<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 000-28372
CARDIAC PATHWAYS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0278793
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
995 BENECIA AVENUE 94086
SUNNYVALE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 737-0505
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS, $.001 PAR VALUE
(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 [ ]
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 the 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, based upon the closing sale price of the Common Stock on
September 23, 1998 as reported on the Nasdaq National Market, was approximately
$35,626,606. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of September 23, 1998, the registrant had outstanding 9,868,483 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Stockholders to
be held November 30, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: the Company's history of losses and uncertainty of profitability; the
uncertainty that those products which have not previously received regulatory
clearance for commercial sale will prove to be safe and efficacious in clinical
trials; the uncertainty as to whether the Company's products and systems will
receive approval for commercial sale from United States and international
regulatory authorities in a timely manner, if at all; the uncertainty of market
acceptance of the Company's products and systems; the Company's dependence on
development and introduction of new products; the Company's lack of sales,
marketing and distribution experience; the risks associated with manufacturing
of the Company's products; the Company's highly competitive industry and rapid
technological change within the Company's industry; the uncertainty of patent
and proprietary technology protection and reliance on technology licensed from
third parties; changes in, or failure to comply with, government regulation; the
uncertainty of third party reimbursement for procedures performed using the
Company's products; the potential fluctuations in the Company's annual and/or
quarterly results; the Company's dependence on retention and attraction of key
employees; general economic and business conditions; and other factors
referenced herein.
ITEM 1. BUSINESS
OVERVIEW
Cardiac Pathways Corporation (the "Company") was organized in 1991 as a
California Corporation and completed a reincorporation in Delaware prior to its
initial public offering in June 1996. The Company designs, develops and
manufactures minimally invasive systems to diagnose and treat cardiac
tachyarrhythmias (abnormally rapid heart rhythms) which, if untreated, can cause
palpitations, fainting and sudden cardiac arrest (a fatal heart rhythm). The
Company is developing products designed to provide integrated system solutions
for the successful diagnosis and treatment of ventricular tachycardia and atrial
fibrillation, two of the most serious and prevalent types of abnormally rapid
heart rhythms. The Company's products consist of systems for diagnostic mapping,
or locating the source of the tachyarrhythmia within the heart, and for
performing ablation treatment, a nonsurgical, minimally invasive technique for
neutralizing heart tissue responsible for starting or maintaining a dangerous
heart rhythm. Current mapping and ablation procedures often take many hours to
complete. The Company believes its systems will substantially shorten mapping
and ablation procedure time and provide safe and more effective treatments of
ventricular tachycardia and atrial fibrillation than other current forms of
therapy. The Company's strategy is to establish its Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems and Atrial Fibrillation Ablation
System as the preferred means for the diagnosis and treatment of ventricular
tachycardia and atrial fibrillation.
The Company has generated only limited revenues from sales of
supraventricular tachycardia and ventricular tachycardia catheters and
Arrhythmia Mapping Systems in certain markets. The Company does not have any
experience in manufacturing, marketing or selling in commercial quantities its
products for diagnosis and treatment of ventricular tachycardia and atrial
fibrillation. There can be no assurance that the Company's development efforts
will result in commercially available products for diagnosis and treatment of
ventricular tachycardia and atrial fibrillation, that any such product will
prove to be safe and efficacious in clinical trials, that required regulatory
approvals will be obtained in a timely manner, or at all, or that the Company
will be successful in introducing any such product. Any commercialization of the
Company's products will require substantial development, clinical, regulatory,
manufacturing, sales and marketing and other expenditures. The Company expects
its operating losses to continue through at least the end of calendar 1999 as it
continues to expend substantial funds for clinical trials in support of
regulatory approvals, expansion of research and development activities,
establishment of commercial-scale manufacturing capabilities and
2
<PAGE> 3
expansion of sales and marketing activities. There can be no assurance that any
of the Company's potential products for diagnosis and treatment of ventricular
tachycardia and atrial fibrillation will be successfully commercialized or that
the Company will achieve significant revenues from either international or
domestic sales. In addition, there can be no assurance that the Company will
achieve or sustain profitability in the future.
BACKGROUND
The heart consists of four chambers: the ventricles, the lower two
chambers, and the atria, the upper two chambers. A healthy heart at rest beats
between 60 to 100 times per minute and pumps over 1,800 gallons of blood per
day. A normal heartbeat is the coordinated contraction of each of the heart's
chambers resulting from the conduction of organized electrical signals generated
by the heart's natural pacemaker, the sinoatrial node ("SA node"). The SA node,
located in the right atrium, initiates the heartbeat by generating an electrical
signal that causes the atria to contract and helps to fill the ventricles, the
heart's primary pumping chambers. Once spread throughout the atria, the
electrical activity of the SA node conducts an electrical signal to the
atrioventricular node ("AV node"). The AV node serves as a delay timer and
electrical signal conductor, allowing the atria to complete their contraction
thus filling the ventricles with blood, then facilitating the organized spread
of the electrical signal to the ventricles, causing them to contract and
distribute deoxygenated blood to the lungs from the right ventricle and freshly
oxygenated blood to the rest of the body from the left ventricle.
When defects compromise the normal conduction of this electrical activity,
the pumping rhythm of the heart can be affected, resulting in cardiac
arrhythmias (abnormal heart rhythms). Cardiac arrhythmias have numerous causes,
including congenital defects, tissue damage due to heart attacks or
arteriosclerosis (the deposition of fatty substances in the inner layer of the
arteries) and other diseases, that accelerate, delay or redirect the
transmission of electrical activity, thereby disrupting the normal coordinated
contractions of the chambers. During a cardiac arrhythmia, the heart beats
either too slowly or too rapidly. Cardiac arrhythmias characterized by an
abnormally slow heart rate, usually defined as a rate lower than 60 beats per
minute, are generally treated by implantation of a pacemaker that delivers
electrical impulses to increase the heart rate. Cardiac arrhythmias
characterized by an abnormally high rate of more than 100 beats per minute are
known as cardiac tachyarrhythmias. The following diagrams illustrate the four
chambers of the heart and a typical location of electrical signals associated
with ventricular tachycardia and atrial fibrillation in the heart's chambers.
[Graphic depicting the four chambers of the heart and illustrating the typical
location of atrial fibrillation and ventricular tachycardia.]
Ventricular Tachycardia. Ventricular tachycardia is a life-threatening
condition characterized by the ventricles beating at an abnormally rapid rate,
significantly interfering with the pumping of oxygenated blood
3
<PAGE> 4
throughout the body. When the ventricles beat at an abnormally rapid rate, they
lack sufficient time to fill with blood prior to each contraction. As a result,
less blood is pumped out of the heart and less oxygen is carried to the tissues
and organs of the body. This lack of oxygen can cause dizziness, loss of
consciousness and sudden cardiac arrest. Individuals with ventricular
tachycardia are at risk of imminent death due to the unpredictable nature of
ventricular tachycardia. Most ventricular tachycardias result from myocardial
infarctions (heart attacks) caused by coronary artery disease. When a myocardial
infarction occurs due to a blockage in one or more coronary arteries, a portion
of the heart muscle (most often in the left ventricle) dies. After the portion
of the left ventricle heart muscle that was served by the blocked artery dies,
an irregular border consisting of intermixed healthy and scar tissue forms.
Ventricular tachycardias typically originate at the border of healthy and scar
tissue.
Atrial fibrillation. Atrial fibrillation is a condition in which the
regular pumping function of the atria is replaced by a disorganized, ineffective
quivering caused by chaotic conduction of electrical signals through the upper
chambers of the heart. Atrial fibrillation is often associated with other forms
of cardiovascular disease, including congestive heart failure, rheumatic heart
disease, coronary artery disease, left ventricular hypertrophy, cardiomyopathy
or hypertension. The progression of atrial fibrillation varies among
individuals. Initial episodes of atrial fibrillation are generally symptomatic,
intermittent (paroxysmal) episodes. Certain individuals suffer recurring
episodes of atrial fibrillation that progress to a chronic state. Although not
immediately life threatening, atrial fibrillation may cause up to a 30%
reduction in cardiac output and a reduction in cerebral blood flow during the
fibrillation episode, resulting in shortness of breath, fainting, fatigue and
reduced exercise capacity. Ventricular rates can also become dangerously high
when the chaotic signals of the atria are conducted to these lower chambers of
the heart. More seriously, since the atria provide minimal pumping function
during atrial fibrillation, blood pools in the chambers, which can lead to the
formation of blood clots. Blood clots in the left atrium can dislodge and travel
to the brain resulting in stroke. Considered for years to be a benign disorder,
atrial fibrillation is now recognized as placing effected patients at a
significantly increased risk for stroke.
Supraventricular Tachycardia. Supraventricular tachycardias affect
ventricular rate from an origin above the ventricles. During in-utero
development, incomplete separation of the top and bottom chambers of the heart
leaves small muscle bundles that can rapidly conduct electrical signals between
chambers, resulting in a rapid heart rhythm. The most common types of
supraventricular tachycardias are Wolff-Parkinson-White ("WPW") syndrome and
Atrioventricular Nodal Reentrant Tachycardia ("AVNRT"). WPW syndrome involves a
congenital remnant of muscle tissue, an accessory pathway, between the atria and
ventricles that can very rapidly conduct electrical signals between the top and
bottom chambers of the heart. AVNRT, primarily a congenital condition, is
characterized by a circuit of conductive tissue between a part of the AV node
and either the atria or the ventricles. This circuit, like that of WPW syndrome,
can conduct the electrical signals from the AV node rapidly, leading to a
symptomatic tachycardia.
THE CARDIAC PATHWAYS SOLUTION
The Company is developing products to provide a comprehensive solution for
the successful diagnosis and treatment of ventricular tachycardia and atrial
fibrillation. The Company's systems are designed to allow the
electrophysiologist to perform high resolution mapping, enabling the physician
to locate cardiac tachyarrhythmias and assess the effectiveness of the minimally
invasive ablation treatment. Current mapping and ablation procedures often take
many hours to complete. The Company believes its systems will substantially
shorten mapping and ablation procedure time and provide safe and more effective
treatments than other forms of therapy. The Company has also developed and is
currently marketing products for the diagnosis and treatment of supraventricular
tachycardia. The following are features and benefits of the core technologies
used in the Company's products.
High Resolution Mapping for Ventricular Tachycardia. The Company's
Arrhythmia Mapping System for ventricular tachycardia utilizes a patented,
basket-shaped, multi-site, high resolution device which is placed in the
ventricle with a minimally invasive procedure, similar to a conventional heart
catheterization. This device is designed to allow the electrophysiologist to
quickly locate high rate ventricular tachycardia at multiple sites, thus
providing a significant improvement over currently used single point mapping
techniques.
4
<PAGE> 5
The Company believes that this ability to locate the source of the ventricular
tachycardia will enable a large population of patients to receive successful
treatment using the Company's Ventricular Tachycardia Ablation System.
Cooled Ablation for Ventricular Tachycardia. The Company's Ventricular
Tachycardia Ablation System utilizes a patented electrode-cooling catheter that
allows the electrophysiologist to deliver greater energy levels than existing
technologies to the site that is causing the ventricular tachycardia without a
significant risk of producing charred blood particles that could lead to stroke.
The Company believes that the ability to make deeper and wider lesions will
enable more effective treatment.
Linear Lesion Ablation for Atrial Fibrillation. The Company's Atrial
Fibrillation Ablation System utilizes a proprietary, non-metallic conformable
electrode device that conforms to the irregular surface in the atrium and
delivers radiofrequency energy for lesion creation through a conductive fluid
medium. With this technology, the electrophysiologist is able to create an
unbroken transmural lesion in the atrium causing disruption in the electrical
wavefronts associated with atrial fibrillation. The Company believes ablation
procedures utilizing this technology will be more effective and significantly
less time consuming than other types of catheter ablation techniques and as
effective as the surgical maze procedure, which currently is the only curative
treatment.
High Resolution Mapping for Atrial Fibrillation. The Company's Arrhythmia
Mapping System for atrial fibrillation utilizes a basket-shaped, multi-site,
high resolution device similar to that used in its Arrhythmia Mapping System for
ventricular tachycardia, but which has been designed to conform to the atria.
This technology provides high resolution, multi-site, simultaneous mapping and
is designed to be used to quickly locate the source of the arrhythmia and assess
the effectiveness of the ablation treatment. The Company believes this approach
will significantly shorten the length of ablation procedures.
STRATEGY
The Company's strategy is to establish its Ventricular Tachycardia Ablation
System, Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System as
the preferred means for the diagnosis and treatment of ventricular tachycardia
and atrial fibrillation. The following are the key elements of the Company's
strategy:
Demonstrate clinical efficacy and safety of the Company's mapping and
ablation systems. The Company expects to market its systems in the United States
and internationally. Successful clinical trials leading to regulatory approval
are critical for market acceptance of the Company's systems. The Company has
established scientifically rigorous clinical studies to assess the efficacy and
safety of its Arrhythmia Mapping System for use in the left ventricle and right
atrium and its Ventricular Tachycardia Ablation System. In addition, the Company
has applied for regulatory approval relating to a clinical study for its Atrial
Fibrillation Ablation System. The results of these trials will be used to seek
Food and Drug Administration ("FDA") regulatory approval to market its mapping
and ablation systems in the United States. The Company also intends to seek
regulatory approval to market these products internationally. See "-- Clinical
Trials."
Build upon relationships with electrophysiologists. The Company has
developed strong relationships with prominent electrophysiologists worldwide who
have been involved and will continue to be involved in the Company's clinical
and product development. The Company intends to continue to build these
substantial relationships through clinical investigator meetings, participation
in physician-run symposia and meetings to discuss clinical issues and
treatments. The Company's strategy is to leverage these relationships with
leading electrophysiologists to gain market acceptance of its products in the
United States and internationally. The Company believes there are approximately
600 board certified electrophysiologists practicing in the United States.
Provide integrated system solutions for diagnosing and treating Ventricular
Tachycardia and Atrial Fibrillation. The Company's mapping baskets and
integrated mapping computer system are designed to quickly identify the source
of an arrhythmia. The Company's catheters, including it cooled ablation and
linear lesion catheters, and integrated radiofrequency generator and
programmable fluid pump are designed to
5
<PAGE> 6
provide safe, effective ablation of the heart tissue. The Company believes that
its integrated systems approach provides solutions for diagnosing and treating a
significant portion of the patients who suffer from ventricular tachycardia and
atrial fibrillation. The Company also believes its integrated systems solution
offers advantages over other products. All of the Company's products are
designed to work together and thereby eliminate incompatibility problems that
may arise from using products from several vendors. This makes the products
easier to use, shortens procedure times and increases the efficiency of the
treatment. In addition, the Company plans to be a single source provider of
complete mapping and ablation systems, thereby making its products more
cost-effective.
Maintain technological leadership and achieve market leadership. The
Company's goal is to be a market leader in the commercialization of integrated
systems to diagnose and treat ventricular tachycardia and atrial fibrillation.
The Company believes that its technological innovations have overcome the
principal obstacles to the development of such systems. In addition, the
Company's goal is to be a leading provider of these integrated systems, and the
Company intends to continue to invest significant resources to enhance its
technological position and to increase market acceptance of its products.
Protect and enhance proprietary position. The Company currently holds
issued and allowed patents and has pending patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The Company
owns 46 United States issued patents and 10 foreign issued patents. The Company
owns an exclusive field-of-use license on one United States issued patent and
licenses to 21 United States issued patents. In addition, the Company has 23
United States pending patent applications, of which one is licensed, and three
have been allowed by the United States Patent and Trademark Office (including
one assigned re-issue patent application). The Company has also filed 25
corresponding foreign patent applications that are currently pending in Europe,
Japan, Australia and Canada, of which 12 have been published and are pending
issuance. Three of the pending foreign patent applications are Patent
Cooperation Treaty ("PCT") applications, with Europe, Japan, Australia and
Canada as designated countries for filing at the national phase. The Company
intends to continue to pursue its patent filing strategy and to vigorously
defend its intellectual property position against infringement.
PRODUCTS AND SYSTEMS
The Company's product line is designed to provide an integrated systems
solution to the mapping and ablation of cardiac arrhythmias. The Company has
focused its product development and clinical applications on systems that
diagnose and treat ventricular tachycardia and atrial fibrillation. The
following table summarizes products that have been released and those that are
currently under development:
<TABLE>
<CAPTION>
PRODUCTS DESCRIPTION STATUS(1)(2)
-------- ----------- ------------
<S> <C> <C>
VENTRICULAR TACHYCARDIA CATHETERS
Mercator Left Ventricular Mapping A high density mapping catheter IDE supplemental submission
Basket and deployment guide used to approved in November, 1997.
assess electrical conduction Currently in clinical trial for
throughout the left ventricle. PMA or 510(k) approval process.
Available in certain
international markets.
Local Sector Mapping Basket Variation of the Mercator Left IDE supplemental submission
Ventricular Mapping Basket that approved in November 1997 for
focuses mapping electrodes in a feasibility study.
sector or region of the left
ventricle.
Chilli Cooled Ablation Catheter An ablation catheter that IDE approved June 1995;
includes lumens to cool the recommended for approval by FDA
catheter tip during Panel in July 1998 for PMA.
radiofrequency energy delivery. Available in certain
international markets.
ATRIAL FIBRILLATION CATHETERS
Nexus Linear Lesion Catheter An ablation catheter used to make IDE supplemental submission
long lesions in the atria. approved in December 1997 for
continuation of feasibility
study.
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
PRODUCTS DESCRIPTION STATUS(1)(2)
-------- ----------- ------------
<S> <C> <C>
Mercator Atrial Mapping Basket A high density mapping catheter 510(k) submitted in July 1998.
used to assess atrial Available in certain
arrhythmias. international markets.
Local Sector Mapping Basket Variation of the Mercator Atrial IDE submission approved in March
Mapping Basket that focuses 1998 for a feasibility study.
mapping electrodes in a sector or
region of the left or right
atria.
SUPRAVENTRICULAR TACHYCARDIA/ DIAGNOSTIC CATHETERS
Radii Mapping and Ablation A family of deflectable catheters Available in international
Catheters for mapping and ablation of markets. Plan to submit 510(k)
supraventricular tachycardia. application in 1998 for
diagnostic electrophysiology
procedures.
Trio/Ensemble Diagnostic A set of three, uniquely small 510(k) submitted by Arrow
Catheters multielectrode catheters and a International, Inc. ("Arrow") and
triple-lumen guide catheter for cleared in December 1995.
use in diagnostic Available in the United States
electrophysiology procedures and international markets.
HIGH RESOLUTION MAPPING EQUIPMENT
Model 8100/8300 Arrhythmia An integrated mapping computer 510(k) cleared in August 1997.
Mapping System for basic system that analyzes and displays Available in the United States
diagnostic electrophysiology data from single point catheters and certain international
studies to map electrical activity within markets.
the heart for basic diagnostic
electrophysiology lab procedures.
Model 8100/8300 Arrhythmia An integrated mapping computer IDE supplement approved in July
Mapping System system that analyzes and displays 1997 for approval-route clinical
data from high density mapping study when used in the
catheters; designed to be used ventricles. Approval-route
with Mercator Left Ventricular clinical study in progress when
Mapping Baskets, Mercator Atrial used in the right atrium.
Mapping Baskets and Local Sector
Mapping Baskets.
ABLATION EQUIPMENT
Model 8002 Radiofrequency An integrated radiofrequency Approved IDE with Nexus Linear
Generator and Integrated Fluid generator energy source and fluid Lesion Catheter in September
Pump pump for cooled ablation 1996.
applications.
Model 8004 Radiofrequency Adds to functionality and ease of Approved IDE with Chilli Ablation
Generator and Integrated Fluid use to the Model 8002 for further Cooled Catheter in September
Pump pump integration and for printing 1995. IDE supplement submitted in
of ablation data. August 1998 for use with Nexus
Linear Lesion Catheter.
</TABLE>
- ---------------
(1) "Approved" or "cleared" means that the Company has received FDA approval of
an application by the Company to sell the product in the United States
pursuant to an application under section 510(k) (a "510(k)" application) of
the Food, Drug and Cosmetics Act of 1938 (the "FDC Act"), as amended, or a
premarket approval (a "PMA") application. The status column includes the
Company's current estimates of the planned submission time periods of
investigational device exemption applications ("IDE") for certain of the
Company's products with the FDA.
(2) With the exception of the Ventricular Tachycardia Ablation System (including
the Chilli cooled ablation catheter), the Company does not anticipate filing
a PMA application for any system for at least the next six months, and does
not anticipate receiving FDA clearance of its PMA applications once filed
for any such system until at least one to two years after such PMA
application is accepted for filing, if at all. See "-- Government
Regulation."
7
<PAGE> 8
The following table sets forth the Company's current and planned systems
for mapping and ablation of ventricular tachycardia and atrial fibrillation and
their component catheters and equipment.
VENTRICULAR TACHYCARDIA
ARRHYTHMIA MAPPING SYSTEM
- Mercator Left Ventricular Mapping Basket or Local Sector Mapping Basket
- Model 8100/8300 Arrhythmia Mapping System
VENTRICULAR TACHYCARDIA ABLATION SYSTEM
- Chilli Cooled Ablation Catheter
- Models 8002 and 8004 Radiofrequency Generator and Integrated Fluid Pump
ATRIAL FIBRILLATION
ARRHYTHMIA MAPPING SYSTEM
- Mercator Atrial Mapping Basket or Local Sector Mapping Basket
- Model 8100/8300 Arrhythmia Mapping System
ATRIAL FIBRILLATION ABLATION SYSTEM
- Nexus Linear Lesion Catheter
- Models 8002 and 8004 Radiofrequency Generator and Integrated Fluid Pump
Ventricular Tachycardia Catheters
The Company's ventricular tachycardia catheters, which consists of the
Chilli Cooled Ablation Catheter, Mercator Left Ventricular Mapping Basket and
the Local Sector Mapping Basket are designed to allow the physician to locate
the source of the ventricular tachycardia and perform an ablation treatment that
can reach wide and deep within the heart tissue to successfully treat the
patient's ventricular tachycardia. The Chilli Cooled Ablation Catheter was
recommended to the FDA for approval with certain additional labeling and
follow-up study requirements by the FDA Circulatory Systems Device Advisory
Panel in July 1998. The Mercator Left Ventricular Mapping Basket and the Local
Sector Mapping Basket are currently in clinical trials.
Chilli Cooled Ablation Catheter. The Chilli Cooled Ablation Catheter is a
minimally invasive device designed to treat ventricular tachycardia using
radiofrequency energy ablation to create lesions in the ventricle. Although
leading electrophysiologists have recently begun to use radiofrequency ablation
to treat ventricular tachycardia, excessive heating of the tissue and the
ablation electrode often limits the level of energy delivered and therefore the
success of the treatment. Incorporating a closed system of fluid circulation,
the Chilli Cooled Ablation Catheter allows circulating fluid to cool the
catheter ablation electrode during delivery of radiofrequency energy. A
programmable pump injects fluid into a catheter lumen that circulates the fluid
to the tip electrode and back to the fluid pump. The circulation of fluid draws
heat away from the metal electrode and from the electrode-to-tissue interface,
which the Company believes will allow the delivery of higher radiofrequency
energy power levels without excessive heating. Higher power levels allow for
creation of wider and deeper lesions than those created with lower power levels,
increasing the likelihood of a successful ablation. The Company intends to label
the Chilli Cooled Ablation Catheter for single use due to its closed system of
fluid circulation through catheter lumens.
8
<PAGE> 9
Mercator Left Ventricular Mapping Basket. The Mercator Left Ventricular
Mapping Basket is a high density 64-electrode, three dimensional basket for use
in left ventricular diagnostic electrophysiology procedures. Based on the
Company's proprietary high-density electrode mapping technology, this basket-
shaped mapping catheter has eight highly flexible electrode-carrying arms that
allow the basket to conform to the shape of the left ventricular chamber. This
design enables mapping with electrodes in contact with the heart tissue. Various
basket sizes have been designed for optimal fit in ventricular tachycardia
patients. The Company currently anticipates that it will develop mapping baskets
in several different sizes to allow for variations in the size of the left
ventricle. The Company believes that the Mercator Left Ventricular Mapping
Basket will reduce procedure time and allow the mapping of a given ventricular
tachycardia rhythm using a single cardiac cycle (a single heartbeat).
Ventricular tachycardia can best be diagnosed while the patient is actually
experiencing an episode of tachyarrhythmia, which must be carefully monitored by
the physician. Current single point mapping techniques are often not appropriate
because the patient cannot be left in the unstable heart rhythm for a sufficient
length of time to determine the origins of the ventricular tachycardia. The
Mercator Left Ventricular Mapping Basket is designed to allow rapid mapping of a
large portion of the left ventricle. The Mercator Left Ventricular Mapping
Basket captures, within a few seconds, a large amount of electrical conduction
information that is useful in identifying appropriate sites for ablation. The
Company intends to label all ventricular mapping baskets for single use due to
the inability of the catheter's biocompatible, anti-coagulation coating to
withstand resterilization.
The Mercator Left Ventricular Mapping Basket is combined with the Company's
Model 8100/8300 Arrhythmia Mapping System to form the Company's Arrhythmia
Mapping System for diagnostic mapping of ventricular tachycardia. This system
captures the conduction activity in the left ventricle and displays the
information, allowing the physician to evaluate and manipulate the data to
determine the source of the ventricular tachycardia and the appropriate location
for ablation. The Company believes that the Mercator Left Ventricular Mapping
Basket will also be compatible with existing computerized electrophysiology
signal display systems after appropriate interface connections have been
implemented.
Local Sector Mapping Basket. The Company has developed the Local Sector
Mapping Basket, which is a variation of the Mercator Left Ventricular Mapping
Basket. This device clusters the electrode-carrying arms together, providing a
one-sided grouping of 40 electrodes. This product is designed to allow the
electrophysiologist to focus the electrodes of the mapping basket in the
specific region or sector of the left or right ventricle believed to be the
focus of the patient's ventricular tachycardia. Focusing the electrodes in a
limited area increases the amount and usefulness of the data collected for the
specific target area. Use of the Local Sector Mapping Basket would allow the
electrophysiologist to concentrate on the ventricular septal wall, the location
of the heart where the vast majority of ventricular tachycardias occur. The
Local Sector Mapping Basket is designed to be used with the Model 8100/8300
Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia. The
Company intends to label the Local Sector Mapping Basket for single use due to
the inability of the catheter's biocompatible, anticoagulation coating to
withstand resterilization.
Atrial Fibrillation Catheters
The Company is currently developing catheters to allow the physician to
treat atrial fibrillation. The Nexus Linear Lesion Catheter is designed to
create long lesions in the atria and the Atrial Mapping Basket is designed to
map the atria to assess the effectiveness of the ablation treatment.
Nexus Linear Lesion Catheter. Currently, the only curative treatment for
atrial fibrillation is the surgical maze procedure in which the surgeon makes
several incisions in the right and left atria creating scar tissue to
electrically isolate portions of the atria. The Company designed the Nexus
Linear Lesion Catheter to provide a minimally invasive ablation procedure to
treat atrial fibrillation and atrial flutter in the right atrium. The Nexus
catheter is currently being evaluated for the treatment of atrial flutter in the
right atrium, and the Company intends to follow such study with additional
studies of its use in treating atrial fibrillation, primarily in the left
atrium. The Company believes that the Nexus Linear Lesion Catheter, through the
use of a conductive fluid medium for radiofrequency energy delivery, will
produce a homogenous lesion that will create a continuous line of block through
the tissue, creating lesions similar to those created with the surgical maze
procedure. The unique design of the Nexus Linear Lesion Catheter mounts several
electrodes together and
9
<PAGE> 10
provides a highly adjustable deployment system. This novel deployment technique
provides specific directional tissue contact for the conformable electrode and a
self-stabilizing support structure. A non-metallic electrode allows the Nexus
Linear Lesion Catheter to conform to irregular surfaces in the endocardium and
efficiently deliver radiofrequency energy for ablating heart tissue. The Company
believes that these features will substantially reduce ablation procedure time
compared to other current catheter based treatments. As a result of the
non-metallic electrode design, the Company intends to label the Nexus Linear
Lesion Catheter for single use.
The Nexus Linear Lesion Catheter will be used with the Company's Model 8002
and Model 8004 Radiofrequency Generator and Integrated Fluid Pump. The Atrial
Fibrillation Ablation System will combine the unique features to be included in
the Nexus Linear Lesion Catheter with an instrument that incorporates the widely
accepted radiofrequency energy method for creating lesions in the heart tissue
and a programmable pump for fluid delivery during the ablation.
Mercator Atrial Mapping Basket. The Mercator Atrial Mapping Basket is a
high density, 64-electrode basket that the Company believes will be useful in
atrial electrophysiology studies. This mapping catheter is based on the same
technology as the Mercator Left Ventricular Mapping Basket and has similar
design characteristics. The use of the Company's proprietary technology for
constructing high density electrode arms was leveraged in this design, and the
arm shapes were designed specifically with consideration for the anatomy of
human atria. A range of basket sizes has been developed to account for
variations in size and shape of human atria. Initially the Company has focused
its product development efforts on a mapping basket for the right atrium. The
Company believes that a mapping system for the atria will be important in
reducing the procedure time and assessing the effectiveness of ablation
procedures for treating the patient's atrial fibrillation. The Company intends
to label the Mercator Atrial Mapping Basket for a single use due to the
inability of the catheter's biocompatible, anticoagulation coating to withstand
resterilization.
The Mercator Atrial Mapping Basket is combined with the Company's Model
8100/8300 Arrhythmia Mapping System to form the Company's Arrhythmia Mapping
System for diagnostic mapping of complex atrial tachyarrhythmias including
atrial fibrillation. This system captures the conduction activity in the atrium
and displays the information allowing the physician to evaluate and manipulate
the data to determine the source of atrial fibrillation. The Company believes
that the mapping catheter will also be compatible with existing computerized
electrophysiology signal display systems after appropriate interface connections
have been implemented.
Local Sector Mapping Basket. The Company has developed the Local Sector
Mapping Basket, which is a variation of the Mercator Atrial Mapping Basket. This
device clusters the electrode-carrying arms together, providing a one-sided
grouping of 40 electrodes. This product is designed to allow the
electrophysiologist to focus the electrodes of the mapping basket in the
specific region or sector of the atria. Focusing the electrodes in a limited
area increases the amount and usefulness of the data collected for the specific
target area. Use of the Local Sector Mapping Basket will be important in
reducing the procedure time and assessing the effectiveness of ablation
procedures for treating the patient's atrial fibrillation. The Local Sector
Mapping Basket is designed to be used with the Model 8100/8300 Arrhythmia
Mapping System for diagnostic mapping of complex atrial tachyarrhythmias
including atrial fibrillation. The Company intends to label the Local Sector
Mapping Basket for single use due to the inability of the catheter's
biocompatible, anticoagulation coating to withstand resterilization.
Supraventricular Tachycardia and Diagnostic Catheters
The Company's Trio/Ensemble diagnostic catheters and Radii supraventricular
tachycardia mapping and ablation catheters, currently sold commercially in
International markets, are used for electrophysiological diagnostic mapping and
ablation of supraventricular tachycardia. These catheters employ single point
mapping and ablation techniques that are effective methods of locating the
appropriate ablation site for treating supraventricular tachycardia.
Trio/Ensemble Diagnostic Catheters. Many diagnostic electrophysiological
studies are performed with placement of multi-electrode catheters in three or
four locations of the right heart chambers. The placement of
10
<PAGE> 11
these diagnostic catheters provides the electrophysiologist with an overall tool
to assess electrical conduction between the atria and the ventricle. The
Ensemble is available with five curve shapes to assist placement of the
catheters in different locations within the heart. The Trio/Ensemble diagnostic
catheters allow the placement of three diagnostic catheters through a single
patient introduction site rather than separate introduction sites for each
catheter, and thereby may reduce patient preparation time, lessen patient trauma
and potentially enable the electrophysiology study to be performed on an
outpatient basis. The FDA granted 510(k) clearance for the Trio/ Ensemble
diagnostic catheter to Arrow in December 1995. Arrow distributes the product in
the United States and Arrow and a limited number of other distributors market
the Trio/Ensemble on the Company's behalf in certain international markets. The
Trio/Ensemble diagnostic catheters currently have list prices ranging from $150
to $250, depending upon configurations and distribution territory.
Radii Mapping and Ablation Catheters. The Company's Radii family of
supraventricular tachycardia mapping and ablation catheters is similar to
catheters widely used in conjunction with ablation procedures. Each catheter has
a deflectable, steerable shaft that can be used with single-point mapping
techniques to locate potential arrhythmia sites prior to application of
radiofrequency energy to ablate the tissue. Unlike ventricular tachycardia,
single-point mapping techniques are appropriate for supraventricular tachycardia
because the arrhythmia can be induced and maintained in the patient for a
sufficient length of time to identify the origins of the supraventricular
tachycardia without threatening the patient's life. The radius of the
deflectable curve may be adjusted by the clinician. This feature allows small
catheter tip movements and slight curve changes that are necessary to reach
different anatomical sites. Some Radii models contain a temperature sensor
embedded into the ablation electrode to provide additional information about the
performance of the radiofrequency energy delivery. The Company believes that the
Radii is compatible with other manufacturer's radiofrequency generators for use
in supraventricular tachycardia ablation procedures. The Radii supraventricular
tachycardia mapping and ablation catheters are distributed internationally by
third party distributors on the Company's behalf. The Company plans to submit a
510(k) application for the Radii catheter for mapping in October 1998. The Radii
supraventricular tachycardia mapping and ablation catheters have list prices
ranging from $425 to $765, depending upon model and distribution territory.
High Resolution Mapping Equipment
Electrophysiologists use dedicated signal amplifier systems to diagnose
information gathered during an electrophysiology study. Typical systems amplify
the signals recorded from the heart, convert these signals into digital
information and permanently store the digital information. A printer provides
paper display of signals for analysis by the electrophysiologist and medical
records storage. Currently, some electrophysiologists still rely on older analog
amplifier systems that merely display signals on a monitor and print them on a
paper strip chart recorder for medical records storage. These systems force the
electrophysiologist to perform a tedious process of manual measurement of the
signals printed on paper. More modern systems, while utilizing computerized
technology, are limited in their ability to support high resolution mapping
devices such as the Company's Mercator Left Ventricular Mapping Basket.
The Model 8100/8300 Arrhythmia Mapping System records, amplifies and
displays the unique electrical activity recorded from catheter electrodes that
have been passed into the heart. The Arrhythmia Mapping System was also designed
to function as a signal amplifier system to be used in basic diagnostic
electrophysiology studies with single point catheters. The system also supports
complex mapping catheters by offering software that intuitively displays
information abstracted from the timing information in the electrical signals
using a type of color display known as an isochronal map. The isochronal maps
represent those parts of the heart's left ventricle that contract at the same
time by using the same color. With this technique, color indicates when parts of
the heart contract relative to each other. Colors provide rapid visual
indication of a segment of the heart that could be a source of the tachycardia.
The Company's Model 8100/8300 Arrhythmia Mapping System (the "Model
8100/8300") received 510(k) clearance from the FDA in August 1997 for basic
diagnostic electrophysiology studies. In fiscal 1998, the Company has begun
marketing such system commercially in the United States. However, there can be
no assurance that such system will gain any significant degree of market
acceptance among physicians, patients and health care payors. The Company
believes that physicians' acceptance of procedures performed using the
11
<PAGE> 12
Company's Model 8100/8300 will be essential for market acceptance of such
system. Even though the clinical efficacy of such system has been established,
electrophysiologists, cardiologists and other physicians may elect not to
recommend the use of the Model 8100/8300 for any number of reasons. The Company
believes that, as with any novel medical technology, there will be a significant
learning process involved for physicians to become proficient. Broad use of such
system will require training of electrophysiologists, and the time required to
complete such training could adversely affect market acceptance. Failure of such
product to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, the Company has limited experience in manufacturing commercial volumes
of its products. Even if the Model 8100/8300 achieves market acceptance, if the
Company is unable to manufacture sufficient quantities of such product to
satisfy customer demand, the Company's business, financial condition and results
of operations would be materially adversely affected.
Ablation Equipment
Radiofrequency energy is the most common energy source used in catheter
ablation procedures. When radiofrequency energy is passed through heart tissue,
the tissue resists the flow of electricity, generating heat in a process known
as resistive heating. Resistive heating destroys the cardiac tissue in contact
with the catheter. The treatment of many arrhythmias requires that ablation
produce large, deep lesions. However, when the tissue becomes too hot from
resistive heating, heat conducts back from within the tissue to the catheter
electrode tip causing the formation of charred blood particles. This inhibits
the flow of electricity to the heart tissue and the depth of the lesion that can
be produced. In addition, this overheating poses a risk as the removal of the
catheter from the heart can dislodge charred blood particles that can travel
through the arteries exiting the heart into the brain, causing a stroke.
Cooled ablation addresses these shortcomings of radiofrequency energy
ablation. By cooling the catheter tip, the Company believes heat is removed from
the electrode-to-tissue interface, allowing more energy to be delivered to the
heart without blood coagulating on the catheter tip, resulting in what the
Company believes are larger and deeper lesions created in a safer manner. The
Model 8002 Radiofrequency Generator and Integrated Fluid Pump incorporates the
widely accepted radiofrequency energy method for creating endocardial lesions
with a programmable fluid pump for fluid delivery during ablation. The Company
believes this is the only radiofrequency generator featuring an integrated fluid
pump for catheter electrode cooling. Currently, software design limits the
radiofrequency energy output to a maximum of 50 watts, a level of energy
delivery believed to be both safe and sufficiently strong to produce an
effective lesion. The Model 8004 Radiofrequency Generator and Integrated Fluid
Pump adds functionality to the Model 8002, by including additional pump
integration and printing of ablation data.
The Company's Ventricular Tachycardia Ablation System, Arrhythmia Mapping
Systems and Atrial Fibrillation Ablation System will require additional
development and clinical trials and regulatory approvals before they can be
marketed in the United States and internationally. With the exception of the
Ventricular Tachycardia Ablation System, the Company does not anticipate filing
a PMA application for any system for at least six months, and does not
anticipate receiving a PMA for any such system until at least one to two years
after such PMA application is accepted for filing, if at all. As a result of the
FDA Circulatory Systems Device Advisory Panel's recommendation, the Company
expects the Ventricular Tachycardia Ablation System to receive PMA approval in
1998 or early 1999. However, there can be no assurance that such marketing
clearance will be granted or, if granted, that the FDA will not impose
additional labeling or use restrictions than those recommended by the panel. The
Company will not generate any significant revenue in the United States from the
sale of the Model 8100/8300 Arrhythmia Mapping System for basic
electrophysiology studies, until such time, if ever, as its Ventricular
Tachycardia Ablation System, Arrhythmia Mapping Systems or Atrial Fibrillation
Ablation System obtain clearance or approval from the FDA. There can be no
assurance that the Company's development efforts will be successful or that the
Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems or Atrial
Fibrillation Ablation System or any other product developed by the Company will
be safe or effective, approved by appropriate regulatory and reimbursement
authorities, capable of being manufactured in commercial quantities at
acceptable costs or successfully marketed. Furthermore, because the Ventricular
Tachycardia Ablation System, Arrhythmia Mapping Systems and
12
<PAGE> 13
Atrial Fibrillation Ablation System represent the Company's sole near-term
product focus, the Company could be required to cease operations if these
systems are not successfully commercialized.
There can be no assurance that the Company's Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems or Atrial Fibrillation Ablation
System or the component catheters and equipment will gain any significant degree
of market acceptance among physicians, patients and health care payors, even if
clinical trials demonstrate safety and efficacy and necessary regulatory and
reimbursement approvals are obtained. The Company believes that physicians'
acceptance of procedures performed using the Company's systems will be essential
for market acceptance of its systems. Physicians will not recommend that
procedures be performed using the Company's systems until such time, if at all,
as clinical data or other factors demonstrate the efficacy of such procedures as
compared to conventional drug, surgical and other treatments. Even if the
clinical efficacy of procedures using the Company's systems is established,
electrophysiologists, cardiologists and other physicians may elect not to
recommend the procedures for any number of other reasons. The Company believes
that, as with any novel medical procedure, there will be a significant learning
process involved for physicians to become proficient. Broad use of the Company's
systems will require training of physicians, and the time required to complete
such training could adversely affect market acceptance. 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.
CLINICAL TRIALS
The Ventricular Tachycardia Ablation System, Arrhythmia Mapping System and
Atrial Fibrillation Ablation System are in various stages of clinical testing.
Other than with respect to the Ventricular Tachycardia Ablation System, the
clinical data obtained to date are insufficient to demonstrate the safety and
efficacy of these products under applicable FDA regulations and guidelines.
There can be no assurance that any of the Company's products will prove to be
safe and effective in clinical trials under applicable United States or
international regulations or that additional modifications to the Company's
products or additional clinical trials will not be necessary. In addition, the
clinical trials may identify significant technical or other obstacles to be
overcome prior to obtaining necessary regulatory or reimbursement approvals. In
addition, the ablation catheter and ablation equipment that together form the
Company's Atrial Fibrillation Ablation System are still under development. There
can be no assurance that the Company will be successful in completing
development of the atrial fibrillation product and submitting the appropriate
IDEs or that the FDA will permit the Company to undertake other clinical trials
of the atrial fibrillation product. Although the FDA granted 510(k) clearance
for basic electrophysiology studies for the Company's Arrhythmia Mapping System
in August 1997, such product cannot be marketed with the Company's mapping
catheters unless and until such catheters receive FDA marketing clearance or
approval. Until such regulatory clearance or approval is obtained, the
Arrhythmia Mapping System may only be used with other manufacturers' catheters.
There can be no assurance that physicians will adopt the Arrhythmia Mapping
System for electrophysiology studies in lieu of a system incorporating mapping
equipment and catheters from a single manufacturer, if at all. If the Arrhythmia
Mapping Systems and Atrial Fibrillation Ablation System and their component
catheters and equipment do not prove to be safe and effective in clinical trials
or if the Company is otherwise unable to commercialize these products
successfully, the Company's business, financial condition and results of
operations will be materially adversely affected. In addition, because ablation
treatment of these cardiac arrhythmias is a relatively new and to date untested
treatment, the long-term effects of radiofrequency ablation on patients are
unknown. As a result, the long-term success of ablation therapy in treating
ventricular tachycardia, atrial fibrillation and atrial flutter will not be
known for several years.
In December 1997, the Company completed enrollment in a clinical trial of
the Chilli Cooled Ablation Catheter and the Models 8002 and 8004 Radiofrequency
Generator and Integrated Fluid Pump, the products that together form the
Company's Ventricular Tachycardia Ablation System. In May 1997, the Company
completed an IDE feasibility study of the Mercator Left Ventricular Mapping
Basket and the Model 8100/8300 Arrhythmia Mapping System, the products that
together form the Company's Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. The Company is currently conducting a clinical trial
for the Local Sector Mapping Basket, a variation of the Mercator Left
Ventricular Mapping
13
<PAGE> 14
Basket. The Company completed a clinical trial of the Mercator Atrial Mapping
Basket and the Model 8100/8300 Arrhythmia Mapping System in March 1998, the
products that together form the Company's Arrhythmia Mapping System for
diagnostic mapping of the right atrium. In February 1998, the Company filed an
IDE for a clinical trial of the Local Sector Mapping Basket in the right atrium.
In April 1997, the Company completed a feasibility study of the Nexus Linear
Lesion Catheter and Model 8002 Radiofrequency Generator and Integrated Fluid
Pump, the products that together form the Company's Atrial Fibrillation Ablation
System. The Company is currently conducting a clinical trial for a second
version of the Nexus Linear Lesion Catheter for the treatment of atrial flutter.
Ventricular Tachycardia Ablation System. The Company initiated a clinical
trial for the Ventricular Tachycardia Ablation System in the United States and
Europe in September 1995 under an IDE approved by the FDA. The clinical trial
was conducted at a maximum of 15 clinical sites. The primary endpoint of the
clinical trial is clinical recurrence of ventricular tachycardia in patients
randomized to receive ablation treatment versus patients in the control group
receiving antiarrhythmic drugs. The required post-treatment follow-up prior to
submission of a PMA was 30 days for safety and the Company is required to follow
up with some patients up to 24 months after the PMA filing. Enrollment for the
clinical trial was completed on December 19, 1997. A PMA application was
submitted on January 29, 1998 for approval to market the Ventricular Tachycardia
Ablation System and its component catheters and equipment in the United States,
and the Company expects that the FDA's review process will take at least nine
months from the date of filing. On July 21, 1998 the FDA Circulatory Systems
Device Advisory Panel recommended that the FDA grant approval of the Company's
PMA with certain recommendations for labeling changes and a post-market study.
The FDA granted the Company's request to permit continuation of the study
and expansion to a maximum of 20 clinical sites and 300 patients while the PMA
application is under review. As of September 17, 1998, 208 patients had been
enrolled in the trial; 75 patients randomized to ablation, 101 patients
non-randomized to ablation, and 32 patients randomized to drug therapy of which
17 patients have subsequently received ablation therapy due to VT recurrence. In
addition, 18 patients have received ablation therapy under a compassionate use
protocol. Analysis of 150 of such patients was included in the PMA application.
The Company believes that such analysis shows that clinical recurrence of VT was
significantly less in the patients randomized to ablation compared to patients
randomized to control. Acute success of ablation therapy, defined as eradication
of all mappable VT at the end of the ablation procedure, was attained in 75% of
patients. The incidence of major adverse events associated with the procedure
was 8.0%.
Arrhythmia Mapping System for Ventricular Tachycardia. In January 1997, the
Company received FDA approval to conduct an IDE feasibility study to evaluate
the safety of the Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. The feasibility study was conducted at three clinical
sites in the United States and Europe and involved a total of 14 patients. The
purpose of the clinical trial was to evaluate and test the success of the
deployment of the Mercator Left Ventricular Mapping Basket into the ventricle,
the fit of the catheter and the system's ability to accurately map the
electrical signals of the left ventricle. In addition, as of September 17, 1998,
24 patients have been studied in Europe outside of the IDE in a similar
protocol. There was no thrombus formation on any mapping basket used in the 38
studies. Of the 38 patients evaluated, one patient developed asymptomatic aortic
regurgitation, one patient had a transient ischemic attack, and two patients
developed pericardial effusions associated with the procedure. In July 1997, the
Company submitted an IDE supplement to support commercialization of two types of
baskets; the Mercator Left Ventricular Mapping Basket, the full chamber "global"
basket evaluated in the feasibility study, as well as a smaller, partial chamber
high density Local Sector basket. Conditional approval was granted to initiate
enrollment of 30 patients at five sites for the global basket. This study has
been initiated at one clinical site, and three patients have been enrolled. The
FDA requested a separate IDE for a study of the Sector Mapping Basket. A new IDE
was submitted and received conditional approval in November 1997 to initiate
enrollment of 30 patients at five sites in the Sector study. This study was
initiated April 8, 1998, and six patients have been enrolled in this trial as of
September 17, 1998. These studies allow the use of the ventricular mapping
baskets with the Ventricular Tachycardia Ablation System simultaneously. The
Company believes that ventricular mapping should enable the treatment of high
rate ventricular tachycardia, which
14
<PAGE> 15
is more common than slow rate ventricular tachycardia which is the only type
amenable to ablation therapy using current techniques.
Arrhythmia Mapping System for Atrial Fibrillation. In June 1997, the
Company received IDE approval by the FDA to conduct a clinical trial of the
Mercator Atrial Mapping Basket for the right atrium and Arrhythmia Mapping
System for complex atrial tachyarrhythmias including atrial fibrillation. The
clinical trial was conducted at seven clinical sites in the United States and
one in Europe. The purpose of this clinical trial was to demonstrate the
equivalency of the Mercator Atrial Mapping Basket and the Arrhythmia Mapping
System to commercially available mapping catheters. Enrollment in the clinical
trial was completed on March 10, 1998 involving testing in 74 patients. There
was no thrombus formation on any mapping basket used in the 74 studies. The
Company has also tested the Mercator Atrial Mapping Basket in nine patients in
Europe outside of the IDE. The Company submitted of a 510(k) application for
clearance of the Mercator Atrial Mapping Basket on July 17, 1998. An IDE was
submitted for a clinical study of the Local Sector Mapping Basket for the right
atrium on February 20, 1998. The Company was granted conditional approval to
test 10 patients at five clinical sites and one patient has been enrolled as of
September 17, 1998.
Atrial Fibrillation Ablation System. The Company received FDA approval of
an IDE feasibility study to evaluate the safety of the Atrial Fibrillation
Ablation System in August 1997. The purpose of the IDE feasibility study for the
Atrial Fibrillation Ablation System was to assess the safety and performance in
creating continuous linear lesions. The feasibility testing was completed with
10 patients undergoing testing. The purpose of the clinical test was to verify
that a linear lesion could be made in a location in the atrium anticipated to
eliminate atrial fibrillation. In a majority of the patients undergoing
ablation, linear lesions were created in the right atrium either with the Nexus
Linear Lesion Catheter alone or with commercial ablation catheter
supplementation. One patient developed a pericardial effusion attributed to
perforation by a commercial diagnostic (non-ablation) catheter. No other
complications occurred. The Company also tested the Nexus Linear Lesion Catheter
in two patients in Europe.
The Nexus Linear Lesion Catheter was modified to improve the ability to
create linear lesions minimizing the need for commercial ablation catheter
supplementation. The modifications include the addition of active deflection to
facilitate tissue contact. An IDE supplement was submitted in October 1997 to
support commercialization of the Nexus Linear Lesion Catheter in the right
atrium to treat atrial flutter. Atrial flutter is an abnormal heart rhythm now
commonly treated using catheter ablation, requiring the creation of a two to
four centimeter linear lesion in the right atrium. The study received
conditional approval in December 1997 to involve 30 patients at five sites. The
study was initiated in February 1998 and six patients have been enrolled as of
September 17, 1998. The Company has also tested the Nexus Linear Lesion Catheter
for atrial flutter and fibrillation in nine patients in Europe as of September
17, 1998. The Company has requested approval from FDA to allow delivery of 70
watts of power and use a superior approach to accessing the right atrium, and
will resume enrollment in the U.S. when the amendment is approved.
A feasibility IDE for use of the modified Nexus Linear Lesion Catheter in
the right and left atrium to treat atrial fibrillation is expected to be
submitted in calendar 1998.
MARKETING AND DISTRIBUTION
The Company markets its Trio/Ensemble diagnostic catheters and Radii
supraventricular tachycardia mapping and ablation catheters, Arrhythmia Mapping
Systems, Ventricular Tachycardia Ablation System and certain mapping baskets
internationally through established distributors of specialty cardiovascular
products. The Company's agreement with Arrow provides distribution rights for
the Trio/Ensemble diagnostic catheters throughout the world except for the
territories of Japan and southern Europe. For distribution of the Company's
commercialized products, the Company has agreements with distributors in Europe,
Japan and the Pacific Rim. Sales to Japan Lifeline Company, Ltd. ("Japan
Lifeline"), the Company's distributor in Japan, Arrow, and Sorin Biomedical
("Sorin"), the Company's former distributor in southern Europe, accounted for
80%, 5% and 3%, respectively, of the Company's net sales in fiscal 1998. Sales
to Japan Lifeline, Arrow, and Sorin accounted for 66%, 17% and 13%,
respectively, of the Company's net sales in fiscal 1997 and
15
<PAGE> 16
54%, 33% and 13%, respectively, in fiscal 1996. International sales accounted
for 87%, 82% and 67% of the Company's net sales in fiscal 1998, 1997 and 1996,
respectively.
