<PAGE> 1
SCHEDULE 14A (RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14A-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14A-11(c) or Rule 14A-12
</TABLE>
CARDIAC PATHWAYS CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14A-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
PRELIMINARY COPIES
FILED JUNE 9, 1999
CARDIAC PATHWAYS CORPORATION
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 20, 1999
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders of CARDIAC
PATHWAYS CORPORATION, a Delaware corporation, will be held on Tuesday, July 20,
1999 at 12:00 p.m. local time, at 995 Benecia Avenue, Sunnyvale, California
94086 for the following purposes:
1. To approve the amendment and restatement of the Cardiac Pathways
certificate of incorporation to effect a one-for-five reverse stock
split of Cardiac Pathways outstanding common stock.
2. To approve the amendment and restatement of the Cardiac Pathways
certificate of incorporation to provide for an increase in the number of
authorized shares of common stock to 75,000,000. If Proposal One is
approved, however, the amendment to the Cardiac Pathways certificate of
incorporation providing for the increase in the authorized shares will
not be put into effect.
3. To approve the sale to an investor group led by BankAmerica Ventures of
up to 40,000 shares of series B convertible preferred stock which are
convertible into 40,000,000 shares (pre-reverse split) of Cardiac
Pathways common stock representing a number of shares of Cardiac
Pathways common stock which is greater than 20% of the outstanding
common stock.
4. To approve an amendment of the Cardiac Pathways 1991 Stock Plan (i) to
increase the number of shares authorized for issuance thereunder by
4,000,000 shares (pre-reverse split) to an aggregate of 6,567,030 shares
(pre-reverse split) and (ii) to increase the share limitations under the
1991 Stock Plan for purposes of Section 162(m) of the Internal Revenue
Code of 1986, as amended.
5. To transact such other business as may properly come before the Special
Meeting including any motion to adjourn to a later date to permit
further solicitation of proxies if necessary, or before any adjournment
thereof.
The foregoing items of business are more fully described in the proxy
statement accompanying this notice. You may vote at the meeting if you were a
stockholder of record as of the close of business on June 4, 1999. All
stockholders are cordially invited to attend the meeting in person. However, to
ensure your representation at the meeting, you are urged to mark, sign, date and
return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. Any stockholder attending the meeting may
vote in person even if he or she has returned a proxy.
By Order of the Board of Directors of
Cardiac Pathways Corporation
Thomas M. Prescott
President and Chief Executive Officer
Sunnyvale, California
June 22, 1999
YOUR VOTE IS IMPORTANT.
IN ORDER TO ENSURE THAT YOUR SHARES ARE VOTED AT THE MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND
RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Frequently Asked Questions.................................. 3
Summary..................................................... 5
Market Price................................................ 11
Dividends................................................... 11
Listing of Shares to be Issued.............................. 11
Ernst & Young LLP........................................... 11
The Cardiac Pathways Special Meeting........................ 12
Proposal One -- One-for-Five Reverse Stock Split............ 16
Proposal Two -- Increase the Authorized Shares of Common
Stock to 75,000,000....................................... 18
Proposal Three -- Sale of Series B Convertible Preferred
Stock..................................................... 22
Proposal Four -- Amendment of 1991 Stock Plan............... 31
Executive Compensation and Other Matters.................... 36
Principal Stockholders...................................... 39
Description of Capital Stock................................ 42
Selected Consolidated Financial Data........................ 47
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 49
Other Matters............................................... 67
Consolidated Financial Statements........................... F-1
Appendix A -- Series B Convertible Preferred Stock Purchase
Agreement................................................. A-1
Appendix B -- Securities Purchase Agreement................. B-1
</TABLE>
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<PAGE> 4
FREQUENTLY ASKED QUESTIONS
WHY IS CARDIAC PATHWAYS SELLING PREFERRED STOCK?
Cardiac Pathways is selling preferred stock in a private placement to raise
funds that it needs to continue to operate its business. A private placement
provides Cardiac Pathways with an opportunity to secure additional financing
without the delay and expense of preparing, filing and completing a registered
public offering. After extensive negotiations with investors, Cardiac Pathways
concluded that it was necessary to offer investors the protection of the rights,
preferences and privileges of preferred stock in order to secure their
commitment. In addition, we believe that there would be little demand in the
public market for additional shares of our common stock.
WHY DOES CARDIAC PATHWAYS NEED ADDITIONAL FINANCING?
Cardiac Pathways has not generated a sufficient amount of cash flows from
its operations, which are largely research and development activities, to fund
those operations. In addition, we received Food and Drug Administration approval
of the Chilli Cooled Ablation System in February 1999, and we need additional
cash to begin to manufacture the product in commercial volumes, hire a sales
force and market and sell the product. Since there is no existing market for our
products, we anticipate that our selling efforts will need to be extensive for
our products to gain market acceptance and that there will be a long period of
market education before we are able to produce revenues from sales of our
products.
WHY AM I VOTING ON THE SALE OF THE SERIES B CONVERTIBLE PREFERRED STOCK?
You are entitled to vote on the sale of the series B convertible preferred
stock because the sale will cause a change in control of Cardiac Pathways to
occur. The rules of the Nasdaq Stock Market require us to seek the approval of
the stockholders before effecting such change of control. Assuming that the
entire class of series B convertible preferred stock is sold, after the series B
convertible preferred stock financing is completed, the existing stockholders
will hold approximately 20% of the voting power in Cardiac Pathways. In
addition, the rules of the Nasdaq Stock Market require us to seek the consent of
our stockholders before selling securities that equal more than 20% of the our
outstanding common stock. The number of shares of common stock into which the
series B convertible preferred stock can be converted exceeds 20% of our
outstanding common stock.
WHY IS CARDIAC PATHWAYS ASKING ME TO APPROVE A REVERSE STOCK SPLIT?
The series B convertible preferred stock we propose to issue in the
financing is convertible into common stock. In order to sell the series B
convertible preferred stock, Cardiac Pathways must have at least 40,000,000
shares of authorized common stock available for the conversion of the series B
convertible preferred stock. Our certificate of incorporation provides for
authorized common stock of 30,000,000 shares, of which 10,038,578 were
outstanding as of June 4, 1999 and 2,866,629 of which were reserved for issuance
under our various stock option and employee stock purchase plans. Absent a
reduction in the number of shares outstanding and reserved for issuance under
our plans, we would not be able to sell a sufficient number of shares of series
B convertible preferred stock to complete the financing.
The trading price of our common stock has been at or below $5.00 since
January 1999 and more recently has traded at approximately $1.00. The reverse
stock split will increase the per share price to a range that is considered more
typical for companies listed on the Nasdaq Stock Market. In addition, the
requirements for continued listing on the Nasdaq Stock Market include the
maintaining of a $1.00 minimum bid price. The reverse stock split is designed to
help Cardiac Pathways common stock continue to maintain the required minimum bid
price.
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<PAGE> 5
WHY IS CARDIAC PATHWAYS ASKING ME TO APPROVE AN INCREASE IN THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK?
In the event that the proposal approving the reverse stock split is not
approved, we would not have a sufficient number of shares to complete the sale
of series B convertible preferred stock. The increase in the number of
authorized shares will enable us to complete the financing and issue shares of
common stock upon conversion of the series B convertible preferred stock. The
increase in the number of authorized shares will only occur if the proposed
reverse stock split is not approved.
WHY IS CARDIAC PATHWAYS SEEKING APPROVAL OF A 4,000,000 SHARE (PRE-REVERSE
SPLIT) INCREASE TO THE 1991 STOCK PLAN AND OTHER CHANGES TO THE PLAN?
In order to execute our business plan, we will need to attract and retain
highly skilled research, engineering, clinical, and sales and marketing
personnel. In order to attract and retain such personnel, we will need to grant
them stock options to allow them to share in any stock price appreciation to
which they contribute. The current reserve of available shares under the 1991
Stock Plan is not sufficient for these purposes. In addition, we seek to
increase the maximum grant size permissible under the 1991 Stock Plan and make
certain other changes in order to make a one-time grant to our new president.
4
<PAGE> 6
SUMMARY
For your convenience, we have summarized here information that is contained
elsewhere in this document. It highlights selected information but does not
contain all of the information that is important to you. To understand the
transactions more fully and for a more complete description of the legal terms
of these transactions, you should carefully read this document and the documents
to which we have referred. Unless otherwise noted, all share numbers in this
proxy statement are presented on a pre-reverse split basis.
Cardiac Pathways designs, develops and manufactures minimally invasive
systems to diagnose and treat cardiac tachyarrhythmias, a form of abnormally
rapid heart rhythms. We are developing products that are designed to provide
integrated system solutions for the improved diagnosis and treatment of
ventricular tachycardia and atrial fibrillation, two of the most serious and
prevalent types of abnormally rapid heart rhythms.
WE NEED TO RAISE ADDITIONAL FINANCING IMMEDIATELY
Cardiac Pathways has experienced significant operating losses since
inception and as of March 31, 1999 had an accumulated deficit of approximately
$75.4 million. On May 14, 1999 we had approximately $450,000 of cash and cash
equivalents. These funds would have supported our operations for only
approximately one week. In the absence of the financing and related bridge
loans, Cardiac Pathways would be forced to cease operations immediately. Over
the last several months we have considered various financing options and have
actively sought additional capital to provide the needed liquidity.
Under our Loan and Security Agreement with Silicon Valley Bank, we were
required to collateralize 105% of the $6,000,000 principal balance of the loan
in the event of noncompliance with certain financial operating ratio and
liquidity covenants. In late March 1999, as a result of noncompliance with those
covenants, Cardiac Pathways fully collateralized the Silicon Valley Bank loan by
pledging $3,000,000 of cash and $3,300,000 of short-term investments. As a
result, such funds were not available to support our operations. On May 20,
1999, Silicon Valley Bank foreclosed and took possession of the collateral in
satisfaction of the full amount due under the loan.
On May 5, 1999, Nasdaq notified us that Cardiac Pathways was no longer in
compliance with the net tangible asset requirement of $4,000,000 for continued
listing on the Nasdaq Stock Market. As a result of our failure to meet the
requirements for continued listing, Nasdaq is reviewing our eligibility for
continued listing on the Nasdaq Stock Market. On May 17, 1999, we advised Nasdaq
of the status of negotiations regarding the financing. We have requested that
Nasdaq defer action on the continued listing of Cardiac Pathways common stock
until after the special meeting of stockholders. If we complete the financing,
we expect to have sufficient cash resources to meet the net tangible assets
listing requirements. The continued listing of our common stock on the Nasdaq
Stock Market will be based in part on our ability to demonstrate that we can
sustain compliance with the continued listing requirements. However, we may
receive a formal notice of deficiency from Nasdaq, at which time Nasdaq may
commence the delisting process.
THE CARDIAC PATHWAYS SPECIAL MEETING OF STOCKHOLDERS
We will hold the Cardiac Pathways special meeting of stockholders on
Tuesday, July 20, 1999 at 12:00 p.m. local time. The meeting will be held at our
offices at 995 Benecia Avenue, Sunnyvale, California 94086.
You will be entitled to vote at the special meeting if you held shares of
Cardiac Pathways common stock on June 4, 1999. You will be entitled to one vote
for each share you hold on all proposals presented.
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<PAGE> 7
VOTES REQUIRED TO APPROVE THE PROPOSALS
The approval and adoption of each of the proposals at the special meeting
will require the affirmative vote of the Cardiac Pathways stockholders as
follows:
<TABLE>
<S> <C>
PROPOSAL VOTE REQUIRED TO APPROVE
Approve a one-for-five reverse stock split Majority of outstanding common stock
Increase of authorized shares of common stock Majority of outstanding common stock
(only to be implemented if the reverse stock
split is not approved)
Sale of series B convertible preferred stock to Majority of the shares present and voting at the
an investor group led by BankAmerica Ventures meeting
and issuance of common stock in excess of 20%
of the outstanding common stock
Amendment of the 1991 Stock Plan to increase Majority of the shares present and voting at the
the number of shares of common stock authorized meeting
for issuance thereunder by 4,000,000 and a
change in certain material terms
</TABLE>
OUR DIRECTORS, OFFICERS AND CERTAIN OF OUR STOCKHOLDERS HAVE AGREED TO VOTE FOR
ALL MATTERS PRESENTED AT THE CARDIAC PATHWAYS SPECIAL MEETING
In accordance with the terms of the stock purchase agreement, our
directors, officers and the following stockholders entered into voting
agreements with Cardiac Pathways and agreed to approve the sale of series B
convertible preferred stock and the related transactions.
<TABLE>
<CAPTION>
PERCENT OF
COMMON
STOCK BENEFICIALLY
OWNED ON
MAY 11, 1999
STOCKHOLDER (PRIOR TO FINANCING)
----------- --------------------
<S> <C>
State of Wisconsin Investment Board......................... 17.5%
Entities affiliated with Institutional Venture Partners..... 8.2%
Arrow International, Inc. .................................. 6.0%
William N. Starling......................................... 3.0%
Thomas J. Fogarty, M.D. .................................... 2.4%
Japan Lifeline Co. ......................................... 1.9%
Mir A. Imran................................................ 1.9%
Earle L. Canty.............................................. 0.7%
S. Allan Johnson............................................ 0.5%
Richard E. Riley............................................ 0.4%
</TABLE>
By entering into the voting agreements, each director, officer and
stockholder named above has agreed to vote in favor of all matters presented at
the Cardiac Pathways special meeting of stockholders. As a result, our officers,
directors and those stockholders listed above will vote all of the shares of
Cardiac Pathways common stock beneficially owned by them at the record date,
which represented 42.5% of the Cardiac Pathways common stock outstanding, for
approval and adoption of the proposals to be voted upon at the special meeting
of stockholders. Accordingly, approval of these proposals is likely.
THE REVERSE STOCK SPLIT
In connection with the financing, we are proposing to effect a one-for-five
reverse stock split. The purpose of the reverse split is to increase the per
share trading price of our common stock to a range that is considered more
typical for companies listed on the Nasdaq Stock Market. The reverse stock split
is also designed to help Cardiac Pathways common stock continue to maintain the
$1.00 minimum bid price necessary for continued listing on the Nasdaq Stock
Market.
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<PAGE> 8
INCREASE OF AUTHORIZED SHARES
In the event that the proposal approving the reverse stock split is not
approved, we would not have a sufficient number of shares to complete the sale
of series B convertible preferred stock. The increase in the number of
authorized shares will enable us to complete the financing and issue shares of
common stock upon conversion of the series B convertible preferred stock. The
increase in the number of authorized shares will only be put into effect if the
proposed reverse stock split is not approved.
THE PROPOSED FINANCING
On May 21, 1999 we signed a definitive agreement with BankAmerica Ventures,
Morgan Stanley Dean Witter Venture Partners and certain other investors
(including Thomas J. Fogarty, M.D. one of our current directors, and the State
of Wisconsin Investment Board, a current stockholder) for the sale of
$31,500,000 of our series B convertible preferred stock. This amount could be
increased to as much as $40,000,000. In connection with the financing, our board
of directors has approved the issuance of up to 40,000 shares of series B
convertible preferred stock that may be converted into 40,000,000 shares of
common stock at the option of the holders. If the financing closes, we will
issue up to 40,000 shares of series B convertible preferred stock at a purchase
price of $1,000 per share and raise up to $40,000,000. As of May 21, 1999,
$31,500,000 of the financing was committed subject to satisfaction of the
closing conditions described below. If the financing does not close, Cardiac
Pathways will not have sufficient resources to continue operations in the
absence of an alternative transaction. We do not believe that any funds would be
available for our stockholders in the event Cardiac Pathways ceased operations
and was liquidated.
DILUTIVE IMPACT OF THE FINANCING ON OUR EXISTING STOCKHOLDERS
The financing will be severely dilutive to our existing stockholders. The
following table summarizes the potential dilutive effect, for percentage
ownership purposes, of the financing on the Cardiac Pathways stockholders if we
sell $40,000,000 of series B convertible preferred stock:
<TABLE>
<CAPTION>
SHARES PERCENTAGE
---------- ----------
<S> <C> <C>
Outstanding common stock as of June 4, 1999................. 10,038,578 20.1%
New common stock issuable upon conversion of the series B
convertible preferred stock............................... 40,000,000 79.9
---------- -----
Total............................................. 50,038,578 100.0%
========== =====
</TABLE>
This table does not give effect to the issuance of warrants to purchase 300
shares of series B convertible preferred stock (convertible into 300,000 shares
of common stock) in connection with the interim funding described below.
Warrants to purchase up to an additional 300 shares of series B convertible
preferred stock will be issued if the investors increase the amount of funds
available under the interim funding. We expect one or more of our current
stockholders who are accredited investors under applicable securities laws to
participate in the financing, including the State of Wisconsin Investment Board
and Thomas J. Fogarty, M.D. Dr. Fogarty is currently a director of Cardiac
Pathways who will resign from the board of directors upon the closing of the
financing. The effect of the financing on those existing stockholders will be
different from the effects on other stockholders in that their purchase of
series B convertible preferred stock will increase such stockholders' particular
ownership in Cardiac Pathways.
BOARD OF DIRECTORS AFTER THE FINANCING
Our existing board of directors will resign effective upon the closing of
the financing. The holders of the series B convertible preferred stock will have
the right to nominate three members to the board of directors, who shall be Mark
J. Brooks, Anchie Y. Kuo, M.D. and Fazle Husain. Our new chief executive
officer, Thomas M. Prescott, will also join the board of directors. The
remaining member and the chairman of the board of directors will be William N.
Starling, our former chief executive officer and president. The consent of the
directors nominated by the series B convertible preferred stock will be required
to increase the number of directors.
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<PAGE> 9
SIGNIFICANT RIGHTS, PREFERENCES AND PRIVILEGES OF THE SERIES B CONVERTIBLE
PREFERRED STOCK
The holders of series B convertible preferred stock will be entitled to
significant rights, preferences and privileges as a result of their investment.
Each share of series B convertible preferred stock will initially be
convertible into 1,000 shares of common stock. The conversion ratio of the
series B convertible preferred stock will be subject to adjustment for price
based antidilution.
The series B convertible preferred stock will be entitled to an 11%
cumulative dividend per year. The series B convertible preferred stock will have
a liquidation preference equal to the initial purchase price plus accrued
dividends upon the occurrence of a liquidation, a merger or the sale of all or
substantially all of our stock or our assets. As a result of the liquidation
preference, in the event of a liquidation, merger or the sale of substantially
all of our stock or assets, the holders of series B convertible preferred stock
will receive their original purchase price plus any accrued dividends prior to
any distribution to the holders of common stock.
The series B convertible preferred stock is redeemable after May 31, 2004
at the request of a majority of the holders, subject to the approval of Cardiac
Pathways. If a redemption request is received but not approved by Cardiac
Pathways, the cumulative dividend rate payable on the series B convertible
preferred stock shall be increased by six percentage points for each year a
redemption does not occur.
The holders of the series B convertible preferred stock will vote on all
matters presented to Cardiac Pathways stockholders on an as-converted to common
stock basis. In addition, the affirmative vote of holders of a majority of the
series B convertible preferred stock, voting as a separate class, will be
required to:
1. Amend or repeal any provision, or add any provision to the Cardiac
Pathways' certificate of incorporation or bylaws which change the rights of
the series B convertible preferred stock;
2. Increase or decrease (other than by redemption or conversion) the
total number of authorized shares of preferred stock or common stock;
3. Authorize or issue, or obligate itself to issue, any other
security, including any other security convertible into or exercisable for
any security having a preference over, or being on a parity with, the
series B convertible preferred stock with respect to voting, dividends,
redemption or upon liquidation;
4. Issue any shares of common stock, other than
(a) shares of common stock issuable or issued to employees,
consultants or directors of Cardiac Pathways directly or pursuant to a
stock option plan or restricted stock plan approved by the board of
directors, including the representatives of the series B convertible
preferred stock;
(b) shares of common stock issuable or issued upon conversion of
the series A participating preferred stock or series B convertible
preferred stock or as dividends or distributions on the series A
participating preferred stock or series B convertible preferred stock;
(c) shares of common stock issuable or issued upon exercise of
warrants issued to banks, equipment lessors or other vendors, where such
common stock or warrants were approved by the board of directors,
including the representatives of the series B convertible preferred
stock; or
(d) shares of common stock issuable or issued as consideration for
business combinations or corporate partnering agreements approved by the
board of directors, including the representatives of the series B
convertible preferred stock.
5. Declare or pay any dividends on its common stock or redeem,
purchase or otherwise acquire (or pay into or set aside for a sinking fund
for such purpose) any share or shares of common stock; provided, however,
that this restriction shall not apply to the repurchase of shares of common
stock from employees, officers, directors, consultants or other persons
performing services for Cardiac Pathways or any subsidiary pursuant to
agreements under which Cardiac Pathways has the option to repurchase such
shares at cost or at cost upon the occurrence of certain events, such as
the termination of employment;
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<PAGE> 10
6. Sell, convey, or otherwise dispose of all or substantially all of
its property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect
any transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of this corporation is disposed of;
7. Repurchase any series of preferred stock, or
8. Increase or decrease the size of the Cardiac Pathways board of
directors.
The holders of the series B convertible preferred stock will have a right
of first offer with respect to future financings by Cardiac Pathways.
The holders of 45% of the then outstanding series B convertible preferred
stock will have the right to request that we register the shares of Cardiac
Pathways common stock into which the series B convertible preferred stock are
convertible after May 21, 2000. In addition, if we otherwise register shares of
Cardiac Pathways common stock, the holders of the series B convertible preferred
stock will be entitled to participate in the registration.
INTERIM FUNDING
Certain of the investors in the financing have provided Cardiac Pathways
with interim financing through a bridge loan of $3,000,000 on May 21, 1999. The
investors may increase the bridge loan to $6,000,000. The purpose of the bridge
loan is to fund our operations pending the completion of the financing. The
promissory notes issued by Cardiac Pathways in connection with the bridge loan
are convertible into shares of series B convertible preferred stock at the same
price as the shares issued in the financing, subject to certain limitations
until the stockholders have approved the transaction. We also issued warrants to
purchase up to 300 shares of series B convertible preferred stock at an exercise
price of $1,000 per share that are initially convertible into 300,000 shares of
common stock. In the event that the remaining $3,000,000 of the bridge loan is
advanced, we will issue warrants for an additional 300 shares of series B
convertible preferred stock, which will be convertible into 300,000 shares of
common stock. The bridge loan is secured by substantially all of Cardiac
Pathways' assets.
ISSUANCE OF COMMON STOCK IN EXCESS OF 20% OF THE OUTSTANDING COMMON STOCK
The conversion of the series B convertible preferred stock issued in the
financing into common stock would result in the issuance of up to 40,000,000 new
shares of Cardiac Pathways common stock. This amount of new shares is in excess
of 20% of the outstanding common stock of Cardiac Pathways. In accordance with
the requirements of the Nasdaq Stock Market, Cardiac Pathways must obtain
stockholder approval for the issuance of a number of shares of series B
preferred which are convertible into a number of shares of Cardiac Pathways
common stock greater than 20% of the outstanding common stock of Cardiac
Pathways. Approval of the financing will constitute such shareholder approval.
AMENDMENT OF THE 1991 STOCK PLAN (I) TO INCREASE THE NUMBER OF SHARES OF COMMON
STOCK AUTHORIZED FOR ISSUANCE THEREUNDER BY 4,000,000 AND (II) TO INCREASE THE
SHARE LIMITATIONS UNDER THE 1991 STOCK PLAN FOR PURPOSES OF SECTION 162(M) OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
At the special meeting, you are being asked to approve an amendment of the
1991 Stock Plan to increase the number of shares of common stock reserved for
issuance thereunder by 4,000,000. The 1991 Stock Plan is structured to allow the
board of directors broad discretion in creating equity incentives in order to
assist Cardiac Pathways to attract, retain and motivate the best available
personnel for the successful conduct of Cardiac Pathways' business. Cardiac
Pathways has a longstanding practice of linking key employee compensation to
corporate performance, because our board of directors believes that this
increases employee motivation to improve stockholder value. Our proposed
investors and our board of directors believe that the remaining shares available
for grant under the 1991 Stock Plan are insufficient to accomplish the purposes
of the 1991 Stock Plan.
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<PAGE> 11
The 1991 Stock Plan currently provides that no employee will be granted, in
any fiscal year, options to purchase more than 200,000 shares of common stock,
except that in connection with an employee's initial employment, he or she may
be granted options to purchase up to an additional 100,000 shares. This
limitation is intended to satisfy the requirements applicable to options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code. You are being asked to approve an
increase in such limitations. The amendment to the 1991 Stock Plan would provide
that no employee will be granted, in any fiscal year, options to purchase more
than 2,000,000 shares of common stock. This increase is being made to allow for
a grant to our new president.
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<PAGE> 12
MARKET PRICE
The common stock of Cardiac Pathways has been traded on the Nasdaq Stock
Market under the symbol CPWY since Cardiac Pathways' initial public offering on
June 12, 1996. Prior to that time there was no public market for Cardiac
Pathways common stock. On May 5, 1999, Nasdaq notified us that we were no longer
in compliance with the net tangible asset requirements of $4,000,000 for
continued listing on the Nasdaq Stock Market. Nasdaq is reviewing our
eligibility for continued listing on the Nasdaq Stock Market. We have requested
that Nasdaq defer action on the continued listing of Cardiac Pathways common
stock until after the special meeting of stockholders. If we complete the
financing, we expect to have sufficient cash resources to meet the listing
requirements with which we are not currently in compliance.
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 1/8 $ 6
Fourth Quarter............................................ $10 1/2 $ 6 7/8
CURRENT FISCAL YEAR
First Quarter............................................. $10 1/4 $ 4 1/2
Second Quarter............................................ $ 5 $ 3 1/2
Third Quarter............................................. $ 5 $ 1 1/8
Fourth Quarter (through June 4, 1999)..................... $ 1 7/16 $ 7/8
</TABLE>
As of June 4, 1999, there were approximately 175 holders of record of the
common stock.
DIVIDENDS
Historically, we have not paid cash dividends to the holders of common
stock. Upon completion of the financing, the series B convertible preferred
stock will be entitled to cumulative dividends of 11% per annum and to any
dividends declared on the common stock on an as-converted basis. We do not
expect to pay dividends on our common stock for the foreseeable future.
LISTING OF SHARES TO BE ISSUED
The series B convertible preferred stock issued in connection with the
financing will not be listed on any exchange or trading system. The issuance of
the series B convertible preferred stock will not be registered pursuant to the
Securities Act of 1933, as amended. We have agreed to apply for the listing of
the common stock issuable upon conversion of the series B convertible preferred
stock on the Nasdaq Stock Market.
ERNST & YOUNG LLP
Ernst & Young LLP has audited Cardiac Pathways' financial statements
annually since 1991. Representatives of Ernst & Young LLP are expected to be
present at the meeting with the opportunity to make a statement if they desire
to do so and are expected to be available to respond to appropriate questions.
11
<PAGE> 13
THE CARDIAC PATHWAYS SPECIAL MEETING
WHEN AND WHERE THE MEETING WILL BE HELD
The special meeting of stockholders of Cardiac Pathways will be held at
12:00 p.m., local time on Tuesday, July 20, 1999, at 995 Benecia Avenue,
Sunnyvale, California 94086.
WHAT WILL BE VOTED UPON
At the Cardiac Pathways meeting, you will be asked to approve the following
proposals:
1. To approve the amendment and restatement of the Cardiac Pathways
certificate of incorporation to effect a one-for-five reverse stock
split of Cardiac Pathways outstanding common stock.
2. To approve the amendment and restatement of the Cardiac Pathways
certificate of incorporation to provide for an increase in the number of
authorized shares of common stock to 75,000,000. If Proposal One is
approved, however, the amendment to the Cardiac Pathways certificate of
incorporation providing for the increase in the authorized shares will
not be put into effect.
3. To approve the sale to an investor group led by BankAmerica Ventures of
up to 40,000 shares of series B convertible preferred stock which are
convertible into 40,000,000 shares (pre-reverse split) of Cardiac
Pathways common stock representing a number of shares of Cardiac
Pathways common stock which is greater than 20% of the outstanding
common stock.
4. To approve an amendment of the Cardiac Pathways 1991 Stock Plan (i) to
increase the number of shares authorized for issuance thereunder by
4,000,000 shares (pre-reverse split) to an aggregate of 6,567,030 shares
(pre-reverse split) and (ii) to increase the share limitations under the
1991 Stock Plan for purposes of Section 162(m) of the Internal Revenue
Code of 1986, as amended.
5. To transact such other business as may properly come before the Special
Meeting including any motion to adjourn to a later date to permit
further solicitation of proxies if necessary, or before any adjournment
thereof.
ONLY STOCKHOLDERS ON JUNE 4, 1999 WILL BE ENTITLED TO VOTE
You will be entitled to vote at the Cardiac Pathways meeting only if you
are a holder of record of shares of Cardiac Pathways common stock at the close
of business on June 4, 1999, the Cardiac Pathways record date. On that date
there were 10,038,578 shares of Cardiac Pathways common stock outstanding, which
were held by approximately 175 holders of record.
You will be entitled to one vote for each share of Cardiac Pathways common
stock you held on the record date on each matter to be acted upon that may
properly come before the Cardiac Pathways meeting.
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<PAGE> 14
VOTE REQUIRED TO APPROVE THE PROPOSALS
The approval and adoption of each of the proposals described above will
require the affirmative vote of the Cardiac Pathways stockholders as follows:
<TABLE>
<CAPTION>
PROPOSAL VOTE REQUIRED TO APPROVE
-------- ------------------------
<S> <C>
Approve a one-for-five reverse stock split Majority of outstanding common stock
Increase of authorized shares of common stock Majority of outstanding common stock
(only to be implemented if the reverse stock
split is not approved)
Sale of series B convertible preferred stock Majority of the shares present and voting at
to an investor group led by BankAmerica the meeting
Ventures and issuance of common stock in
excess of 20% of the outstanding common stock
Amendment of the 1991 Stock Plan to increase Majority of the shares present and voting at
the number of shares of common stock the meeting
authorized for issuance thereunder by
4,000,000 and a change in certain material
terms
</TABLE>
In accordance with the terms of the stock purchase agreement, our
directors, officers and the following stockholders entered into voting
agreements with Cardiac Pathways related to the approval of the sale of series B
convertible preferred stock and the related transactions.
