
5.10 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein, except for taxes the
amount or validity of which the Borrower is contesting in good faith by
appropriate proceedings and with respect to which the Borrower has taken
adequate reserves in accordance with GAAP.
5.11 SUBSIDIARIES. As of the date hereof, Borrower does not own any
stock, partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.12 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted,
except to the extent that failure to do so would not have a Material Adverse
Effect on the Borrower.
5.13 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates
or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
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6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower shall deliver to Bank: (a) as soon as available,
but in any event within ninety (90) days after the end of Borrower's fiscal
year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified
opinion on such financial statements of an independent certified public
accounting firm reasonably acceptable to Bank; (b) within five (5) days upon
becoming available, copies of all statements, reports and notices sent or
made available generally by Borrower to its security holders or to any
holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed with
the Securities and Exchange Commission; (c) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower
or any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of Five Hundred Thousand Dollars ($500,000) or more; and (d) such
financial information as Bank may reasonably request from time to time.
(b) If at any time and during such time that Borrower's
Liquidity is less than (i) three (3) times the outstanding Obligations hereunder
or (ii) twelve (12) times Remaining Months Liquidity, Borrower shall deliver to
Bank a company prepared consolidated balance sheet and income statement covering
Borrower's consolidated operations for the relevant month, certified by a
Responsible Officer within thirty (30) days after the last day of each calendar
month.
(c) Borrower shall deliver to Bank with each of the quarterly or
monthly financial statement required above a Compliance Certificate signed by a
Responsible Officer in substantially the form of EXHIBIT C hereto.
6.4 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.5 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain
insurance relating to Borrower's ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as reasonably satisfactory to Bank.
After the Effective Date only, all such policies of property insurance shall
contain a lender's loss payable endorsement, in a form satisfactory to Bank,
showing Bank as an additional loss payee thereof and all liability insurance
policies shall show the Bank as an additional insured, and shall specify that
the insurer must give at least twenty (20) days notice to Bank before canceling
its policy for any reason. After the Effective Date only, upon Bank's request,
Borrower shall deliver to Bank certified copies of such policies of insurance
and evidence of the payments of all premiums therefor. After the Effective Date
only, all
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proceeds payable under any such policy shall, at the option of Bank, be
payable to Bank to be applied on account of the Obligations.
6.6 PRINCIPAL DEPOSITORY. Borrower shall either (i) maintain its
principal domestic depository and operating accounts with Bank or (ii) shall
maintain a minimum balance of no less than Four Million Dollars ($4,000,000) in
a deposit account with Bank.
6.7 DEBT-NET WORTH RATIO. Subject to the following sentence,
Borrower shall maintain, as of the last day of each of Borrower's fiscal
quarters, a ratio of Total Liabilities less Subordinated Debt to Tangible Net
Worth plus Subordinated Debt of not more than .75 to 1.00. At any time
Borrower is subject to the monthly reporting requirements of Section 6.3(b),
Borrower shall maintain, as of the last day of each calendar month, a ratio
of Total Liabilities less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than .75 to 1.00.
6.8 TANGIBLE NET WORTH. Subject to the following sentence, Borrower
shall maintain, as of the last day of each of Borrower's fiscal quarters, a
Tangible Net Worth of not less than Thirty Million Dollars ($30,000,000). At
any time Borrower is subject to the monthly reporting requirements of Section
6.3(b), Borrower shall maintain, as of the last day of each calendar month, a
Tangible Net Worth of not less than Thirty Million Dollars ($30,000,000).
6.9 MINIMUM LIQUIDITY AND DEBT SERVICE COVERAGE. Subject to the
remainder of this Section, Borrower shall maintain, as of the last day of each
of Borrower's fiscal quarters, a minimum Liquidity of the greater of (a) two (2)
times the amount of outstanding obligations hereunder OR (b) six (6) times
Remaining Months Liquidity. Subject to the remainder of this Section, at any
time Borrower is subject to the monthly reporting requirements of Section
6.3(b), Borrower shall maintain, as of the last day of each calendar month, a
minimum Liquidity of the greater of (a) two (2) times the amount of outstanding
obligations hereunder OR (b) six (6) times Remaining Months Liquidity.