The Company generally operates under written distribution agreements that
grant exclusive rights to sell the Company's products within a defined
territory. These agreements generally grant the Company the right to terminate
the distributor for cause (which includes failure to satisfy specified minimum
performance obligations) or the failure of the distributor to obtain required
governmental approvals to distribute the Company's products in the territory.
These distributors also market medical products of other companies, although the
Company has obtained covenants from its distributors granting the Company rights
to terminate given distribution agreements with distributors that market medical
devices that compete directly with those of the Company. Distributors typically
purchase the Company's products at a discount to list price and resell the
products to hospitals and physicians. Sales to international distributors are
usually denominated in United States dollars. The end-user price is determined
by the distributor and varies from country to country.
The Company currently has only a limited sales and marketing organization.
The Company's Vice President of International Sales manages distributor
relationships outside North America. In addition the Company intends to leverage
its existing field clinical engineers' and specialists' technical expertise to
support the Arrhythmia Mapping System revenue related installations. If FDA
clearances or approvals are received for the Company's ventricular tachycardia
or atrial fibrillation products, the Company intends to market its products
primarily through a direct sales force in the United States and indirect sales
channels internationally. The Company believes that the concentrated nature of
the market of practicing electrophysiologists in the United States will allow it
to address this market with a small, targeted sales force. The Company believes
that fewer than 200 of the practicing electrophysiology centers account for
approximately two-thirds of the electrophysiological procedures performed for
ventricular tachycardia. There can be no assurance that electrophysiologists
will accept the Arrhythmia Mapping System on a commercial basis. Failure of such
system to gain market acceptance would have a material adverse effect upon the
Company's business, financial condition and results of operations.
The Company expects to expand its sales and marketing efforts to include
marketing managers and clinical specialists to assist in the sales and marketing
efforts. The Company's marketing and sales strategy in the United States will
involve the use of a combination of sales representatives directly employed by
the Company and field application engineers to provide technical expertise. The
role of the sales representative will be to demonstrate the use of the Company's
products while educating physicians as to the clinical benefits of catheter
ablation for atrial fibrillation and ventricular tachycardia, using marketing
techniques similar to those commonly employed in the cardiovascular device
industry. The role of the field application engineer will be to provide
installations of the Company's systems and provide training to physicians and
their staff on appropriate operation of the Company's equipment. The Company
also intends to establish a resource to provide physicians with relevant
clinical information regarding the Company's products. The Company believes that
this combination of sales representatives and field clinical engineers will
provide an appropriate balance of professional selling skills while maintaining
an appropriate level of technical expertise in the field.
A key element of the Company's marketing strategy has been to develop
relationships with prominent academic physicians who have a history of research
and publications in peer reviewed literature on ablation for ventricular
tachycardia and atrial fibrillation. The Company's strategy is to leverage off
these relationships with leading electrophysiologists to gain market acceptance
of its products in the United States and internationally. The Company believes
there are approximately 600 board certified electrophysiologists practicing in
the United States. These physicians have been involved and will continue to be
involved in the Company's clinical and product development efforts. The Company
intends to continue to build these relationships through clinical investigator
meetings, participation in physician-run symposia and meetings to discuss
clinical issues and treatments. Because of the sub-specialty nature of
electrophysiology, electrophysiologists with high patient volume are found in
referral centers usually associated with major academic medical centers in large
urban population centers. These electrophysiologists have been identified by the
Company as potential prospects and will be the object of concentrated sales
efforts in the future if the Company's ventricular tachycardia or atrial
fibrillation products receive regulatory approvals.
16
<PAGE> 17
Establishing a marketing and sales capability sufficient to support sales
in commercial quantities will require substantial efforts and require
significant management and financial resources. There can be no assurance that
the Company will be able to build such a marketing staff or sales force, that
establishing such a marketing staff or sales force will be cost-effective or
that the Company's sales and marketing efforts will be successful. If the
Company is successful in obtaining the necessary regulatory approvals for its
ventricular tachycardia and atrial fibrillation products in international
markets, it expects to establish a sales and marketing capability in those
markets primarily through distributors. In May 1998, the Company terminated the
distribution relationship with Sorin Biomedical for the territories of France,
U.K., Spain, Italy and Portugal. There can be no assurance that the Company will
be able to enter into agreements with existing or new distributors on a timely
basis or at all, or that such distributors will devote adequate resources to
selling the Company's products. Failure to establish appropriate distribution
relationships could have a material adverse effect upon the Company's business,
financial condition and results of operations.
The Company currently sells its Radii supraventricular tachycardia mapping
and ablation catheters, Trio/ Ensemble diagnostic catheters, Arrhythmia Mapping
Systems, Ventricular Tachycardia Ablation System and certain mapping basket
catheters through distributors in certain international markets. In addition,
the Company plans to market its atrial fibrillation products in international
markets, subject to receipt of required regulatory approvals. Changes in
overseas economic conditions, currency exchange rates, foreign tax laws, or
tariffs or other trade regulations could have a material adverse effect on the
Company's ability to market its products internationally and therefore on its
business, financial condition and results of operations. All sales of the
Company's products to date have been denominated in U.S. dollars.
STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, international
regulatory approval, manufacturing and marketing of certain of its products. In
March 1995, the Company formed a strategic relationship with Arrow, a
manufacturer of medical products for critical care medicine, interventional
cardiology and radiology. The relationship included Arrow's equity investment of
$9.1 million in the Company. The Company and Arrow entered into agreements
pursuant to which the Company granted to Arrow certain manufacturing and
distribution rights to the Trio/Ensemble diagnostic catheters and Radii
supraventricular tachycardia mapping and ablation catheters. Subsequently, the
Company and Arrow have terminated the manufacturing and distribution agreement
related to the Radii product. 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 "-- Marketing and
Distribution."
The Company has ongoing manufacturing and distribution agreements with
Arrow related to the Trio/Ensemble product. Under the manufacturing agreement,
Arrow has the exclusive right to manufacture and sell the Trio/Ensemble
diagnostic catheters (the "Products") throughout the world except in the
countries of Japan, Italy, France, Portugal and Spain ( the world other than
such countries is the "Territory") for use in the field of electrophysiology
testing; provided, however, that, after the expiration of the initial five years
of the term, the Company has the option to convert the distribution right to be
a nonexclusive right. The term of the distribution agreement is ten years, and
Products purchased by Arrow for distribution under the distribution agreement
are to be paid net thirty (30) days after the date of invoice. Under the
manufacturing agreement, Arrow has a nonexclusive right to manufacture the
Products for distribution and sale in the Territory by Arrow and for
distribution and sale outside of the Territory by the Company. Arrow is required
to make royalty payments to the Company for the manufacturing right that include
a nonrefundable, prepaid royalty of $3 million and an ongoing royalty of 5% on
net sales of the Products; provided, however, that, if the Company elects to
convert the distribution agreement to be nonexclusive, the royalty rate will be
reduced to 3% of net sales. Also, the manufacturing agreement requires that, at
the Company's option, Arrow shall manufacture and supply to the Company such
quantities of the Products as the parties agree upon from time to time. The
manufacturing agreement terminates upon termination of the distribution
agreement but the
17
<PAGE> 18
Company may extend the term of the manufacturing agreement with respect to
Products supplied by Arrow to the Company for a period of three months.
RESEARCH AND DEVELOPMENT
Substantially all of the Company's research and development activities are
performed internally by the Company's team of research scientists, engineers and
technicians. The Company's research and development team is generally divided
into two groups. The Systems and Software Group, consisting of 19 persons as of
June 30, 1998, is responsible for all development activities related to the
Company's ablation and mapping equipment. The Catheter Development Group,
consisting of 19 persons at June 30, 1998, is responsible for all development
activities related to ablation and mapping catheters. The Company's primary
research and development programs involve completing development of the Atrial
Fibrillation Ablation System and developing improvements to the Ventricular
Tachycardia Mapping System, including new mapping and ablation catheter
configurations and new versions of the mapping and ablation equipment and
related software in order to increase the efficacy of the procedures, increase
manufacturing reliability and reduce component and manufacturing costs.
Research and development expenses, including clinical and certain
regulatory expenses, were $14.4 million, $11.8 million and $6.8 million in
fiscal 1998, 1997 and 1996, respectively. The Company intends to continue to
make significant investments in research and development.
MANUFACTURING
The Company has a 14,000 square feet manufacturing facility consisting of
approximately 9,000 square feet for catheter manufacturing, systems assembly and
testing, and approximately 5,000 square feet of manufacturing support area at
its facilities in Sunnyvale, California. The Company currently manufactures its
catheters and systems in limited quantities for laboratory testing, United
States clinical trials, international clinical trials and, in the case of its
Radii supraventricular tachycardia mapping and ablation catheters, Trio/
Ensemble diagnostic catheters, Arrhythmia Mapping Systems and Ventricular
Tachycardia Ablation Systems, limited commercial sales. The manufacture of
catheters is a complex operation involving a number of separate processes and
components. Each catheter is assembled and individually tested by the Company
prior to sterilization in accordance with FDA regulations. The manufacturing
process for the mapping and ablation equipment consists primarily of assembly of
purchased components and testing operations.
The Company is currently encountering low yields and other significant
production inefficiencies in the manufacture of its Sector basket catheters.
Although the Company is taking steps to address these yield and other production
inefficiencies, there can be no assurance that such improvements will be
achieved. Failure to obtain acceptable yields in the manufacture of such
products will adversely affect the ability of the Company to expand its mapping
system clinical sites and commence commercialization of these products in
international markets.
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. The Company conducts quality
audits of suppliers and is establishing a vendor certification program. A number
of the components are provided by sole source suppliers. For certain of these
components, there are relatively few alternative sources of supply, and
establishing additional or replacement vendors for such components could not be
accomplished quickly. The Company plans to qualify additional suppliers if and
as future production volumes increase. Because of the long lead time for some
components that are currently available from a single source, a vendor's
inability to supply such components in a timely manner could have a material
adverse effect on the Company's ability to manufacture the mapping basket,
mapping equipment and ablation equipment and therefore on its business,
financial condition and ability to market its products as currently
contemplated.
The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high-volume manufacturing capacity
can be established or maintained at commercially reasonable costs. If the
Company receives FDA clearance or approval for its products, it will need to
expend significant capital resources and
18
<PAGE> 19
develop manufacturing expertise to establish large-scale manufacturing
capabilities. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes. In addition, the Company believes
that substantial cost reductions in its manufacturing operations will be
required for it to commercialize its catheters and systems on a profitable
basis. Any inability of the Company to establish and maintain large-scale
manufacturing capabilities would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection
by regulatory authorities, and its operations must undergo Quality System
Regulations ("QSR," the successor regulations to Good Manufacturing Practices
Regulations) compliance inspections conducted by the FDA. The Company is
required to comply with QSR requirements in order to manufacture and sell
products in the United States and with ISO9001/EN46001 standards to manufacture
and sell products in Europe. The Company's manufacturing facilities are subject
to periodic inspection by regulatory authorities, and failure of the Company to
comply with quality system requirements may result in the Company being required
to take corrective actions, such as modification of its policies and procedures.
In August 1998, the Company's facilities and manufacturing process were
inspected by the FDA in an inspection related to a PMA application. This
inspection resulted in a recommendation for approval of certification with QSR
by the FDA district office. The Company has received ISO9001/EN46001
certification for the Medical Device Directive QSR from its European Notified
Body. The Company has also received a medical device manufacturing license
issued by the State of California Department of Health Services ("CDHS") and is
registered with the FDA as a medical device manufacturer. If the Company is
unable to maintain such licenses and certifications, the Company would be unable
to manufacture and distribute its products and such inability would have a
material adverse effect on the Company's financial condition and results of
operations.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
and copyright protection for its products and processes, to preserve its trade
secrets and to operate without infringing or violating the proprietary rights of
third parties. The Company's strategy is to actively pursue patent protection in
the United States and foreign jurisdictions for technology that it believes to
be proprietary and that offers a potential competitive advantage for its
products. The Company holds issued and allowed patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The Company
owns 46 United States issued patents and 10 foreign issued patents. The Company
owns an exclusive field-of-use license on one United States issued patent,
licenses to 21 United States issued patents, and one to an assigned, re-issue
patent. In addition, the Company has 23 United States pending patent
applications, of which one is licensed, and three have been allowed by the
United States Patent and Trademark Office (the "USPTO") (including one licensed
patent application). The Company has also filed 25 corresponding foreign patent
applications that are currently pending in Europe, Japan, Australia and Canada,
of which 12 have been published and are pending issuance. Three of the pending
foreign patent applications are PCT applications, with Europe, Japan, Australia
and Canada as designated countries for filing at the national phase. The
Company's 46 United States patents expire at various dates ranging from 2009 to
2018 and the 10 foreign issued patents expire at various dates ranging from 2012
to 2014. The exclusive field-of-use license of one United States issued patent
and the licenses of 15 United States issued patents expire at various dates
ranging from 2013 to 2018.
The Company's patents and patent applications relate to a number of aspects
of the Company's technology, including the technology related to the Company's
basket approach to diagnostic mapping, the integration of mapping and ablation
in a single device, the cooled ablation catheters, bend location and radius
adjustment in the ablation catheters and the multipart introducer. The Company
intends to file additional patent applications to seek protection for other
proprietary aspects of its technology in the future. The patent positions of
medical device companies, including those of the Company, are uncertain and
involve complex and evolving legal and factual questions. The coverage sought in
a patent application either can be denied or
19
<PAGE> 20
significantly reduced before or after the patent is issued. Consequently, there
can be no assurance that any patents from pending patent applications or from
any future patent application will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by the Company. Since patent applications are
secret until patents are issued in the United States or corresponding
applications are published in international countries, and since publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, the Company cannot be certain that it was the first to make the
inventions covered by each of its pending patent applications or that it was the
first to file patent applications for such inventions. In addition, there can be
no assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. Further, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do the
laws of the United States. Litigation or regulatory proceedings, which could
result in substantial cost and uncertainty to the Company, may also be necessary
to enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
The Company also relies on licensed technology from others for certain
components of its mapping and ablation systems. The Company relies on an
exclusive royalty-bearing license for the use of patents relating to a device
for ablating atrial fibrillation. The license will convert into a fully paid
nonexclusive license on the later of ten years from the first commercial sale of
products based on the patents or the expiration date of the last-to-expire
licensed patent. The Company obtained the rights to its biocompatible coating
material through a nonexclusive royalty bearing license that will terminate upon
the later of ten years from the first commercial sale of catheters treated with
the coating material or the expiration of the last-to-expire licensed patent.
In addition to patents, the Company relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
individuals by the Company during the course of the relationship with the
Company is to be kept confidential and not disclosed to third parties, except
under specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the USPTO to determine the priority of
inventions or an opposition to a patent grant in a foreign jurisdiction. The
defense and prosecution of intellectual property suits, USPTO interference or
opposition proceedings and related legal and administrative proceedings are both
costly and time-consuming. Any litigation, opposition or interference
proceedings will result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel. An
adverse determination in litigation or interference proceedings to which the
Company may become a party could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from third parties or
require the Company to cease using such technology. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses from others would
be available to the Company on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company
20
<PAGE> 21
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 is aware of certain patents owned or licensed by others and relating
to cardiac catheters and cardiac monitoring. Certain enhancements of the
Company's products are still in the design and pre-clinical testing phase.
Depending on the ultimate design specifications and results of pre-clinical
testing of these enhancements, there can be no assurance that the Company would
be able to obtain a license to such patents or that a court would find that such
patents are either not infringed by such enhancements or are invalid. Further,
there can be no assurance that owners or licensees of these patents will not
attempt to enforce their patent rights against the Company in a patent
infringement suit or other legal proceeding, regardless of the likely outcome of
such suit or proceeding.
COMPETITION
At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of ventricular
tachycardia and atrial fibrillation, including drugs, external electrical
cardioversion and defibrillation, implantable defibrillators, ablation
accompanied by pacemaker implantation and open-heart surgery. In addition,
several competitors are also developing new approaches and new products for the
treatment and mapping of ventricular tachycardia and atrial fibrillation,
including ablation systems using ultrasound, microwave, laser and cryoablation
technologies and mapping systems using contact mapping, single-point spatial
mapping and non-contact, multisite electrical mapping technologies. Many of the
Company's competitors have an established presence in the field of
interventional cardiology and electrophysiology, including Boston Scientific
Corporation, C.R. Bard, Inc., Johnson & Johnson through its Cordis Division and
Medtronic, Inc. Many of these competitors have substantially greater financial
and other resources than the Company, including larger research and development
staffs and more experience and capabilities in conducting research and
development activities, testing products in clinical trials, obtaining
regulatory approvals, and manufacturing, marketing and distributing products.
There can be no assurance that the Company will succeed in developing and
marketing technologies and products that are more clinically efficacious and
cost-effective than the more established treatments or the new approaches and
products developed and marketed by its competitors. Furthermore, there can be no
assurance that the Company will succeed in developing new technologies and
products that are available prior to its competitors' products. The failure of
the Company to demonstrate the efficacy and cost advantages of its products over
those of its competitors or the failure to develop new technologies and products
before its competitors could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that the primary competitive factors in the market for
cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for products to be developed and
to receive regulatory and, in some cases, reimbursement approval is an important
competitive factor. The medical device industry is characterized by rapid and
significant technological change. Accordingly, the Company's success will depend
in part on its ability to respond quickly to medical and technological changes
through the development and introduction of new products. Product development
involves a high degree of risk and there can be no assurance that the Company's
new product development efforts will result in any commercially successful
products. The Company believes it competes favorably with respect to these
factors, although there is no assurance that it will be able to continue to do
so.
GOVERNMENT REGULATION
United States
The design, pre-clinical and clinical testing, manufacture, labeling, sale,
distribution and promotion of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. 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 authorizations or a recommendation
by the FDA that the Company not be
21
<PAGE> 22
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 current QSR). 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 (e.g.,
life-sustaining, life-supporting and implantable devices or new devices which
have not been found substantially equivalent to legally marketed devices) are
those that require clinical testing to assure safety and effectiveness and FDA
approval prior to marketing and distribution.
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 an approval of a PMA application under Section
515 of the FDC Act. Clearance of a 510(k) submission typically will be granted
if the submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or II medical device or
to a Class III medical device for which the FDA has not called for a PMA (i.e.,
a predicate device). 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) clearance is required can only begin after the
FDA issues an order finding the device to be "substantially equivalent" to a
predicate device. The FDA recently has 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. Based upon industry and FDA
publications the Company believes that it generally takes from four to twelve
months from the date of submission to obtain clearance of a 510(k) submission,
but it may take longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device or that additional
information is needed before a substantial equivalence determination can be
made. A "not substantially equivalent" determination or a request for additional
information could delay the market introduction of new products that fall into
this category.
For any devices that are cleared through the 510(k) process, modifications
or enhancements that could significantly affect safety or effectiveness or that
constitute a major change in the intended use of the device will require new
510(k) submissions. The FDA granted 510(k) clearance to Arrow in December 1995
for Trio/Ensemble diagnostic Catheters and Arrow distributes the product in the
United States and internationally. In addition, in August 1997 the FDA granted
510(k) clearance to the Company for the Model 8100/8300 Arrhythmia Mapping
System for basic diagnostic electrophysiology studies.
If the Company cannot establish that a proposed device is substantially
equivalent to a legally marketed predicate device, the Company must seek
premarket approval of the proposed device from the FDA through the submission of
a PMA application. A PMA application must be supported by valid scientific
evidence that typically includes extensive data including pre-clinical and
clinical trial data to demonstrate the safety and efficacy of the device. If
human clinical trials of a device are required 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 without the need for FDA approval.
Sponsors of clinical trials are permitted to sell investigational 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 device or plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects.
22
<PAGE> 23
The Company initiated a clinical trial for the Ventricular Tachycardia
Ablation System in the United States and Europe in November 1995 under an IDE
approved by the FDA. Enrollment for the clinical trial was completed in December
1997. A PMA application was submitted in January 1998, and the FDA Circulatory
Systems Device Advisory Panel recommended approval of the PMA application with
certain labeling and follow-up studies in July 1998. The Company initiated a
clinical trial for the Arrhythmia Mapping System for diagnostic mapping with the
Mercator Basket in the right atrium in June 1996 under an IDE approved by the
FDA. Enrollment for the clinical trial was completed in March 1998 and a 510(k)
was submitted in July 1998. In January 1996, the Company received FDA approval
to conduct an IDE feasibility study to evaluate the safety of the Arrhythmia
Mapping System for diagnostic mapping with the Mercator Basket for ventricular
tachycardia. An IDE feasibility study is a limited investigation that is
intended to provide data on the device's form, function and feasibility for
diagnosis or therapeutic use. IDE applications for feasibility studies vary in
scope, but typically will include one investigator at one site with a limited
number of subjects, usually consisting of ten or less. Data from the IDE
feasibility study will not be considered by the FDA as pivotal evidence of
safety and effectiveness, but rather as a basis to finalize and confirm the
device's design and determine its potential for further development. In June
1996, the Company received an IDE supplement approval to the feasibility study
relating to a slight modification to the deployment system of the Arrhythmia
Mapping System for ventricular tachycardia in response to a complication noted
in the evaluation of a patient enrolled in the feasibility study. The IDE
feasibility study for the diagnostic mapping of ventricular tachycardia was
completed in May 1997. In November 1997, the Company received FDA approval to
conduct an IDE feasibility study to evaluate the safety of the Arrhythmia
Mapping System for diagnostic mapping with the Local Sector Mapping Basket for
ventricular tachycardia. This study also allows for the simultaneous use of the
Ventricular Tachycardia Ablation System with the Local Sector Mapping Basket. In
March 1998, the Company received FDA approval to conduct an IDE feasibility
study to evaluate the safety of the Arrhythmia Mapping System for diagnostic
mapping with the Local Sector Mapping Basket of the right atrium. See
"-- Clinical Trials -- Arrhythmia Mapping System for Ventricular Tachycardia."
There can be no assurance that any IDE feasibility study that the Company
proposes will be approved by the FDA, will be completed or, if completed, will
provide sufficient data and information to support additional clinical
investigations of the type necessary to obtain FDA marketing clearance or
approval. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis or at all, and delays in
receipt of or failure to receive such approvals, the loss of previously received
approvals or failure to comply with existing or future regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's current estimates of planned submission time periods of IDEs
for certain of the Company's products are set forth above in "-- Products and
Systems" and involve risks and uncertainties. The actual submission times could
differ materially from those anticipated as a result of certain factors,
including the Company's success in completing any remaining development of the
products, the efficacy and safety of the products in laboratory and animal
testing and the other factors set forth elsewhere in this report. The PMA
application must contain the results of clinical trials, 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, within 45
days 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. Although under
the FDC Act the FDA is required to complete its review of a PMA within 180 days,
the agency may take a significantly longer period of time to complete its
review. Based upon industry and FDA publications, the Company believes that 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 may be significantly extended if the FDA asks for additional
information or clarification of information provided in the initial 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
23
<PAGE> 24
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 applicable QSR requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA typically issues an approval letter or an
"approvable letter," which usually contains a number of conditions that must be
met in order to secure final approval of the PMA application. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA, authorizing commercial distribution of the device for certain
indications. If the FDA 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 may 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 expensive, uncertain
and lengthy. A number of devices for which FDA approval has been sought by other
companies have never been approved for marketing.
Significant modifications to a device that is the subject of an approved
PMA, its labeling or manufacturing process that affect safety or effectiveness
may require approval by the FDA of PMA supplements or new PMAs. Supplements to a
PMA often require the submission of the same type of information required for an
initial PMA, except that the supplement is generally limited to that information
needed to support the proposed change from the product covered by the original
PMA.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by FDA
and certain state agencies, including record keeping requirements and reporting
of adverse experiences with the use of the device. Labeling and promotional
activities are subject to scrutiny by FDA and for devices marketed
over-the-counter without a prescription by the Federal Trade Commission ("FTC").
Current FDA enforcement policy prohibits the marketing of approved or
cleared medical devices for unapproved uses. Labeling and promotional activities
are subject to scrutiny by the FDA and, in certain circumstances, by the FTC.
FDA enforcement policy generally prohibits the marketing of FDA cleared or
approved medical devices for unapproved or "off-label" uses. The Company also is
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 in the future or that
such laws or regulations will not have a material adverse effect upon the
Company's ability to do business.
Manufacturers of medical devices intended for distribution in the United
States are required to adhere to applicable regulations setting forth detailed
QSR requirements, which include testing, control and documentation requirements
to register their establishments with the FDA and to submit device listing
information regarding the devices marketed in the United States. Manufacturers
must also comply with Medical Device Reporting ("MDR") requirements that a
manufacturer report to FDA any incident in which its product may have caused or
contributed to a death or serious injury or in which its product malfunctioned
and, if the malfunction were to recur, it would be likely to cause or contribute
to a death or serious injury.
In February 1998, the Company received a device manufacturing license from
the CDHS. The Company is subject to routine inspection by FDA and the CDHS for
compliance with QSR requirements, MDR requirements and other applicable
regulations. FDA has implemented the QSR, including design control requirements,
which will likely increase the cost of compliance. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition, and results of operation.
There can be no assurance that the Company will not incur significant costs to
comply with laws and regulations in the future or that laws and regulations will
not have a material adverse effect upon the Company's business, financial
condition or results of operation.
In summary, the process of obtaining a PMA and other required regulatory
approvals can be expensive, uncertain and lengthy, and there can be no assurance
that the Company will ever obtain such approvals. The
24
<PAGE> 25
Company filed a PMA application for the Ventricular Tachycardia Ablation System
in January 1998. Although the FDA Circulatory Systems Device Advisory Panel
recommended that the Company's PMA be approved with certain conditions in July
1998, there can be no assurance that the FDA will issue a PMA for such system in
the near term, if at all. There can be no assurance that the FDA will act
favorably or quickly on any of the Company's other pending or future submissions
to the FDA. Significant difficulties and costs may be encountered by the Company
in its efforts to obtain FDA approval or clearance that could delay or preclude
the Company from selling its products in the United States. Furthermore, there
can be no assurance that the FDA will not request additional data or require
that the Company conduct further clinical studies, causing the Company to incur
substantial cost and delay. In addition, there can be no assurance that the FDA
will not impose strict labeling requirements, onerous operator training
requirements or other requirements as a condition of its PMA approval, any of
which could limit the Company's ability to market its systems. For example, the
FDA Circulatory Systems Device Advisory Panel recommended that the Company's PMA
for the Ventricular Tachycardia Ablation System be granted subject to certain
labeling changes and performance of a post-market study. FDA enforcement policy
strictly prohibits the marketing of FDA cleared or approved medical devices for
unapproved uses. Further, if a company wishes to modify a product after FDA
approval of a PMA, including changes in indications or other modifications that
could affect safety or efficacy, additional clearances or approvals will be
required from the FDA. Failure to receive or delays in receipt of FDA clearances
or approvals, including the need for additional clinical trials or data as a
prerequisite to clearance or approval, or any FDA conditions that limit the
ability of the Company to market its systems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
International
In order for the Company to market its products 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. Export sales of medical devices that have not received FDA marketing
authorization are subject to FDA export requirements. In accordance with the FDA
Export Reform and Enforcement Act of 1996, such devices may be exported to any
country provided that the device meets a number of criteria including marketing
authorization in one of the "Tier I" countries identified in that Act. If the
device has no marketing authorization in a Tier I country, and is intended for
marketing, it may be necessary to obtain approval from the FDA to export the
device. In order to obtain export approval, the Company may be required to
provide the FDA with documentation from the medical device regulatory authority
of the country in which the study is to be conducted or the purchaser is
located, stating that the device has the approval of the country. In addition,
the FDA must find that the exportation of the device is not contrary to the
public health and safety of the country in order for the Company to obtain the
permit. The Company is in the process of obtaining the necessary approvals or
conducting clinical trials in the United Kingdom, Germany, France, Canada, Japan
and several other countries in Europe and Asia.
The European Union has promulgated rules which require that medical
products distributed after June 14, 1998 bear the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. Quality Systems certification is
one of the CE mark requirements. In December 1997, the Company received
ISO9001/EN46001 certification from its European Notified Body. Furthermore, in
January 1998, the Company received the right to affix the CE mark to its
Arrhythmia Mapping System and Chilli Cooled Ablation System. In April 1998, the
Company received the right to affix the CE mark to its Radii catheters. In July
1998, the Company received the right to affix the
25
<PAGE> 26
CE mark to its Trio/Ensemble catheters. While the Company intends to satisfy the
requisite policies and procedures that will permit it to receive the CE Mark
Certification on additional products, there can be no assurance that the Company
will be successful in meeting the European certification requirements for
additional products and failure to receive the right to affix the CE mark will
prohibit the Company from selling those products in member countries of the
European Union. See "-- Manufacturing."
THIRD-PARTY REIMBURSEMENT AND UNCERTAINTY RELATED TO HEALTH CARE REFORM
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used.
Third-party payors may deny reimbursement if they determine that a prescribed
device has not received appropriate regulatory clearances or approvals, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate. If FDA clearance or
approval is received, third-party reimbursement would also depend upon decisions
by the United States Healthcare Financing Administration (the "HCFA") for
Medicare, as well as by individual health maintenance organizations, private
insurers and other payors. Government agencies, private insurers and other
payors determine whether to provide coverage for a particular procedure and
reimburse health care providers for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the HCFA. The fixed rate of
reimbursement is based on the procedure performed, and is unrelated to the
specific type of number of devices used in a procedure. If a procedure is not
covered by a DRG, payors may deny reimbursement. The Company intends to obtain
an appropriate Medicare DRG assignment by HCFA for procedures performed using
its devices. As part of this process, during clinical trials the Company will
collect economic data regarding resources expended in performing procedures with
the devices. The Company will use these data to document differences in resource
use between procedures performed with the Company's devices and procedures
currently categorized under existing DRGS. The Company intends to meet with HCFA
policy staff to request and support development of appropriate hospital payment
policies for the procedures performed using the Company's devices. In addition,
the Company may also collect resource use data regarding physician services to
support establishment of appropriate fee schedules by third-party payors. The
Company believes these efforts will also support reimbursement among private
payors.
In addition, Medicare traditionally has considered items or services
involving devices that have not been approved or cleared for marketing by FDA to
be precluded from Medicare coverage. However, under a new policy which has been
in effect since November 1, 1995, Medicare coverage will not be precluded for
items and related services involving devices that have been classified by FDA as
"non-experimental/investigational" (Category B) devices and that are furnished
in accordance with the FDA-approved IDE governing clinical trials. Even with
items or services involving Category B devices, however, Medicare coverage may
be denied if any other coverage requirements are not met, for example if the
treatment is not medically needed for the specific patient. In June 1995, the
FDA assigned the IDE covering the clinical trial for the Ventricular Tachycardia
Ablation System to Category B and in January 1996 assigned the IDE covering the
clinical trial for the Arrhythmia Mapping System for ventricular tachycardia to
Category B and in June 1996 assigned the IDE covering the clinical trial for the
Arrhythmia Mapping System for atrial fibrillation to Category B. Furthermore, in
September 1996, the FDA assigned the IDE for the Atrial Fibrillation Ablation
System to Category B. There can be no assurance that the Company's systems will
be covered when they are used in clinical trials and, if covered, whether the
payment amounts for their use will be considered to be adequate by hospitals and
physicians. If the devices are not covered or the payments are considered to be
inadequate, the Company may need to bear additional costs to sponsor such
trials, and such costs could have a material adverse effect on the Company's
business, financial condition and results of operation.
Capital costs for medical equipment purchased by hospitals are currently
reimbursed separately from DRG payments. Recent federal legislation reduced
capital cost reimbursements under the Medicare capital
26
<PAGE> 27
cost pass-through system. Such legislation required that the aggregate amount of
reimbursements in fiscal years 1992 through 1995 be reduced by approximately 10%
per year. Such reductions have had an adverse impact on reimbursements to
hospitals for the capital cost of equipment such as the system components of the
Company's products. There can be no assurance that similar legislation will not
be enacted in the future and, if enacted, that such legislation would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that a patient's
underlying arrhythmia will typically not recur after treatment with the
Company's procedures. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant cost
savings and clinical benefits that the Company believes would be derived from
the use of its products. However, there can be no assurance that this will be
the case. There can be no assurance that reimbursement for the Company's
products will be available in the United States or in international markets
under either government or private reimbursement systems, or that physicians
will support and advocate reimbursement for procedures using the Company's
products. Failure by hospitals and other users of the Company's products to
obtain reimbursement from third-party payors, or changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. The Company
anticipates that Congress, state legislatures and the private sector will
continue to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include mandated basic
health care benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative debate
is expected to continue in the future, and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal or state health care reform measures, future private sector reform or
market forces may have on its business.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has conducted only limited clinical trials to date and does not yet
have, and will not have for a number of years, sufficient clinical data to allow
the Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. The Company currently
maintains product liability insurance with coverage limits of $6.0 million per
occurrence and $12.0 million annually in the aggregate and there can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. In
27
<PAGE> 28
addition, the Company will require increased product liability coverage if any
potential products are successfully commercialized. Such insurance is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
or at all. Any claims against the Company, regardless of their merit or eventual
outcome, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
EMPLOYEES
As of June 30, 1998, the Company had 127 employees, 50 of whom were engaged
directly in research, development, regulatory and clinical activities, 54 in
manufacturing and quality assurance and 23 in marketing, sales, and
administrative positions. No employee of the Company is covered by collective
bargaining agreements, and the Company believes that its relationship with its
employees is good.
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, clinical, regulatory
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire and
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
In addition, in order to complete clinical trials in progress, prepare
additional products for clinical trials, and develop future products, the
Company believes that it will be required to expand its operations, particularly
in the areas of research and development, manufacturing and sales and marketing.
As the Company expands its operations in these areas, such expansion will 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 any such growth and compete effectively,
the Company will be required to implement and improve information systems,
procedures, and controls, and to expand, train, motivate and manage its work
force. 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 as required by future growth, if any, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William N. Starling......... 45 President, Chief Executive Officer and Chairman of the
Board of Directors
Debra S. Echt, M.D.......... 47 Vice President and Chief Medical Officer
Dan S. Ellis................ 47 Vice President, North American Sales
David W. Gryska............. 42 Vice President, Finance and Chief Financial Officer
Jon P. Hunt, Ph.D........... 43 Vice President, International Sales
Robert E. Maston............ 43 Vice President, Manufacturing
Richard E. Riley............ 43 Executive Vice President, Research and Development
</TABLE>
William N. Starling has been a Director of the Company since its inception.
Mr. Starling became President and Chief Executive Officer of the Company in
January 1992 and Chairman of the Board of Directors in January 1996. Prior to
joining the Company, Mr. Starling co-founded and was a director and a vice
president of Ventritex, Inc. ("Ventritex"), a medical device company, from 1985
to 1991. From 1982 to
28
<PAGE> 29
1985, Mr. Starling was the Director of Marketing of Advanced Cardiovascular
Systems, Inc. ("ACS"), a division of Guidant, Inc. ("Guidant"). Mr. Starling
serves on the Board of Visitors of the University of North Carolina at Chapel
Hill.
Debra S. Echt, M.D. has been Vice President and Chief Medical Officer of
the Company since September 1996. From July 1990 to August 1996, Dr. Echt was
Associate Professor of Medicine/Cardiology and Director of the Cardiac
Arrhythmia Section at Vanderbilt University. She held a concurrent position as a
member and consultant on the United States Food and Drug Administration's
Circulatory System Devices Advisory Panel from June 1991 to July 1996.
Dan S. Ellis has been Vice President, North American Sales of the Company
since January 1998. From April 1996 to January 1998, Mr. Ellis was Director,
North American Sales at Fusion Medical Technologies, Inc., a medical device
company. From December 1994 to April 1996, Mr. Ellis was Director, National
Accounts at Guidant. From October 1993 to December 1994, Mr. Ellis was Director,
Corporate Accounts at ACS. From August 1987 to October 1993, Mr. Ellis was
Director, Worldwide Sales at Peripheral Systems Group, a division of ACS.
David W. Gryska has been Vice President, Finance and Chief Financial
Officer of the Company since October 1993. From 1982 to September 1993, Mr.
Gryska was with Ernst & Young, LLP, as a partner from 1989 to September 1993.
Jon P. Hunt, Ph.D. has been Vice President, International Sales of the
Company since March 1998. From April 1996 to March 1998, Dr. Hunt was Business
Unit Director of the Cardiac Rhythm Management Division of St. Jude Medical
Europe, a medical device company. From November 1993 to March 1996, Dr. Hunt was
Director of Clinical Research at Pacesetter Systems, Inc. ("Pacesetter"), a
medical device company. From January 1992 to November 1993, Dr. Hunt was
Director of Clinical Programs at Cardiac Pacemakers, Inc., a medical device
company.
Robert E. Maston has been Vice President, Manufacturing since February
1998. From February 1997 to January 1998, Mr. Maston was Director, Manufacturing
of the Company. From July 1990 to February 1997, Mr. Maston was Manufacturing
Engineering Manager for Ventritex. From June 1988 to June 1990, Mr. Maston was
Product Engineering Manager for Pacesetter.
Richard E. Riley has been Executive Vice President, Research and
Development since July 1998. Mr. Riley was Vice President, Product Development
of the Company from July 1994 to July 1998. From July 1992 to July 1994, Mr.
Riley was Vice President, Software Development of the Company. From 1982 to June
1992, Mr. Riley held various engineering positions, including Project Director
with Medtronic, Inc., a medical device company.
ITEM 2. PROPERTIES
The Company leases approximately 36,000 square feet in Sunnyvale,
California, for production, research and development, clinical research and
selling and administrative activities. This facility is leased through October
2003. In addition, the Company leases approximately 8,000 square feet in
Sunnyvale, California at a separate facility for warehouse and field service
activities. This facility is leased through October 2000. The Company believes
that these facilities will be adequate to meet its needs through fiscal 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
29
<PAGE> 30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol CPWY since the Company's initial public offering on June
12, 1996. Prior to that time there was no public market for the Company's Common
Stock. The following table sets forth for the period indicated the high and low
sale prices of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter............................................. $17 1/2 $10 1/8
Second Quarter............................................ $13 1/4 $10 1/4
Third Quarter............................................. $15 1/2 $ 7 1/16
Fourth Quarter............................................ $12 1/4 $ 5 1/2
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................. $ 9 1/2 $ 7 3/4
Second Quarter............................................ $12 $ 5 3/4
Third Quarter............................................. $ 9 5/8 $ 6
Fourth Quarter............................................ $10 1/2 $ 6 7/8
</TABLE>
As of September 23, 1998, there were approximately 162 holders of record of
the Common Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
30
<PAGE> 31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with the
consolidated financial statements and related notes attached to the Annual
Report on Form 10-K as pages F-1 through F-22.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------
1998 1997 1996(2) 1995 1994
-------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales............................... $ 2,420 $ 2,409 $ 1,684 $ 115 $ --
Operating expenses:
Manufacturing start-up and cost of
goods sold......................... 2,828 2,508 2,408 2,520 1,432
Research and development.............. 14,353 11,756 6,819 5,666 5,103
Selling, general and administrative... 4,092 3,147 1,981 1,745 1,152
-------- -------- -------- -------- --------
Total operating expenses...... 21,273 17,411 11,208 9,931 7,687
-------- -------- -------- -------- --------
Loss from operations.................... (18,853) (15,002) (9,524) (9,816) (7,687)
Other income (expense), net............. 1,354 2,136 155 156 257
-------- -------- -------- -------- --------
Net loss................................ $(17,499) $(12,866) $ (9,369) $ (9,660) $ (7,430)
======== ======== ======== ======== ========
Net loss per share -- basic and
diluted(1)............................ $ (1.81) $ (1.37) $ (6.36)
======== ======== ========
Shares used in computing net loss per
share -- basic and diluted(1)......... 9,648 9,379 1,472
======== ======== ========
Pro forma net loss per share -- basic
and diluted(1)........................ $ (1.44)
========
Shares used in computing pro forma net
loss per share -- basic and
diluted(1)............................ 6,509
========
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $ 24,517 $ 41,567 $ 52,873 $ 11,652 $ 15,819
Working capital......................... 22,351 39,511 52,028 10,632 14,861
Total assets............................ 30,935 46,655 57,188 15,139 17,777
Long-term liabilities, net of current
portion............................... 9,248 9,077 8,877 5,978 5,050
Accumulated deficit..................... (61,418) (43,919) (31,053) (21,684) (12,024)
Stockholders' equity.................... 17,485 33,992 46,051 7,440 11,483
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net loss per share and pro forma net loss per
share.
(2) The selected consolidated balance sheet data as of June 30, 1996 reflect the
Company's initial public offering completed in June 1996.
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors that include, but are not limited to, the risks discussed in "Factors
That May Impact Future Operations" as well as those discussed in the following
"Overview" section. These forward looking statements include the statements (i)
in the "Overview" section including the statement in the first paragraph
relating to expectations of operating losses, the statement in the second
paragraph relating to anticipated filing and approval time periods for PMA
applications and the commercialization of products that have received FDA
manufacturing approval, the statements in the third paragraph related to the
manufacturing, marketing and distribution of the Company's products; (ii) the
statements in "Results of Operations -- Years Ended June 30, 1998 and 1997"
including statements in the last sentence of the first paragraph and the entire
second paragraph of "Cost of Goods Sold," the statements in the last sentence of
each of the "Research and Development" and "Selling, General and Administrative"
paragraphs; and (iii) the statements in the "Liquidity and Capital Resources"
section including the statements regarding future capital expenditures in the
third paragraph, the Company's forecast of the period of time through which its
financial resources will be adequate to support its operations in the fifth
paragraph and the statements in the sixth paragraph regarding potential sources
of additional capital resources.
OVERVIEW
The Company was founded in April 1991, operates in a single industry
segment, and has engaged primarily in researching, developing, testing and
obtaining regulatory clearances for its products. The Company has experienced
significant operating losses since inception and as of June 30, 1998 had an
accumulated deficit of approximately $61.4 million. The Company has generated
only limited revenues from sales of Radii supraventricular tachycardia mapping
and ablation catheters, Trio/Ensemble diagnostic catheters, Ventricular
Tachycardia Ablation Systems, certain mapping baskets and Arrhythmia Mapping
Systems. The Company expects its operating losses to continue through at least
the end of calendar 2000 as it continues to expend substantial funds for
clinical trials in support of regulatory approvals, expansion of research and
development activities, establishment of commercial-scale manufacturing
capabilities and expansion of sales and marketing activities.
The Company believes that its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and their
component catheters and equipment are currently the Company's only significant
potential products. The Atrial Fibrillation Ablation System is also being
developed for use in treating atrial flutter. The FDA granted clearance pursuant
to Section 510(k) of the FDC Act ("510(k) Clearance") to the Company in August
1997 for the Model 8100/8300 Arrhythmia Mapping System for basic diagnostic
electrophysiology studies. The Company filed a PMA application for the
Ventricular Tachycardia Ablation System in January 1998, and the FDA Circulatory
Systems Device Advisory Panel recommended approval of the PMA application in
July 1998 with certain labeling changes and follow-up study requirements. The
Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia is
in various stages of clinical testing, and clinical data obtained to date are
insufficient to demonstrate the safety and efficacy of these products under
applicable FDA regulatory guidelines. In addition, the ablation catheter and
ablation equipment that together form the Atrial Fibrillation Ablation System
and the mapping catheter and mapping equipment that together form the Arrhythmia
Mapping System for atrial fibrillation and atrial flutter are in the early
stages of clinical testing and will require further development. See
"Business -- Clinical Trials" and "-- Factors That May Impact Future Operating
Results -- Clinical Trials" for a discussion of the status of the clinical
trials conducted to date for the Company's products. The design, manufacturing,
labeling, distribution and marketing of the Company's products are subject to
extensive and rigorous government regulation in the United States and certain
other countries where the process of obtaining required regulatory approvals is
lengthy, expensive and uncertain. In order for the Company to market the
Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems or Atrial
Fibrillation Ablation System and related catheters and equipment in the United
States, the Company must obtain clearance or
32
<PAGE> 33
approval from the FDA. With the exception of the Chilli Cooled Ablation
Catheter, at the earliest, the Company does not anticipate filing a PMA
application for any additional system for at least six months, and does not
anticipate receiving a PMA for any such system until at least one year to two
years after such PMA application is accepted for filing, if at all. The Company
will not generate any significant revenue in the United States until such time,
if ever, as its Ventricular Tachycardia Ablation System, Arrhythmia Mapping
Systems or Atrial Fibrillation Ablation System obtain clearance or approval from
the FDA. Even if one or more of the Company's products obtain FDA clearance or
approval, there can be no assurance that any of the Company's products for
diagnosis and treatment of ventricular tachycardia, atrial fibrillation and
atrial flutter will be successfully commercialized or that the Company will
achieve significant revenues from either international or domestic sales.
Although the FDA granted 510(k) clearance for basic electrophysiology studies
for the Company's Model 8100/8300 Arrhythmia Mapping System in August 1997, such
product cannot be marketed for use with the Company's diagnostic mapping
catheters unless and until such catheters receive marketing clearance from the
FDA. Until such regulatory approval is obtained, the Arrhythmia Mapping System
may only be used with other manufacturer's catheters. There can be no assurance
that this system will be successfully commercialized in the United States or in
international markets where it has not yet received approval. On July 21, 1998,
the FDA Circulatory System Device Advisory Panel recommended that the Company's
PMA for the Ventricular Tachycardia Ablation System be granted subject to
certain conditions, but there can be no assurance that the FDA will issue such
PMA clearance in a timely manner, if at all. The Company will not be permitted
to commercialize the Ventricular Tachycardia Ablation System until such time as
approval is received. See "Business -- Clinical Trials" and "-- Factors That May
Impact Future Operating Results -- Clinical Trials" for a discussion of the
status of the clinical trials conducted to date for the Company's products.
The Company does not have any experience in manufacturing, marketing or
selling its products for diagnosis and treatment of ventricular tachycardia,
atrial fibrillation or atrial flutter in commercial quantities. If the Company
receives FDA clearance or approval for its products, it will need to expend
significant capital resources and develop manufacturing expertise to establish
large-scale manufacturing capabilities. Nor does the Company have any experience
in manufacturing, marketing or selling its mapping equipment for the Arrhythmia
Mapping System in commercial quantities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. In
addition, if FDA clearances or approvals are received, the Company intends to
market its products primarily through a direct sales force in the United States
and indirect sales channels internationally. Establishing a marketing and sales
capability sufficient to support sales in commercial quantities will require
substantial efforts and require significant management and financial resources.
RESULTS OF OPERATIONS
Years Ended June 30, 1998 and 1997
Net Sales. The Company's net sales to date have resulted primarily from
limited sales of Radii supraventricular tachycardia mapping and ablation
catheters, Trio/Ensemble diagnostic catheters, Chilli cooled ablation catheters,
Mercator mapping baskets, Radiofrequency Generator Systems and Arrhythmia
Mapping Systems. The Company's net sales remained level at $2.4 million for each
of the years ended June 30, 1998 and 1997. During fiscal 1998, the Company had
increased sales of its Radii catheters in Japan following the initial launch of
the Radii product line in the Japanese market during the first quarter. In
addition, the Company had increased sales of Arrhythmia Mapping Systems during
fiscal 1998. These increases were offset by lower overall demand for
Trio/Ensemble catheters following the transfer, during fiscal 1997, of
manufacturing and distribution for the U.S. market and certain international
markets to Arrow. These increases were also offset in part by decreased
international sales of Radiofrequency Generator Systems. The Company experienced
a delay in the international launch of Radii catheters in Japan, a delay in the
release of a software revision for the Company's Arrhythmia Mapping System and
delays in receiving CE mark approval for certain catheters in Europe. Each of
the foregoing factors resulted in lower than expected revenue in fiscal
33
<PAGE> 34
1998. International sales accounted for 87% and 82% of the Company's net sales
in fiscal 1998 and 1997, respectively. The Company believes that its exposure to
foreign currency fluctuations is not material and the Company does not engage in
foreign currency hedging programs.
In December 1995, the Company received $3.0 million pursuant to a royalty
agreement with Arrow. This amount was recorded as deferred royalty income and
will be amortized to income for those Trio/Ensemble catheters that Arrow
manufactures and sells. The royalty rate is 5% of the Trio/Ensemble catheter's
sales price, and a total of $69,000 of royalty income related to the agreement
has been recorded through June 30, 1998, of which $20,000 was recognized in
fiscal 1998.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs and system assembly and test costs. Cost of
goods sold was $2.8 million for fiscal 1998 and resulted in a gross margin
deficit of $408,000. For fiscal 1997, cost of goods sold was $2.5 million and
resulted in a gross margin deficit of $99,000. The decrease in the gross margin
for fiscal 1998 compared to fiscal 1997 was primarily attributable to changes in
sales mix, increased fixed overhead costs resulting from the expansion of
catheter and equipment production capacity, lower manufacturing yields and
increased compensation and associated labor costs for assembly, quality control
and engineering support personnel. In addition, cost of goods sold increased in
fiscal 1998 due to the additional expenses related to a change in specifications
for certain Radii catheters. The Company expects future gross margins to
fluctuate as other products are commercialized.
The Company is currently encountering low yields and other production
inefficiencies in the manufacture of its Sector mapping catheters. Although the
Company believes it is taking steps to address these yield and other production
inefficiencies, there can be no assurance that such improvements will be
achieved. Although the Company anticipates resolving such production
inefficiencies in calendar 1998, no assurance can be given that the Company will
succeed in such attempts. Failure to obtain acceptable yields in the manufacture
of such products will adversely affect the ability of the Company to expand its
mapping system clinical sites and commence commercialization of this product in
international markets.
Research and Development. Research and development expenses include costs
associated with product research, clinical trials, prototype development,
obtaining regulatory approvals and costs associated with hiring regulatory,
clinical, research and engineering personnel. Research and development expenses
increased to $14.4 million in fiscal 1998 compared to $11.8 million in fiscal
1997. The increase in research and development expenses was primarily
attributable to increased costs associated with the hiring of additional
engineering personnel, costs in connection with procurement of certain
materials, increased costs for regulatory and other consulting services and the
placement of Arrhythmia Mapping Systems, Radiofrequency Generator Systems and
catheter products at clinical sites in the United States and Europe. The Company
believes that research and development expenditures will increase in the future
as the Company invests in product and process improvements related to its
ventricular tachycardia and atrial fibrillation and/or flutter products, expands
clinical research activities and increases its research and development efforts
related to new products and technologies.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, senior
management and administrative personnel, various legal and professional fees
including those in connection with obtaining patent protection and costs of
trade shows. Selling, general and administrative expenses increased to $4.1
million in fiscal 1998 compared to $3.1 million in fiscal 1997. The increase was
primarily attributable to higher expenditures for sales and marketing personnel
and services to support expanding international sales and marketing activities,
increased costs associated with demonstration units, product marketing materials
and insurance. The Company anticipates that selling, general and administrative
expenses will increase in future periods as additional personnel are added to
support growing business operations in all functional areas.
Other Income (Expense), Net. Other income (expense), net decreased to net
other income of $1.4 million in fiscal 1998 from net other income of $2.1
million in fiscal 1997. The reduction in net other income was the result of
declining interest income on lower cash, cash equivalent and short-term
investment balances.
34
<PAGE> 35
Net Loss. The Company's net loss increased to $17.5 million in fiscal 1998
compared to $12.9 million in fiscal 1997. The increase in the Company's net loss
primarily resulted from the larger gross margin deficit, increased operating
expenses, including product development, clinical research and selling, general
and administrative expenses and lower interest income.