<TABLE>
<CAPTION>
PERCENT OF
COMMON
STOCK BENEFICIALLY
OWNED ON
MAY 11, 1999
(PRIOR TO
STOCKHOLDER FINANCING)
----------- --------------------
<S> <C>
State of Wisconsin Investment Board......................... 17.5%
Entities affiliated with Institutional Venture Partners..... 8.2%
Arrow International, Inc. .................................. 6.0%
William N. Starling......................................... 3.0%
Thomas J. Fogarty, M.D. .................................... 2.4%
Japan Lifeline Co. ......................................... 1.9%
Mir A. Imran................................................ 1.9%
Earle L. Canty.............................................. 0.7%
S. Allan Johnson............................................ 0.5%
Richard E. Riley............................................ 0.4%
</TABLE>
By entering into the voting agreements, each director, officer and
stockholder named above have agreed to vote in favor of all matters presented at
the Cardiac Pathways special meeting. As a result, our officers, directors and
those stockholders listed above will vote all of the shares of Cardiac Pathways
beneficially owned by them at the Cardiac Pathways record date, that represented
42.5% of the Cardiac Pathways common stock outstanding, for approval and
adoption of the proposals to be voted upon at the Cardiac Pathways special
meeting. Accordingly, approval of these proposals is likely.
SHARES HELD BY DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES
On June 4, 1999, the directors and officers of Cardiac Pathways
beneficially owned approximately 9.8% of the outstanding voting stock of Cardiac
Pathways.
VOTES NEEDED FOR A QUORUM
The required quorum for the transaction of business at the Cardiac Pathways
meeting is a majority of the shares of Cardiac Pathways common stock outstanding
on the record date.
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<PAGE> 15
EFFECT OF ABSTENTIONS AND BROKER NONVOTES
We will treat shares that are voted "abstain" as being present and entitled
to vote for purposes of determining the presence of a quorum but will not be
treated as votes in favor of approving any matter submitted to the stockholders
for a vote. If a broker indicates on the enclosed proxy or its substitute that
such broker does not have discretionary authority as to certain shares to vote
on a particular matter ("broker nonvotes"), those shares will not be considered
as present with respect to that matter. We believe that the tabulation
procedures to be followed by the Inspector of Election are consistent with the
general statutory requirements in Delaware concerning voting of shares and
determination of a quorum.
ADJOURNING THE MEETING
In the event that there are not sufficient votes to approve and adopt the
proposals set forth above at the time of the Cardiac Pathways meeting, the
financing could not be approved by our stockholders and we could not complete
the sale of the series B convertible preferred stock unless the Cardiac Pathways
meeting was adjourned in order to permit further solicitation of proxies from
our stockholders. The proxies that are being solicited by the Cardiac Pathways
board grant the discretionary authority to vote for any such adjournment, if
necessary. If it is necessary to adjourn the Cardiac Pathways meeting, and the
adjournment is for a period of less than 30 days, no notice of the time and
place of the adjourned meeting is required to be given to you other than an
announcement of such time and place at the Cardiac Pathways meeting. A majority
of the voting power represented and voting at the Cardiac Pathways meeting is
required to approve any such adjournment, whether or not a quorum is present at
the Cardiac Pathways meeting.
CARDIAC PATHWAYS WILL PAY THE EXPENSES OF PROXY SOLICITATION
Cardiac Pathways will pay the expenses of soliciting proxies to be voted at
the special meeting of stockholders. Following the original mailing of the
proxies, this document and other soliciting materials, proxies may be solicited
by Cardiac Pathways' directors, officers and other employees without additional
compensation personally or by telephone, facsimile or telegram.
HOW PROXIES WILL BE VOTED
The proxy accompanying this document is solicited on behalf of the Cardiac
Pathways board of directors for use at the special meeting of stockholders. If
you are a Cardiac Pathways stockholder, we request that you complete, date and
sign the accompanying proxy and return it in the enclosed envelope or otherwise
mail it to Norwest Bank N.A. When proxies are properly dated, executed and
returned, the shares they represent will be voted at the meeting of stockholders
in accordance with your instructions. If no specific instructions are given,
your shares will be voted:
- for the approval of the one-for-five reverse stock split;
- for the approval of the increase in the number of authorized shares of
common stock;
- for the approval of the sale of series B convertible preferred stock;
- for the increase of 4,000,000 shares reserved for issuance upon exercise
of options granted under the 1991 Stock Plan and other material changes;
and
- at the discretion of the proxy holders, upon such other business as may
properly come before the special meeting or any adjournment or
postponement thereof.
HOW YOU CAN REVOKE YOUR PROXY
If you have given a proxy, you may revoke it at any time before it is
exercised at the Cardiac Pathways meeting by:
- delivering a written notice stating that the proxy is revoked to the
Secretary of Cardiac Pathways by any means, including facsimile, bearing
a date later than the date of the proxy;
14
<PAGE> 16
- signing and delivering a proxy relating to the same shares that bears a
later date prior to the vote at the Cardiac Pathways meeting; or
- attending the Cardiac Pathways meeting and voting in person.
If you attend the Cardiac Pathways meeting your proxy will not be revoked
unless you also take one of the other actions outlined above.
YOU DO NOT HAVE DISSENTERS' OR APPRAISAL RIGHTS IN CONNECTION WITH ANY PROPOSAL
TO BE CONSIDERED AT THE SPECIAL MEETING OF STOCKHOLDERS.
YOU MUST ACT BY A SPECIFIED DATE TO PRESENT A STOCKHOLDER PROPOSAL AT THE NEXT
CARDIAC PATHWAYS ANNUAL MEETING
As a Cardiac Pathways stockholder, you are entitled to present proposals
for action at a forthcoming meeting if they comply with the requirements of the
proxy rules established by the Securities and Exchange Commission. If you intend
to present a proposal or nominate a director at Cardiac Pathways' next annual
meeting of stockholders, the proposal or nomination must be received by Cardiac
Pathways no later than June 30, 1999 in order that the proposals or nomination
be considered for inclusion in the proxy statement and form of proxy relating to
that meeting.
The attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the special meeting of stockholders. If you intend
to submit a proposal or nomination at the next Cardiac Pathways annual meeting
of stockholders, which is not eligible for inclusion in the proxy statement
relating to that meeting, you must give notice to Cardiac Pathways in accordance
with the requirements set forth in the Securities Exchange Act no later than
June 30, 1999. If you fail to comply with the foregoing sentence, the proxy
holders will be allowed to use their discretionary voting authority when and if
the proposal or nomination is raised at the next Cardiac Pathways annual meeting
of stockholders.
15
<PAGE> 17
PROPOSAL ONE
ONE-FOR-FIVE REVERSE STOCK SPLIT
At the Cardiac Pathways special meeting, you are being asked to approve the
amendment and restatement of the Cardiac Pathways certificate of incorporation
to effect a one-for-five reverse stock split. The purpose of the proposed
amendment is to provide for a sufficient number of authorized shares of Cardiac
Pathways common stock to allow for the issuance of common stock upon the
conversion of the series B convertible preferred stock and to provide additional
shares of authorized but unissued common stock for issuance for proper corporate
purposes, including under Cardiac Pathways' stock plans and in future
financings. In addition, the trading price of our common stock has been at or
below $5.00 since January 1999 and more recently has traded at approximately
$1.00. The reverse stock split will increase the per share price to a range that
is considered more typical for companies listed on the Nasdaq Stock Market. In
addition, the requirements for continued listing on the Nasdaq Stock Market
include the maintaining of a $1.00 minimum bid price for the common stock. The
reverse stock split is designed to help Cardiac Pathways common stock continue
to maintain the required minimum bid price.
VOTE REQUIRED
The amendment of the Cardiac Pathways certificate of incorporation to
effect a one-for-five reverse stock split requires the affirmative vote of a
majority of the shares of common stock outstanding.
REASONS FOR THE REVERSE STOCK SPLIT
Our board of directors has considered the proposed amendment to the
certificate of incorporation and has determined that the proposed one-for-five
reverse stock split is in the best interests of Cardiac Pathways and its
stockholders. In connection with the financing described in Proposal Three, our
board of directors has approved the issuance of up to 40,000 shares of series B
convertible preferred stock that may be converted into 40,000,000 shares of
common stock at the option of the holders. In addition, in connection with the
interim funding, Cardiac Pathways has agreed to issue up to 600,000 shares of
common stock upon exercise and conversion of warrants to purchase series B
convertible preferred stock. Absent approval of the reverse stock split, Cardiac
Pathways will not be able to complete the financing because the number of
authorized but unissued shares of common stock are insufficient to permit
conversion of the series B convertible preferred stock into common stock.
Approval of the amendment to the Cardiac Pathways certificate of incorporation
will constitute approval of the reverse stock split of the outstanding shares of
common stock. The authorized but unissued shares of Cardiac Pathways common
stock would be available for issuance from time to time for such purposes and
for such consideration as our board of directors determines to be appropriate
without further action by the stockholders, except for those instances where
contract, applicable law or stock exchange rules require stockholder approval.
The Cardiac Pathways certificate of incorporation currently provides that
Cardiac Pathways may issue up to 30,000,000 shares of common stock and 5,000,000
shares of preferred stock. Currently, 30,000 shares of preferred stock are
designated as series A participating preferred stock and 50,000 shares are
designated as series B convertible preferred stock. No shares of series A or
series B convertible preferred stock are outstanding as of the date of this
proxy statement. In addition, as of June 4, 1999 an aggregate of 2,866,629
shares of Cardiac Pathways common stock are reserved for issuance under the
Cardiac Pathways stock option and purchase plans, exclusive of the proposed
increase set forth in Proposal Four and 143,141 shares are reserved for issuance
upon the exercise of outstanding warrants (excluding the warrants issued
pursuant to the interim financing). Thus, assuming that Cardiac Pathways
reserved shares of common stock for the possible conversion of all authorized
options and warrants but not the conversion of any shares of common stock upon
conversion of preferred stock, only approximately 16,951,652 shares of common
stock would remain available for issuance.
Our board of directors believes that it is in the best interest of Cardiac
Pathways and its stockholders to implement a one-for-five reverse stock split
that would have the effect of reducing the number of shares of outstanding
common stock to one-fifth of the current number, or 2,007,716 shares, in order
to have additional authorized but unissued shares available without the expense
and delay of a special meeting of stockholders.
16
<PAGE> 18
For example, the financing described in Proposal Three could not be completed
because Cardiac Pathways would not have a sufficient number of shares of common
stock to issue upon the conversion of the series B convertible preferred stock.
In addition, our board of directors believes the availability of such shares
will provide Cardiac Pathways with the flexibility to issue common stock for
proper corporate purposes that may be identified in the future. For example,
shares of common stock may be issued if our board of directors determines it is
necessary or appropriate to permit a future stock dividend or stock split, to
raise additional capital, to acquire another corporation or another
corporation's business or assets or to establish a strategic relationship with a
corporate partner. Our board of directors does not intend to authorize the
issuance of any such shares except on terms the board deems to be in the best
interest of Cardiac Pathways.
If the proposal to implement a one-for-five reverse stock split is approved
by the Cardiac Pathways stockholders, our board of directors does not intend to
solicit further stockholder approval before issuing any additional shares of
common stock including upon the conversion of the series B convertible preferred
stock to be sold in the financing, except as may be required by contract,
applicable law or stock exchange rules. The reverse stock split will not have
any immediate effect on the rights of existing stockholders.
No fractional shares of common stock will be issued in connection with the
reverse stock split. In lieu of fractional shares, the number of post-split
shares to which each holder is entitled will be rounded up or down to the
nearest whole number.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE ONE-FOR-FIVE
REVERSE STOCK SPLIT.
17
<PAGE> 19
PROPOSAL TWO
INCREASE THE AUTHORIZED SHARES OF COMMON STOCK TO 75,000,000
At the Cardiac Pathways meeting, you are being asked to approve an
amendment and restatement of the Cardiac Pathways certificate of incorporation
to increase the authorized shares of common stock to 75,000,000. This amendment
of the Cardiac Pathways certificate of incorporation, if approved, will not be
filed if the stockholders also approve the reverse stock split described in
Proposal One. The purpose of the proposed amendment is to provide for a
sufficient number of authorized shares of Cardiac Pathways common stock to allow
for the issuance of common stock upon the conversion of the series B convertible
preferred stock and to provide additional shares of authorized but unissued
common stock for issuance for proper corporate purposes, including under Cardiac
Pathways' stock plans and in future financings.
VOTE REQUIRED
The amendment of the Cardiac Pathways certificate of incorporation to
increase the authorized shares of common stock requires the affirmative vote of
a majority of the shares of common stock outstanding.
REASONS FOR THE INCREASE IN AUTHORIZED SHARES
Our board of directors has considered the proposed amendment to the
certificate of incorporation and has determined that the proposed increase in
the authorized shares of common stock is in the best interests of Cardiac
Pathways and its stockholders. In connection with the financing described in
Proposal Three, our board of directors has approved the issuance of up to 40,000
shares of series B convertible preferred stock that may be converted into
40,000,000 shares of common stock at the option of the holders. In addition, in
connection with the interim funding, Cardiac Pathways has agreed to issue up to
600,000 shares of common stock upon exercise and conversion of warrants to
purchase series B convertible preferred stock. Absent approval of the increase
in the authorized shares of common stock, Cardiac Pathways will not be able to
complete the financing because the number of authorized but unissued shares of
common stock are insufficient to permit conversion of the series B convertible
preferred stock into common stock. Approval of the amendment to the Cardiac
Pathways certificate of incorporation will constitute approval of the increase
in authorized shares of common stock. The authorized but unissued shares of
Cardiac Pathways common stock would be available for issuance from time to time
for such purposes and for such consideration as our board of directors
determines to be appropriate without further action by the stockholders, except
for those instances where contract, applicable law or stock exchange rules
require stockholder approval.
The Cardiac Pathways certificate of incorporation currently provides that
Cardiac Pathways may issue up to 30,000,000 shares of common stock and 5,000,000
shares of preferred stock. Currently, 30,000 shares of preferred stock are
designated as series A participating preferred stock and 50,000 shares are
designated as series B convertible preferred stock. No shares of series A or
series B convertible preferred stock are outstanding as of the date of this
proxy statement. In addition, as of June 4, 1999 an aggregate of 2,866,629
shares of Cardiac Pathways common stock are reserved for issuance under the
Cardiac Pathways stock option and purchase plans, exclusive of the proposed
increase set forth in Proposal Four and 143,141 shares are reserved for issuance
upon the exercise of outstanding warrants (excluding the warrants issued
pursuant to the interim financing). Thus, assuming that Cardiac Pathways
reserved shares of common stock for the possible conversion of all authorized
options and warrants but not the conversion of any shares of common stock upon
conversion of preferred stock, only approximately 16,951,652 shares of common
stock would remain available for issuance.
Our board of directors believes that it is in the best interest of Cardiac
Pathways and its stockholders to increase the authorized shares of common stock
in order to have additional authorized but unissued shares available without the
expense and delay of a special meeting of stockholders. For example, the
financing described in Proposal Three could not be completed because Cardiac
Pathways would not have a sufficient
18
<PAGE> 20
number of shares of common stock to issue upon the conversion of the series B
convertible preferred stock. In addition, our board of directors believes the
availability of such shares will provide Cardiac Pathways with the flexibility
to issue common stock for proper corporate purposes that may be identified in
the future. For example, shares of common stock may be issued if our board of
directors determines it is necessary or appropriate to permit a future stock
dividend or stock split, to raise additional capital, to acquire another
corporation or another corporation's business or assets or to establish a
strategic relationship with a corporate partner. Our board of directors does not
intend to authorize the issuance of any such shares except on terms the board
deems to be in the best interest of Cardiac Pathways.
If the proposal to implement an increase in the authorized shares of common
stock is approved by the Cardiac Pathways stockholders, our board of directors
does not intend to solicit further stockholder approval before issuing any
additional shares of common stock including upon the conversion of the series B
convertible preferred stock to be sold in the financing, except as may be
required by applicable law or stock exchange rules. The reverse stock split will
not have any immediate effect on the rights of existing stockholders.
To the extent that the additional authorized shares are issued in the
future, they will decrease the existing stockholders' percentage of equity
ownership of Cardiac Pathways, and, depending on the price at which such
additional shares are issued, could be dilutive to existing stockholders.
Existing Cardiac Pathways stockholders have no statutory preemptive rights with
respect to issuances of common stock.
ANTI-TAKEOVER IMPLICATIONS OF DELAWARE LAW AND EXISTING CHARTER DOCUMENTS
The increase in the authorized but unissued number of shares of Cardiac
Pathways common stock to 75,000,000 and the subsequent issuance of such shares
could have the effect of delaying or preventing a change in control of Cardiac
Pathways, without further action by the stockholders. Shares of authorized but
unissued common stock could, within the limits imposed by applicable law, be
issued in one or more transactions that would make a change in control of
Cardiac Pathways more difficult and, therefore, less likely. Any such issuance
of additional stock could have the effect of diluting the earnings per share or
book value per share of outstanding shares of common stock. Additional shares
could be used to dilute the stock ownership or voting rights of a person seeking
to obtain control of Cardiac Pathways.
In recent years, a number of states have adopted special laws designed to
make certain kinds of unfriendly corporate takeovers, or other transactions
involving a corporation and one or more of its significant stockholders, more
difficult. Under Section 203 of the Delaware General Corporation Law, certain
business combinations with interested stockholders of Delaware corporations are
subject to a three year moratorium unless specified conditions are met.
Section 203 applies to Cardiac Pathways because it is a corporation whose
shares are listed on the Nasdaq Stock Market. Section 203 applies to those
Delaware corporations whose shares are:
- listed on a national securities exchange;
- quoted on an interdealer quotation system of a registered national
securities association; or
- held of record by more than 2,000 stockholders.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which:
- owns, individually or with or through certain other persons or entities,
fifteen percent (15%) or more of the corporation's outstanding voting
stock; or
- is an affiliate or associate of the corporation and was the owner,
individually or with or through certain other persons or entities, of
fifteen percent (15%) or more of such voting stock at any time within the
previous three years; or
- is an affiliate or associate of any of the foregoing.
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<PAGE> 21
Section 203 defines outstanding voting stock to include in addition to
outstanding capital stock any rights to acquire stock pursuant to an option,
warrant, agreement, arrangement or understanding, or upon the exercise of
conversion or exchange rights. Outstanding voting stock also includes those
shares of stock with respect to which the person has voting rights only in an
interested stockholders' total voting stock.
For purposes of Section 203, the term "business combination" is defined
broadly to include:
- mergers with or caused by the interested stockholder;
- sales or other dispositions to the interested stockholder (except
proportionately with the corporation's other stockholders) of assets of
the corporation or a direct or indirect majority-owned subsidiary equal
in aggregate market value to ten percent (10%) or more of the aggregate
market value of either the corporation's consolidated assets or all of
its outstanding stock;
- the issuance or transfer by the corporation or a direct or indirect
majority-owned subsidiary of stock of the corporation or such subsidiary
to the interested stockholder (except for certain transfers in a
conversion or exchange or a pro rata distribution or certain other
transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or
such subsidiary's stock or of the corporation's voting stock); or
- receipt by the interested stockholder (except proportionately as a
stockholder), directly or indirectly, of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the
corporation or a subsidiary.
The three year moratorium imposed on business combinations by Section 203
does not apply if:
- prior to the date on which such stockholder becomes an interested
stockholder the board of directors approves either the business
combination or the transaction that resulted in the person or entity
becoming an interested stockholder;
- upon consummation of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least eighty-five percent
(85%) of the corporation's voting stock outstanding at the time the
transaction commenced (excluding from the eighty-five percent (85%)
calculation shares owned by directors who are also officers of the target
corporation and shares held by employee stock plans that do not give
employee participants the right to decide confidentially whether to
accept a tender or exchange offer);
- or on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent
(66 2/3%) of the outstanding voting stock not owned by the interested
stockholder.
Although a Delaware corporation to which Section 203 applies may elect not
to be governed by Section 203, Cardiac Pathways did not so elect to be excluded.
Section 203 will encourage any potential acquirer to negotiate with Cardiac
Pathways' board of directors. Section 203 also might have the effect of limiting
the ability of a potential acquirer to make a two-tiered bid for Cardiac
Pathways in which all stockholders would not be treated equally. Stockholders
should note, however, that the application of Section 203 to Cardiac Pathways
confers upon the board the power to reject a proposed business combination in
certain circumstances, even though a potential acquirer may be offering a
substantial premium for Cardiac Pathways' shares over the then current market
price. Section 203 would also discourage certain potential acquirers unwilling
to comply with its provisions. In connection with the financing described
pursuant to Proposal Three below, the Cardiac Pathways board of directors has
voted unanimously to approve the financing. As a result, the investors
purchasing the series B convertible preferred stock in the financing would not
become interested stockholders for purposes of Section 203 as a result of the
financing.
The certificate of incorporation provides for the board to be divided into
three classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the board will be elected each year. The provision
for a classified board could prevent a party who acquires control of a majority
of the outstanding voting stock from obtaining control of the board until the
second annual stockholders meeting following the
20
<PAGE> 22
date the acquirer obtains the controlling stock interest. The classified board
provision could have the effect of discouraging a potential acquirer from making
a tender offer or otherwise attempting to obtain control of Cardiac Pathways and
could increase the likelihood that incumbent directors will retain their
positions. The certificate of incorporation provides that directors may be
removed (i) with cause by the affirmative vote of the holders of at least a
majority of the voting power of all of the outstanding shares of voting stock or
(ii) without cause by the affirmative vote of the holders of at least 66 2/3% of
the voting power of all of the then-outstanding shares of the voting stock.
The certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. The certificate of incorporation and
the bylaws provide that, except as otherwise required by law, special meetings
of the stockholders can only be called pursuant to a resolution adopted by a
majority of the board of directors, by the chief executive officer of Cardiac
Pathways, or by stockholders holding shares in the aggregate entitled to cast
not less than 10% of the votes at that meeting.
The bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of Cardiac Pathways,
including proposed nominations of persons for election to the board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given to Cardiac Pathways' Secretary timely written notice, in proper form,
of the stockholder's intention to bring that business before the meeting.
Although the bylaws do not give the board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at a special or annual meeting, the bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper procedures
are not followed or may discourage or defer a potential acquirer from conducting
a solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of Cardiac Pathways.
The certificate of incorporation provides that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
its provisions. This requirement of a super-majority vote to approve amendments
to the certificate of incorporation could enable a minority of Cardiac Pathways'
stockholders to exercise veto power over any such amendments.
In addition, Delaware law permits a corporation to adopt such measures as
stockholder rights plans designed to reduce a corporation's vulnerability to
unsolicited takeover attempts. In April 1997, Cardiac Pathways adopted such a
plan (the "Rights Plan"). Pursuant to the Rights Plan, Cardiac Pathways declared
a dividend of one common Share Purchase Right (a "Right") for each outstanding
share of common stock and each share of common stock issued thereafter.
Initially, each Right entitles holders of common stock to purchase from Cardiac
Pathways one share of common stock at an exercise price of $125.00, subject to
adjustment. The Rights are not exercisable until the occurrence of specified
events. See "Description of Capital Stock" on page 42. The financing described
in Proposal Three below will not be an event that triggers the exercisability of
the Rights.
We have no present intention to amend the certificate of incorporation or
bylaws to include additional provisions other than those now present in its
certificate of incorporation and bylaws which might deter an unsolicited
takeover attempt. However, in the discharge of its fiduciary obligations to its
stockholders, our board of directors will continue to evaluate Cardiac Pathways'
vulnerability to potential unsolicited bids to acquire Cardiac Pathways on
unfavorable terms and to consider strategies to enhance the board's ability to
negotiate with an unsolicited bidder.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE INCREASE IN
THE AUTHORIZED SHARES OF COMMON STOCK, HOWEVER, THE INCREASE WILL NOT BE
IMPLEMENTED IF PROPOSAL ONE IS ALSO APPROVED.
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PROPOSAL THREE
SALE OF SERIES B CONVERTIBLE PREFERRED STOCK
BACKGROUND OF THE FINANCING
Cardiac Pathways was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. We have experienced significant operating losses since inception. As
of March 31, 1999, we had an accumulated deficit of $75.4 million.
Delays in product development, in the commencement, progress and completion
of clinical trials for our products, in the FDA approval process for our
products and in the commercialization of such products have resulted in Cardiac
Pathways expending more resources in its operations than anticipated. As a
result, in order to execute our business plan, we need to raise additional
capital. Beginning in early 1998 and continuing until May 1999, our management
explored the strategic alternatives available to us. The strategic alternatives
explored included raising additional capital through private and public equity
financings. We explored the possibility of raising needed capital through a
public offering. Unfortunately, discussions with potential investment bankers
indicated that a public offering by an early stage medical device company would
be difficult to complete given prevailing market conditions. During this period,
our management also sought discussions with several third parties regarding a
potential private placement in order to raise the needed capital. Among the
parties with whom we had discussions regarding a potential private placement
were BankAmerica Ventures and Morgan Stanley Dean Witter Venture Partners.
We also explored the possibility of selling Cardiac Pathways. Beginning in
early 1998, our management sought discussions with third parties regarding a
potential acquisition or other strategic relationship that would result in a
significant infusion of capital. In addition, in July 1998 we engaged the
services of Morgan Stanley & Co. Incorporated as financial advisor to assist us
in analyzing the strategic alternatives available to us. On July 23, 1998,
Cardiac Pathways executed an engagement letter pursuant to which Morgan Stanley
was formally retained. Beginning in July 1998, Morgan Stanley actively solicited
third parties to ascertain interest in acquiring Cardiac Pathways. From July
1998 through May 1999, Morgan Stanley and our management contacted or were
contacted by several potential strategic buyers.
During this time period, the Cardiac Pathways Board received reports from
management regarding the results of efforts to investigate various forms of
public or private financings or strategic transactions with third parties.
On March 2, 1999, we informed Silicon Valley Bank that we were not in
compliance with the financial ratio and liquidity covenants in our May 1998 loan
agreement with the bank. In March 1999, we transferred $3,000,000 of our cash
balances to a restricted account at Silicon Valley Bank for the purpose of
collateralizing part of the loan balance and pledged an additional $3,300,000 of
securities to collateralize 105% of the principal amount of the loan. By May 20,
1999, Silicon Valley Bank had foreclosed and had taken possession of the
collateral in satisfaction of the full amount due under the loan.
On March 22, 1999, in order to widely disseminate our desire to discuss
strategic transactions with third parties and to improve the likelihood that all
indications of interest would be received, we issued a press release announcing
that we had retained Morgan Stanley to assist us to analyze and pursue strategic
alternatives, including raising additional capital or the sale of Cardiac
Pathways.
On April 7, 1999, Nasdaq requested that we provide Nasdaq information with
respect to our ability to meet Nasdaq's quantitative maintenance requirements.
On May 5, 1999, Nasdaq notified us that, based upon its review of the
information provided, we were no longer in compliance with the net tangible
assets requirement of $4.0 million for continued listing on Nasdaq. Nasdaq
requested that we provide Nasdaq with a plan on or prior to May 17, 1999 to
sustain compliance with the continued listing requirements of Nasdaq. In the
absence of such a plan, Nasdaq would commence the delisting process.
In March and April 1999, discussions with BankAmerica Ventures regarding a
significant private placement became serious. During this period we negotiated
the terms of a potential private placement and BankAmerica Ventures performed
extensive due diligence. Our management and Morgan Stanley also actively
solicited and contacted several third parties to ascertain if there were any
interest in entering into a strategic transaction with Cardiac Pathways.
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<PAGE> 24
On April 22, 1999, our management reported to our board of directors that
the terms of a Letter of Intent regarding a significant private financing had
been negotiated with BankAmerica Ventures. Our management also reported to the
board regarding our alternatives. At this meeting, the board of directors
approved the Letter of Intent regarding the financing and authorized management
to execute the Letter of Intent and to negotiate definitive agreements for the
financing.
As of May 14, 1999, Cardiac Pathways' balance of cash, cash equivalents and
short-term investments was only $450,000. In the absence of an immediate in flow
of capital, Cardiac Pathways would not have sufficient resources to continue
operations.
From April 23 through May 21, 1999, we negotiated the terms of definitive
agreements for the financing. On May 16 and May 20, 1999, our board of directors
met to review the terms of the definitive agreements and approved the terms of
the financing and authorized management to enter into the definitive agreements.
Thereafter, on May 21, 1999, the definitive agreements were executed.
THE PROPOSED FINANCING
On May 21, 1999 we signed a definitive agreement with BankAmerica Ventures,
Morgan Stanley Dean Witter Venture Partners and certain other investors
(including Thomas J. Fogarty, M.D. one of our current directors, and the State
of Wisconsin Investment Board, a current stockholder) for the sale of
$31,500,000 of our series B convertible preferred stock (with the possibility
that this amount will increase up to $40,000,000). The proposed investors
include certain of our existing stockholders. In connection with the financing,
our board of directors has approved the issuance of up to 40,000 shares of
series B convertible preferred stock that may be converted into 40,000,000
shares of common stock at the option of the holders. If the financing closes, we
will issue up to 40,000 shares of series B convertible preferred stock at a
purchase price of $1,000 per share and raise up to $40,000,000, not including
the issuance and exercise warrants to purchase up to 600 shares of series B
convertible preferred stock in the interim funding (described below). As of May
21, 1999, $31,500,000 of the financing was committed subject to satisfaction of
the closing conditions described below. If the financing does not close, Cardiac
Pathways will not have sufficient resources to continue our operations in the
absence of an alternative transaction. We do not believe that any funds would be
available for our stockholders in the event Cardiac Pathways ceased operations
and was liquidated.
INTERIM FUNDING
Certain of the investors in the financing have provided Cardiac Pathways
with interim financing through a bridge loan of $3,000,000 on May 21, 1999. The
investors may increase the bridge loan to $6,000,000. The purpose of the bridge
loan is to fund our operations until the completion of the financing. The
promissory notes issued by Cardiac Pathways in connection with the bridge loan
and the interest accrued thereon are convertible into shares of series B
convertible preferred stock at the same price as the shares issued in the
financing at the election of the holder. We also issued warrants to purchase up
to 300 shares of series B convertible preferred stock at an exercise price of
$1,000 per share that are initially convertible into 300,000 shares of common
stock. In the event that the remaining $3,000,000 of the bridge loan is
advanced, we will issue warrants for an additional 300 shares of series B
convertible preferred stock. The bridge loan is secured by substantially all of
Cardiac Pathways' assets. In the event the stockholders do not approve the
series B convertible financing by October 31, 1999 or by affirmative vote fail
to approve the financing, the holders of 25% of the outstanding notes may demand
that the entire principal of the notes be immediately due and payable. At such
time, Cardiac Pathways has also agreed to issue additional warrants to purchase
series B convertible preferred stock.
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REASONS FOR THE FINANCING
FACTORS WEIGHING IN FAVOR OF THE FINANCING
The effect on Cardiac Pathways of the deteriorating financing opportunities
for development stage medical device companies. This situation, as well as
Cardiac Pathways' cash position, made completion of a transaction that would
provide liquidity in a short time frame imperative.
The deterioration in Cardiac Pathways' financial condition and the
anticipated qualification by Cardiac Pathways' auditors of their report on
Cardiac Pathways' financial statements for the period ended June 30, 1999 by
noting "substantial doubt about its ability to continue as a going concern,"
thereby decreasing Cardiac Pathways' other financing alternatives.
The absence of any serious offers from any other third parties regarding a
possible acquisition of Cardiac Pathways' assets or a possible merger with
Cardiac Pathways.