Notwithstanding the foregoing, from and after the time Borrower achieves a Debt
Service Coverage for four (4) consecutive fiscal quarters of at least 1.50 to
1.00, and for so long as Borrower maintains as of the last day of each fiscal
quarter thereafter, a Debt Service Coverage of at least 1.50 to 1.00, Borrower
shall not be subject to the minimum required Liquidity set forth above.
6.10 CO-BORROWERS; FURTHER ASSURANCES. At any time and from time to
time, Borrower shall, at Bank's request in Bank's sole discretion, cause any
Subsidiary to become party to this Agreement as a co-borrower and to grant a
security interest in its assets to secure the Obligations, all on terms
acceptable to Bank. At any time and from time to time Borrower shall execute
and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory and other assets in the ordinary course of business; (ii) Transfers of
non-exclusive licenses and similar arrangements for the use of the property of
Borrower or its Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment;
or (iv) as disclosed in writing to Bank prior to date hereof.
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7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto). Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the capital stock or property of another Person
except (i) if Borrower is the surviving entity of any such merger or
consolidation (except for the merger or consolidation of one Subsidiary into
another Subsidiary) and (ii) no Event of Default has occurred and is
continuing or would result from such action.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, except (i) repurchases from current or former employees, directors or
consultants of the Borrower under the terms of any stock option or stock
purchase plans or agreements up to a maximum of $500,000 in any one fiscal year
(provided an Event of Default has not occurred and is continuing at the time of
such repurchase or would exist after giving effect to such repurchase), and
(ii) dividends payable solely in common stock.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral, or
permit any of its Subsidiaries to do any of the foregoing.
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8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of, or
any interest on, any Advances when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation
under Sections 4.4, 6.7, 6.8 or 6.9 or violates any of the covenants contained
in Article 7 of this Agreement, or fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within twenty (20) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within the
twenty (20) day period or cannot after diligent attempts by Borrower be cured
within such twenty (20) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case exceed thirty (30) days) to attempt to cure
such default, and within such reasonable time period the failure to have cured
such default shall not be deemed an Event of Default (provided that no Advances
will be required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse
change in Borrower's business or consolidated financial condition, or if there
is a material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's security
interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within twenty (20) days
(provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of Five Hundred Thousand
Dollars ($500,000) or that could have a Material Adverse Effect;
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8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money,
the uninsured amount of which is, individually or in the aggregate, at least
Five Hundred Thousand Dollars ($500,000), shall be rendered against Borrower and
shall remain unsatisfied and unstayed for a period of thirty (30) days (provided
that no Advances will be made prior to the satisfaction or stay of such
judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement on or as of the date made exists now or hereafter in any
warranty or representation set forth herein or in any certificate delivered to
Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to
enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
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connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale;
and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. At any time after the Effective Date, but
effective only upon the occurrence and during the continuance of an Event of
Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated
officers, or employees) as Borrower's true and lawful attorney to: (a) send
requests for verification of Accounts or notify account debtors of Bank's
security interest in the Accounts; (b) endorse Borrower's name on any checks or
other forms of payment or security that may come into Bank's possession;
(c) sign Borrower's name on any invoice or bill of lading relating to any
Account, drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) make, settle, and
adjust all claims under and decisions with respect to Borrower's policies of
insurance; and (e) settle and adjust disputes and claims respecting the accounts
directly with account debtors, for amounts and upon terms which Bank determines
to be reasonable; provided Bank may exercise such power of attorney to sign the
name of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3 ACCOUNTS COLLECTION. At any time from the Effective Date, Bank
may notify any Person owing funds to Borrower of Bank's security interest in
such funds and verify the amount of such Account. Borrower shall collect all
amounts owing to Borrower for Bank, receive in trust all payments as Bank's
trustee, and immediately deliver such payments to Bank in their original form as
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; or (b) obtain and maintain
insurance policies of the type discussed in Section 6.5 of this Agreement, and
take any action with respect to such policies as Bank deems prudent. Any
amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable rate
hereinabove provided, and shall be secured by the Collateral. Any payments made
by Bank shall not constitute an agreement by Bank to make similar payments in
the future or a waiver by Bank of any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
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9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments,
chattel paper, and guarantees at any time held by Bank on which Borrower may
in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: Heartport, Inc.