Net Operating Loss and Research Tax Credit Carryforwards. As of June 30,
1998, the Company's reported net operating loss carryforwards were approximately
$55.6 million and $11.9 million for federal and state income tax purposes,
respectively. The Company's research tax credit carryforwards were approximately
$3.3 million. If not utilized, the net operating loss and credit carryforwards
will expire at various dates beginning in the years between 1998 through 2013.
In addition, the net operating loss and tax credit carryforwards may be subject
to annual limitations under the ownership change provisions of Internal Revenue
Code Section 382.
Impact of Adoption of New Accounting Standards. In February 1997, the
Financial Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards No. 128 (FAS 128), "Earnings per Share," which the Company
adopted on December 31, 1997 pursuant to the requirements of FAS 128. The
adoption of FAS 128 changed the method used to compute earnings per share and
required restatement of all prior periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options and
warrants is excluded. The adoption of FAS 128 did not have a material impact on
the Company's reported basic and diluted net loss per share due to the exclusion
of antidilutive options and warrants from the calculations in periods when the
Company incurred a net loss, which occurred in all periods reported herein. See
Note 1 to Consolidated Financial Statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (FAS 130), "Reporting Comprehensive Income" which requires the reporting
and presentation of comprehensive income and its components in the financial
statements. Comprehensive income reflects certain items not currently reported
in measuring net income such as changes in value of available-for-sale
securities and foreign currency translation adjustments. The Company does not
expect the adoption of FAS 130 to have a material effect on its financial
statements. FAS 130 will first be reported in the Company's financial statements
for the year ending June 30, 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related
Information" which supersedes the current segment reporting requirements of
Statement of Financial Accounting Standards No. 14 (FAS 14), "Financial
Reporting for Segments of a Business Enterprise," as amended. FAS 131 requires
the reporting of certain financial and other disclosures related to the
Company's operating segments which are identified using a "management approach."
Operating segments are revenue-producing components of the business for which
separate financial information is produced internally and are subject to
evaluation by the chief operating decision maker in the resource allocation
process. FAS 131 will first be reported in the Company's unaudited interim
financial statements for the quarter ending September 30, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
1999. The Company has not in the past and does not anticipate in the future
using derivative instruments, and the Company does not expect that the adoption
of FAS 133 will have a significant impact on its financial condition or results
of operations.
Years Ended June 30, 1997 and 1996
Net Sales. Net sales increased to $2.4 million in fiscal 1997 from $1.7
million in fiscal 1996. The increase in net sales was due to higher overall
shipments of Trio/Ensemble catheters in Japan and the shipment of Arrhythmia
Mapping Systems to Japan and Europe during fiscal 1997, but such increase was
offset in part by the non-recurrence of the sale of Radiofrequency Generator
Systems during fiscal 1996. International sales accounted for 82% and 67% of the
Company's net sales in fiscal 1997 and 1996, respectively.
35
<PAGE> 36
Cost of Goods Sold. Cost of goods sold was $2.5 million for fiscal 1997 and
resulted in a gross margin deficit of approximately $99,000. For fiscal 1996,
cost of goods sold was $2.4 million, and resulted in a gross margin deficit of
approximately $724,000. The improvement in the gross margin deficit was
primarily attributable to higher sales volumes and the non-recurrence of certain
manufacturing start-up costs associated with the expansion of catheter
production capacity in fiscal 1996. The improvement in the gross margin deficit
was offset in part by increased compensation and associated costs for assembly,
quality control and engineering support personnel, and low production yields for
the Mercator Mapping Basket. The improvement in the gross margin deficit was
also aided by increased production and sales levels for Trio/Ensemble diagnostic
catheters and such increases have resulted in generally lower per unit
manufacturing costs.
Research and Development. Research and development expenses increased to
$11.8 million in fiscal 1997 from $6.8 million in fiscal 1996. This increase was
primarily attributable to increased costs associated with the hiring of
additional engineering, regulatory and clinical personnel, costs associated with
conducting clinical trials, increased prototype development costs, increased
costs related to the manufacture and placement of Ventricular Tachycardia
Ablation, Atrial Fibrillation Ablation and Arrhythmia Mapping Systems and
related catheter products at clinical sites in the United States and Europe.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $3.1 million in fiscal 1997 from $2.0 million in fiscal
1996. The increase was primarily attributable to increased expenditures for
administrative personnel and services to support expanding international sales
and marketing activities, increased costs associated with expanded participation
in trade shows, increased professional fees related to the filing and
registration of the Company's patents, costs related to obtaining certain
insurance policies and costs related to the Company's internal computer network
and related administrative services.
Other Income (Expense), Net. Other income (expense), net increased to net
other income of $2.1 million in fiscal 1997 from net other income of $155,000 in
fiscal 1996. The net increase resulted from a higher level of interest income
earned on substantially higher cash, cash equivalent and short-term investment
balances following the closing of the Company's initial public offering in June
1996, the net proceeds of which were approximately $43.1 million.
Net Loss. The Company's net loss increased to $12.9 million in fiscal 1997
from $9.4 million in fiscal 1996. The increase in the net loss primarily
resulted from increased product development, clinical research and selling,
general and administrative expenses, but such factors were offset in part by
increased sales and interest income.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $33.5 million, a
private placement of debt securities yielding approximately $4.5 million, a bank
line of credit of $6.0 million, equipment lease financing arrangements yielding
$3.8 million and a prepaid royalty arrangement yielding $3.0 million. In
addition, the Company closed its initial public offering in June 1996 and raised
net proceeds of $43.1 million. As of June 30, 1998, the Company had $24.5
million in cash, cash equivalents and short-term investments.
Net cash used in operating activities was $16.8 million, $10.2 million and
$5.0 million in fiscal 1998, 1997 and 1996, respectively. For such periods, net
cash used in operating activities resulted primarily from net losses. Net cash
provided by investing activities was $17.7 million in fiscal 1998 and net cash
used in investing activities was $13.6 million and $18.5 million in fiscal 1997
and 1996, respectively. Net cash provided by investing activities primarily
resulted from maturities and sales of short-term investments but was offset in
part by purchases of short-term investments and equipment. The net cash used in
investing activities was primarily attributable to the purchase of short-term
investments. Net cash provided by financing activities was $1.3 million in
fiscal 1998, and net cash used in financing activities was $311,000 in fiscal
1997. The net cash provided by financing activities in fiscal 1998 primarily
resulted from borrowings on a line of credit from a commercial bank offset, in
part, by the repayment of a note payable due to Sorin Biomedical. Net cash
provided by financing activities was $47.3 million in fiscal 1996 which was
primarily attributable to the private placement of preferred stock and the
closing of the Company's initial public offering during June 1996.
36
<PAGE> 37
As of June 30, 1998, the Company had capital equipment of $7.5 million,
less accumulated depreciation and amortization of $3.9 million, to support its
clinical, development, manufacturing and administrative activities. The Company
has financed $3.8 million from capital lease obligations through June 30, 1998.
The Company expects capital expenditures to increase over the next several years
as it expands facilities and acquires equipment to support the planned expansion
of manufacturing capabilities. In September 1997, the Company secured an
equipment lease financing facility of $2.0 million (the "lease line") that is
available to the Company in two equal annual increments of $1.0 million. In
connection with the origination of the lease line, the Company issued a warrant
to purchase 35,170 shares of its Common Stock to the lessor at an exercise price
of $8.53 per share. As of June 30, 1998, the Company had utilized approximately
$635,000 of the first increment of this lease line and expects to utilize the
remainder of the lease line and a portion of existing cash resources to purchase
additional equipment over the next 12 months.
In May 1998, the Company obtained a term loan credit facility of $8,000,000
from a commercial bank. The loan agreement provides for an initial advance of
$6,000,000 available for the repayment of a note payable and related accrued
interest due to Sorin Biomedical (described below) with the remaining $2,000,000
available for general corporate purposes. Advances can be made to the Company
during a 12-month non-revolving drawdown period that expires in May 1999.
Borrowings under the credit facility bear floating interest at the bank's prime
rate plus 1.25% (9.75% at June 30, 1998) and the Company can elect a fixed
interest rate option at the end of the 12-month drawdown period. Interest
payments are due monthly following commencement of each advance and the
outstanding balance of all borrowings under the credit facility will be fully
amortized over the 36-month period following the end of the drawdown period with
principal and interest payments due monthly. Under the terms of the loan
agreement, all borrowings are collateralized by substantially all of the
Company's assets and the Company must maintain certain financial ratios and
other covenants. At June 30, 1998, the Company had an unused amount of
$2,000,000 under the credit facility that is available for drawdowns through May
1999. The Company was in compliance with all covenants as of June 30, 1998.
In May 1998, the Company utilized $6,000,000 of the term loan credit
facility in order to repay a $4,500,000 note payable and related accrued
interest of approximately $1,500,000 due to Sorin Biomedical. The $4,500,000
note payable bore interest at the prime rate as quoted in the Wall Street
Journal and all principal and accrued interest was due on June 27, 1999. The
early repayment of the note payable was made in connection with the termination
of a product distribution agreement with Sorin Biomedical.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress of the Company's product development
efforts, the progress of the Company's clinical trials, actions relating to
regulatory matters, the costs and timing of expansion of product development,
manufacturing, marketing and sales activities and the extent to which the
Company's products gain market acceptance, and competitive developments. The
Company has received marketing approval for its Model 8100/8300 Arrhythmia
Mapping System for basic electrophysiology studies, and the FDA Circulatory
System Device Advisory Panel has recommended that the Company's PMA application
for its Ventricular Tachycardia Ablation System be granted clearance by the FDA.
In order to successfully manufacture in commercial quantities and market and
sell its FDA-cleared products and to apply for FDA marketing clearance for its
remaining products, the Company anticipates that it will be required to raise
additional funds through equity or debt financing in fiscal 1999 or 2000. Absent
successful fund raising, the Company believes it will not have sufficient
resources to successfully commercialize its products and that such inability
will have a material adverse effect on the Company's business, financial
condition and results of operations.
The factors described in the previous paragraph, "Factors That May Impact
Future Operations" and elsewhere in this Report will impact the Company's future
capital requirements and the adequacy of its available funds. The Company
anticipates that it will be required to raise additional funds through public or
private financing, collaborative relationships or other arrangements in fiscal
1999 or fiscal 2000. There can be no assurance that such additional funding,
when needed, will be available on terms acceptable to the Company, if at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve additional restrictive covenants.
Collaborative arrangements with a capital raising component may require the
Company to relinquish its rights to certain of its technologies, products or
37
<PAGE> 38
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations.
INFLATIONARY IMPACT
Since the inception of operations, inflation has not significantly affected
the operating results of the Company. However, inflation and changing interest
rates have had a significant effect on the economy in general and therefore
could affect the operating results of the Company in the future.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
Limited Operating History; History of Losses and Expectation of Future Losses
The Company was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception. As of June 30, 1998, the Company had an accumulated deficit of $61.4
million. To date, the Company has generated only limited revenues from sales of
its products and expects its operating losses to continue through at least the
end of calendar 2000 as it continues to expend substantial funds for clinical
trials in support of regulatory approvals, expansion of research and development
activities, establishment of commercial scale manufacturing capabilities and
expansion of sales and marketing activities. There can be no assurance that any
of the Company's potential products for diagnosis and treatment of ventricular
tachycardia, atrial fibrillation and atrial flutter will receive regulatory
approvals for marketing, will be successfully commercialized or that the Company
will achieve significant revenues from either international or domestic sales.
In addition, there can be no assurance that the Company will achieve or sustain
profitability in the future or meet the expectations of securities industry
analysts. The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year and will depend on numerous factors,
including actions relating to regulatory matters, progress of clinical trials,
the extent to which the Company's products gain market acceptance, the scale-up
of manufacturing abilities, the expansion of sales and marketing activities and
competition.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress of the Company's product development
efforts, the progress of the Company's clinical trials, actions relating to
regulatory matters, the costs and timing of expansion of product development,
manufacturing, marketing and sales activities and the extent to which the
Company's products gain market acceptance, and competitive developments. The
Company has received marketing approval for its Model 8100/8300 Arrhythmia
Mapping System for basic electrophysiology studies, and the FDA Circulatory
System Device Advisory Panel has recommended that the Company's PMA application
for its Ventricular Tachycardia Ablation System be granted clearance by the FDA.
In order to successfully manufacture in commercial quantities and market and
sell its FDA-cleared products and to apply for FDA marketing clearance for its
remaining products, the Company anticipates that it will be required to raise
additional funds through equity or debt financing in fiscal 1999 or 2000. Absent
successful fund raising, the Company believes it will not have sufficient
resources to successfully commercialize its products and that such inability
will have a material adverse effect on the Company's business, financial
condition and results of operations.
Clinical Trials
The Ventricular Ablation System, Arrhythmia Mapping System and Atrial
Fibrillation Ablation System are in various stages of clinical testing. Other
than with respect to the Ventricular Tachycardia Ablation System, the clinical
data obtained to date are insufficient to demonstrate the safety and efficacy of
these products under applicable FDA regulations and guidelines. There can be no
assurance that any of the Company's products will prove to be safe and effective
in clinical trials under applicable United States or international regulations
or that additional modifications to the Company's products will not be
necessary. In addition, the clinical trials may identify significant technical
or other obstacles to be overcome prior to obtaining necessary regulatory or
reimbursement approvals. In addition, the ablation catheter and ablation
equipment that together form the Company's Atrial Fibrillation Ablation System
are still under development.
38
<PAGE> 39
There can be no assurance that the Company will be successful in completing
development of the atrial fibrillation product and submitting the appropriate
Investigational Device Exemption supplement ("IDEs") or that the FDA will permit
the Company to undertake clinical trials of the atrial fibrillation product.
Although the FDA granted 510(k) clearance for basic electrophysiology studies
for the Company's Arrhythmia Mapping System in August 1997, such product cannot
be marketed with the Company's mapping catheters unless and until such catheters
receive FDA marketing clearance or approval. Until such regulatory clearance or
approval is obtained, the Arrhythmia Mapping System may only be used with other
manufacturers' catheters. There can be no assurance that physicians will adopt
the Arrhythmia Mapping System for electrophysiology studies in lieu of a system
incorporating mapping equipment and catheters from a single manufacturer if at
all. If the Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System
and their component catheters and equipment do not prove to be safe and
effective in clinical trials or if the Company is otherwise unable to
commercialize these products successfully, the Company's business, financial
condition and results of operations will be materially adversely affected. In
addition, because ablation treatment of these cardiac arrhythmias is a
relatively new and to date untested treatment, the long-term effects of
radiofrequency ablation on patients are unknown. As a result, the long-term
success of ablation therapy in treating ventricular tachycardia, atrial
fibrillation and atrial flutter will not be known for several years.
In December 1997, the Company completed enrollment in a clinical trial of
the Chilli Cooled Ablation Catheter and the Models 8002 and 8004 Radiofrequency
Generator and Integrated Fluid Pump, the products that together form the
Company's Ventricular Tachycardia Ablation System. In May 1997, the Company
completed an IDE feasibility study of the Mercator Left Ventricular Mapping
Basket and the Model 8100/8300 Arrhythmia Mapping System, the products that
together form the Company's Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. The Company is currently conducting a clinical trial
for the Local Sector Mapping Basket, a variation of the Mercator Left
Ventricular Mapping Basket. The Company completed a clinical trial of the
Mercator Atrial Mapping Basket and the Model 8100/8300 Arrhythmia Mapping System
in March 1998, the products that together form the Company's Arrhythmia Mapping
System for diagnostic mapping of the right atrium. In February 1998, the Company
filed an IDE for a clinical trial of the Local Sector Mapping Basket in the
right atrium. In April 1997, the Company completed a feasibility study of the
Nexus Linear Lesion Catheter and Model 8002 Radiofrequency Generator and
Integrated Fluid Pump, the products that together form the Company's Atrial
Fibrillation Ablation System. The Company is currently conducting a clinical
trial for a second version of the Nexus Linear Lesion Catheter for the treatment
of atrial flutter.
Ventricular Tachycardia Ablation System. The Company initiated a clinical
trial for the Ventricular Tachycardia Ablation System in the United States and
Europe in September 1995 under an IDE approved by the FDA. The clinical trial
was conducted at a maximum of 15 clinical sites. The primary endpoint of the
clinical trial is clinical recurrence of ventricular tachycardia in patients
randomized to receive ablation treatment versus patients in the control group
receiving antiarrhythmic drugs. The required post-treatment follow-up prior to
submission of a PMA application was 30 days for safety and the Company is
required to follow up with some patients for up to 24 months after the PMA
application filing. Enrollment for the clinical trial was completed on December
19, 1997. A PMA application was submitted on January 29, 1998 for approval to
market the Ventricular Tachycardia Ablation System and its component catheters
and equipment in the United States, and the FDA Circulatory Systems Device
Advisory Panel recommended approval of the PMA application with certain
conditions on July 21, 1998. To date, the FDA has not acted on the Panel's
recommendation or approved or denied the Company's PMA. There can be no
assurance that the FDA will accept the Panel's recommendation or grant marketing
clearance of the Company's PMA , if at all.
The FDA granted the Company's request to permit continuation of the study
and expansion to a maximum of 20 clinical sites and 300 patients while the PMA
application is under review. As of September 17, 1998, 208 patients had been
enrolled in the trial: 75 patients randomized to ablation, 101 patients
non-randomized to ablation and 32 patients randomized to drug therapy of which
17 patients have subsequently received ablation therapy due to VT recurrence. In
addition, 18 patients have received ablation therapy under a compassionate use
protocol. Analysis of 150 of such patients was included in the PMA application.
The Company believes that such analysis shows that clinical recurrence of VT was
significantly
39
<PAGE> 40
less in the patients randomized to ablation compared to patients randomized to
control. Acute success of ablation therapy, defined as eradication of all
mappable VT at the end of the ablation procedure, was attained in 75% of
patients. The incidence of major adverse events associated with the procedure
was 8.0%.
Arrhythmia Mapping System for Ventricular Tachycardia. In January 1997, the
Company received FDA approval to conduct an IDE feasibility study to evaluate
the safety of the Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. The feasibility study was conducted at three clinical
sites in the United States and Europe and involved a total of 14 patients. The
purpose of the clinical trial was to evaluate and test the success of the
deployment of the Mercator Left Ventricular Mapping Basket into the ventricle,
the fit of the catheter and the system's ability to accurately map the
electrical signals of the left ventricle. In addition, as of September 17, 1998,
24 patients have been studied in Europe outside of the IDE in a similar
protocol. There was no thrombus formation on any mapping basket used in the 38
studies. Of the 38 patients evaluated, one patient developed asymptomatic aortic
regurgitation, one patient had a transient ischemic attack, and two patients
developed pericardial effusions associated with the procedure. In July 1997, the
Company submitted an IDE supplement to support commercialization of two types of
baskets: the Mercator Left Ventricular Mapping Basket, a full chamber global
basket evaluated in the feasibility study and a smaller, partial chamber high
density Local Sector basket. Conditional approval was granted to initiate
enrollment of 30 patients at five sites for the global basket. This study has
been initiated at one clinical site, and three patients have been enrolled. The
FDA requested a separate IDE for a study of the Sector Mapping Basket. A new IDE
was submitted and received conditional approval in November 1997 to initiate
enrollment of 30 patients at five sites in the Sector study. This study was
initiated April 8, 1998, and six patients have been enrolled in this trial as of
September 17, 1998. These studies allow the use of the ventricular mapping
baskets with the Ventricular Tachycardia Ablation System simultaneously. The
Company believes that ventricular mapping will enable the treatment of high rate
ventricular tachycardia, which is more common than slow rate ventricular
tachycardia. Slow rate ventricular tachycardia is currently the only type of
ventricular tachycardia amenable to ablation therapy using current techniques.
Arrhythmia Mapping System for Atrial Fibrillation. In June 1997, the
Company received IDE approval by the FDA to conduct a clinical trial of the
Mercator Atrial Mapping Basket for the right atrium and Arrhythmia Mapping
System for complex atrial tachyarrhythmias including atrial fibrillation. The
clinical trial is being conducted at seven clinical sites in the United States
and one in Europe. The purpose of this clinical trial was to demonstrate the
equivalency of the Mercator Atrial Mapping Basket and the Arrhythmia Mapping
System to commercially available mapping catheters. Enrollment in the clinical
trial was completed on March 10, 1998 and the trial includes 74 patients. There
was no thrombus formation on any mapping basket used in the 74 studies. The
Company has also tested the Mercator Atrial Mapping Basket in nine patients in
Europe outside of the IDE. The Company submitted a 510(k) application for
clearance of the Mercator Atrial Mapping Basket on July 17, 1998. An IDE was
submitted for a clinical study of the Local Sector Mapping Basket for the right
atrium on February 20, 1998. The Company was granted conditional approval to
test 10 subjects at five clinical sites, and one patient has been enrolled as of
September 17, 1998.
Atrial Fibrillation Ablation System. The Company received FDA approval of
an IDE feasibility study to evaluate the safety of the Atrial Fibrillation
Ablation System in August 1997. The purpose of the IDE feasibility study for the
Atrial Fibrillation Ablation System was to assess the safety and performance in
creating continuous linear lesions. The feasibility testing was completed with
10 patients undergoing testing. The purpose of the clinical test was to verify
that a linear lesion could be made in a location in the atrium anticipated to
eliminate atrial fibrillation. In a majority of the patients undergoing
ablation, linear lesions were created in the right atrium either with the Nexus
Linear Lesion Catheter alone or with commercial ablation catheter
supplementation. One patient developed a pericardial effusion attributed to
perforation by a commercial diagnostic (non-ablation) catheter. No other
complications occurred. The Company also tested the Nexus Linear Lesion Catheter
in two patients in Europe.
The Nexus Linear Lesion Catheter was modified to improve the ability to
create linear lesions minimizing the need for commercial ablation catheter
supplementation. The modifications include the addition of active deflection to
facilitate tissue contact. An IDE supplement was submitted in October 1997 to
support commercialization of the Nexus Linear Lesion Catheter in the right
atrium to treat atrial flutter.
40
<PAGE> 41
Atrial flutter is an abnormal heart rhythm now commonly treated using catheter
ablation, requiring the creation of a two to four centimeter linear lesion in
the right atrium. The study received conditional approval in December 1997 to
involve 30 patients at five sites. The study was initiated in February 1998 and
six patients have been enrolled as of September 17, 1998. The Company has also
tested the Nexus Linear Lesion Catheter for atrial flutter and fibrillation in
nine patients in Europe as of September 17, 1998. The Company has requested
approval from FDA to allow delivery of 70 watts of power and use a superior
approach to accessing the right atrium and will resume enrollment when the
amendment is approved.
A feasibility IDE for use of the modified Nexus Linear Lesion Catheter in
the right and left atrium to treat atrial fibrillation is expected to be
submitted in calendar 1998.
No Existing Market
The Company's Model 8100/8300 Arrhythmia Mapping System (the "Model
8100/8300") received 510(k) Clearance from the FDA in August 1997 for basic
diagnostic electrophysiology studies. In September 1997, the Company began
marketing such system commercially in the United States. However, there can be
no assurance that such system will gain any significant degree of market
acceptance among physicians, patients, and health care payors. The Company
believes that physician's acceptance of procedures using the Company's Model
8100/8300 will be essential for market acceptance of such system. Even though
the clinical efficacy of such system has been established, electrophysiologists,
cardiologists and other physicians may elect not to recommend the use of the
Model 8100/8300 for any number of reasons. Although the FDA granted 510(k)
Clearance for basic electrophysiology studies for the Company's Model 8100/8300
Arrhythmia Mapping System in August 1997, such product cannot be marketed for
use with the Company's diagnostic mapping catheters unless and until such
catheters receive marketing clearance from the FDA. Until such regulatory
approval is obtained, the Arrhythmia Mapping System may only be used with other
manufacturer's catheters. There can be no assurance that this system will be
successfully commercialized in the United States or in international markets
where it has not yet received approval. The Company believes that, as with any
novel medical technology, there will be a significant learning process involved
for physicians to become proficient. Broad use of such system will require
training of electrophysiologists, and the time required to complete such
training could adversely affect market acceptance. Failure of such product to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. Even if
the Model 8100/8300 achieves market acceptance, if the Company is unable to
manufacture sufficient quantities of such product to satisfy customer demand,
the Company's business, financial condition and results of operations would be
materially adversely affected.
Marketing and Distribution
The Company currently has only a limited sales and marketing organization.
If FDA clearances or approvals are received for the Company's ventricular
tachycardia or atrial fibrillation products, the Company intends to market its
products primarily through a direct sales force in the United States and
indirect sales channels internationally. Although the Company received marketing
clearance for the Arrhythmia Mapping System in August 1997, the Company has only
started to establish a direct sales force to market this product.
Establishing a marketing and sales capability sufficient to support sales
in commercial quantities will require substantial efforts and require
significant management and financial resources. There can be no assurance that
the Company will be able to build such a marketing staff or sales force, that
establishing such a marketing staff or sales force will be cost effective or
that the Company's sales and marketing efforts will be successful. If the
Company is successful in obtaining the necessary regulatory approvals for its
ventricular tachycardia and atrial fibrillation products in international
markets, it expects to establish a sales and marketing capability in those
markets primarily through distributors. There can be no assurance that the
Company will be able to enter into agreements with desired distributors on a
timely basis or at all, or that such distributors will devote adequate resources
to selling the Company's products. Failure to establish appropriate distribution
relationships could have a material adverse effect upon the Company's business,
financial condition and results of operations.
41
<PAGE> 42
Manufacturing
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. The Company conducts quality
audits of suppliers and is establishing a vendor certification program. A number
of components for the Company's products are provided by sole source suppliers.
For certain of these components, there are relatively few alternative sources of
supply, and establishing additional or replacement vendors for such components
could not be accomplished quickly. The Company plans to qualify additional
suppliers if and as future production volumes increase. Because of the long lead
time for some components that are currently available from a single source, a
vendor's inability to supply such components in a timely manner could have a
material adverse effect on the Company's ability to manufacture the mapping
basket, mapping equipment and ablation equipment and therefore on its business,
financial condition and ability to market its products as currently
contemplated.
The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high volume manufacturing capacity
can be established or maintained at commercially reasonable costs. If the
Company receives FDA clearance or approval for its products, it will need to
expend significant capital resources and develop manufacturing expertise to
establish large scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations and
the need for further FDA approval of new manufacturing processes. For example,
the Company encountered low yields, and other production inefficiencies in the
manufacture of its Sector mapping basket catheters. In addition, the Company
believes that substantial cost reductions in its manufacturing operations will
be required for it to commercialize its catheters and systems on a profitable
basis. Any inability of the Company to establish and maintain large scale
manufacturing capabilities would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection
by regulatory authorities, and its operations must undergo QSR compliance
inspections conducted by the FDA. The Company is required to comply with QSR in
order to produce products for sale in the United States and with ISO
9001/EN46001 standards in order to produce products for sale in Europe. In
December 1997, the Company received ISO 9001/EN46001 certification from its
European Notified Body. Any failure of the Company to comply with QSR or ISO
9001/EN46001 standards may result in the Company being required to take
corrective actions, such as modification of its policies and procedures. The
State of California also requires that the Company obtain a license to
manufacture medical devices and granted the Company such a license in February
1998. If the Company is unable to maintain such a license, it would be unable to
manufacture or ship any product, and such inability would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Patents and Proprietary Rights
The Company's success will depend in part on its ability to obtain patent
and copyright protection for its products and processes, to preserve its trade
secrets and to operate without infringing or violating the proprietary rights of
third parties. The Company's strategy is to actively pursue patent protection in
the United States and foreign jurisdictions for technology that it believes to
be proprietary and that offers a potential competitive advantage for its
products. The Company holds issued and allowed patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The patent
positions of medical device companies, including those of the Company, are
uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. In addition, there can be no assurance
that competitors, many of
42
<PAGE> 43
which have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use or sell its
products either in the United States or in international markets. Litigation or
regulatory proceedings, which could result in substantial cost and uncertainty
to the Company, may also be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. There can be no assurance that the Company will
have the financial resources to defend its patents from infringement or claims
of invalidity.
In addition to patents, the Company relies on trade secrets and proprietary
know how to compete. The Company seeks to protect its trade secrets and
proprietary know how, in part, through appropriate confidentiality and
proprietary information agreements. These agreements generally provide that all
confidential information developed or made known to individuals by the Company
during the course of the relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering service to the Company
shall be the exclusive property of the Company. There can be no assurance that
proprietary information or confidentiality agreements with employees,
consultants and others will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known to or independently developed by competitors.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the USPTO to determine the priority of
inventions or an opposition to a patent grant in a foreign jurisdiction. The
defense and prosecution of intellectual property suits, USPTO interference or
opposition proceedings and related legal and administrative proceedings and
related legal and administrative proceedings are both costly and time-consuming.
Any litigation, opposition or interference proceedings will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology. Although patent and intellectual property disputes
in the medical device area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses from others would be available to the Company on satisfactory
terms, if at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is aware of certain patents owned or licensed by others and relating
to cardiac catheters and cardiac monitoring. Certain enhancements of the
Company's products are still in the design and pre-clinical testing phase.
Depending on the ultimate design specifications and results of pre-clinical
testing of these enhancements, there can be no assurance that the Company would
be able to obtain a license to such parties' patents or that a court would find
that such patents are either not infringed by the Company's enhancements or that
the Company's patents are invalid.
Further, there can be no assurance that owners or licensees of these
patents will not attempt to enforce their patent rights against the Company in a
patent infringement suit or other legal proceeding, regardless of the likely
outcome of such suit or proceeding.
Competition
At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of ventricular
tachycardia and atrial fibrillation, including drugs, external electrical
cardioversion and defibrillation, implantable defibrillators, ablation
accompanied by pacemaker implantation and open-heart surgery. In addition,
several competitors are also developing new approaches and new products for the
treatment and mapping of ventricular tachycardia and atrial fibrillation,
43
<PAGE> 44
including ablation systems using ultrasound, microwave, laser and cryoablation
technologies and mapping systems using contact mapping, single-point spatial
mapping and non-contact, multisite electrical mapping technologies. Many of the
Company's competitors have an established presence in the field of
interventional cardiology and electrophysiology. Many competitors have
substantially greater financial and other resources than the Company, including
larger research and development staffs and more experience and capabilities in
conducting research and development activities, testing products in clinical
trials, obtaining regulatory approvals and manufacturing, marketing and
distributing products. There can be no assurance that the Company will succeed
in developing and marketing technologies and products that are more clinically
efficacious and cost effective than the more established treatments or the new
approaches and products developed and marketed by its competitors. Furthermore,
there can be no assurance that the Company will succeed in developing new
technologies and products that are available prior to its competitors' products.
The failure of the Company to demonstrate the efficacy and cost effective
advantages of its products over those of its competitors or the failure to
develop new technologies and products before its competitors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that the primary competitive factors in the market for
cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for products to be developed and
to receive regulatory and, in some cases, third party payor reimbursement
approval are important competitive factors. The medical device industry is
characterized by rapid and significant technological change. Accordingly, the
Company's success will depend in part on its ability to respond quickly to
medical and technological changes through the development and introduction of
new products. Product development involves a high degree of risk and there can
be no assurance that the Company's new product development efforts will result
in any commercially successful products. The Company believes it competes
favorably with respect to these factors, although there is no assurance that it
will be able to continue to do so.
Government Regulation
United States
The design, pre-clinical and clinical testing, manufacture, labeling, sale,
distribution and promotion of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. 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 authorization, a recommendation by
the FDA that the Company not be permitted to enter into government contracts
and/or 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.
Before a new device can be introduced into the market, a manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or an approval of a PMA application under Section
515 of the FDC Act. Commercial distribution of a device for which a 510(k)
clearance is required can begin only after the FDA issues an order finding the
device to be "substantially equivalent" to a predicate device. If the Company
cannot establish that a proposed device is substantially equivalent to a legally
marketed predicate device, the Company must seek premarket approval of the
proposed device from the FDA through the submission of a PMA application.
The process of obtaining a PMA and other required regulatory approvals can
be expensive, uncertain and lengthy, and there can be no assurance that the
Company will ever obtain such approvals. At the earliest, the Company does not
anticipate filing any additional PMA applications for any system for at least
the next nine months, and does not anticipate receiving a PMA for any such
system until at least one to two years after such PMA application is accepted
for filing, if at all. There can be no assurance that the FDA will act favorably
or quickly on any of the Company's submissions to the FDA. Significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
products in the United States. Furthermore, there can be no assurance that the
FDA will not request additional data or require that the Company conduct further
clinical studies, causing the Company to
44
<PAGE> 45
incur substantial cost and delay. In addition, there can be no assurance that
the FDA will not impose strict labeling requirements, onerous operator training
requirements or other requirements as a condition of its PMA approval, any of
which could limit the Company's ability to market its systems. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the FTC. FDA enforcement policy strictly prohibits the
marketing of FDA cleared or approved medical devices for unapproved uses.
Further, if a company wishes to modify a product after FDA approval of a PMA,
including changes in indications or other modifications that could affect safety
or efficacy, additional clearances or approvals will be required from the FDA.
Failure to receive or delays in receipt of FDA clearances or approvals,
including the need for additional clinical trials or data as a prerequisite to
clearance or approval, or any FDA conditions that limit the ability of the
Company to market its systems, could have a material adverse effect on the
Company's business, financial condition and results of operations.
International
The European Union has promulgated rules which require that medical
products distributed after June 14, 1998 bear the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. Quality system certification is
one of the CE mark requirements. The Company has received ISO9001/EN46001
certification by its European Notified Body, one of the CE mark certification
prerequisites for its manufacturing facility in Sunnyvale, California.
Furthermore, in January 1998, the Company received the right to affix the CE
mark to its Arrhythmia Mapping System and Chilli Cooled Ablation System. In
April 1998, the Company received the right to affix the CE mark to its Radii
catheters. In July 1998, the Company received the right to affix the CE mark to
its Trio/Ensemble catheters. While the Company intends to satisfy the requisite
policies and procedures that will permit it to receive the CE Mark Certification
for other products, there can be no assurance that the Company will be
successful in meeting the European certification requirements and failure to
receive the right to affix the CE mark will prohibit the Company from selling
these and other products in member countries of the European Union.
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. Export sales of medical devices that have not received FDA marketing
authorization are subject to FDA export requirements. In accordance with the FDA
Export Reform & Enforcement Act of 1996, such devices may be exported to any
country provided that the device meets a number of criteria including marketing
authorization in one of the "Tier I" countries identified in that act. If the
device has no marketing authorization in a Tier I country, and is intended for
marketing, it may be necessary to obtain approval from the FDA to export the
device. In order to obtain export approval, the Company may be required to
provide the FDA with documentation from the medical device regulatory authority
of the country in which the study is to be conducted or the purchaser is
located, stating that the device has the approval of the country. In addition,
the FDA must find that the exportation of the device is not contrary to the
public health and safety of the country in order for the Company to obtain the
permit. The Company currently has marketing authorization in one or more Tier I
countries for all its clinically used products. The Company is in the process of
obtaining the necessary marketing approvals or conducting clinical trials in the
United Kingdom, Germany, France, Canada, Japan and several other countries in
Europe and Asia.
Third-Party Reimbursement and Uncertainty Related to Health Care Reform
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third party
payors for medical procedures in which the Company's products are used. Third
party payors may deny reimbursement if they determine that a prescribed device
has not received appropriate regulatory clearances or approvals, is not used in
accordance with cost-effective treatment methods as determined by the payor, or
is experimental,
45
<PAGE> 46
unnecessary or inappropriate. Third party reimbursement is generally provided on
the basis of the procedure's DRG code and such code is established by the HCFA.
The failure of the procedures in which the Company's products are used or an
insufficient level of reimbursements for such procedures would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, medical equipment reimbursements have been mandated by
statute to be reduced in the past, and there can be no assurance that any such
reimbursements with respect to the Company's products will be adequate or
provided at all. Failure by hospitals and other users of the Company's products
to obtain reimbursement from third party payors, or changes in government and
private third party payors' policies toward reimbursement for procedures
employing the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country by country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that treatment with the
Company's products will be more efficacious than currently available therapies.
The Company anticipates that hospital administrators and physicians would
justify the use of the Company's products by the attendant cost savings and
clinical benefits that the Company believes would be derived from the use of its
products. However, there can be no assurance that this will be the case. There
can be no assurance that reimbursement for the Company's products will be
available in the United States or in international markets under either
government or private reimbursement systems, or that physicians will support and
advocate reimbursement procedures using the Company's products.
Product Liability and Insurance
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has conducted only limited clinical trials to date and does not yet
have, and will not have for a number of years, sufficient clinical data to allow
the Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. In addition, the
Company will require increased product liability coverage if any potential
products are successfully commercialized. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
Any claims against the Company regardless of their merit or eventual outcome
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
Employees
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, regulatory and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain such
46
<PAGE> 47
personnel or that it can attract or retain other highly qualified scientific,
technical, clinical, regulatory and managerial personnel in the future,
including key sales and marketing personnel. The loss of key personnel or the
inability to hire and retain qualified personnel could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
In addition, in order to complete clinical trials in progress, prepare
additional products for clinical trials, and develop future products, the
Company believes that it will be required to expand its operations, particularly
in the areas of research and development, manufacturing and sales and marketing.
The Company hired a new Vice President of North American Sales in January 1998
and a new Vice President of International Sales in March 1998. However, there
can be no assurance that they will be able to build a successful sales force or
that they will be able to operate effectively with the existing management team.
As the Company expands its operations in these areas, such expansion will 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 any such growth and compete effectively,
the Company will be required to implement and improve information systems,
procedures, and controls, and to expand, train, motivate and manage its work
force.
Year 2000 Impact on Information Technology and Budgets and Year 2000
Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. The
Company has recently commenced a program, to be substantially completed by early
calendar 1999, to review the Year 2000 compliance status of the software and
systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreements
to modify or replace all non-compliant products. The Company has contacted its
major suppliers to determine whether the products obtained by the Company from
such vendors are Year 2000 compliant. To date, the Company has not received
responses from a majority of such suppliers. The Company's suppliers are under
no contractual obligation to provide such information to the Company. In
addition, the Company is considering converting certain of its software and
systems to commercial products that are known to be Year 2000 compliant.
Implementation of software products of third parties, however, will require the
dedication of substantial administrative and management information resources,
the assistance of consulting personnel from third party software vendors and the
training of the Company's personnel using such systems. Based on the information
available to date, the Company believes it will be able to complete its Year
2000 compliance review and make necessary modifications prior to early calendar
1999. Software or systems that are deemed critical to the Company's business are
scheduled to be Year 2000 compliant by early calendar 1999. Nevertheless,
particularly to the extent the Company is relying on the products of other
vendors to resolve Year 2000 issues, there can be no assurances that the Company
will not experience delays in implementing such products. If key systems, or a
significant number of systems were to fail as a result of Year 2000 problems, or
the Company were to experience delays implementing Year 2000 compliant software
products, the Company could incur substantial costs and disruption of its
business, which would potentially have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company in its ordinary course of business tests and evaluates its own
software products. The Company's proprietary software products that operate its
Arrhythmia Mapping System and Radiofrequency Generator System are designed for
use with certain hardware developed by other vendors. The Company believes that
its software products are generally Year 2000 compliant, meaning that the use or
occurrence of dates on or after January 1, 2000 will not materially affect the
performance of the Company's software products with respect to four digit date
dependent data or the ability of such products to correctly create, store,
process and output information related to such data. To the extent the Company's
software products are not fully Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary software routines and
codes necessary for the accurate calculation, display, storage and manipula-
47
<PAGE> 48
tion of data involving dates. Furthermore, these systems will be used in various
operating environments once installed at customer sites. The Company believes
its products are in Year 2000 compliance. In certain circumstances, the Company
has warranted that the use or occurrence of dates on or after January 1, 2000
will not adversely affect the performance of the Company's products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.
To date the Company has not identified a complete and separate budget for
investigating and remedying issues related to Year 2000 compliance whether
involving the Company's own software products or the software or systems used in
its internal operations. The Company has incurred costs and expects to incur
approximately $20,000 in connection with the procurement of software upgrades,
if required, and the implementation of new Year 2000 compliant information
systems. There can be no assurance that the Company's resources spent on
investigating and remedying Year 2000 compliance issues will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Impact of Introduction of Single European Currency (Euro)
The introduction of the Single European Currency (Euro) is scheduled for
initial implementation as of January 1, 1999 with a transition period through to
January 1, 2002. The Company expects that the introduction and use of the Euro
will not have a material adverse impact on the Company's internal systems or
will result in increased costs related to its European business activities.
Furthermore, the Company does not believe that the introduction of the Euro will
have a material adverse effect on its business, financial condition and results
of operations.
Issuance of Preferred Stock Could Delay or Prevent Corporate Takeover
The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. To date, the Board of Directors has designated 30,000 shares
as Series A Participating Preferred Stock in connection with the Company's
Stockholder Rights Plan. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or otherwise adversely affecting the rights of the
holders of Common Stock.
On April 22, 1997, pursuant to a Preferred Shares Rights Agreement (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A. (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right to purchase 1/1000th a share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common
Stock of the Company (a "Right"). Each Right entitles the registered holder to
purchase from the Company 1/1000th a share of Series A Preferred at an exercise
price of $125 (the "Purchase Price"), subject to adjustment. The Rights approved
by the Board are designed to protect and maximize the value of the outstanding
equity interests in the Company in the event of an unsolicited attempt by an
acquirer to take over the Company, in a manner or on terms not approved by the
Board of Directors. The Rights have been declared by the Board in order to deter
coercive tactics, including a gradual accumulation of shares in the open market
of a 15% or greater position to be followed by a merger or a partial or two tier
tender offer that does not treat all stockholders equally. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors. However, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
48
<PAGE> 49
Potential Volatility of Stock Price
The market price of shares of Common Stock, like that of the common stock
of many medical products and high technology companies, has in the past been,
and is likely in the future to continue to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new commercial products by the Company or competitors, government
regulation, changes in the current structure of the health care financing and
payment systems, developments in or disputes regarding patent or other
proprietary rights, release of reports by securities analysts, changes in
securities analysts recommendations, economic and other external factors and
general market conditions may have a significant effect on the market price of
the Common Stock. Also, at some future time, the Company's revenues and results
of operations may be below the expectations of securities analysts or investors,
resulting in significant fluctuations in the market price of the Company's
Common Stock. Moreover, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market prices for medical products and high technology companies and which have
often been unrelated to the operating performance of such companies. These broad
market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's Common Stock.
In the past, following periods of volatility in the market price of a company's
stock, securities class action litigation has occurred against the issuing
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. Any adverse determination in such litigation could also
subject the Company to significant liabilities.
Absence of Dividends
The Company has not paid any cash dividends since inception and does not
anticipate paying cash dividends in the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the report of independent auditors
appear on pages F-1 through F-22 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
49
<PAGE> 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held November 30, 1998, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive officers
is set forth in Part I of this Report. The information required by this item
concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Proxy Statement in the table labeled
"Principal Stockholders."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation" and "Compensation of Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement in the table labeled "Principal
Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Employment Contracts and Change-of-Control Arrangements,"
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions With Management" contained in the Proxy Statement.
50
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are filed as part of this Report:
<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>
(a)(2) Financial Statement Schedules
II -- Valuation and Qualifying Accounts....................S-1
All other Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(a)(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1(1) Restated Certificate of Incorporation of the Registrant.
3.2(1) Bylaws of Registrant.
4.1(2) Preferred Share Rights Agreement, dated April 22, 1997
between the Registrant and Norwest Bank Minnesota, N.A.
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2(3) 1991 Stock Plan and form of Stock Option Agreement
thereunder.
10.3(3) 1996 Director Option Plan and form of Director Stock Option
Agreement thereunder.
10.4(3) 1996 Employee Stock Purchase Plan and forms of agreement
thereunder.
10.5+(1) OEM Agreement between Registrant and Liebel-Flarsheim
Company dated June 22, 1994.
10.6+(1) License Agreement between Registrant and BSI Corporation
dated October 21, 1994.
10.7(1) Loan Agreement between the Registrant and Dideco S.p.A.
dated June 23, 1994, as amended by Amendment to Loan
Agreement dated June 22, 1995 and Amendment No. 2 to Loan
Agreement dated April 10, 1996.
10.7.1 Distributor Termination Agreement between the Registrant and
Dideco S.p.A. dated May 26, 1998.
10.8+(1) Exclusive License Agreement dated May 24, 1995.
10.9(1) Manufacturing and Supply Agreement between the Registrant
and Arrow International Inc. dated March 8, 1995.
10.10(1) Exclusive International Distributor Agreement between the
Registrant and Arrow International dated March 8, 1995.
10.11(1) Lease dated June 25, 1993 between the Registrant and Brock
Properties.
10.11.1(4) Lease Modification Agreement effective as of February 24,
1998 between the Registrant and Brock Properties.
10.12(1) Master Lease Agreement dated December 1, 1993 between the
Registrant and Linc Capital Management Services, Ltd., as
amended.
10.12.1(5) Amendment No. 5 to Master Lease Agreement dated December 1,
1993 between the Registrant and Linc Capital Management
Services, Ltd.
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13(1) Shareholder Rights Agreement, as amended to date, dated June
13, 1995, between the Registrant and certain holders of the
Company's securities.
10.14(1) Consulting Agreement dated June 1, 1995 between the
Registrant and Mir Imran.
10.15 1998 Employee Stock Purchase Plan.
10.16 Loan and Security Agreement dated May 15, 1998 between the
Registrant and Silicon Valley Bank.
10.17 Lease Agreement dated April 27, 1998 between the Registrant
and Lincoln Property Company Management Services, Inc. for
the premises located at 824 W. California Ave., Sunnyvale,
California 94086.
10.18 Agreement dated April 18, 1996 between the Registrant and
Earle Canty.
10.18.1 Amendment No. 1 to Agreement dated April 18, 1996 between
the Registrant and Earle Canty.
10.19 Promissory Note dated April 18, 1996 between the Registrant
and Earle Canty.
10.19.1 Amendment No. 1 dated August 31, 1998 to Loan Agreement
dated April 18, 1996 between the Registrant and Earle Canty.
10.20 Promissory Note dated December 23, 1996 between the
Registrant and Earle Canty.
10.20.1 Amendment No. 1 dated August 31, 1998 to Loan Agreement
dated December 23, 1996 between the Registrant and Earle
Canty.
10.21 Consulting Agreement dated September 1, 1998 between the
Registrant and Earle Canty.
10.22 1998 Nonstatutory Option Plan and form of agreement
thereunder.
22.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 53).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 333-3616) as declared effective by the
Commission on June 12, 1996.
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-A (Reg. No. 000-28372) as declared
effective by the Commission on May 22, 1997.
(3) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 333-38049) as declared
effective by the Commission on October 16, 1997.
(4) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
(5) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ended June 30, 1998.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
52
<PAGE> 53
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 Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CARDIAC PATHWAYS CORPORATION
By: /s/ WILLIAM N. STARLING
------------------------------------
William N. Starling
President, Chief Executive Officer
and Director
Date: September 25, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William N. Starling and David W. Gryska,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or their substitute or substitutes, or any of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM N. STARLING President, Chief Executive September 25, 1998
- ----------------------------------------------------- Officer and Director
(William N. Starling) (Principal Executive
Officer)
/s/ DAVID W. GRYSKA Vice President, Finance and September 25, 1998
- ----------------------------------------------------- Chief Financial Officer
(David W. Gryska) (Principal Financial and
Accounting Officer)
/s/ MICHAEL L. EAGLE Director September 25, 1998
- -----------------------------------------------------
(Michael L. Eagle)
/s/ THOMAS J. FOGARTY, M.D. Director September 25, 1998
- -----------------------------------------------------
(Thomas J. Fogarty, M.D.)
/s/ GLENDON E. FRENCH Director September 25, 1998
- -----------------------------------------------------
(Glendon E. French)
/s/ JOSEPH P. ILVENTO, M.D. Director September 25, 1998
- -----------------------------------------------------
(Joseph P. Ilvento, M.D.)
/s/ LOUIS G. LANGE, M.D., PH.D. Director September 25, 1998
- -----------------------------------------------------
(Louis G. Lange, M.D., Ph.D.