The strong possibility that if this financing is not completed Cardiac
Pathways will be forced into bankruptcy, which would result in little or no
return to the current stockholders.
The anticipated positive effects upon Cardiac Pathways' balance sheet and
results of operations from the use of the net proceeds of the financing to
expand Cardiac Pathways' ability to develop and market its products.
The board's belief that Cardiac Pathways is well positioned to contribute
and engage in several growing segments of the medical device industry. Cardiac
Pathways' strategy for its continuing catheter business includes seeking to
achieve commercialization of its Chilli Cooled Ablation Catheter, further
development of Cardiac Pathways' enabling visualization technology for multiple
applications and development of new capabilities to meet electrophysiologists
future needs.
FACTORS WEIGHING AGAINST THE FINANCING
The terms of the financing are highly dilutive to the current holders of
common stock. If the financing is completed, the current holders will own
approximately 20% of Cardiac Pathways outstanding capital stock.
Considering all of the above factors, the board of directors concluded that
Cardiac Pathways should become focused on developing its products with a
significantly downsized workforce. The infusion of cash provided by the
financing will give Cardiac Pathways the resources to fund the commercialization
and further development of its Chilli Cooled Ablation Catheter products, and
will enable Cardiac Pathways to sharply focus its development activities. The
board did not independently establish a value for the financing, but based on
all the above factors, determined that the financing was fair and reasonable to
Cardiac Pathways and its stockholders. The board did not assign a weight for the
individual factors considered in evaluating the financing. The board did not
perform any material financial analyses. The board also considered a liquidation
sale of assets, but determined that the financing would result in higher
stockholder value. The value of Cardiac Pathways' significant intellectual
property and seasoned engineering team would not be realized in a liquidation.
The board believes that with the cash to be obtained from the financing, Cardiac
Pathways will be better positioned to develop next generation products, thereby
creating the potential for increased revenues from these products. The board
consulted with counsel for Cardiac Pathways regarding whether the financing is a
change in control of Cardiac Pathways, and based on the percentage of ownership
of existing stockholders before and after the financing, such counsel advised
Cardiac Pathways that the financing should be considered a change in control of
Cardiac Pathways. The board did not obtain a formal written opinion of such
counsel to such effect. The board did not seek such a formal written opinion
because the question of whether the financing constitutes a change in control is
primarily a factual determination and, in light of the percentage of
stockholders' equity to be held by existing stockholders after the financing,
such determination was relatively free from doubt.
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TERMS OF THE FINANCING
THE STOCK PURCHASE AGREEMENT
The existing board of directors of Cardiac Pathways will resign effective
upon the closing of the financing. The holders of the series B convertible
preferred stock will have the right to elect three members of the board of
directors, two of whom shall be nominated by BankAmerica Ventures and shall be
Mark J. Brooks and Anchie Y. Kuo, M.D. and one of whom shall be nominated by
Morgan Stanley Dean Witter Venture Partners who shall be Fazle Husain. One
member of the board of directors will be the chief executive officer of Cardiac
Pathways, Thomas M. Prescott. The remaining director will be appointed by a
majority of the board of directors and will initially be William N. Starling who
is also the chairman. Cardiac Pathways has agreed to amend its bylaws to provide
that the board of directors may consist of five to seven members. Cardiac
Pathways will be required to obtain the consent of the directors nominated by
the holders of the series B convertible preferred stock in order to increase the
size of the board of directors from five.
William N. Starling resigned as chief executive officer and president of
Cardiac Pathways on May 24, 1999.
RIGHT OF FIRST OFFER
The holders of the series B convertible preferred stock will have a right
of first offer with respect to additional financings by Cardiac Pathways.
VOTING AGREEMENT
Closing of the financing is contingent upon Cardiac Pathways obtaining the
approval of its stockholders to the terms of the financing. Holders of Cardiac
Pathways common stock who have voting power over 42.5% of Cardiac Pathways
common stock have entered into voting agreements with Cardiac Pathways. Pursuant
to the voting agreements, such holders of Cardiac Pathways common stock have
agreed to vote in favor of the financing. In addition, the board of directors
has agreed to recommend that our stockholders approve the financing. The
financing is also contingent upon Cardiac Pathways completing a one-for-five
reverse stock split.
NON-SOLICITATION
We have agreed to a nonsolicitation provision that provides that we will
not directly or indirectly solicit an acquisition, furnish information that is
in connection with or response to an acquisition proposal or engage in
discussions regarding an acquisition. We are required to notify the purchasers
of the series B convertible preferred stock immediately of any other acquisition
proposals. In the event that Cardiac Pathways receives a bona fide, unsolicited
offer to acquire all of the capital stock of Cardiac Pathways or substantially
all of our assets at a higher valuation for Cardiac Pathways than the financing,
we are required to notify the purchasers. We may enter into negotiations with or
accept the higher offer; however, we are required to pay a $1,000,000 break-up
fee to the participants in the interim funding upon the closing of the alternate
transaction on a pro rata basis according to their level of participation in the
interim funding.
CLOSING CONDITIONS
The closing of the financing is subject to other conditions including:
- Termination of our existing shareholders rights agreement;
- Execution of the voting agreement by the holders of at least 40% of our
common stock;
- Receipt of stockholder approval to increase the number of shares
authorized for issuance under the 1991 Stock Plan by 4,000,000 shares;
- Satisfaction of the stockholder approval requirements of the Nasdaq Stock
Market in connection with the issuance of securities convertible into 20%
or more of Cardiac Pathways' common stock;
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- Approval of the financing for purposes of Section 203; and
- No material adverse change in our financial condition since the date of
our most recent Form 10-Q.
THE REGISTRATION RIGHTS AGREEMENT
The holders of the series B convertible preferred stock will be entitled to
certain registration rights. Demand registrations on Form S-1 and S-3 may be
exercised by the holders of at least 45% of the then outstanding shares of
series B convertible preferred stock after May 31, 2000.
INTERESTS OF OUR OFFICERS, DIRECTORS AND STOCKHOLDERS IN THE FINANCING
In connection with the financing, William N. Starling, Cardiac Pathways'
chairman, resigned as our President and chief executive officer. Mr. Starling,
unlike our other current directors, will be a member of the Cardiac Pathways'
board of directors after the closing of the financing. Mr. Starling will also be
reappointed as chairman of the post-financing board of directors. Cardiac
Pathways, the proposed holders of the series B convertible preferred stock and
Mr. Starling have agreed that for as long as Mr. Starling continues as a member
of Cardiac Pathways' board of directors, the options to purchase Cardiac
Pathways common stock held by Mr. Starling will continue to vest.
Thomas M. Prescott was appointed as Cardiac Pathways' president and chief
executive officer as of May 24, 1999. In connection with the financing, Cardiac
Pathways and the investors have agreed to appoint Mr. Prescott as a director of
Cardiac Pathways effective upon the closing of the financing. In addition, Mr.
Prescott entered into an employment agreement with Cardiac Pathways that among
other things provides that Mr. Prescott is entitled to an annual base salary of
$225,000 and options to purchase 1,236,532 shares of Cardiac Pathways common
stock at an exercise price of $1.00 per share. Cardiac Pathways granted such
options shares on June 7, 1999 subject to our stockholders approval of the
increase in authorized shares available for grant under the 1991 Stock Plan set
forth in Proposal Four. One-fourth of Mr. Prescott's options will vest on each
anniversary of his employment over the next four years. In the event Mr.
Prescott is terminated without justifiable cause (as defined in the employment
agreement) during the first year of his employment, Mr. Prescott will be
entitled to acceleration of vesting as to 1/48th of such options for each full
month of employment. Mr. Prescott is also entitled to immediate vesting of 100%
of his shares if a merger or other sale of Cardiac Pathways results in a change
in control of its voting stock and Mr. Prescott is involuntarily terminated.
In addition to options to purchase Cardiac Pathways' common stock, Mr.
Prescott is entitled to the following:
- a $250,000 loan from Cardiac Pathways at a 7% interest rate to purchase
shares of the series B convertible preferred stock that is payable in 12
quarterly installments commencing on the third anniversary of the loan;
- relocation expenses;
- a one-time bonus of $75,000 payable by June 25, 1999;
- severance of 12 months of his then current monthly salary in the event
Mr. Prescott is terminated without justifiable cause (as such term is defined in
the employment agreement); and
- a bonus of up to 25% of his then current salary upon the attainment of
goals set by the board of directors for each fiscal year during which Mr.
Prescott remains Cardiac Pathways' chief executive officer.
Thomas J. Fogarty, M.D., a current director, has agreed to purchase 500
shares of our series B convertible preferred stock in the financing. The State
of Wisconsin Investment Board, our largest current stockholder, has agreed to
purchase 6,000 shares of series B convertible preferred in the financing. The
State of Wisconsin Investment Board has also provided a $600,000 bridge loan to
Cardiac Pathways that is secured, jointly with the other bridge loans, by
substantially all of our assets. We granted the State of Wisconsin
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Investment Board warrants to purchase 60 shares of series B convertible
preferred stock at a per share exercise price that is initially $1,000 per
share.
CARDIAC PATHWAYS BOARD OF DIRECTORS AND MANAGEMENT AFTER THE FINANCING
Effective upon the closing of the financing, our current board of directors
will resign. The board of directors after the closing of the financing will
consist of five members, three of whom will be nominees of the series B
stockholders. The fourth director will be our chief executive officer. The
incoming director will be an individual acceptable to the other directors. The
consent of the directors nominated by the series B convertible preferred stock
will be required to increase the number of directors.
Our board of directors will consist of the following persons after the
closing of the financing:
<TABLE>
<CAPTION>
NAME AGE REPRESENTATIVE OF
---- --- -----------------
<S> <C> <C>
Mark J. Brooks...... 32 BankAmerica Ventures
M. Fazle Husain..... 35 Morgan Stanley Dean Witter Venture Partners
Anchie Y. Kuo,
M.D. ............. 39 BankAmerica Ventures
Thomas M.
Prescott.......... 43 Chief Executive Officer
William N.
Starling.......... 46 Chairman
</TABLE>
MARK J. BROOKS is a partner of BankAmerica Ventures where he has been
employed since August 1995. From September 1993 to July 1995, Mr. Brooks was a
senior associate at Mercer Management Consulting. Prior to that time, Mr. Brooks
was a loan officer in the Media Group of Manufacturers Hanover Trust Company.
Mr. Brooks is a member of the boards of directors of ManorHouse Retirement
Centers, LivHome and InPatient Management Consultants, Inc.
M. FAZLE HUSAIN is a Principal of Morgan Stanley Dean Witter & Co., an
investment banking firm, where he has been employed since 1991, and is a
Managing Member of Morgan Stanley Venture Partners III, L.L.C., the General
Partner of Morgan Stanley Venture Partners III, L.P., Morgan Stanley Venture
Investors III, L.P. and The Morgan Stanley Venture Partners Entrepreneur Fund,
L.P. Mr. Husain was also employed at Morgan Stanley Dean Witter from 1987 until
1989. Mr. Husain focuses primarily on investments in the healthcare industry,
including healthcare services, medical devices and healthcare information
technology. Mr. Husain is also a member of the boards of directors of IntegraMed
America Inc., Allscripts, Inc., U.S. Healthworks, Inc. and DentalCo, Inc.
ANCHIE Y. KUO, M.D. is a partner of BankAmerica Ventures, where he has been
employed since 1994. Prior to joining BankAmerica Ventures, Dr. Kuo was a
general partner of Ventures Medical. Dr. Kuo is also a member of the boards of
directors of Acusphere, Collegiate Healthcare, Dynavax, Immusol, the Call Doctor
Company, U.S. Healthworks, Inc. and Via Medical Corporation.
THOMAS M. PRESCOTT has served as Cardiac Pathways' President and Chief
Executive Officer since May 1999. Mr. Prescott was Vice President and General
Manager of a respiratory business unit of Mallinckrodt, Inc. from August, 1996
to May 1999. Mr. Prescott served in other senior leadership roles at Nellcor,
Inc. from April 1994 until Nellcor's acquisition by Mallinckrodt in August 1997.
Prior to that time, Mr. Prescott served in various roles at General Electric
Medical Systems and Siemens A.G.
WILLIAM N. STARLING has been a director of Cardiac Pathways since 1991 and
has served as Chairman since 1996. From January 1992 to May 1999, Mr. Starling
served as the President and Chief Executive Officer of Cardiac Pathways. Mr.
Starling serves as a director of several privately held companies and serves on
the Board of Visitors of the University of North Carolina at Chapel Hill.
The other key members of the Cardiac Pathways management team include:
DEBRA S. ECHT, M.D. has been Vice President and Chief Medical Officer of
Cardiac Pathways 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
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member and consultant on the United States Food and Drug Administration's
Circulatory System Devices Advisory Panel from June 1991 to July 1996.
BRIAN GRIGSBY has been Vice President Operations since February 1999. From
August 1998 to January 1999, Mr. Grigsby was Senior Director of Quality
Assurance of Cardiac Pathways. From September 1996 to July 1998, Mr. Grigsby was
Director of Quality Assurance of the Company. From September 1988 to August
1996, Mr. Grigsby held various positions within the medical device industry
including Director, Manufacturing, Quality and Regulatory Affairs with Catheter
Research Inc. and Manager, Quality and Manufacturing Engineering with Medtronic,
Inc.
JON P. HUNT, PH.D. has been Vice President, Sales and Marketing since June
1999. He previously served as Vice President, International Sales of Cardiac
Pathways from March 1998 through May 1999. 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 of 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.
G. MICHAEL LATTA has been Vice President, Finance and Chief Financial
Officer of Cardiac Pathways since December 1998. From September 1994 to November
1998, Mr. Latta held various financial management positions with Cardiac
Pathways. From September 1989 to September 1994, Mr. Latta was with Ernst &
Young LLP, most recently as Audit Manager. Mr. Latta is a Certified Public
Accountant.
RICHARD E. RILEY has been Executive Vice President, Research and
Development since July 1998. Mr. Riley was Vice President, Product Development
of Cardiac Pathways from July 1994 to July 1998. From July 1992 to July 1994,
Mr. Riley was Vice President, Software Development of Cardiac Pathways. From
1982 to June 1992, Mr. Riley held various engineering positions, including
Project Director with Medtronic, Inc., a medical device company.
THE 20% RULE
The Bylaws of the Nasdaq Stock Market require Cardiac Pathways to obtain
stockholder approval in connection with a transaction other than a public
offering involving the sale or issuance by Cardiac Pathways of common stock (or
securities convertible into or exercisable for common stock) equal to 20% or
more of the common stock outstanding before the issuance for less than the
greater of book value or market value of the common stock.
Before voting, each stockholder should consider the following factors with
respect to the conversion of the series B convertible preferred stock in excess
of the 20% Rule. If Cardiac Pathways fails to obtain the approval of our
stockholders prior to the issuance of the series B convertible preferred stock,
we would be in violation of the continued listing requirements of the Nasdaq
Stock Market and we expect that the Nasdaq Stock Market would initiate delisting
proceedings with respect to the Cardiac Pathways common stock. Delisting of our
common stock would make it difficult for our stockholders to sell our shares and
would substantially inhibit our ability to raise additional capital if
necessary. Furthermore, if Cardiac Pathways fails to obtain stockholder approval
for the sale of the Series B Preferred, the investors will not be required to
proceed with the financing. The number of shares of common stock issuable upon
conversion of the series B convertible preferred stock will be greater than 20%
of the common stock outstanding immediately prior to the financing. The series B
convertible preferred stock may be converted at any time at the request of its
holders. The terms of the series B convertible preferred stock will allow the
holders of the series B convertible preferred stock to obtain shares of common
stock at a price below the current market value and are entitled to adjustments
to the Conversion Price if Cardiac Pathways issues additional securities at a
price lower than the prevailing conversion price of the series B convertible
preferred stock. See "Terms of The Preferred Stock" below. It is a condition to
closing that Cardiac Pathways obtain the consent of the stockholders in
satisfaction of the Nasdaq Stock Market requirements. Therefore, the board of
directors has determined that we are required to obtain the approval of Cardiac
Pathways' stockholders at this time.
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THE SERIES B CONVERTIBLE PREFERRED STOCK FINANCING
TERMS OF THE PREFERRED STOCK
PURCHASE PRICE, CONVERSION RIGHTS. Each share of the series B convertible
preferred stock will be sold at a purchase price of $1,000. Each holder of
shares of series B convertible preferred stock has the right at any time, and
from time to time, to convert some or all such shares into 1,000 fully paid and
nonassessable shares (pre-reverse split) of common stock per share of series B
convertible preferred stock (subject to adjustment as described below). In
addition, all outstanding shares of series B convertible preferred stock will be
automatically converted into Cardiac Pathways common stock upon the affirmative
vote of a majority of the outstanding shares of series B convertible preferred
stock.
Any conversion shall occur according to the following conversion formula:
The number of shares of common stock issuable upon conversion of each share
of series B convertible preferred stock will be equal to 1,000 times the
original purchase price of the series B convertible preferred stock, divided by
the Conversion Price. The Conversion Price shall be initially equal to $1,000
but is subject to adjustment in the event that Cardiac Pathways sells securities
after the closing of the financing at a per share price lower than the
Conversion Price then in effect. No adjustment to the conversion price will be
made for the issuance of shares of common stock upon the exercise of options
held by employees or consultants of Cardiac Pathways or the issuance of
securities of Cardiac Pathways in a merger or similar transaction.
PREFERENTIAL CUMULATIVE DIVIDENDS. The holders of series B convertible
preferred stock shall be entitled to receive cumulative dividends at the rate
per share equal to 11% per annum of the initial purchase price of the series B
convertible preferred stock before any dividend or other distribution will be
paid or declared and set apart for payment on any shares of any common stock or
other class of stock junior to the series B convertible preferred stock. In the
event that Cardiac Pathways has not redeemed the series B convertible preferred
stock prior to May 2004 after a request by the holders to do so, the cumulative
dividend will increase by six percentage points each full year after May 2004 in
which a redemption does not occur.
LIQUIDATION RIGHTS. In the event of the dissolution, liquidation or
winding-up of Cardiac Pathways, whether voluntary or involuntary, the holders of
the series B convertible preferred stock will be entitled to receive before any
payment or distribution will be made on any common stock or other outstanding
security of Cardiac Pathways, out of the assets of Cardiac Pathways available
for distribution to stockholders, the initial purchase price per share of series
B convertible preferred stock and all accrued and unpaid dividends to and
including the date of payment thereof. Upon the payment in full of all amounts
due to holders of the series B convertible preferred stock (and any amounts due
to the holders of series A participating preferred stock), then the holders of
the common stock and the series B convertible preferred stock of Cardiac
Pathways will receive, ratably, all remaining assets of Cardiac Pathways legally
available for distribution. If the assets of Cardiac Pathways available for
distribution to the holders of the series B convertible preferred stock are
insufficient to permit payment in full of the amounts payable as aforesaid to
the holders of series B convertible preferred stock upon such liquidation,
dissolution or winding-up, whether voluntary or involuntary, then all such
assets of the Company will be distributed ratably among the holders of series B
convertible preferred stock.
A sale, conveyance or disposition of all or substantially all of the assets
of Cardiac Pathways or the effectuation by Cardiac Pathways of a transaction or
series of related transactions in which more than 50% of the voting power of
Cardiac Pathways is disposed of, or a consolidation or merger of Cardiac
Pathways with or into any other company or companies will be deemed to be a
liquidation, dissolution or winding-up of Cardiac Pathways for the purposes of
the liquidation rights that would be available to the holders of series B
convertible preferred stock.
REDEMPTION PROVISIONS. On or after May 31, 2004, the holders of a majority
of the series B convertible preferred stock may request that Cardiac Pathways
redeem all or part of the series B convertible preferred stock. Cardiac Pathways
will have the right to accept or reject the request. If Cardiac Pathways accepts
the request, the series B convertible preferred stock will be redeemed as
requested upon payment of 100% of the
29
<PAGE> 31
initial purchase price plus accrued but unpaid dividends. The redemption will
occur in two annual installments. Cardiac Pathways may not redeem any amount
that a holder of series B convertible preferred stock has elected to convert,
including a notice of conversion given after the Redemption Date but prior to
receipt by the holder of series B convertible preferred stock of the payment
under the redemption provisions. If Cardiac Pathways does not accept the request
for redemption, the cumulative dividend rate payable on the series B convertible
preferred stock shall be increased by six percentage points for each year a
redemption does not occur.
VOTING RIGHTS. The shares of common stock into which the series B
convertible preferred stock is converted will have full voting rights. Except as
otherwise required by law, the series B convertible preferred stock shall be
entitled to the number of votes per share into which it is then convertible.
Initially, the series B convertible preferred stock shall be entitled to 1,000
votes per share.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE ISSUANCE OF THE SERIES B CONVERTIBLE PREFERRED STOCK.
30
<PAGE> 32
PROPOSAL FOUR
AMENDMENT OF 1991 STOCK PLAN
At the Cardiac Pathways special meeting, you are being asked to approve an
amendment of the 1991 Stock Plan to increase the number of shares of common
stock reserved for issuance thereunder by 4,000,000 shares. The adoption of the
1991 Stock Plan and the aggregate reservation of 2,567,030 shares for issuance
thereunder were previously approved by our board of directors and by Cardiac
Pathways' stockholders. Our board of directors approved the amendment of the
1991 Stock Plan to increase the number of shares reserved for issuance
thereunder by 4,000,000 shares in May 1999. As of June 4, 1999, options to
purchase an aggregate of 1,067,591 shares of Cardiac Pathways common stock were
outstanding under the 1991 Stock Plan, with a weighted average exercise price of
$5.00 per share, and 374,849 shares were available for future grant, exclusive
of the 4,000,000 shares for which approval is sought hereunder. In addition, as
of June 4, 1999, 1,124,590 shares had been purchased pursuant to the exercise of
stock options under the 1991 Stock Plan, and there were 1,442,440 shares
authorized but unissued.
The 1991 Stock Plan authorizes our board of directors to grant stock
options to eligible employees and consultants of Cardiac Pathways, its parent
and subsidiaries. The 1991 Stock Plan is structured to allow the board of
directors broad discretion in creating equity incentives in order to assist
Cardiac Pathways to attract, retain and motivate the best available personnel
for the successful conduct of Cardiac Pathways' business. Cardiac Pathways has a
longstanding practice of linking key employee compensation to corporate
performance, because our board of directors believes that this increases
employee motivation to improve stockholder value. Cardiac Pathways has,
therefore, consistently included equity incentives as a significant component of
compensation for a broad range of our employees and consultants. This practice
has enabled Cardiac Pathways to attract and retain the talent that its business
continues to require.
Our proposed investors and our board of directors believe that the
remaining shares available for grant under the 1991 Stock Plan are insufficient
to accomplish the purposes of the 1991 Stock Plan. Cardiac Pathways anticipates
there will be a need to hire additional technical or management employees during
fiscal 2000, and it will be necessary to offer equity incentives to attract and
motivate these individuals, particularly in the competitive job market in
Silicon Valley. In addition, in order to retain the services of valuable
employees as our employee base grows larger, it will be necessary to grant
additional options to current employees as older options become fully vested.
In connection with the financing, prior to the closing date of the
financing, Cardiac Pathways has agreed to amend its bylaws to require the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares to increase the number of shares reserved for
issuance under any stock plan beyond 30% of the total outstanding capital stock,
on an as-converted basis. Cardiac Pathways also agreed to amend its bylaws to
require the affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares to reprice any options granted after
May 20, 1999 and agreed to only reprice options outstanding prior to May 20,
1999 on one occasion.
In addition, you are being asked to approve an amendment of the 1991 Stock
Plan to increase the maximum grant size under the plan. The 1991 Stock Plan
currently provides that no employee will be granted, in any fiscal year of the
Company, options to purchase more than 200,000 shares of common stock, except
that in connection with an employee's initial employment, he or she may be
granted options to purchase up to an additional 100,000 shares. This limitation
is intended to satisfy the requirements applicable to options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Internal Revenue Code. The amendment to the 1991 Stock Plan would provide
that no employee will be granted, in any fiscal year of the Company, options to
purchase more than 2,000,000 shares of common stock. This increase is being made
to allow for a grant to our new chief executive officer of an option to purchase
1,236,532 shares of common stock. See "Proposal Three -- Sale of Series B
Convertible Preferred Stock -- Interest of Certain Persons."
31
<PAGE> 33
VOTE REQUIRED
The affirmative vote of a majority of the shares of our common stock
present and voting at the special meeting will be required to approve the
amendment of the 1991 Stock Plan.
PURPOSE
The purposes of the 1991 Stock Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to employees and consultants of Cardiac Pathways and to
promote the success of Cardiac Pathways' business.
TERMS OF THE 1991 STOCK PLAN
The essential terms of the 1991 Stock Plan are summarized as follows:
ADMINISTRATION
The 1991 Stock Plan may be administered by our board of directors or one of
its committees. The 1991 Stock Plan is administered currently by the
compensation committee. Our board of directors or the compensation committee is
referred to in this description as the administrator. The administrator
determines the terms of options granted including, but not limited to, the
exercise price, the number of shares subject to the option and the
exercisability thereof. The administrator determines all questions of
interpretation, and its decisions are final and binding upon all participants.
Members of our board of directors or the compensation committee, as the case may
be, receive no additional compensation for their services in connection with the
administration of the 1991 Stock Plan.
ELIGIBILITY
The 1991 Stock Plan provides that the administrator may grant either
incentive or nonstatutory stock options to employees, including officers and
employee directors, of Cardiac Pathways, any of its designated subsidiaries or
its parent. In addition, the 1991 Stock Plan provides that the administrator may
grant nonqualified stock options to consultants of Cardiac Pathways, any of its
designated subsidiaries or its parent. The administrator selects the optionees
and determines the number of shares to be subject to each option. In making such
determination, the administrator takes into account the duties and
responsibilities of the optionee, the value of the optionee's services, the
optionee's present and potential contribution to the success of Cardiac Pathways
and other relevant factors. The 1991 Stock Plan provides for a limit of $100,000
on the aggregate fair market value of shares subject to all incentive options
that become exercisable for the first time in any one calendar year.
TERMS OF OPTIONS
Each option is evidenced by a stock option agreement between Cardiac
Pathways and the person to whom such option is granted and is subject to the
following additional terms and conditions:
(1) Exercise of the option: The administrator determines when options
granted under the 1991 Stock Plan may be exercised. An option is exercised when
the optionee gives written notice of exercise to Cardiac Pathways, specifying
the number of shares of Cardiac Pathways common stock to be purchased and
tendering payment to Cardiac Pathways of the purchase price. Payment for shares
issued upon exercise of an option may consist of cash, check, promissory note,
delivery of already-owned shares of Cardiac Pathways' common stock (subject to
certain conditions), delivery of an exercise notice with other required
documentation to effect an exercise of the option and delivery of the sale or
loan proceeds required to pay the exercise price, cancellation of a portion of
the shares subject to the option with a fair market value equal to the aggregate
exercise price of the shares as to which the option shall be exercised, or any
combination of the foregoing methods. Options may be exercised at any time on or
following the date the options are first exercisable or, subject to repurchase
rights, exercised early pursuant to a restricted stock purchase agreement at the
sole discretion of the administrator. An option may not be exercised for a
fraction of a share.
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<PAGE> 34
(2) Option price: The exercise price of all incentive stock options and
nonstatutory stock options under the 1991 Stock Plan is determined by the
administrator but, in the case of incentive stock options, in no event will it
be less than the fair market value of Cardiac Pathways' common stock on the date
the option is granted, or in the case of nonstatutory stock options, less than
100% of the fair market value of Cardiac Pathways' common stock on the date the
option is granted. In the case of an option granted to a person who at the time
of grant owns stock representing more than 10% of the voting power of all
classes of stock of Cardiac Pathways, the exercise price must be not less than
100% of the fair market value on the date of grant. In the absence of an
established market for the common stock, the fair market value shall be
determined in good faith by the administrator.
(3) Termination of employment: The 1991 Stock Plan provides that if the
optionee's employment or consulting relationship by Cardiac Pathways, any of its
subsidiaries or its parent is terminated for any reason, other than death or
disability, options may be exercised within thirty days, or such other period of
time not exceeding three months as determined by the administrator, after such
termination and may be exercised only to the extent the options were exercisable
on the date of termination.
(4) Death: If an optionee should die while an employee or a consultant of
Cardiac Pathways, any of its subsidiaries or its parent, the options may be
exercised at any time within twelve months after the date of death but only to
the extent that the options were exercisable on the date of death and in no
event later than the expiration of the term of such option.
(5) Disability: If an optionee's employment or consulting relationship is
terminated due to a disability, the options may be exercised at any time within
twelve months from the date of such termination, but only to the extent that the
options were exercisable on the date of termination of employment and in no
event later than the expiration of the term of the option.
(6) Termination of options: The administrator determines the term of
options granted under the 1991 Stock Plan, provided that options may not expire
later than ten years from the date of grant. However, incentive stock options
granted to a person who at the time the option is granted owns more than 10% of
the voting power of all classes of stock of Cardiac Pathways, one of its
subsidiaries or its parent, may not have a term of more than five years.
(7) Nontransferability of options: An option is nontransferable by the
optionee, other than by will or the laws of descent and distribution and is
exercisable, during the lifetime of the optionee, only by the optionee.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event any change such as a stock split or dividend is made in
Cardiac Pathways' capitalization which results in an increase or decrease in the
number of outstanding shares of Cardiac Pathways common stock without receipt of
consideration by Cardiac Pathways, an appropriate adjustment will be made in the
option price and in the number of shares subject to each option. In the event of
the proposed dissolution or liquidation of Cardiac Pathways, the administrator
shall notify the optionee at least fifteen days prior to such proposed action.
To the extent it has not been previously exercised, an option will terminate
immediately prior to the consummation of such proposed action. In the event of a
merger of Cardiac Pathways with or into another corporation or sale of
substantially all of the assets of Cardiac Pathways, all outstanding options may
be assumed or an equivalent option substituted by the successor corporation.
PERFORMANCE-BASED COMPENSATION LIMITATIONS
In any fiscal year of Cardiac Pathways, the administrator may not grant any
employee options to purchase more than 2,000,000 shares of Cardiac Pathways
common stock. The foregoing limitation, which will be adjusted proportionately
in connection with any change in Cardiac Pathways' capitalization (including the
proposed reverse stock split described above under Proposal One), is intended to
satisfy the requirements applicable to options intended to qualify as
performance-based compensation within the meaning of section 162(m) of the
Internal Revenue Code of 1986.
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<PAGE> 35
AMENDMENT AND TERMINATION
Our board of directors may amend the 1991 Stock Plan at any time or from
time to time or may terminate it without approval of our stockholders; provided,
however, that stockholder approval is required for any amendment which increases
the number of shares which may be issued under the 1991 Stock Plan or as
necessary to remain in compliance with Rule 16b-3 of the Securities Exchange Act
or Section 422 of the Internal Revenue Code of 1986. However, no action by our
board of directors or stockholders may alter or impair any option previously
granted under the 1991 Stock Plan without the consent of the optionee. In any
event, the 1991 Stock Plan will terminate in June 2001.