200 Chesapeake Drive
Redwood City, CA 94063
Attn: Ms. Rebecca Kuhn
FAX: (415) 306-7905
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Mr. Gary Reagan
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
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12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or
21
<PAGE>
becomes part of the public domain after disclosure to Bank through no fault
of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not
have actual knowledge that such third party is prohibited from disclosing
such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
HEARTPORT, INC.
/s/ Rebecca L. Kuhn
By:_________________________________________
Treasurer
Title:______________________________________
SILICON VALLEY BANK
/s/ Christopher Coleman
By:_________________________________________
Senior Vice President
Title:______________________________________
22
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, claims, literature, reports, catalogs, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing.
23
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: (408) 496-2426 TIME:
- - --------------------------------------------------------------------------------
FROM: HEARTPORT, INC.
-------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
-------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
-----------------------------------------------------------
PHONE NUMBER:
-------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
-------------------------------- ----------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $---------------------------------------------
PRINCIPAL PAYMENT (ONLY) $---------------------------------------------
INTEREST PAYMENT (ONLY) $---------------------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $---------------------------------------------
OTHER INSTRUCTIONS:-------------------------------------------------------------
- - --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- - -------------------------------------- ----------------------------
Authorized Requester Phone #
- - -------------------------------------- ----------------------------
Received By (Bank) Phone #
-------------------------------
Authorized Signature (Bank)
24
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: HEARTPORT, INC.
The undersigned authorized officer of Heartport, Inc. hereby certifies that
in accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending ___________________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
<S> <C> <C>
Monthly financial statements Monthly within 30 days* Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10K & 10Q Within 5 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
Maintain on a Quarterly/
Monthly** Basis:
Liquidity*** **** _________ Yes No
Debt Service Coverage 1:50:1.00***** ____:1.00 Yes No
Minimum Tangible Net Worth $30,000,000 $________ Yes No
Maximum Debt/Tangible Net Worth .75:1.00 ____:1.00 Yes No
</TABLE>
* Only required if Liquidity LESS THAN 3x loan balance or RML LESS THAN 4
quarters.
** Tested Quarterly unless Liquidity LESS THAN 3x loan balance or RML LESS
THAN 4 quarters.
*** Tested until 4 quarters of DSC at 1.50:1.00
**** 2x outstanding obligations or 6x Remaining Months Liquidity
***** Tested once 4 quarters of DSC at 1.50:1.00.
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Sincerely, Received by:________________
AUTHORIZED SIGNER
SIGNATURE Date:_______________________
Verified:___________________
AUTHORIZED SIGNER
TITLE Date:_______________________
DATE Compliance Status: Yes No
<PAGE>
EXHIBIT D
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of December 31, 1996, by and
between HEARTPORT, INC. ("Debtor") and SILICON VALLEY BANK ("Creditor").