</TABLE>
53
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997.... F-3
Consolidated Statements of Operations for the years ended
June 30, 1998, 1997 and 1996.............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1998, 1997 and 1996.................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997, and 1996............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardiac Pathways Corporation
We have audited the accompanying consolidated balance sheets of Cardiac
Pathways Corporation as of June 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cardiac
Pathways Corporation at June 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1998, 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 aspects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
July 28, 1998
F-2
<PAGE> 56
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,268,877 $ 5,091,426
Short-term investments.................................... 17,248,500 36,475,534
Accounts receivable, net of allowance for doubtful
accounts of $16,500 at June 30, 1998 and $9,500 at June
30, 1997............................................... 523,455 168,828
Receivable from related party............................. -- 1,552
Inventories............................................... 668,042 420,005
Prepaid expenses.......................................... 317,549 411,758
Other current assets...................................... 526,193 528,528
----------- -----------
Total current assets.............................. 26,552,616 43,097,631
Property and equipment, net................................. 3,632,488 3,140,849
Notes receivable from related parties....................... 260,477 319,491
Deposits and other assets................................... 488,996 97,283
----------- -----------
$30,934,577 $46,655,254
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,079,772 $ 788,384
Accrued compensation and related benefits................. 601,307 462,814
Accrued clinical expenses................................. 1,144,556 696,106
Other accrued expenses.................................... 654,670 870,242
Current obligations under capital leases.................. 554,806 768,813
Current portion of long-term debt......................... 166,667 --
----------- -----------
Total current liabilities......................... 4,201,778 3,586,359
Long-term obligations under capital leases.................. 483,586 472,588
Deferred royalty income..................................... 2,930,862 2,950,473
Long-term debt, less current portion........................ 5,833,333 --
Note payable................................................ -- 4,500,000
Interest payable on note.................................... -- 1,153,625
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized and none issued and outstanding at June 30,
1998 and 1997.......................................... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 9,795,974 shares issued and outstanding at
June 30, 1998 and 9,523,540 at June 30, 1997........... 9,796 9,524
Additional paid-in capital................................ 79,783,779 79,089,193
Receivables from stockholders............................. (385,000) (420,000)
Accumulated deficit....................................... (61,417,629) (43,918,832)
Deferred compensation..................................... (505,928) (767,676)
----------- -----------
Total stockholders' equity........................ 17,485,018 33,992,209
----------- -----------
$30,934,577 $46,655,254
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 57
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net sales......................................... $ 2,419,816 $ 2,408,773 $ 1,684,107
Cost of goods sold................................ 2,827,789 2,507,375 2,407,655
------------ ------------ -----------
Gross margin (deficit)............................ (407,973) (98,602) (723,548)
Operating expenses:
Research and development..................... 14,353,393 11,756,260 6,819,647
Selling, general and administrative.......... 4,091,637 3,147,311 1,981,309
------------ ------------ -----------
Total operating expenses................ 18,445,030 14,903,571 8,800,956
------------ ------------ -----------
Loss from operations.............................. (18,853,003) (15,002,173) (9,524,504)
Other income (expense):
Interest income................................. 1,857,981 2,624,055 700,934
Interest expense................................ (578,931) (523,038) (568,802)
Other, net...................................... 75,156 35,562 23,208
------------ ------------ -----------
Total other income (expense)............ 1,354,206 2,136,579 155,340
------------ ------------ -----------
Net loss.......................................... $(17,498,797) $(12,865,594) $(9,369,164)
============ ============ ===========
Net loss per share - basic and diluted............ $ (1.81) $ (1.37) $ (6.36)
============ ============ ===========
Shares used in computing net loss per
share -- basic and diluted...................... 9,648,000 9,379,000 1,472,000
============ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 58
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLES
-------------------- ------------------ PAID-IN FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT
---------- ------- --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995.......... 5,149,702 $ 5,150 925,185 $ 925 $29,129,381 $ (11,000) $(21,684,074)
Issuance of Series F Convertible
Preferred Stock, less $997 in
issuance costs................... 300,000 300 -- -- 4,498,702 -- --
Issuance of Series F Preferred
Stock Warrants................... -- -- -- -- 33,000 -- --
Issuance of nonqualified stock
options for services............. -- -- -- -- 34,131 -- --
Exercise of warrant to purchase
Common Stock..................... -- -- 6,667 7 57,993 -- --
Exercise of options to purchase
Common Stock..................... -- -- 387,778 388 576,887 (395,000) --
Conversion of Preferred Stock to
Common Stock..................... (5,449,702) (5,450) 5,449,702 5,450 -- -- --
Issuance of Common Stock in
connection with initial public
offering, less $1,037,725 in
issuance costs................... -- -- 2,500,000 2,500 43,134,775 -- --
Deferred compensation............. -- -- -- -- 191,765 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- (9,369,164)
---------- ------- --------- ------ ----------- --------- ------------
Balance at June 30, 1996.......... -- -- 9,269,332 9,270 77,656,634 (406,000) (31,053,238)
Issuance of nonqualified stock
options for services............. -- -- -- -- 17,750 -- --
Exercise of options to purchase
Common Stock..................... -- -- 216,642 217 305,736 (14,000) --
Issuance of Common Stock under
employee stock purchase plan..... -- -- 37,566 37 253,573 -- --
Deferred compensation............. -- -- -- -- 855,500 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- (12,865,594)
---------- ------- --------- ------ ----------- --------- ------------
Balance at June 30, 1997.......... -- -- 9,523,540 9,524 79,089,193 (420,000) (43,918,832)
Issuance of Common Stock
Warrants......................... -- -- -- -- 60,351 -- --
Issuance of nonqualified stock
options for services............. -- -- -- -- 65,121 -- --
Exercise of options to purchase
Common Stock..................... -- -- 208,881 209 225,335 35,000 --
Issuance of Common Stock under
employee stock purchase plan..... -- -- 63,553 63 343,779 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- (17,498,797)
---------- ------- --------- ------ ----------- --------- ------------
Balance at June 30, 1998.......... -- $ -- 9,795,974 $9,796 $79,783,779 $(385,000) $(61,417,629)
========== ======= ========= ====== =========== ========= ============
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------ -------------
<S> <C> <C>
Balance at June 30, 1995.......... $ -- $ 7,440,382
Issuance of Series F Convertible
Preferred Stock, less $997 in
issuance costs................... -- 4,499,002
Issuance of Series F Preferred
Stock Warrants................... -- 33,000
Issuance of nonqualified stock
options for services............. -- 34,131
Exercise of warrant to purchase
Common Stock..................... -- 58,000
Exercise of options to purchase
Common Stock..................... -- 182,275
Conversion of Preferred Stock to
Common Stock..................... -- --
Issuance of Common Stock in
connection with initial public
offering, less $1,037,725 in
issuance costs................... -- 43,137,275
Deferred compensation............. (191,765) --
Amortization of deferred
compensation..................... 35,994 35,994
Net loss.......................... -- (9,369,164)
--------- ------------
Balance at June 30, 1996.......... (155,771) 46,050,895
Issuance of nonqualified stock
options for services............. -- 17,750
Exercise of options to purchase
Common Stock..................... -- 291,953
Issuance of Common Stock under
employee stock purchase plan..... -- 253,610
Deferred compensation............. (855,500) --
Amortization of deferred
compensation..................... 243,595 243,595
Net loss.......................... -- (12,865,594)
--------- ------------
Balance at June 30, 1997.......... (767,676) 33,992,209
Issuance of Common Stock
Warrants......................... -- 60,351
Issuance of nonqualified stock
options for services............. -- 65,121
Exercise of options to purchase
Common Stock..................... -- 260,544
Issuance of Common Stock under
employee stock purchase plan..... -- 343,842
Amortization of deferred
compensation..................... 261,748 261,748
Net loss.......................... -- (17,498,797)
--------- ------------
Balance at June 30, 1998.......... $(505,928) $ 17,485,018
========= ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 59
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................... $(17,498,797) $(12,865,594) $ (9,369,164)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 1,274,226 1,260,546 818,072
Amortization of deferred royalty income... (19,611) (49,527) --
Amortization of deferred compensation..... 261,748 243,595 35,994
(Gain) loss on disposal of property and
equipment.............................. (33,678) -- 12,860
Issuance of common stock warrants......... 60,351 -- --
Issuance of preferred stock warrants...... -- -- 33,000
Issuance of nonqualified stock options for
services............................... 65,121 17,750 34,131
Changes in operating assets and liabilities:
Accounts receivable............................ (354,627) 230,169 (348,126)
Receivable from related party.................. 1,552 20,173 114,075
Inventories.................................... (248,037) (257,489) 49,177
Prepaid expenses............................... 94,209 (177,419) (93,266)
Other current assets........................... 52,335 (188,237) (179,336)
Accounts payable............................... 291,388 276,998 (68,211)
Accrued compensation and related benefits...... 138,493 269,303 94,856
Accrued clinical expenses...................... 448,450 546,102 150,004
Other accrued expenses......................... (215,572) 136,677 252,210
Interest payable on note....................... (1,153,625) 379,204 399,656
Deferred royalty income........................ -- -- 3,000,000
------------ ------------ ------------
Net cash used in operating activities............ (16,836,074) (10,157,749) (5,064,068)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments.............. (25,167,799) (54,509,722) (27,761,202)
Maturities and sales of short-term investments... 44,394,833 41,795,000 10,279,751
Purchase of property and equipment............... (1,170,621) (742,155) (981,344)
Proceeds from disposal of equipment.............. 23,519 -- --
(Increase) decrease in notes receivable.......... 59,014 (57,075) 4,000
(Increase) in deposits and other assets.......... (391,713) (38,095) (47,298)
------------ ------------ ------------
Net cash provided by (used in) investing
activities..................................... 17,747,233 (13,552,047) (18,506,093)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering, net....... -- -- 43,137,275
Principal payments under capital lease
obligations.................................... (838,094) (856,596) (567,081)
Repayment of note payable........................ (4,500,000) -- --
Proceeds from borrowings on line of credit....... 6,000,000 -- --
Proceeds from issuance of preferred stock........ -- -- 4,499,002
Proceeds from issuance of common stock........... 569,386 559,563 250,275
Notes receivable from stockholders............... 35,000 (14,000) (10,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 1,266,292 (311,033) 47,309,471
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... 2,177,451 (24,020,829) 23,739,310
Cash and cash equivalents at beginning of year... 5,091,426 29,112,255 5,372,945
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 7,268,877 $ 5,091,426 $ 29,112,255
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 60
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Cardiac Pathways Corporation, a Delaware corporation (the "Company"),
operates in a single industry segment and designs, develops and manufactures
minimally invasive systems to diagnose and treat cardiac tachyarrhythmias.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Cardiac Pathways B.V., Cardiac
Pathways G.m.b.H. and Cardiac Pathways S.A. (see Note 13). All significant
intercompany accounts and transactions have been eliminated.
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.
Reincorporation and Reverse Stock Split
In March 1996, the Company's Board of Directors authorized the
reincorporation of the Company in the state of Delaware and a 2-for-3 reverse
stock split. The reincorporation was effected in May 1996 following stockholder
approval. In June 1996, the Company completed its initial public offering of
2,500,000 shares of common stock at a price of $19.00 per share, raising net
proceeds of $43,137,000. Each share of the Company's outstanding convertible
preferred stock was automatically converted to a share of common stock during
the initial public offering. Effective upon the closing of the initial public
offering, the Company became authorized to issue 5,000,000 shares of $.001 par
value preferred stock and 30,000,000 shares of $.001 par value common stock (see
Note 4). All par value, share and per share amounts have been retroactively
adjusted to reflect the reverse stock split and the Company's reincorporation.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents and short-term investments approximate fair value. The fair value of
short-term investments was based on quoted market prices.
The carrying amount for the Company's long-term debt approximates fair
value. The fair value of the Company's long-term debt was estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
Concentrations of Credit Risk
The Company is potentially subject to concentrations of credit risk with
respect to its cash investments and trade accounts receivable. The Company
invests its excess cash in a diversified portfolio of investment grade interest
bearing instruments. The Company is exposed to credit risk in the event of
default by the financial institutions or issuers of investments only to the
extent recorded on the balance sheet. To date, the Company has not experienced
any significant losses on its investments.
F-7
<PAGE> 61
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
The Company sells its products to distributors in Japan, China and Europe
and to hospitals in the United States (see Note 10). The Company does not
require collateral and maintains reserves for estimated credit losses. To date,
such losses have been within management's expectations and have not been
significant.
Cash, Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
other liquid investments are classified as short-term investments and consist
primarily of U.S. government agency instruments, corporate obligations and money
market instruments. Management currently classifies the Company's investment
portfolio as held-to-maturity and available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses reported
as a separate component of stockholders' equity. To date, the Company has not
experienced any significant unrealized gains or losses on available-for-sale
securities and, accordingly, no adjustments have been made to stockholders'
equity.
The cost of held-to-maturity securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization of
premiums and accretion of discounts are included in interest income. At June 30,
1998 and 1997, these securities were valued at amortized cost, which
approximates fair value.
The following is a summary of held-to-maturity and available-for-sale
securities at June 30, 1998:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government agency........... $ 2,996,886 $ -- $ (1,171) $ 2,995,715
U.S. corporate obligations....... 10,751,614 2,221 (8,968) 10,744,867
Available-for-sale:
Auction rate preferred stock..... 3,500,000 -- -- 3,500,000
----------- ------ -------- -----------
17,248,500 2,221 (10,139) 17,240,582
Amounts classified as cash
equivalents...................... -- -- -- --
----------- ------ -------- -----------
Amounts included in short-term
investments...................... $17,248,500 $2,221 $(10,139) $17,240,582
=========== ====== ======== ===========
</TABLE>
There were no significant realized gains or losses as a result of the
maturity or sale of securities for the year ended June 30, 1998. The cost of
securities sold is based on the specific identification method. Held-to-
maturity securities at June 30, 1998 mature at various dates through October
1999.
F-8
<PAGE> 62
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
The following is a summary of held-to-maturity and available-for-sale
securities at June 30, 1997:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION COST GAINS LOSSES FAIR VALUE
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. government agency........... $15,485,479 $ 1,495 $ (9,079) $15,477,895
U.S. corporate obligations....... 20,329,767 12,511 (10,168) 20,332,110
Available-for-sale:
Auction rate preferred stock..... 2,100,000 -- -- 2,100,000
U.S corporate obligations........ 1,055,206 -- (1,626) 1,053,580
----------- ------- -------- -----------
38,970,452 14,006 (20,873) 38,963,585
Amounts classified as cash
equivalents...................... 2,494,918 139 -- 2,495,057
----------- ------- -------- -----------
Amounts included in short-term
investments...................... $36,475,534 $13,867 $(20,873) $36,468,528
=========== ======= ======== ===========
</TABLE>
There were no realized gains or losses as a result of the maturity or sale
of securities for the year ended June 30, 1997.
Inventory
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials.......................................... $432,867 $252,349
Work-in-process........................................ 123,052 26,929
Finished goods......................................... 112,123 140,727
-------- --------
$668,042 $420,005
======== ========
</TABLE>
Property and Equipment
Property and equipment, including equipment under capital leases, are
carried at cost less accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over estimated useful
lives of three to five years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the remaining term of the lease. Depreciation expense includes amortization
of capital leases and leasehold improvements.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Property and equipment:
Equipment........................................... $5,626,967 $4,799,030
Leasehold improvements.............................. 348,610 274,307
Equipment-in-process................................ 1,523,411 1,076,157
---------- ----------
7,498,988 6,149,494
Less accumulated depreciation and amortization...... 3,866,500 3,008,645
---------- ----------
$3,632,488 $3,140,849
========== ==========
</TABLE>
F-9
<PAGE> 63
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
Revenue Recognition
Revenue from disposable products is recognized at the time of shipment.
Revenue from equipment is recognized upon shipment and the completion of certain
installation and acceptance criteria.
Product Warranties
The Company warrants its equipment for a period of one year. The Company
provides for estimated warranty costs concurrent with the recognition of
revenue.
Capitalized Software
The Company capitalizes internally generated software development costs in
accordance with Statement of Financial Accounting Standards No. 86 (FAS 86),
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility for the product. At June 30, 1998,
the Company had $233,000 of capitalized software development costs. There were
no capitalized software development costs at June 30, 1997. The Company
amortizes capitalized amounts upon commercial release of the product on a
straight-line basis over the estimated economic lives. There was no capitalized
software amortization expense during the years ended June 30, 1998, 1997 and
1996.
Royalty Income
At June 30, 1998 and 1997, the Company had $2,930,862 and $2,950,473 of
deferred royalty income, respectively, related to one of its diagnostic catheter
systems (see Note 9). Income earned from this royalty agreement is recorded as a
component of net sales.
Research and Development Costs
Research and development costs, which include clinical and certain
regulatory costs, are charged to expense as incurred.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Monetary assets and liabilities denominated in foreign currencies are
remeasured at the fiscal year-end exchange rate. Inventory, property and other
nonmonetary assets and liabilities including related revenues, expenses, gains
and losses are remeasured using historical exchange rates during the month in
which the transactions occurred. Adjustments resulting from these remeasurements
are included in the results of operations and have been immaterial to date.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (FAS 128), "Earnings per Share," which
the Company adopted on December 31, 1997 pursuant to the requirements of FAS
128. The adoption of FAS 128 changed the method used to compute earnings per
share and required restatement of all prior periods. Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options
and warrants is excluded. In addition, in February 1998, the Securities and
Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 98,
"Earnings per Share" (SAB 98), which affected the treatment of certain stock
options, warrants and convertible preferred stock ("cheap stock") issued at
prices substantially below the public offering price during the twelve-month
period prior to the filing of the initial public offering. Upon the adoption of
FAS 128,
F-10
<PAGE> 64
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
the SEC Staff does not generally believe that such stock options, warrants and
convertible preferred stock should be treated as outstanding for all reporting
periods. Earnings per share amounts presented have been restated to conform to
the requirements of FAS 128 and SAB 98.
Basic and dilutive historical net loss per share is computed using the
weighted average number of shares of common stock outstanding. Potentially
dilutive shares from stock options and warrants are excluded from the
computation as their effect is antidilutive. The adoption of FAS 128 did not
have a material impact on the Company's reported basic and diluted net loss per
share due to the exclusion of antidilutive options and warrants from the
calculations in periods when the Company incurred a net loss, which occurred in
all periods reported herein. Net loss per share, as restated, reflects the
reduction in the weighted average shares outstanding in accordance with the
adoption of SAB 98 resulting in an increase in reported net loss per share for
fiscal 1996 from $3.95 to $6.36.
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that automatically converted to common stock upon completion of the
Company's initial public offering (using the if-converted method) from the
original date of issuance. The adoption of SAB 98 resulted in an increase in
reported pro forma net loss per share for fiscal 1996 from $1.33 to $1.44.
The following table sets forth the computation of net loss per share and
pro forma net loss per share:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Numerator for basic and diluted and pro
forma basic and diluted net loss per
share:
Net loss............................. $(17,498,797) $(12,865,594) $(9,369,164)
Denominator:
Denominator for basic and diluted
net loss per share.............. 9,648,000 9,379,000 1,472,000
============ ============
Convertible preferred shares....... 5,037,000
-----------
Denominator for pro forma basic and
diluted net loss per share...... 6,509,000
===========
Basic and diluted net loss per share.... $ (1.81) $ (1.37) $ (6.36)
============ ============ ===========
Pro forma basic and diluted net loss per
share................................ $ (1.44)
===========
</TABLE>
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements using
the intrinsic-value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and accordingly, has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (FAS 123), "Accounting for Stock-Based Compensation." These provisions
require the Company to disclose pro forma net loss and net loss per share
amounts as if compensation expense related to certain stock awards were
recognized based on the fair value accounting rules under FAS 123 (see Note 4).
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income" which requires the reporting and presentation of comprehensive income
and its components in the financial statements. Comprehensive income reflects
certain items not currently reported in measuring net income, such as changes in
value of available-for-sale securities and foreign currency translation
adjustments. The Company does not expect the adoption of
F-11
<PAGE> 65
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
FAS 130 to have a material effect on its financial statements. FAS 130 will
become effective for the Company's year ending June 30, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of
an Enterprise and Related Information" which supersedes the current segment
reporting requirements of Statement of Financial Accounting Standards No. 14
(FAS 14), "Financial Reporting for Segments of a Business Enterprise," as
amended. FAS 131 requires the reporting of certain financial and other
disclosures related to the Company's operating segments which are identified
using a "management approach." Operating segments are revenue-producing
components of the business for which separate financial information is produced
internally and are subject to evaluation by the chief operating decision maker
in the resource allocation process. FAS 131 will become effective for the
Company's year ending June 30, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
1999. The Company has not in the past and does not anticipate in the future
using derivative instruments, and the Company does not expect that the adoption
of FAS 133 will have a significant impact on its financial condition or results
of operations.
2. DEBT
In May 1998, the Company obtained a term loan credit facility of $8,000,000
from a commercial bank. The loan agreement provides for an initial advance of
$6,000,000 available for the repayment of a note payable and related accrued
interest due to Sorin Biomedical (described below) with the remaining $2,000,000
available for general corporate purposes. Advances can be made to the Company
during a 12-month non-revolving drawdown period that expires in May 1999.
Borrowings under the credit facility bear floating interest at the bank's prime
rate plus 1.25% (9.75% at June 30, 1998) and the Company can elect a fixed
interest rate option at the end of the 12-month drawdown period. Interest
payments are due monthly following commencement of each advance and the
outstanding balance of all borrowings under the credit facility will be fully
amortized over the 36-month period following the end of the drawdown period with
principal and interest payments due monthly. Under the terms of the loan
agreement, all borrowings are collateralized by substantially all of the
Company's assets and the Company must maintain certain financial ratios and
other covenants. At June 30, 1998, the Company had an unused amount of
$2,000,000 under the credit facility that is available for drawdowns through May
1999. Furthermore, the Company was in compliance with all covenants.
In May 1998, the Company utilized $6,000,000 of the term loan credit
facility in order to repay a $4,500,000 note payable and related accrued
interest of approximately $1,500,000 due to Sorin Biomedical. The $4,500,000
note payable bore interest at the prime rate as quoted in The Wall Street
Journal and all principal and accrued interest was due on June 27, 1999. The
early repayment of the note payable was made in connection with the termination
of a product distribution agreement with Sorin.
F-12
<PAGE> 66
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
Principal payments due under the term loan credit facility were as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
1999........................................................ $ 166,667
2000........................................................ 2,000,000
2001........................................................ 2,000,000
2002........................................................ 1,833,333
----------
Total minimum principal payments.................. 6,000,000
Less current portion........................................ 166,667
----------
Long-term portion........................................... $5,833,333
==========
</TABLE>
3. COMMITMENTS
The Company leases facilities and equipment under noncancelable lease
agreements. Future minimum lease payments were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
1999................................................ $ 632,855 $1,021,357
2000................................................ 298,379 816,338
2001................................................ 203,629 763,808
2002................................................ 28,618 741,408
2003................................................ -- 741,408
Thereafter.......................................... -- 247,136
---------- ----------
Total minimum lease payments.............. 1,163,481 $4,331,455
==========
Less amount representing interest................... 125,089
----------
Present value of minimum lease payments............. 1,038,392
Less current portion................................ 554,806
----------
Long-term portion................................... $ 483,586
==========
</TABLE>
The Company leases its facilities under operating lease agreements that
extend through October 2003. Rent expense, net of sublease income, was
approximately, $364,000, $322,000, and $301,000 for the years ended June 30,
1998, 1997 and 1996, respectively. Sublease income for the years ended June 30,
1997 and 1996 was $45,000 and $65,000, respectively. There was no sublease
income for the year ended June 30, 1998. The Company leases certain equipment
under long-term leases, the terms of which qualify as capital leases. Capital
lease obligations are collateralized with leased equipment. At June 30, 1998,
the Company had an unused equipment lease financing facility of $1,365,000 that
expires in July 1999.
The Company's equipment acquired under capital lease arrangements and
related accumulated amortization are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Equipment at cost................................... $3,792,000 $3,157,000
Less accumulated amortization....................... 2,747,000 1,779,000
---------- ----------
$1,045,000 $1,378,000
========== ==========
</TABLE>
F-13
<PAGE> 67
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
At June 30, 1998, the Company had approximately $322,000 in noncancelable
commitments with suppliers to provide components in the normal course of
business.
4. STOCKHOLDERS' EQUITY
Common Stock
The Company is authorized to issue 30,000,000 shares of common stock, $.001
par value per share, of which a total of 9,795,974 and 9,523,540 shares were
outstanding at June 30, 1998 and 1997, respectively. In June 1996, the Company
completed its initial public offering of 2,500,000 shares of common stock,
raising net proceeds of approximately $43,137,000. Upon completion of the
offering, all of the preferred stock outstanding automatically converted into
5,449,702 shares of common stock.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock, $.001 par value per share. Preferred stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the rights, preferences, privileges, and restrictions granted to and
imposed upon any wholly unissued series of preferred stock and to fix the number
of shares of any series of preferred stock and the designation of any such
series without any vote or action by the Company's stockholders. At June 30,
1998 and 1997, the Company had no shares of preferred stock outstanding.
Stock Warrants
The Company has issued warrants to purchase common stock in connection with
various financing and lease agreements. The fair value of warrants issued in
connection with lease transactions was expensed. The following warrants to
purchase common stock were outstanding at June 30, 1998:
<TABLE>
<CAPTION>
RESERVED FOR PRICE PER AGGREGATE EXPIRATION
SHARES ISSUANCE SHARE PRICE DATE
- --------------------- ------------ --------- ---------- ----------
<C> <C> <C> <C> <S>
35,170 35,170 $ 8.53 $ 300,000 July 2009
19,999 19,999 8.70 173,991 June 2001
76,972 76,972 13.125 1,010,258 June 2001
11,000 11,000 15.00 165,000 June 2001
</TABLE>
Stock Option Plans
In July 1991, the Board of Directors of the Company approved the Company's
1991 Stock Option Plan (the "Plan"). The Plan provides for the issuance of
incentive and nonstatutory options to employees, officers, and consultants of
the Company to acquire common stock of the Company. The Plan, as amended,
provides for the granting of options for up to 2,267,030 shares of common stock
of the Company. The exercise price of incentive stock options granted under the
Plan may not be less than 100% (110% in the case of any options granted to a
person who owns more than 10% of the total combined voting power of all classes
of stock of the Company) of the fair market value of the common stock subject to
the option on the date of grant. Options granted under the Plan generally become
exercisable over a four-year period and generally expire ten years from the date
of grant. Expired options become available under the Plan. At June 30, 1998, a
total of 1,303,669 shares of common stock have been reserved for issuance under
the Plan (see Note 13).
During fiscal 1998, one officer of the Company was granted a nonstatutory
option outside of the Plan, to purchase 43,683 shares of the Company's Common
Stock at an exercise of $6.75 per share. The option was subject to the same
vesting schedule as that of the Plan.
F-14
<PAGE> 68
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
In September 1996 and April 1997, the Board of Directors authorized the
exchange of certain stock option grants at the then fair market values of the
Company's common stock. These exchanges were voluntary and open to all employees
holding options subsequent to certain dates. In September 1996, options to
purchase 28,651 shares of common stock at prices ranging from $12.75 to $15.00
per share were exchanged for options to purchase a like number of shares at
$12.00 per share. Under the September 1996 exchange, all previous vesting of the
related options was forfeited. In April 1997, options to purchase 154,628 shares
of common stock at prices ranging from $8.50 to $17.00 per share were exchanged
for options to purchase a like number of shares at $6.63 per share. Vesting
terms were not modified under the April 1997 exchange, however, no vested
options related to the exchange were exercisable for a period of 180 days
following the exchange.
During the years ended June 30, 1997 and 1996, the Company recorded
deferred compensation of approximately $856,000 and $192,000, respectively,
representing the difference between the grant price and the fair value of the
Company's common stock for certain options granted during those years. The
deferred compensation is amortized over the period for which the related stock
options become exercisable, which is generally four years. Amortization of
deferred compensation was approximately $262,000, $244,000 and $36,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
In April 1996, the Company adopted the 1996 Director Option Plan (the
"Director Plan"). The Director Plan provides for the granting of options for up
to 40,000 shares of common stock of the Company. The option grants under the
Director Plan are automatic and non-discretionary, and the exercise price of the
options is 100% of the fair market value of the common stock on the grant date.
The Director Plan provides for an initial grant of options to purchase 13,000
shares of common stock to each new non-employee director. In addition, each
non-employee director will automatically be granted an option to purchase 700
shares of common stock annually. Options granted under the Director Plan become
exercisable over a four-year period and expire ten years from the date of grant.
At June 30, 1998, total of 40,000 shares of common stock has been reserved for
issuance under the Director Plan.
The fair value of option grants related to the above plans is estimated on
the date of grant using the Black-Scholes pricing model with the following
assumptions for the years ended June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate............ 5.75% 6.02% 6.02%
Expected life...................... 3.73 years 3.49 years 3.49 years
Expected volatility................ 76.20% 72.62% 72.62%
Dividend yield..................... -- -- --
</TABLE>
F-15
<PAGE> 69
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
The following is a summary of activity under the stock option plans:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at July 1..... 1,027,762 $3.52 1,045,172 $1.91 1,093,884 $0.85
Granted................. 466,687 $7.75 615,917 $8.16 379,408 $4.52
Exercised............... (208,881) $1.08 (216,642) $1.41 (384,446) $1.49
Canceled................ (72,874) $6.93 (416,685) $7.43 (43,674) $1.96
--------- --------- ---------
Outstanding at June 30.... 1,212,694 $5.46 1,027,762 $3.52 1,045,172 $1.91
========= ========= =========
Exercisable at June 30.... 532,043 $3.13 454,390 $1.12 400,194 $0.94
Weighted average fair
value
of options granted...... $4.42 $4.70 $2.22
Shares available for
grant................... 130,975 124,788 304,020
</TABLE>
The following table summarizes information for outstanding and exercisable
options at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.23 - $ 1.50 382,643 5.88 $ 1.13 349,063 $ 1.10
$2.25 - $ 6.63 385,068 8.52 $ 6.39 143,441 $ 6.32
$6.75 - $ 8.50 382,694 9.51 $ 7.78 29,429 $ 8.08
$8.63 - $15.00 62,289 8.89 $10.33 10,110 $13.45
- --------------------- --------- ---- ------ ------- ------
$ .23 - $15.00 1,212,694 8.07 $ 5.46 532,043 $ 3.13
</TABLE>
Employee Stock Purchase Plan
In April 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan, as amended, provides for the purchase
by employees of up to 123,000 shares of the Company's common stock. The Purchase
Plan provides for consecutive, overlapping 24-month offering periods. Each
offering period consists of four semi-annual purchase periods and is designed to
allow eligible employees to purchase common stock through payroll deductions at
a price equal to 85% of the lesser of the fair market value of the Company's
common stock on the first day of the applicable offering period or the last day
of the respective purchase period. During the years ended June 30, 1998 and
1997, a total of 63,553 and 37,566 shares were purchased, respectively, under
the Purchase Plan at prices ranging from $5.31 to $9.35 per share. There were no
shares purchased during the year ended June 30, 1996. At June 30, 1998, there
were 21,881 shares reserved for issuance under the Purchase Plan (see Note 13).
F-16
<PAGE> 70
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
The estimated fair value of purchase rights under the Company's Employee
Stock Purchase Plan is determined using the Black-Scholes pricing model with the
following assumptions for the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Risk-free interest rate............................... 5.54% 5.41%
Expected life......................................... 6 months 6 months
Expected volatility................................... 76.20% 72.62%
Dividend yield........................................ -- --
</TABLE>
For the years ended June 30, 1998 and 1997, the weighted average fair value
of purchase rights under the plan was $2.78 and $3.87, respectively.
Pro Forma Compensation Expense
The Company has adopted the disclosure-only provisions of FAS 123, and
accordingly, no compensation expense has been recorded for stock awards based on
the fair value method for the years ended June 30, 1998, 1997 and 1996. Had
compensation expense for the Company's stock plans been determined based on the
fair value methodology, the Company's net loss and net loss per share would have
been reported as the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net loss -- as reported........... $(17,498,797) $(12,865,594) $(9,369,164)
Net loss -- pro forma............. $(19,094,636) $(14,094,538) $(9,636,827)
Net loss per share -- as
reported........................ $ (1.81) $ (1.37) $ (6.36)
Net loss per share -- pro forma... $ (1.98) $ (1.50) $ (6.55)
</TABLE>
The above pro forma effects on the results of operations may not be
representative of the effects for future years as option grants typically vest
over several years and additional options are generally granted each year.
Furthermore, as FAS 123 applies only to options granted after July 1, 1995, the
pro forma effect will not be fully reflected until the year ended June 30, 1999.
Stockholder Rights Plan
In April 1997, the Board of Directors approved a stockholder rights plan
and declared a dividend of one preferred share purchase right (a "Right") for
each outstanding share of common stock of the Company to holders of record as of
April 30, 1997. Each Right will entitle stockholders to purchase 1/1000 of a
share of Series A participating preferred stock of the Company (a newly
designated series of preferred stock for which each 1/1000 of a share has
economic attributes and voting rights equivalent to those of one share of the
Company's common stock) at an exercise price of $125. The Rights only become
exercisable in certain limited circumstances involving acquisitions of or tender
offers for 15% or more of the Company's capital stock by another person or group
of persons. For a limited period of time after the announcement of any such
acquisition or offer, the Rights are redeemable at a price of $.01 per Right.
After becoming exercisable, each Right entitles its holder to purchase for $125
an amount of common stock of the Company, or in certain circumstances,
securities of the acquirer, having a then current market value equal to two
times the exercise price of the Right. The Rights expire on April 21, 2007.
F-17
<PAGE> 71
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
5. INCOME TAXES
Due to operating losses and the inability to recognize an income tax
benefit therefrom, there was no provision for income taxes for the years ended
June 30, 1998, 1997 and 1996.
As of June 30, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $55,600,000 and
$11,900,000, respectively. In addition, the Company had research credit
carryforwards of approximately $3,300,000. The net operating loss and credit
carryforwards described above will expire at various dates beginning in the
years 1998 through 2013, if not utilized. Utilization of the net operating
losses and credits may be subject to a substantial annual limitation due to the
ownership change provisions of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating losses and credits
before utilization. The deferred tax asset for capitalized research costs
relates to certain research and development project costs that were capitalized
for California state tax purposes. These costs were not capitalized on the
balance sheet.
Deferred income taxes reflect the net effects of tax carryforwards and
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 were as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................ $ 19,300,000 $ 13,400,000
Capitalized research costs...................... 2,100,000 1,400,000
Research credit carryforwards................... 2,900,000 2,000,000
Deferred revenue................................ 1,200,000 1,100,000
Other........................................... 1,100,000 800,000
------------ ------------
Subtotal...................................... 26,600,000 18,700,000
Valuation allowance............................. (26,600,000) (18,700,000)
------------ ------------
Total deferred tax asset.............. $ -- $ --
============ ============
</TABLE>
The increase in the valuation allowance was approximately $7,900,000 and
$5,800,000 for years ended June 30, 1998 and 1997, respectively.
6. RISKS DUE TO CONCENTRATIONS
Dependence on Systems
The Company has been engaged primarily in researching, developing, testing
and obtaining regulatory clearances for the catheters and equipment that are
components of the Ventricular Tachycardia Ablation System, Arrhythmia Mapping
System and Atrial Fibrillation Ablation System. The Company believes that these
systems are currently the Company's only significant potential products and
these systems will require additional development, clinical trials and
regulatory approvals before they can be marketed in the United States and
internationally.
There can be no assurance that the Company's development efforts will be
successful or that the systems or any other product developed by the Company
will be safe or effective, approved by appropriate regulatory and reimbursement
authorities, capable of being manufactured in commercial quantities at
acceptable costs or successfully marketed.
F-18
<PAGE> 72
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
Dependence on Key Suppliers
The Company purchases certain key components of its products, including a
computer workstation, a fluid pump, certain integrated circuit components, flex
circuits and biocompatible coatings from sole, single or limited source
suppliers. Any significant component supply delay or interruption could require
the Company to qualify new sources of supply, if available, and could have a
material adverse effect on the Company's ability to manufacture its products.
7. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Capital lease obligations incurred to
acquire equipment....................... $ 635,085 $823,885 $176,818
Issuance of note receivable in connection
with stock option exercise.............. $ -- $ -- $385,000
Cash paid for interest.................... $1,672,205 $143,887 $149,193
</TABLE>
8. NOTES RECEIVABLE
In March 1996, the Company entered into an employment agreement with an
officer of the Company pursuant to which it loaned $385,000 to the officer at an
annual interest rate of 5.88%. The proceeds of the loan were used to exercise a
stock option granted to this officer in January 1996. The loan is due upon the
sale of the shares, or any portion thereof, underlying the option up to an
amount equal to fifty percent (50%) of the proceeds from such sale. The
outstanding balance of the note and accrued interest is due and payable on the
earlier of the termination of the officer's employment, or January 2001. In
December 1996, the Company loaned $197,450 to the officer at an annual interest
rate of 6.40% pursuant to the same employment agreement. The proceeds of the
loan were used to pay certain federal and state income taxes related to the
above stock option exercise. The loan is due upon the sale of the shares, or any
portion thereof, underlying the option up to an amount equal to fifty percent
(50%) of the proceeds from such sale. The outstanding balance of the note and
accrued interest is due and payable on the earlier of the termination of the
officer's employment, or December 2001. In January 1998, the officer repaid to
the Company a portion of the $197,450 note, the outstanding balance of which was
$164,950 at June 30, 1998. In August 1998, the officer resigned from the Company
and became a consultant to the Company pursuant to a consulting agreement. The
terms of the consulting agreement provide for a six-month extension of time
related to the repayment provisions of both notes.
The Company has made loans to employees and an officer in connection with
their relocation to the Company's geographic area. The aggregate outstanding
balance of these loans was $93,000 at June 30, 1998. These full recourse notes,
which are unsecured, may be forgiven at the end of four years and are charged to
expense in some circumstances. In addition, the Company has made full recourse
unsecured loans to a director of the Company in the aggregate amount of $55,000
at June 30, 1998 in connection with the purchase of the Company's stock and
certain federal and state income tax obligations arising therefrom.
9. RELATIONSHIP WITH ARROW INTERNATIONAL, INC.
The Company entered into an agreement with Arrow International, Inc.
(Arrow) whereby the Company sold an aggregate of 606,667 shares of Series F
preferred stock (which automatically converted to common stock upon the closing
of the Company's initial public offering in June 1996) at $15.00 per share in
June 1995 and December 1995 for an aggregate purchase price of approximately
$9,100,000. In addition, Arrow acquired distribution and manufacturing rights
related to certain of the Company's diagnostic catheter products and the Company
received a $3,000,000 prepaid royalty from Arrow in December 1995. This amount
was recorded as
F-19
<PAGE> 73
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
deferred royalty income and will be amortized to income as the catheter products
are manufactured and sold by Arrow. The royalty rate is 5% of the sales price of
the related products. For the years ended June 30, 1998 and 1997, the Company
recorded royalty income of approximately $20,000 and $50,000, respectively.
There was no royalty income recorded during the year ended June 30, 1996.
10. INDUSTRY SEGMENT, CUSTOMER AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment with principal
manufacturing and distribution operations located in the United States. The
Company also operates limited sales and distribution activities through its
European subsidiaries, Cardiac Pathways B.V. in The Netherlands, Cardiac
Pathways G.m.b.H. in Germany and Cardiac Pathways S.A. in Switzerland (see note
13).
Net sales primarily consist of product sales to three significant
distributors located in the United States, Japan and Europe. The relative
percentage of net sales for these specific distributors is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Distributor A....................................... 80% 66% 54%
Distributor B....................................... 5% 17% 33%
Distributor C....................................... 3% 13% 13%
</TABLE>
All export and other foreign sales are denominated in U.S. dollars. The
following table summarizes net sales including export and other foreign sales to
unaffiliated customers by geographic region:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
United States.......................... $ 321,491 $ 407,377 $ 559,723
Japan.................................. 1,924,538 1,593,521 908,529
Europe................................. 173,787 407,875 215,855
---------- ---------- ----------
$2,419,816 $2,408,773 $1,684,107
========== ========== ==========
</TABLE>
F-20
<PAGE> 74
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
The following table presents information about the Company's operations
located in certain geographical areas:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, U.S. EUROPE ELIMINATIONS CONSOLIDATED
- ------------------------------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
1998
Sales to unaffiliated
customers.................... $ 2,057,193 $362,623 $ -- $ 2,419,816
Transfers between geographic
areas........................ 220,576 -- (220,576) --
------------ -------- --------- ------------
Total revenue........ $ 2,277,769 $362,623 $(220,576) $ 2,419,816
============ ======== ========= ============
Operating income (loss)........ $(18,845,430) $ 18,391 $ (25,964) $(18,853,003)
Other income................... 1,354,206
------------
Net loss....................... $(17,498,797)
============
Identifiable assets............ $ 30,919,990 $107,081 $ (92,494) $ 30,934,577
============ ======== ========= ============
1997
Sales to unaffiliated
customers.................... $ 2,023,798 $384,975 $ -- $ 2,408,773
Transfers between geographic
areas........................ 450,669 -- (450,669) --
------------ -------- --------- ------------
Total revenue........ $ 2,474,467 $384,975 $(450,669) $ 2,408,773
============ ======== ========= ============
Operating income (loss)........ $(14,928,670) $ 5,227 $ (78,730) $(15,002,173)
Other income................... 2,136,579
------------
Net loss....................... $(12,865,594)
============
Identifiable assets............ $ 46,620,699 $179,815 $(145,260) $ 46,655,254
============ ======== ========= ============
1996
Sales to unaffiliated
customers.................... $ 1,317,752 $366,355 $ -- $ 1,684,107
Transfers between geographic
areas........................ 263,370 -- (263,370) --
------------ -------- --------- ------------
Total revenue........ $ 1,581,122 $366,355 $(263,370) $ 1,684,107
============ ======== ========= ============
Operating income (loss)........ $ (9,535,431) $ 10,927 $ -- $ (9,524,504)
Other income................... 155,340
------------
Net loss....................... $ (9,369,164)
============
Identifiable assets............ $ 57,214,612 $ 57,142 $ (83,860) $ 57,187,894
============ ======== ========= ============
</TABLE>
11. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1998, the Company sold approximately $50,000
of research equipment to Conway-Stuart Medical, Inc. ("Conway-Stuart"), a
medical device company. Proceeds from the sale of equipment were recorded in
other income. There is one director and one officer who is also a director of
the Company who has a direct financial interest in Conway-Stuart.
During the years ended June 30, 1997 and 1996, the Company entered into
certain transactions (described below) with Somnus Medical Technologies, Inc.
("Somnus"). There is one officer who is also a director of the Company who has a
direct financial interest in Somnus. The Company had a sublease agreement with
Somnus for approximately 6,900 square feet. In addition, the Company had a
shared services and equipment rental agreement whereby the Company would
provide, at the request of Somnus, certain facilities and administrative support
services, and would rent certain office furniture and equipment to Somnus on a
month-to-month basis. Both agreements terminated on March 31, 1997. For the
years ended June 30, 1997 and 1996, the Company recorded rental and related
income under the agreements of $96,000 and $22,000, respectively.
F-21
<PAGE> 75
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
12. EMPLOYEE BENEFIT PLAN
The Company has an employee 401(k) salary deferral plan that allows
voluntary contributions by all full-time employees. Eligible employees may
contribute from 1% to 15% of their respective compensation, subject to statutory
limitations, and the Company may match a percentage of employee contributions at
the discretion of the Board of Directors. The Company made matching
contributions to certain eligible employees in the plan of approximately
$38,000, $27,000 and $4,500 for the years ended June 30, 1998, 1997 and 1996,
respectively.
13. SUBSEQUENT EVENTS (UNAUDITED)
In August 1998, the Board of Directors of the Company approved the
termination of the open offering periods for the 1996 Employee Stock Purchase
Plan effective as of the next purchase date and the termination of any future
offering periods under the 1996 Employee Stock Purchase Plan. In August 1998,
the Company's Board of Directors approved the adoption of the Cardiac Pathways
Corporation 1998 Employee Stock Purchase Plan and the initial reservation of
100,000 shares of Common Stock under the Plan. The 1998 Employee Stock Purchase
Plan provides for an annual increase, commencing in 1999, in the number of
Common Stock shares reserved for issuance equal to the lesser of 200,000 shares
or 1.5% of the Company's outstanding Common Stock. The adoption of the 1998
Employee Stock Purchase Plan is subject to stockholder approval.
In August 1998, the Board of Directors of the Company approved the adoption
the Cardiac Pathways Corporation 1998 Nonstatutory Stock Option Plan under which
400,000 shares of Common Stock were reserved for issuance.
In September 1998, the Company dissolved its Swiss subsidiary, Cardiac
Pathways S.A. Total revenues, operating income and identifiable assets of
Cardiac Pathways S.A. were immaterial to the fiscal 1998 consolidated financial
statements. Furthermore, the expenses incurred in connection with the
dissolution were insignificant.
F-22
<PAGE> 76
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTIONS PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
June 30, 1996............... $9,500 $2,000 $(2,000) $9,500
June 30, 1997............... 9,500 -- -- 9,500
June 30, 1998............... 9,500 7,000 -- 16,500
</TABLE>
S-1
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------
<C> <S>
3.1(1) Restated Certificate of Incorporation of the Registrant.
3.2(1) Bylaws of Registrant.
4.1(2) Preferred Share Rights Agreement, dated April 22, 1997
between the Registrant and Norwest Bank Minnesota, N.A.
10.1(1) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2(3) 1991 Stock Plan and form of Stock Option Agreement
thereunder.
10.3(3) 1996 Director Option Plan and form of Director Stock Option
Agreement thereunder.
10.4(3) 1996 Employee Stock Purchase Plan and forms of agreement
thereunder.
10.5+(1) OEM Agreement between Registrant and Liebel-Flarsheim
Company dated June 22, 1994.
10.6+(1) License Agreement between Registrant and BSI Corporation
dated October 21, 1994.
10.7(1) Loan Agreement between the Registrant and Dideco S.p.A.
dated June 23, 1994, as amended by Amendment to Loan
Agreement dated June 22, 1995 and Amendment No. 2 to Loan
Agreement dated April 10, 1996.
10.7.1 Distributor Termination Agreement between the Registrant and
Dideco S.p.A. dated May 26, 1998.
10.8+(1) Exclusive License Agreement dated May 24, 1995.
10.9(1) Manufacturing and Supply Agreement between the Registrant
and Arrow International Inc. dated March 8, 1995.
10.10(1) Exclusive International Distributor Agreement between the
Registrant and Arrow International dated March 8, 1995.
10.11(1) Lease dated June 25, 1993 between the Registrant and Brock
Properties.
10.11.1(4) Lease Modification Agreement effective as of February 24,
1998 between the Registrant And Brock Properties.
10.12(1) Master Lease Agreement dated December 1, 1993 between the
Registrant and Linc Capital Management Services, Ltd., as
amended.
10.12.1(5) Amendment No. 5 to Master Lease Agreement dated December 1,
1993 between the Registrant and Linc Capital Management
Services, Ltd.
10.13(1) Shareholder Rights Agreement, as amended to date, dated June
13, 1995, between the Registrant and certain holders of the
Company's securities.
10.14(1) Consulting Agreement dated June 1, 1995 between the
Registrant and Mir Imran.
10.15 1998 Employee Stock Purchase Plan.
10.16 Loan and Security Agreement dated May 15, 1998 between the
Registrant and Silicon Valley Bank.
10.17 Lease Agreement dated April 27, 1998 between the Registrant
and Lincoln Property Company Management Services, Inc. for
the premises located at 824 W. California Ave., Sunnyvale,
California 94086.
10.18 Agreement dated April 18, 1996 between the Registrant and
Earle Canty.
10.18.1 Amendment No. 1 to Agreement dated April 18, 1996 between
the Registrant and Earle Canty.
10.19 Promissory Note dated April 18, 1996 between the Registrant
and Earle Canty.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ -----------
<C> <S>
10.19.1 Amendment No. 1 dated August 31, 1998 to Loan Agreement
dated April 18, 1996 between the Registrant and Earle Canty.
10.20 Promissory Note dated December 23, 1996 between the
Registrant and Earle Canty.
10.20.1 Amendment No. 1 dated August 31, 1998 to Loan Agreement
dated December 23, 1996 between the Registrant and Earle
Canty.
10.21 Consulting Agreement dated September 1, 1998 between
Registrant and Earle Canty.
10.22 1998 Nonstatutory Option Plan and form of agreement
thereunder.
22.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 53).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 333-3616) as declared effective by the
Commission on June 12, 1996.
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form 8-A (Reg. No. 000-28372) as declared
effective by the Commission on May 22, 1997.
(3) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (Reg. No. 333-38049) as declared
effective by the Commission on October 16, 1997.
(4) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
(5) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
<PAGE> 1
EXHIBIT 10.7.1
AGREEMENT
This AGREEMENT is entered into May 26, 1998, by and between CARDIAC
PATHWAYS CORPORATION, a California corporation with offices at 995 Benecia
Avenue, Sunnyvale, California 94086 ("Pathways") and DIDECO S.P.A., a
corporation organized under the laws of Italy with offices at Via Statale 12
Nord, 86, 41037 Mirandola (MO), Italy ("Distributor").
BACKGROUND
A. Pathways and Distributor entered into a certain Exclusive
International Distributor Agreement effective as of June 23, 1994 (the
"Distributor Agreement"), which each wishes now to terminate.
B. Pathways and Distributor entered into a certain Loan Agreement
effective as of June 23, 1994 and the attached Promissory Note dated
June 27, 1994 (collectively, the "Loan"), which Pathways is willing to
repay early.
NOW, THEREFORE, Pathways and Distributor agree as follows:
1. The Distributor Agreement shall terminate effective as of May 26, 1998.
2. On May 26, 1998, Pathways shall pay to Distributor six million four
thousand two hundred fifty dollars and no cents ($6,004,250.00), in full
and complete repayment of all amounts due to Distributor with respect to
the Loan.
3. Pathways will repurchase all inventory of Products purchased by Distributor
from Pathways pursuant to the Distributor Agreement during the period from
February 8, 1998 to May 8, 1998 which Distributor has not sold as of May 8,
1998 at a price equal to the price paid by Distributor for such Products
less a 10% restocking charge. Distributor shall ship such Products F.O.B.
its facility, using a carrier designated by Pathways. Pathways shall repay
Distributor for such Products and the shipping and insurance costs
associated therewith within ten days of receipt of the Products and any
invoice therefore, provided, that such Products are undamaged and suitable
for re-sale.
4. Pathways will repurchase the three (3) cooled radio frequency generators
purchased by Distributor from Pathways for a total price of forty three
thousand one hundred twenty five dollars ($43,125.00) (i.e., equal to the
net price paid by Distributor depreciated using straight line depreciation
over four (4) years), provided that such generators are undamaged and fully
operable. Exhibit A sets forth a calculation of this amount.
5. Except with respect to the obligations created by, acknowledged, or arising
out of this Agreement, the parties hereto (on behalf of themselves, their
directors, officers, employees, agents, parents, subsidiaries and
affiliates) release and absolutely and forever discharge one another and
their respective directors, officers, employees, agents, and attorneys of
and from
1
<PAGE> 2
any and all claims, demands, damages, debts, liabilities, obligations,
costs, expenses, and causes of action, of every kind and nature whatsoever
(each a "Liability"), which they now have, own or hold against one another
relating to the matters described or referred to in the Distributor
Agreement and/or Loan (except to the extent such Liability is subject to
the provisions of Sections 4, 6, 9(f), (g), (i) or (j), 10, 11, 13 or 14 of
the Distributor Agreement which provisions shall survive the termination of
the Distributor Agreement).
It is the intention of the parties hereto in executing this Agreement that
this Agreement shall be effective among the parties as a full and final
accord and satisfaction and release of liability in connection with the
matters referred to herein.
In furtherance of the intentions set forth in this Agreement, all parties
hereto acknowledge that they are familiar with Section 1542 of the Civil
Code of the State of California, which provides in part as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Each of the parties hereto waives and relinquishes any right or benefit
which he or it has or may have under Section 1542 to the full extent that
he or it may lawfully waive such rights and benefits pertaining to the
matters referred to herein.
6. No provision of this Agreement may be modified or amended except expressly
in a writing signed by both parties nor shall any terms be waived except
expressly in a writing signed by the party charged therewith. This
Agreement shall be governed in accordance with the laws of the State of
California, without reference to rules of conflicts or choice of laws.
IN WITNESS WHEREOF, each of the parties has executed this Amendment as of
the date indicated on this Amendment.
Cardiac Pathways Corporation Dideco S.P.A.
By: /s/ William N. Starling By: /s/ Wayne C. Krachun
------------------------------- -------------------------------
Name: WILLIAM N. STARLING Name: WAYNE C. KRACHUN
------------------------------ -----------------------------
Title: CEO Title: Attorney-in-Fact
----------------------------- ----------------------------
2
<PAGE> 3
EXHIBIT A
COOLED RF GENERATOR PURCHASES
<TABLE>
<CAPTION>
Depreciation
Based on Net Book
Serial No. Price Date 4 Year Life Value
- ---------- ---------- --------- ------------ ---------
<S> <C> <C> <C> <C>
102242 $15,000.00 12/27/95 $ 8,750.00 $ 6,250.00
102252 $15,000.00 12/27/95 $ 8,750.00 $ 6,250.00
112132 $30,000.00 9/29/95 $19,375.00 $10,625.00
Upgrades $30,000.00 12/31/96 $10,000.00 $20,000.00
$90,000.00 $46,875.00 $43,125.00
----------
</TABLE>
<PAGE> 1
EXHIBIT 10.15
CARDIAC PATHWAYS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock Purchase
Plan of Cardiac Pathways Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean Cardiac Pathways Corporation and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
commissions, overtime, shift premium, incentive compensation, incentive
payments, and bonuses but exclusive of payments for any other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each Purchase
Period.
<PAGE> 2
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable; or
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 (beginning in 1998) of each year and terminat ing on the last Trading Day in
the periods ending twenty-four months later. The duration and timing of Offering
Periods may be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 1998 Employee Stock Purchase Plan.
(m) "Purchase Period" shall mean the approximately six month period
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
-2-
<PAGE> 3
(q) "Trading Day" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 (beginning in 1998) of each year,
or on such other date as the Board shall determine, and continuing thereafter
until terminated in accordance with Section 20 hereof. The Board shall have the
power to change the duration of Offering Periods (including the commencement
dates thereof) with respect to future offerings without stockholder approval if
such change is announced prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not
-3-
<PAGE> 4
exceeding fifteen percent (15%) of the Compensation which he or she receives on
each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 5,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
-4-
<PAGE> 5
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the option shall occur
as provided in Section 8 hereof, unless the participant has withdrawn pursuant
to Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. Exercise of Option.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
stockholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on which
a purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his or her option.