TAX INFORMATION
Options granted under the 1991 Stock Plan may be either incentive stock
options or nonstatutory options.
A person who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of (1)
the fair market value of the shares at the date of the option exercise or (2)
the sale price of the shares. A different rule for measuring ordinary income
upon such a premature disposition may apply if the optionee is also an officer,
director or 10% stockholder of Cardiac Pathways. Generally, Cardiac Pathways
will be entitled to a deduction in the same amount as the ordinary income
recognized by the optionee. Any gain or loss recognized on such a premature
disposition of the shares in excess of the amount treated as ordinary income
will be characterized as long-term or short-term capital gain or loss, depending
on the holding period.
All other options that do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he or she is granted a nonstatutory option. However, upon its
exercise, the optionee will recognize ordinary income generally measured as the
excess of the then fair market value of the shares purchased over the purchase
price. Any taxable income recognized in connection with an option exercise by an
optionee who is also an employee of Cardiac Pathways will be subject to tax
withholding by Cardiac Pathways. Upon resale of such shares by the optionee, any
difference between the sales price and the optionee's purchase price to the
extent not recognized as taxable income as described above will be treated as
long-term or short-term capital gain or loss depending on the holding period.
Generally, Cardiac Pathways will be entitled to a tax deduction in the same
amount as the ordinary income recognized by the optionee with respect to shares
acquired upon exercise of a nonstatutory option.
This discussion is only a summary of the effect of federal income taxation
upon the optionee and Cardiac Pathways with respect to the grant and exercise of
options under the 1991 Stock Plan. This discussion does not purport to be
complete, and does not discuss the tax consequences of the optionee's death or
the income tax laws of any municipality, state or foreign country in which an
optionee may reside.
PARTICIPATION IN THE 1991 STOCK PLAN
The grant of options under the 1991 Stock Plan to executive officers,
including the officers named in the Summary Compensation Table in the Cardiac
Pathways Proxy Statement filed with the Securities and Exchange Commission on
October 28, 1998 is subject to the discretion of the administrator. Except as
describe in the next paragraph, as of the date of this document, there has been
no determination by the administrator with respect to future awards under the
1991 Stock Plan. Accordingly, future awards are not determinable. The table of
option grants under "Executive Compensation -- Option Grants in 1998" in the
Cardiac Pathways Proxy Statement filed with the Securities and Exchange
Commission on October 28, 1998 in connection with its 1998 Annual Meeting of
stockholders provides information with respect to the grant of options to the
Cardiac Pathways Named Executive Officers during fiscal 1998. Information
regarding options granted to directors of Cardiac Pathways pursuant to the 1991
Stock Plan during fiscal 1998 is set forth under
34
<PAGE> 36
the heading "Executive Compensation -- Director Compensation." During fiscal
1998, all current executive officers of Cardiac Pathways as a group and all
other individuals as a group received options to purchase 248,317 shares and
188,870 shares, respectively, pursuant to the 1991 Stock Plan. As of the Cardiac
Pathways record date, approximately 113 employees were eligible to participate
in the 1991 Stock Plan.
In connection with his acceptance of employment with Cardiac Pathways,
Thomas Prescott, our new chief executive officer was granted an option to
purchase 1,236,532 shares of common stock. Cardiac Pathways has granted Mr.
Prescott an option to purchase such shares of common stock subject to
stockholder approval of these amendments to the 1991 Stock Option Plan. See
"Proposal Three -- Sale of Series B Convertible Preferred Stock -- Interests of
Certain Persons."
THE CARDIAC PATHWAYS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR"
THE APPROVAL OF THE AMENDMENT OF THE 1991 STOCK PLAN.
35
<PAGE> 37
EXECUTIVE COMPENSATION AND OTHER MATTERS
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth certain information
regarding the compensation of the chief executive officer of Cardiac Pathways
and the other four most highly compensated executive officers of Cardiac
Pathways for services rendered in all capacities to Cardiac Pathways for the
fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION OTHER ANNUAL SECURITIES
------------------- COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS ($) OPTIONS(1)
--------------------------- ----------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
William N. Starling............. 1998 $233,154 $ -- $ -- 30,000
President, Chief Executive
Officer 1997 275,000 -- -- --
and Director 1996 250,159 -- -- --
Debra S. Echt, M.D.............. 1998 212,394 -- 949(2) 15,000
Vice President and Chief
Medical 1997 165,257 -- 79,203(3) 100,000
Officer 1996 -- -- -- --
David W. Gryska(5).............. 1998 163,719 -- 36,812(4) 12,000
Vice President, Finance and
Chief 1997 155,000 -- -- --
Financial Officer 1996 133,750 -- -- 16,667
Mark L. Pomeranz(6)............. 1998 163,000 20,000 3,351(7) 15,000
Executive Vice President, 1997 151,865 -- 17,105(4) 55,000
Research and Development 1996 120,812 10,600 -- 67
Earle L. Canty(8)............... 1998 160,000 -- 5,294(9) --
Vice President, Regulatory
Affairs 1997 152,500 -- 57,392(10) 7,000
and Quality Assurance 1996 37,500 -- -- 66,667
</TABLE>
- ---------------
(1) These shares are subject to exercise under stock options granted under
Cardiac Pathways' 1991 Stock Plan. See "-- Option Grants in Last Fiscal
Year."
(2) Represents forgiveness of accrued interest on a loan and payment for
certain federal and state income tax obligations in connection with such
forgiveness.
(3) Consists of moving and relocation expenses and temporary housing allowance.
(4) Represents forgiveness of loan and related accrued interest, and payment
for certain federal and state income tax obligations in connection
therewith.
(5) Mr. Gryska resigned as an officer of Cardiac Pathways in December 1998.
(6) Mr. Pomeranz resigned as an officer of Cardiac Pathways in July 1998.
(7) Represents payment for certain federal and state income tax obligations in
connection with a loan which was forgiven in fiscal 1997.
(8) Mr. Canty resigned as an officer Cardiac Pathways in August 1998 but
continues to provide consulting services to Cardiac Pathways on a part-time
basis.
(9) Represents payments in connection with certain taxable medical benefits.
(10) Represents payment for certain federal and state income tax obligations in
connection with stock option exercise.
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<PAGE> 38
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended June 30,
1998. All such options were awarded under Cardiac Pathways' 1991 Stock Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED(#)(2) FISCAL 1998(%) SHARE($)(3)(4) DATE 5%($) 10%($)
---- ------------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William N. Starling... 30,000 6.5% $8.50 10/14/2007 $160,368 $406,404
Debra S. Echt, M.D.... 15,000 3.3 8.50 10/14/2007 80,184 203,202
David W. Gryska(5).... 12,000 2.6 8.50 10/14/2007 64,147 162,562
Earle L. Canty(6)..... -- -- -- -- -- --
Mark L. Pomeranz(7)... 15,000 3.3 6.75 01/28/2008 63,676 161,366
</TABLE>
- ---------------
(1) Potential realizable value is based on the assumption that the common stock
of Cardiac Pathways appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the 10 years option
term. These numbers are calculated based on the requirements promulgated by
the Securities and Exchange Commission and do not reflect Cardiac Pathways'
estimate of future stock price growth.
(2) Options become exercisable as to 1/48 of the option shares at the end of
each month following the date of grant, with full vesting occurring on the
fourth anniversary of the date of grant. end of every month thereafter, with
full vesting occurring on the fourth anniversary of the date of grant.
(3) Options were granted at an exercise price equal to the fair market value of
Cardiac Pathways common stock, as determined by reference to the closing
price reported on the Nasdaq Stock Market on the date of grant.
(4) Exercise may be paid in cash, check, promissory note, by delivery of
already-owned shares of Cardiac Pathways common stock subject to certain
conditions, delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to Cardiac Pathways
the amount of sale or loan proceeds required to pay the exercise price, a
reduction in the among of any Cardiac Pathways liability to an optionee, or
any combination of the foregoing methods of payment or such other
consideration or method of payment to the extent permitted under applicable
law.
(5) Mr. Gryska resigned from Cardiac Pathways in December 1998.
(6) Mr. Canty resigned as an officer Cardiac Pathways in August 1998 but
continues to provide consulting services to Cardiac Pathways on a part-time
basis.
(7) Mr. Pomeranz resigned as an officer of Cardiac Pathways in July 1998.
37
<PAGE> 39
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information regarding the exercise
of stock options by the Named Executive Officers during the fiscal year ended
June 30, 1998 and the value of stock options held as of June 30, 1998 by the
Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES JUNE 30, 1998(#) JUNE 30, 1998($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED(#)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William N. Starling...... 128,466 $841,102 113,362 35,972 $613,672 $72,579
Debra S. Echt, M.D....... -- -- 46,563 68,437 38,500 49,500
David W. Gryska(3)....... 1,200 6,450 65,829 15,972 392,731 33,760
Mark L. Pomeranz(4)...... -- -- 64,258 46,147 246,856 21,503
Earle L. Canty(5)........ -- -- 2,042 4,958 -- --
</TABLE>
- ---------------
(1) Fair market value of Cardiac Pathways common stock at fiscal year end ($7.13
based on the last reported sale price of Cardiac Pathways common stock on
June 30, 1998) minus the exercise price.
(2) Fair market value of Cardiac Pathways common stock on the date of exercise
minus the exercise price.
(3) Mr. Gryska resigned from Cardiac Pathways in December 1998.
(4) Mr. Pomeranz resigned as an officer of Cardiac Pathways in July 1998.
(5) Mr. Canty resigned as an officer Cardiac Pathways in August 1998 but
continues to provide consulting services to Cardiac Pathways on a part-time
basis.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
Ms. Echt and Messrs. Starling, Gryska, Canty, Hunt and Pomeranz have
entered into employment agreements with Cardiac Pathways pursuant to which
Cardiac Pathways may terminate the employee's employment at any time with or
without cause; provided, however, that if employment is terminated with cause,
Cardiac Pathways will pay the employee a severance payment in an amount equal to
one month of the employee's then-current monthly base salary and if the
employee's employment is terminated without cause, Cardiac Pathways will pay the
employee a severance payment of an amount equal to six months of the employee's
then-current monthly base salary. The agreements, other than Mr. Starling's
agreement, also provide that all outstanding stock options held by the employees
become immediately exercisable in the event that the employee's employment is
terminated without cause or is constructively terminated in connection with a
merger, reorganization or sale of substantially all of the assets of Cardiac
Pathways in which stockholders of Cardiac Pathways immediately prior to the
transaction possess less than fifty percent (50%) of the voting power of the
surviving entity (or its parent) immediately after the transaction.
38
<PAGE> 40
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock of Cardiac Pathways as of June 4, 1999 as to (i) each
person or entity who is known by Cardiac Pathways to own beneficially more than
5% of the outstanding shares of common stock, (ii) each director of Cardiac
Pathways, (iii) each of the Named Executive Officers (as defined above under
"Executive Compensation and Other Matters -- Summary Compensation Table") and
(iv) all directors and executive officers of Cardiac Pathways as a group. Except
as otherwise noted, the stockholders named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to applicable community property laws.
<TABLE>
<CAPTION>
COMMON STOCK APPROXIMATE COMMON STOCK APPROXIMATE
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
OWNED BEFORE OWNED BEFORE OWNED AFTER OWNED AFTER
BENEFICIAL OWNER FINANCING FINANCING(1) FINANCING FINANCING(2)
---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
State of Wisconsin Investment Board(3)...... 2,415,000 22.6% 7,815,000 18.8%
P.O. Box 7842
Madison, WI 53707
BankAmerica Ventures(4)..................... 1,540,000 13.3 10,140,000 24.3
950 Tower Lane, Suite 700
Foster City, CA 94404
Entities affiliated with Morgan Stanley
Venture Partners(5)....................... 1,100,000 9.9 10,100,000 24.3
1221 Avenue of the Americas
New York, NY 10020
Nicholas Fund NV(6)......................... 834,000 8.3 834,000 2.0
P.O. Box 837
Curacao
Netherlands Antilles
Entities affiliated with Institutional
Venture Partners(7)....................... 831,539 8.3 831,539 2.0
3000 Sand Hill Road, 2-290
Menlo Park, CA 94025
Capital Guardian Trust Company(8)........... 686,100 6.8 686,100 1.7
111000 Santa Monica Boulevard
Suite 1500
Los Angeles, CA 90025
Arrow International, Inc.(9)................ 614,334 6.1 614,334 1.5
P.O. Box 12888
3000 Bernville Road
Reading, PA 19612
Entities affiliated with Van Wagoner........ -- -- 5,000,000 12.0
Capital Management, Inc.
One Bush Street, Suite 1150
San Francisco, CA 94104
William N. Starling(10)..................... 436,520 4.3 436,520 1.0
Thomas J. Fogarty, M.D.(11)................. 240,017 2.4 740,017 1.8
Joseph P. Ilvento, M.D.(12)................. 36,185 * 36,185 *
Michael L. Eagle(13)........................ 18,479 * 18,479 *
Glendon E. French........................... 4,721 * 4,721 *
Louis G. Lange, M.D......................... 4,450 * 4,450 *
Thomas M. Prescott.......................... -- * -- *
G. Michael Latta(14)........................ 24,228 * 24,228 *
David W. Gryska............................. 33,264 * 33,264 *
Mark L. Pomeranz............................ 78,003 * 78,003 *
Earle L. Canty.............................. 66,667 * 66,667 *
Richard E. Riley(15)........................ 121,691 1.2 121,691 *
Debra S. Echt(16)........................... 86,811 * 86,811 *
All directors and current executive officers
as a group (12 persons)(17)............... 1,028,793 9.8% 1,528,793 3.6%
</TABLE>
- ---------------
* Less than 1%
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<PAGE> 41
(1) Applicable percentage ownership is based on 10,038,578 shares of common
stock outstanding as of June 4, 1999 and 41,538,578 shares of common stock
(assuming the sale of 31,500,000 shares on an as-converted basis)
outstanding after giving effect to the financing, together with applicable
options or warrants for such stockholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, based on factors including voting and investment power with
respect to shares subject to the applicable community property laws. Shares
of common stock subject to options or warrants currently exercisable or
exercisable within 60 days after June 4, 1999 are deemed outstanding for
computing the percentage ownership of the person holding such options, but
are not deemed outstanding for computing the percentage of any other
person.
(2) Applicable percentage ownership is based on the beneficial ownership as
defined in (1) above together with the shares of common stock issuable on
an as-converted basis in connection with the issuance of 31,500 shares of
series B convertible preferred stock.
(3) The State of Wisconsin Investment Board (the "SWIB"). The SWIB is a
government agency which manages public pension funds and has sole
dispositive and voting power over 1,755,000 shares of Cardiac Pathways'
common stock. Also includes 600,000 shares of common stock issuable upon
conversion of series B preferred stock which is issuable upon conversion of
a $600,000 bridge loan (assuming approval of the issuance of the series B
preferred stock by the Cardiac Pathways stockholders). Also includes the
exercise of warrants to purchase 60 shares of Series B preferred and the
conversion of such shares into 60,000 shares of common stock.
(4) Includes 1,400,000 shares of common stock issuable upon conversion of
series B convertible preferred stock (assuming approval of the issuance of
the series B preferred by the Cardiac Pathways stockholders). Such series B
convertible preferred stock is issuable upon the conversion of a $1,400,000
bridge loan. Also includes warrants convertible into 140,000 shares of
common stock.
(5) Includes 1,000,000 shares of common stock issuable upon conversion of
series B convertible preferred stock (assuming approval of the issuance of
the series B preferred by the Cardiac Pathways stockholders). Such series B
convertible preferred stock is issuable upon the conversion of a $1,000,000
bridge loan. Also includes warrants convertible into 100,000 shares of
common stock.
(6) Reflects ownership as reported on Schedule 13G dated March 26, 1999 with
the Commission by Nicholas Fund NV. Nicholas Fund NV and Atlantic Capital
Management Limited, its investment advisor, have shared voting and
dispositive power over 834,000 shares of Cardiac Pathways' common stock.
(7) Reflects ownership as reported on Schedule 13G dated June 23, 1997 filed
with the Commission by Institutional Venture Partners V ("IVP V"), a
venture capital fund; Institutional Venture Management V ("IVPM V"); the
general partner of IVP V, Institutional Venture Partners VII ("IVP VII"), a
venture capital fund; Institutional Venture Management VII ("IVPM VII"),
the general partner of IVP VII; IVP Founders Fund I ("Founders"), a venture
capital fund; Institutional Venture Management VI ("IVPM VI"); Founders'
general partner, Samuel D. Colella; Reid W. Dennis; Mary Jane Elmore;
Norman A. Fogelsong; Ruthann Quindlen; L. James Strand; T. Peter Thomas and
Geoffrey Y. Yang. Mr. Strand and Ms. Quindlen are general partners of IVPM
VII. Messrs. Colella, Dennis, Fogelsong, Thomas and Yang and Ms. Elmore are
general partners of IVPM VII and IVPM V. Mr. Colella is also a general
partner of IVPM VI. IVP VII and IVPM VII have shared voting and dispositive
power over 400,000 shares of Cardiac Pathways' common stock. Founders also
has shared voting and dispositive power over 400,000 shares of Cardiac
Pathways' common stock. IVP V and IVPM V have shared voting and dispositive
power over 425,539 shares of Cardiac Pathways' common stock. Mr. Collella
has shared voting and dispositive power over 827,539 shares of Cardiac
Pathways' common stock. Each of Messrs. Dennis, Fogelsong, Thomas, and Mr.
Yang and Ms. Elmore has shared voting and dispositive power over 825,539
shares of Cardiac Pathways' common stock. Each of Ms. Quindlen and Mr.
Strand has shared voting and dispositive power over 400,000 shares of
Cardiac Pathways' common stock.
(8) Reflects ownership as reported on Schedule 13F dated March 13, 1999 filed
with the Commission by Capital Guardian Trust Co. ("CGT"). CGT is a bank
which serves as the investment manager of
40
<PAGE> 42
various institutional accounts. CGT has sole dispositive power over all of
the shares, sole voting power over 662,000 of the shares and disclaims
beneficial ownership over all of the shares.
(9) Reflects ownership as reported on Schedule 13G dated February 2, 1997 filed
with the Commission by Arrow International, Inc. ("Arrow"). Arrow is a
medical device manufacturer with whom Cardiac Pathways has a strategic
relationship. Arrow has sole dispositive and voting power over 614,334
shares of Cardiac Pathways' common stock.
(10) Consists of 293,319 shares of common stock held by the Starling Family
Trust, 8,867 shares of common stock held by the Starling Irrevocable Trust
and 134,334 shares of common stock which may be acquired upon exercise of
stock options exercisable within 60 days after June 4, 1999. Mr. Starling
holds voting and dispositive control over all of such shares.
(11) Includes 238,445 shares of common stock and 667 shares of common stock
which may be acquired upon exercise of a warrant exercisable within 60 days
after June 4, 1999 held by the Fogarty Family Revocable Trust, over which
Dr. Fogarty holds voting and dispositive control. Also includes 905 shares
of common stock which may be acquired upon exercise of stock options
exercisable within 60 days after June 4, 1999.
(12) Includes 8,682 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after June 4, 1999.
(13) Includes 18,479 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after June 4, 1999.
(14) Includes 18,929 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after June 4, 1999.
(15) Includes 80,412 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after June 4, 1999.
(16) Includes 85,388 shares of common stock which may be acquired upon exercise
of stock options exercisable within 60 days after June 4, 1999.
(17) Includes 408,054 and 667 shares of common stock which may be acquired upon
exercise of stock options and warrants, respectively, exercisable within 60
days after June 4, 1999.
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<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of the reverse stock split and the financing, Cardiac
Pathways will be authorized to issue 30,000,000 shares of common stock, $.001
par value, and 5,000,000 shares of preferred stock, $.001 par value. Of the
preferred stock, 4,920,000 shares are undesignated, 30,000 shares are designated
series A participating preferred stock and 50,000 shares are designated series B
convertible preferred stock.
The following summary of certain provisions of Cardiac Pathways capital
stock describes all material provisions of, but does not purport to be complete
and is subject to, and qualified in its entirety by, the certificate of
incorporation, as amended, and the bylaws of Cardiac Pathways that are included
as appendices to this proxy statement and by the provisions of applicable law.
The certificate of incorporation and bylaws contain certain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and which may have the effect of delaying,
deferring, or preventing a future takeover or change in control of Cardiac
Pathways unless such takeover or change in control is approved by the board of
directors. All amounts are pre-reverse stock split.
COMMON STOCK
As of June 4, 1999, there were 10,038,578 shares of common stock
outstanding held of record by approximately 175 stockholders.
The issued and outstanding shares of common stock are, and the shares of
common stock issuable upon conversion of the series B convertible preferred
stock upon payment for the series B convertible preferred stock upon payment
therefor, validly issued, fully paid and nonassessable. Subject to the prior
rights of the holders of any preferred stock, the holders of outstanding shares
of common stock are entitled to receive dividends out of assets legally
available therefor at such times and in such amounts as the board of directors
may from time to time determine. The shares of common stock are neither
redeemable nor convertible and the holders thereof have no preemptive or
subscription rights to purchase any securities of Cardiac Pathways. Upon
liquidation, dissolution or winding up of Cardiac Pathways, the holders of
common stock are entitled to receive pro rata the assets of Cardiac Pathways
which are legally available for distribution, after payment of all debts and
other liabilities and subject to the prior rights of any holders of any
preferred stock then outstanding. Each outstanding share of common stock is
entitled to one vote on all matters submitted to a vote of stockholders.
WARRANTS
As of June 4, 1999, there were outstanding warrants to purchase an
aggregate of 143,141 shares of common stock at a weighted average exercise price
of $11.52 per share. Of such warrants, the warrants to purchase 107,971 shares
of common stock expire in June 2001 and the warrants to purchase 35,170 shares
of common stock expire in July 2009. As of June 4, 1999, there were also
outstanding warrants to purchase 300 shares of series B convertible preferred
stock at an exercise price of $1,000 per share that are convertible into 300,000
shares of common stock.
PREFERRED STOCK
The board of directors of Cardiac Pathways is authorized to issue 5,000,000
shares of undesignated preferred stock. Our board of directors has the authority
to issue the preferred stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
a series or the designation of such series, without any further vote or action
by Cardiac Pathways stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of Cardiac Pathways without further action by the
stockholders and may adversely affect the market price of the common stock, and
the voting and other rights of the holders of common stock. Effective upon the
closing of the financing, Cardiac Pathways will not be permitted to issue
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<PAGE> 44
any additional shares of preferred stock without the consent of two-thirds of
the holders of the series B convertible preferred stock.
SERIES A PARTICIPATING PREFERRED STOCK. On April 22, 1997, pursuant to a
preferred Shares Rights Agreement (the "Rights Agreement") between Cardiac
Pathways and Norwest Bank Minnesota, N.A., as Rights Agent (the "Rights Agent"),
Cardiac Pathways' board of directors declared a dividend of one right (a
"Right") to purchase one one-thousandth of a share of Cardiac Pathways' series A
participating preferred stock for each outstanding share of common stock of
Cardiac Pathways. The dividend was paid on May 23, 1997 to stockholders of
record as of the close of business on April 30, 1997. Each Right entitles the
registered holder to purchase from Cardiac Pathways one one-thousandth of a
share of series A preferred at an exercise price of $125.00 (the "Purchase
Price"), subject to adjustment.
RIGHTS EVIDENCED BY COMMON SHARE CERTIFICATES. The Rights are not be
exercisable until the Distribution Date (defined below). Certificates for the
Rights ("Rights certificates") were not sent to stockholders and the Rights will
attach to and trade only together with the common stock. Accordingly, common
share certificates outstanding on the record date evidence the Rights related
thereto, and common share certificates issued after the record date contain a
notation incorporating the Rights Agreement by reference. Until the Distribution
Date (or earlier redemption or expiration of the Rights), the surrender or
transfer of any certificates for common stock, outstanding as of the record date
also constitute the transfer of the Rights associated with the common stock
represented by such certificate.
DISTRIBUTION DATE. The Rights will separate from the common stock, Rights
certificates will be issued and the Rights will become exercisable upon the
earlier of:
- 10 days (or such later date as may be determined by a majority of the
board of directors) following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15%
or more of the outstanding common stock; or
- 10 business days (or such later date as may be determined by a majority
of the board of directors) following the commencement of, or announcement
of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a
person or group of 15% or more of the outstanding common stock.
The earlier of such dates is referred to as the "Distribution Date." The sale of
the series B convertible preferred stock in connection with the financing and
the issuance of shares of common stock upon the conversion of the series B
convertible preferred stock will not constitute an action that would trigger a
Distribution Date. In addition, the purchasers of the series B convertible
preferred stock will not be acquiring persons with respect to the Rights
Agreement.
ISSUANCE OF RIGHTS CERTIFICATES; EXPIRATION OF RIGHTS. As soon as
practicable following the Distribution Date, separate Rights certificates will
be mailed to holders of record of the common stock as of the close of business
on the Distribution Date and such separate Rights certificates alone will
evidence the Rights from and after the Distribution Date. The Rights will expire
on the earliest of (i) April 21, 2007 (the "Final Expiration Date") or (ii)
redemption or exchange of the Rights as described below.
INITIAL EXERCISE OF THE RIGHTS. Following the Distribution Date, and until
one of the further events described below, holders of the Rights will be
entitled to receive, upon the exercise and payment of the Purchase Price, one
one-thousandth of a share of the series A participating preferred stock.
RIGHT TO BUY CARDIAC PATHWAYS COMMON STOCK. Unless the Rights are earlier
redeemed, in the event that an Acquiring Person becomes the beneficial owner of
15% or more of Cardiac Pathways' common stock then outstanding, then proper
provision will be made so that each holder of a Right which has not theretofore
been exercised (other than Rights beneficially owned by the Acquiring Person or
any affiliate of the Acquiring Person, which will thereafter be void) will
thereafter have the right to receive, upon exercise, common stock having a value
equal to two times the Purchase Price. In the event that Cardiac Pathways does
not have sufficient common stock available for all Rights to be exercised, or
the board of directors decides that such
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<PAGE> 45
action is necessary and not contrary to the interests of Rights holders, Cardiac
Pathways may instead substitute cash, assets or other securities for the common
stock for which the Rights would have been exercisable.
RIGHT TO BUY ACQUIRING COMPANY STOCK. Similarly, unless the Rights are
earlier redeemed, in the event that, after an Acquiring Person becomes the
beneficial owner of 15% or more of Cardiac Pathways' common stock then
outstanding, (i) Cardiac Pathways is acquired in a merger or other business
combination transaction, or (ii) 50% or more of Cardiac Pathways' consolidated
assets or earning power are sold (other than in transactions in the ordinary
course of business), proper provision must be made so that each holder of a
Right which has not theretofore been exercised (other than Rights beneficially
owned by the Acquiring Person or any affiliate of the Acquiring Person, which
will thereafter be void) will thereafter have the right to receive, upon
exercise, shares of common stock of the acquiring company having a value equal
to two times the Purchase Price.
EXCHANGE PROVISION. At any time after the acquisition by an Acquiring
Person of beneficial ownership of 15% or more of Cardiac Pathways' outstanding
common stock and prior to the acquisition by any person or entity of beneficial
ownership of 50% or more of Cardiac Pathways' outstanding common stock, the
board of directors of Cardiac Pathways may exchange the Rights (other than
Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio
of one common Share per Right.
REDEMPTION. At any time on or prior to the close of business on the earlier
of (i) the 10th day following the acquisition by an Acquiring Person of
beneficial ownership of 15% or more of Cardiac Pathways' common stock or such
later date as may be determined by a majority of the board of directors and
publicly announced by Cardiac Pathways, or (ii) the Final Expiration Date of the
Rights, Cardiac Pathways may redeem the Rights in whole, but not in part, at a
price of $0.01 per Right.
ADJUSTMENTS TO PREVENT DILUTION. The Purchase Price payable, the number of
Rights, and the number of series A preferred or common stock or other securities
or property issuable upon exercise of the Rights are subject to adjustment from
time to time in connection with the dilutive issuances by Cardiac Pathways as
set forth in the Rights Agreement. With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price.
CASH PAID INSTEAD OF ISSUING FRACTIONAL SHARES. No fractional portion less
than integral multiples of one common Share or one one-thousandth of a share of
series A participating preferred stock will be issued upon exercise of a Right
and in lieu thereof, an adjustment in cash will be made based on the market
price of the security to be so issued on the last trading date prior to the date
of exercise.
NO STOCKHOLDERS' RIGHTS PRIOR TO EXERCISE. Until a Right is exercised, the
holder thereof, as such, will have no rights as a stockholder of Cardiac
Pathways (other than any rights resulting from such holder's ownership of common
stock), including, without limitation, the right to vote or to receive
dividends.
AMENDMENT OF RIGHTS AGREEMENT. The provisions of the Rights Agreement may
be supplemented or amended by the board of directors in any manner prior to the
close of business on the date the Rights separate from the common stock and
become exercisable. After such date, the provisions of the Rights Agreement may
be amended by the board in order to cure any ambiguity, defect or inconsistency,
to make changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen any
time period under the Rights Agreement; provided, however, that no amendment to
adjust the time period governing redemption shall be made at such time as the
Rights are not redeemable.
RIGHTS AND PREFERENCES OF THE SERIES A PARTICIPATING PREFERRED
STOCK. Series A participating preferred stock purchasable upon exercise of the
Rights will not be redeemable. Each share of series A participating preferred
stock will be entitled to an aggregate dividend of 1,000 times the dividend
declared per common share. In the event of liquidation, the holders of the
series A participating preferred stock will be entitled to 1,000 times the
amount paid per common Share plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment. Each share of series A participating preferred stock will have
1,000 votes, voting together with the common stock. These rights are protected
by customary anti-dilution provisions.
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<PAGE> 46
Because of the nature of the dividend, liquidation and voting rights of the
shares of series A participating preferred stock, the value of the one
one-thousandth interest in a share of series A participating preferred stock
purchasable upon exercise of each Right should approximate the value of one
common Share.
CERTAIN ANTI-TAKEOVER EFFECTS. The Rights approved by the board are
designed to protect and maximize the value of the outstanding equity interests
in Cardiac Pathways in the event of an unsolicited attempt by an acquirer to
take over Cardiac Pathways, in a manner or on terms not approved by the board of
directors. Takeover attempts frequently include coercive tactics to deprive
Cardiac Pathways' board of directors and its stockholders of any real
opportunity to determine the destiny of Cardiac Pathways. The Rights have been
declared by the board in order to deter such 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. These tactics unfairly pressure stockholders, squeeze
them out of their investment without giving them any real choice and deprive
them of the full value of their shares.