In connection with the Loan Documents being concurrently executed between
Debtor and Creditor, Debtor agrees as follows:
1. Debtor shall not sell, transfer, assign, mortgage, pledge, lease,
grant a security interest in, or encumber any of Debtor's intellectual
property, including, without limitation, the following:
a. Any and all copyright rights, copyright applications, copyright
registrations and like protection in each work or authorship and derivative work
thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired or held
(collectively, the "Copyrights");
b. Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
c. Any and all design rights which may be available to Debtor now
or hereafter existing, created, acquired or held;
d. All patents, patent applications and like protections, including,
without limitation, improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including, without limitation,
the patents and patent applications (collectively, the "Patents");
e. Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Debtor connected with and symbolized by
such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights,
Patents or Trademarks and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
h. All amendments, extensions, renewals and extensions of any of the
Copyrights, Patents or Trademarks; and
i. All proceeds and products of the foregoing, including, without
limitation, all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
Notwithstanding the foregoing, Debtor may sell, license and otherwise dispose
of the foregoing (i) to the extent set forth in the Loan Documents, and (ii) in
the ordinary course of business.
2. It shall be an Event of Default under the Loan Documents between Debtor
and Creditor if there is a breach of any term of this Negative Pledge Agreement.
3. Capitalized items used herein without definition shall have the same
meanings as set forth in the Loan and Security Agreement of even date herewith.
HEARTPORT, INC. SILICON VALLEY BANK
/s/ Rebecca L. Kuhn /s/ Christopher Coleman
By:__________________________________ By:____________________________________
Treasurer Senior Vice President
Title:_______________________________ Title:_________________________________
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Heartport, Inc. Bank: Silicon Valley Bank
LOAN TYPE. This is a variable rate, term loan of a principal amount up to
$15,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Working Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
TERM LOAN
Amount paid to Borrower directly: $________
Undisbursed Funds $________
Principal $________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $________
$37,500 Loan Fee
Other Charges Paid in Cash: $________
$ 100 UCC Search Fees
--------
$ 50 UCC Filing Fees
--------
$ 7,150 Outside Counsel Fees and Expenses (Estimate)
--------
Total Charges Paid in Cash $________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered _______________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF DECEMBER 31, 1996.
BORROWER:
HEARTPORT, INC.
/s/ Rebecca L. Kuhn
Authorized Officer
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: Heartport, Inc. BANK: Silicon Valley Bank
INSURANCE REQUIREMENTS. Heartport, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsement: Coverage will not be cancelled or diminished without a
minimum of twenty (20) days' prior written notice to
Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of December 31, 1996, or earlier. Grantor acknowledges and
agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at the
option of Bank, shall be payable on demand or shall be added to the indebtedness
as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO
PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION
AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN;
HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION,
THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER 31,
1996.
GRANTOR:
HEARTPORT, INC.
x /s/ Rebecca L. Kuhn
Authorized Officer
- - --------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
- - --------------------------------------------------------------------------------
<PAGE>
LIBOR SUPPLEMENT TO AGREEMENT
This LIBOR Supplement to Agreement (the "Supplement") is a supplement to
the Loan and Security Agreement (the "Agreement") dated as of December 31,
1996, between Silicon Valley Bank ("Bank") and Heartport, Inc. ("Borrower"),
and forms a part of and is incorporated into the Agreement. Except as
otherwise defined in this Supplement, capitalized terms shall have the
meanings assigned in the Agreement.
1. DEFINITIONS.
"Business Day" means a day of the year (a) that is not a Saturday, Sunday
or other day on which banks in the State of California or the City of London
are authorized or required to close and (b) on which dealings are carried on
in the interbank market in which Bank customarily participates.
"Interest Period" means for each LIBOR Rate Advance, a period of
approximately one, two, three, six or nine months as the Borrower may elect,
PROVIDED that the last day of an Interest Period for a LIBOR Rate Advance
shall be determined in accordance with the practices of the LIBOR interbank
market as from time to time in effect, PROVIDED, FURTHER, in all cases such
period shall expire not later than the applicable Maturity Date.
"Interest Rate" shall mean as to: (a) Prime Rate Advances, a rate equal
to the Prime Rate; and (b) LIBOR Rate Advances, a rate of one and one-half
percent (1 1/2%) per annum in excess of the LIBOR Rate (based on the LIBOR
Rate applicable for the Interest Period selected by the Borrower).
"LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate
Advance, the rate of interest per annum determined by Bank to be the per
annum rate of interest at which deposits in United States Dollars are offered
to Bank in the London interbank market in which Bank customarily participates
a 11:00 A.M. (local time in such interbank market) two (2) Business Days
before the first day of such Interest Period for a period approximately equal
to such Interest Period and in an amount approximately equal to the amount of
such Advance.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate
Advance, a rate per annum (rounded upwards, if necessary, to the nearest 1/16
of 1%) equal to (i) the LIBOR Base Rate for such Interest Period divided by
(ii) 1 minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Advances" means any Advances made or a portion thereof on
which interest is payable based on the LIBOR Rate in accordance with the
terms hereof.
"Prime Rate Advances" means any Advances made or a portion thereof on
which interest is payable based on the Prime Rate in accordance with the
terms hereof.
"Regulatory Change" means, with respect to Bank, any change on or after
the date of this Agreement in United States federal, state or foreign laws or
regulations, including Regulation D, or the adoption or making on or after
such date of any interpretations, directives or requests applying to a class
of lenders including Bank of or under any United States federal or state, or
any foreign, laws or regulations (whether or not having the force of law) by
any court or governmantal or monetary authority charged with the
interpretation or administration thereof.
"Reserve Requirement" means, for any Interest Period, the average
maximum rate at which reserves (including any marginal, supplemental or
emergency reserves) are required to be maintained during such Interest Period
under Regulation D against "Eurocurrency liabilities" (as such term is used
in Regulation D) by member banks of the Federal Reserve System. Without
limiting the effect of the
1
<PAGE>
foregoing, the Reserve Requirement shall reflect any other reserves required
to be maintained by Bank by reason of any Regulatory Change against (i) any
category of liabilities which includes deposits by reference to which the
LIBOR Rate is to be determined as provided in the definition of "LIBOR Base
Rate" or (ii) any category of extensions of credit or other assets which
include Advances.
2. REQUESTS FOR ADVANCES; CONFIRMATION OF INITIAL ADVANCES. Each
LIBOR Rate Advance shall be made upon the irrevocable written request of
Borrower received by Bank not later than 11:00 a.m. (Santa Clara, California
time) on the Business Day three (3) Business Days prior to the date such
Advance is to be made. Each such notice shall specify the date such Advance
is to be made, which day shall be a Business Day; the amount of such Advance,
the Interest Period for such Advance, and comply with such other requirements
as Bank determines are reasonable or desirable in connection therewith.
Each written request for a LIBOR Rate Advance shall be in the form of a
LIBOR Rate Advance Form as set forth on Exhibit A, which shall be duly
executed by a Responsible Officer.
3. CONVERSION/CONTINUATION OF ADVANCES.
(a) Borrower may from time to time submit in writing a
request that Prime Rate Advances be converted to LIBOR Rate Advances or that
any existing LIBOR Rate Advances continue for an additional Interest Period.
Such request shall specify the amount of the Prime Rate Advances which will
constitute LIBOR Rate Advances (subject to the limits set forth below) and
the Interest Period to be applicable to such LIBOR Rate Advances. Each
written request for a conversion to a LIBOR Rate Advance or a continuation of
a LIBOR Rate Advance shall be substantially in the form of a LIBOR Rate
Conversion/Continuation Certificate as set forth on Exhibit B, which shall be
duly executed by a Responsible Officer. Subject to the terms and conditions
contained herein, three (3) Business Days after Bank's receipt of such a
request from Borrower, such Prime Rate Advances shall be converted to LIBOR
Rate Advances or such LIBOR Rate Advances shall continue, as the case may be
provided that:
(i) no Event of Default or event which with notice or
passage of time or both would constitute an Event of Default exists;
(ii) no party hereto shall have sent any notice of
termination of this Supplement or of the Agreement;
(iii) Borrower shall have complied with such customary
procedures as Bank has established from time to time for Borrower's requests
for LIBOR Rate Advances;
(iv) the amount of a LIBOR Rate Advance shall be
$500,000 or such greater amount which is an integral multiple of $50,000; and
(v) Bank shall have determined that the Interest
Period or LIBOR Rate is available to Bank which can be readily determined as
of the date of the request for such LIBOR Rate Advance.