-5-
<PAGE> 6
10. Withdrawal.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 100,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 1999 equal to the lesser of (i) 200,000
shares or (ii) 1.5% of the outstanding shares on such date.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
-6-
<PAGE> 7
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such partici pant's death subsequent to an Exercise
Date on which the option is exercised but prior to delivery to such participant
of such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to
exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements
-7-
<PAGE> 8
shall set forth the amounts of payroll deductions, the Purchase Price, the
number of shares purchased and the remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised
-8-
<PAGE> 9
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain stockholder approval in such a manner
and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(2) shortening any Offering Period so that the Offering Period
ends on a new Exercise Date, including an Offering Period underway at the time
of the Board action; and
(3) allocating shares.
-9-
<PAGE> 10
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE> 11
EXHIBIT A
CARDIAC PATHWAYS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _______________________________ hereby elects to participate in the Cardiac
Pathways Corporation 1998 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribes to purchase shares of the Company's Common
Stock in accordance with this Sub scription Agreement and the Employee
Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 15%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my ability
to exercise the option under this Subscription Agreement is subject to
stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
____________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me
<PAGE> 12
over the price which I paid for the shares. I hereby agree to notify the
Company in writing within 30 days after the date of any disposition of my
shares and I will make adequate provision for Federal, state or other tax
withholding obligations, if any, which arise upon the disposition of the
Common Stock. The Company may, but will not be obligated to, withhold from
my compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year and 1-year holding periods, I understand
that I will be treated for federal income tax purposes as having received
income only at the time of such disposition, and that such income will be
taxed as ordinary income only to the extent of an amount equal to the
lesser of (1) the excess of the fair market value of the shares at the time
of such disposition over the purchase price which I paid for the shares, or
(2) 15% of the fair market value of the shares on the first day of the
Offering Period. The remainder of the gain, if any, recognized on such
disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
------------------------------------------------------------
(First) (Middle) (Last)
- ------------------------------- --------------------------------------------
Relationship
--------------------------------------------
(Address)
-2-
<PAGE> 13
Employee's Social
Security Number:
----------------------------------
Employee's Address:
----------------------------------
----------------------------------
----------------------------------
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
--------------------------------------------
Signature of Employee
--------------------------------------------
Spouse's Signature
(If beneficiary other than spouse)
-3-
<PAGE> 14
EXHIBIT B
CARDIAC PATHWAYS CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Cardiac Pathways
Corporation 1998 Employee Stock Purchase Plan which began on ____________,
19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The under
signed understands and agrees that his or her option for such Offering Period
will be automatically terminated. The undersigned understands further that no
further payroll deductions will be made for the purchase of shares in the
current Offering Period and the undersigned shall be eligible to partici pate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
--------------------------------
--------------------------------
--------------------------------
Signature:
--------------------------------
Date:
---------------------------
<PAGE> 1
EXHIBIT 10.16
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CARDIAC PATHWAYS CORPORATION
LOAN AND SECURITY AGREEMENT
<PAGE> 2
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........................................................ 8
2.1 Term Loan............................................................ 8
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..................................................... 10
2.7 Term................................................................. 10
3. CONDITIONS OF LOANS.............................................................. 10
3.1 Conditions Precedent to Initial Advance.............................. 10
3.2 Post-Closing Obligation.............................................. 11
4. CREATION OF SECURITY INTEREST.................................................... 11
4.1 Grant of Security Interest........................................... 11
4.2 Delivery of Additional Documentation Required........................ 12
4.3 Right to Inspect..................................................... 12
5. REPRESENTATIONS AND WARRANTIES................................................... 12
5.1 Due Organization and Qualification................................... 12
5.2 Due Authorization; No Conflict....................................... 12
5.3 No Prior Encumbrances................................................ 13
5.4 Bona Fide Accounts................................................... 13
5.5 Merchantable Inventory............................................... 13
5.6 Name; Location of Chief Executive Office............................. 13
5.7 Litigation........................................................... 13
5.8 No Material Adverse Change in Financial Statements................... 13
5.9 Solvency............................................................. 13
5.10 Regulatory Compliance................................................ 13
5.11 Environmental Condition.............................................. 13
5.12 Taxes................................................................ 14
5.13 Subsidiaries......................................................... 14
5.14 Government Consents.................................................. 14
5.15 Full Disclosure...................................................... 14
6. AFFIRMATIVE COVENANTS............................................................ 14
6.1 Good Standing........................................................ 14
6.2 Government Compliance................................................ 14
6.3 Adverse Information.................................................. 15
6.4 Financial Statements, Reports, Certificates.......................... 15
6.5 Inventory; Returns................................................... 15
6.6 Taxes................................................................ 15
6.7 Insurance............................................................ 16
6.8 Principal Depository................................................. 16
6.9 Total Liabilities-Net Worth Ratio.................................... 16
6.10 Tangible Net Worth................................................... 16
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
6.11 Minimum Liquidity and Debt Service Coverage.......................... 16
6.12 Further Assurances................................................... 17
7. NEGATIVE COVENANTS............................................................... 17
7.1 Dispositions......................................................... 17
7.2 Change in Business................................................... 17
7.3 Mergers or Acquisitions.............................................. 17
7.4 Indebtedness......................................................... 17
7.5 Encumbrances......................................................... 17
7.6 Distributions........................................................ 17
7.7 Investments.......................................................... 17
7.8 Transactions with Affiliates......................................... 17
7.9 Subordinated Debt.................................................... 18
7.10 Inventory............................................................ 18
7.11 Compliance........................................................... 18
8. EVENTS OF DEFAULT................................................................ 18
8.1 Payment Default...................................................... 18
8.2 Covenant Default..................................................... 18
8.3 Material Adverse Change.............................................. 18
8.4 Attachment........................................................... 19
8.5 Insolvency........................................................... 19
8.6 Other Agreements..................................................... 19
8.7 Subordinated Debt.................................................... 19
8.8 Judgments............................................................ 19
8.9 Misrepresentations................................................... 19
8.10 Change of Control.................................................... 19
9. BANK'S RIGHTS AND REMEDIES....................................................... 19
9.1 Rights and Remedies.................................................. 19
9.2 Power of Attorney.................................................... 20
9.3 Accounts Collection.................................................. 21
9.4 Bank Expenses........................................................ 21
9.5 Bank's Liability for Collateral...................................... 21
9.6 Remedies Cumulative.................................................. 21
9.7 Demand; Protest...................................................... 21
10. NOTICES......................................................................... 21
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER...................................... 22
12. GENERAL PROVISIONS.............................................................. 22
12.1 Successors and Assigns............................................... 22
12.2 Indemnification...................................................... 23
12.3 Time of Essence...................................................... 23
12.4 Severability of Provisions........................................... 23
12.5 Counterparts......................................................... 23
12.6 Survival............................................................. 23
12.7 Confidentiality...................................................... 24
</TABLE>
ii
<PAGE> 4
This LOAN AND SECURITY AGREEMENT is entered into as of May 15, 1998, by and
between SILICON VALLEY BANK ("Bank") and CARDIAC PATHWAYS CORPORATION
("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 cash advances under the Term
Loan 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 Bank's 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, 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 Loan Amount" means Eight Million Dollars
($8,000,000).
1
<PAGE> 5
"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
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 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, and (iii) accrued interest, to (b) an amount
equal to the sum of all scheduled repayments for such quarter (or month, as
applicable), including accrued interest, and mandatory prepayments of principal
on account of long-term Debt.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts,
substitutions, and attachments in which Borrower has any interest.
"Equity Infusion" means the receipt by Borrower of cash
proceeds from the sale of its capital stock or Subordinated Debt, other than in
a nonfinancing transaction to employees, officers, directors or consultants of
the Borrower, in a minimum aggregate amount of Twenty Million Dollars
($20,000,000).
"ERISA" means the Employment Retirement Income Security Act
of 1974, as amended, and the regulations thereunder.
"FDA" means the Food and Drug Administration of the United
States government, and any successor regulatory body.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"GMP" has the meaning set forth in Section 6.2.
"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 informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other similar 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
2
<PAGE> 6
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.
"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,
supplemented 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 the
fourth (4th) anniversary of the date of this Agreement.
"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 date of
determination, determined on a consolidated basis in accordance with GAAP for
Borrower and its consolidated Subsidiaries, the reduction in cash from
operations (excluding non-recurring charges) during the three months prior to
such date of determination or if the date of determination is the last day of a
fiscal quarter, during the fiscal quarter then ending (or, if monthly reporting
is required pursuant to Section 6.4(c), during the three fiscal months ending
prior to such date of determination).
"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.
"Payment Date" means the fourteenth (14th) calendar day of
each month during the term of this Agreement.
"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.
3
<PAGE> 7
"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 date of this Agreement and
disclosed in the Schedule;
(c) Indebtedness to trade creditors incurred in the ordinary
course of business;
(d) Subordinated Debt;
(e) Indebtedness of Borrower to any Subsidiary and
Contingent Obligations of any Subsidiary with respect to obligations of Borrower
(provided that the primary obligations are not prohibited hereby); 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); and Contingent Obligations
of the Borrower as a guarantor for obligations of its Subsidiaries that (i) are
existing on the date of this Agreement, or (ii) have been approved by Bank in
writing;
(f) Indebtedness secured by Permitted Liens;
(g) Capital leases or indebtedness incurred solely to
purchase equipment which is secured in accordance with clause (c) of "Permitted
Liens" below and is not in excess of the lesser of the purchase price of such
equipment or the fair market value of such equipment on the date of acquisition;
and
(h) Extensions, refinancings, modifications, amendments and
restatements of any of items of Permitted Indebtedness (a) through (g) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Date of this Agreement and
disclosed in the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Rating Services or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank, and (iv) any Investments permitted by
Borrower's investment policy, as amended from time to time and approved by
Borrower's board of directors, provided that such investment policy (any such
amendment thereto) has been approved by Bank (with such approval not to be
unreasonably withheld);
(c) Investments consisting of the endorsement of negotiable
instrument for deposit or collection or similar transactions in the ordinary
course of business;
(d) Investments accepted in connection with Transfers
permitted by Section 7.1;
(e) Investments (whether consisting of the purchase of
securities, loans, capital contribution, or otherwise) of Borrower in
Subsidiaries and of Subsidiaries in or to other Subsidiaries or in Borrower;
4
<PAGE> 8
(f) 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, and (iii) loans to
employees, officers or directors relating to the purchase of equity securities
of Borrower or its Subsidiaries pursuant to employee stock purchase plans or
agreements approved by Borrower's Board of Directors;
(g) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;
(h) Investments consisting of notes receivable of, or
prepaid royalties and other credit extensions, to customers and suppliers who
are not Affiliates, in the ordinary course of business; provided that this
paragraph (h) shall not apply to Investments by Borrower in any Subsidiary;
(i) Investments constituting acquisitions permitted under
Section 7.3; and
(j) Deposit accounts of Borrower in which Bank has a Lien
prior to any other Lien.
"Permitted Liens" means the following:
(a) Any Liens existing on the date of this Agreement 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 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 on Equipment leased by Borrower or any Subsidiary
pursuant to an operating or capital lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such Equipment (including Liens pursuant to
leases permitted pursuant to Section 7.1 and Liens referred to in UCC financing
statements regarding leases permitted by this Agreement);
(e) Leases or subleases and license and sublicenses granted
to others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license;
(f) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.8;
(g) Easements, reservations, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances affecting real property not constituting a Material Adverse Effect;
(h) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods;
5
<PAGE> 9
(i) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a), (c), (d), (e) and (f) 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;
(j) Liens (i) upon or in any real property to secure the
purchase price of such real property or indebtedness incurred solely for the
purpose of financing the acquisition of such real property or (ii) existing on
such real property owned by Borrower as of the Closing Date, provided that (x)
the real property is not financed hereunder and (y) the Lien is confined solely
to the real property and the proceeds thereof, attachments and accessories
thereto and improvements thereon;
(k) Mechanics', workers', materialmens', landlords',
carriers' or other like Liens arising in the ordinary and normal course of
business with respect to obligations which are not yet due;
(l) Liens that are not prior to the Lien of Bank which
constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangements entered into with banks in the
ordinary course of business;
(m) Earn-out and royalty obligations existing on the date
hereof or entered into in connection with an acquisition permitted by Section
7.3; and
(n) Liens on insurance proceeds in favor of insurance
companies granted solely as security for financed premiums.
"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 the end of each
fiscal quarter, or if monthly reporting is required pursuant to Section 6.4(c),
as at the end of each fiscal month, the ratio of (i) Liquidity at such time to
(ii) the monthly average of Net Cash Losses.
"Responsible Officer" means each of the Chief Executive
Officer, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto,
if any.
"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,
6
<PAGE> 10
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 Loan Facility" means the facility under which Borrower
may request cash advances as specified in Section 2.1.
"Term Availability Date" means the date immediately
preceding the first (1st) anniversary of the date of this Agreement.
"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, except as amended in Section 6.9 below.
"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.
7
<PAGE> 11
2. LOAN AND TERMS OF PAYMENT
2.1 Term Loans.
(a) Term Loan Facility. Subject to and upon the terms and
conditions of this Agreement, Bank agrees, at any time from the date of this
Agreement through the Term Availability Date, to make Advances to Borrower in an
aggregate principal amount not to exceed the Committed Loan Amount; provided,
however, the initial Advance in the amount of approximately Six Million Dollars
($6,000,000) shall be used by Borrower to pay in full an obligation owed to one
of Borrower's European distributors (the "Existing Obligation"). Borrower shall
deliver to Bank within twenty (20) days following the initial Advance hereunder,
evidence of payment in full of the Existing Obligation, satisfactory to Bank, in
Bank's sole discretion. Amounts borrowed pursuant to this Section 2.1 may not be
reborrowed once repaid.
(b) Procedures. Whenever Borrower desires an Advance,
Borrower shall notify Bank by facsimile transmission or telephone no later than
3:00 p.m. California time, one (1) Business Day before the day on which the
Advance is requested to be made. Each such notification shall be promptly
confirmed by a Payment/Advance Form in substantially the form of Exhibit B
hereto and signed by a Responsible Officer. 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 meet Obligations which have become due and remain unpaid. 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 damages or 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) Interest and Principal. Interest shall accrue from the
date of each Advance at the rate specified in Section 2.3(a), and shall be
payable monthly on the Payment Date for each month through the month in which
the Maturity Date falls. Bank shall, at its option, charge such interest, all
Bank Expenses, and all Periodic Payments against any of Borrower's deposit
accounts, including account number _____________, against the Term Loan
Facility, 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.
(d) Maturity. The Term Loan Facility shall terminate on the
Maturity Date, at which time all Obligations owing under this Section 2.1 and
all other Obligations Borrower owes to Bank under this Agreement shall be
immediately due and payable.
2.2 Interest Rate Protection. Subject to the terms and condition
of this Agreement, Borrower may prepay the 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(a), 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(a) is higher than the then current
fixed rate for the Advances.
8
<PAGE> 12
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b),
from and after the Closing Date through the Term Availability Date, the Advances
shall bear interest, on the average daily balance thereof, at a rate equal to
one and one-quarter (1.25) percentage points above the Prime Rate. Following the
Term Availability Date through the Maturity Date, the Advances shall bear
interest, on the average daily balance thereof, at a rate equal to, at
Borrower's election, either (i) (a) prior to the Equity Infusion, one and
one-quarter (1.25) percentage points above the Prime Rate, or (b) following the
Equity Infusion, three-quarters of one (.75) percentage point above the Prime
Rate; OR (ii) four (4) percentage points above the yield of the 48 month
Treasury Note as reported in the Western edition of The Wall Street Journal,
which rate shall be fixed at the time of Borrower's election. Borrower shall
give written notice to Bank of its interest rate election no later than two (2)
Business Days prior to the Term Availability Date of its interest rate election
hereunder. If Borrower fails to give such notice, then the applicable rate shall
be the 48 month Treasury Note fixed rate described herein.
(b) Default Rate. All Obligations shall bear interest, from
and after the occurrence and during the continuance of an Event of Default, at a
rate equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable on
the Payment Date of each month during the term hereof. Borrower shall make
payments of interest only from and after the Closing Date through the Term
Availability Date. Following the Term Availability Date, Borrower shall make
payments of principal and interest to Bank in thirty-six (36) equal monthly
installments of principal and interest which shall be due and payable on the
Payment Date of each month during the term hereof. Borrower's final payment, due
on the Maturity Date, shall include all outstanding Advances under the Term Loan
Facility of principal plus all accrued interest not yet paid. Bank shall, at its
option, charge such interest, principal, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts, including Account Number
______________ 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.
(d) 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 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.
Notwithstanding the foregoing, this Section 2.3(d) shall not apply in the event
the Borrower elects the fixed rate option as set forth in Section 2.3(a).
2.4 Crediting Payments. Prior to the occurrence and during the
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
similar item for the purpose of payment of Obligations 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:
9
<PAGE> 13
(a) Facility Fee. A Facility Fee equal to (i) Sixty Thousand
Dollars ($60,000), which fee shall be due and payable on the Closing Date, and
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; and
(c) Bank Expenses. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses (not to exceed Five Thousand Dollars ($5,000) prior to the Closing
Date), and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses as and when they become due; provided, however,
Borrower shall be responsible for fifty percent (50%) of all such attorneys'
fees and expenses incurred prior to the Closing Date in excess of Five Thousand
Dollars ($5,000).
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,
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 made by Bank, 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
constitute prima facie evidence of such amount; provided, however, that Borrower
shall not be liable for any such amount attributable to any period prior to the
date one hundred and eighty (180) days prior to the date of such certificate.
2.7 Term. This Agreement shall become effective on the Closing
Date and, subject to Section 12.6, 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 the Advance under this Agreement
immediately and without notice 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 (other than inchoate
indemnity 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 conditions precedent that:
(a) Bank shall have received, in form and substance
satisfactory to Bank, the following:
(i) this Agreement;
10
<PAGE> 14
(ii) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(iii) a negative pledge agreement;
(iv) evidence of outstanding obligation owed to one of
Borrower's European distributors, which shall be paid in full by the initial
Advance, in form satisfactory to Bank, in Bank's sole discretion;
(v) financing statements (Forms UCC-1);
(vi) insurance certificate;
(vii) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(viii) timely receipt of the Payment/Advance Form as
provided in Section 2.1;
(ix) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate; 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
the Payment/Advance Form and on the effective date of each of the Advances, and
no Event of Default shall have occurred and be continuing, or would result from
each of the Advances. The making of each of the Advances shall be deemed to be a
representation and warranty by Borrower on the date of each of the Advances as
to the accuracy of the facts referred to in this Section 3.1(b).
3.2 Post-Closing Obligation. Borrower shall deliver a consent to
release of collateral in substantially the form of Exhibit D attached hereto,
executed by each warehouseman, storage company or other bailee of Borrower's
Inventory, within ninety (90) days following the Closing Date. Borrower's
failure to deliver the foregoing consents shall be deemed an Event of Default
under this Agreement.
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. 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,
in each case, to the extent that a security interest in such Collateral can be
perfected by the filing of a financing statement or, in the case of Collateral
consisting of instruments, documents, chattel paper or certificated securities,
to the extent that Bank takes possession of such Collateral. Bank agrees to
execute and deliver to Borrower from time to time such Lien subordinations as
Borrower may request and as are necessary to give to other lenders which finance
new Equipment for Borrower a first priority security interest in the new
Equipment financed so long as the Liens and the Indebtedness incurred with
respect to such Equipment financing are permitted under this Agreement.
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.
11
<PAGE> 15
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; provided, that unless an Event of
Default has occurred and is continuing, such inspections and appraisals shall
occur no more frequently than once every six (6) calendar months.
4.4 Requirement for Cash Collateral. Borrower shall pledge cash
or a certificate of deposit to Bank as follows:
(a) Upon an Event of Default (except for six (6) months
Remaining Months Liquidity of Section 6.11), the Borrower shall pledge cash in
the form of a certificate of deposit at Silicon Valley Bank, on terms acceptable
to Bank, in an amount equal to fifty-five percent (55%) of the outstanding loan
balances, at which time Borrower shall be deemed to have cured the Event of
Default. Notwithstanding the foregoing, Bank shall have no obligation to release
the cash pledged pursuant to this Section 4.4(a) unless and until Borrower
achieves compliance with all the terms of the Loan Documents and cures such
Event of Default.
(b) If at any time the Liquidity of Borrower is less than
(i) Twelve Million Dollars ($12,000,000), or (ii) six (6) times Remaining Months
Liquidity, then Borrower shall pledge cash in the form of a certificate of
deposit at Silicon Valley Bank, on terms acceptable to Bank, in an amount equal
to one hundred and five percent (105%) of the outstanding loan balances, at
which time Borrower shall be deemed to have cured the Event of Default.
Notwithstanding the foregoing, Bank shall have no obligation to release the cash
pledged pursuant to this Section 4.4(b) unless and until Borrower achieves
compliance with all the terms of the Loan Documents and cures such Event of
Default.
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 except to the extent that
certain intellectual property agreements prohibit the assignment of the rights
thereunder to a third party without the Borrower's or other party's consent and
the Loan Documents constitute an assignment. Borrower is not in default under
any agreement to which it is a party or by which it is bound, which default
could reasonably be expected to 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 Bona Fide Accounts. The Accounts are bona fide existing
obligations. The property giving rise to such Accounts has been delivered to the
account debtor or to the account debtor's agent for immediate shipment to and
unconditional acceptance by the account debtor. Borrower has not received notice
of actual or imminent Insolvency Proceeding of any account debtor.
12
<PAGE> 16
5.5 Merchantable Inventory. All Inventory, net of reserves in
accordance with GAAP, is in all material respects of good and marketable
quality, free from all material defects.
5.6 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.
5.7 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 reasonably
be expected to 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.
5.8 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.
5.9 Solvency. The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower is able to pay its
respective debts (including trade debts) as they mature.
5.10 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, as amended. 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 or which violation of
which could reasonably be expected to have a Material Adverse Effect.
5.11 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.
5.12 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.
13
<PAGE> 17
5.13 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. Borrower and each Subsidiary have
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 where the failure to obtain any such consent, approval or
authorization, to make any such declaration or filing, or to be given any such
notice could not reasonably be expected to have a Material Adverse Effect.
5.15 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 (it being recognized by Bank that the
projections and forecasts provided by Borrower are not to be viewed as facts and
that actual results during the period or period covered by any such projections
and forecasts may differ from the projected or forecasted results).
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.
(a) ERISA. 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.
(b) FDA. To the extent required by law, Borrower shall cause
its, and each of its Subsidiaries', manufacturing and quality control to conform
in all material respects to FDA Good Manufacturing Practices ("GMP") regulations
and such other regulations applicable to Borrower and its Subsidiaries with
respect to advertising, labeling and reporting, product testing, design, safety
and labeling of products except where the failure to so conform is not
reasonably likely to have a Material Adverse Effect. To the extent necessary to
the conduct of its and its Subsidiaries' business, Borrower shall register, and
shall cause each of its Subsidiaries to register, with the Food and Drug Branch
of the California Department of Health Services and the FDA, and Borrower shall
register its, and shall cause each of its Subsidiaries to register their,
manufacturing facilities in accordance with GMP regulations.
(c) Statutory Compliance. 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 is reasonably likely to have a Material Adverse Effect, including without
limitation, compliance in all material respects with the Federal Food, Drug, and
Cosmetics Act, the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, and all other applicable
federal, state and local laws, orders and regulations.
6.3 Adverse Information. Borrower shall immediately notify Bank
upon receipt of any information that indicates that the FDA or other
governmental agency has advised Borrower that it found material deficiencies in
Borrower's or a Subsidiary's compliance with applicable regulations.
6.4 Financial Statements, Reports, Certificates.
14
<PAGE> 18
(a) Borrower shall deliver to Bank, (i) 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; (ii) 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; (iii) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower that would be likely to
result in damages or costs to Borrower of Two Hundred Fifty Thousand Dollars
($250,000) or more in a single action; and (iv) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time.
(b) Borrower shall deliver to Bank with the quarterly
financial statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto.
(c) If at any time and during such time that Borrower's
Liquidity is less than Twenty Million Dollars ($20,000,000), or if an Event of
Default occurs and is continuing, Borrower shall deliver to Bank, within
twenty-five (25) days after the last day of each calendar month, a company
prepared monthly report of liquidity and average of Net Cash Losses for such
period, in form and substance satisfactory to Bank, and certified by a
Responsible Officer. At such time that monthly reporting under this Section
6.4(c) is required and is continuing, until minimum liquidity exceeds Twenty
Million Dollars ($20,000,000), minimum liquidity under Section 6.11 below shall
be measured as of the last day of each calendar month.
6.5 Inventory; Returns. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Two
Hundred Fifty Thousand Dollars ($250,000).
6.6 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, upon reasonable request, 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 reasonable 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 required hereunder 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.
6.7 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. Nothing herein
shall be construed as requiring the Borrower to maintain credit insurance with
respect to its accounts receivable.
(b) All such policies of insurance shall be in such form,
with such companies and in such amounts as reasonably satisfactory to Bank. 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
15
<PAGE> 19
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. 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. So long as no Event of Default has
occurred and is continuing, Borrower shall have the option of applying the
proceeds of any casualty policy to the replacement or repair of destroyed or
damaged property; provided, that after the occurrence and during the continuance
of an Event of Default, all proceeds payable under any such policy shall, at the
option of Bank, be payable to Bank to be applied on account of the Obligations.
6.8 Principal Depository. Borrower shall maintain its principal
domestic operating accounts with Bank.
6.9 Total Liabilities-Net Worth Ratio. Borrower shall maintain,
as of the last day of each fiscal quarter during the term of this Agreement, a
ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than (i) 1.75 to 1.00, prior to the Equity
Infusion, and (ii) 1.50 to 1.00, following the Equity Infusion.
6.10 Tangible Net Worth. Borrower shall maintain, as of the last
day of each fiscal quarter, (i) commencing on the Closing Date through the date
of the Equity Infusion, a Tangible Net Worth of not less than Eight Million
Dollars ($8,000,000), and (ii) following the Equity Infusion, a Tangible Net
Worth of not less than Eighteen Million Dollars ($18,000,000).
6.11 Minimum Liquidity and Debt Service Coverage. Subject to the
remainder of this Section, Borrower shall maintain, as of the last day of each
of fiscal quarter, a minimum Liquidity of the greater of (a) two (2) times the
amount of Obligations plus all other debt owed by Borrower to Bank, OR (b) six
times (6x) the average of Net Cash Losses for the immediately preceding three
(3) month period. Notwithstanding the foregoing, from and after the time
Borrower achieves a Debt Service Coverage for two 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.
6.12 Further Assurances. 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 the Advance, 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 Transfers: (i)
of inventory in the ordinary course of business, (ii) of non-exclusive licenses
and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business, (iii) of worn-out or obsolete
Equipment or Equipment financed by other vendors, (iv) which constitute
liquidation of Investments permitted under Section 7.7, (v) permitted by Section
7.8, and (vi) not otherwise permitted by this Section 7.1 not exceeding Two
Hundred and Fifty Thousand Dollars ($250,000) in the aggregate in any fiscal
year.
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.
16
<PAGE> 20
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; provided
that this Section 7.3 shall not apply to (i) the purchase of inventory,
equipment or intellectual property rights in any single transaction valued at
less than Two Hundred Fifty Thousand Dollars ($250,000) in the ordinary course
of business or (ii) transactions among Subsidiaries or among Borrower and its
Subsidiaries in which Borrower is the surviving entity.
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, provided, that (i) Borrower may declare and make any
dividend payment or other distribution payable in its equity securities, (ii)
Borrower may convert any of its convertible securities into other securities
pursuant to the terms of such convertible securities or otherwise in exchange
therefor and (iii) for so long as an Event of Default has not occurred, Borrower
may repurchase stock from former employees of Borrower in accordance with the
terms of repurchase or similar agreements between Borrower and such employees.
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 and
except for transactions with a Subsidiary that are upon fair and reasonable
terms and transactions constituting Permitted Investments.
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 Inventory. Store the Inventory with a bailee, warehouseman,
or similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as disclosed in the Schedule and as
Bank may approve in writing, Borrower shall keep the Inventory only at the
location set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended, 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 or Loan
for such purpose. Fail to (i) comply in all material respects with FDA's GMP
regulations and registration requirements; (ii) comply in all material respects
with Federal Food, Drug and Cosmetics Act, the Occupational Safety and Health
Act, the Environmental Protection Act, and the Toxic Substances Control Act;
(iii) meet the minimum funding requirements of ERISA, permit a reportable event
or prohibited transaction, as defined in ERISA, to occur; (iv) comply with the
Federal Fair Labor Standards Act in all material respects; or (v) violate any
law or regulation, in each case which violation could have a Material Adverse
Effect.
17
<PAGE> 21
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, the Advance 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 Section 6.8, 6.9, 6.10 or 6.11 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 ten (10) 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
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) 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 Advance 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 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 Advance 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 thirty (30)
days (provided that no Advance 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 Two Hundred Fifty
Thousand Dollars ($250,000) or that could have a Material Adverse Effect;
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 in an amount, individually or in the aggregate, of at least Two Hundred
Fifty Thousand Dollars ($250,000) shall be rendered against
18
<PAGE> 22
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);
8.9 Misrepresentations. If any material misrepresentation or
material misstatement 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.
8.10 Change of Control. If any "person" or "group" (within the
meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of a sufficient number of shares
of all classes of stock then outstanding of Borrower ordinarily entitled to vote
in the election of directors, empowering such "person" or "group" to elect a
majority of the Board of Directors of Borrower.
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 reasonably 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, for up to one hundred twenty (120) days 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 and pursuant to applicable law) 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 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
19
<PAGE> 23
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. 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; (f) file, in its
sole discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (g) transfer the Collateral into the name of Bank or
a third party to the extent permitted under the California Uniform Commercial
Code 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. After the occurrence and during the
continuance of an Event of Default, 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 when due
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; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 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 Section 9207 of the Code and only so long as any Obligations remain
outstanding and unpaid under this Agreement, 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.
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
20
<PAGE> 24
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.
21
<PAGE> 25
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, to Borrower or to Bank, as the case may be, at its addresses set
forth below:
If to Borrower: Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, CA 94086
Attn: Mr. David W. Gryska, Chief Financial Officer
FAX: (408) 737-1700
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Ms. Debra Springer-Bowman
FAX: (650) 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.
12. GENERAL PROVISIONS
12.1 Successors and Assigns.
(a) 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
participations in all or any part of, or any interest in Bank's obligations,
rights and benefits hereunder subject to the provisions of this Section 12.1.
(b) Bank may sell, negotiate or grant participations to
other financial institutions in all or part of the obligations of the Borrower
outstanding under the Loan Documents, without notice to or the approval of
Borrower; provided that any such sale, negotiation or participation shall be in
compliance with the applicable federal and state securities laws and the other
requirements of this Section 12.1. Notwithstanding the sale, negotiation or
grant
22
<PAGE> 26
of participations, Bank shall remain solely responsible for the performance of
its obligations under this Agreement, and Borrower shall continue to deal solely
and directly with Bank in connection with this Agreement and the other Loan
Documents.
(c) The grant of a participation interest shall be on such
terms as Bank determines are appropriate, provided only that (1) the holder of
such a participation interest shall not have any of the rights of Bank under
this Agreement except, if the participation agreement so provides, rights to
demand the payment of costs of the type described in Section 2.6, (ii) extend
the term of this Agreement, (iii) decrease the rate of interest or the amount of
any fee or any other amount payable to Bank under this Agreement, (iv) reduce
the principal amount payable under this Agreement, or (v) extend the date fixed
for the payment of principal or interest or any other amount payable under this
Agreement.
(d) Bank may assign, from time to time, all or any portion
of its pro rata share of the Committed Loan Amount to an Affiliate of the Bank
or to the Federal Reserve Bank or, subject to the prior written approval of
Borrower (which approval will not be unreasonably withheld), to any other
financial institution; provided, that the parties to each such assignment shall
execute and deliver to Borrower an assignment agreement in a form renewable
acceptable to each. Upon such execution and delivery, from and after the
effective date specified in such assignment agreement (x) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such assignment
agreement, have the rights and obligations of Bank hereunder and (y) Bank shall,
to the extent that rights and obligations hereunder have been assigned by it
pursuant to such assignment agreement, relinquish its rights and be released
from its obligations under this Agreement (other than pursuant to this Section
12.1(d)), and, in the case of an assignment agreement covering all or the
remaining portion of Bank's rights and obligations under this Agreement, Bank
shall cease to be a party hereto. In the event of an assignment hereunder, the
parties agree to amend this Agreement to the extent necessary to reflect the
mechanical changes which are necessary to document such assignment and which are
standard for a multi-bank credit facility.
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 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.
12.6 Survival. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations (excluding Obligations under Section 2.6 and 12.2 to the extent they
remain inchoate at the time the outstanding payment Obligations are paid in
full) 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, provided that
so long as the obligations set forth in the first sentence of this Section 12.8
have been satisfied, and Bank has no commitment to make any Advance or to make
any other loans to Borrower, Bank shall release all security interests granted
hereunder and redeliver all Collateral held by it in accordance with applicable
law.
23
<PAGE> 27
12.7 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 Advances, 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 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.
CARDIAC PATHWAYS CORPORATION
By: /s/ David W. Gryska
---------------------------------
Title: CFO
------------------------------
SILICON VALLEY BANK
By: /s/ D.S. Bowman
---------------------------------
Title: Vice President
------------------------------
24
<PAGE> 28
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,
except those which were purchased pursuant to a lease agreement, 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, securities
entitlements, financial assets, investment properties, securities accounts,
securities entitlements, 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.
25
<PAGE> 29
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: CARDIAC PATHWAYS CORPORATION
---------------------------------------------------------------------------
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 (TERM 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)
26
<PAGE> 30
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: CARDIAC PATHWAYS CORPORATION
The undersigned authorized officer of Cardiac Pathways Corporation 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> <C>
10-K 10-Q within 5 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Liquidity/Cash Burn Report(1) Monthly within 25 days Yes No
</TABLE>
(1) Only required if Liquidity below $20,000,000.
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Quarterly Basis:
Total Liabilities/Tangible Net Worth (2) _____:1.0 Yes No
Tangible Net Worth (3) $_______ Yes No
Liquidity/Debt Service Coverage 2x obligations/_____:1.0 Yes No
Bank debt or 6 RML(4)
</TABLE>
(2)(i) prior to Equity Infusion, 1.75 to 1.00, (ii) following Equity Infusion,
1.50 to 1.00
(3)(i) prior to Equity Infusion, 8,000,000, (ii) following Equity Infusion,
$18,000,000
(4) converts to Debt Service Coverage of 1.5:1.0 upon two
consecutive quarters of compliance with Debt Service Coverage
BANK USE ONLY
Received by:_______________________
AUTHORIZED SIGNER
Date:______________________________
Verified:__________________________
AUTHORIZED SIGNER
Date:______________________________
Compliance Status: Yes No
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
- ----------------------------------
SIGNATURE
- ----------------------------------
TITLE
- ----------------------------------
DATE
27
<PAGE> 31
EXHIBIT D
CONSENT TO RELEASE OF COLLATERAL
To: __________________
__________________
__________________
From: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Date: __________________, 1998
Cardiac Pathways Corporation ("Cardiac Pathways") has requested a line of
credit from Silicon Valley Bank. The line of credit is to be secured by all the
personal property of Cardiac Pathways, including equipment and inventory (the
"Inventory") in which Cardiac Pathways has any interest. Cardiac Pathways has
advised us that some of its Inventory are stored on your premises. It is
important to us that, if we need to exercise our remedies under the line of
credit, we have the right to remove the Inventory from your premises and sell or
otherwise dispose of the Inventory.
Please confirm that you have no interest in the Inventory and that you
irrevocably give us or our agents permission to promptly remove the Inventory
from your premises upon our giving notice to you that we are exercising our
remedies under the line of credit and upon payment of all warehousing and
transportation services due and owing to you at such time. Please confirm also
that you have not given to any person (other than Cardiac Pathways) the right to
remove the Inventory. Finally, please confirm that you will not issue any
warehouse receipts or documents of title, or release any of the Inventory, to
any person except in the ordinary course of business and that, upon our notice
to you that a default has occurred under our agreement with Cardiac Pathways,
you will release the Inventory only to Silicon Valley Bank or any other person
designated by us.
Your agreement with the above is important to our making the proposed line
of credit available to Cardiac Pathways. Please sign and return a copy of this
Consent as promptly as possible to the undersigned, in the envelope provided.
Thank you for your consideration.
SILICON VALLEY BANK
By:_________________________________
Title:______________________________
We confirm the foregoing.
__________________________________
By:_______________________________
Date:_____________________________
cc:_______________________________
29
<PAGE> 32
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Cardiac Pathways Corporation Bank: Silicon Valley Bank
- --------------------------------------------------------------------------------
LOAN TYPE. This is a Variable/Fixed Rate, Term Loan Facility of a principal
amount up to $8,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: General Corporate
Purposes.
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:
Facility Fee: $60,000
Other Charges Paid in Cash: $____
$ 100 UCC Search Fees
$ 100 UCC Filing Fees
$ TBD 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 MAY 15, 1998.
BORROWER:
__________________________________
__________________________________
Authorized Officer
___________________________________________________________________________
30
<PAGE> 33
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: Cardiac Pathways Corporation BANK:Silicon Valley Bank
- --------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. Cardiac Pathways Corporation ("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.
Endorsements: Loss payable clause to Bank with stipulation
that 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 May 15, 1998, 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 MAY 15, 1998.
GRANTOR:
CARDIAC PATHWAYS CORPORATION
x
Authorized Officer
- --------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION
PHONE:
DATE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
- --------------------------------------------------------------------------------
<PAGE> 34
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
BORROWER: Cardiac Pathways Corporation
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Cardiac Pathways
Corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and
complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
_________________________________________________ _________________________
_________________________________________________ _________________________
_________________________________________________ _________________________
_________________________________________________ _________________________
_________________________________________________ _________________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of May 15, 1998 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or notes
of the Corporation, on Lender's forms, at such rates of interest and on such
terms as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion of
the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable to or
belonging to the Corporation or in which the Corporation may have an interest,
and either to receive cash for the same or to cause such proceeds to be credited
to the account of the Corporation with Bank, or to cause such other disposition
of the proceeds derived therefrom as they may deem advisable.
1
<PAGE> 35
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on May 15, 1998, and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X
___________________________________________________________________________
Attachments:
1. Certificate of Incorporation
2. By-Laws
____________________________________
2
<PAGE> 1
EXHIBIT 10.17
LEASE AGREEMENT
(NNN)
BASIC LEASE INFORMATION
LEASE DATE: April 27, 1998
LANDLORD: SUNNYVALE BUSINESS PARK,
A CALIFORNIA LIMITED PARTNERSHIP
LANDLORD'S ADDRESS: c/o LPC MS, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404-1167
TENANT: Cardiac Pathways Corporation,
a Delaware corporation
TENANT'S ADDRESS: 995 Benecia Avenue
Sunnyvale, California 94086
PREMISES: Approximately 8,000 rentable square feet as
shown on Exhibit A
PREMISES ADDRESS: 824 W. California Avenue
Sunnyvale, California 94086
BUILDING: WAREHOUSE A: Approximately 102,810 rentable square feet
LOT: (BUILDING'S TAX PARCEL): APN #165-26-002
PARK: SUNNYVALE BUSINESS PARK: Approximately 594,788 rentable square feet
TERM: April 29, 1998, ("Commencement Date"), through
October 31, 2000 ("Expiration Date")
BASE RENT (Paragraph 3): Five thousand two hundred and 00/100 Dollars
($5,200.00) per month commencing April 29,
1998 through April 28, 1999.
ADJUSTMENTS TO BASE RENT: Effective 4/29/1999, the Base Rent shall
increase to $5,400.00 per month
Effective 4/29/2000, the Base Rent shall
increase to $5,600.00 per month
Security Deposit (Paragraph 4): Twenty thousand eight hundred and 00/100
Dollars ($20,800.00), subject to Section 4
of the Lease.
*TENANT'S SHARE OF OPERATING EXPENSES (Paragraph 6.1): 7.78% of the Building
*TENANT'S SHARE OF TAX EXPENSES (Paragraph 6.2): 7.78% of the Building
*TENANT'S SHARE OF COMMON AREA UTILITY COSTS
(Paragraph 7): 7.78% of the Building
*TENANT'S SHARE OF UTILITY EXPENSES (Paragraph 7): 7.78% of the Building
*The amount of Tenant's Share of the expenses as referenced above shall be
subject to modification as set forth in this Lease.
PERMITTED USES (Paragraph 9): The warehouse, storage office and testing of
medical device goods, but only to the extent
permitted by the City of Sunnyvale and all
agencies and governmental authorities having
jurisdiction thereof
UNRESERVED
PARKING SPACES: Eight (8) non-exclusive and non-designated
spaces
BROKER (Paragraph 38): Cooper-Brady for Tenant
LPC MS, Inc. for Landlord
EXHIBITS: Exhibit A - Premises, Building, Lot
and/or Park
Exhibit B - Intentionally omitted
Exhibit C - Rules and Regulations
Exhibit D - Covenants, Conditions and
Restrictions
Exhibit E - Hazardous Materials Disclosure
Certificate - Example
Exhibit F - Change of Commencement Date -
Example
Exhibit G - Tenant's Initial Hazardous
Materials Disclosure Certificate
Exhibit H Sign Criteria (Intentionally
omitted)
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
1. PREMISES...................................................................................................3
2. ADJUSTMENT OF COMMENCEMENT DATE; CONDITION OF THE PREMISES.................................................3
3. RENT.......................................................................................................3
4. SECURITY DEPOSIT...........................................................................................4
5. TENANT IMPROVEMENTS........................................................................................4
6. ADDITIONAL RENT............................................................................................4
7. UTILITIES..................................................................................................7
8. LATE CHARGES...............................................................................................7
9. USE OF PREMISES............................................................................................8
10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES.......................................................9
11. REPAIRS AND MAINTENANCE....................................................................................9
12. INSURANCE.................................................................................................10
13. WAIVER OF SUBROGATION.....................................................................................11
14. LIMITATION OF LIABILITY AND INDEMNITY.....................................................................12
15. ASSIGNMENT AND SUBLEASING.................................................................................12
16. AD VALOREM TAXES..........................................................................................13
17. SUBORDINATION.............................................................................................14
18. RIGHT OF ENTRY............................................................................................14
19. ESTOPPEL CERTIFICATE......................................................................................14
20. TENANT'S DEFAULT..........................................................................................15
21. REMEDIES FOR TENANT'S DEFAULT.............................................................................15
22. HOLDING OVER..............................................................................................16
23. LANDLORD'S DEFAULT (Intentionally Omitted)................................................................16
24. PARKING...................................................................................................17
25. SALE OF PREMISES..........................................................................................17
26. WAIVER....................................................................................................17
27. CASUALTY DAMAGE...........................................................................................17
28. CONDEMNATION..............................................................................................18
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS.................................................................18
30. FINANCIAL STATEMENTS......................................................................................20
31. GENERAL PROVISIONS........................................................................................20
32. SIGNS.....................................................................................................22
33. MORTGAGEE PROTECTION......................................................................................22
34. QUITCLAIM.................................................................................................22
35. MODIFICATIONS FOR LENDER..................................................................................22
36. WARRANTIES OF TENANT......................................................................................22
37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT...........................................................22
38. BROKERAGE COMMISSION......................................................................................23
39. QUIET ENJOYMENT...........................................................................................23
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS............................................23
41. CONDITION OF EFFECTIVENESS OF LEASE.......................................................................24
</TABLE>
2
<PAGE> 3
LEASE AGREEMENT
DATE: This Lease is made and entered into as of the Lease Date set forth
on Page 1. The Basic Lease Information set forth on Page 1 and
this Lease are and shall be construed as a single instrument.
1. PREMISES: Landlord hereby leases the Premises to Tenant upon the terms
and conditions contained herein. Landlord hereby grants to Tenant a license for
the right to use, on a non-exclusive basis, parking areas and ancillary
facilities located within the Common Areas of the Park, subject to the terms of
this Lease. Landlord and Tenant hereby agree that for purposes of this Lease, as
of the Lease Date, the rentable square footage area of the Premises, the
Building, the Lot and the Park shall be deemed to be the number of rentable
square feet as set forth in the Basic Lease Information on Page 1. Tenant hereby
acknowledges that the rentable square footage of the Premises may include a
proportionate share of certain areas used in common by all occupants of the
Building and/or the Park (for example an electrical room or telephone room).
Tenant further agrees that the number of rentable square feet of the Building,
the Lot and the Park may subsequently change after the Lease Date commensurate
with any modifications to any of the foregoing by Landlord, and Tenant's Share
shall accordingly change.
2. ADJUSTMENT OF COMMENCEMENT DATE; CONDITION OF THE PREMISES:
2.1 If Landlord cannot deliver possession of the Premises on the
Commencement Date, Landlord shall not be subject to any liability nor shall the
validity of the Lease be affected; provided, the Lease Term and the obligation
to pay Rent shall commence on the date possession is tendered and the Expiration
Date shall be extended commensurately. In the event the commencement date and/or
the expiration date of this Lease is other than the Commencement Date and/or
Expiration Date specified in the Basic Lease Information, as the case may be,
Landlord and Tenant shall execute a written amendment to this Lease,
substantially in the form of Exhibit F hereto, wherein the parties shall specify
the actual commencement date, expiration date and the date on which Tenant is to
commence paying Rent. The word "Term" whenever used herein refers to the initial
term of this Lease and any extension thereof. By taking possession of the
Premises, Tenant shall be deemed to have accepted the Premises in its existing
condition and state of repair. Tenant hereby acknowledges and agrees that
neither Landlord nor Landlord's agents or representatives has made any
representations or warranties as to the suitability, safety or fitness of the
Premises for the conduct of Tenant's business, Tenant's intended use of the
Premises or for any other purpose.
2.2 In the event Landlord permits Tenant to occupy the Premises
prior to the Commencement Date, such occupancy shall be at Tenant's sole risk
and subject to all the provisions of this Lease, including, but not limited to,
the requirement to pay Rent and the Security Deposit, and to obtain the
insurance required pursuant to this Lease and to deliver insurance certificates
as required herein. In addition to the foregoing, Landlord shall have the right
to impose such additional conditions on Tenant's early entry as Landlord shall
deem appropriate. If, at any time, Tenant is in default of any term, condition
or provision of this Lease, any such waiver by Landlord of Tenant's requirement
to pay rental payments shall be null and void and Tenant shall immediately pay
to Landlord all rental payments so waived by Landlord.
3. RENT: On the date that Tenant executes this Lease, Tenant shall deliver
to Landlord the original executed Lease, the Base Rent in the amount of
$31,200.00 (which shall be applied against the Base Rent payable for the first
six (6) months Tenant is required to pay Base Rent), the Security Deposit, and
all insurance certificates evidencing the insurance required to be obtained by
Tenant under Section 12 of this Lease. Tenant agrees to pay Landlord, without
prior notice or demand, or abatement, offset, deduction or claim, the Base Rent
described in the Basic Lease Information, payable in advance at Landlord's
address specified in the Basic Lease Information on the Commencement Date and
thereafter on the first (1st) day of each month throughout the balance of the
Term of the Lease. In addition to the Base Rent set forth in the Basic Lease
Information, Tenant shall pay Landlord in advance on the Commencement Date and
thereafter on the first (1st) day of each month throughout the balance of the
Term of this Lease, as Additional Rent, Tenant's Share of Operating Expenses,
Tax Expenses, Common Area Utility Costs, and Utility Expenses, as well as the
Administrative Expenses. Tenant shall also pay to Landlord as Additional Rent
hereunder, immediately on Landlord's demand therefor, any and all costs and
expenses incurred by Landlord to enforce the provisions of this Lease,
including, but not limited to, costs associated with the delivery of notices,
delivery and recordation of notice(s) of default, attorneys' fees, expert fees,
court costs and filing fees (collectively, the "Enforcement Expenses"). The term
"Rent" whenever used herein refers to the aggregate of all these amounts. If
Landlord permits Tenant to occupy the Premises without requiring Tenant to pay
rental payments for a period of time, the waiver of the requirement to pay
rental payments shall only apply to waiver of the Base Rent and Tenant shall
otherwise perform all other obligations of Tenant required hereunder. The Rent
for any fractional part of a calendar month at the commencement or termination
of the Lease term shall be a prorated amount of the Rent for a full calendar
month based upon a thirty (30) day month. The prorated Rent shall be
3
<PAGE> 4
paid on the Commencement Date and the first day of the calendar month in which
the date of termination occurs, as the case may be.
4. SECURITY DEPOSIT: Upon Tenant's execution of this Lease, Tenant shall
deliver to Landlord, as a Security Deposit for the performance by Tenant of its
obligations under this Lease, the amount specified in the Basic Lease
Information. If Tenant is in default (beyond any applicable notice and cure
periods described in Section 20 of the Lease), Landlord may, but without
obligation to do so, use the Security Deposit, or any portion thereof, to cure
the default or to compensate Landlord for all damages sustained by Landlord
resulting from Tenant's default, including, but not limited to the Enforcement
Expenses. Tenant shall, immediately on demand, pay to Landlord a sum equal to
the portion of the Security Deposit so applied or used so as to replenish the
amount of the Security Deposit held to increase such deposit to the amount
initially deposited with Landlord. At any time after Tenant has defaulted
hereunder, Landlord may require an increase in the amount of the Security
Deposit required hereunder for the then balance of the Lease Term and Tenant
shall, immediately on demand, pay to Landlord additional sums in the amount of
such increase. As soon as practicable after the termination of this Lease,
Landlord shall return the Security Deposit to Tenant, less such amounts as are
reasonably necessary, as determined solely by Landlord, to remedy Tenant's
default(s) hereunder or to otherwise restore the Premises to a clean and safe
condition, reasonable wear and tear excepted. If the cost to restore the
Premises exceeds the amount of the Security Deposit, Tenant shall promptly
deliver to Landlord any and all of such excess sums as reasonably determined by
Landlord. Landlord shall not be required to keep the Security Deposit separate
from other funds, and, unless otherwise required by law, Tenant shall not be
entitled to interest on the Security Deposit. In no event or circumstance shall
Tenant have the right to any use of the Security Deposit and, specifically,
Tenant may not use the Security Deposit as a credit or to otherwise offset any
payments required hereunder, including, but not limited to, Rent or any portion
thereof. Notwithstanding the above, provided Tenant is not or has not been in
default of the Lease (beyond any applicable notice and cure periods described in
Section 20 of the Lease), Landlord shall apply $5,200 of the Security Deposit
shall be applied to the Base Rent due in month 17 and month 25 of the Lease Term
and the amount of the Security Deposit will be thereby reduced by said amounts.
5. TENANT IMPROVEMENTS: Tenant hereby accepts the Premises as suitable for
Tenant's intended use and as being in an "AS IS" condition. Tenant acknowledges
and agrees that neither Landlord nor any of Landlord's agents, representatives
or employees has made any representations as to the suitability, fitness or
condition of the Premises for the conduct of Tenant's business or for any other
purpose, including without limitation, any storage incidental thereto. Tenant
further acknowledges and agrees that neither Landlord nor any of Landlord's
agents, representatives or employees has agreed to perform or undertake (i) any
alterations to the Premises, or (ii) construct any improvements in or to the
Premises (collectively, "Tenant Improvements"). Any exception to the foregoing
provisions must be made by express written agreement by both parties. However,
Tenant shall have the right to remove, at its sole cost and expense, a wall in
the existing office area. Tenant agrees at Landlord's discretion to replace said
wall upon the termination of the Lease.