The Rights are not intended to prevent a takeover of Cardiac Pathways and
will not do so. The Rights may be redeemed by Cardiac Pathways at $0.01 per
Right within ten days (or such later date as may be determined by a majority of
the continuing directors) after the accumulation of 15% or more of Cardiac
Pathways' shares by a single acquirer or group. Accordingly, the Rights should
not interfere with any merger or business combination approved by the board of
directors.
Issuance of the Rights does not in any way weaken the financial strength of
Cardiac Pathways or interfere with its business plans. The issuance of the
Rights themselves has no dilutive effect, will not affect reported earnings per
share, should not be taxable to Cardiac Pathways or to its stockholders, and
will not change the way in which Cardiac Pathways' shares are presently traded.
Cardiac Pathways' board of directors believes that the Rights represent a sound
and reasonable means of addressing the complex issues of corporate policy
created by the current takeover environment.
However, the Rights may have the effect of rendering more difficult or
discouraging an acquisition of Cardiac Pathways deemed undesirable by the board
of directors. The Rights may cause substantial dilution to a person or group
that attempts to acquire Cardiac Pathways on terms or in a manner not approved
by Cardiac Pathways' board of directors, except pursuant to an offer conditioned
upon the negation, purchase or redemption of the Rights.
SERIES B CONVERTIBLE PREFERRED STOCK
As of June 4, 1999, no shares of series B convertible preferred stock were
issued or outstanding. At the effective time of the financing, Cardiac Pathways
will issue up to 40,000 shares of series B convertible preferred stock to
investors participating in the financing in a private placement.
The shares of series B convertible preferred stock are entitled to
cumulative dividends of 11% of the initial series B convertible preferred stock
purchase price, $1,000, per year, when, as and if declared by the board of
directors, prior to and in preference over any dividends paid to holders of the
series A participating preferred stock or common stock. After payment of the
cumulative dividend to the holders of the series B convertible preferred stock,
the holders of the series B convertible preferred stock are entitled to
participate on an as-converted basis with the holders of the common stock in any
dividends paid on the common stock.
The shares of series B convertible preferred stock will have a per share
right to a distribution of $1,000 plus all accrued and unpaid dividends on such
shares of series B convertible preferred stock prior to any distributions or
payments to the holders of the series A participating preferred stock or the
common stock. The right to a distribution would occur upon any liquidation,
dissolution or winding up of Cardiac Pathways. A liquidation also includes:
- the acquisition of Cardiac Pathways by another entity by means of any
transaction or series of related transaction, including, without
limitation, any reorganization, merger or consolidation, that results in
the transfer of 50% or more of the outstanding voting power of Cardiac
Pathways;
- a sale of all or substantially all of the assets of Cardiac Pathways; or
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<PAGE> 47
- a sale or any transaction or series of transactions that result in a sale
or transfer of 50% or more of the voting power of Cardiac Pathways.
Each share of the series B convertible preferred stock is convertible at
the option of the holder into 1,000 shares of Cardiac Pathways common stock,
subject to adjustment. All outstanding shares of series B convertible preferred
stock are subject to conversion upon a vote of a majority of such outstanding
shares in favor of conversion. In the event that Cardiac Pathways issues equity
securities at a per share price lower than the Conversion Price in effect of the
series B convertible preferred stock, such Conversion Price will be adjusted.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The certificate of incorporation provides for the board to be divided into
three classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the board will be elected each year. The provision
for a classified board could prevent a party who acquires control of a majority
of the outstanding voting stock from obtaining control of the board until the
second annual stockholders meeting following the date the acquirer obtains the
controlling stock interest. The classified board provision could have the effect
of discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Cardiac Pathways and could increase the
likelihood that incumbent directors will retain their positions. The certificate
of incorporation provides that directors may be removed (i) with cause by the
affirmative vote of the holders of at least a majority of the voting power of
all of the outstanding shares of voting stock or (ii) without cause by the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
of the then-outstanding shares of the voting stock.
The certificate of incorporation provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. The certificate of incorporation and
the bylaws provide that, except as otherwise required by law, special meetings
of the stockholders can only be called pursuant to a resolution adopted by a
majority of the board of directors, by the chief executive officer of Cardiac
Pathways, or by stockholders holding shares in the aggregate entitled to cast
not less than 10% of the votes at that meeting.
The bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of Cardiac Pathways,
including proposed nominations of persons for election to the board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given to Cardiac Pathways' Secretary timely written notice, in proper form,
of the stockholder's intention to bring that business before the meeting.
Although the bylaws do not give the board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at a special or annual meeting, the bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper procedures
are not followed or may discourage or defer a potential acquirer from conducting
a solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of Cardiac Pathways.
The certificate of incorporation provides that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
its provisions. This requirement of a super-majority vote to approve amendments
to the certificate of incorporation could enable a minority of Cardiac Pathways'
stockholders to exercise veto power over any such amendments.
REGISTRATION RIGHTS
The holders of the series B convertible preferred stock and their permitted
transferees (the "Holders") will be entitled to certain rights with respect to
the registration of such shares ("Registrable Securities").
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<PAGE> 48
Under the terms of an agreement between Cardiac Pathways and the Holders,
the holders of at least 45% of the Registrable Securities may require, on two
occasions after May 31, 2000, that Cardiac Pathways use its best efforts to
register the Registrable Securities for public resale. In addition, if Cardiac
Pathways proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, the Holders are entitled to notice of such
registration and are entitled to include shares of such common stock therein.
The holders of 45% of the Registrable Securities may also require Cardiac
Pathways to register all or a portion of their Registrable Securities on Form
S-3 under the Securities Act when use of such form becomes available to Cardiac
Pathways. All such registration rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares to be included in such registration. If such holders, by
exercising their demand registration rights, cause a large number of securities
to be registered and sold in the public market, such sales could have an adverse
effect on the market price for Cardiac Pathways' common stock. If Cardiac
Pathways were to initiate a registration and include shares held by such holders
pursuant to the exercise of their piggyback registration rights, such sales may
have an adverse effect on Cardiac Pathways' ability to raise capital.
SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with the
consolidated financial statements and related notes located at pages F-1 through
F-33.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
------------------- ----------------------------------------------------
1999 1998 1998 1997 1996(2) 1995 1994
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales................ $ 3,427 $ 1,659 $ 2,420 $ 2,409 $ 1,684 $ 115 $ --
Operating expenses:
Manufacturing start-up
and cost of goods
sold................ 3,112 2,063 2,828 2,508 2,408 2,520 1,432
Research and
development......... 9,783 10,688 14,353 11,756 6,819 5,666 5,103
Selling, general and
administrative...... 4,669 3,000 4,092 3,147 1,981 1,745 1,152
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses..... 17,564 15,751 21,273 17,411 11,208 9,931 7,687
-------- -------- -------- -------- -------- -------- --------
Loss from operations..... (14,137) (14,092) (18,853) (15,002) (9,524) (9,816) (7,687)
Other income (expense),
net.................... 188 1,105 1,354 2,136 155 156 257
-------- -------- -------- -------- -------- -------- --------
Net loss................. $(13,949) $(12,987) $(17,499) $(12,866) $ (9,369) $ (9,660) $ (7,430)
======== ======== ======== ======== ======== ======== ========
Net loss per
share -- basic and
diluted(1)............. $ (1.41) $ (1.35) $ (1.81) $ (1.37) $ (6.36)
======== ======== ======== ======== ========
Shares used in computing
net loss per
share -- basic and
diluted(1)............. 9,909 9,603 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
========
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, ----------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 2,164 $ 24,517 $ 41,567 $ 52,873 $ 11,652 $ 15,819
Working capital.......... 265 22,351 39,511 52,028 10,632 14,861
Total assets............. 16,667 30,935 46,655 57,188 15,139 17,777
Long-term liabilities,
net of current
portion................ 7,445 9,248 9,077 8,877 5,978 5,050
Accumulated deficit...... (75,367) (61,418) (43,919) (31,053) (21,684) (12,024)
Stockholders' equity..... 4,079 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.
48
<PAGE> 50
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. Cardiac Pathways' 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
"Recent Developments" and "Overview" sections. These forward looking-statements
include (i) the statements in the "Recent Developments" section, including the
statements in the first paragraph regarding the sufficiency of our resources and
the statements in the fourth paragraph regarding Cardiac Pathways' expectations
with regard to formal notice of deficiency from Nasdaq; (ii) the statements in
the "Overview" section including the statement in the first paragraph relating
to expectations of operating losses, the statement in the third paragraph
relating to anticipated filing and approval time periods for premarket approval
applications, and the statements in the fourth paragraph relating to the
commercialization of products that have received Food and Drug Administration
("FDA") manufacturing approval and, the statements related to the manufacturing,
marketing, and distribution of Cardiac Pathways' products; (iii) the statements
in "Results of Operations -- Nine Months Ended March 31, 1999 and 1998"
including statements in the last sentence of "Cost of Goods Sold," the
statements in the last sentence of each of the "Research and Development",
"Selling, General and Administrative" paragraphs; (iv) the statements in
"Results of Operations -- Years Ended June 30, 1998 and 1997" including
statements in the last sentence of the first paragraph of "Net Sales", the last
sentence of the first paragraph of "Cost of Goods Sold", the second paragraph of
"Costs of Goods Sold", the last sentence of "Research and Development", the last
sentence of "Selling, General and Administrative", and (v) the statements in the
"Liquidity and Capital Resources" section including the statements regarding
future capital expenditures in the fourth paragraph.
RECENT DEVELOPMENTS
Immediate Need for Additional Financing
As of May 14, 1999, Cardiac Pathways' balance of cash, cash equivalents and
short-term investments were only $450,000. In the absence of an immediate in
flow of capital, Cardiac Pathways would not have sufficient resources to
continue operations.
On May 21, 1999, Cardiac Pathways signed a definitive agreement with
investors for the sale of $31.5 million of Cardiac Pathways' series B
convertible preferred stock (with the possibility that the amount could increase
up to $40 million) and interim financing, whereby certain of the investors in
the financing have provided Cardiac Pathways with interim financing through a
bridge loan of $3 million. The issuance of the series B convertible preferred
stock is subject to stockholder approval. The bridge loan is secured by
substantially all of Cardiac Pathways' assets. If the financing does not close,
Cardiac Pathways will not have sufficient resources to continue its operations
in the absence of an alternative transaction.
Noncompliance With Loan Covenants
Cardiac Pathways' long-term credit facility with Silicon Valley Bank
requires Cardiac Pathways to collateralize 105% of the principal balance of the
loan in the event of noncompliance with the restrictive covenants of the
facility. In late March 1999, as a result of noncompliance with certain
financial covenants required by the facility, Cardiac Pathways fully
collateralized its $6.0 million loan obligation to Silicon Valley Bank by
pledging $3.0 million of cash and $3.3 million of short-term investments as
collateral for the loan. As a result, these pledged amounts were not available
to Cardiac Pathways to support its operations or to meet its cash flow
requirements. As of May 20, 1999, Silicon Valley Bank had foreclosed and taken
possession of the collateral in satisfaction of the full amounts under the loan.
Noncompliance with Requirements for Continued Listing on the Nasdaq National
Market
Cardiac Pathways common stock is currently listed for trading on the Nasdaq
Stock Market's National Market. On March 22, 1999, Cardiac Pathways issued a
press release announcing, as described above, that it
49
<PAGE> 51
had pledged $6.3 million of cash as collateral for the credit facility with
Silicon Valley Bank. On April 7, 1999, based upon information contained in such
press release, Nasdaq requested that Cardiac Pathways provide additional
information with respect to Cardiac Pathways' ability to meet Nasdaq's
quantitative maintenance requirements. On May 5, 1999, Nasdaq notified Cardiac
Pathways that, based upon its review of the information provided, Cardiac
Pathways was no longer in compliance with the net tangible assets requirement of
$4.0 million for continued listing on the Nasdaq National Market under NASD Rule
4450(a) (Maintenance Standard 1). As a result of Cardiac Pathways' failure to
meet the stated standards, Nasdaq is reviewing Cardiac Pathways' eligibility for
continued listing on the Nasdaq National Market. On May 17, 1999, we advised
Nasdaq of the status of negotiations regarding the financing. We have requested
that Nasdaq defer action on the continued listing of Cardiac Pathways common
stock until after the special meeting of stockholders. If we complete the
financing, we expect to have sufficient cash resources to meet the net tangible
assets listing requirements. The continued listing of our common stock on the
Nasdaq Stock Market will be based in part on our ability to demonstrate that we
can sustain compliance with the continued listing requirements. However, we may
receive a formal notice of deficiency from Nasdaq, at which time Nasdaq may
commence the delisting process.
OVERVIEW
Cardiac Pathways 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. Cardiac Pathways has
experienced significant operating losses since inception and as of March 31,
1999 had an accumulated deficit of approximately $75.4 million. Cardiac Pathways
has generated only limited revenues from sales of Radii supraventricular
tachycardia mapping and ablation catheters, Trio/Ensemble diagnostic catheters,
Chilli cooled ablation catheters, certain mapping baskets, Radiofrequency
Generator Systems and Arrhythmia Mapping Systems. Cardiac Pathways expects its
operating losses to continue through at least the end of calendar 2000 as it
continues to expend substantial funds to conduct its research and development
activities, obtain regulatory approvals for its products, establish
commercial-scale manufacturing capabilities and expand its sales and marketing
activities.
Cardiac Pathways believes that its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and their
component catheters and equipment are currently Cardiac Pathways' only
significant potential products. In February 1999, the FDA granted approval of
Cardiac Pathways' premarket approval ("PMA") application to commercially release
its Ventricular Tachycardia Ablation System which consists of the Chilli cooled
ablation catheter and the Model 8004 Radiofrequency Generator. In January 1999,
the FDA granted clearance of Cardiac Pathways' application pursuant to section
510(k) of the Food, Drug, & Cosmetics Act of 1938, as amended (the 510(k)
application) to commercially release its Mercator Atrial High Density Array
Catheter which is intended to be used in the right atrium for diagnostic mapping
procedures. In August 1997, the FDA granted clearance of Cardiac Pathways'
510(k) application for the Model 8100/8300 Arrhythmia Mapping System for basic
diagnostic electrophysiology studies. 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 this product under applicable FDA regulatory guidelines.
In addition, the ablation catheter and ablation equipment that together form the
Atrial Fibrillation Ablation System are in the early stages of clinical testing
and will require further development. See "Factors That May Impact Future
Operating Results -- Clinical Trials" for a discussion of the status of the
clinical trials conducted to date for Cardiac Pathways' products.
The design, manufacturing, labeling, distribution and marketing of Cardiac
Pathways' 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
Cardiac Pathways to market its products in the United States, Caridac Pathways
must obtain clearance or approval from the FDA. Cardiac Pathways does not
anticipate filing a PMA application for any additional system for at least
twelve months, and does not anticipate receiving a PMA for any such system for
at least one year to two years after such PMA application is accepted for
filing, if at all. Cardiac Pathways will not generate any
50
<PAGE> 52
significant revenue in the United States from its Arrhythmia Mapping System for
diagnostic mapping of ventricular tachycardia or its Atrial Fibrillation
Ablation System unless and until such products obtain clearance or approval from
the FDA.
For Cardiac Pathways' products which have recently obtained FDA clearance
or approval, there can be no assurance that any such products will be
successfully commercialized or that Cardiac Pathways will achieve significant
revenues from either domestic or international sales. Although the FDA granted
PMA approval for the Ventricular Tachycardia Ablation System, 510(k) clearance
for the Mercator atrial catheter, and 510(k) clearance for the Arrhythmia
Mapping System for basic diagnostic studies, Cardiac Pathways does not have any
experience in manufacturing, marketing or selling these products in commercial
quantities. In order to successfully implement its business plan, Cardiac
Pathways must manufacture in commercial quantities and sell the Ventricular
Tachycardia Ablation System. Furthermore, Cardiac Pathways 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. Cardiac
Pathways 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. See "Factors That May Impact Future Operations."
Reduction in Force. During the quarter ended March 31, 1999, Cardiac
Pathways reduced its work force company-wide by approximately 40%. Cardiac
Pathways recorded costs associated with the reduction in force of approximately
$225,000 in the three month period ending March 31, 1999. Cardiac Pathways does
not expect to realize any material reductions in manufacturing or operating
expenses from the reduction in force until the fourth quarter of fiscal 1999 or
the first quarter of fiscal 2000 at the earliest.
RESULTS OF OPERATIONS
Nine Months Ended March 31, 1999 and 1998
Net Sales. Cardiac Pathways' 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. For the nine months ended March 31, 1999, Cardiac Pathways had
net sales of $3.4 million compared to $1.7 million for the nine months ended
March 31, 1998. The increase in net sales for the nine months ended March 31,
1999 compared to the same period in the prior year was primarily due to higher
overall shipments of Radii and Trio/Ensemble catheter products in Japan and
Europe, and to a lesser extent, the initial product shipments in the U.S. market
for the Chilli catheter following FDA approval in February 1999.
In December 1995, Cardiac Pathways 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 or ratably over the period for which the related
technology patents expire. A total of $294,000 of royalty income related to the
agreement has been recorded through March 31, 1999, of which $225,000 was
recognized in the nine months ended March 31, 1999.
Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, and system assembly and test costs. For the
nine months ended March 31, 1999, Cardiac Pathways had a gross margin of
$316,000, or 9% of net sales, compared to a gross margin deficit of $404,000 for
the nine months ended March 31, 1998. The increase in the gross margins for the
nine months ended March 31, 1999 compared to the same period in the prior year
was primarily due to increased sales volumes, changes in sales mix, improved
manufacturing yields, and certain decreases in manufacturing spending during the
quarter ended March 31, 1999. These improvements were offset in part by
increased overhead and training costs for manufacturing personnel, and higher
costs associated quality control and manufacturing engineering activities
51
<PAGE> 53
to support higher production volumes. Cardiac Pathways expects its gross margins
to fluctuate in the future as its products are commercialized.
Research and Development. Research and development expenses include costs
associated with product research, clinical trials, prototype development, design
and testing, and costs associated with obtaining regulatory approvals. Research
and development expenses were $9.8 million for the nine months ended March 31,
1999 compared to $10.7 million for the nine months ended March 31, 1998. The
decrease in research and development expenses was primarily attributable to
decreased costs related to clinical trials of the Chilli cooled ablation system,
for which patient enrollment was completed in December 1997, and decreased costs
reflecting an overall smaller research and development organization. This
decrease was offset by increased costs associated with consulting services,
facilities and the placement at clinical sites of Arrhythmia Mapping Systems and
Radiofrequency Generator Systems and catheter products to support Cardiac
Pathways' high resolution mapping and linear ablation studies. Cardiac Pathways
expects to expend substantial funds in the future to continue its product
development programs.
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 were $4.7 million for
the nine months ended March 31, 1999, compared to $3.0 million for the nine
months ended March 31, 1998. The increase was primarily attributable to higher
expenditures for sales and marketing personnel and services to support expanding
international and domestic sales, marketing and customer service activities and
increased costs associated with demonstration units and product marketing
materials. Cardiac Pathways 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. Net other income was $188,000 for the nine
months ended March 31, 1999, compared to $1.1 million for the nine months ended
March 31, 1998. The reduction in net other income was the result of decreased
interest income on significantly lower cash, cash equivalent and short-term
investment balances.
Net Loss. The net loss was $13.9 million for the nine months ended March
31, 1999, compared to $13.0 million for the nine months ended March 31, 1998.
Impact of Adoption of New Accounting Standards. 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. FAS 130 was adopted in the first quarter of
fiscal year 1999 and did not have a material effect on Cardiac Pathways'
financial statements.
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 Cardiac
Pathways' 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. Cardiac Pathways does not expect the adoption of FAS 131 to have a
material effect on its financial statements. FAS 131 will become effective for
Cardiac Pathways' 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. Cardiac Pathways has not in the past and does not anticipate in the future
using
52
<PAGE> 54
derivative instruments, and Cardiac Pathways 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, 1998 and 1997
Net Sales. Cardiac Pathways' 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. Cardiac Pathways' net sales remained level at $2.4 million for
each of the years ended June 30, 1998 and 1997. During fiscal 1998, Cardiac
Pathways 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, Cardiac Pathways 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. Cardiac Pathways
experienced a delay in the international launch of Radii catheters in Japan, a
delay in the release of a software revision for Cardiac Pathways' 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 1998. International sales accounted for 87% and 82% of Cardiac Pathways'
net sales in fiscal 1998 and 1997, respectively. Cardiac Pathways believes that
its exposure to foreign currency fluctuations is not material and Cardiac
Pathways does not engage in foreign currency hedging programs.
In December 1995, Cardiac Pathways 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. Cardiac Pathways expects future gross margins to
fluctuate as other products are commercialized.
Cardiac Pathways is currently encountering low yields and other production
inefficiencies in the manufacture of its Sector mapping catheters. Although
Cardiac Pathways 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 Cardiac Pathways anticipates resolving such production
inefficiencies in calendar 1998, no assurance can be given that Cardiac Pathways
will succeed in such attempts. Failure to obtain acceptable yields in the
manufacture of such products will adversely affect the ability of Cardiac
Pathways 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. Cardiac
Pathways believes that research and development expenditures will increase in
the future as Cardiac Pathways invests in
53
<PAGE> 55
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. Cardiac Pathways 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.
Net Loss. Cardiac Pathway's net loss increased to $17.5 million in fiscal
1998 compared to $12.9 million in fiscal 1997. The increase in Cardiac Pathways'
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, Cardiac Pathways' reported net operating loss carryforwards were
approximately $55.6 million and $11.9 million for federal and state income tax
purposes, respectively. Cardiac Pathways' 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.
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
Cardiac Pathways' net sales in fiscal 1997 and 1996, respectively.
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.
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<PAGE> 56
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 Cardiac Pathways' patents, costs related to obtaining certain
insurance policies and costs related to Cardiac Pathways' 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 Cardiac Pathways' initial public offering in
June 1996, the net proceeds of which were approximately $43.1 million.
Net Loss. Cardiac Pathways' 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, Cardiac Pathways has financed its operations through a
combination of private placements of equity securities yielding $33.5 million, a
bank line of credit of $6.0 million, equipment lease financing arrangements
yielding $4.0 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 March 31, 1999, Cardiac Pathways had
$2.2 million in unrestricted cash, cash equivalents and short-term investments.
Net cash used in operating activities was $14.7 million and $11.3 million
for the nine months ended March 31, 1999 and 1998, respectively. For each of
these periods, the net cash used in operating activities resulted primarily from
net losses. Net cash provided from investing activities was $14.7 million and
$11.6 million for the nine months ended March 31, 1999 and 1998, respectively.
Net cash provided by investing activities primarily resulted from maturities and
sales of short-term investments, offset in part by purchases of short-term
investments and equipment. Net cash used in financing activities was $6.4
million and $356,000 for the nine months ended March 31, 1999 and 1998,
respectively. The net cash used in financing activities during the nine months
ended March 31, 1999 was primarily due to amounts held as restricted cash and
cash equivalents and the reclassification of restricted short-term investments
in the current reporting period.
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 Cardiac Pathways' initial public offering during June 1996.
As of March 31, 1999, Cardiac Pathways had capital equipment of $9.1
million, less accumulated depreciation and amortization of $4.7 million, to
support its clinical, development, manufacturing and administrative activities.
Cardiac Pathways had financed $4.0 million from capital lease obligations
through March 31, 1999. Cardiac Pathways expects capital expenditures to
increase over the next several years as it acquires equipment to support
manufacturing operations. As of March 31, 1999, Cardiac Pathways had
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available an unused equipment lease financing facility of approximately $1.1
million. In connection with the origination of a portion of the lease line,
Cardiac Pathways issued a warrant to purchase 35,170 shares of its common stock
to the lessor at an exercise price of $8.53 per share.
In May 1998, Cardiac Pathways obtained a term loan credit facility of $8.0
million from a commercial bank. The loan agreement provided for an initial
advance of $6.0 million available for the repayment of a note payable and
related accrued interest due to Sorin Biomedical (described below) with the
remaining $2.0 million available for general corporate purposes. Advances can be
made to Cardiac Pathways 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% (9.00% at March 31, 1999), and Cardiac
Pathways 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. In May
1998, Cardiac Pathways utilized $6.0 million of the term loan credit facility in
order to repay a $4.5 million note payable and related accrued interest of
approximately $1.5 million due to Sorin Biomedical. The $4.5 million 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. At March 31, 1999, Cardiac
Pathways had an unused amount of $2.0 million under the credit facility that is
available for drawdowns through May 1999.
Under the terms of the loan agreement, all borrowings are collateralized by
substantially all of Cardiac Pathways' assets and Cardiac Pathways must maintain
certain financial ratios and other covenants. As of March 31, 1999, Cardiac
Pathways was not in compliance with its financial covenants pertaining to the
loan and was therefore required to designate to Silicon Valley Bank a restricted
cash pledge of $6.3 million representing 105% of the outstanding principal
balance of the loan. As of March 31, 1999, Cardiac Pathways had restricted cash
equivalents and investments of $3.0 million and $3.3 million, respectively, in
connection with the restricted cash pledge requirements of the loan agreement.
The pledged amounts of $6.3 million were not available to Cardiac Pathways to
support its operations or to meet its cash flow requirements. As of May 20,
1999, Silicon Valley Bank had foreclosed and taken possession of the collateral
in satisfaction of the full amounts under the loan.
Cardiac Pathways' future liquidity and capital requirements will depend
upon numerous factors, including those factors set forth above under recent
developments, the progress of Cardiac Pathways' product development efforts, the
progress of Cardiac Pathways' 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 Cardiac
Pathways' products gain market acceptance, and competitive developments. 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, Cardiac Pathways will be required to raise additional funds.
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 one year, 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.
Cardiac Pathways commenced a program in fiscal 1998, to be substantially
completed by mid 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. Cardiac Pathways
has contacted its major suppliers to determine whether the products obtained by
Cardiac Pathways from such vendors are Year 2000 compliant. To date, Cardiac
Pathways has not received responses from many of such suppliers. Cardiac
Pathways' suppliers are under no contractual obligation to provide such
information to Cardiac Pathways. In
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addition, Cardiac Pathways 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 Cardiac Pathways' personnel using such systems. Based on the
information available to date, Cardiac Pathways believes it will be able to
complete its Year 2000 compliance review and make necessary modifications prior
to mid calendar 1999. Software or systems that are deemed critical to Cardiac
Pathways' business are scheduled to be Year 2000 compliant by mid calendar 1999.
Nevertheless, particularly to the extent Cardiac Pathways is relying on the
products of other vendors to resolve Year 2000 issues, there can be no
assurances that Cardiac Pathways 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 Cardiac Pathways were to experience delays
implementing Year 2000 compliant software products, Cardiac Pathways could incur
substantial costs and disruption of its business, which would potentially have a
material adverse effect on Cardiac Pathways' business, financial condition and
results of operations.
Cardiac Pathways in its ordinary course of business tests and evaluates its
own software products. Cardiac Pathways' proprietary software products that
operate its Arrhythmia Mapping System and Radiofrequency Generator System are
designed for use with certain hardware developed by other vendors. Cardiac
Pathways 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 Cardiac Pathways' 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 Cardiac Pathways' software products are not fully Year 2000
compliant, there can be no assurance that Cardiac Pathways' software products
contain all necessary software routines and codes necessary for the accurate
calculation, display, storage and manipulation of data involving dates.
Furthermore, these systems will be used in various operating environments once
installed at customer sites. Cardiac Pathways believes its products are in Year
2000 compliance. In certain circumstances, Cardiac Pathways has warranted that
the use or occurrence of dates on or after January 1, 2000 will not adversely
affect the performance of Cardiac Pathways' 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 Cardiac Pathways' licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.
To date Cardiac Pathways has not identified a complete and separate budget
for investigating and remedying issues related to Year 2000 compliance whether
involving Cardiac Pathways' own software products or the software or systems
used in its internal operations. Cardiac Pathways 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 Cardiac Pathways' resources
spent on investigating and remedying Year 2000 compliance issues will not have a
material adverse effect on Cardiac Pathways' business, financial condition and
results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cardiac Pathways does not engage in any foreign currency hedging
transactions and therefore, does not believe it is subject to exchange rate
risk. In compliance with Cardiac Pathways' cash investment policy, Cardiac
Pathways limits its cash investments in terms of type of financial instrument,
concentration limit, credit quality and marketability with the highest priority
being preservation of principal. Cardiac Pathways does not consider itself
exposed with respect to any material market risk.
FACTORS THAT MAY IMPACT FUTURE OPERATIONS
Limited Operating History; History of Losses and Expectation of Future Losses
Cardiac Pathways was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. Cardiac Pathways has experienced significant operating losses since
inception. As of March 31, 1999, Cardiac Pathways had an accumulated deficit of
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$75.4 million. To date, Cardiac Pathways 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 to
conduct its research and development activities, obtain regulatory approvals for
its products, establish commercial-scale manufacturing capabilities and expand
its sales and marketing activities. There can be no assurance that any of
Cardiac Pathways' potential products for diagnosis and treatment of ventricular
tachycardia and atrial fibrillation will either receive regulatory approvals for
marketing or be successfully commercialized or that Cardiac Pathways will
achieve significant revenues from either international or domestic sales. In
addition, there can be no assurance that Cardiac Pathways will achieve or
sustain profitability in the future or meet the expectations of securities
industry analysts. Cardiac Pathways' 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 Cardiac Pathways' products gain market
acceptance, the scale-up of manufacturing abilities, the expansion of sales and
marketing activities and competition.
Immediate Additional Financing Required
See "Recent Developments" above for a discussion of Cardiac Pathways' need
to raise additional financing immediately.
Clinical Trials
The Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems and
Atrial Fibrillation Ablation System are in various stages of clinical testing.
Other than with respect to the Ventricular Tachycardia Ablation System, the
Mercator Atrial Mapping Basket, and the Arrhythmia Mapping System for basic
electrophysiology studies for which FDA approval or clearance was obtained, the
clinical data to date is insufficient to demonstrate the safety and efficacy of
these products under applicable FDA regulations and guidelines. There can be no
assurance that any of Cardiac Pathways' pre-clinical or clinical products will
prove to be safe and effective in clinical trials under applicable United States
or international regulations and guidelines or that additional modifications to
Cardiac Pathways' 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 Cardiac
Pathways' Atrial Fibrillation Ablation System are still under development. There
can be no assurance that Cardiac Pathways 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
Cardiac Pathways to undertake clinical trials of the atrial fibrillation
product. 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 and atrial
fibrillation will not be known for several years.