Any request by Borrower to convert Prime Rate Advances to LIBOR Rate
Advances or continue any existing LIBOR Rate Advances shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Bank shall not be
required to purchase United States Dollar deposits in the London interbank
market or other applicable LIBOR Rate market to fund any LIBOR Rate Advances,
but the provisions hereof shall be deemed to apply as if Bank had purchased
such deposits to fund the LIBOR Rate Advances.
2
<PAGE>
(b) Any LIBOR Rate Advances shall automatically convert to Prime
Rate Advances upon the last day of the applicable Interest Period, unless
Bank has received and approved a complete and proper request to continue such
LIBOR Rate Advance at least three (3) Business Days prior to such last day in
accordance with the terms hereof. Any LIBOR Rate Advances shall, at Bank's
option, convert to Prime Rate Advances in the event that (i) an Event of
Default, or event which with the notice or passage of time or both would
constitute an Event of Default, shall exist, (ii) this Supplement or the
Agreement shall terminate, or (iii) the aggregate principal amount of the
Prime Rate Advances which have previously been converted to LIBOR Rate
Advances, or the aggregate principal amount of existing LIBOR Rate Advances
continued, as the case may be, at the beginning of an Interest Period shall
at any time during such Interest Period exceeds the Committed Line. Borrower
agrees to pay to Bank, upon demand by Bank (or Bank may, at its option,
charge Borrower's deposit account) any amounts required to compensate Bank
for any loss (including loss of anticipated profits), cost or expense
incurred by such person, as a result of the conversion of LIBOR Rate Advances
to Prime Rate Advances pursuant to any of the foregoing.
(c) On all Advances, Interest shall be payable by Borrower to
Bank monthly in arrears not later than the twenty-eighth (28th) day of each
calendar month at the applicable Interest Rate.
4. ADDITIONAL REQUIREMENTS/PROVISIONS REGARDING LIBOR RATE ADVANCES;
ETC.
(a) If for any reason (including voluntary or mandatory
prepayment or acceleration), Bank receives all or part of the principal
amount of a LIBOR Rate Advance prior to the last day of the Interest Period
for such Advance, Borrower shall immediately notify Borrower's account
officer at Bank and, on demand by Bank, pay Bank the amount (if any) by which
(i) the additional interest which would have been payable on the amount so
received had it not been received until the last day of such Interest Period
exceeds (ii) the interest which would have been recoverable by Bank by
placing the amount so received on deposit in the offshore currency interbank
markets, for a period starting on the date on which it was so received and
ending on the last day of such Interest Period at the interest rate
determined by Bank in its reasonable discretion. Bank's determination as to
such amount shall be conclusive absent manifest error.
(b) Borrower shall pay to Bank, upon demand by Bank, from
time to time such amounts as Bank may determine to be necessary to compensate
it for any costs incurred by Bank that Bank determines are attributable to
its making or maintaining of any amount receivable by Bank hereunder in
respect of any Advances relating thereto (such increases in costs and
reductions in amounts receivable being herein called "Additional Costs"), in
each case resulting from any Regulatory Change which:
(i) changes the basis of taxation of any amounts
payable to Bank under this Supplement in respect of any Advances (other than
changes which affect taxes measured by or imposed on the overall net income
of Bank by the jurisdiction in which such Bank has its principal office); or
(ii) imposes or modifies any reserve, special deposit
or similar requirements relating to any extensions of credit or other assets
of, or any deposits with or other liabilities of Bank (including any Advances
or any deposits referred to in the definition of "LIBOR Base Rate"); or
(iii) imposes any other condition affecting this
Supplement (or any of such extensions of credit or liabilities).