6. ADDITIONAL RENT : It is intended by Landlord and Tenant that this Lease
be a "triple net lease." The costs and expenses described in this Section 6 and
all other sums, charges, costs and expenses specified in this Lease other than
Base Rent are to be paid by Tenant to Landlord as additional rent (collectively,
"Additional Rent").
6.1 OPERATING EXPENSES: In addition to the Base Rent set forth in
Section 3, Tenant shall pay Tenant's Share, which is specified in the Basic
Lease Information, of all Operating Expenses as Additional Rent. The term
"Operating Expenses" as used herein shall mean the total amounts paid or payable
by Landlord in connection with the ownership, maintenance, repair and operation
of the Premises, the Building and the Lot, and where applicable, of the Park
referred to in the Basic Lease Information. The amount of Tenant's Share of
Operating Expenses shall be reviewed from time to time by Landlord and shall be
subject to modification by Landlord if there is a change in the rentable square
footage of the Premises, the Building and/or the Park. Notwithstanding the
foregoing, Operating Expenses incurred for common areas of the Park shall be
allocated on a pro rated and equitable basis to the Building. These Operating
Expenses may include, but are not limited to:
6.1.1 Landlord's cost of repairs to, and maintenance of, the
non-structural portion of the roof, the roof membrane and the
non-structural portions of the exterior walls of the Building;
6.1.2 Landlord's cost of maintaining the outside paved area,
landscaping and other common areas for the Park. The term "Common Areas"
shall mean all areas and facilities within the Park exclusive of the
Premises and the other portions of the Park leasable exclusively to
other tenants. The Common Areas include, but are not limited to,
interior lobbies, mezzanines, parking areas, access and perimeter roads,
sidewalks, rail spurs, landscaped areas and similar areas and
facilities;
4
<PAGE> 5
6.1.3 Landlord's annual cost of insurance insuring against
fire and extended coverage (including, if Landlord elects, "all risk" or
"special purpose" coverage) and all other insurance, including, but not
limited to, earthquake, flood and/or surface water endorsements for the
Building, the Lot and the Park (including the Common Areas), rental
value insurance against loss of Rent in an amount equal to the amount of
Rent for a period of at least six (6) months commencing on the date of
loss, and subject to the provisions of Section 27 below, any deductible;
6.1.4 Landlord's cost of: (i) modifications and/or new
improvements to the Building, the Common Areas and/or the Park
occasioned by any rules, laws or regulations effective subsequent to the
date on which the Building was originally constructed; (ii) reasonably
necessary replacement improvements to the Building, the Common Areas and
the Park after the Lease Date; and (iii) new improvements to the
Building, the Common Areas and/or the Park that reduce operating costs
or improve life/safety conditions, all as reasonably determined by
Landlord, in its sole discretion;
6.1.5 If Landlord elects to so procure, Landlord's cost of
preventative maintenance, and repair contracts including, but not
limited to, contracts for elevator systems and heating, ventilation and
air conditioning systems, lifts for disabled persons, and trash or
refuse collection;
6.1.6 Landlord's cost of security and fire protection services
for the Building and/or the Park, as the case may be, if in Landlord's
sole discretion such services are provided;
6.1.7 Landlord's cost of supplies, equipment, rental equipment
and other similar items used in the operation and/or maintenance of the
Park; and
6.1.8 Landlord's cost for the repairs and maintenance items
set forth in Section 11.2 below.
Notwithstanding anything to the contrary contained herein, for
purposes of this Lease, the term "Operating Expenses" shall not include the
following:
(a) Costs (including permit, license, and inspection fees)
incurred in renovating, improving, decorating, painting, or redecorating
vacant space or space for other tenants within the Park;
(b) Costs incurred because Landlord or another tenant
actually violated the terms of any lease for premises within the
Buildings and/or Park;
(c) Legal and auditing fees (other than those fees
reasonably incurred in connection with the maintenance and operation of
the Buildings and/or Park), leasing commissions, advertising expenses,
and other costs incurred in connection with the original development or
original leasing of the Buildings and/or Park or future re-leasing of
the Buildings and/or Park;
(d) Depreciation of the Buildings or any other improvements
situated within the Park;
(e) Any items for which Landlord is actually reimbursed by
insurance or by direct reimbursement by any other tenant of the
Buildings or Park;
(f) Costs of repairs or other work necessitated by fire,
windstorm or other casualty (excluding any commercially reasonable
deductibles) and/or costs of repair or other work necessitated by the
exercise of the right of eminent domain to the extent insurance proceeds
or a condemnation award, as applicable, is actually received by Landlord
for such purposes; provided such costs of repairs or other work shall be
paid by the parties in accordance with the provisions of Sections 27 and
28 below;
(g) Other than any interest charges for capital improvements
referred to in Section 6.1.4 hereinabove, any interest or payments on
any financing for the Buildings or the Park, interest and penalties
incurred as a result of Landlord's late payment of any invoice (provided
that Tenant pays Tenant's Share of Operating Expenses and Tax Expenses
to Landlord when due as set forth herein), and any bad debt loss, rent
loss or reserves for same;
(h) Costs associated with the investigation and/or
remediation of Hazardous Materials (hereafter defined) present in, on or
about the Premises, the Buildings or the Park, unless such costs and
expenses are the responsibility of Tenant as provided in Section 29 of
this Lease, in which event such costs and expenses shall be paid solely
by Tenant in accordance with the provisions of Section 29 of this Lease;
(i) Costs of correcting defects in the initial design or
construction of the Shell Improvements or the repair or replacement of
any original materials and equipment as a result of such defects, as
long as such defects are covered by warranties from the contractors
performing such work and Landlord has actually received compensation
therefor; and
5
<PAGE> 6
(j) Landlord's cost for the repairs and maintenance items
set forth in Section 11.3 below.
6.2 TAX EXPENSES: In addition to the Base Rent set forth in Section
3, Tenant shall pay its share, which is specified in the Basic Lease
Information, of all real property taxes applicable to the land and improvements
included within the Lot on which the Premises are situated and one hundred
percent (100%) of all personal property taxes now or hereafter assessed or
levied against the Premises or Tenant's personal property. The amount of
Tenant's Share of Tax Expenses shall be reviewed from time to time by Landlord
and shall be subject to modification by Landlord if there is a change in the
rentable square footage of the Premises, the Building and/or the Park. Tenant
shall also pay one hundred percent (100%) of any increase in real property taxes
attributable, in Landlord's reasonable discretion, to any and all alterations or
other improvements of any kind, which are above standard improvements
customarily installed for similar buildings located within the Building or the
Park (as applicable), whatsoever placed in, on or about the Premises for the
benefit of, at the request of, or by Tenant. The term "Tax Expenses" shall mean
and include, without limitation, any form of tax and assessment (general,
special, supplemental, ordinary or extraordinary), commercial rental tax,
payments under any improvement bond or bonds, license fees, license tax,
business license fee, rental tax, transaction tax, levy, or penalty imposed by
authority having the direct or indirect power of tax (including any city,
county, state or federal government, or any school, agricultural, lighting,
drainage or other improvement district thereof) as against any legal or
equitable interest of Landlord in the Premises, the Building, the Lot or the
Park, as against Landlord's right to rent or as against Landlord's business of
leasing the Premises or the occupancy of Tenant or any other tax, fee, or
excise, however described, including, but not limited to, any value added tax,
or any tax imposed in substitution (partially or totally) of any tax previously
included within the definition of real property taxes, or any additional tax the
nature of which was previously included within the definition of real property
taxes. The term "Tax Expenses" shall not include any franchise, estate,
inheritance, net income, or excess profits tax imposed upon Landlord.
6.3 ADMINISTRATIVE EXPENSES: The Administrative Expenses set forth
in this Section 6.3 are considered part of Additional Rent. In addition to the
Base Rent set forth in Section 3 hereof, Tenant shall pay Landlord, without
prior notice or demand, commencing on the Commencement Date and continuing
thereafter on the first (1st) day of each month throughout the balance of the
Term of this Lease, as compensation to Landlord for accounting and management
services rendered on behalf of the Building and/or the Park, one-twelfth
(1/12th) of an amount equal to ten percent (10%) of the estimated amount of the
aggregate of the Tenant's Share of (i) the total Operating Expenses and Tax
Expenses as described in Sections 6.1 and 6.2 above, respectively, and (ii) all
Common Area Utility Costs for the Park and Utility Expenses for the Premises as
described in Section 7 below (collectively, the "Administrative Expenses"). Any
reconciliation of the Administrative Expenses shall be substantially in the same
manner as specified in Section 6.5 below, to the extent such provisions are
applicable. Tenant's obligation to pay such Administrative Expenses shall
survive the expiration or earlier termination of this Lease.
6.4 PAYMENT OF EXPENSES: Landlord shall estimate Tenant's Share of
the Operating Expenses and Tax Expenses for the calendar year in which the Lease
commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this
estimated amount shall be paid by Tenant to Landlord, as Additional Rent, and
thereafter on the first (1st) day of each month throughout the remaining months
of such calendar year. Thereafter, Landlord may estimate such expenses as of the
beginning of each calendar year during the Term of this Lease and Tenant shall
pay one-twelfth (1/12th) of such estimated amount as Additional Rent hereunder
on the first (1st) day of each month during such calendar year and for each
ensuing calendar year throughout the Term of this Lease. Tenant's obligation to
pay Tenant's Share of Operating Expenses and Tax Expenses shall survive the
expiration or earlier termination of this Lease.
6.5 ANNUAL RECONCILIATION: By June 30th of each calendar year, or as
soon thereafter as reasonably possible Landlord shall endeavor to furnish Tenant
with an accounting of actual Operating Expenses and Tax Expenses. Within thirty
(30) days of Landlord's delivery of such accounting, Tenant shall pay to
Landlord the amount of any underpayment. Notwithstanding the foregoing, failure
by Landlord to give such accounting by such date shall not constitute a waiver
by Landlord of its right to collect any of Tenant's underpayment at any time.
Landlord shall credit the amount of any overpayment by Tenant toward the next
estimated monthly installment(s) falling due, or where the Term of the Lease has
expired, refund the amount of overpayment to Tenant. If the Term of the Lease
expires prior to the annual reconciliation of expenses Landlord shall have the
right to reasonably estimate Tenant's Share of such expenses, and if Landlord
determines that an underpayment is due, Tenant hereby agrees that Landlord shall
be entitled to deduct such underpayment from Tenant's Security Deposit. If
Landlord reasonably determines that an overpayment has been made by Tenant,
Landlord shall refund said overpayment to Tenant as soon as practicable
thereafter. Notwithstanding the foregoing, failure of Landlord to accurately
estimate Tenant's Share of such expenses or to otherwise perform such
reconciliation of expenses, including without limitation, Landlord's failure to
deduct any portion of any underpayment from Tenant's Security Deposit, shall not
constitute a waiver of Landlord's right to collect any of Tenant's underpayment
at any time during the Term of the Lease or at any time after the expiration or
earlier termination of this Lease.
6
<PAGE> 7
6.6 AUDIT: After delivery to Landlord of at least thirty (30) days
prior written notice, Tenant, at its sole cost and expense through any
accountant designated by it, shall have the right to examine and/or audit the
books and records evidencing such costs and expenses for the previous one (1)
calendar year, during Landlord's reasonable business hours but not more
frequently than once during any calendar year. Any such accounting firm
designated by Tenant may not be compensated on a contingency fee basis. The
results of any such audit (and any negotiations between the parties related
thereto) shall be maintained strictly confidential by Tenant and its accounting
firm and shall not be disclosed, published or otherwise disseminated to any
other party other than to Landlord and its authorized agents. Landlord and
Tenant shall use their best efforts to cooperate in such negotiations and to
promptly resolve any discrepancies between Landlord and Tenant in the accounting
of such costs and expenses.
7. UTILITIES: Utility Expenses, Common Area Utility Costs and all other
sums or charges set forth in this Section 7 are considered part of Additional
Rent. In addition to the Base Rent set forth in Section 3 hereof, Tenant shall
pay the cost of all water, sewer use, sewer discharge fees and sewer connection
fees, gas, heat, electricity, refuse pickup, janitorial service, telephone and
other utilities billed or metered separately to the Premises and/or Tenant.
Tenant shall also pay Tenant's Share of any assessments or charges for utility
or similar purposes included within any tax bill for the Lot on which the
Premises are situated, including, without limitation, entitlement fees,
allocation unit fees, and/or any similar fees or charges, and any penalties
related thereto. For any such utility fees or use charges that are not billed or
metered separately to Tenant, including without limitation, water and refuse
pick up charges, Tenant shall pay to Landlord, as Additional Rent, without prior
notice or demand, on the Commencement Date and thereafter on the first (1st) day
of each month throughout the balance of the Term of this Lease the amount which
is attributable to Tenant's use of the utilities or similar services, as
reasonably estimated and determined by Landlord based upon factors such as size
of the Premises and intensity of use of such utilities by Tenant such that
Tenant shall pay the portion of such charges reasonably consistent with Tenant's
use of such utilities and similar services ("Utility Expenses"). If Tenant
disputes any such estimate or determination, then Tenant shall either pay the
estimated amount or cause the Premises to be separately metered at Tenant's sole
expense. In addition, Tenant shall pay to Landlord Tenant's Share of any Common
Area utility costs, fees, charges or expenses ("Common Area Utility Costs").
Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated amount of
Tenant's Share of the Common Area Utility Costs on the Commencement Date and
thereafter on the first (1st) day of each month throughout the balance of the
Term of this Lease and any reconciliation thereof shall be substantially in the
same manner as specified in Section 6.5 above. The amount of Tenant's Share of
Common Area Utility Costs shall be reviewed from time to time by Landlord and
shall be subject to modification by Landlord if there is a change in the
rentable square footage of the Premises, the Building and/or the Park. Tenant
acknowledges that the Premises may become subject to the rationing of utility
services or restrictions on utility use as required by a public utility company,
governmental agency or other similar entity having jurisdiction thereof.
Notwithstanding any such rationing or restrictions on use of any such utility
services, Tenant acknowledges and agrees that its tenancy and occupancy
hereunder shall be subject to such rationing restrictions as may be imposed upon
Landlord, Tenant, the Premises, the Building or the Park, and Tenant shall in no
event be excused or relieved from any covenant or obligation to be kept or
performed by Tenant by reason of any such rationing or restrictions. Tenant
further agrees to timely and faithfully pay, prior to delinquency, any amount,
tax, charge, surcharge, assessment or imposition levied, assessed or imposed
upon the Premises, or Tenant's use and occupancy thereof. Notwithstanding
anything to the contrary contained herein, if permitted by applicable Laws,
Landlord shall have the right at any time and from time to time during the Term
of this Lease to either contract for service from a different company or
companies (each such company shall be referred to herein as an "Alternate
Service Provider") other than the company or companies presently providing
electricity service for the Building or the Park (the "Electric Service
Provider") or continue to contract for service from the Electric Service
Provider, at Landlord's sole discretion. Tenant hereby agrees to cooperate with
Landlord, the Electric Service Provider, and any Alternate Service Provider at
all times and, as reasonably necessary, shall allow Landlord, the Electric
Service Provider, and any Alternate Service Provider reasonable access to the
Building's electric lines, feeders, risers, wiring, and any other machinery
within the Premises.
8. LATE CHARGES: Any and all sums or charges set forth in this Section 8
are considered part of Additional Rent. Tenant acknowledges that late payment
(the second day of each month or any time thereafter) by Tenant to Landlord of
Base Rent, Tenant's Share of Operating Expenses, Tax Expenses, Common Area
Utility Costs, and Utility Expenses, Administrative Expenses or other sums due
hereunder, will cause Landlord to incur costs not contemplated by this Lease,
the exact amount of such costs being extremely difficult and impracticable to
fix. Such costs include, without limitation, processing and accounting charges,
and late charges that may be imposed on Landlord by the terms of any note
secured by any encumbrance against the Premises, and late charges and penalties
due to the late payment of real property taxes on the Premises. Therefore, if
any installment of Rent or any other sum due from Tenant is not received by
Landlord when due, Tenant shall promptly pay to Landlord all of the following,
as applicable: (a) an additional sum equal to ten percent (10%) of such
delinquent amount, (b) the amount of seventy-five dollars ($75) for each
three-day notice prepared for, or served on, Tenant, (c) the amount of fifty
dollars ($50) relating to checks for which there are not sufficient funds. If
Tenant delivers to Landlord a check for which there are not sufficient funds,
Landlord may, at its sole option, require Tenant to replace such check with a
cashier's check for the amount of such check and all other charges
7
<PAGE> 8
payable hereunder. The parties agree that this late charge and the other charges
referenced above represent a fair and reasonable estimate of the costs that
Landlord will incur by reason of late payment by Tenant. Acceptance of any late
charge or other charges shall not constitute a waiver by Landlord of Tenant's
default with respect to the delinquent amount, nor prevent Landlord from
exercising any of the other rights and remedies available to Landlord for any
other breach of Tenant under this Lease. If a late charge or other charge
becomes payable for any three (3) installments of Rent within any twelve (12)
month period, then Landlord, at Landlord's sole option, can either require the
Rent be paid quarterly in advance, or be paid monthly in advance by cashier's
check or by electronic funds transfer.
9. USE OF PREMISES:
9.1 COMPLIANCE WITH LAWS, RECORDED MATTERS, AND RULES AND
REGULATIONS: The Premises are to be used solely for the purposes and uses
specified in the Basic Lease Information and for no other uses or purposes
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed so long as the proposed use (i) does not
involve the use of Hazardous Materials other than as expressly permitted under
the provisions of Section 29 below, (ii) does not require any additional parking
in excess of the parking spaces already licensed to Tenant pursuant to the
provisions of Section 24 of this Lease, and (iii) is compatible and consistent
with the other uses then being made in the Park and in other similar types of
buildings in the vicinity of the Park, as reasonably determined by Landlord. The
use of the Premises by Tenant and its employees, representatives, agents,
invitees, licensees, subtenants, customers or contractors (collectively,
"Tenant's Representatives") shall be subject to, and at all times in compliance
with, (a) any and all applicable laws, ordinances, statutes, orders and
regulations as same exist from time to time (collectively, the "Laws"), (b) any
and all documents, matters or instruments, including without limitation, any
declarations of covenants, conditions and restrictions, and any supplements
thereto, each of which has been or hereafter is recorded in any official or
public records with respect to the Premises, the Building, the Lot and/or the
Park, or any portion thereof (collectively, the "Recorded Matters"), and (c) any
and all rules and regulations set forth in Exhibit C, attached to and made a
part of this Lease, and any other reasonable rules and regulations promulgated
by Landlord now or hereafter enacted relating to parking and the operation of
the Premises, the Building and the Park (collectively, the "Rules and
Regulations"). Tenant agrees to, and does hereby, assume full and complete
responsibility to ensure that the Premises are adequate to fully meet the needs
and requirements of Tenant's intended operations of its business within the
Premises, and Tenant's use of the Premises and that same are in compliance with
all applicable Laws throughout the Term of this Lease. Additionally, Tenant
shall be solely responsible for the payment of all costs, fees and expenses
associated with any modifications, improvements or alterations to the Premises,
Building, the Common Areas and/or the Park occasioned by the enactment of, or
changes to, any Laws to the extent such modifications, improvements or
alterations are necessitated due to Tenant's particular use of the Premises or
alterations, improvements or additions made to the Premises by or on behalf of
Tenant regardless of when such Laws became effective.
9.2 PROHIBITION ON USE: Tenant shall not use the Premises or permit
anything to be done in or about the Premises nor keep or bring anything therein
which will in any way conflict with any of the requirements of the Board of Fire
Underwriters or similar body now or hereafter constituted or in any way increase
the existing rate of or affect any policy of fire or other insurance upon the
Building or any of its contents, or cause a cancellation of any insurance
policy. No auctions may be held or otherwise conducted in, on or about the
Premises, the Building, the Lot or the Park without Landlord's written consent
thereto, which consent may be given or withheld in Landlord's sole discretion.
Tenant shall not do or permit anything to be done in or about the Premises which
will in any way obstruct or interfere with the rights of Landlord, other tenants
or occupants of the Building, other buildings in the Park, or other persons or
businesses in the area, or injure or annoy other tenants or use or allow the
Premises to be used for any unlawful purpose, as determined by Landlord, in its
reasonable discretion, for the benefit, quiet enjoyment and use by Landlord and
all other tenants or occupants of the Building or other buildings in the Park;
nor shall Tenant cause, maintain or permit any private or public nuisance in, on
or about the Premises, Building, Park and/or the Common Areas, including, but
not limited to, any offensive odors, noises, fumes or vibrations. Tenant shall
not damage or deface or otherwise commit or suffer to be committed any waste in,
upon or about the Premises. Tenant shall not place or store, nor permit any
other person or entity to place or store, any property, equipment, materials,
supplies, personal property or any other items or goods outside of the Premises
for any period of time. Tenant shall not permit any animals, including, but not
limited to, any household pets, to be brought or kept in or about the Premises.
Tenant shall place no loads upon the floors, walls, or ceilings in excess of the
maximum designed load permitted by the applicable Uniform Building Code or which
may damage the Building or outside areas; nor place any harmful liquids in the
drainage systems; nor dump or store waste materials, refuse or other such
materials, or allow such to remain outside the Building area, except for any
non-hazardous or non-harmful materials which may be stored in refuse dumpsters
or in any enclosed trash areas provided. Tenant shall honor the terms of all
Recorded Matters relating to the Premises, the Building, the Lot and/or the
Park. Tenant shall honor the Rules and Regulations. If Tenant fails to comply
with such Laws, Recorded Matters, Rules and Regulations or the provisions of
this Lease, Landlord shall have the right to collect from Tenant a reasonable
sum as a penalty, in addition to all rights and remedies of Landlord hereunder
including, but not limited to, the payment by Tenant to Landlord of all
Enforcement
8
<PAGE> 9
Expenses and Landlord's costs and expenses, if any, to cure any of such failures
of Tenant, if Landlord, at its sole option, elects to undertake such cure.
10. ALTERATIONS AND ADDITIONS; AND SURRENDER OF PREMISES:
10.1 ALTERATIONS AND ADDITIONS: Tenant shall not install any signs,
fixtures, improvements, nor make or permit any other alterations or additions to
the Premises without the prior written consent of Landlord. If any such
alteration or addition is expressly permitted by Landlord, Tenant shall deliver
at least twenty (20) days prior notice to Landlord, from the date Tenant intends
to commence construction, sufficient to enable Landlord to post a Notice of
Non-Responsibility. In all events, Tenant shall obtain all permits or other
governmental approvals prior to commencing any of such work and deliver a copy
of same to Landlord. All alterations and additions shall be installed by a
licensed contractor approved by Landlord, at Tenant's sole expense in compliance
with all applicable Laws (including, but not limited to, the ADA as defined
herein), Recorded Matters, and Rules and Regulations. Tenant shall keep the
Premises and the property on which the Premises are situated free from any liens
arising out of any work performed, materials furnished or obligations incurred
by or on behalf of Tenant. As a condition to Landlord's consent to the
installation of any fixtures, additions or other improvements, Landlord may
require Tenant to post and obtain a completion and indemnity bond for up to one
hundred fifty percent (150%) of the cost of the work.
10.2 SURRENDER OF PREMISES: Upon the termination of this Lease,
whether by forfeiture, lapse of time or otherwise, or upon the termination of
Tenant's right to possession of the Premises, Tenant will at once surrender and
deliver up the Premises, together with the fixtures (other than trade fixtures),
additions and improvements which Landlord has notified Tenant, in writing, that
Landlord will require Tenant not to remove, and in the condition in which the
Premises existed as of the Commencement Date, except for reasonable wear and
tear. Reasonable wear and tear shall not include any damage or deterioration to
the Premises which would have been prevented by proper maintenance by Tenant or
Tenant otherwise performing all of its obligations under this Lease. Upon such
termination of this Lease, Tenant shall remove all tenant signage, trade
fixtures, furniture, furnishings, personal property, additions, and other
improvements unless Landlord requests, in writing, that Tenant not remove some
or all of such fixtures (other than trade fixtures), additions or improvements
installed by, or on behalf of Tenant or situated in or about the Premises. By
the date which is twenty (20) days prior to such termination of this Lease,
Landlord shall notify Tenant in writing of those fixtures (other than trade
fixtures), alterations, additions and other improvements which Landlord shall
require Tenant not to remove from the Premises. Tenant shall repair any damage
caused by the installation or removal of such signs, trade fixtures, furniture,
furnishings, fixtures, additions and improvements which are to be removed from
the Premises by Tenant hereunder. If Landlord fails to so notify Tenant at least
twenty (20) days prior to such termination of this Lease, then Tenant shall
remove all tenant signage, alterations, furniture, furnishings, trade fixtures,
additions and other improvements installed in or about the Premises by, or on
behalf of Tenant. Tenant shall ensure that the removal of such items and the
repair of the Premises will be completed prior to such termination of this
Lease. Notwithstanding anything to the contrary, Landlord hereby acknowledges
that Tenant intends to expand the office area within the Premises to an area
consisting of approximately 1200 square feet in the aggregate.
11. REPAIRS AND MAINTENANCE:
11.1 TENANT'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for those
portions of the Building to be maintained by Landlord, as provided in Sections
11.2 and 11.3 below and except in the event of a casualty or condemnation as
described in Section 27 or 28 of this Lease, Tenant shall, at Tenant's sole cost
and expense, keep and maintain the Premises and the adjacent dock and staging
areas in good, clean and safe condition and repair to the reasonable
satisfaction of Landlord including, but not limited to, repairing any damage
caused by Tenant or Tenant's Representatives and replacing any property so
damaged by Tenant or Tenant's Representatives. Without limiting the generality
of the foregoing, Tenant shall be solely responsible for maintaining and
repairing all mechanical systems, heating, ventilation and air conditioning
systems exclusively serving the Premises, and for maintaining, repairing and
replacing (a) all plumbing, electrical wiring and equipment serving the
Premises, (b) all interior lighting (including, without limitation, light bulbs
and/or ballasts) and exterior lighting serving the Premises or adjacent to the
Premises, (c) all glass, windows, window frames, window casements, skylights,
interior and exterior doors, door frames and door closers, (d) all roll-up
doors, ramps and dock equipment, including without limitation, dock bumpers,
dock plates, dock seals, dock levelers and dock lights, (e) all tenant signage,
(f) lifts for disabled persons serving the Premises, (g) sprinkler systems, fire
protection systems and security systems, (h) all partitions, fixtures,
equipment, interior painting, and interior walls and floors of the Premises and
every part thereof (including, without limitation, any demising walls contiguous
to any portion of the Premises). Notwithstanding the above, in the event
replacement of the mechanical equipment, as outlined above is required during
the Term of the Lease, such replacement costs shall be initially paid for by
Landlord and shall be amortized over the useful life of the equipment which
shall not be greater than ten (10) years (at an interest rate as reasonably
9
<PAGE> 10
determined by Landlord) and Tenant shall reimburse Landlord by paying its pro
rata share of the monthly amortized costs (including interest charges) as part
of the Operating Expenses.
11.2 REIMBURSABLE REPAIRS AND MAINTENANCE OBLIGATIONS: Subject to the
provisions of Sections 6 and 9 of this Lease and except for (i) the obligations
of Tenant set forth in Section 11.1 above, (ii) the obligations of Landlord set
forth in Section 11.3 below, and (iii) the repairs rendered necessary by the
intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives, Landlord agrees, at Landlord's expense, subject to
reimbursement pursuant to Section 6 above, to keep in good repair the plumbing
and mechanical systems exterior to the Premises, the non-structural portions of
the roof, roof membranes, the non-structural portions of the exterior walls of
the Building, signage (exclusive of tenant signage), and exterior electrical
wiring and equipment, exterior lighting, exterior glass, exterior
doors/entrances and door closers, exterior window casements, exterior painting
of the Building (exclusive of the Premises), and underground utility and sewer
pipes outside the exterior walls of the Building. For purposes of this Section
11.2, the term "exterior" shall mean outside of and not exclusively serving the
Premises. Unless otherwise notified by Landlord, in writing, that Landlord has
elected to procure and maintain the following described contract(s), Tenant
shall procure and maintain (a) the heating, ventilation and air conditioning
systems preventative maintenance and repair contract(s); such contract(s) to be
on a bi-monthly or quarterly basis, as reasonably determined by Landlord, and
(b) the fire and sprinkler protection services and preventative maintenance and
repair contract(s) (including, without limitation, monitoring services); such
contract(s) to be on a bi-monthly or quarterly basis, as reasonably determined
by Landlord. Landlord reserves the right, but without the obligation to do so,
to procure and maintain (i) the heating, ventilation and air conditioning
systems preventative maintenance and repair contract(s), and/or (ii) the fire
and sprinkler protection services and preventative maintenance and repair
contract(s) (including, without limitation, monitoring services). If Landlord so
elects to procure and maintain any such contract(s), Tenant will reimburse
Landlord for the cost thereof in accordance with the provisions of Section 6
above. If Tenant procures and maintains any of such contract(s), Tenant will
promptly deliver to Landlord a true and complete copy of each such contract and
any and all renewals or extensions thereof, and each service report or other
summary received by Tenant pursuant to or in connection with such contract(s).
11.3 LANDLORD'S REPAIRS AND MAINTENANCE OBLIGATIONS: Except for
repairs rendered necessary by the intentional or negligent acts or omissions of
Tenant or any of Tenant's Representatives, Landlord agrees, at Landlord's sole
cost and expense, to (a) keep in good repair the structural portions of the
floors, foundations and exterior perimeter walls of the Building (exclusive of
glass and exterior doors), and (b) replace the structural portions of the roof
of the Building (excluding the roof membrane) as, and when, Landlord determines
such replacement to be necessary in Landlord's sole discretion.
11.4 TENANT'S FAILURE TO PERFORM REPAIRS AND MAINTENANCE OBLIGATIONS:
Except for normal maintenance and repair of the items described above, Tenant
shall have no right of access to or right to install any device on the roof of
the Building nor make any penetrations of the roof of the Building without the
express prior written consent of Landlord. If Tenant refuses or neglects to
repair and maintain the Premises and the adjacent areas properly as required
herein and to the reasonable satisfaction of Landlord and after written notice
by Landlord of Tenant's such failure, Landlord may, but without obligation to do
so, at any time make such repairs and/or maintenance without Landlord having any
liability to Tenant for any loss or damage that may accrue to Tenant's
merchandise, fixtures or other property, or to Tenant's business by reason
thereof, except to the extent any damage is caused by the willful misconduct or
gross negligence of Landlord or its authorized agents and representatives. In
the event Landlord makes such repairs and/or maintenance, upon completion
thereof Tenant shall pay to Landlord, as additional rent, the Landlord's costs
for making such repairs and/or maintenance, plus ten percent (10%) for overhead,
upon presentation of a bill therefor, plus any Enforcement Expenses. The
obligations of Tenant hereunder shall survive the expiration of the Term of this
Lease or the earlier termination thereof. Tenant hereby waives any right to
repair at the expense of Landlord under any applicable Laws now or hereafter in
effect respecting the Premises.
12. INSURANCE:
12.1 TYPES OF INSURANCE: Tenant shall maintain in full force and
effect at all times during the Term of this Lease, at Tenant's sole cost and
expense, for the protection of Tenant and Landlord, as their interests may
appear, policies of insurance issued by a carrier or carriers reasonably
acceptable to Landlord and its lender(s) which afford the following coverages:
(i) worker's compensation: statutory limits; (ii) employer's liability, as
required by law, with a minimum limit of $100,000 per employee and $500,000 per
occurrence; (iii) commercial general liability insurance (occurrence form)
providing coverage against any and all claims for bodily injury and property
damage occurring in, on or about the Premises arising out of Tenant's and
Tenant's Representatives' use and/or occupancy of the Premises. Such insurance
shall include coverage for blanket contractual liability, fire damage, premises,
personal injury and completed operations. Such insurance shall have a combined
single limit of not less than One Million Dollars ($1,000,000) per occurrence
with a Two Million Dollar ($2,000,000) aggregate limit and excess/umbrella
insurance in the amount of Two Million Dollars ($2,000,000). If Tenant has other
locations which it owns or leases, the policy shall include an aggregate limit
per location endorsement.
10
<PAGE> 11
If necessary, as reasonably determined by Landlord, Tenant shall provide for
restoration of the aggregate limit; (iv) "all risk" or "special purpose"
property insurance, including without limitation, sprinkler leakage, boiler and
machinery comprehensive form, if applicable of Tenant, covering damage to or
loss of any personal property, trade fixtures, inventory, fixtures and equipment
located in, on or about the Premises, and in addition, coverage for business
interruption of Tenant, together with, if the property of Tenant's invitees is
to be kept in the Premises, warehouser's legal liability or bailee customers
insurance for the full replacement cost of the property belonging to invitees
and located in the Premises. Such insurance shall be written on a replacement
cost basis (without deduction for depreciation) in an amount equal to one
hundred percent (100%) of the full replacement value of the aggregate of the
items referred to in this subparagraph (v); and (vi) such other insurance as
Landlord deems reasonably necessary and prudent or as may otherwise be required
by any of Landlord's lenders or joint venture partners.
12.2 INSURANCE POLICIES: Insurance required to be maintained by
Tenant shall be written by companies (i) licensed to do business in the State of
California, (ii) domiciled in the United States of America, and (iii) having a
"General Policyholders Rating" of at least A:X (or such higher rating as may be
required by a lender having a lien on the Premises) as set forth in the most
current issue of "A.M. Best's Rating Guides." Any deductible amounts under any
of the insurance policies required hereunder shall not exceed Ten Thousand
Dollars ($10,000). Tenant shall deliver to Landlord certificates of insurance
and true and complete copies of any and all endorsements required herein for all
insurance required to be maintained by Tenant hereunder at the time of execution
of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to
expiration of each policy, furnish Landlord with certificates of renewal or
"binders" thereof. Each certificate shall expressly provide that such policies
shall not be cancelable or otherwise subject to modification except after thirty
(30) days prior written notice to the parties named as additional insureds as
required in this Lease (except for cancellation for nonpayment of premium, in
which event cancellation shall not take effect until at least ten (10) days'
notice has been given to Landlord). Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms of this
Lease under a blanket insurance policy, provided such blanket policy expressly
affords coverage for the Premises and for Landlord as required by this Lease.
12.3 ADDITIONAL INSUREDS AND COVERAGE: Landlord, any property
management company and/or agent of Landlord for the Premises, the Building, the
Lot or the Park, and any lender(s) of Landlord having a lien against the
Premises, the Building, the Lot or the Park shall be named as additional
insureds under all of the policies required in Section 12.1(iii) above.
Additionally, such policies shall provide for severability of interest. All
insurance to be maintained by Tenant shall, except for workers' compensation and
employer's liability insurance, be primary, without right of contribution from
insurance maintained by Landlord. Any umbrella/excess liability policy (which
shall be in "following form") shall provide that if the underlying aggregate is
exhausted, the excess coverage will drop down as primary insurance. The limits
of insurance maintained by Tenant shall not limit Tenant's liability under this
Lease. It is the parties' intention that the insurance to be procured and
maintained by Tenant as required herein shall provide coverage for any and all
damage or injury arising from or related to Tenant's operations of its business
and/or Tenant's or Tenant's Representatives' use of the Premises and/or any of
the areas within the Park, whether such events occur within the Premises (as
described in Exhibit A hereto) or in any other areas of the Park. It is not
contemplated or anticipated by the parties that the aforementioned risks of loss
be borne by Landlord's insurance carriers, rather it is contemplated and
anticipated by Landlord and Tenant that such risks of loss be borne by Tenant's
insurance carriers pursuant to the insurance policies procured and maintained by
Tenant as required herein.
12.4 FAILURE OF TENANT TO PURCHASE AND MAINTAIN INSURANCE: In the
event Tenant does not purchase the insurance required in this Lease or keep the
same in full force and effect throughout the Term of this Lease (including any
renewals or extensions), Landlord may, but without obligation to do so, purchase
the necessary insurance and pay the premiums therefor. If Landlord so elects to
purchase such insurance, Tenant shall promptly pay to Landlord as Additional
Rent, the amount so paid by Landlord, upon Landlord's demand therefor. In
addition, Landlord may recover from Tenant and Tenant agrees to pay, as
Additional Rent, any and all Enforcement Expenses and damages which Landlord may
sustain by reason of Tenant's failure to obtain and maintain such insurance. If
Tenant fails to maintain any insurance required in this Lease, Tenant shall be
liable for all losses, damages and costs resulting from such failure.
13. WAIVER OF SUBROGATION: Landlord and Tenant hereby mutually waive their
respective rights of recovery against each other for any loss of, or damage to,
either parties' property to the extent that such loss or damage is insured by an
insurance policy required to be in effect at the time of such loss or damage.
Each party shall obtain any special endorsements, if required by its insurer
whereby the insurer waives its rights of subrogation against the other party.
This provision is intended to waive fully, and for the benefit of the parties
hereto, any rights and/or claims which might give rise to a right of subrogation
in favor of any insurance carrier. The coverage obtained by Tenant pursuant to
Section 12 of this Lease shall include, without limitation, a waiver of
subrogation endorsement attached to the certificate of insurance. The provisions
of this Section 13 shall not apply in those instances in which such waiver of
subrogation would invalidate such insurance coverage or would cause either
party's insurance coverage to be voided or otherwise uncollectible.
11
<PAGE> 12
14. LIMITATION OF LIABILITY AND INDEMNITY: Except to the extent of damage
resulting from the active gross negligence or willful misconduct of Landlord or
its authorized representatives, Tenant agrees to protect, defend (with counsel
acceptable to Landlord) and hold Landlord and Landlord's lenders, partners,
members, property management company (if other than Landlord), agents,
directors, officers, employees, representatives, contractors, shareholders,
successors and assigns and each of their respective partners, members,
directors, employees, representatives, agents, contractors, shareholders,
successors and assigns (collectively, the "Indemnitees") harmless and indemnify
the Indemnitees from and against all liabilities, damages, claims, losses,
judgments, charges and expenses (including reasonable attorneys' fees, costs of
court and expenses necessary in the prosecution or defense of any litigation
including the enforcement of this provision) arising from or in any way related
to, directly or indirectly, (i) Tenant's or Tenant's Representatives' use of the
Premises, Building and/or the Park, (ii) the conduct of Tenant's business, (iii)
from any activity, work or thing done, permitted or suffered by Tenant in or
about the Premises, (iv) in any way connected with the Premises or with the
improvements or personal property therein, including, but not limited to, any
liability for injury to person or property of Tenant, Tenant's Representatives,
or third party persons, and/or (v) Tenant's failure to perform any covenant or
obligation of Tenant under this Lease. Tenant agrees that the obligations of
Tenant herein shall survive the expiration or earlier termination of this Lease.
Except to the extent of damage resulting from the active gross
negligence or willful misconduct of Landlord or its authorized representatives,
to the fullest extent permitted by law, Tenant agrees that neither Landlord nor
any of Landlord's lender(s), partners, members, employees, representatives,
legal representatives, successors or assigns shall at any time or to any extent
whatsoever be liable, responsible or in any way accountable for any loss,
liability, injury, death or damage to persons or property which at any time may
be suffered or sustained by Tenant or by any person(s) whomsoever who may at any
time be using, occupying or visiting the Premises, the Building or the Park,
including, but not limited to, any acts, errors or omissions by or on behalf of
any other tenants or occupants of the Building and/or the Park. Tenant shall
not, in any event or circumstance, be permitted to offset or otherwise credit
against any payments of Rent required herein for matters for which Landlord may
be liable hereunder. Landlord and its authorized representatives shall not be
liable for any interference with light or air, or for any latent defect in the
Premises or the Building.
15. ASSIGNMENT AND SUBLEASING:
15.1 PROHIBITION: Tenant shall not assign, mortgage, hypothecate,
encumber, grant any license or concession, pledge or otherwise transfer this
Lease (collectively, "assignment"), in whole or in part, whether voluntarily or
involuntarily or by operation of law, nor sublet or permit occupancy by any
person other than Tenant of all or any portion of the Premises without first
obtaining the prior written consent of Landlord, which consent shall not be
unreasonably withheld. Tenant hereby agrees that Landlord may withhold its
consent to any proposed sublease or assignment if the proposed sublessee or
assignee or its business is subject to compliance with additional requirements
of the ADA (defined below) and/or Environmental Laws (defined below) beyond
those requirements which are applicable to Tenant, unless the proposed sublessee
or assignee shall (a) first deliver plans and specifications for complying with
such additional requirements and obtain Landlord's written consent thereto, and
(b) comply with all Landlord's conditions for or contained in such consent,
including without limitation, requirements for security to assure the lien-free
completion of such improvements. If Tenant seeks to sublet or assign all or any
portion of the Premises, Tenant shall deliver to Landlord at least thirty (30)
days prior to the proposed commencement of the sublease or assignment (the
"Proposed Effective Date") the following: (i) the name of the proposed assignee
or sublessee; (ii) such information as to such assignee's or sublessee's
financial responsibility and standing as Landlord may reasonably require; and
(iii) the aforementioned plans and specifications, if any. Within ten (10) days
after Landlord's receipt of a written request from Tenant that Tenant seeks to
sublet or assign all or any portion of the Premises, Landlord shall deliver to
Tenant a copy of Landlord's standard form of sublease or assignment agreement
(as applicable), which instrument shall be utilized for each proposed sublease
or assignment (as applicable), and such instrument shall include a provision
whereby the assignee or sublessee assumes all of Tenant's obligations hereunder
and agrees to be bound by the terms hereof. As Additional Rent hereunder, Tenant
shall pay to Landlord a fee in the amount of five hundred dollars ($500) plus
Tenant shall reimburse Landlord for actual legal and other expenses incurred by
Landlord in connection with any actual or proposed assignment or subletting. In
the event the sublease or assignment (1) by itself or taken together with prior
sublease(s) or partial assignment(s) covers or totals, as the case may be, more
than twenty-five percent (25%) of the rentable square feet of the Premises or
(2) is for a term which by itself or taken together with prior or other
subleases or partial assignments is greater than fifty percent (50%) of the
period remaining in the Term of this Lease as of the time of the Proposed
Effective Date, then Landlord shall have the right, to be exercised by giving
written notice to Tenant, to recapture the space described in the sublease or
assignment. If such recapture notice is given, it shall serve to terminate this
Lease with respect to the proposed sublease or assignment space, or, if the
proposed sublease or assignment space covers all the Premises, it shall serve to
terminate the entire term of this Lease in either case, as of the Proposed
Effective Date. However, no termination of this Lease with respect to part or
all of the Premises shall become effective without the prior written consent,
where necessary, of the holder of each deed of trust encumbering the Premises or
any part thereof. If this Lease is terminated pursuant to the foregoing with
12
<PAGE> 13
respect to less than the entire Premises, the Rent shall be adjusted on the
basis of the proportion of square feet retained by Tenant to the square feet
originally demised and this Lease as so amended shall continue thereafter in
full force and effect. Each permitted assignee or sublessee shall assume and be
deemed to assume this Lease and shall be and remain liable jointly and severally
with Tenant for payment of Rent and for the due performance of, and compliance
with all the terms, covenants, conditions and agreements herein contained on
Tenant's part to be performed or complied with, for the term of this Lease. No
assignment or subletting shall affect the continuing primary liability of Tenant
(which, following assignment, shall be joint and several with the assignee), and
Tenant shall not be released from performing any of the terms, covenants and
conditions of this Lease. Tenant hereby acknowledges and agrees that it
understands that Landlord's accounting department may process and accept Rent
payments without verifying that such payments are being made by Tenant, a
permitted sublessee or a permitted assignee in accordance with the provisions of
this Lease. Although such payments may be processed and accepted by such
accounting department personnel, any and all actions or omissions by the
personnel of Landlord's accounting department shall not be considered as
acceptance by Landlord of any proposed assignee or sublessee nor shall such
actions or omissions be deemed to be a substitute for the requirement that
Tenant obtain Landlord's prior written consent to any such subletting or
assignment, and any such actions or omissions by the personnel of Landlord's
accounting department shall not be considered as a voluntary relinquishment by
Landlord of any of its rights hereunder nor shall any voluntary relinquishment
of such rights be inferred therefrom. For purposes hereof, in the event Tenant
is a corporation, partnership, joint venture, trust or other entity other than a
natural person, any change in the direct or indirect ownership of Tenant
(whether pursuant to one or more transfers) which results in a change of more
than fifty percent (50%) (except for sales of shares through a regulated public
exchange) in the direct or indirect ownership of Tenant shall be deemed to be an
assignment within the meaning of this Section 15 and shall be subject to all the
provisions hereof. Except for a permissible assignment to a Related Entity, any
and all options, first rights of refusal, tenant improvement allowances and
other similar rights granted to Tenant in this Lease, if any, shall not be
assignable by Tenant unless expressly authorized in writing by Landlord.
Notwithstanding anything to the contrary contained herein, except to the extent
not permitted by applicable federal, state, and local laws pertaining to the
merger, acquisitions and or sales of publicly traded stock for a public company
(in which event all of the items hereinafter referred shall be delivered to
Landlord within twenty (20) days after the making of the public announcement or
actual consummation thereof) so long as Tenant delivers to Landlord (1) at least
twenty (20) days prior written notice of its intention to assign or sublease the
Premises to any Related Entity, which notice shall set forth the name of the
Related Entity, (2) a copy of the proposed agreement pursuant to which such
assignment or sublease shall be effectuated, and (3) such other information
concerning the Related Entity as Landlord may reasonably require, including
without limitation, information regarding any change in the proposed use of any
portion of the Premises and any financial information with respect to such
Related Entity, and so long as Landlord approves, in writing, of any change in
the proposed use of the subject portion of the Premises, then Tenant may assign
this Lease or sublease any portion of the Premises (X) to any Related Entity, or
(Y) in connection with any merger, consolidation or sale of substantially all of
the assets of Tenant, without having to obtain the prior written consent of
Landlord thereto. For purposes of this Lease the term "Related Entity" shall
mean and refer to any corporation or entity which controls, is controlled by or
is under common control with Tenant, as all of such terms are customarily used
in the industry, and with an equal or greater net worth as Tenant has as of the
proposed transfer date. Any assignment to a Related Entity shall in no way
relieve Tenant of any liability Tenant may have under this Lease and such
assignee or sublessee shall be jointly and severally liable with Tenant
hereunder.
15.2 EXCESS SUBLEASE RENTAL OR ASSIGNMENT CONSIDERATION: In the event
of any sublease or assignment of all or any portion of the Premises where the
rent or other consideration provided for in the sublease or assignment either
initially or over the term of the sublease or assignment exceeds the Rent or pro
rata portion of the Rent, as the case may be, for such space reserved in the
Lease, Tenant shall pay the Landlord monthly, as Additional Rent, at the same
time as the monthly installments of Rent are payable hereunder, seventy-five
percent (75%) of the excess of each such payment of rent or other consideration
in excess of the Rent called for hereunder.
15.3 WAIVER: Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or failure by Landlord to take action against any assignee or
sublessee, Tenant waives notice of any default of any assignee or sublessee and
agrees that Landlord may, at its option, proceed against Tenant without having
taken action against or joined such assignee or sublessee, except that Tenant
shall have the benefit of any indulgences, waivers and extensions of time
granted to any such assignee or sublessee.
16. AD VALOREM TAXES: Prior to delinquency, Tenant shall pay all taxes and
assessments levied upon trade fixtures, alterations, additions, improvements,
inventories and personal property located and/or installed on or in the Premises
by, or on behalf of, Tenant; and if requested by Landlord, Tenant shall promptly
deliver to Landlord copies of receipts for payment of all such taxes and
assessments. To the extent any such taxes are not separately assessed or billed
to Tenant, Tenant shall pay the amount thereof as invoiced by Landlord.
13
<PAGE> 14
17. SUBORDINATION: Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any bona fide mortgagee or deed of trust beneficiary
with a lien on all or any portion of the Premises or any ground lessor with
respect to the land of which the Premises are a part, the rights of Tenant under
this Lease and this Lease shall be subject and subordinate at all times to: (i)
all ground leases or underlying leases which may now exist or hereafter be
executed affecting the Building or the land upon which the Building is situated
or both, and (ii) the lien of any mortgage or deed of trust which may now exist
or hereafter be executed in any amount for which the Building, the Lot, ground
leases or underlying leases, or Landlord's interest or estate in any of said
items is specified as security. Notwithstanding the foregoing, Landlord or any
such ground lessor, mortgagee, or any beneficiary shall have the right to
subordinate or cause to be subordinated any such ground leases or underlying
leases or any such liens to this Lease. If any ground lease or underlying lease
terminates for any reason or any mortgage or deed of trust is foreclosed or a
conveyance in lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination and upon the request of such successor to
Landlord, attorn to and become the Tenant of the successor in interest to
Landlord, provided such successor in interest will not disturb Tenant's use,
occupancy or quiet enjoyment of the Premises so long as Tenant is not in default
of the terms and provisions of this Lease. The successor in interest to Landlord
following foreclosure, sale or deed in lieu thereof shall not be (a) liable for
any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership; (b) subject to any offsets or defenses which
Tenant might have against any prior lessor; (c) bound by prepayment of more than
one (1) month's Rent, except in those instances when Tenant pays Rent quarterly
in advance pursuant to Section 8 hereof, then not more than three months' Rent;
or (d) liable to Tenant for any Security Deposit not actually received by such
successor in interest to the extent any portion or all of such Security Deposit
has not already been forfeited by, or refunded to, Tenant. Landlord shall be
liable to Tenant for all or any portion of the Security Deposit not forfeited
by, or refunded to Tenant, until and unless Landlord transfers such Security
Deposit to the successor in interest. Tenant covenants and agrees to execute
(and acknowledge if required by Landlord, any lender or ground lessor) and
deliver, within five (5) days of a demand or request by Landlord and in the form
requested by Landlord, ground lessor, mortgagee or beneficiary, any additional
documents evidencing the priority or subordination of this Lease with respect to
any such ground leases or underlying leases or the lien of any such mortgage or
deed of trust. Tenant's failure to timely execute and deliver such additional
documents shall, at Landlord's option, constitute a material default hereunder.
It is further agreed that Tenant shall be liable to Landlord, and shall
indemnify Landlord from and against any loss, cost, damage or expense,
incidental, consequential, or otherwise, arising or accruing directly or
indirectly, from any failure of Tenant to execute or deliver to Landlord any
such additional documents, together with any and all Enforcement Expenses.
18. RIGHT OF ENTRY: Tenant grants Landlord or its agents the right to enter
the Premises at all reasonable times following twenty four (24) hours prior
notice, (except in the event of an emergency) for purposes of inspection,
exhibition, posting of notices, repair or alteration. At Landlord's option,
Landlord shall at all times have and retain a key with which to unlock all the
doors in, upon and about the Premises, excluding Tenant's vaults and safes. It
is further agreed that Landlord shall have the right to use any and all means
Landlord deems necessary to enter the Premises in an emergency. Landlord shall
have the right to place "for rent" or "for lease" signs on the outside of the
Premises, the Building and in the Common Areas. Landlord shall also have the
right to place "for sale" signs on the outside of the Building and in the Common
Areas. Tenant hereby waives any claim from damages or for any injury or
inconvenience to or interference with Tenant's business, or any other loss
occasioned thereby except for any claim for any of the foregoing arising out of
the sole active gross negligence or willful misconduct of Landlord or its
authorized representatives.