On February 2, 1999, Cardiac Pathways obtained PMA approval for the Chilli
Cooled Ablation Catheter and the Model 8004 Radiofrequency Generator and
Integrated Fluid Pump, the products that together form Cardiac Pathways'
Ventricular Tachycardia Ablation System. In May 1997, Cardiac Pathways 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
Cardiac Pathways' Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. On March 11, 1999, Cardiac Pathways suspended a
clinical trial for the Local Sector Mapping Basket, a variation of the Mercator
Left Ventricular Mapping Basket due to financial constraints. On January 27,
1999, Cardiac Pathways received 510(k) clearance for the Mercator Atrial Mapping
Basket sizes 70cc and 100cc and the Model 8100/8300 Arrhythmia Mapping System,
the products that together form Cardiac Pathways' Arrhythmia Mapping System for
diagnostic mapping of the right atrium. Cardiac Pathways is continuing to enroll
patients in the study for the 130cc-size basket to support a special 510(k)
submission. On March 11, 1999, Cardiac Pathways suspended a clinical trial of
the Local Sector Mapping Basket in the right atrium due to financial
constraints. In April 1997, Cardiac Pathways completed a feasibility study of
the Nexus Linear Lesion Catheter and Model 8002 Radiofrequency Generator
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and Integrated Fluid Pump, the products that together form Cardiac Pathways'
Atrial Fibrillation Ablation System. Cardiac Pathways submitted an IDE for the
treatment of Atrial Fibrillation for a second version of the Nexus Linear Lesion
Catheter in December 1998 which was conditionally approved in January 1999.
Furthermore, Cardiac Pathways discontinued a clinical trial for a second version
of the Nexus Linear Lesion Catheter for the treatment of atrial flutter in
February 1999.
Ventricular Tachycardia Ablation System. Cardiac Pathways obtained PMA
approval for the Chilli Cooled Ablation Catheter and Model 8004 Radiofrequency
Generator and Fluid Pump on February 2, 1999. The approval requires a post
approval study be performed.
Arrhythmia Mapping System for Ventricular Tachycardia. In January 1997,
Cardiac Pathways 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. There was no thrombus formation on any
mapping basket used in the 40 studies. Of the 40 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, Cardiac Pathways 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. Three patients were enrolled in this study
as of May 14, 1999. 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 seven patients were enrolled
in this trial as of May 14, 1999. Due to limited financial resources, enrollment
into the Mercator and Local Sector Left Ventricular Mapping Basket studies were
suspended on March 11, 1999. These studies allow the use of the ventricular
mapping baskets with the Ventricular Tachycardia Ablation System simultaneously.
Cardiac Pathways believes that ventricular mapping will be an enabling
technology for 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, Cardiac
Pathways 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 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 included 74 patients. There
was no thrombus formation on any mapping basket used in the 74 studies. Cardiac
Pathways submitted a 510(k) application for clearance of the Mercator Atrial
Mapping Basket on July 17, 1998 and received clearance of two of the three
basket sizes (70 and 100cc). Four cases have been performed of the 12 additional
cases needed for a special 510(k) submission requesting approval of the
130cc-sized basket. An IDE was submitted for a clinical study of the Local
Sector Mapping Basket for the right atrium on February 20, 1998. Cardiac
Pathways has approval to test 95 subjects at ten clinical sites, and 25 patients
were enrolled as of May 14, 1999. Due to limited financial resources, enrollment
into the clinical trial was suspended on March 11, 1999.
Atrial Fibrillation Ablation System. Cardiac Pathways 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
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catheter supplementation. One patient developed a pericardial effusion
attributed to perforation by a commercial diagnostic (non-ablation) catheter. No
other complications occurred. Cardiac Pathways 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 and
was further amended in October 1998 to allow delivery of 70 watts of power and
use a superior approach to accessing the right atrium. The study was initiated
in February 1998 and eight patients were enrolled as of February 3, 1999.
Cardiac Pathways has also tested the Nexus Linear Lesion Catheter for atrial
flutter and fibrillation in 15 patients in Europe as of May 14, 1999.
A feasibility IDE for use of the modified Nexus Linear Lesion Catheter in
the right atrium to treat atrial fibrillation was submitted on December 30,
1998, and was conditionally approved on January 29, 1999. The IDE approval is
for four clinical sites to enroll a total of 20 patients. Because the FDA is now
open to an approval study route for the indication of treating atrial
fibrillation with right atrial lesions exclusively, Cardiac Pathways has changed
its regulatory strategy to pursue commercialization of the Nexus 2.0 for
treating atrial fibrillation. On February 3, 1999, Cardiac Pathways discontinued
the Nexus study to treat atrial flutter.
No Existing Market
On February 2, 1999, Cardiac Pathways received approval from the FDA of its
PMA application to commercially release its Chilli Cooled Ablation System. In
January 1999, the FDA granted 510(k) clearance of Cardiac Pathways' Mercator
Atrial High Density Array Catheter. Cardiac Pathways' 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. Although Cardiac
Pathways has received such approval or clearance, there can be no assurance that
such products will gain any significant degree of market acceptance among
physicians, patients, and health care payors. There can be no assurance that
these products will be successfully commercialized in the United States or in
international markets. Cardiac Pathways 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 Cardiac
Pathways' business, financial condition and results of operations. Even if any
or all such products achieve market acceptance, if Cardiac Pathways is unable to
manufacture sufficient quantities of such product to satisfy customer demand,
Cardiac Pathways' business, financial condition and results of operations would
be materially adversely affected.
Marketing and Distribution
Cardiac Pathways currently has only a limited sales and marketing
organization. Cardiac Pathways 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. There can be no
assurance that Cardiac Pathways 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 Cardiac Pathways' sales and marketing efforts will be
successful. If Cardiac Pathways is successful in obtaining the necessary
regulatory approvals for its 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 Cardiac Pathways 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 Cardiac
Pathways' products. Failure to establish appropriate distribution relationships,
including those European markets in which Cardiac Pathways does not currently
have a
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distributor in place, could have a material adverse effect upon Cardiac
Pathways' business, financial condition and results of operations.
Manufacturing
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. Cardiac Pathways conducts
quality audits of suppliers and is establishing a vendor certification program.
A number of components for Cardiac Pathways' 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. Cardiac Pathways
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 Cardiac Pathways'
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.
Cardiac Pathways has no experience manufacturing its products in the
volumes that will be necessary for Cardiac Pathways 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 Cardiac Pathways 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. In
particular, Cardiac Pathways received FDA clearance for its Chilli Cooled
Ablation Catheter on February 2, 1999 and will be required to manufacture such
catheters in large volumes to successfully commercialize the product.
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, Cardiac Pathways believes that substantial
per unit cost reductions in its manufacturing operations will be required for it
to commercialize its catheters and systems on a profitable basis. Any inability
of Cardiac Pathways to establish and maintain large scale manufacturing
capabilities would have a material adverse effect on Cardiac Pathways' business,
financial condition and results of operations.
Cardiac Pathways' manufacturing facilities are subject to periodic
inspection by regulatory authorities, and its operations must undergo Quality
System Regulation ("QSR;" the successor regulations to Good Manufacturing
Practices) compliance inspections conducted by the FDA. Cardiac Pathways 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, Cardiac Pathways received ISO 9001/EN46001
certification from its European Notified Body. Any failure of Cardiac Pathways
to comply with QSR or ISO 9001/EN46001 standards may result in Cardiac Pathways
being required to take corrective actions, such as modification of its policies
and procedures. The State of California also requires that Cardiac Pathways
obtain a license to manufacture medical devices and granted Cardiac Pathways
such a license in February 1998. If Cardiac Pathways 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 Cardiac Pathways' business,
financial condition and results of operations.
Patents and Proprietary Rights
Cardiac Pathways' 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. Cardiac Pathways' 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. Cardiac Pathways holds issued and allowed patents covering a
number of fundamental aspects of Cardiac Pathways' Ventricular Tachycardia
Ablation System, Arrhythmia Mapping Systems and Atrial Fibrillation Ablation
System. The patent positions of medical device companies, including those of
Cardiac Pathways, are uncertain and involve complex and evolving legal and
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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 Cardiac Pathways, that any of Cardiac Pathways' 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 Cardiac Pathways.
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 Cardiac Pathways' 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 Cardiac Pathways, may also be necessary to enforce patent or other
intellectual property rights of Cardiac Pathways or to determine the scope and
validity of other parties' proprietary rights. There can be no assurance that
Cardiac Pathways will have the financial resources to defend its patents from
infringement or claims of invalidity.
In addition to patents, Cardiac Pathways relies on trade secrets and
proprietary know how to compete. Cardiac Pathways 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 Cardiac
Pathways during the course of the relationship with Cardiac Pathways 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 Cardiac
Pathways shall be the exclusive property of Cardiac Pathways. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that Cardiac Pathways
will have adequate remedies for any breach, or that Cardiac Pathways' 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 Cardiac Pathways will not
become subject to patent infringement claims or litigation in a court of law, or
interference proceedings declared by the United States Patent and Trademark
Office (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 Cardiac Pathways and significant diversion of effort by
Cardiac Pathways' technical and management personnel. An adverse determination
in litigation or interference proceedings to which Cardiac Pathways may become a
party could subject Cardiac Pathways to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
Cardiac Pathways 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 Cardiac Pathways on satisfactory terms, if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent Cardiac Pathways from manufacturing and selling
its products, which would have a material adverse effect on Cardiac Pathways'
business, financial condition and results of operations. Cardiac Pathways is
aware of certain patents owned or licensed by others and relating to cardiac
catheters and cardiac monitoring. Certain enhancements of Cardiac Pathways'
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 Cardiac Pathways 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 Cardiac Pathways' enhancements or that
Cardiac Pathways' 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 Cardiac Pathways in a patent infringement suit or other legal
proceeding, regardless of the likely outcome of such suit or proceeding.
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Competition
At present, Cardiac Pathways 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 Cardiac Pathways' competitors have an established presence
in the field of interventional cardiology and electrophysiology. Many
competitors have substantially greater financial and other resources than
Cardiac Pathways, 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 Cardiac Pathways 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 Cardiac Pathways
will succeed in developing new technologies and products that are available
prior to its competitors' products. The failure of Cardiac Pathways 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 Cardiac Pathways'
business, financial condition and results of operations.
Cardiac Pathways 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, Cardiac Pathways' 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 Cardiac Pathways' new product development
efforts will result in any commercially successful products. Cardiac Pathways
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 Cardiac Pathways' 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 Cardiac Pathways 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 Cardiac Pathways.
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 Cardiac
Pathways cannot establish that a proposed device is substantially equivalent to
a legally marketed predicate device, Cardiac Pathways must seek premarket
approval of the proposed device from the FDA through the submission of a PMA
application.
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<PAGE> 65
The process of obtaining a PMA and other required regulatory approvals can
be expensive, uncertain and lengthy, and there can be no assurance that Cardiac
Pathways will ever obtain such approvals. At the earliest, Cardiac Pathways does
not anticipate filing any additional PMA applications for any system for at
least the next twelve 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 Cardiac Pathways' submissions to the FDA.
Significant difficulties and costs may be encountered by Cardiac Pathways in its
efforts to obtain FDA clearance that could delay or preclude Cardiac Pathways
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 Cardiac
Pathways conduct further clinical studies, causing Cardiac Pathways 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 Cardiac Pathways' ability to market its systems. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. 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 Cardiac Pathways to market its systems, could have a material adverse
effect on Cardiac Pathways' 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. Cardiac Pathways 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, Cardiac Pathways received the right to affix the
CE mark to its Arrhythmia Mapping System and Chilli Cooled Ablation System. In
April 1998, Cardiac Pathways received the right to affix the CE mark to its
Radii catheters. In July 1998, Cardiac Pathways received the right to affix the
CE mark to its Trio/Ensemble catheters. While Cardiac Pathways 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 Cardiac
Pathways will be successful in meeting the European certification requirements
and failure to receive the right to affix the CE mark will prohibit Cardiac
Pathways 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, Cardiac Pathways 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 Cardiac Pathways to obtain
the permit. Cardiac Pathways currently has marketing authorization in one or
more Tier I countries for all of its clinically used products. Cardiac Pathways
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.
64
<PAGE> 66
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.
Cardiac Pathways' 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 Cardiac Pathways' 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. Third
party reimbursement is generally provided on the basis of the procedure's
diagnosis-related group ("DRG") code and such code is established by the United
States Health Care Finance Administration.
The failure of the procedures in which Cardiac Pathways' products are used
or an insufficient level of reimbursements for such procedures would have a
material adverse effect on Cardiac Pathways' 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 Cardiac Pathways' products will be
adequate or provided at all. Failure by hospitals and other users of Cardiac
Pathways' products to obtain reimbursement from third party payors, or changes
in government and private third party payors' policies toward reimbursement for
procedures employing Cardiac Pathways' products, would have a material adverse
effect on Cardiac Pathways' business, financial condition and results of
operations. Moreover, Cardiac Pathways 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 Cardiac Pathways.
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 Cardiac Pathways'
products will depend on the availability and level of reimbursement in
international markets targeted by Cardiac Pathways. There can be no assurance
that Cardiac Pathways 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, Cardiac Pathways believes
that physician advocacy of Cardiac Pathways' products will be required to obtain
reimbursement. Cardiac Pathways believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, Cardiac Pathways believes that treatment with
Cardiac Pathways' products will be more efficacious than currently available
therapies. Cardiac Pathways anticipates that hospital administrators and
physicians would justify the use of Cardiac Pathways' products by the attendant
cost savings and clinical benefits that Cardiac Pathways 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 Cardiac
Pathways' 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 Cardiac
Pathways' products.
Product Liability and Insurance
The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. Cardiac
Pathways 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
Cardiac Pathways to measure the risk of such claims with respect to its
products. Cardiac Pathways 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. Cardiac Pathways also faces the possibility that
defects in the design or manufacture of
65
<PAGE> 67
Cardiac Pathways' 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, Cardiac Pathways 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
Cardiac Pathways regardless of their merit or eventual outcome could have a
material adverse effect upon Cardiac Pathways' business, financial condition and
results of operations.
Employees
Cardiac Pathways' 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 Cardiac Pathways 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 Cardiac
Pathways' 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, Cardiac
Pathways believes that it will be required to expand its operations,
particularly in the areas of research and development, manufacturing and sales
and marketing. As Cardiac Pathways expands its operations in these areas, such
expansion will likely result in new and increased responsibilities for
management personnel and place significant strain upon Cardiac Pathways'
management, operating and financial systems and resources. To accommodate any
such growth and compete effectively, Cardiac Pathways will be required to
implement and improve information systems, procedures, and controls, and to
expand, train, motivate and manage its work force.
Impact of Introduction of Single European Currency
The introduction of the Single European Currency (Euro) began on January 1,
1999 with a transition period through January 1, 2002. Cardiac Pathways expects
that the introduction and use of the Euro will not have a material adverse
impact on Cardiac Pathways' internal systems or will result in increased costs
related to its European business activities. Furthermore, Cardiac Pathways 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 Cardiac Pathways'
Stockholder Rights Plan. The issuance of preferred stock under certain
circumstances could have the effect of delaying or preventing a change in
control of Cardiac Pathways 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 Cardiac Pathways and Norwest Bank Minnesota, N.A.
(the "Rights Agent"), Cardiac Pathways' board of directors declared a dividend
of one right to purchase 1/1000 a share of Cardiac Pathways' Series A
participating preferred Stock for each outstanding share of common stock of
Cardiac Pathways (a "Right"). Each Right entitles the registered holder to
purchase from Cardiac Pathways 1/1000 a share of series A participating
preferred stock 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 Cardiac Pathways in
the event of an unsolicited attempt by an acquirer to take over Cardiac
Pathways, 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
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<PAGE> 68
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 Cardiac Pathways deemed undesirable by the
board of directors. The Rights may cause substantial dilution to a person or
group that attempts to acquire Cardiac Pathways on terms or in a manner not
approved by Cardiac Pathways' board of directors, except pursuant to an offer
conditioned upon the negation, purchase or redemption of the Rights.
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 Cardiac Pathways' operating results, announcements of
technological innovations or new commercial products by Cardiac Pathways 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, Cardiac Pathways'
revenues and results of operations may be below the expectations of securities
analysts or investors, resulting in significant fluctuations in the market price
of Cardiac Pathways' 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
Cardiac Pathways' 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 Cardiac Pathways. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on Cardiac
Pathways' business, financial condition and results of operations. Any adverse
determination in such litigation could also subject Cardiac Pathways to
significant liabilities.
Absence of Dividends
Cardiac Pathways has not paid any cash dividends since inception and does
not anticipate paying cash dividends in the foreseeable future.
OTHER MATTERS
Cardiac Pathways knows of no other matters to be submitted at the meeting.
If any other matters properly come before the meeting, it is the intention of
the proxy holders named in the enclosed form of proxy to vote the shares they
represent as the board of directors may recommend.
THE BOARD OF DIRECTORS
Dated: June 22, 1999
67
<PAGE> 69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<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
Consolidated Balance Sheets as of March 31, 1999 and June
30, 1998 (unaudited)...................................... F-25
Consolidated Statements of Operations for the nine months
ended March 31, 1999 and 1998 (unaudited)................. F-26
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1999 and 1998 (unaudited)................. F-27
Notes to Consolidated Financial Statements.................. F-28
Schedule II -- Valuation and Qualifying Accounts............ F-33
</TABLE>
F-1
<PAGE> 70
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. 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.
The accompanying financial statements have been prepared assuming Cardiac
Pathways Corporation will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company's recurring losses and need for additional
financing raise substantial doubt about its ability to continue as a going
concern. Management's plans as to these matters are also described in Note 1.
The fiscal 1998 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
San Jose, California
July 28, 1998
except for the first and second paragraphs
of Note 1, as to which the date is June 7, 1999
F-2
<PAGE> 71
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> 72
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> 73
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> 74
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> 75
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 Report of Independent Auditors on the Company's financial statements
for the year ended June 30, 1998 contain an explanatory paragraph which
indicates substantial doubt about the Company's ability to continue as a going
concern. The Company has experienced significant operating losses since
inception and as of March 31, 1999 had an accumulated deficit of approximately
$75.4 million. On May 15, 1998, the Company entered into a Loan and Security
Agreement with Silicon Valley Bank for $6.0 million. The purpose of the loan was
to repay a $4.5 million note payable and related accrued interest of
approximately $1 million due to Sorin Biomedical, one of the Company's European
distributors and to provide additional working capital financing. The Company
was required to collateralize 105% of the principal balance of the loan in the
event of noncompliance with certain financial operating ratio and liquidity
covenants. In late March 1999, as a result of noncompliance with those
covenants, the Company fully collateralized the Silicon Valley Bank loan by
pledging $3.0 million of cash and $3.3 million of short-term investments. On May
18, 1999, the Company received notice that Silicon Valley Bank was foreclosing
upon and would take possession of all of the pledged cash and short-term
investments. As of May 20, 1999, Silicon Valley Bank had foreclosed and taken
possession of the collateral in satisfaction of the full amount due under the
loan.
On May 21, 1999, the Company signed a definitive agreement with investors
for the sale of $31.5 million of the Company's series B convertible preferred
stock (with the possibility that the amount could increase up to $40 million)
and interim financing, whereby certain of the investors in the financing have
provided the Company with interim financing through a bridge loan of $3 million.
The issuance of the series B convertible preferred stock is subject to
stockholder approval. The bridge loan is secured by substantially all of the
Company's assets. If the financing does not close, the Company will not have
sufficient resources to continue its operations in the absence of an alternative
transaction. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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
F-7
<PAGE> 76
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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.
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.
F-8
<PAGE> 77
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, 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.
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>
F-9
<PAGE> 78
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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>
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.
F-10
<PAGE> 79
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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, 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.
F-11
<PAGE> 80
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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 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
F-12
<PAGE> 81
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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.
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>
F-13
<PAGE> 82
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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>
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.
F-14
<PAGE> 83
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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.
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
F-15
<PAGE> 84
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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>
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>
F-16
<PAGE> 85
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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).
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.
F-17
<PAGE> 86
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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.
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.
F-18
<PAGE> 87
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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.
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>
F-19
<PAGE> 88
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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 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).
F-20
<PAGE> 89
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
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-21
<PAGE> 90
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-22
<PAGE> 91
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.
The Company's long-term credit facility with Silicon Valley Bank required
the Company to collateralize 105% of the principal balance of the loan in the
event of noncompliance with the restrictive covenants of the facility. In late
March 1999, as a result of noncompliance with certain financial covenants, the
Company fully collateralized its $6.0 million loan obligation to Silicon Valley
Bank by pledging $3.0 million of cash and $3.3 million of short-term investments
as collateral for the loan. On May 18, 1999, the Company received notice that
Silicon Valley Bank was commencing to foreclose upon and take possession of the
pledged cash and short-term investments. As of May 20, 1999, Silicon Valley Bank
had foreclosed and taken possession of the collateral in satisfaction of the
full amounts under the loan.
On May 21, 1999 the Company signed definitive agreements in connection with
a preferred stock financing (the "Financing") that, if closed, would result in a
significant infusion of capital into the Company. The investors in the Financing
are certain accredited investors, including certain current shareholders of the
Company. If the Financing closes, the Company will issue up to a maximum of
40,000 shares of series B preferred stock at a purchase price of $1,000 per
share raising up to $40.0 million. Approximately $31.5 million of the Financing
is currently committed, subject to the satisfaction of certain closing
conditions. Each share of series B preferred stock will initially be convertible
into 1,000 shares of the Company's common stock (before the proposed reverse
stock split described below). The conversion ratio of the series B preferred
stock will be subject to adjustment for price based anti-dilution. The series B
preferred stock will be entitled to a cumulative divided of 11% of the purchase
price per share per annum, and will have a liquidation preference in certain
circumstances equal to the initial purchase price plus accrued but unpaid
dividends. If the financing closes, the holders of series B preferred stock will
vote on all matters presented to the stockholders on an
F-23
<PAGE> 92
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
as-converted to common stock basis. In addition, certain matters, including a
merger or acquisition of the Company, will require the approval of 50% of the
holders of series B preferred stock voting as a separated class.
The existing board of directors of the Company will resign effective upon
the closing the Financing. The holders of the series B preferred stock will have
the right to nominate three members to the board of directors. The chief
executive officer of the Company will also be nominated as a director. The
remaining director will be an outside director nominated by a majority of the
board of directors. The Company will be required to obtain the consent of the
directors nominated by the holders of the series B preferred stock in order to
increase the size of the board above five.
Closing of the Financing is contingent upon the Company obtaining the
approval of its stockholders to the terms of the issuance and reservation of
shares of capital stock in connection with the Financing. Holders of the
Company's common stock who have voting power of approximately 42.5% of the
Company's common stock have entered into voting agreements with the Company and
the investors in the Financing and have agreed to vote in favor of all matters
related to the Financing. In addition, the board of directors has agreed to
recommend that the stockholders of the Company approve the issuance and
reservation of shares of capital stock in connection with the Financing and all
related matters. The Financing is also contingent upon the Company completing a
reverse stock split, currently expected to be one for five.
In connection with the Financing, certain of the investors have agreed to
provide bridge financing (the "Bridge Financing") to the Company in the amount
of $3.0 million. Such investors also have the option to increase the Bridge
Financing to an aggregate of $6.0 million. The convertible bridge notes
evidencing the Bridge Financing are convertible into series B preferred stock.
In connection with the Bridge Financing, the Company will issue warrants to
purchase up to 600 shares of series B preferred stock (convertible into 600,000
shares of common stock), assuming the full $6.0 million of Bridge Financing is
advanced. The Bridge Financing is secured by substantially all of the assets of
the Company. The Bridge Financing is subject to customary conditions to closing.
If the Financing does not close, the Company will not have sufficient
resources to continue operations in the absence of an alternative transaction.
The Company does not believe that any funds would be available for holders of
common stock in the event of such a liquidation.
F-24
<PAGE> 93
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998(1)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 955,614 $ 7,268,877
Short-term investments.................................... 1,208,044 17,248,500
Accounts receivable, net of allowance for doubtful
accounts of $40,000 at March 31, 1999 and $16,500 at
June 30, 1998.......................................... 1,369,679 523,455
Inventories............................................... 1,257,548 668,042
Prepaid expenses.......................................... 297,297 317,549
Other current assets...................................... 320,096 526,193
------------ ------------
Total current assets.............................. 5,408,278 26,552,616
Restricted cash equivalents................................. 3,000,000 --
Restricted investments...................................... 3,300,000 --
Property and equipment, net................................. 4,399,985 3,632,488
Notes receivable from related parties....................... 234,108 260,477
Deposits and other assets................................... 324,463 488,996
------------ ------------
$ 16,666,834 $ 30,934,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 898,467 $ 1,079,772
Accrued compensation and related benefits................. 599,038 601,307
Accrued clinical expenses................................. 1,044,435 1,144,556
Other accrued expenses.................................... 525,642 654,670
Current obligations under capital leases.................. 408,600 554,806
Current portion of long-term debt......................... 1,666,667 166,667
------------ ------------
Total current liabilities......................... 5,142,849 4,201,778
Long-term obligations under capital leases.................. 405,730 483,586
Deferred royalty income..................................... 2,705,862 2,930,862
Long-term debt, less current portion........................ 4,333,333 5,833,333
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized and none issued and outstanding at March 31,
1999 and June 30, 1998................................. -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 9,979,084 shares issued and outstanding at
March 31, 1999 and 9,795,974 at June 30, 1998.......... 9,979 9,796
Additional paid-in capital................................ 80,046,394 79,783,779
Receivable from stockholder............................... (385,000) (385,000)
Accumulated deficit....................................... (75,366,834) (61,417,629)
Deferred compensation..................................... (225,479) (505,928)
------------ ------------
Total stockholders' equity........................ 4,079,060 17,485,018
------------ ------------
$ 16,666,834 $ 30,934,577
============ ============
</TABLE>
- ---------------
(1) Derived from the Company's audited consolidated balance sheet as of June 30,
1998.
See notes to consolidated financial statements.
F-25
<PAGE> 94
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales................................................... $ 3,427,277 $ 1,659,451
Cost of goods sold.......................................... 3,111,677 2,063,366
------------ ------------
Gross margin (deficit).................................... 315,600 (403,915)
Operating expenses:
Research and development.................................. 9,783,331 10,687,922
Selling, general and administrative....................... 4,669,302 3,000,259
------------ ------------
Total operating expenses.......................... 14,452,633 13,688,181
------------ ------------
Loss from operations........................................ (14,137,033) (14,092,096)
Other income (expense):
Interest income........................................... 652,594 1,483,191
Interest expense.......................................... (496,620) (439,089)
Other, net................................................ 31,854 61,082
------------ ------------
Total other income (expense), net................. 187,828 1,105,184
------------ ------------
Net loss.................................................... $(13,949,205) $(12,986,912)
============ ============
Net loss per share -- basic and diluted..................... $ (1.41) $ (1.35)
============ ============
Shares used in computing net loss per share -- basic and
diluted................................................... 9,909,000 9,603,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 95
CARDIAC PATHWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(13,949,205) $(12,986,912)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 949,959 970,909
Amortization of deferred royalty income................... (225,000) (18,134)
Amortization of deferred compensation..................... 146,042 196,927
Gain on disposal of property and equipment................ -- (30,122)
Issuance of common stock warrants......................... -- 60,351
Issuance of nonqualified stock options for services....... 3,811 65,121
Changes in operating assets and liabilities:
Accounts receivable....................................... (846,224) (325,239)
Inventories............................................... (589,506) (117,548)
Prepaid expenses.......................................... 20,252 224,613
Other current assets...................................... 206,097 148,454
Accounts payable.......................................... (181,305) (75,734)
Accrued compensation and related benefits................. (2,269) 66,381
Accrued clinical expenses................................. (100,121) 292,290
Other accrued expenses.................................... (129,028) (49,586)
Interest payable.......................................... -- 291,125
------------ ------------
Net cash used in operating activities....................... (14,696,497) (11,287,104)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments......................... (2,312,448) (22,658,792)
Maturities and sales of short-term investments.............. 18,352,904 35,301,450
Purchases of property and equipment, net.................... (1,491,055) (1,139,300)
Decrease in notes receivable................................ 26,369 141,492
(Increase) decrease in deposits and other assets............ 164,533 (83,117)
------------ ------------
Net cash provided by investing activities................... 14,740,303 11,561,733
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations.......... (450,463) (716,627)
Amounts held as restricted cash equivalents................. (3,000,000) --
Reclassification of restricted short-term investments....... (3,300,000) --
Proceeds from sale of common stock.......................... 393,394 350,838
Decrease in note receivable from stockholder................ -- 10,000
------------ ------------
Net cash used in financing activities....................... (6,357,069) (355,789)
------------ ------------
Net decrease in cash and cash equivalents................... (6,313,263) (81,160)
Cash and cash equivalents at beginning of period.......... 7,268,877 5,091,426
------------ ------------
Cash and cash equivalents at end of period................ $ 955,614 $ 5,010,266
============ ============
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 96
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
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.
The operating results for the nine month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 1999. The accompanying consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included elsewhere in this proxy statement.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. On May 21, 1999, the
Company signed a definitive agreement with investors for the sale of $31.5
million of the Company's series B convertible preferred stock (with the
possibility that the amount could increase up to $40 million) and interim
financing, whereby certain of the investors in the financing have provided the
Company with interim financing through a bridge loan of $3 million. The issuance
of the series B convertible preferred stock is subject to stockholder approval.
The bridge loan is secured by substantially all of the Company's assets. If the
financing does not close, the Company will not have sufficient resources to
continue its operations in the absence of an alternative transaction. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
2. 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 or restricted investments.
At March 31, 1999 and June 30, 1998, all short-term investments were classified
as available-for-sale and held-to-maturity. The amortized 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. Available-for-sale securities are
carried at fair value with unrealized gains and losses, net of tax, reported as
a separate component of stockholders' equity. 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.
At March 31, 1999, the Company had restricted cash equivalents and
investments of $3,000,000 and $3,300,000, respectively, pursuant to a loan
agreement with Silicon Valley Bank. The Company is not in compliance with its
financial covenants required by the Company's loan agreement under which Silicon
Valley Bank may require the Company to collateralize up to 105% of the
outstanding principal balance of the loan as long as the Company remains out of
compliance with its covenants. The outstanding principal balance of the loan was
$6,000,000 as of March 31, 1999. The $6,300,000 pledged amounts are not
available to the Company to support its operations or to meet its cash flow
requirements.
F-28
<PAGE> 97
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
The following is a summary of held-to-maturity and available-for-sale
securities at cost, which approximates fair value:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
DESCRIPTION (UNRESTRICTED) 1999 1998
-------------------------- ---------- -----------
<S> <C> <C>
Held-to-maturity:
U.S. government agency................................... $ -- $ 2,996,886
U.S. corporate obligations............................... -- 10,751,614
Available-for-sale:
U.S. corporate obligations............................... 1,208,044 --
Auction rate preferred stock............................. -- 3,500,000
---------- -----------
1,208,044 17,248,500
Amounts classified as cash equivalents..................... -- --
---------- -----------
Amounts included in short-term investments................. $1,208,044 $17,248,500
========== ===========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
DESCRIPTION (RESTRICTED) 1999 1998
------------------------ ---------- -----------
<S> <C> <C>
Available-for-sale:
Certificate of Deposit.................................... $3,000,000 $ --
U.S. corporate obligations................................ 3,300,000 --
---------- -----------
6,300,000 --
Amounts classified as cash equivalents...................... 3,000,000 --
---------- -----------
Amounts included in restricted investments.................. $3,300,000 $ --
========== ===========
</TABLE>
There were no material realized gains or losses for the nine month periods
ending March 31, 1999 and 1998. The cost of securities sold is based on the
specific identification method. During the nine months ended March 31, 1999, the
Company sold certain of its held-to-maturity securities to meet its liquidity
needs. All securities held at March 31, 1999 are classified as
available-for-sale.