Bank will notify Borrower of any event occurring after the date of the
Agreement which will entitle Bank to compensation pursuant to this section as
promptly as practicable after it obtains knowledge
3
<PAGE>
thereof and determines to request such compensation. Bank will furnish
Borrower with a statement setting forth the basis and amount of each request
by Bank for compensation under this Section 4. Determinations and allocations
by Bank for purposes of this Section 4 of the effect of any Regulatory Change
on its costs of maintaining its obligations to make Advances or of making or
maintaining Advances or on amounts receivable by it in respect of Advances,
and of the additional amounts required to compensate Bank in respect of any
Additional Costs, shall be conclusive absent manifest error.
(c) Borrower shall pay to Bank, upon the request of Bank,
such amount or amounts as shall be sufficient (in the sole good faith opinion
of such Bank) to compensate it for any loss, costs or expense incurred by it
as a result of any failure by Borrower to borrow a LIBOR Rate Advance on the
date for such borrowing specified in the relevant notice of borrowing
hereunder.
(d) If Bank shall determine that the adoption or
implementation of any applicable law, rule, regulation or treaty regarding
capital adequacy, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration
thereof, or compliance by Bank (or its applicable lending office) with any
respect or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has
or would have the effect of reducing the rate of return on capital of Bank or
any person or entity controlling Bank (a "Parent") as a consequence of its
obligations hereunder to a level below that which Bank (or its Parent) could
have achieved but for such adoption, change or compliance (taking into
consideration its policies with respect to capital adequacy) by an amount
deemed by Bank to be material, then from time to time, within 15 days after
demand by Bank, Borrower shall pay to Bank such additional amount or amounts
as will compensate Bank for such reduction. A statement of Bank claiming
compensation under this Section and setting forth the additional amount or
amounts to be paid to it hereunder shall be conclusive absent manifest error.
(e) If at any time Bank, in its sole and absolute discretion,
determines that: (i) the amount of the LIBOR Rate Advances for periods equal
to the corresponding Interest Periods are not available to Bank in the
offshore currency interbank markets, or (ii) the LIBOR Rate does not
accurately reflect the cost to Bank of lending the LIBOR Rate Advance, then
Bank shall promptly give notice thereof to Borrower, and upon the giving of
such notice Bank's obligation to make the LIBOR Rate Advances shall
terminate, unless Bank and the Borrower agree in writing to a different
interest rate Advances shall terminate, unless Bank and the Borrower agree in
writing to a different interest rate applicable to LIBOR Rate Advances. If it
shall become unlawful for Bank to continue to fund or maintain any Advances,
or to perform its obligations hereunder, upon demand by Bank, Borrower shall
prepay the Advances in full with accrued interest thereon and all other
amounts payable by Borrower hereunder (including, without limitation, any
amount payable in connection with such prepayment pursuant to Section 4(a)).
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this LIBOR Supplement
to Agreement as of the first date above written.
HEARTPORT, INC.
By: /s/ Rebecca L. Kuhn
--------------------------
Title: Treasurer
-----------------------
SILICON VALLEY BANK
By: /s/ Christopher Coleman
--------------------------
Title: Senior Vice President
-----------------------
5
<PAGE>
EXHIBIT A
LIBOR RATE ADVANCE FORM
The undersigned hereby certifies as follows:
I, ________________, am the duly elected and acting ____________ of
Heartport, Inc. ("Borrower").
This certificate is delivered pursuant to Section 2 of that certain LIBOR
Supplement to Agreement together with the Loan and Security Agreement by and
between Borrower and Silicon Valley Bank ("Bank") (the "Agreement"). The terms
used in this Borrowing Certificate which are defined in the Agreement have the
same meaning herein as ascribed to them therein.
Borrower hereby requests on ____________, 19__ a LIBOR Rate Advance (the
"Advance") as follows:
(a) The date on which the Advance is to be made is _____________, 19__.
(b) The amount of the Advance is to be ___________________ ($______), for
an Interest Period of ____ month(s).