19. ESTOPPEL CERTIFICATE: Tenant shall execute (and acknowledge if required
by any lender or ground lessor) and deliver to Landlord, within five (5) days
after Landlord provides such to Tenant, a statement in writing certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification), the date to which the Rent and other charges
are paid in advance, if any, acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder or specifying
such defaults as are claimed, and such other matters as Landlord may reasonably
require. Any such statement may be conclusively relied upon by Landlord and any
prospective purchaser or encumbrancer of the Premises. Tenant's failure to
deliver such statement within such time shall be conclusive upon the Tenant that
(a) this Lease is in full force and effect, without modification except as may
be represented by Landlord; (b) there are no uncured defaults in Landlord's
performance; and (c) not more than one month's Rent has been paid in advance,
except in those instances when Tenant pays Rent quarterly in advance pursuant to
Section 8 hereof, then not more than three month's Rent has been paid in
advance. Failure by Tenant to so deliver such certified estoppel certificate
shall be a material default of the provisions of this Lease. Tenant shall be
liable to Landlord, and shall indemnify Landlord from and against any loss,
cost, damage or expense, incidental, consequential, or otherwise, arising or
accruing directly or indirectly, from any failure of Tenant to execute or
deliver to Landlord any such certified estoppel certificate, together with any
and all Enforcement Expenses.
14
<PAGE> 15
20. TENANT'S DEFAULT: The occurrence of any one or more of the following
events shall, at Landlord's option, constitute a material default by Tenant of
the provisions of this Lease:
20.1 The abandonment of the Premises by Tenant or the vacation of the
Premises by Tenant which would cause any insurance policy to be invalidated or
otherwise lapse. Tenant agrees to notice and service of notice as provided for
in this Lease and waives any right to any other or further notice or service of
notice which Tenant may have under any statute or law now or hereafter in
effect;
20.2 The failure by Tenant to make any payment of Rent, Additional
Rent or any other payment required hereunder within three (3) days of after
receipt of written notice from Landlord that said payment is due. Tenant agrees
that such written notice by Landlord shall serve as the statutorily required
notice under the law and Tenant further agrees to notice and service of notice
as provided for in this Lease;
20.3 The failure by Tenant to observe, perform or comply with any of
the conditions, covenants or provisions of this Lease (except failure to make
any payment of Rent and/or Additional Rent) and such failure is not cured within
(i) thirty (30) days of the date on which Landlord delivers written notice of
such failure to Tenant for all failures other than with respect to Hazardous
Materials, and (ii) ten (10) days of the date on which Landlord delivers written
notice of such failure to Tenant for all failures in any way related to
Hazardous Materials. However, Tenant shall not be in default of its obligations
hereunder if such failure cannot reasonably be cured within such thirty (30) or
ten (10) day period, as applicable, and Tenant promptly commences, and
thereafter diligently proceeds with same to completion, all actions necessary to
cure such failure as soon as is reasonably possible, but in no event shall the
completion of such cure be later than forty-five (45) days after the date on
which Landlord delivers to Tenant written notice of such failure, unless
Landlord, acting reasonably and in good faith, otherwise expressly agrees in
writing to a longer period of time based upon the circumstances relating to such
failure as well as the nature of the failure and the nature of the actions
necessary to cure such failure;
20.4 The making of a general assignment by Tenant for the benefit of
creditors, the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation, or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing, the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold, Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due, any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking
any action toward the dissolution or winding up of Tenant's affairs, the
cessation or suspension of Tenant's use of the Premises, or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
20.5 Tenant's use or storage of Hazardous Materials in, on or about
the Premises, the Building, the Lot and/or the Park other than as expressly
permitted by the provisions of Section 29 below; or
20.6 The making of any material misrepresentation or omission by
Tenant in any materials delivered by or on behalf of Tenant to Landlord pursuant
to this Lease.
21. REMEDIES FOR TENANT'S DEFAULT:
21.1 LANDLORD'S RIGHTS: In the event of Tenant's material default
(beyond any applicable notice and cure period) under this Lease, Landlord may
terminate Tenant's right to possession of the Premises by any lawful means in
which case upon delivery of written notice by Landlord this Lease shall
terminate on the date specified by Landlord in such notice and Tenant shall
immediately surrender possession of the Premises to Landlord. In addition, the
Landlord shall have the immediate right of re-entry whether or not this Lease is
terminated, and if this right of re-entry is exercised following abandonment of
the Premises by Tenant, Landlord may consider any personal property belonging to
Tenant and left on the Premises to also have been abandoned. No re-entry or
taking possession of the Premises by Landlord pursuant to this Section 21 shall
be construed as an election to terminate this Lease unless a written notice of
such intention is given to Tenant. If Landlord relets the Premises or any
portion thereof, (i) Tenant shall be liable immediately to Landlord for all
costs Landlord incurs in reletting the Premises or any part thereof, including,
without limitation, broker's commissions, expenses of cleaning, redecorating,
and further improving the Premises and other similar costs (collectively, the
"Reletting Costs"), and (ii) the rent received by Landlord from such reletting
shall be applied to the payment of, first, any indebtedness from Tenant to
Landlord other than Base Rent, Operating Expenses, Tax Expenses, Administrative
Expenses, Common Area Utility Costs, and Utility Expenses; second, all costs
including maintenance, incurred by Landlord in reletting; and, third, Base Rent,
Operating Expenses, Tax Expenses, Administrative Expenses, Common Area Utility
Costs, Utility Expenses, and all other sums due under this Lease. Any and all of
the Reletting Costs shall be fully chargeable to Tenant and shall not be
prorated or otherwise amortized in relation to any new lease for the Premises or
any portion thereof. After deducting the payments referred to above, any sum
remaining from the rental
15
<PAGE> 16
Landlord receives from reletting shall be held by Landlord and applied in
payment of future Rent as Rent becomes due under this Lease. In no event shall
Tenant be entitled to any excess rent received by Landlord. Reletting may be for
a period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. So
long as this Lease is not terminated, Landlord shall have the right to remedy
any default of Tenant, to maintain or improve the Premises, to cause a receiver
to be appointed to administer the Premises and new or existing subleases and to
add to the Rent payable hereunder all of Landlord's reasonable costs in so
doing, with interest at the maximum rate permitted by law from the date of such
expenditure.
21.2 DAMAGES RECOVERABLE: If Tenant breaches this Lease and abandons
the Premises before the end of the Term, or if Tenant's right to possession is
terminated by Landlord because of a breach or default under this Lease, then in
either such case, Landlord may recover from Tenant all damages suffered by
Landlord as a result of Tenant's failure to perform its obligations hereunder,
including, but not limited to, the portion of any broker's or leasing agent's
commission incurred with respect to the leasing of the Premises to Tenant for
the balance of the Term of the Lease remaining after the date on which Tenant is
in default of its obligations hereunder, and all Reletting Costs, and the worth
at the time of the award (computed in accordance with paragraph (3) of
Subdivision (a) of Section 1951.2 of the California Civil Code) of the amount by
which the Rent then unpaid hereunder for the balance of the Lease Term exceeds
the amount of such loss of Rent for the same period which Tenant proves could be
reasonably avoided by Landlord and in such case, Landlord prior to the award,
may relet the Premises for the purpose of mitigating damages suffered by
Landlord because of Tenant's failure to perform its obligations hereunder;
provided, however, that even though Tenant has abandoned the Premises following
such breach, this Lease shall nevertheless continue in full force and effect for
as long as Landlord does not terminate Tenant's right of possession, and until
such termination, Landlord shall have the remedy described in Section 1951.4 of
the California Civil Code (Landlord may continue this Lease in effect after
Tenant's breach and abandonment and recover Rent as it becomes due, if Tenant
has the right to sublet or assign, subject only to reasonable limitations) and
may enforce all its rights and remedies under this Lease, including the right to
recover the Rent from Tenant as it becomes due hereunder. The "worth at the time
of the award" within the meaning of Subparagraphs (a)(1) and (a)(2) of Section
1951.2 of the California Civil Code shall be computed by allowing interest at
the rate of ten percent (10%) per annum. Tenant waives redemption or relief from
forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or
under any other present or future law, in the event Tenant is evicted or
Landlord takes possession of the Premises by reason of any default of Tenant
hereunder.
21.3 RIGHTS AND REMEDIES CUMULATIVE: The foregoing rights and
remedies of Landlord are not exclusive; they are cumulative in addition to any
rights and remedies now or hereafter existing at law, in equity by statute or
otherwise, or to any equitable remedies Landlord may have, and to any remedies
Landlord may have under bankruptcy laws or laws affecting creditor's rights
generally. In addition to all remedies set forth above, if Tenant materially
defaults under this Lease, any and all Base Rent waived by Landlord under
Section 3 above shall be immediately due and payable to Landlord and all options
granted to Tenant hereunder shall automatically terminate, unless otherwise
expressly agreed to in writing by Landlord.
21.4 WAIVER OF A DEFAULT: The waiver by Landlord of any default of
any provision of this Lease shall not be deemed or construed a waiver of any
other default by Tenant hereunder or of any subsequent default of this Lease,
except for the default specified in the waiver.
22. HOLDING OVER: If Tenant holds possession of the Premises after the
expiration of the Term of this Lease with Landlord's consent, Tenant shall
become a tenant from month-to-month upon the terms and provisions of this Lease,
provided the monthly Base Rent during such hold over period shall be 150% of the
Base Rent due on the last month of the Lease Term, payable in advance on or
before the first day of each month. Acceptance by Landlord of the monthly Base
Rent without the additional fifty percent (50%) increase of Base Rent shall not
be deemed or construed as a waiver by Landlord of any of its rights to collect
the increased amount of the Base Rent as provided herein at any time. Such
month-to-month tenancy shall not constitute a renewal or extension for any
further term. All options, if any, granted under the terms of this Lease shall
be deemed automatically terminated and be of no force or effect during said
month-to-month tenancy. Tenant shall continue in possession until such tenancy
shall be terminated by either Landlord or Tenant giving written notice of
termination to the other party at least thirty (30) days prior to the effective
date of termination. This paragraph shall not be construed as Landlord's
permission for Tenant to hold over. Acceptance of Base Rent by Landlord
following expiration or termination of this Lease shall not constitute a renewal
of this Lease.
23. LANDLORD'S DEFAULT: Intentionally Omitted
16
<PAGE> 17
24. PARKING: At no additional cost to Tenant, Tenant shall have a license to
use the number of non-designated and non-exclusive parking spaces specified in
the Basic Lease Information. Landlord shall exercise reasonable efforts to
insure that such spaces are available to Tenant for its use, but Landlord shall
not be required to enforce Tenant's right to use the same.
25. SALE OF PREMISES: In the event of any sale of the Premises by Landlord
or the cessation otherwise of Landlord's interest therein, Landlord shall be and
is hereby entirely released from any and all of its obligations to perform or
further perform under this Lease and from all liability hereunder accruing from
or after the date of such sale; and the purchaser, at such sale or any
subsequent sale of the Premises shall be deemed, without any further agreement
between the parties or their successors in interest or between the parties and
any such purchaser, to have assumed and agreed to carry out any and all of the
covenants and obligations of the Landlord under this Lease. For purposes of this
Section 25, the term "Landlord" means only the owner and/or agent of the owner
as such parties exist as of the date on which Tenant executes this Lease. A
ground lease or similar long term lease by Landlord of the entire Building, of
which the Premises are a part, shall be deemed a sale within the meaning of this
Section 25. Tenant agrees to attorn to such new owner provided such new owner
does not disturb Tenant's use, occupancy or quiet enjoyment of the Premises so
long as Tenant is not in default of any of the provisions of this Lease.
26. WAIVER: No delay or omission in the exercise of any right or remedy of
Landlord on any default by Tenant shall impair such a right or remedy or be
construed as a waiver. The subsequent acceptance of Rent by Landlord after
default by Tenant of any covenant or term of this Lease shall not be deemed a
waiver of such default, other than a waiver of timely payment for the particular
Rent payment involved, and shall not prevent Landlord from maintaining an
unlawful detainer or other action based on such breach. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly Rent and other sums due
hereunder shall be deemed to be other than on account of the earliest Rent or
other sums due, nor shall any endorsement or statement on any check or
accompanying any check or payment be deemed an accord and satisfaction; and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such Rent or other sum or pursue any other remedy
provided in this Lease. No failure, partial exercise or delay on the part of the
Landlord in exercising any right, power or privilege hereunder shall operate as
a waiver thereof.
27. CASUALTY DAMAGE: If the Premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall give prompt written notice thereof to
Landlord. In case the Building shall be so damaged by fire or other casualty
that substantial alteration or reconstruction of the Building shall, in
Landlord's sole opinion, be required (whether or not the Premises shall have
been damaged by such fire or other casualty), Landlord may, at its option,
terminate this Lease by notifying Tenant in writing of such termination within
ninety (90) days after the date of such damage, in which event the Rent shall be
abated as of the date of such damage. If the Building or any part thereof shall
be damaged by fire or other casualty such that the reparation of such damage or
casualty shall require more than one hundred eighty (180) days after the date of
Landlord's receipt of Tenant's written notice to complete (subject to extension
for Force Majeure Delays or delays attributable to Tenant's or any of Tenant's
Representatives' acts or omissions (collectively, "Tenant Delays")), then either
Tenant or Landlord may terminate this Lease by notifying the other party of such
election to terminate this Lease within thirty (30) days after the date on which
it is determined by Landlord of the length of time necessary to substantially
complete such repairs (which Landlord determination shall be made within sixty
(60) days after the date of Landlord's receipt of Tenant's written notice), in
which event the Rent shall be abated as of the date of such damage but only to
the extent Tenant is not able to conduct its operations in the Building. If
neither party exercises their rights to so elect to terminate this Lease in
accordance with the aforesaid provisions, and provided insurance proceeds are
available to fully repair the damage (excluding any deductible), Landlord shall
within ninety (90) days after the date of Landlord's receipt of Tenant's written
notice after the date of such damage commence to repair and restore the Building
and shall proceed with reasonable diligence to restore the Building (except that
Landlord shall not be responsible for delays outside its control) to
substantially the same condition in which it was immediately prior to the
happening of the casualty; provided, Landlord shall not be required to rebuild,
repair, or replace any part of Tenant's furniture, furnishings, fixtures and/or
equipment removable by Tenant or any improvements, alterations or additions
installed by or for the benefit of Tenant under the provisions of this Lease.
Landlord shall not in any event be required to spend for such work an amount in
excess of the insurance proceeds (excluding any deductible) and any
contributions from Tenant, if necessary, actually received by Landlord as a
result of the fire or other casualty. Landlord shall not be liable for any
inconvenience or annoyance to Tenant, injury to the business of Tenant, loss of
use of any part of the Premises by the Tenant or loss of Tenant's personal
property resulting in any way from such damage or the repair thereof, except
that, subject to the provisions of the next sentence, Landlord shall allow
Tenant a fair diminution of Rent during the time and to the extent the Premises
are unfit for occupancy. Notwithstanding anything to the contrary contained
herein, if the Premises or any other portion of the Building be damaged by fire
or other casualty resulting from the intentional or negligent acts or omissions
of Tenant or any of Tenant's Representatives, (i) the Rent shall not be
diminished during the repair of such damage, (ii) Tenant shall not have any
right to terminate this Lease due to the occurrence of such casualty or damage,
and (iii)
17
<PAGE> 18
Tenant shall be liable to Landlord for the cost and expense of the repair and
restoration of all or any portion of the Building caused thereby (including,
without limitation, any deductible) to the extent such cost and expense is not
covered by insurance proceeds. In the event the holder of any indebtedness
secured by the Premises requires that the insurance proceeds be applied to such
indebtedness, then Landlord shall have the right to terminate this Lease by
delivering written notice of termination to Tenant within thirty (30) days after
the date of notice to Tenant of any such event, whereupon all rights and
obligations shall cease and terminate hereunder except for those obligations
expressly intended to survive any such termination of this Lease. Except as
otherwise provided in this Section 27, Tenant hereby waives the provisions of
Sections 1932(2.), 1933(4.), 1941 and 1942 of the California Civil Code.
28. CONDEMNATION: If twenty-five percent (25%) or more of the Premises is
condemned by eminent domain, inversely condemned or sold in lieu of condemnation
for any public or quasi-public use or purpose ("Condemned"), then Tenant or
Landlord may terminate this Lease as of the date when physical possession of the
Premises is taken and title vests in such condemning authority, and Rent shall
be adjusted to the date of termination. Tenant shall not because of such
condemnation assert any claim against Landlord or the condemning authority for
any compensation because of such condemnation, and Landlord shall be entitled to
receive the entire amount of any award without deduction for any estate of
interest or other interest of Tenant. If neither party elects to terminate this
Lease, Landlord shall, if necessary, promptly proceed to restore the Premises or
the Building to substantially its same condition prior to such partial
condemnation, allowing for the reasonable effects of such partial condemnation,
and a proportionate allowance shall be made to Tenant, as solely determined by
Landlord, for the Rent corresponding to the time during which, and to the part
of the Premises of which, Tenant is deprived on account of such partial
condemnation and restoration. Landlord shall not be required to spend funds for
restoration in excess of the amount received by Landlord as compensation
awarded.
29. ENVIRONMENTAL MATTERS/HAZARDOUS MATERIALS:
29.1 HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE: Prior to executing
this Lease, Tenant has completed, executed and delivered to Landlord Tenant's
initial Hazardous Materials Disclosure Certificate (the "Initial HazMat
Certificate"), a copy of which is attached hereto as Exhibit G and incorporated
herein by this reference. Tenant covenants, represents and warrants to Landlord
that the information on the Initial HazMat Certificate is true and correct and
accurately describes the use(s) of Hazardous Materials which will be made and/or
used on the Premises by Tenant. Tenant shall commencing with the date which is
one year from the Commencement Date and continuing every year thereafter,
complete, execute, and deliver to Landlord, a Hazardous Materials Disclosure
Certificate ("the "HazMat Certificate") describing Tenant's present use of
Hazardous Materials on the Premises, and any other reasonably necessary
documents as requested by Landlord. The HazMat Certificate required hereunder
shall be in substantially the form as that which is attached hereto as Exhibit
E.
29.2 DEFINITION OF HAZARDOUS MATERIALS: As used in this Lease, the
term Hazardous Materials shall mean and include (a) any hazardous or toxic
wastes, materials or substances, and other pollutants or contaminants, which are
or become regulated by any Environmental Laws; (b) petroleum, petroleum by
products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos
and asbestos containing material, in any form, whether friable or non-friable;
(d) polychlorinated biphenyls; (e) radioactive materials; (f) lead and
lead-containing materials; (g) any other material, waste or substance displaying
toxic, reactive, ignitable or corrosive characteristics, as all such terms are
used in their broadest sense, and are defined or become defined by any
Environmental Law (defined below); or (h) any materials which cause or threatens
to cause a nuisance upon or waste to any portion of the Premises, the Building,
the Lot, the Park or any surrounding property; or poses or threatens to pose a
hazard to the health and safety of persons on the Premises or any surrounding
property.
29.3 PROHIBITION; ENVIRONMENTAL LAWS: Tenant shall not be entitled to
use nor store any Hazardous Materials on, in, or about the Premises, the
Building, the Lot and the Park, or any portion of the foregoing, without, in
each instance, obtaining Landlord's prior written consent thereto. If Landlord
consents to any such usage or storage, then Tenant shall be permitted to use
and/or store only those Hazardous Materials that are necessary for Tenant's
business and to the extent disclosed in the HazMat Certificate and as expressly
approved by Landlord in writing, provided that such usage and storage is only to
the extent of the quantities of Hazardous Materials as specified in the then
applicable HazMat Certificate as expressly approved by Landlord and provided
further that such usage and storage is in full compliance with any and all
local, state and federal environmental, health and/or safety-related laws,
statutes, orders, standards, courts' decisions, ordinances, rules and
regulations (as interpreted by judicial and administrative decisions), decrees,
directives, guidelines, permits or permit conditions, currently existing and as
amended, enacted, issued or adopted in the future which are or become applicable
to Tenant or all or any portion of the Premises (collectively, the
"Environmental Laws"). Tenant agrees that any changes to the type and/or
quantities of Hazardous Materials specified in the most recent HazMat
Certificate may be implemented only with the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole
18
<PAGE> 19
discretion. Tenant shall not be entitled nor permitted to install any tanks
under, on or about the Premises for the storage of Hazardous Materials without
the express written consent of Landlord, which may be given or withheld in
Landlord's sole discretion. Landlord shall have the right at all times during
the Term of this Lease to (i) inspect the Premises, (ii) conduct tests and
investigations to determine whether Tenant is in compliance with the provisions
of this Section 29, and (iii) request lists of all Hazardous Materials used,
stored or otherwise located on, under or about any portion of the Premises
and/or the Common Areas. The cost of all such inspections, tests and
investigations shall be borne solely by Tenant, if Landlord reasonably
determines that Tenant or any of Tenant's Representatives are directly or
indirectly responsible in any manner for any contamination revealed by such
inspections, tests and investigations. The aforementioned rights granted herein
to Landlord and its representatives shall not create (a) a duty on Landlord's
part to inspect, test, investigate, monitor or otherwise observe the Premises or
the activities of Tenant and Tenant's Representatives with respect to Hazardous
Materials, including without limitation, Tenant's operation, use and any
remediation related thereto, or (b) liability on the part of Landlord and its
representatives for Tenant's use, storage, disposal or remediation of Hazardous
Materials, it being understood that Tenant shall be solely responsible for all
liability in connection therewith.
29.4 TENANT'S ENVIRONMENTAL OBLIGATIONS: Tenant shall give to
Landlord immediate verbal and follow-up written notice of any spills, releases,
discharges, disposals, emissions, migrations, removals or transportation of
Hazardous Materials on, under or about any portion of the Premises or in any
Common Areas. Tenant, at its sole cost and expense, covenants and warrants to
promptly investigate, clean up, remove, restore and otherwise remediate
(including, without limitation, preparation of any feasibility studies or
reports and the performance of any and all closures) any spill, release,
discharge, disposal, emission, migration or transportation of Hazardous
Materials arising from or related to the intentional or negligent acts or
omissions of Tenant or Tenant's Representatives such that the affected portions
of the Park and any adjacent property are returned to the condition existing
prior to the appearance of such Hazardous Materials. Any such investigation,
clean up, removal, restoration and other remediation shall only be performed
after Tenant has obtained Landlord's prior written consent, which consent shall
not be unreasonably withheld so long as such actions would not potentially have
a material adverse long-term or short-term effect on any portion of the
Premises, the Building, the Lot or the Park. Notwithstanding the foregoing,
Tenant shall be entitled to respond immediately to an emergency without first
obtaining Landlord's prior written consent. Tenant, at its sole cost and
expense, shall conduct and perform, or cause to be conducted and performed, all
closures as required by any Environmental Laws or any agencies or other
governmental authorities having jurisdiction thereof. If Tenant fails to so
promptly investigate, clean up, remove, restore, provide closure or otherwise so
remediate, Landlord may, but without obligation to do so, take any and all steps
necessary to rectify the same and Tenant shall promptly reimburse Landlord, upon
demand, for all costs and expenses to Landlord of performing investigation,
clean up, removal, restoration, closure and remediation work. All such work
undertaken by Tenant, as required herein, shall be performed in such a manner so
as to enable Landlord to make full economic use of the Premises, the Building,
the Lot and the Park after the satisfactory completion of such work.
29.5 ENVIRONMENTAL INDEMNITY: In addition to Tenant's obligations as
set forth hereinabove, Tenant and Tenant's officers and directors agree to, and
shall, protect, indemnify, defend (with counsel acceptable to Landlord) and hold
Landlord and the other Indemnitees harmless from and against any and all claims,
judgments, damages, penalties, fines, liabilities, losses (including, without
limitation, diminution in value of any portion of the Premises, the Building,
the Lot or the Park, damages for the loss of or restriction on the use of
rentable or usable space, and from any adverse impact of Landlord's marketing of
any space within the Building and/or Park), suits, administrative proceedings
and costs (including, but not limited to, attorneys' and consultant fees and
court costs) arising at any time during or after the Term of this Lease in
connection with or related to, directly or indirectly, the use, presence,
transportation, storage, disposal, migration, removal, spill, release or
discharge of Hazardous Materials on, in or about any portion of the Premises,
the Common Areas, the Building, the Lot or the Park as a result (directly or
indirectly) of the intentional or negligent acts or omissions of Tenant or any
of Tenant's Representatives. Neither the written consent of Landlord to the
presence, use or storage of Hazardous Materials in, on, under or about any
portion of the Premises, the Building, the Lot and/or the Park, nor the strict
compliance by Tenant with all Environmental Laws shall excuse Tenant and
Tenant's officers and directors from its obligations of indemnification pursuant
hereto. Tenant shall not be relieved of its indemnification obligations under
the provisions of this Section 29.5 due to Landlord's status as either an
"owner" or "operator" under any Environmental Laws.
29.6 SURVIVAL: Tenant's obligations and liabilities pursuant to the
provisions of this Section 29 shall survive the expiration or earlier
termination of this Lease. If it is determined by Landlord that the condition of
all or any portion of the Premises, the Building, the Lot and/or the Park is not
in compliance with the provisions of this Lease with respect to Hazardous
Materials, including without limitation all Environmental Laws at the expiration
or earlier termination of this Lease, then in Landlord's sole discretion,
Landlord may require Tenant to hold over possession of the Premises until Tenant
can surrender the Premises to Landlord in the condition in which the Premises
existed as of the Commencement Date and prior to the appearance of such
Hazardous Materials except for reasonable wear and tear, including without
limitation, the conduct or performance of any closures as required by any
Environmental Laws. The burden of proof hereunder shall be upon Tenant. For
purposes hereof, the term "reasonable wear and tear" shall not include any
deterioration in the condition or diminution of the value of any portion of the
Premises, the Building, the Lot and/or the Park in any manner whatsoever related
to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant
will be with
19
<PAGE> 20
Landlord's consent, will not be terminable by Tenant in any event or
circumstance and will otherwise be subject to the provisions of Section 22 of
this Lease.
29.7 EXCULPATION OF TENANT: Tenant shall not be liable to Landlord for nor
otherwise obligated to Landlord under any provision of the Lease with respect to
the following: (i) any claim, remediation, obligation, investigation, liability,
cause of action, attorney's fees, consultants' cost, expense or damage resulting
from any Hazardous Materials present in, on or about the Premises or the
Building to the extent not caused or otherwise permitted, directly or
indirectly, by Tenant or Tenant's Representatives; or (ii) the removal,
investigation, monitoring or remediation of any Hazardous Material present in,
on or about the Premises or the Building caused by any source, including third
parties, other than Tenant or Tenant's Representatives; provided, however,
Tenant shall be fully liable for and otherwise obligated to Landlord under the
provisions of this Lease for all liabilities, costs, damages, penalties, claims,
judgments, expenses (including without limitation, attorneys' and experts' fees
and costs) and losses to the extent (a) Tenant or any of Tenant's
Representatives contributes to the presence of such Hazardous Materials, or
Tenant and/or any of Tenant's Representatives exacerbates the conditions caused
by such Hazardous Materials, or (b) Tenant and/or Tenant's Representatives
allows or permits persons over which Tenant or any of Tenant's Representatives
has control, and/or for which Tenant or any of Tenant's Representatives are
legally responsible for, to cause such Hazardous Materials to be present in, on,
under, through or about any portion of the Premises, the Common Areas, the
Building or the Park, or (c) Tenant and/or any of Tenant's Representatives does
not take all reasonably appropriate actions to prevent such persons over which
Tenant or any of Tenant's Representatives has control and/or for which Tenant or
any of Tenant's Representatives are legally responsible from causing the
presence of Hazardous Materials in, on, under, through or about any portion of
the Premises, the Common Areas, the Building or the Park.
30. FINANCIAL STATEMENTS: Tenant, for the reliance of Landlord, any lender
holding or anticipated to acquire a lien upon the Premises, the Building or the
Park or any portion thereof, or any prospective purchaser of the Building or the
Park or any portion thereof, within ten (10) days after Landlord's request
therefor, but not more often than once annually so long as Tenant is not in
default of this Lease, shall deliver to Landlord the then current audited
financial statements of Tenant (including interim periods following the end of
the last fiscal year for which annual statements are available) which statements
shall be prepared or compiled by a certified public accountant and shall present
fairly the financial condition of Tenant at such dates and the result of its
operations and changes in its financial positions for the periods ended on such
dates. If an audited financial statement has not been prepared, Tenant shall
provide Landlord with an unaudited financial statement and/or such other
information, the type and form of which are acceptable to Landlord in Landlord's
reasonable discretion, which reflects the financial condition of Tenant. If
Landlord so requests, Tenant shall deliver to Landlord an opinion of a certified
public accountant, including a balance sheet and profit and loss statement for
the most recent prior year, all prepared in accordance with generally accepted
accounting principles consistently applied. Any and all options granted to
Tenant hereunder shall be subject to and conditioned upon Landlord's reasonable
approval of Tenant's financial condition at the time of Tenant's exercise of any
such option.
31. GENERAL PROVISIONS:
31.1 TIME. Time is of the essence in this Lease and with respect to
each and all of its provisions in which performance is a factor.
31.2 SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
31.3 RECORDATION. Tenant shall not record this Lease or a short form
memorandum hereof without the prior written consent of the Landlord.
31.4 LANDLORD'S PERSONAL LIABILITY. The liability of Landlord (which,
for purposes of this Lease, shall include Landlord and the owner of the Building
if other than Landlord) to Tenant for any default by Landlord under the terms of
this Lease shall be limited to the actual interest of Landlord and its present
or future partners or members in the Premises or the Building, and Tenant agrees
to look solely to the Premises for satisfaction of any liability and shall not
look to other assets of Landlord nor seek any recourse against the assets of the
individual partners, members, directors, officers, shareholders, agents or
employees of Landlord (including without limitation, any property management
company of Landlord); it being intended that Landlord and the individual
partners, members, directors, officers, shareholders, agents and employees of
Landlord (including without limitation, any property management company of
Landlord) shall not be personally liable in any manner whatsoever for any
judgment or deficiency. The liability of Landlord under this Lease is limited to
its actual period of ownership of title to the Building, and Landlord shall be
automatically released from further performance under this Lease upon transfer
of Landlord's interest in the Premises or the Building.
20
<PAGE> 21
31.5 SEPARABILITY. Any provisions of this Lease which shall prove to
be invalid, void or illegal shall in no way affect, impair or invalidate any
other provisions hereof and such other provision shall remain in full force and
effect.
31.6 CHOICE OF LAW. This Lease shall be governed by, and construed in
accordance with, the laws of the State of California.
31.7 ATTORNEYS' FEES. In the event any dispute between the parties
results in litigation or other proceeding, the prevailing party shall be
reimbursed by the party not prevailing for all reasonable costs and expenses,
including, without limitation, reasonable attorneys' and experts' fees and costs
incurred by the prevailing party in connection with such litigation or other
proceeding, and any appeal thereof. Such costs, expenses and fees shall be
included in and made a part of the judgment recovered by the prevailing party,
if any.
31.8 ENTIRE AGREEMENT. This Lease supersedes any prior agreements,
representations, negotiations or correspondence between the parties, and
contains the entire agreement of the parties on matters covered. No other
agreement, statement or promise made by any party, that is not in writing and
signed by all parties to this Lease, shall be binding.
31.9 WARRANTY OF AUTHORITY. On the date that Tenant executes this
Lease, Tenant shall deliver to Landlord an original certificate of status for
Tenant issued by the California Secretary of State or statement of partnership
for Tenant recorded in the county in which the Premises are located, as
applicable, and such other documents as Landlord may reasonably request with
regard to the lawful existence of Tenant. Each person executing this Lease on
behalf of a party represents and warrants that (1) such person is duly and
validly authorized to do so on behalf of the entity it purports to so bind, and
(2) if such party is a partnership, corporation or trustee, that such
partnership, corporation or trustee has full right and authority to enter into
this Lease and perform all of its obligations hereunder. Tenant hereby warrants
that this Lease is valid and binding upon Tenant and enforceable against Tenant
in accordance with its terms.
31.10 NOTICES. Any and all notices and demands required or permitted
to be given hereunder to Landlord shall be in writing and shall be sent: (a) by
United States mail, certified and postage prepaid; or (b) by personal delivery;
or (c) by overnight courier, addressed to Landlord at 101 Lincoln Centre Drive,
Fourth Floor, Foster City, California 94404-1167. Any and all notices and
demands required or permitted to be given hereunder to Tenant shall be in
writing and shall be sent: (i) by United States mail, certified and postage
prepaid; or (ii) by personal delivery to any employee or agent of Tenant over
the age of eighteen (18) years of age; or (iii) by overnight courier, all of
which shall be addressed to Tenant at the Premises. Notice and/or demand shall
be deemed given upon the earlier of actual receipt or the third day following
deposit in the United States mail. Any notice or requirement of service required
by any statute or law now or hereafter in effect, including, but not limited to,
California Code of Civil Procedure Sections 1161, 1161.1, and 1162 (including
any amendments, supplements or substitutions thereof), is hereby waived by
Tenant.
31.11 JOINT AND SEVERAL. If Tenant consists of more than one person or
entity, the obligations of all such persons or entities shall be joint and
several.
31.12 COVENANTS AND CONDITIONS. Each provision to be performed by
Tenant hereunder shall be deemed to be both a covenant and a condition.
31.13 WAIVER OF JURY TRIAL. The parties hereto shall and they hereby
do waive trial by jury in any action, proceeding or counterclaim brought by
either of the parties hereto against the other on any matters whatsoever arising
out of or in any way related to this Lease, the relationship of Landlord and
Tenant, Tenant's use or occupancy of the Premises, the Building or the Park,
and/or any claim of injury, loss or damage.
31.14 COUNTERCLAIMS. In the event Landlord commences any proceedings
for nonpayment of Rent, Additional Rent, or any other sums or amounts due
hereunder, Tenant shall not interpose any counterclaim of whatever nature or
description in any such proceedings, provided, however, nothing contained herein
shall be deemed or construed as a waiver of the Tenant's right to assert such
claims in any separate action brought by Tenant or the right to offset the
amount of any final judgment owed by Landlord to Tenant.
31.15 UNDERLINING. The use of underlining within the Lease is for
Landlord's reference purposes only and no other meaning or emphasis is intended
by this use, nor should any be inferred.
31.16 MERGER. The voluntary or other surrender of this Lease by
Tenant, the mutual termination or cancellation hereof by Landlord and Tenant, or
a termination of this Lease by Landlord for a material default by Tenant
hereunder, shall not work a merger, and, at the sole option of Landlord, (i)
shall terminate all or any existing subleases or subtenancies, or (ii) may
operate as an assignment to Landlord of any or all of such subleases or
subtenancies. Landlord's election of either or both of the
21
<PAGE> 22
foregoing options shall be exercised by delivery by Landlord of written notice
thereof to Tenant and all known subtenants under any sublease.
32. SIGNS: All signs and graphics of every kind visible in or from public
view or corridors or the exterior of the Premises shall be subject to Landlord's
prior written approval and shall be subject to any applicable governmental laws,
ordinances, and regulations and in compliance with Landlord's sign criteria as
same may exist from time to time. Tenant shall remove all such signs and
graphics prior to the termination of this Lease. Such installations and removals
shall be made in a manner as to avoid damage or defacement of the Premises; and
Tenant shall repair any damage or defacement, including without limitation,
discoloration caused by such installation or removal. Landlord shall have the
right, at its option, to deduct from the Security Deposit such sums as are
reasonably necessary to remove such signs, including, but not limited to, the
costs and expenses associated with any repairs necessitated by such removal.
Notwithstanding the foregoing, in no event shall any: (a) neon, flashing or
moving sign(s) or (b) sign(s) which shall interfere with the visibility of any
sign, awning, canopy, advertising matter, or decoration of any kind of any other
business or occupant of the Building or the Park be permitted hereunder. Tenant
further agrees to maintain any such sign, awning, canopy, advertising matter,
lettering, decoration or other thing as may be approved in good condition and
repair at all times.
33. MORTGAGEE PROTECTION: Upon any default on the part of Landlord, Tenant
will give written notice by registered or certified mail to any beneficiary of a
deed of trust or mortgagee of a mortgage covering the Premises who has provided
Tenant with notice of their interest together with an address for receiving
notice, and shall offer such beneficiary or mortgagee a reasonable opportunity
to cure the default (which, in no event shall be less than ninety (90) days),
including time to obtain possession of the Premises by power of sale or a
judicial foreclosure, if such should prove necessary to effect a cure. If such
default cannot be cured within such time period, then such additional time as
may be necessary will be given to such beneficiary or mortgagee to effect such
cure so long as such beneficiary or mortgagee has commenced the cure within the
original time period and thereafter diligently pursues such cure to completion,
in which event this Lease shall not be terminated while such cure is being
diligently pursued. Tenant agrees that each lender to whom this Lease has been
assigned by Landlord is an express third party beneficiary hereof. Tenant shall
not make any prepayment of Rent more than one (1) month in advance without the
prior written consent of each such lender, except if Tenant is required to make
quarterly payments of Rent in advance pursuant to the provisions of Section 8
above and except for the initial prepaid rent described in Section 3 of this
Lease. Tenant waives the collection of any deposit from such lender(s) or any
purchaser at a foreclosure sale of such lender(s)' deed of trust unless the
lender(s) or such purchaser shall have actually received and not refunded the
deposit. Tenant agrees to make all payments under this Lease to the lender with
the most senior encumbrance upon receiving a direction, in writing, to pay said
amounts to such lender. Tenant shall comply with such written direction to pay
without determining whether an event of default exists under such lender's loan
to Landlord.
34. QUITCLAIM: Upon any termination of this Lease, Tenant shall, at
Landlord's request, execute, have acknowledged and deliver to Landlord a
quitclaim deed of Tenant's interest in and to the Premises. If Tenant fails to
so deliver to Landlord such a quitclaim deed, Tenant hereby agrees that Landlord
shall have the full authority and right to record such a quitclaim deed signed
only by Landlord and such quitclaim deed shall be deemed conclusive and binding
upon Tenant.
35. MODIFICATIONS FOR LENDER: If, in connection with obtaining financing for
the Premises or any portion thereof, Landlord's lender shall request reasonable
modification(s) to this Lease as a condition to such financing, Tenant shall not
unreasonably withhold, delay or defer its consent thereto, provided such
modifications do not materially adversely affect Tenant's rights hereunder or
the use, occupancy or quiet enjoyment of Tenant hereunder.
36. WARRANTIES OF TENANT: Tenant hereby warrants and represents to Landlord,
for the express benefit of Landlord, that Tenant has undertaken a complete and
independent evaluation of the risks inherent in the execution of this Lease and
the operation of the Premises for the use permitted hereby, and that, based upon
said independent evaluation, Tenant has elected to enter into this Lease and
hereby assumes all risks with respect thereto. Tenant hereby further warrants
and represents to Landlord, for the express benefit of Landlord, that in
entering into this Lease, Tenant has not relied upon any statement, fact,
promise or representation (whether express or implied, written or oral) not
specifically set forth herein in writing and that any statement, fact, promise
or representation (whether express or implied, written or oral) made at any time
to Tenant, which is not expressly incorporated herein in writing, is hereby
waived by Tenant.
37. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT: Landlord and Tenant
hereby agree and acknowledge that the Premises, the Building and/or the Park may
be subject to the requirements of the Americans with Disabilities Act, a federal
law codified at 42 U.S.C. 12101 et seq, including, but not
22
<PAGE> 23
limited to Title III thereof, all regulations and guidelines related thereto,
together with any and all laws, rules, regulations, ordinances, codes and
statutes now or hereafter enacted by local or state agencies having jurisdiction
thereof, including all requirements of Title 24 of the State of California, as
the same may be in effect on the date of this Lease and may be hereafter
modified, amended or supplemented (collectively, the "ADA"). Tenant shall be
solely responsible for conducting its own independent investigation of this
matter and for ensuring that the design of all improvements or alterations to be
made to the Premises by, or on behalf of, Tenant strictly comply with all
requirements of the ADA. Subject to reimbursement pursuant to Section 6 of the
Lease, if any barrier removal work or other work is required to the Building,
the Common Areas or the Park under the ADA, then such work shall be the
responsibility of Landlord; provided, if such work is required under the ADA as
a result of any work or alteration made to the Premises by or on behalf of
Tenant, then such work shall be performed by Landlord at the sole cost and
expense of Tenant. Except as otherwise expressly provided in this provision,
Tenant shall be responsible at its sole cost and expense for fully and
faithfully complying with all applicable requirements of the ADA to the extent
such compliance is necessitated due to Tenant's particular use of the Premises,
including without limitation, not discriminating against any disabled persons in
the operation of Tenant's business in or about the Premises, and offering or
otherwise providing auxiliary aids and services as, and when, required by the
ADA. Within ten (10) days after receipt, Landlord and Tenant shall advise the
other party in writing, and provide the other with copies of (as applicable),
any notices alleging violation of the ADA relating to any portion of the
Premises or the Building; any claims made or threatened in writing regarding
noncompliance with the ADA and relating to any portion of the Premises or the
Building; or any governmental or regulatory actions or investigations instituted
or threatened regarding noncompliance with the ADA and relating to any portion
of the Premises or the Building. Tenant shall and hereby agrees to protect,
defend (with counsel acceptable to Landlord) and hold Landlord and the other
Indemnitees harmless and indemnify the Indemnitees from and against all
liabilities, damages, claims, losses, penalties, judgments, charges and expenses
(including reasonable attorneys' fees, costs of court and expenses necessary in
the prosecution or defense of any litigation including the enforcement of this
provision) arising from or in any way related to, directly or indirectly,
Tenant's or Tenant's Representatives' violation or alleged violation of the ADA.
Tenant agrees that the obligations of Tenant herein shall survive the expiration
or earlier termination of this Lease.
38. BROKERAGE COMMISSION: Landlord and Tenant each represents and warrants
for the benefit of the other that it has had no dealings with any real estate
broker, agent or finder in connection with the Premises and/or the negotiation
of this Lease, except for the Broker(s) (as set forth on Page 1), and that it
knows of no other real estate broker, agent or finder who is or might be
entitled to a real estate brokerage commission or finder's fee in connection
with this Lease or otherwise based upon contacts between the claimant and
Tenant. Each party shall indemnify and hold harmless the other from and against
any and all liabilities or expenses arising out of claims made for a fee or
commission by any real estate broker, agent or finder in connection with the
Premises and this Lease other than Broker(s), if any, resulting from the actions
of the indemnifying party. Any real estate brokerage commission or finder's fee
payable to the Broker(s) in connection with this Lease shall only be payable and
applicable to the extent of the initial Term of the Lease and to the extent of
the Premises as same exist as of the date on which Tenant executes this Lease.
Unless expressly agreed to in writing by Landlord and Broker(s), no real estate
brokerage commission or finder's fee shall be owed to, or otherwise payable to,
the Broker(s) for any renewals or other extensions of the initial Term of this
Lease or for any additional space leased by Tenant other than the Premises as
same exists as of the date on which Tenant executes this Lease. Tenant further
represents and warrants to Landlord that Tenant will not receive (i) any portion
of any brokerage commission or finder's fee payable to the Broker(s) in
connection with this Lease or (ii) any other form of compensation or incentive
from the Broker(s) with respect to this Lease.
39. QUIET ENJOYMENT: Landlord covenants with Tenant, upon the paying of Rent
and observing and keeping the covenants, agreements and conditions of this Lease
on its part to be kept, and during the periods that Tenant is not otherwise in
default (beyond any applicable cure periods described in Section 20 of this
Lease) of any of the terms or provisions of this Lease, and subject to the
rights of any of Landlord's lenders, (i) that Tenant shall and may peaceably and
quietly hold, occupy and enjoy the Premises and the Common Areas during the Term
of this Lease, and (ii) neither Landlord, nor any successor or assign of
Landlord, shall disturb Tenant's occupancy or enjoyment of the Premises and the
Common Areas.
40. LANDLORD'S ABILITY TO PERFORM TENANT'S UNPERFORMED OBLIGATIONS:
Notwithstanding anything to the contrary contained in this Lease, if Tenant
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Tenant pursuant to this Lease, and/or if the
failure of Tenant relates to a matter which in Landlord's judgment reasonably
exercised is of an emergency nature and such failure shall remain uncured for a
period of time commensurate with such emergency, then Landlord may, at
Landlord's option without any obligation to do so, and in its sole discretion as
to the necessity therefor, perform any such term, provision, covenant, or
condition, or make any such payment and Landlord by reason of so doing shall not
be liable or responsible for any loss or damage thereby sustained by Tenant or
anyone holding under or through Tenant. If Landlord
23
<PAGE> 24
performs any of Tenant's obligations hereunder, the full amount of the cost
and expense entailed or the payment so made or the amount of the loss so
sustained shall immediately be owing by Tenant to Landlord, and Tenant shall
promptly pay to Landlord upon demand, as Additional Rent, the full amount
thereof with interest thereon from the date of payment at the greater of (i) ten
percent (10%) per annum, or (ii) the highest rate permitted by applicable law
and Enforcement Expenses.
41. CONDITION OF EFFECTIVENESS OF LEASE: Notwithstanding anything to the
contrary contained herein, the effectiveness of this Lease is expressly
conditioned upon Landlord and ACI-US, Inc. ("Existing Tenant") terminating the
Existing Tenant's Lease by executing an agreement to terminate said lease
agreements ("Termination Agreement"). In no event or circumstance shall this
Lease be effective or enforceable against Landlord or Tenant unless and until
Landlord and Existing Tenant execute and deliver such Termination Agreement.
Landlord shall notify Tenant of the satisfaction of such condition. Upon
delivery of such written notice by Landlord, this Lease shall be fully effective
to the parties. If Landlord notifies Tenant that it is unable to obtain such
Termination Agreement, then this Lease shall terminate and be of no further
force and effect.
IN WITNESS WHEREOF, this Lease is executed by the parties as of the
Lease Date referenced on Page 1 of this Lease.
TENANT:
Cardiac Pathways Corporation,
a Delaware corporation
By: /S/ David W. Gryska
----------------------------------------
Its: Chief Financial Officer
----------------------------------------
Date: 4/28/98
----------------------------------------
LANDLORD:
SUNNYVALE BUSINESS PARK,
A CALIFORNIA LIMITED PARTNERSHIP
By: LINCOLN MATHILDA ASSOCIATES LIMITED PARTNERSHIP,
a California limited partnership
By: LPC MS, Inc.,
as agent and manager for SUNNYVALE BUSINESS PARK,
A CALIFORNIA LIMITED PARTNERSHIP
By: Signature Illegible
----------------------------------------
Senior Vice President
Date:
----------------------------------------
By: PATRICIAN ASSOCIATES, INC.,
a California corporation
By: /s/ John N. Urban
----------------------------------------
By:
----------------------------------------
Date:
----------------------------------------
24
<PAGE> 25
EXHIBIT A - PREMISES
This exhibit, entitled "Premises", is and shall constitute EXHIBIT A to that
certain Lease Agreement dated April 27, 1998 (the "Lease"), by and between
SUNNYVALE BUSINESS PARK, A CALIFORNIA LIMITED PARTNERSHIP ("Landlord") and
Cardiac Pathways Corporation, a Delaware corporation ("Tenant") for the leasing
of certain premises located in the Sunnyvale Business Park at 824 W. California
Avenue, Sunnyvale, California (the "Premises").
The Premises consist of the rentable square footage of space specified in the
Basic Lease Information and has the address specified in the Basic Lease
Information. The Premises are a part of and are contained in the Building
specified in the Basic Lease Information. The cross-hatched area depicts the
Premises within the Project:
[SUNNYVALE BUSINESS PARK DIAGRAM]
<PAGE> 26
EXHIBIT C TO LEASE AGREEMENT
RULES & REGULATIONS
This exhibit, entitled "Rules & Regulations", is and shall constitute EXHIBIT C
to that certain Lease Agreement dated April 27, 1998 (the "Lease"), by and
between SUNNYVALE BUSINESS PARK, A CALIFORNIA LIMITED PARTNERSHIP ("Landlord")
and Cardiac Pathways Corporation, a Delaware corporation ("Tenant") for the
leasing of certain premises located in the Sunnyvale Business Park at 824 W.
California Avenue, Sunnyvale, California (the "Premises"). The terms, conditions
and provisions of this EXHIBIT C are hereby incorporated into and are made a
part of the Lease. Any capitalized terms used herein and not otherwise defined
herein shall have the meaning ascribed to such terms as set forth in the Lease:
1. No advertisement, picture or sign of any sort shall be displayed on or
outside the Premises or the Building without the prior written consent
of Landlord. Landlord shall have the right to remove any such
unapproved item without notice and at Tenant's expense.
2. Tenant shall not regularly park motor vehicles in designated parking
areas after the conclusion of normal daily business activity.
3. Tenant shall not use any method of heating or air conditioning other
than that supplied by Landlord without the prior written consent of
Landlord.
4. All window coverings installed by Tenant and visible from the outside
of the Building require the prior written approval of Landlord.
5. Tenant shall not use, keep or permit to be used or kept any foul or
noxious gas or substance or any flammable or combustible materials on
or around the Premises, the Building or the Park.
6. Tenant shall not alter any lock or install any new locks or bolts on
any door at the Premises without the prior consent of Landlord.
7. Tenant agrees not to make any duplicate keys without the prior consent
of Landlord.
8. Tenant shall park motor vehicles in those general parking areas as
designated by Landlord except for loading and unloading. During those
periods of loading and unloading, Tenant shall not unreasonably
interfere with traffic flow within the Park and loading and unloading
areas of other tenants.
9. Tenant shall not disturb, solicit or canvas any occupant of the
Building or Park and shall cooperate to prevent same.
10. No person shall go on the roof without Landlord's permission.
11. Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of
the Building, to such a degree as to be objectionable to Landlord or
other Tenants, shall be placed and maintained by Tenant, at Tenant's
expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibration.
12. All goods, including material used to store goods, delivered to the
Premises of Tenant shall be immediately moved into the Premises and
shall not be left in parking or receiving areas overnight.
13. Tractor trailers which must be unhooked or parked with dolly wheels
beyond the concrete loading areas must use steel plates or wood blocks
under the dolly wheels to prevent damage to the asphalt paving
surfaces. No parking or storing of such trailers will be permitted in
the auto parking areas of the Park or on streets adjacent thereto.
14. Forklifts which operate on asphalt paving areas shall not have solid
rubber tires and shall only use tires that do not damage the asphalt.
15. Tenant is responsible for the storage and removal of all trash and
refuse. All such trash and refuse shall be contained in suitable
receptacles stored behind screened enclosures at locations approved by
Landlord.
16. Tenant shall not store or permit the storage or placement of goods, or
merchandise or pallets or equipment of any sort in or around the
Premises, the Building, the Park or any of the Common Areas of the
foregoing. No displays or sales of merchandise shall be allowed in the
parking lots or other Common Areas.
17. In accordance with conditions numbers 25 and 26 of the Special
Development Permit No. 5188 issued by the City of Sunnyvale to Lessor,
1) "Hours of operation of delivery trucks on the property shall be
limited to the hours between 6:00 a.m. to 10:00 p.m. with only
maintenance crews on Sundays and holidays." 2) "Trucks operating in
and out of the property, shall not use California Avenue west of
Pastoria, at any time."
18. Tenant shall not permit any animals, including, but not limited to,
any household pets, to be brought or kept in or about the Premises,
the Building, the Park or any of the Common Areas of the foregoing.
19. Tenant shall not permit any motor vehicles to be washed on any portion
of the Premises or in the Common Areas of the Park, nor shall Tenant
permit mechanical work or maintenance of motor vehicles to be
performed on any portion of the Premises or in the Common Areas of the
Park.