3. CONSOLIDATED BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Inventories:
Raw materials..................................... $ 598,800 $ 432,867
Work-in-process................................... 476,862 123,052
Finished goods.................................... 181,886 112,123
---------- ----------
$1,257,548 $ 668,042
========== ==========
Property and equipment:
Equipment......................................... $6,591,431 $5,626,967
Leasehold improvements............................ 422,062 348,610
Equipment-in-process.............................. 2,054,158 1,523,411
---------- ----------
9,067,651 7,498,988
Less accumulated depreciation and amortization.... 4,667,666 3,866,500
---------- ----------
$4,399,985 $3,632,488
========== ==========
</TABLE>
F-29
<PAGE> 98
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
4. STOCK PLANS
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 October 31, 1998 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 as of July 1, 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 or such an
amount as may be determined by the Company's board of directors. The 1998
Employee Stock Purchase Plan was approved by the stockholders at the 1998 Annual
Meeting of Stockholders on November 30, 1998.
In August 1998, the board of directors of the Company approved the adoption
of the Cardiac Pathways Corporation 1998 Nonstatutory Stock Option Plan under
which 400,000 shares of common stock were reserved for issuance.
In October 1998, the board of directors of the Company approved the
amendment of the 1991 Stock Plan and 1996 Director Option Plan to increase the
number of shares reserved for issuance by 300,000 and 20,000 shares,
respectively. These increases were approved by the stockholders at the 1998
Annual Meeting of Stockholders on November 30, 1998.
5. RECENT PRONOUNCEMENTS
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 reported
in measuring net income such as changes in value of available-for-sale
securities and foreign currency translation adjustments. The Company has adopted
FAS 130 as of the first quarter of fiscal 1999. FAS 130 establishes new rules
for the reporting and display of comprehensive income and its components,
however it has no impact on the Company's net income or total stockholder's
equity.
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 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.
6. RECENT DEVELOPMENTS
The Company's long-term credit facility with Silicon Valley Bank required
the Company to collateralize 105% of the principal balance of the loan in the
event of noncompliance with the restrictive covenants of the facility. In late
March 1999, as a result of noncompliance with certain financial covenants, the
Company fully
F-30
<PAGE> 99
CARDIAC PATHWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(UNAUDITED)
collateralized its $6.0 million loan obligation to Silicon Valley Bank by
pledging $3.0 million of cash and $3.3 million of short-term investments as
collateral for the loan. On May 18, 1999, the Company received notice that
Silicon Valley Bank was commencing to foreclose upon and take possession of the
pledged cash and short-term investments. As of May 20, 1999, Silicon Valley Bank
had foreclosed and taken possession of the collateral in satisfaction of the
full amounts under the loan.
On May 21, 1999 the Company signed definitive agreements in connection with
a preferred stock financing (the "Financing") that, if closed, would result in a
significant infusion of capital into the Company. The investors in the Financing
are certain accredited investors, including certain current shareholders of the
Company. If the Financing closes, the Company will issue up to a maximum of
40,000 shares of series B preferred stock at a purchase price of $1,000 per
share raising up to $40.0 million (excluding the issuance of warrants to
purchase Series B preferred in connection with the Bridge Financing described
below). Approximately $31.5 million of the Financing is currently committed,
subject to the satisfaction of certain closing conditions. Each share of series
B preferred stock will initially be convertible into 1,000 shares of the
Company's common stock (before the proposed reverse stock split described
below). The conversion ratio of the series B preferred stock will be subject to
adjustment for price based anti-dilution. The series B preferred stock will be
entitled to a cumulative divided of 11% of the purchase price per share per
annum, and will have a liquidation preference in certain circumstances equal to
the initial purchase price plus accrued but unpaid dividends. If the financing
closes, the holders of series B preferred stock will vote on all matters
presented to the stockholders on an as-converted to common stock basis. In
addition, certain matters, including a merger or acquisition of the Company,
will require the approval of 50% of the holders of series B preferred stock
voting as a separated class.
The existing board of directors of the Company will resign effective upon
the closing the Financing. The holders of the series B preferred stock will have
the right to nominate three members to the board of directors. The chief
executive officer of the Company will also be nominated as a director. The
remaining director will be an outside director nominated by a majority of the
board of directors. The Company will be required to obtain the consent of the
directors nominated by the holders of the series B preferred stock in order to
increase the size of the board above five.
Closing of the Financing is contingent upon the Company obtaining the
approval of its stockholders to the terms of the issuance and reservation of
shares of capital stock in connection with the Financing. Holders of the
Company's common stock who have voting power of approximately 42.5% of the
Company's common stock have entered into voting agreements with the Company and
the investors in the Financing and have agreed to vote in favor of all matters
related to the Financing. In addition, the board of directors has agreed to
recommend that the stockholders of the Company approve the issuance and
reservation of shares of capital stock in connection with the Financing and all
related matters. The Financing is also contingent upon the Company completing a
reverse stock split, currently expected to be one for five.
In connection with the Financing, certain of the investors have agreed to
provide bridge financing (the "Bridge Financing") to the Company in the amount
of $3.0 million. Such investors also have the option to increase the Bridge
Financing to an aggregate of $6.0 million. The convertible bridge notes
evidencing the Bridge Financing and the interest accrued thereon are convertible
into series B preferred stock. In connection with the Bridge Financing, the
Company will issue warrants to purchase up to 600 shares of series B preferred
stock (convertible into 600,000 shares of common stock), assuming the full $6.0
million of Bridge Financing is advanced. The Bridge Financing is secured by
substantially all of the assets of the Company. The Bridge Financing is subject
to customary conditions to closing.
If the Financing does not close, the Company will not have sufficient
resources to continue operations in the absence of an alternative transaction.
The Company does not believe that any funds would be available for holders of
common stock in the event of such a liquidation.
F-31
<PAGE> 100
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>
F-32
<PAGE> 101
APPENDIX A
CARDIAC PATHWAYS CORPORATION
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
MAY 20, 1999
<PAGE> 102
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C> <C>
1. Sale of Stock...................................................... A-1
2. Closing Date....................................................... A-1
3. Delivery........................................................... A-2
4. Representations and Warranties of the Company...................... A-2
(a) Corporate Power............................................. A-2
(b) Authorization............................................... A-2
(c) Capital Structure........................................... A-3
(d) Valid Issuance of Stock..................................... A-3
(e) No Conflict; Required Filings and Consents.................. A-4
(f) Litigation.................................................. A-4
(g) Charter Documents; Subsidiaries............................. A-4
(h) Absence of Certain Developments............................. A-4
(i) Absence of Undisclosed Liabilities.......................... A-5
(j) Non-Contravention........................................... A-5
(k) Filings..................................................... A-5
(l) Employee Matters and Benefit Plans.......................... A-6
(m) Labor Matters............................................... A-8
(n) Title to Property........................................... A-8
(o) Taxes....................................................... A-8
(p) Compliance with Laws........................................ A-9
(q) Environmental Matters....................................... A-9
(r) Intellectual Property....................................... A-10
(s) Personnel................................................... A-10
(t) Year 2000 Compliance........................................ A-10
(u) No Brokers.................................................. A-10
(v) Chief Executive Officer..................................... A-10
(w) Registration Rights......................................... A-10
(x) Permits..................................................... A-11
(y) Royalties................................................... A-11
(z) Real Property Holding Corporation........................... A-11
(aa) Investment Company Act...................................... A-11
(bb) Qualified Small Business.................................... A-11
(cc) Small Business Concern...................................... A-11
(dd) Broker's or Finder's Fee.................................... A-11
(ee) Vote Required............................................... A-11
5. Representations and Warranties of the Purchasers................... A-11
(a) Corporate Power............................................. A-11
(b) Authorization............................................... A-11
(c) Governmental Approvals...................................... A-12
(d) Non-Contravention........................................... A-12
(e) Risk Factors................................................ A-12
(f) No Brokers.................................................. A-12
</TABLE>
A-i
<PAGE> 103
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C> <C>
Compliance with Securities Laws and Restrictions on Transfer of
6. Securities......................................................... A-13
Additional Representations and Warranties and Agreements of
(a) Each Purchaser.............................................. A-13
(b) Agreement Not to Transfer................................... A-14
(c) Stop Transfer Orders........................................ A-14
(d) Compliance with Section 6................................... A-14
7. Additional Covenants of the Purchasers Regarding Securities........ A-14
(a) Forms 13D or 13G............................................ A-14
(b) Insider Trading Policy; Short Sales......................... A-14
(c) Material Confidential Information........................... A-15
(d) Reporting Obligations Pursuant to Section 16................ A-15
8. Additional Covenants of the Company................................ A-16
(a) Inspection.................................................. A-16
(b) Board of Directors.......................................... A-16
(c) Right of First Offer........................................ A-16
(d) Sonometrics License......................................... A-18
(e) Chief Executive Officer..................................... A-18
(f) Reverse Stock Split; Bylaws................................. A-18
(g) Reservation of Common Stock................................. A-18
(h) Proprietary Information and Inventions Agreement............ A-18
(i) Qualified Small Business.................................... A-18
(j) Small Business Administration Matters....................... A-18
(k) Regulatory Compliance Cooperation........................... A-19
(l) Proxy Statement............................................. A-19
(m) Stockholder Approvals; Recommendations...................... A-20
(n) Notices of Certain Events................................... A-20
(o) Efforts..................................................... A-21
(p) No Solicitation............................................. A-21
9. Closing Conditions................................................. A-22
(a) Conditions to Purchaser's Obligations at the Closing........ A-22
(b) Conditions to Company's Obligations at the Closing.......... A-24
10. General Provisions................................................. A-24
(a) Notices..................................................... A-24
(b) Governing Law............................................... A-25
(c) Amendments.................................................. A-25
(d) Assignment.................................................. A-26
(e) Expenses.................................................... A-26
(f) Counterparts................................................ A-26
(g) Entire Agreement............................................ A-26
(h) Titles...................................................... A-26
(i) Termination................................................. A-26
(j) Effect of Termination....................................... A-27
EXHIBITS
A. CERTIFICATE OF DESIGNATION.................................. A-31
C. REGISTRATION RIGHTS AGREEMENT............................... A-43
D. VOTING AGREEMENT............................................ A-57
</TABLE>
A-ii
<PAGE> 104
CARDIAC PATHWAYS CORPORATION
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
THIS CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the "AGREEMENT") is
made as of May 20, 1999 between Cardiac Pathways Corporation, a Delaware
corporation having its principal executive office at 995 Benecia Avenue,
Sunnyvale, California 94086 (the "Company"), and the purchasers listed on
Schedule A hereto, each of which is herein referred to as a "PURCHASER" and
collectively, the "PURCHASERS".
RECITALS
A. The parties desire that the Purchasers make an equity investment of
between $25,000,000 and $40,000,000 in the Company pursuant to the terms and
conditions of this Agreement.
B. The shares of Series B Convertible Preferred Stock issued to the
Purchasers pursuant to this Agreement shall have registration rights and other
rights as evidenced by the Registration Rights Agreement in the form attached
hereto as Exhibit C (the "RIGHTS AGREEMENT").
C. In order to induce the Purchasers to enter into this Agreement, certain
directors, certain officers, and certain stockholders of the Company have
entered into a voting agreement in the form attached hereto as Exhibit D (the
"VOTING AGREEMENT") with the Company, pursuant to which they have agreed to vote
to approve the transaction contemplated hereunder.
D. In partial consideration of the Purchasers' investment in the Company,
three nominees of the Purchasers shall be elected to the Board of Directors of
the Company pursuant to the terms and conditions set forth in the Rights
Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and promises set forth in this Agreement, the parties agree as follows:
1. Sale of Stock.
(a) The Company hereby agrees to sell to the Purchasers or their designees,
and the Purchasers or their designees hereby agree to purchase from the Company
in the amounts listed on Schedule A hereto, which are inclusive of any Shares
(as defined below) issued upon cancellation of notes issued by the Company to
the Purchasers, for aggregate consideration of between $25.0 and $40.0 million,
up to 40,000 shares of the Company's Series B Convertible Preferred Stock (the
"SHARES") at the per share purchase price (the "PER SHARE PURCHASE PRICE") equal
to 1,000 times the lower of (i) $1.00 or (ii) average trading price of the
Company's common stock (the "COMMON STOCK") on the five (5) trading days
immediately prior to the date of the public announcement of this private
placement, as reported on the Nasdaq National Market. Additional Purchasers may
be added to Schedule A after the date of this Agreement at the sole discretion
of the majority in interest of the Purchasers as set forth on Schedule A.
(b) The Shares shall have the respective rights, preferences and privileges
set forth in a certificate of designation attached hereto as Exhibit A (the
"CERTIFICATE OF DESIGNATION"), which shall be approved by the Purchasers and
filed on or prior to the Closing Date (as defined below) by the Company with the
Secretary of State of Delaware.
2. Closing Date. The closing of the purchase and sale of the Shares
hereunder (the "CLOSING") will take place, upon the satisfaction of the
conditions to closing set forth in Section 9 hereof, at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo
Alto, California, as soon as practicable but in any event, subject to applicable
law, no later than the earlier to occur of five (5) business days after the last
of the conditions set forth in Section 9 hereof have been satisfied or October
31, 1999. The date of the Closing is hereinafter referred to as the "Closing
Date."
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3. Delivery. At the Closing, the Company will deliver a certificate
registered in each Purchaser's name representing the Shares to be purchased by
such Purchaser. Such delivery shall be against payment of the purchase price
therefor or by cancellation of notes delivered by the Purchasers to the Company,
or a combination of each of the foregoing, in an amount equal to the product of
the number of Shares and the Per Share Purchase Price (the "PURCHASE PRICE") by
wire transfer to the Company's bank account at:
<TABLE>
<S> <C>
Bank Name: Citibank
Bank Address: 111 Wall Street
New York, NY 10005
Contact: David L. Hayes (415-576-2148)
ABA#: 021000089
Account Name: Morgan Stanley
Account Number: #3889-0774
FBO CPC #14-78247
</TABLE>
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchasers as follows, except as set forth on a
Disclosure Schedule (the "DISCLOSURE SCHEDULE") attached hereto as Exhibit B and
furnished to each Purchaser, which exceptions shall be deemed to be
representations and warranties as if made hereunder
(a) Corporate Power. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and is
qualified to do business as a foreign corporation in each jurisdiction where
failure to qualify would not, individually or in the aggregate, (i) adversely
affect the legality, validity or enforceability of this Agreement, the Voting
Agreement or the Rights Agreement in any material respect, (ii) have or result
in a Material Adverse Effect on the results of operations, assets, prospects or
financial condition of the Company, taken as a whole or (iii) adversely impair
the Company's ability to perform fully on a timely basis its obligations under
this Agreement, the Voting Agreement or the Rights Agreement (any of (i), (ii)
or (iii), being a "MATERIAL ADVERSE EFFECT"). The Company has full corporate
power and authority to own its property, to carry on its business as presently
conducted and to carry out the transactions contemplated hereby.
(b) Authorization. The Company has full corporate power to execute, deliver
and perform this Agreement, the Voting Agreement and the Rights Agreement, and
each such agreement has been duly executed and delivered by the Company and is
the legal, valid and, assuming due execution by the Purchaser, binding
obligation of the Company, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting creditors' rights generally, and to general equitable principles. The
execution, delivery and performance by the Company of this Agreement, the Voting
Agreement and the Rights Agreement, including the issuance (or reservation for
issuance), sale and delivery of the Shares contemplated by Section 1 hereof and
the Common Stock issuable upon conversion thereof, have been duly authorized by
all necessary corporate action on the part of the Company, its officers,
directors and stockholders; provided, however, that the Company makes no
representation or warranty as to the enforceability of the indemnification and
contribution provisions of Section 5 of the Rights Agreement to the extent that
the provisions thereof may be subject to limitations of public policy and the
effect of applicable statutes and judicial decisions. The Board of Directors of
the Company (at a meeting duly called and held) has (a) determined that the sale
of the Shares is advisable and fair and in the best interests of the Company and
its stockholders, and (b) recommended the approval and adoption of this
Agreement and approval of the sale of the Shares by the stockholders and
directed that this Agreement and the sale of the Shares by submitted for
consideration by the Company's stockholders. The Board of Directors of the
Company has taken all action necessary to render inapplicable, as it relates to
Purchasers, the provisions of Section 203 of the Delaware General Corporation
Law (the "DGCL"). No other corporate action on the part of the Company is
necessary to authorize the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby (other than, in the
case of this Agreement, the approval of the sale of the Shares by the holders of
at least a majority of the Common Stock voting at the meeting held to consider
sale of the Shares).
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(c) Capital Structure.
(i) The authorized capital stock of the Company consists of 30,000,000
shares of Common Stock, $.001 par value per share, and 5,000,000 shares of
Preferred Stock, $.001 par value per share, of which 30,000 shares have
been designated Series A Participating Preferred Stock, 50,000 shares have
been designated Series B Convertible Preferred Stock and 4,920,000 are
undesignated. As of the date hereof, (i) 10,038,578 shares of Common Stock,
all of which are validly issued, fully paid and nonassessable, no shares of
Series A Participating Preferred Stock and no shares of Series B
Convertible Preferred Stock were issued and outstanding; (ii) no shares
were held in treasury by the Company or by any subsidiaries of the Company;
(iii) 2,866,629 shares of Common Stock were reserved for issuance under the
Company's stock plans (including (A) 1,442,440 shares of Common Stock
reserved for issuance under the 1991 Stock Option Plan, 1,067,591 shares of
which were subject to outstanding options and 374,849 of which were
reserved for future grants, (B) 60,000 shares of Common Stock were reserved
for issuance under the 1996 Director Option Plan, 33,000 shares of which
were subject to outstanding options and 27,000 of which were reserved for
future grants, (C) 400,000 shares of Common Stock were reserved for
issuance under the 1998 Non-Statutory Stock Option Plan, 143,818 of which
were subject to outstanding options and 256,182 shares of which were
available for future grants, (D) 920,506 shares of Common Stock were
reserved for issuance under the 1998 Employee Stock Purchase Plan, 40,506
shares of which were available for future purchase in fiscal 1999 and
880,000 of which may be purchased in maximum amounts of 200,000 shares per
fiscal year commencing July 1, 1999 and (E) 43,683 shares were subject to
an outstanding nonstatutory option granted outside of the plans);
collectively the Company's "STOCK PLANS;" and (iv) 143,141 shares of Common
Stock and related Preferred Stock Purchase Rights were subject to
outstanding warrants to purchase such shares. All shares of the Company's
Common Stock subject to issuance as specified above, on the terms and
conditions specified in the instruments pursuant to which they are
issuable, shall be duly authorized, validly issued, fully paid and
nonassessable. There are no obligations, contingent or otherwise, of the
Company or any of its subsidiaries to repurchase, redeem or otherwise
acquire any shares of the Company's capital stock or the capital stock of
any of the Company's subsidiaries or make any investment (in the form of a
loan, capital contribution or otherwise) in any such subsidiary or any
other entity other than as contemplated by this Agreement. All of the
outstanding shares of capital stock of each subsidiary of the Company are
duly authorized, validly issued, fully paid and nonassessable, and all such
shares (other than directors' qualifying shares) are owned by the Company
or another subsidiary of the Company free and clear of all security
interests, liens, claims, pledges, agreements, limitations on the Company's
voting rights, charges or other encumbrances of any nature. The Common
Stock is quoted on the Nasdaq National Market.
(ii) Except as set forth in Section 4(c)(i), there are no equity
securities of any class of capital stock of the Company, or any security
exchangeable into or exercisable for such equity securities, issued,
reserved for issuance or outstanding. Except as set forth in Section
4(c)(i), there are no options, warrants, equity securities, calls, rights,
commitments or agreements of any character to which the Company or any of
its subsidiaries is a party or by which it is bound obligating the Company
or any of its subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock of the
Company or any of its subsidiaries to grant or enter into any such warrant,
equity security, call, right, commitment or agreement, and except for the
transactions contemplated by this Agreement, the Voting Agreement and the
Rights Agreement, there are no voting trusts, proxies or other agreements
or understandings with respect to the shares of capital stock of the
Company to which the Company is a party.
(d) Valid Issuance of Stock. The Shares will be duly authorized, validly
issued, fully paid and non-assessable and, based in part upon the
representations of the Purchaser in this Agreement, will be issued in compliance
with all applicable federal and state securities laws. The Common Stock issuable
upon conversion of the Shares (the "CONVERSION SHARES") has been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the Certificate of Designation, will be duly and validly issued and fully paid
and nonassessable. The Shares and the Conversion Shares will be free of
restrictions on transfer other than the restrictions in this Agreement and the
Rights Agreement and under applicable state and/or federal securities
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laws, and will not be subject to any preemptive or other similar rights or any
liens or encumbrances (other than any liens or encumbrances created by the
Purchasers).
(e) No Conflict; Required Filings and Consents.
(i) The execution and delivery of this Agreement, the Voting Agreement
and the Rights Agreement by the Company do not, and the performance of this
Agreement, the Voting Agreement and the Rights Agreement by the Company
shall not, (i) conflict with or violate the Amended and Restated
Certificate of Incorporation (the "CERTIFICATE OF INCORPORATION"), the
Certificate of Designation, the Company's Bylaws, as amended (the "BYLAWS")
or equivalent organizational documents of the Company or any of its
subsidiaries, (ii) conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to the Company or any of its
subsidiaries or by which it or their respective properties are bound or
affected, or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default)
under, or impair the Company's or any such subsidiary's rights or alter the
rights or obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on any of the properties or
assets of the Company or any of its subsidiaries pursuant to, any material
note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or its or any of their respective properties are bound or
affected, except for any such breaches, defaults or other occurrences that
do not have or result in, individually or in the aggregate, a Material
Adverse Effect.
(ii) The execution and delivery of this Agreement, the Voting
Agreement and the Rights Agreement by the Company do not, and the
performance of this Agreement, the Voting Agreement and the Rights
Agreement by the Company shall not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
governmental entity except for applicable requirements, if any, of the
Securities Act, the Exchange Act, state securities laws, the rules and
regulations of the Nasdaq National Market and the consent of a majority of
the holders of the Common Stock of the Company subject to that certain
Shareholder Rights Agreement dated as of June 13, 1995.
(f) Litigation. There is no litigation or governmental proceeding or
investigation pending or, to the knowledge of the Company, threatened against
the Company that either (i) adversely affects or challenges the legality,
validity or enforceability of this Agreement, the Voting Agreement or the Rights
Agreement or (ii) could reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect.
(g) Charter Documents; Subsidiaries. Except for Cardiac Pathways B.V., a
corporation organized under the laws of the Netherlands, and Cardiac Pathways
G.m.b.H., a corporation organized under the laws of Germany, the Company has no
active subsidiaries and does not otherwise directly or indirectly control any
other business entity. The Company has furnished counsel to the Purchasers with
true, correct and complete copies of its Amended and Restated Certificate of
Incorporation and Bylaws, together with any amendments thereto as of the date
hereof and the charter documents of each of its subsidiaries. Each of the
Company's subsidiaries is duly organized and existing under the laws of its
jurisdiction of organization and is in good standing under such laws. None of
the Company's subsidiaries owns or leases property or engages in any activity in
any jurisdiction that might require its qualification to do business as a
foreign corporation and in which the failure so to qualify would have a Material
Adverse Effect.
(h) Absence of Certain Developments. Since the date of its most recent
report filed with the Commission pursuant to the Securities and Exchange Act of
1934, as amended from time to time (such act, together with the rules and
regulations promulgated thereunder, the "EXCHANGE ACT," and such report, the
"CURRENT SEC FILING"), except as disclosed therein, there has been no (i) change
in the condition, financial or otherwise, of the Company or its assets,
liabilities, properties, business, operations, intellectual property rights
owned or controlled by it, or prospects generally that would, individually or in
the aggregate, have a Material Adverse Effect; (ii) declaration, setting aside
or payment of any dividend or other distribution with respect to the capital
stock of the Company, or (iii) loss, destruction or damage to any property of
the Company, whether or not insured, which has or may have a Material Adverse
Effect.
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(i) Absence of Undisclosed Liabilities. Except as and to the extent
reflected or stated in the Current SEC Filing, there has been no:
(i) Material accrued or contingent liability of a type required to be
reflected on a balance sheet in accordance with generally accepted
accounting principles or described in the footnotes thereto.
(ii) Resignation or termination of any key officers in the Company;
and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(iii) Material change, except in the ordinary course of business, in
the contingent obligations of the Company by way of guaranty, endorsement,
indemnity, warranty or otherwise;
(iv) Damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the properties, business or prospects or
financial condition of the Company;
(v) Waiver by the Company of a valuable right or of a material debt
owed to it;
(vi) Direct or indirect loans made by the Company to any stockholder,
employee, officer or director of the Company, other than advances made in
the ordinary course of business;
(vii) Material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
(viii) Declaration or payment of any dividend or other distribution of
the assets of the Company;
(ix) Labor organization activity;
(x) Debt, obligation or liability incurred, assumed or guaranteed by
the Company, except those for immaterial amounts and for current
liabilities incurred in the ordinary course of business;
(xi) Sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(xii) Change in any material agreement to which the Company is a party
or by which it is bound which has had a Material Adverse Effect; or
(xiii) Any other event or condition of any character that, either
individually or cumulatively, has had a Material Adverse Effect.
(j) Non-Contravention. The execution, delivery and performance by the
Company of this Agreement, the Voting Agreement and the Rights Agreement do not
and will not (i) contravene or conflict with the Amended and Restated
Certificate of Incorporation, the Certificate of Designation or Bylaws of the
Company, or (ii) contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgment, injunction, order or decree binding
upon or applicable to the Company or its property, or result in a breach of or
constitute a default under any material agreement of the Company (whether upon
notice or passage of time) binding upon or applicable to it or its property, in
any manner which would materially and adversely affect the Purchasers' rights or
their ability to realize the intended benefits under this Agreement, the Voting
Agreement or the Rights Agreement.
(k) Filings.
(i) The Company has filed in a timely manner, and has delivered to the
Purchasers copies of, the following reports required to be filed with the
Commission under the Exchange Act: (1) the Company's quarterly report on
Form 10-Q for the quarter ended December 31, 1998 filed with the Commission
on February 16, 1999 and (2) the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 filed with Commission on September 25,
1998 (collectively the "SEC REPORTS"). As of its filing date, (i) each such
report complied in all material respects with the applicable requirements
of the Securities Act and the Exchange Act, as the case may be, (ii) no
such report or statement filed pursuant to the Exchange Act contained any
untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under
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<PAGE> 109
which they were made, not misleading. None of the Company's subsidiaries is
required to file any forms, reports or other documents with the Commission.
(ii) Each of the consolidated financial statements (including in each
case any related notes) contained in the SEC Reports complied as to form in
all material respects with the applicable published rules and regulations
of the Commission with respect thereto, was prepared in accordance with
U.S. generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q and the rules and regulations promulgated by the
Commission), and fairly presented the consolidated financial position of
the Company and its subsidiaries as of the respective dates and the
consolidated results of operations and statements of cash flows for the
periods indicated, except that the unaudited interim financial statements
were subject to normal and recurring year-end adjustments which were not or
are not expected to be material in amount.
(l) Employee Matters and Benefit Plans.
(i) Definitions. The following terms shall have the meanings set forth
below:
(1) "Affiliate," as used in this section shall mean any other
person or entity under common control with the Company within the
meaning of Section 414(b), (c), (m) or (o) of the Internal Revenue Code
of 1986, as amended (the "CODE"), and regulations thereunder;
(2) "Company Employee Plan" shall refer to any plan, program,
policy, practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether formal or informal, funded or
unfunded, including without limitation, each "employee benefit plan,"
within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1978, as amended ("ERISA"), which is or has been
maintained, contributed to, or required to be contributed to, by the
Company or any Affiliate for the benefit of any "Company Employee" (as
defined below), and pursuant to which the Company or any Affiliate has
or may have any material liability contingent or otherwise;
(3) "Company Employee" shall mean any current, former, or retired
employee, officer, or director of the Company or any Affiliate;
(4) "Company Employee Agreement" shall refer to each management,
employment, severance, consulting, relocation, repatriation,
expatriation, visa, work permit or similar agreement or contact between
the Company or any Affiliates and any Company Employee or consultant;
and
(5) "Company Pension Plan" shall refer to each Company Employee
Plan which is an "employee pension benefit plan," within the meaning of
Section 3(2) of ERISA.
(ii) Schedule. The Company does not have any plan or commitment to
establish any new Company Employee Plan or Company Employee Agreement, to
modify any Company Employee Plan or Company Employee Agreement (except to
the extent required by law or to conform any such Company Employee Plan or
Company Employee Agreement to the requirements of any applicable law, in
each case as previously disclosed to the Purchasers in writing, or as
required by this Agreement), or to enter into any Company Employee Plan or
Company Employee Agreement, nor does it have any intention or commitment to
do any of the foregoing.
(iii) Documents. The Company has provided to the Purchasers (i)
correct and complete copies of all documents embodying or relating to each
Company Employee Plan and each Company Employee Agreement including all
amendments thereto and written interpretations thereof, (ii) the most
recent annual actuarial valuations, if any, prepared for each Company
Employee Plan; (iii) the three most recent annual reports (Series 5500 and
all schedules thereto), if any, required under ERISA or the Code in
connection with each Company Employee Plan or related trust; (iv) if any
Company Employee Plan is funded, the most recent annual and periodic
accounting of Company Employee Plan assets; (v) the most recent summary
plan description together with the most recent summary of material
modifications, if
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any, required under ERISA with respect to each Company Employee Plan; (vi)
all IRS determination letters and rulings relating to Company Employee
Plans and copies of all applications and correspondence to or from the
Internal Revenue Service (the "IRS") or the Department of Labor (the "DOL")
with respect to any Company Employee Plan; (vii) all communications
material to any Company Employee or Company Employees relating to any
Company Employee Plan and any proposed Company Employee Plans, in each
case, relating to any amendments, terminations, establishments, increases
or decreases in benefits, acceleration of payments or vesting schedules or
other events which would result in any material liability to the Company;
and (viii) all registration statements and prospectuses prepared in
connection with each Company Employee Plan.