All representations and warranties of Borrower stated in the Agreement are
true, correct and complete in all material respects as of the date of this
request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Advance Form is executed by the
undersigned as of this _____________ day of __________, 19___.
HEARTPORT, INC.
By:_________________________
Title:______________________
FOR INTERNAL BANK USE ONLY
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
- - ------------------ ----------- ------------------- --------------
__%
6
<PAGE>
EXHIBIT B
LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I, ________________, am the duly elected and acting ____________ of
Heartport, Inc. ("Borrower").
This certificate is delivered pursuant to Section 2 of that certain LIBOR
Supplement to Agreement together with the Loan and Security Agreement by and
between Borrower and Silicon Valley Bank ("Bank") (the "Agreement"). The terms
used in this LIBOR Rate Conversion/Continuation Certificate which are defined
in the Agreement have the same meaning herein as ascribed to them therein.
Borrower hereby requests on ____________, 19__ a LIBOR Rate Advance (the
"Advance") as follows:
(a) ___ (i) A rate conversion of an existing Prime Rate Advance from a
Prime Rate Advance to a LIBOR Rate Advance; or
___ (ii) A continuation of an existing LIBOR Rate Advance as a LIBOR
Rate Advance;
[CHECK (i) OR (ii) ABOVE]
(b) The date on which the Advance is to be made is _____________, 19___.
(c) The amount of the Advance is to be __________________ ($______), for
an Interest Period of ________ month(s).
All representations and warranties of Borrower stated in the Agreement are
true, correct and complete in all material respects as of the date of this
request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate is
executed by the undersigned as of this _____________ day of __________, 19___.
HEARTPORT, INC.
By:_________________________
Title:______________________
FOR INTERNAL BANK USE ONLY
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
- - ------------------ ----------- ------------------- --------------
__%
7
<PAGE>
EXHIBIT 11.1
HEARTPORT, INC.
STATEMENT RE: COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
----------- ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C>
PRO FORMA
Net loss $(34,054) $(9,353)
-------- -------
-------- -------
Weighted average common
shares outstanding 22,771 5,982
Convertible preferred
shares outstanding - 9,238
Shares related to SAB No.
55, 64 and 83 - 4,562
-------- -------
Total weighted average common
shares outstanding 22,771 19,782
-------- -------
-------- -------
Net loss per share $(1.50) $(0.47)
-------- -------
-------- -------
HISTORICAL
Net loss $(34,054) $(9,353) $(4,821)
-------- ------- -------
-------- ------- -------
Weighted average common
shares outstanding 18,712 5,982 6,053
Shares related to SAB No.
55, 64 and 83 1,782 7,128 7,128
-------- ------- -------
Total weighted average common
shares outstanding 20,494 13,110 13,181
-------- ------- -------
-------- ------- -------
Net loss per share $ (1.66) $ (0.71) $ (0.37)
-------- ------- -------
-------- ------- -------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-4030) pertaining to the Heartport, Inc. 1996 Stock Option
Plan and Employee Stock Purchase Plan, of our report dated January 24, 1997,
with respect to the consolidated financial statements and schedule of
Heartport, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
San Jose, California
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
IN THE COMPANY'S FORM 10-K FOR 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,445
<SECURITIES> 56,407
<RECEIVABLES> 550
<ALLOWANCES> 33
<INVENTORY> 2,107
<CURRENT-ASSETS> 94,226
<PP&E> 7,979
<DEPRECIATION> 1,584
<TOTAL-ASSETS> 101,852
<CURRENT-LIABILITIES> 6,665
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 90,446
<TOTAL-LIABILITY-AND-EQUITY> 101,852
<SALES> 624
<TOTAL-REVENUES> 624
<CGS> 561
<TOTAL-COSTS> 561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 592
<INCOME-PRETAX> (34,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,054)
<EPS-PRIMARY> (1.50)
<EPS-DILUTED> (1.50)
</TABLE>