<PAGE> 27
EXHIBIT E
HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Landlord (identified below) to evaluate and finalize a lease agreement
with you as tenant. After a lease agreement is signed by you and the Landlord
(the "Lease Agreement"), on an annual basis in accordance with the provisions of
Section 29 of the signed Lease Agreement, you are to provide an update to the
information initially provided by you in this certificate. The information
contained in the initial Hazardous Materials Disclosure Certificate and each
annual certificate provided by you thereafter will be maintained in
confidentiality by Landlord subject to release and disclosure as required by (i)
any lenders and owners and their respective environmental consultants, (ii) any
prospective purchaser(s) of all or any portion of the property on which the
Premises are located, (iii) Landlord to defend itself or its lenders, partners
or representatives against any claim or demand, and (iv) any laws, rules,
regulations, orders, decrees, or ordinances, including, without limitation,
court orders or subpoenas. Any and all capitalized terms used herein, which are
not otherwise defined herein, shall have the same meaning ascribed to such term
in the signed Lease Agreement. Any questions regarding this certificate should
be directed to, and when completed, the certificate should be delivered to:
Landlord:
______________________________________________________
______________________________________________________
c/o Lincoln Property Company Management Services, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404
Attn:_________________________________________________
Phone: (650) 571-2200
Name of (Prospective) Tenant:__________________________________________________
Mailing Address:_______________________________________________________________
Contact Person, Title and Telephone Number(s):_________________________________
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s):___________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Address of (Prospective) Premises:_____________________________________________
Length of (Prospective) initial Term:__________________________________________
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about the
Premises, including, without limitation, principal products processed,
manufactured or assembled services and activities to be provided or
otherwise conducted. Existing tenants should describe any proposed changes
to on-going operations.
2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials be used, generated, stored or disposed of
in, on or about the Premises? Existing tenants should describe any
Hazardous Materials which continue to be used, generated, stored or
disposed of in, on or about the Premises.
Wastes Yes |_| No |_|
Chemical Products Yes |_| No |_|
Other Yes |_| No |_|
If Yes is marked, please explain:____________________________________
_____________________________________________________________________
_____________________________________________________________________
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or about
the Premises, including the applicable hazard class and an estimate of
the quantities of such Hazardous Materials at any given time;
estimated annual throughput; the proposed location(s) and method of
storage
1
<PAGE> 28
(excluding nominal amounts of ordinary household cleaners and janitorial
supplies which are not regulated by any Environmental Laws); and the
proposed location(s) and method of disposal for each Hazardous Material,
including, the estimated frequency, and the proposed contractors or
subcontractors. Existing tenants should attach a list setting forth the
information requested above and such list should include actual data from
on-going operations and the identification of any variations in such
information from the prior year's certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel, petroleum,
or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing tenants should describe any such actual
or proposed activities.
Yes |_| No |_|
If yes, please explain:______________________________________________
_____________________________________________________________________
_____________________________________________________________________
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing tenants should describe any additional identification
numbers issued since the previous certificate.
Yes |_| No |_|
4.2 Has your company filed a biennial or quarterly reports as a hazardous
waste generator? Existing tenants should describe any new reports
filed.
Yes |_| No |_|
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
_____ storm drain? _____ sewer?
_____ surface water? _____ no wastewater or other wastes
discharged.
Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
_____________________________________________________________________
_____________________________________________________________________
5.2 Will any such wastewater or waste be treated before discharge?
Yes |_| No |_|
If yes, describe the type of treatment proposed to be conducted.
Existing tenants should describe the actual treatment conducted.
_____________________________________________________________________
_____________________________________________________________________
6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing tenants should indicate whether or not there are any such air
filtration systems or stacks in use in, on or about the Premises which
discharge into the air and whether such air emissions are being
monitored.
Yes |_| No |_|
If yes, please describe:_____________________________________________
_____________________________________________________________________
_____________________________________________________________________
2
<PAGE> 29
6.2 Do you propose to operate any of the following types of equipment, or
any other equipment requiring an air emissions permit? Existing
tenants should specify any such equipment being operated in, on or
about the Premises.
_____ Spray booth(s) _____ Incinerator(s)
_____ Dip tank(s) _____ Other (Please describe)
_____ Drying oven(s) _____ No Equipment Requiring Air Permits
If yes, please describe:_____________________________________________
_____________________________________________________________________
_____________________________________________________________________
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant to
Fire Department or other governmental or regulatory agencies'
requirements? Existing tenants should indicate whether or not a
Management Plan is required and has been prepared.
Yes |_| No |_|
If yes, attach a copy of the Management Plan. Existing tenants should
attach a copy of any required updates to the Management Plan.
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
regulated under Proposition 65? Existing tenants should indicate
whether or not there are any new Hazardous Materials being so used
which are regulated under Proposition 65.
Yes |_| No |_|
If yes, please explain:______________________________________________
_____________________________________________________________________
_____________________________________________________________________
8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has your
company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company received
requests for information, notice or demand letters, or any other
inquiries regarding its operations? Existing tenants should indicate
whether or not any such actions, orders or decrees have been, or are
in the process of being, undertaken or if any such requests have been
received.
Yes |_| No |_|
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions, orders or
decrees and also describe any requests, notices or demands, and attach
a copy of all such documents. Existing tenants should describe and
attach a copy of any new actions, orders, decrees, requests, notices
or demands not already delivered to Landlord pursuant to the
provisions of Section 29 of the signed Lease Agreement.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
8.2 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
Yes |_| No |_|
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other documents
related thereto as requested by Landlord. Existing tenants should
describe and attach a copy of any new complaint(s),
cross-complaint(s), pleadings and other related documents not already
delivered to Landlord pursuant to the provisions of Section 29 of the
signed Lease Agreement.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and
3
<PAGE> 30
safety concerns? Existing tenants should indicate whether or not there
have been any such problems or complaints from adjacent tenants,
owners or other neighbors at, about or near the Premises.
Yes |_| No |_|
If yes, please describe. Existing tenants should describe any such
problems or complaints not already disclosed to Landlord under the
provisions of the signed Lease Agreement.
9. PERMITS AND LICENSES
9.1 Attach copies of all Hazardous Materials permits and licenses
including a Transporter Permit number issued to your company with
respect to its proposed operations in, on or about the Premises,
including, without limitation, any wastewater discharge permits, air
emissions permits, and use permits or approvals. Existing tenants
should attach copies of any new permits and licenses as well as any
renewals of permits or licenses previously issued.
The undersigned hereby acknowledges and agrees that (A) this Hazardous Materials
Disclosure Certificate is being delivered in connection with, and as required
by, Landlord in connection with the evaluation and finalization of a Lease
Agreement and will be attached thereto as an exhibit; (B) that this Hazardous
Materials Disclosure Certificate is being delivered in accordance with, and as
required by, the provisions of Section 29 of the Lease Agreement; and (C) that
Tenant shall have and retain full and complete responsibility and liability with
respect to any of the Hazardous Materials disclosed in the HazMat Certificate
notwithstanding Landlord's/Tenant's receipt and/or approval of such certificate.
Tenant further agrees that none of the following described acts or events shall
be construed or otherwise interpreted as either (a) excusing, diminishing or
otherwise limiting Tenant from the requirement to fully and faithfully perform
its obligations under the Lease with respect to Hazardous Materials, including,
without limitation, Tenant's indemnification of the Indemnitees and compliance
with all Environmental Laws, or (b) imposing upon Landlord, directly or
indirectly, any duty or liability with respect to any such Hazardous Materials,
including, without limitation, any duty on Landlord to investigate or otherwise
verify the accuracy of the representations and statements made therein or to
ensure that Tenant is in compliance with all Environmental Laws; (i) the
delivery of such certificate to Landlord and/or Landlord's acceptance of such
certificate, (ii) Landlord's review and approval of such certificate, (iii)
Landlord's failure to obtain such certificate from Tenant at any time, or (iv)
Landlord's actual or constructive knowledge of the types and quantities of
Hazardous Materials being used, stored, generated, disposed of or transported on
or about the Premises by Tenant or Tenant's Representatives. Notwithstanding the
foregoing or anything to the contrary contained herein, the undersigned
acknowledges and agrees that Landlord and its partners, lenders and
representatives may, and will, rely upon the statements, representations,
warranties, and certifications made herein and the truthfulness thereof in
entering into the Lease Agreement and the continuance thereof throughout the
term, and any renewals thereof, of the Lease Agreement.
I (print name)__________________ , acting with full authority to bind the
(proposed) Tenant and on behalf of the (proposed) Tenant, certify, represent and
warrant that the information contained in this certificate is true and correct.
(PROSPECTIVE) TENANT:
By: ________________________________________
Title: ________________________________________
Date: ________________________________________
4
<PAGE> 31
EXHIBIT F
FIRST AMENDMENT TO LEASE AGREEMENT
CHANGE OF COMMENCEMENT DATE
This First Amendment to Lease Agreement (the "Amendment") is made and entered
into to be effective as of ___________________, by and between
____________________________ ("LANDLORD"), AND ________________________
("TENANT"), with reference to the following facts:
RECITALS
A. Landlord and Tenant have entered into that certain Lease Agreement dated
___________ (the "Lease"), for the leasing of certain premises containing
approximately __________ rentable square feet of space located at
____________________________, California (the "Premises") as such Premises
are more fully described in the Lease.
B. Landlord and Tenant wish to amend the Commencement Date of the Lease.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true
and correct.
2. The Commencement Date of the Lease shall be ________________________.
3. The last day of the Term of the Lease (the "Expiration Date") shall be
______________.
4. The dates on which the Base Rent will be adjusted are:
<TABLE>
<S> <C>
for the period __________ to _________ the monthly Base Rent shall be $___________;
for the period __________ to _________ the monthly Base Rent shall be $___________;and
for the period __________ to _________ the monthly Base Rent shall be $___________;
</TABLE>
5. Effect of Amendment: Except as modified herein, the terms and
conditions of the Lease shall remain unmodified and continue in full
force and effect. In the event of any conflict between the terms and
conditions of the Lease and this Amendment, the terms and conditions
of this Amendment shall prevail.
6. Definitions: Unless otherwise defined in this Amendment, all terms not
defined in this Amendment shall have the meaning set forth in the
Lease.
7. Authority: Subject to the provisions of the Lease, this Amendment
shall be binding upon and inure to the benefit of the parties hereto,
their respective heirs, legal representatives, successors and assigns.
Each party hereto and the persons signing below warrant that the
person signing below on such party's behalf is authorized to do so and
to bind such party to the terms of this Amendment.
8. The terms and provisions of the Lease are hereby incorporated in this
Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
[PROPERTY MANAGER: PLEASE PROVIDE TENANT INFORMATION AND WORD PROCESSING WILL
COMPLETE THE SIGNATURE BLOCK]
<PAGE> 32
EXHIBIT G (TENANT/LANDLORD)
TENANT'S INITIAL HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Landlord (identified below) to evaluate and finalize a lease agreement
with you as tenant. After a lease agreement is signed by you and the Landlord
(the "Lease Agreement"), on an annual basis in accordance with the provisions of
Section 29 of the signed Lease Agreement, you are to provide an update to the
information initially provided by you in this certificate. The information
contained in the initial Hazardous Materials Disclosure Certificate and each
annual certificate provided by you thereafter will be maintained in
confidentiality by Landlord subject to release and disclosure as required by (i)
any lenders and owners and their respective environmental consultants, (ii) any
prospective purchaser(s) of all or any portion of the property on which the
Premises are located, (iii) Landlord to defend itself or its lenders, partners
or representatives against any claim or demand, and (iv) any laws, rules,
regulations, orders, decrees, or ordinances, including, without limitation,
court orders or subpoenas. Any and all capitalized terms used herein, which are
not otherwise defined herein, shall have the same meaning ascribed to such term
in the signed Lease Agreement. Any questions regarding this certificate should
be directed to, and when completed, the certificate should be delivered to:
Landlord: SUNNYVALE BUSINESS PARK
A CALIFORNIA LIMITED PARTNERSHIP
c/o Lincoln Property Company Management Services, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404
Attn: Portfolio Manager
Phone: (650) 571-2200
Name of (Prospective) Tenant: Cardiac Pathways Corporation
Mailing Address: 995 Benecia Avenue
Sunnyvale, California 94086
Contact Person, Title and Telephone Number(s):_________________________________
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s):___________________________________________________________
Address of (Prospective) Premises:_____________________________________________
_______________________________________________________________________________
Length of (Prospective) initial Term:__________________________________________
_______________________________________________________________________________
1. GENERAL INFORMATION:
Describe the initial proposed operations to take place in, on, or about the
Premises, including, without limitation, principal products processed,
manufactured or assembled services and activities to be provided or
otherwise conducted. Existing tenants should describe any proposed changes
to on-going operations.
__________________________________________________________________________
__________________________________________________________________________
2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
2.1 Will any Hazardous Materials be used, generated, stored or disposed of
in, on or about the Premises? Existing tenants should describe any
Hazardous Materials which continue to be used, generated, stored or
disposed of in, on or about the Premises.
Wastes Yes [ ] No [ ]
Chemical Products Yes [ ] No [ ]
Other Yes [ ] No [ ]
If Yes is marked, please explain:____________________________________
_____________________________________________________________________
_____________________________________________________________________
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or about
the Premises, including the applicable hazard class and an estimate of
the quantities of such Hazardous Materials at any given time;
estimated annual throughput; the proposed location(s) and method of
storage (excluding nominal amounts of ordinary household cleaners and
janitorial supplies which are not regulated by any Environmental
Laws); and the proposed location(s) and method of disposal for each
Hazardous Material, including, the estimated frequency, and the
proposed contractors or subcontractors. Existing tenants should attach
a list setting forth the information requested above and such list
should include actual data from on-going
1
<PAGE> 33
operations and the identification of any variations in such
information from the prior year's certificate.
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel, petroleum,
or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing tenants should describe any such actual
or proposed activities.
Yes [ ] No [ ]
If yes, please explain:______________________________________________
_____________________________________________________________________
_____________________________________________________________________
4. WASTE MANAGEMENT
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing tenants should describe any additional identification
numbers issued since the previous certificate.
Yes [ ] No [ ]
4.2 Has your company filed a biennial or quarterly reports as a hazardous
waste generator? Existing tenants should describe any new reports
filed.
Yes [ ] No [ ]
If yes, attach a copy of the most recent report filed.
5. WASTEWATER TREATMENT AND DISCHARGE
5.1 Will your company discharge wastewater or other wastes to:
_____ storm drain? _____ sewer?
_____ surface water? _____ no wastewater or other wastes
discharged.
Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
_____________________________________________________________________
_____________________________________________________________________
5.2 Will any such wastewater or waste be treated before discharge?
Yes [ ] No [ ]
If yes, describe the type of treatment proposed to be conducted.
Existing tenants should describe the actual treatment conducted.
_____________________________________________________________________
_____________________________________________________________________
6. AIR DISCHARGES
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing tenants should indicate whether or not there are any such air
filtration systems or stacks in use in, on or about the Premises which
discharge into the air and whether such air emissions are being
monitored.
Yes [ ] No [ ]
If yes, please describe:_____________________________________________
_____________________________________________________________________
_____________________________________________________________________
6.2 Do you propose to operate any of the following types of equipment, or
any other equipment requiring an air emissions permit? Existing
tenants should specify any such equipment being operated in, on or
about the Premises.
_____ Spray booth(s) _____ Incinerator(s)
_____ Dip tank(s) _____ Other (Please describe)
_____ Drying oven(s) _____ No Equipment Requiring Air Permits
If yes, please describe:_____________________________________________
_____________________________________________________________________
_____________________________________________________________________
2
<PAGE> 34
7. HAZARDOUS MATERIALS DISCLOSURES
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant to
Fire Department or other governmental or regulatory agencies'
requirements? Existing tenants should indicate whether or not a
Management Plan is required and has been prepared.
Yes [ ] No [ ]
If yes, attach a copy of the Management Plan. Existing tenants should
attach a copy of any required updates to the Management Plan.
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
regulated under Proposition 65? Existing tenants should indicate
whether or not there are any new Hazardous Materials being so used
which are regulated under Proposition 65.
Yes [ ] No [ ]
If yes, please explain:______________________________________________
_____________________________________________________________________
_____________________________________________________________________
8. ENFORCEMENT ACTIONS AND COMPLAINTS
8.1 With respect to Hazardous Materials or Environmental Laws, has your
company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company received
requests for information, notice or demand letters, or any other
inquiries regarding its operations? Existing tenants should indicate
whether or not any such actions, orders or decrees have been, or are
in the process of being, undertaken or if any such requests have been
received.
Yes [ ] No [ ]
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions, orders or
decrees and also describe any requests, notices or demands, and attach
a copy of all such documents. Existing tenants should describe and
attach a copy of any new actions, orders, decrees, requests, notices
or demands not already delivered to Landlord pursuant to the
provisions of Section 29 of the signed Lease Agreement.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
8.2 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
Yes [ ] No [ ]
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other documents
related thereto as requested by Landlord. Existing tenants should
describe and attach a copy of any new complaint(s),
cross-complaint(s), pleadings and other related documents not already
delivered to Landlord pursuant to the provisions of Section 29 of the
signed Lease Agreement.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
8.3 Have there been any problems or complaints from adjacent tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
tenants should indicate whether or not there have been any such
problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises.
Yes [ ] No [ ]
If yes, please describe. Existing tenants should describe any such
problems or complaints not already disclosed to Landlord under the
provisions of the signed Lease Agreement.
_____________________________________________________________________
_____________________________________________________________________
9. PERMITS AND LICENSES
9.1 Attach copies of all Hazardous Materials permits and licenses
including a Transporter Permit number issued to your company with
respect to its proposed operations in, on or about the Premises,
3
<PAGE> 35
including, without limitation, any wastewater discharge permits, air
emissions permits, and use permits or approvals. Existing tenants
should attach copies of any new permits and licenses as well as any
renewals of permits or licenses previously issued.
The undersigned hereby acknowledges and agrees that (A) this Hazardous Materials
Disclosure Certificate is being delivered in connection with, and as required
by, Landlord in connection with the evaluation and finalization of a Lease
Agreement and will be attached thereto as an exhibit; (B) that this Hazardous
Materials Disclosure Certificate is being delivered in accordance with, and as
required by, the provisions of Section 29 of the Lease Agreement; and (C) that
Tenant shall have and retain full and complete responsibility and liability with
respect to any of the Hazardous Materials disclosed in the HazMat Certificate
notwithstanding Landlord's/Tenant's receipt and/or approval of such certificate.
Tenant further agrees that none of the following described acts or events shall
be construed or otherwise interpreted as either (a) excusing, diminishing or
otherwise limiting Tenant from the requirement to fully and faithfully perform
its obligations under the Lease with respect to Hazardous Materials, including,
without limitation, Tenant's indemnification of the Indemnitees and compliance
with all Environmental Laws, or (b) imposing upon Landlord, directly or
indirectly, any duty or liability with respect to any such Hazardous Materials,
including, without limitation, any duty on Landlord to investigate or otherwise
verify the accuracy of the representations and statements made therein or to
ensure that Tenant is in compliance with all Environmental Laws; (i) the
delivery of such certificate to Landlord and/or Landlord's acceptance of such
certificate, (ii) Landlord's review and approval of such certificate, (iii)
Landlord's failure to obtain such certificate from Tenant at any time, or (iv)
Landlord's actual or constructive knowledge of the types and quantities of
Hazardous Materials being used, stored, generated, disposed of or transported on
or about the Premises by Tenant or Tenant's Representatives. Notwithstanding the
foregoing or anything to the contrary contained herein, the undersigned
acknowledges and agrees that Landlord and its partners, lenders and
representatives may, and will, rely upon the statements, representations,
warranties, and certifications made herein and the truthfulness thereof in
entering into the Lease Agreement and the continuance thereof throughout the
term, and any renewals thereof, of the Lease Agreement.
I (print name) , acting with full authority to bind the
(proposed) Tenant and on behalf of the (proposed) Tenant, certify, represent and
warrant that the information contained in this certificate is true and correct.
(PROSPECTIVE) TENANT:
By: ________________________________________
Its: ________________________________________
Date: ________________________________________
4
<PAGE> 1
EXHIBIT 10.18
CARDIAC PATHWAYS CORPORATION
AGREEMENT
This Agreement is made this 18th day of April, 1996, by and between
Earle Canty ("Executive") and Cardiac Pathways Corporation, a California
corporation ("the Company").
WHEREAS, on January 22, 1996, Executive was granted certain stock
options (the "Options") pursuant to the Company's 1991 Stock Plan;
WHEREAS, the Company and Executive have executed a promissory note (the
"First Note");
WHEREAS, the Company desires to assist Executive in paying the taxes
associated with exercise of the Options;
WHEREAS, the Company intends to loan Executive the funds necessary to
pay such taxes pursuant to a promissory note (the "Second Note");
NOW, THEREFORE in consideration of the mutual covenants hereinafter
contained, the Company and Executive agree as follows:
1. Prior to such time as Executive shall be required to remit payment to
the Internal Revenue Service for the taxes associated with exercise of the
Options (the "Taxes"), the Company shall, in exchange for the Second Note, loan
Executive an amount equal to the Taxes; provided, however, that the amount of
such loan shall not exceed $150,000. Except as provided herein, the terms of the
Second Note shall be substantially similar to those of the First Note.
2. Upon sale of the shares, or any portion thereof, underlying the
Options, fifty percent (50%) of the proceeds from such sale shall be applied
against the principal amount of the First Note. If at the time of such sale, no
portion of the principal amount of the First Note remains unpaid, fifty percent
(50%) of the proceeds from such sale shall be applied against the principal
amount due and payable under the Second Note.
<PAGE> 2
3. The Second Note shall bear interest at a rate equal to the Applicable
Federal Rate for the month in which the Second Note is executed.
IN WITNESS WHEREOF, this Agreement has been entered into as of the date
first set forth above.
EARLE CANTY CARDIAC PATHWAYS CORPORATION
/s/ Earle Canty By: /s/ William Starling
- --------------------------------- ----------------------------
Its: President
---------------------------
-2-
<PAGE> 1
EXHIBIT 10.18.1
CARDIAC PATHWAYS CORPORATION
AMENDMENT NUMBER 1 TO
APRIL 18, 1996 AGREEMENT
This Amendment Number 1 to the Agreement dated as of April 18,, by and
between Earle Canty ("Executive") and Cardiac Pathways Corporation, a Delaware
corporation ("the Company")1996 is made this 31st day of August, 1998.
WHEREAS, on January 22, 1996, Executive was granted certain stock options
(the "Options") pursuant to the Company's 1991 Stock Plan;
WHEREAS, the Company and Executive executed a promissory note (the "First
Note") on April 18, 1996;
WHEREAS, the Company desired to assist Executive in paying the taxes
associated with exercise of the Options;
WHEREAS, the Company and the Executive executed a promissory note (the
"Second Note") on December 23, 1996;
NOW, THEREFORE in consideration of the mutual covenants hereinafter
contained, the Company and Executive agree as follows:
1. The maturity dates of each of the First Note and the Second Note shall
be extended to be the earlier of (i) the date that the Executive ceases to
provide consulting services for the Company or (ii) February 28, 1999.
2. Each of the Company and the Executive shall execute simultaneously
herewith an amendment to each of the First Note and the Second Note to revise
the due dates of such notes to be substantially as set forth in paragraph 1
above.
3. Nothing in this Amendment Number 1 shall be deemed to waive or
otherwise impair the Company's ability to repurchase any shares of the Company's
Common Stock held by the Executive that are unvested as of the termination of
his full-time employment as an officer of the Company.
4. The remaining terms of the Agreement dated April 18, 1996 between the
Company and the Executive, the Security Agreements, Joint Escrow Instructions
and Restricted Stock Purchase Agreements related thereto shall remain in force
and effect without regard to this
-1-
<PAGE> 2
Amendment Number 1, and this Amendment Number 1 shall become a part of such
Agreement as if made on and incorporated as of the date of such agreement.
5. This Amendment Number 1 may be executed in counterparts, and both
signatures shall constitute the complete document.
6. This Amendment Number 1 shall be governed by the laws of the State of
California without regard to conflict of law principles.
IN WITNESS WHEREOF, this Amendment Number 1 has been entered into as of the
date first set forth above.
EARLE CANTY CARDIAC PATHWAYS CORPORATION
/s/ Earle Canty By: /s/ William Starling
- ------------------------------ ------------------------------
Its: President
------------------------------
-2-
<PAGE> 1
EXHIBIT 10.19
NOTE
$385,000 [City, State]
April 18, 1996
1. FOR VALUE RECEIVED, Earle Canty promises to pay to Cardiac Pathways
Corporation, a California corporation (the "Company"), or order, the principal
sum of Three Hundred and Eight-Five Thousand Dollars ($385,000), together with
interest on the unpaid principal hereof from the date hereof at the rate of five
and eighty-eight one-hundredths percent (5.88%) per annum.
2. Principal shall be due and payable in installments as follows: upon sale of
the shares, or any portion thereof (the "Shares"), underlying the options
granted to the undersigned by the Company on January 22, 1996 (the "Options"),
fifty percent (50%) of the proceeds from the sale of such Shares shall be due
and payable as an installment to be applied against the principal amount of this
Note; provided, however, that if no principal shall remain unpaid under this
Note, such proceeds shall be applied against the principal of any other note the
undersigned shall have made with the Company under which the principal amount is
not fully paid, but shall not be applied against interest due under this Note or
any other such note. Interest shall be due and payable in equal annual
installments on the last day of each fiscal year of the Company during which
this Note is outstanding. Should the undersigned fail to make full payment of
principal or interest for a period of 10 days or more after the due date
thereof, the whole unpaid balance on this Note of principal and interest shall
become immediately due at the option of the holder of this Note. Any remaining
indebtedness evidenced by this Note, if not sooner paid, shall be due and
payable upon the Maturity Date (as hereinafter defined). Payments of principal
and interest shall be made in lawful money of the United States of America.
3. Notwithstanding anything to the contrary contained in this Note, the entire
principal balance and all accrued and unpaid interest thereon shall, at the
option of the Company, be due and payable upon that date (the "Maturity Date")
which is the earlier of:
A. The date of termination or cessation of employment of the undersigned
with the Company for any reason, whether voluntary or involuntary, and whether
with cause or without cause;
B. The fifth (5th) anniversary of the date of this Note.
4. The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
<PAGE> 2
5. This Note is subject to the terms of the Options. This Note is secured in
part by a pledge of the Company's Common Stock under the terms of a Security
Agreement of even date herewith and is subject to all the provisions thereof.
6. The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
7. This Note may be amended or modified, and provisions hereof may be waived,
only by the written agreement of the undersigned and the Company. No delay or
failure by the Company in exercising any right, power or remedy hereunder shall
operate as a waiver of such right, power or remedy, and a waiver of any right,
power or remedy on any one occasion shall not operate as a bar or waiver of any
such right, power or remedy on any other occasion. Without limiting the
generality of the foregoing, the delay or failure by the Company for any period
of time to enforce collection of any amounts due hereunder shall not be deemed
to be a waiver of any rights of the Company under contract or under law. The
rights of the Company under this Note are in addition to any other rights and
remedies which the Company may have.
8. The undersigned hereby acknowledges that the Company has made no
representation or warranty to the undersigned concerning the income tax
consequences of the loan to the undersigned, and the undersigned shall be solely
responsible for ascertaining and bearing such tax consequences.
9. Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
/s/ Earle Canty
--------------------------------------
EARLE CANTY
-2-
<PAGE> 1
EXHIBIT 10.19.1
AMENDMENT NUMBER 1 TO
NOTE DATED APRIL 18, 1996
Sunnyvale, California
August 31, 1998
WHEREAS, on April 18, 1996 Earle Canty (the "Borrower") promised to pay to
Cardiac Pathways Corporation, a Delaware corporation (the "Company"), or order,
the principal sum of Three Hundred and Eight-Five Thousand Dollars ($385,000),
together with interest on the unpaid principal thereof from the date thereof at
the rate of five and eighty-eight one-hundredths percent (5.88%) per annum (the
"April 1996 Note").
WHEREAS, paragraph 3 of such April 1996 Note provided that:
"3. Notwithstanding anything to the contrary contained in this Note, the
entire principal balance and all accrued and unpaid interest thereon shall,
at the option of the Company, be due and payable upon that date (the
"Maturity Date") which is the earlier of:
A. The date of termination or cessation of employment of the undersigned
with the Company for any reason, whether voluntary or involuntary, and
whether with cause or without cause;
B. The fifth (5th) anniversary of the date of this Note."
WHEREAS, the Borrower will cease full-time employment as an officer of the
Company on the date hereof but has agreed to provide consulting services to the
Company for such period of time as is mutually agreeable to the Borrower and the
Company.
1. NOW, THEREFORE the Company and the Borrower for consideration received
agree to amend the April 1996 Note to amend and restate paragraph 3 in its
entirety as follows:
"3. Notwithstanding anything to the contrary contained in this Note, the
entire principal balance and all accrued and unpaid interest thereon shall,
at the option of the Company, be due and payable upon that date (the
"Maturity Date") which is the earlier of:
A. The date the undersigned ceases or terminates his consulting
relationship with the Company for any reason, whether voluntary or
involuntary, and whether with cause or without cause; or
B. February 28, 1999."
2. The remaining terms of the April 1996 Note, the Security Agreement, Joint
Escrow Instructions and Restricted Stock Purchase Agreement related thereto
shall remain in force and effect
-1-
<PAGE> 2
without regard to this Amendment Number 1, and this Amendment Number 1 shall
become a part of the April 1996 Note as if made on and incorporated as of the
date of such note.
3. This Amendment Number 1 may be executed in counterparts, and both
signatures shall constitute the complete document.
4. This Amendment Number 1 shall be governed by the laws of the State of
California without regard to conflict of law principles.
IN WITNESS WHEREOF, this Amendment Number 1 has been entered into as of the
date first set forth above.
EARLE CANTY CARDIAC PATHWAYS CORPORATION
/s/ Earle Canty By: /s/ William Starling
- ------------------------------- ------------------------------
Its: Chief Executive Officer
-----------------------------
-2-
<PAGE> 1
EXHIBIT 10.20
NOTE
$197,450.00 Sunnyvale, California
December 23, 1996
1. FOR VALUE RECEIVED, Earle Canty promises to pay to Cardiac Pathways
Corporation, a California corporation (the "Company"), or order, the principal
sum of One Hundred Ninety Seven Thousand Four Hundred Fifty Dollars ($197,450),
together with interest in the unpaid principal hereof from the date hereof at
the rate of six and four tenths percent (6.4%) per annum.
2. Principal shall be due and payable in installments as follows: upon sale of
the shares, or any portion thereof (the "Shares"), underlying the options
granted to the undersigned by the Company on January 22, 1996 (the "Options"),
fifty percent (50%) of the proceeds from the sales of such Shares shall be due
and payable as an installment to be applied against the principal amount of this
Note; provided, however, that if no principal shall remain unpaid under this
Note, such proceeds shall be applied against the principal of any other note the
undersigned shall have made with the Company under which the principal amount is
not fully paid, but shall not be applied against interest due under this Note or
any other such note. Interest shall be due and payable in equal annual
installments on the last day of each fiscal year of the Company during which
this Note is outstanding. Should the undersigned fail to make full payment of
principal or interest for a period of 10 days or more after the due date
thereof, the whole unpaid balance on this Note of principal and interest shall
become immediately due at the option of the holder of this Note. Any remaining
indebtedness evidenced by this Note, if not sooner paid, shall be due and
payable upon the Maturity Date (as hereinafter defined). Payment of principal
and interest shall be made in lawful money of the United States of America.
3. Notwithstanding anything to the contrary contained in this Note, the entire
principal balance and all accrued and unpaid interest thereon shall, at the
option of the Company, be due and payable upon that date (the "Maturity Date")
which is the earlier of:
A. The date of termination or cessation of employment of the undersigned
with the Company for any reason, whether voluntary or involuntary, and whether
with cause or without cause;
B. The fifth (5th) anniversary of the date of this Note.
4. The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
5. This note is subject to the terms of the Options. This Note is secured in
part by a pledge of the Company's Common Stock under the terms of a Security
Agreement of even date herewith and is subject to all the provisions thereof.
<PAGE> 2
6. The holder of this Note shall have recourse against the undersigned, and
shall not be required to proceed against the collateral securing this Note in
the event of default.
7. This Note may be amended or modified, and provisions hereof may be waived,
only by the written agreement of the undersigned and the Company. No delay or
failure by the Company in exercising any right, power or remedy hereunder shall
operate as a waiver of such right, power or remedy, and a waiver of any right,
power or remedy on any one occasion shall not operate as bar or waiver of any
such right, power or remedy on any other occasion. Without limiting the
generality of the foregoing, the delay or failure by the Company for any period
of time to enforce collection of any amounts due hereunder shall not be deemed
to be a waiver of any rights of the Company under contract or under law. The
rights of the Company under this Note are in addition to any other rights and
remedies which the Company may have.
8. The undersigned hereby acknowledges that the Company has made no
representation or warranty to the undersigned concerning the income tax
consequences of the loan to the undersigned, and the undersigned shall be solely
responsible for ascertaining and bearing such tax consequences.
9. Should any action be instituted for the collection of this Note, the
reasonable costs and attorney's fees therein of the holder shall be paid by the
undersigned.
/s/ Earle Canty
---------------------------
Earle Canty
<PAGE> 1
EXHIBIT 10.20.1
AMENDMENT NUMBER 1 TO
NOTE DATED DECEMBER 23, 1996
Sunnyvale, California
August 31, 1998
WHEREAS, on December 23, 1996 Earle Canty (the "Borrower") promised to pay
to Cardiac Pathways Corporation, a Delaware corporation (the "Company"), or
order, the principal sum of One Hundred and Ninety-Seven Thousand Four Hundred
Fifty Dollars ($197,450), together with interest on the unpaid principal thereof
from the date thereof at the rate of six and forty one-hundredths percent (6.4%)
per annum (the "December 1996 Note").
WHEREAS, paragraph 3 of such December 1996 Note provided that:
"3. Notwithstanding anything to the contrary contained in this Note, the
entire principal balance and all accrued and unpaid interest thereon shall,
at the option of the Company, be due and payable upon that date (the
"Maturity Date") which is the earlier of:
A. The date of termination or cessation of employment of the
undersigned with the Company for any reason, whether voluntary or
involuntary, and whether with cause or without cause;
B. The fifth (5th) anniversary of the date of this Note."
WHEREAS, the Borrower will cease full-time employment as an officer of the
Company on the date hereof but has agreed to provide consulting services to the
Company for such period of time as is mutually agreeable to the Borrower and the
Company.
1. NOW, THEREFORE the Company and the Borrower for consideration received
agree to amend the December 1996 Note to amend and restate paragraph 3 in its
entirety as follows:
"3. Notwithstanding anything to the contrary contained in this Note,
the entire principal balance and all accrued and unpaid interest
thereon shall, at the option of the Company, be due and payable upon
that date (the "Maturity Date") which is the earlier of:
A. The date the undersigned ceases or terminates his consulting
relationship with the Company for any reason, whether voluntary or
involuntary, and whether with cause or without cause; or
B. February 28, 1999."
2. The remaining terms of the December 1996 Note, the Security Agreement,
Joint Escrow Instructions and Restricted Stock Purchase Agreement related
thereto shall remain in force and effect
-1-
<PAGE> 2
without regard to this Amendment Number 1, and this Amendment Number 1 shall
become a part of the December 1996 Note as if made on and incorporated as of the
date of such note.
3. This Amendment Number 1 may be executed in counterparts, and both
signatures shall constitute the complete document.
4. This Amendment Number 1 shall be governed by the laws of the State of
California without regard to conflict of law principles.
IN WITNESS WHEREOF, this Amendment Number 1 has been entered into as of the
date first set forth above.
EARLE CANTY CARDIAC PATHWAYS CORPORATION
/s/ Earle Canty By: /s/ William Starling
- --------------------------------- ---------------------------------
Its: President
--------------------------------
-2-
<PAGE> 1
EXHIBIT 10.21
CARDIAC PATHWAYS CORPORATION
CONSULTING AGREEMENT
This Agreement (the "Agreement") is made by and between Cardiac
Pathways Corporation (the "Company") and Earle Canty (the "Consultant") as of
September 1, 1998.
1. SERVICES. The Consultant shall provide to the Company the services
set forth in Paragraph 1 of Exhibit A in accordance with the terms and
conditions contained in this Agreement. The manner and means by which Consultant
chooses to complete the Projects are in consultant's sole discretion and
control. Consultant agrees to exercise the highest degree of professionalism,
and utilize its expertise and creative talents in achieving such Projects. The
Company will make its facilities, equipment and personnel available to
Consultant when necessary. Consultant shall perform the services necessary to
achieve the Projects in a timely manner consistent with industry standards at a
location, place and time which the Consultant deems appropriate.
2. TERM. Unless terminated in accordance with the provisions of
Paragraph 7 hereof, the services provided by the Consultant to the Company shall
be performed during the period set forth in Paragraph 2 of Exhibit A or up to
completion of the project as described in Paragraph 2 of Exhibit A. The
Consultant shall coordinate his work efforts and report his progress regularly
to the individual set forth in Paragraph 3 of Exhibit A.
3. PAYMENT FOR SERVICE RENDERED. For providing the consulting services
as defined herein, the Company shall deliver to the Consultant the consideration
described in Paragraph 4 of Exhibit A. The Company shall reimburse the
Consultant for all reasonable expenses provided the Company has approved the
expenses in advance and in writing.
4. NATURE OF RELATIONSHIP. The Consultant is an independent contractor.
The Consultant will not act as an agent nor shall be deemed and employee of the
Company for the purposes of any employee benefit program, income tax
withholding, FICA taxes, unemployment benefits, or otherwise. As an independent
contractor, the Company will not withhold or make payments for state of federal
income tax or social security; make unemployment insurance or disability
insurance contributions; or obtain workers compensation insurance on
Consultant's behalf. The Company will issue Consultant a 1099 form with respect
to Consultant's consulting fees. Consultant agrees to accept exclusive liability
for complying with all applicable state and federal laws governing self employed
individuals, including obligations such as payment of quarterly taxes, social
security, disability and other
<PAGE> 2
contributions based on the fees paid to Consultant, its agents or employees
under this Agreement. Consultant hereby indemnifies and defends the Company
against any and all such taxes or contributions. Consultant will not receive any
employee benefits such as paid holidays, vacations, sick leave or other such
paid time off, or participate in company-sponsored health insurance or other
employee benefit plans. The Consultant shall not enter into any agreement or
incur obligations on the Company's behalf, or commit the Company in any manner
without the Company's prior written notice.
5. CONFIDENTIALITY.
(a) The Consultant agrees that he shall not use (except for the
Company's benefit) or divulge to anyone either during the term of this Agreement
or thereafter any of the Company's trade secrets or other proprietary data or
information of any kind whatsoever acquired by the Consultant. The Consultant
further agrees that upon completion or termination of this Agreement, he will
turn over to the Company any notebook, data, information or other material
acquired or compiled by the Consultant in carrying out the terms of the
Agreement, However, the Consultant may keep one copy of such material for
archival purposes. The confidentiality obligations of the Consultant thereunder
shall survive for a period of five (5) years.
(b) The Consultant represents that his performance of the terms of the
Agreement does not and will not conflict with the terms of any agreement to keep
in confidence proprietary information and trade secrets acquired in confidence
or in trust prior to his consulting relationship with the Company. The
Consultant will not disclose to the Company or induce the Company to use, any
confidential or proprietary information or material belonging to any third
party.
(c) The Consultant represents that he is not presently retained by any
entity that manufactures or sells products competitive with those of the Company
and he agrees that he will not accept such retention during the term of this
Agreement without prior written approval of the Company.
6. INVENTIONS.
(a) The Consultant shall promptly and fully disclose to the Company any
and all inventions, improvements, discoveries, developments, original works of
authorship, trade secrets or other intellectual property conceived, developed or
reduced to practice by the Consultant during the term of the Agreement and in
any way relating to (1) the actual or anticipated research and development of
the Company, or (2) the services performed by the Consultant under this
Agreement (the "information"). The Consultant shall treat all of the information
as the proprietary property of the Company. The Consultant agrees to assign, and
does hereby assign, to the Company and its successors and assigns, without
further
2
<PAGE> 3
consideration, the Consultant's entire right, title and interest in and to the
Information whether or not patentable or copyrightable. The Consultant further
agrees to execute all applications for patents and/or copyrights, domestic or
foreign, assignments and other papers necessary to secure and enforce rights
related to the information. The parties acknowledge that all original works of
authorship which are made by the Consultant within the scope of his consulting
services which are protectable by copyright are "works made for hire", as that
term is defined in the United States Copyright Act (17 USCA Section 101).
(b) The Consultant shall specifically describe and identify in Exhibit
A to this Agreement and all technology (i) which the Consultant intends to use
in performing under this Agreement (ii) which is either owned solely by the
Consultant or licensed to the Consultant with a right to sublicense, and (iii)
which is existence in the form of a writing or working prototype prior to the
effective date of this Agreement (Background Technology"). The Consultant hereby
grants to the Company a non-exclusive, royalty-free and worldwide right to use
and sublicense the use of any Background Technology for the purpose of
developing and marketing the Company's products, but not for the purpose of
marketing any Background Technology separate from the Company's products.
(c) The Consultant warrants that he has good and marketable title to
all of the Information and that the Information shall be free and clear of all
liens, claims, encumbrances or demands of third parties, including any claims by
any such third parties of any right, title or interest in or to the Information
arising out of any trade secret, copyright or patent. The Consultant shall
indemnify, defend and hold harmless the Company and its officers, agents,
directors, employees, and customers from and against any claim, loss, judgment
or expense (including reasonable attorney's and expert witnesses' fees and cost)
resulting from or arising in any way out of any such claims by any third parties
which are based upon or are the result of any breach of the warranties contained
in the Section 6.
7. TERMINATION. Either party may terminate this Agreement in whole or
part at its convenience upon 30 days written notice to the other party. Such
termination shall be effective in the manner and upon the date specified in said
notice and shall be without prejudice to any claims which one party may have
against the other. In the event of such termination the Company shall be
obligated to reimburse the Consultant for services actually performed by the
Consultant up to the effective date of termination. Termination shall not
relieve the Consultant of his continuing obligation under this Agreement,
including without limitation the requirements of Paragraphs 5 and 6 above.
8. MISCELLANEOUS.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of California. The Federal and State courts
3
<PAGE> 4
within the State of California shall have exclusive jurisdiction to adjudicate
any dispute arising out of this Agreement. The parties consent to personal
jurisdiction of the Federal and State courts within California and service of
process being effective by registered mail sent to the address set forth at the
end of this Agreement.
(b) This Agreement may not be and shall not be deemed or construed
to have been modified, amended, rescinded, canceled or waived in whole or in
part, except by written instruments signed by the partied hereto. No failure on
the part of either party to exercise, and no delay in exercising, any right or
remedy hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right or remedy hereunder preclude any other or further
exercise thereof or the exercise of any other right or remedy granted hereby or
by any related document or by law.
(c) This Agreement, including the exhibit attached hereto and made a
part thereof, constitutes and expresses the entire agreement and understanding
between the parties. All previous discussions, promises, representations and
understandings between the parties relative to this Agreement, if any, have been
merged into this document. The provisions of Paragraphs 5 and 6 shall survive
the termination of this Agreement. The terms and provisions of this Agreement
shall be binding on and inure to the benefit of the parties, their heirs, legal
representatives, successors and assigns.
(d) The Consultant may not subcontract all or any part of the
services to be provided hereunder without the prior written consent of the
Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
CARDIAC PATHWAYS CORPORATION
a Delaware Corporation
David W. Gryska EARLE CANTY
By: /S/ David W. Gryska /s/ Earle Canty
-------------------------------- --------------------------------
Title: Chief Financial Officer Signature
--------------------------------
Social Security Number
995 Benecia Avenue --------------------------------
Sunnyvale, CA 94086 Street Address
408-737-0505 --------------------------------
408-737-1700 FAX City, State, Zip Code
--------------------------------
4
<PAGE> 5
CARDIAC PATHWAYS CORPORATION
CONSULTING AGREEMENT
EXHIBIT A
NAME OF CONSULTANT: Earle Canty
1. DESCRIPTION OF CONSULTING SERVICES:
- Regulatory Consulting for a minimum of 20 hours per week.
2. TERM OF AGREEMENT:
6 months
3. COMPANY CONTACT:
Bill Starling or Debra Echt or other individuals Bill Starling may
designate.
4. CONSIDERATION FOR SERVICES:
Consideration: Consultant will be paid $2,000 week (rate of $100 per
hour). It is expected that consultant will provide the Company no less
than 80 hours of consulting per month. Company guarantees the Consultant
at least 80 hours of consulting fees per month. To the extent the
Consultant provides less than 80 hours of work the unused hours will be
carried forward to the next month. To the extent the Consultant works more
than 80 hours per month and there are no unused credits the consultant
will be paid at a rate of $100 per hour.
Method of Payment and Accounting: The payments for the Consultant will be
processed every 10 days in increments of $2,000 (i.e. consulting for the
first week of the month will be paid by the 17th.) On the 5th day of the
following month the Consultant shall provide the Company (Bill Starling) a
detailed statement of consulting hours (i.e. hours by day and project).
5
<PAGE> 1
EXHIBIT 10.22
CARDIAC PATHWAYS CORPORATION
1998 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Nonstatutory Stock
Option Plan are:
o to attract and retain the best available personnel for positions
of substantial responsibility,
o to provide additional incentive to Employees, Directors and
Consultants, and
o to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Cardiac Pathways Corporation, a Delaware
corporation.
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
-1-
<PAGE> 2
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers, employed by the
Company or any Parent or Subsidiary of the Company. A Service Provider shall not
cease to be an Employee in the case of (i) any leave of absence approved by the
Company or (ii) transfers between locations of the Company or between the
Company, its Parent, any Subsidiary, or any successor. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option grant. The Notice of Grant
is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted pursuant to
\the Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations promulgated
thereunder.
(q) "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
-2-
<PAGE> 3
(r) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option.
(t) "Optionee" means the holder of an outstanding Option granted
under the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1998 Nonstatutory Stock Option Plan.
(w) "Service Provider" means an Employee including an Officer,
Consultant or Director.
(x) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is Four Hundred Thousand (400,000) Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the Board
or (ii) a Committee, which committee shall be constituted to satisfy Applicable
Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be
granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
-3-
<PAGE> 4
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any restriction
or limitation regarding any Option or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(xi) to modify or amend each Option (subject to Section 14(b) of
the Plan), including the discretionary authority to extend the post-termination
exercisability period of Options longer than is otherwise provided for in the
Plan;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option previously granted by
the Administrator;
(xiii) to determine the terms and restrictions applicable to
Options;
(xiv) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value equal to
the amount required to be withheld. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be withheld
is to be determined. All elections by an Optionee to have Shares withheld for
this purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable; and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
-4-
<PAGE> 5
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers; provided,
however, that notwithstanding anything to the contrary contained in the Plan,
Options may not be granted to Officers and Directors.
6. Limitation. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect for ten (10) years, unless sooner terminated
under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
-5-
<PAGE> 6
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
-6-
<PAGE> 7
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement, to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Non-Transferability of Options . Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock Resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock
-7-
<PAGE> 8
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the Option, the Optionee shall fully vest in and
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock, immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is
-8-
<PAGE> 9
determined by the Administrator. Notice of the determination shall be provided
to each Optionee within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-9-
<PAGE> 10
CARDIAC PATHWAYS CORPORATION
1998 NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1998 Nonstatutory
Stock Option Plan shall have the same defined meanings in this Stock Option
Agreement.
I. NOTICE OF STOCK OPTION GRANT
[OPTIONEE'S NAME AND ADDRESS]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number
------------------------------------
Date of Grant
------------------------------------
Vesting Commencement Date
------------------------------------
Exercise Price per Share $
------------------------------------
Total Number of Shares Granted
------------------------------------
Total Exercise Price $
------------------------------------
Type of Option: Nonstatutory Stock Option
Term/Expiration Date:
------------------------------------
Vesting Schedule:
Subject to the Optionee continuing to be a Service Provider on such dates,
this Option shall vest and become exercisable in accordance with the following
schedule:
[25% OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE MONTHS AFTER THE
VESTING COMMENCEMENT DATE, AND 1/48TH OF THE SHARES SUBJECT TO THE OPTION SHALL
VEST UPON THE LAST DAY OF EACH MONTH THEREAFTER.]
-1-
<PAGE> 11
Termination Period:
This Option may be exercised for _____ [DAYS/MONTHS] after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 14(b) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to [TITLE]. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by such aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
-2-
<PAGE> 12
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
income tax liability upon exercise of an NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Exercised Shares on the
date of exercise over their aggregate Exercise Price. If the Optionee is an
Employee or a former Employee, the Company will be required to withhold from his
or her compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for at
least one year, any gain realized on disposition of the Shares will be treated
as long-term capital gain for federal income tax purposes.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
-3-
<PAGE> 13
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE CARDIAC PATHWAYS CORPORATION
- ----------------------------------- --------------------------------------
Signature By
- ----------------------------------- --------------------------------------
Print Name Title
- -----------------------------------
Residence Address
- -----------------------------------
-4-
<PAGE> 14
EXHIBIT A
CARDIAC PATHWAYS CORPORATION
1998 NONSTATUTORY STOCK OPTION PLAN
EXERCISE NOTICE
CARDIAC PATHWAYS CORPORATION
[ADDRESS]
Attention: [TITLE]
1. Exercise of Option. Effective as of today, ________________, 199__,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Cardiac Pathways Corporation (the
"Company") under and pursuant to the 1998 Nonstatutory Stock Option Plan (the
"Plan") and the Stock Option Agreement dated , 19___ (the "Option Agreement").
The purchase price for the Shares shall be $ , as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
-1-
<PAGE> 15
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER CARDIAC PATHWAYS CORPORATION
- ---------------------------------- -------------------------------------
Signature By
- ---------------------------------- -------------------------------------
Print Name Title
-------------------------------------
Date Received
Address: Address:
-------------------------- --------------------------
-------------------------- --------------------------
-------------------------- --------------------------
-2-
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION
---------- -------------
<S> <C>
Cardiac Pathways B.V. ......................................... The Netherlands
Cardiac Pathways S.A. ......................................... Switzerland
Cardiac Pathways G.m.b.H. ..................................... Germany
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 333-07629 and 333-38049) pertaining to the 1996 Employee Stock
Purchase Plan, 1996 Director Option Plan and the 1991 Stock Plan of Cardiac
Pathways Corporation of our report dated July 28, 1998, with respect to the
consolidated financial statements and schedule of Cardiac Pathways Corporation
included in its Annual Report (Form 10-K) for the year ended June 30, 1998.
/s/ ERNST & YOUNG LLP
San Jose, California
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 7,269
<SECURITIES> 17,249
<RECEIVABLES> 540
<ALLOWANCES> (17)
<INVENTORY> 668
<CURRENT-ASSETS> 26,553
<PP&E> 7,499
<DEPRECIATION> 3,867
<TOTAL-ASSETS> 30,935
<CURRENT-LIABILITIES> 4,202
<BONDS> 6,317
0
0
<COMMON> 10
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,935
<SALES> 2,420
<TOTAL-REVENUES> 2,420
<CGS> 2,828
<TOTAL-COSTS> 2,828
<OTHER-EXPENSES> 14,353
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 579
<INCOME-PRETAX> (17,499)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,499)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,449)
<EPS-PRIMARY> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>