(iv) Company Employee Plan Compliance. (i) The Company has performed
in all material respects all obligations required to be performed by it
under each Company Employee Plan and each Company Employee Plan has been
established and maintained in all material respects in accordance with its
terms and in compliance with all applicable laws, statutes, orders, rules
and regulations, including but not limited to ERISA or the Code; (ii) to
the Company's knowledge no "prohibited transaction," within the meaning of
Section 4975 of the Code or Section 406 of ERISA, has occurred with respect
to any Company Employee Plan; (iii) there are no actions, suits or claims
pending, or, to the knowledge of the Company, threatened or anticipated
(other than routine claims for benefits) against any Company Employee Plan
or against the assets of any Company Employee Plan; (iv) each Company
Employee Plan can be amended, terminated or otherwise discontinued after
the closing in accordance with its terms, without liability to the Company
or any Affiliates (other than ordinary administration expenses typically
incurred in a termination event); (v) there are no inquiries or proceedings
pending or, to the knowledge of the Company or any Affiliates, threatened
by the IRS or DOL with respect to any Company Employee Plan; and (vi) to
the Company's knowledge neither the Company nor any Affiliate is subject to
any penalty or tax with respect to any Company Employee Plan under Section
402(i) of ERISA or Section 4975 through 4980 of the Code.
(v) Company Pension Plans. The Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Company Pension Plan which is subject to Part 3 of Subtitle B of Title I of
ERISA, Title IV of ERISA or Section 412 of the Code.
(vi) Multiemployer Plans. At no time has the Company contributed to or
been requested to contribute to any Multiemployer Plan.
(vii) No Post-Employment Obligations. No Company Employee Plan
provides, or has any liability to provide, life insurance, medical or other
employee benefits to any Company Employee upon his or her retirement or
termination of employment for any reason, except as may be required by
statute, and the Company has never represented, promised or contracted
(whether in oral or written form) to any Company Employee (either
individually or to Company Employees as a group) that such Company
Employee(s) would be provided with life insurance, medical or other
employee welfare benefits upon their retirement or termination of
employment, except to the extent required by statute.
(viii) Effect of Transaction.
(1) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the
occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Company Employee Agreement, trust or
loan that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any Company Employee.
(ix) Employment Matters. The Company and each of its subsidiaries (i)
is in compliance in all material respects with all applicable foreign,
federal, state and local laws, rules and regulations respecting employment,
employment practices, terms and conditions of employment and wages and
hours, in each case, in each location in which the Company or any of its
subsidiaries employs persons; (ii) has withheld all amounts required by law
or by agreement to be withheld from the wages, salaries and other payments
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to Company Employees; (iii) is not liable for any material arrears of wages
or any material taxes or any material penalty for failure to comply with
any of the foregoing; and (iv) is not liable for any material payment to
any trust or other fund or to any governmental or administrative authority,
with respect to unemployment compensation benefits, social security or
other benefits or obligations for Company Employees (other than routine
payments to be made in the normal course of business and consistent with
past practice).
(x) Violations. To the Company's knowledge, no employee of the Company
has violated any employment contract, patent disclosure agreement or non
competition agreement between such employee and any former employer of such
employee due to such employee being employed by the Company and disclosing
to the Company trade secrets or proprietary information of such employer.
The Company is not, and has never been, a party to any collective
bargaining agreement. The Company and its subsidiaries are in compliance in
all material respects with all applicable laws regarding employment
practices, terms and conditions of employment, and wages and hours
(including, without limitation, ERISA, the Worker Adjustment and Retaining
Notification Act or any similar state or local law).
(m) Labor Matters. (i) There are no controversies pending or, to the best
knowledge of each of the Company and its respective subsidiaries, threatened,
between the Company or any of its subsidiaries and any of their respective
employees, which controversies have or could reasonably be expected to have a
Material Adverse Effect; (ii) as of the date of this Agreement, neither the
Company nor any of its subsidiaries is a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by the
Company or its subsidiaries nor does the Company or its subsidiaries know of any
activities or proceedings of any labor union to organize any such employees (A)
as of the date of this Agreement and (B) which, as of the Closing, have or could
reasonably be expected to have a Material Adverse Effect; and (iii) as of the
date of this Agreement, neither the Company nor any of its subsidiaries has any
knowledge of any strikes, slowdowns, work stoppages or lockouts, or threats
thereof, by or with respect to any employees of the Company or any of its
subsidiaries (A) as of the date of this Agreement and (B) which, as of the
closing, have or could reasonably be expected to have a Material Adverse Effect.
(n) Title to Property. The Company owns no material real property. The
Company and each of its subsidiaries have good and defensible title to all of
their material properties and assets, free and clear of all liens, charges and
encumbrances except liens for taxes not yet due and payable and such liens or
other imperfections of title, if any, as do not materially detract from the
value of or interfere with the present use of the property affected thereby or
which, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect; and all leases pursuant to which the Company or
any of its subsidiaries lease from others material amounts of real or personal
property are in good standing, valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
material default or event of default (or any event which with notice or lapse of
time, or both, would constitute a material default and in respect of which the
Company or its subsidiary has not taken adequate steps to prevent such default
from occurring) except where the lack of such good standing, validity and
effectiveness or the existence of such default or event of default could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. All the plants, structures and equipment of the Company and its
subsidiaries, except such as may be under construction, are in good operating
condition and repair, except where the failure of such plants, structures and
equipment to be in such good operating condition and repair could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(o) Taxes. The Company and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for tax purposes of which the Company or
any of its subsidiaries is or has been a member, have timely filed all tax
returns required to be filed by them and have paid all taxes shown thereon to be
due. These returns and reports are true and complete in all material respects.
The Company has paid all taxes and other assessments due. The Company has
provided adequate accruals in accordance with generally accepted accounting
principles in its financial statements for any taxes that have not been paid,
whether or not shown as being due on any tax returns. There is (i) no material
claim for taxes that is a lien against the property of the Company or any of its
subsidiaries or is being asserted against the Company or any of its subsidiaries
other than liens for taxes not yet due and payable, (ii) no audit of any tax
return of the Company or any of its
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subsidiaries being conducted by a tax authority, (iii) no extension of the
statute of limitations on the assessment of any taxes granted by the Company or
any of its subsidiaries and currently in effect, and (iv) no agreement, contract
or arrangement to which the Company or any of its subsidiaries is a party that
may result in the payment of any amount that would not be deductible by reason
of Sections 162(m), 280G or 404 of the Code. Neither the Company nor any of its
subsidiaries has ever been a member of any combined, controlled, consolidated or
affiliated group (other than the group of which the Company is the parent) for
tax purposes. Neither the Company nor any of its subsidiaries is a party to any
tax sharing or tax allocation agreement nor does the Company or any of its
subsidiaries owe any amount under any such agreement. Neither the Company nor
any of its subsidiaries has been at any time, a "United States real property
holding corporation" with the meaning of Section 897(c)(2) of the Code.
(p) Compliance with Laws. Except with respect to environmental matters
(which are covered by Section 4(q) below), the Company and its Subsidiaries are,
and at all times since January 1, 1996 have been, in compliance with all
applicable laws, regulations, orders, judgments and decrees, except where the
failure to so comply would not have a Material Adverse Effect on the condition
of the Company and its Subsidiaries taken as a whole. Neither the Company nor
any of its subsidiaries has received any notice or other communication from any
governmental entity or other person regarding any actual or possible material
violation of, or material failure to comply with, any law, regulation, order,
judgment or decree.
(q) Environmental Matters.
(i) Hazardous Material. Except as would result in any material
liability to the Company under Environmental Laws (as defined below), no
underground storage tanks and no amount of any substance that has been
designated by any Governmental Entity or by applicable Environmental Laws
to be radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant
to the Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated pursuant to Environmental Laws, but excluding
office and janitorial supplies maintained in accordance with Environmental
Laws (a "HAZARDOUS MATERIAL") are present, as a result of the actions of
the Company or any of its subsidiaries or any affiliate of the Company, or,
to the Company's knowledge, as a result of any action of any third party or
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company or
any of its subsidiaries has at any time owned, operated, occupied or
leased. For the purposes of this Agreement, "ENVIRONMENTAL LAWS" shall mean
all federal, state, local and foreign laws, ordinances, treaties, rules,
regulations, guidelines and permit conditions relating to contamination,
pollution or the environment (including ambient air, surface water, ground
water, land surface or subsurface strata) or the protection of human health
and worker safety, including, without limitation, laws and regulations
relating to Hazardous Materials Activities (as hereinafter defined) or
emissions, discharges, releases or threatened releases of Hazardous
Materials.
(ii) Hazardous Materials Activities. Neither the Company nor any of
its subsidiaries has (i) transported, stored, used, manufactured, disposed
of, released or exposed its employees or others to Hazardous Materials in
violation of Environmental Laws, or (ii) disposed of, transported, sold,
used, released, exposed its employees or others to or manufactured any
product contained a Hazardous Material (collectively "HAZARDOUS MATERIALS
ACTIVITIES") in violation of any Environmental Laws in effect prior to or
as of the date hereof except for which violation has not heretofore been
cured or for which there is any remaining liability.
(iii) Permits. The Company and its subsidiaries hold all environmental
approvals, permits, licenses, clearances and consents (the "ENVIRONMENTAL
PERMITS") necessary for the conduct of the Company's and its subsidiaries'
Hazardous Material Activities and other businesses of the Company and its
subsidiaries as such activities and businesses are currently being
conducted. The Company and its subsidiaries are and at all times have been
in compliance in all material respects with the terms of the
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Environmental Permits except for which noncompliance has heretofore been
cured or for which there is any remaining liability.
(iv) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, claim or injunction is pending, and
to the Company's knowledge, no action, proceeding, revocation proceeding,
amendment procedure, writ, claim or injunction has been threatened by any
governmental entity against the Company or any of its subsidiaries
concerning any Environmental Permit, Hazardous Material or any Hazardous
Materials Activities of the Company or any of its subsidiaries.
(r) Intellectual Property. The Company or its subsidiaries owns each of the
patents and patent applications referred to in the SEC Reports and, except as
disclosed in the SEC Reports, (i) the Company owns or possesses adequate and
enforceable rights to use all other patent applications, patents, trademarks,
trademark applications, trade names, service marks, copyrights, copyright
applications, licenses, know-how and other similar rights and proprietary
knowledge (collectively with the patents and patent applications described in
the SEC Reports, the "INTANGIBLES") necessary for the conduct of the Company's
current, former and anticipated activities and (ii) neither the Company nor any
subsidiary, to its knowledge, has infringed, is infringing, or has received any
notice of infringement of any Intangible of any other person that, if the
subject of an unfavorable decision, ruling or finding, could reasonably be
expected to have a Material Adverse Effect and the Company knows of no basis
therefor. The expiration of any Intangibles would not have a Material Adverse
Effect on the Company and its subsidiaries taken as a whole. Except as set forth
in the SEC Reports, the Company has received no notice of potential indemnity
claims from customers based upon a notice of infringement any such customer has
received from a patent owner relating to an assertion of infringement of a
patent other than potential indemnity claims which individually or in the
aggregate would not reasonably be expected to have a Material Adverse Effect on
the Company.
(s) Personnel. All personnel, including employees, agents, consultants and
contractors, who have contributed to or participated in the conception and
development of the Intangibles on behalf of the Company have executed
nondisclosure agreements in the form set forth on the Disclosure Schedule and
either (i) have been a party to a "work-for-hire" arrangement or agreements with
the Company in accordance with applicable national and state law that has
accorded the Company full, effective, exclusive and original ownership of all
tangible and intangible property thereby arising, or (ii) have executed
appropriate instruments of assignment in favor of the Company as assignee that
have conveyed to the Company effective and exclusive ownership of all tangible
and intangible property thereby arising.
(t) Year 2000 Compliance. Except as would not reasonably be expected to
have a Material Adverse Effect on the Company, all of the Company's Information
Technology (as defined below) effectively addresses the Year 2000 issue, and
will not cause an interruption in the ongoing operations of the Company's
business on or after January 1, 2000. For purposes of the foregoing, the term
"INFORMATION TECHNOLOGY" shall mean and include all software, hardware,
firmware, telecommunications systems, network systems, embedded systems and
other systems, components and/or services that are owned or used by the Company
in the conduct of its business, or purchased by the Company from third party
suppliers.
(u) No Brokers. The Company has not directly or indirectly employed any
broker, finder or other person (including any employee) that might be entitled
to a fee, commission or other compensation upon the execution of this Agreement,
the Voting Agreement or the Rights Agreement or the consummation of the
transactions contemplated by this Agreement, the Voting Agreement or the Rights
Agreement for which the Purchasers or the Company is or may be liable.
(v) Chief Executive Officer. The Company has entered into an employment
agreement with a new Chief Executive Officer acceptable to the Purchasers.
(w) Registration Rights. Except as provided in the Rights Agreement, the
Company is presently not under any obligation and has not granted any rights to
register under the Securities Act any of its presently outstanding securities or
any of its securities that may subsequently be issued.
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(x) Permits. The Company has all franchises, permits, licenses, and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could have a Material Adverse Effect on the
business, properties, prospects, or financial condition of the Company, and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as presently planned to be conducted. The
Company is not in default in any material respect under any such franchises,
permits, licenses or other similar authority.
(y) Royalties. Except as set forth in the Disclosure Schedule, there are no
royalties, fees, honoraria or other payments payable by the Company to any
person or entity by reason of the ownership, development, use, license, sale or
disposition of the Intangibles, other than salaries and sales commissions paid
to employees and sales agents in the ordinary course of business.
(z) Real Property Holding Corporation. The Company is not a real property
holding corporation within the meaning of Section 897(c)(2) of the Internal
Revenue Code of 1986, as amended (the "Code") and any regulations promulgated
thereunder.
(aa) Investment Company Act. The Company 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.
(bb) Qualified Small Business. The Company is a "qualified small business"
within the meaning of Section 1202(d) of the Code as of the date hereof and the
Series B Preferred should qualify as "qualified small business stock" as defined
in Section 1202(c) of the Code as of the date hereof. The Company further
represents and warrants that, as of the date hereof, it meets the "active
business requirement" of Section 1202(e) of the Code and it has made no
"significant redemptions" within the meaning of Section 1202(c)(3)(B) of the
Code.
(cc) Small Business Concern. The Company, together with its "affiliates"
(as that term is defined in Section 121.103 of Title 13 of the Code of Federal
Regulations (the "FEDERAL REGULATIONS")), is a "small business concern" within
the meaning of the Small Business Investment Act of 1958, as amended (the "SMALL
BUSINESS ACT"), and Part 121 of Title 13 of the Federal Regulations. The
information delivered by the Company to Purchaser on SBA Forms 480, 652 and 1031
of the Small Business Administration (the "SBA") delivered in connection
herewith is accurate and complete. The Company is not ineligible for financing
by any SBIC Investor pursuant to Section 107.720 of Title 13 of the Federal
Regulations. The Company acknowledges that BankAmerica Ventures is a Federal
licensee under the Small Business Act.
(dd) Broker's or Finder's Fee. No agent, broker, person or firm acting on
behalf of the Company or any of its subsidiaries is, or will be, entitled to any
fee, commission or brokers or finder's fees from any of the parties hereto, or
from any person controlling, controlled by, or under common control with any of
the parties hereto, in connection with this Agreement or any of the transactions
contemplated hereby.
(ee) Vote Required. The approval of the sale of the Shares by the
affirmative vote of a majority of the shares of Common Stock voting is the only
vote of the holders of any class or series of the Company's capital stock
necessary to approve the transactions contemplated hereby. Holders of Common
Stock will not have any appraisal rights or similar rights in connection with
the sale of the Shares or any of the other transactions contemplated hereby.
5. Representations and Warranties of the Purchasers. Each of the
Purchasers, severally and not jointly, hereby represents and warrants to the
Company as follows:
(a) Corporate Power. Each Purchaser is a corporation duly incorporated
or a limited partnership duly formed, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or formation with
the requisite power and authority, corporate or otherwise, to enter into
and to consummate the transactions contemplated hereby and otherwise to
carry out its obligations hereunder and thereunder.
(b) Authorization. Each Purchaser has full power to execute, deliver
and perform this Agreement, the Voting Agreement and the Rights Agreement,
and each such agreement has been duly executed and delivered by such
Purchaser and is the legal, valid and, assuming due execution by the
Company, binding
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obligation of such Purchaser, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws affecting creditors' rights generally, and to general
equitable principles. The execution, delivery and performance by such
Purchaser of this Agreement, the Voting Agreement and the Rights Agreement,
including the payment of the Purchase Price, have been duly authorized by
all necessary corporate action of such Purchaser.
(c) Governmental Approvals. No authorization, consent, approval,
license, exemption of or filing or registration with any court or
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, under any applicable laws, rules or
regulations presently in effect, other than a Control Certificate to be
filed with the SBA by BankAmerica Ventures within thirty (30) days of the
Closing Date, is or will be necessary to be made or obtained by such
Purchaser or any of its Affiliates (as such term is defined below) for, or
in connection with, the execution and delivery of this Agreement, the
Voting Agreement or the Rights Agreement, the consummation of the
transactions contemplated hereby or thereby or performance by such
Purchaser of its obligations hereunder or thereunder. For purposes of this
Agreement, the term "AFFILIATE" means, when used with respect to any
specified person, any other person directly or indirectly controlling or
controlled by or under direct or indirect common control with such
specified person. For the purposes of this definition, "control," when used
with respect to any person, means the power to direct the management and
policies of such person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to
the foregoing.
(d) Non-Contravention. The execution, delivery and performance by the
Company of this Agreement, the Voting Agreement and the Rights Agreement do
not and will not (i) contravene or conflict with the charter documents or
bylaws of such Purchaser, or (ii) contravene or conflict with or constitute
a violation of any provision of any law, regulation, judgment, injunction,
order or decree binding upon or applicable to such Purchaser, or result in
a breach of or constitute a default under any material agreement of such
Purchaser.
(e) Risk Factors. Each such Purchaser acknowledges that an investment
in the Company involves known and unknown risks, uncertainties and other
factors which may result in such Purchaser's loss of its entire investment.
The Company is an early stage medical device company that develops and
intends to commercialize medical devices for the treatment of certain
cardiovascular and circulatory disorders. The Company's product candidates
are at an early stage of development and have not been approved for
marketing by any regulatory agencies. In addition, significant investment
in research and development, preclinical and clinical testing, regulatory
and sales and marketing activity will be necessary for the Company to
commercialize its product candidates. There can be no assurance that any of
the Company's product candidates can be successfully developed. If
successfully developed, there can be no assurance that the Company's
product candidates will be approved for marketing by regulatory agencies,
will result in any meaningful benefits to patients, will be accepted by the
medical community for use in treatment or will generate sufficient or
sustainable revenues to enable the Company to be profitable.
Each Purchaser acknowledges that such Purchaser has received a copy of
the SEC Reports and reviewed the section captioned "Factors Affecting
Future Operation Results" contained therein, which such factors are deemed
incorporated by reference into this Agreement.
(f) No Brokers. The Purchasers have not directly or indirectly
employed any broker, finder or other person (including any employee) that
might be entitled to a fee, commission or other compensation upon the
execution of this Agreement, the Voting Agreement or the Rights Agreement
or the consummation of the transactions contemplated by this Agreement, the
Voting Agreement or the Rights Agreement for which the Purchasers or the
Company is or may be liable.
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6. Compliance with Securities Laws and Restrictions on Transfer of
Securities.
(a) Additional Representations and Warranties and Agreements of Each
Purchaser. Each Purchaser, severally and not jointly, hereby represents and
warrants to, and agrees with, the Company as follows:
(i) The Purchaser (A) is purchasing the Shares for its own account for
investment only and not with a view to any resale or distribution thereof,
except pursuant to an effective registration statement under the Securities
Act of 1933, as amended from time to time (such act, together with the
rules and regulations promulgated thereunder, herein the "Securities Act"),
covering the sale, assignment or transfer or an opinion of counsel
reasonably satisfactory to the Company, concurred in by counsel to the
Company, that such registration is not required; provided, however, that
BankAmerica Ventures shall be permitted to transfer its Shares to Bank of
America Ventures, L.P. without such requirements.
(ii) Such Purchaser has received and carefully reviewed the Current
SEC Filing, and has had the opportunity to obtain and receive such other
information as it deems necessary to understand the business and financial
condition of the Company and to make the investment decision to purchase
the Shares.
(iii) As an investor in companies in the medical device industry, such
Purchaser has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of the
investment represented by the Shares, and it is able to bear the economic
risk of such investment.
(iv) Such Purchaser is an "accredited investor" as such term is
defined in Rule 501(a) of Regulation D under the Securities Act. If other
than an individual, the Purchaser also represents it has not been organized
for the purpose of acquiring the Shares.
(v) Such Purchaser understands that the Shares are being issued in a
transaction which is exempt from the registration requirements of the
Securities Act by reason of the provisions of Section 4(2) of the
Securities Act and that the Shares will be subject to transfer restrictions
and must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available.
The certificate representing the Shares will be affixed with the
following legends:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED, ASSIGNED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT COVERING
THE TRANSFER OR AN OPINION OF COUNSEL OR OTHER EVIDENCE IN FORM AND
SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED."
The restrictions on sale, assignment and transfer of the Shares
contained in this Section 6(a)(v) shall terminate at such time as there
shall be delivered to the Company and such Purchaser an opinion of counsel
to such Purchaser, in form and substance reasonably satisfactory to the
Company, to the effect that, due to the lapse of time or otherwise, no
registration of such securities is required under the Securities Act in
connection with any distribution of such securities to the public in the
United States. In addition, at any time after (A) the delivery of such
opinion; or (B) such securities are sold pursuant to and in accordance with
an effective registration statement under the Securities Act covering such
sale, the Purchaser shall be entitled to exchange its certificate
representing such securities (or any portion thereof as to which (A) or (B)
above applies) for a new certificate not bearing the first legend set forth
in Section 6(a)(v).
(vi) Such Purchaser understands that the Shares constitute "restricted
securities" within the meaning of Rule 144, promulgated under the
Securities Act. Purchaser is aware that Rule 144, in substance, except as
otherwise provided in subsection (k) of such rule, permits limited public
resale of "restricted securities" acquired, directly or indirectly, from
the issuer thereof (or from an affiliate of such issuer), in a non-public
offering subject to the satisfaction of certain conditions, including,
among other
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things: (A) the availability of certain public information about the
Company; (B) the resale occurring not earlier than the expiration of the
applicable holding period stated therein; (C) the sale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Exchange Act) and
(D) the amount of securities being sold during any three-month period not
exceeding the specified limitations stated therein. Such Purchaser also
understands that the holding period under Rule 144 will commence on the
Closing Date.
(vii) Such Purchaser further understands that in the event all of the
applicable requirements of Rule 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other
registration exemption will be required; and that, notwithstanding the fact
that Rule 144 is not exclusive, the staff of the Commission has expressed
its opinion that persons proposing to sell private placement securities
other than in a registered offering and otherwise than pursuant to Rule 144
will have a substantial burden of proof in establishing that an exemption
from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions
do so at their own risk.
(b) Agreement Not to Transfer.
(i) Prior to twelve months after the Closing, the Purchasers shall
not, directly or indirectly, Transfer or offer to Transfer any Shares,
unless the Company consents to such Transfer and the transferee agrees to
be bound by this Agreement; provided however, that BankAmerica Ventures
shall be permitted to transfer its Shares to Bank of America Ventures, L.P.
without such requirements.
(ii) As used in this Section 6(b), the term "TRANSFER" shall mean any
sale, transfer, assignment, hypothecation, encumbrance or other
disposition, whether voluntary or involuntary, of Shares. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of
the initial pledge and at any pledgee's sale or a sale by any secured
creditor or a retention by the secured creditor of the pledged Shares in
complete or partial satisfaction of the indebtedness for which the Shares
are security.
(c) Stop Transfer Orders. Such Purchaser understands that notations
restricting the transfer of the Shares will be made on the transfer records of
the Company and that a stop transfer order will be entered with the Company's
transfer agent.
(d) Compliance with Section 6. None of the Shares (nor any interest
therein) shall be sold, assigned or offered except in accordance with the
provisions of this Section 6.
7. Additional Covenants of the Purchasers Regarding Securities.
(a) Forms 13D or 13G. Promptly following the Closing, the Purchasers shall
file with the Commission any reports regarding their ownership of the Company's
Common Stock as required by Section 13(d) of the Exchange Act and the rules and
regulations.
(b) Insider Trading Policy; Short Sales.
(i) For so long as a representative of the Purchasers is a member of
the Board of Directors of the Company, the Purchasers and their Affiliates
who have access to Material Confidential Information (as defined below) of
the Company shall agree to comply with the Insider Trading Compliance
Program of the Company including, but not limited to, trade pre-clearance
requirements and trading blackout periods as may be in effect from time to
time. In addition, the Purchasers hereby acknowledge that each Purchaser is
aware, and that each Purchaser will advise such directors, officers,
employees, representatives, agents and advisors who are informed as to the
matters concerning the Company or who have access to the Company's Material
Confidential Information, that United States securities laws prohibit any
person who has received from an issuer material nonpublic information
concerning the issuer from communicating such information to any other
person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell the securities of such issuer, make
investment recommendations based on such material nonpublic information or
otherwise affect the trading price of such issuer's securities. The
limitations set forth in the immediately preceding sentence are not
intended to preclude the brokerage, investment advisory, financial
advisory, financing, money management,
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trading, arbitrage or other similar activities conducted on the Purchasers'
behalf by only those directors, officers, representatives and agents and
advisors who do not have access to the Company's Material Confidential
Information or are not aware of the content of such Material Confidential
Information.
(ii) The Purchasers and their Affiliates shall not make any short sale
of, loan, or grant any option for the purchase of, any equity securities of
the Company held by the Purchasers at any time.
(c) Material Confidential Information.
(i) In connection with the Purchasers' decision-making with respect to
their acquisition of the Shares, the Company has furnished to the
Purchasers and their officers, directors, employees and agents
(collectively referred to as "PURCHASERS AND AGENTS") financial and other
information which has not theretofore been made available to the public
("MATERIAL CONFIDENTIAL INFORMATION"). The Purchasers and Agents may also
receive Material Confidential Information of the Company in the future.
Pursuant to a Nondisclosure Agreement dated March 5, 1999, the Purchasers
have agreed to refrain from disclosing such information pursuant to the
terms and conditions of such agreement. The Company and the Purchasers wish
to replace the confidentiality obligations of the parties set forth in such
agreement with those provided herein. Therefore, the Purchasers and Agents
shall treat all such Material Confidential Information in accordance with
the provisions of this agreement and to take or abstain from taking certain
other actions herein set forth. The term "Material Confidential
Information" does not include information which (i) was already in the
Purchasers' or Agents' possession prior to the disclosure by the Company of
the Material Confidential Information, provided that such information is
not known by the Purchasers and Agents to be subject to another
confidentiality agreement with or other obligation of secrecy to the
Company or another party, (ii) becomes generally available to the public
other than as a result of disclosure by the Purchasers or Agents or (iii)
becomes available to you on a non-confidential basis from a source other
than the Company or its advisors, provided that such source is not known to
the Purchasers or Agents to be bound by a confidentiality agreement with or
other obligation of secrecy to the Company or another party. The Purchasers
agree that the Company's Material Confidential Information will be used
solely for the purpose of monitoring the Purchasers' holdings of the
Shares. The Purchasers also agree that the Purchasers and Agents will not
disclose any of the Company's Material Confidential Information now or
hereafter received or obtained from the Company or its representatives to
any third party or otherwise use or permit the use of the Material
Confidential Information, except as required by applicable law or legal
process, without the prior written consent of the Company; provided,
however, that any such Material Confidential Information of the Company may
be disclosed to such of the Purchasers' representatives who need to know
such information for the purpose of monitoring the Purchasers' investment
in the Shares; in which case it is understood that the Purchasers'
representatives, directors, officers, employees, agents and advisors shall
be informed by the Purchasers of the confidential nature of such
information and shall be directed by the Purchasers to treat such
information confidentially. In the event that the Purchasers and Agents or
any of their representatives becomes legally compelled (by deposition,
interrogatory, request for documents, subpoena, civil investigative demand,
other demand or rules and regulations under the federal securities laws or
similar process, but not pursuant to laws and regulations which Purchasers
and Agents are subject to as a result of being an affiliate of a national
bank) to disclose any of the Material Confidential Information, the
Purchasers and Agents shall provide the Company with prompt prior written
notice of such requirement prior to such disclosure. In the event that a
protective order or other remedy is not obtained, or that the Company
waives compliance with the provisions hereof, each Purchaser agrees to
furnish only that portion of the Material Confidential Information which
such Purchaser is legally required to furnish and, where appropriate, to
exercise the Purchasers' and Agents' reasonable efforts to obtain
assurances that confidential treatment will be accorded such Material
Confidential Information.
(d) Reporting Obligations Pursuant to Section 16. The Purchasers agree to
file with the Commission any reports required to be filed pursuant to Section
16(a) of the Exchange Act and the rules and regulations promulgated thereunder
by such Purchasers, their officers, directors, employees or affiliates or by
such Purchasers' nominee to the Company's Board of Directors within the time
such filings are required to be made and to provide the Company with a copy of
all such filings promptly thereafter.
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8. Additional Covenants of the Company.
(a) Inspection. For so long as a Purchaser holds at least 500 shares of
Series B Convertible Preferred Stock (or the Common Stock issuable or issued
upon conversion of 500 shares of Series B Convertible Preferred Stock), the
Company shall permit each the Purchaser, at such Purchaser's expense, to visit
and inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with its
officers, all at such reasonable times as may be requested by the Investor;
provided, however, that the Company shall not be obligated pursuant to this
Section 8(a) to provide access to any information that it reasonably considers
to be a competitively sensitive information unless such Purchaser has executed a
non-disclosure agreement in a form reasonably acceptable to the Company.
(b) Board of Directors. The following actions will be taken with respect to
the Company's Board of Directors.
(i) The existing Board of Directors will resign effective as of the
Closing Date.
(ii) At or prior to the Closing the Company shall amend its Bylaws, if
required, to fix the number of directors to five (5) members with a
provision that the number of directors may be increased to seven (7)
members with the consent of the directors who are representatives of the
Purchasers.
(iii) The holders of the Series B Convertible Preferred shall have the
right to nominate three (3) members of the Company's Board of Directors,
two (2) of which shall be representatives of BankAmerica Ventures and one
(1) of which shall be a representative of Morgan Stanley Dean Witter
Venture Partners ("MSDW"). In the event that the number of the Company's
directors exceeds five (5), the holders of Series B Convertible Preferred
shall have the right to nominate one (1) additional director. All members
of the Company's Board of Directors nominated by holders of Series B
Convertible Preferred shall have the right to be members of all committees
of the Board of Directors. The Company shall not file any proxy or other
materials with the SEC opposed to the re-election of such persons as
directors of the Company unless such director has committed any actions
giving the stockholders of the Company the right to remove such director
for cause and shall use all reasonable efforts to secure the election of
such persons as directors.
(iv) The remaining directors will include (i) one (1) representative
of the Company's management, who shall be the Company's Chief Executive
Officer and (ii) one (1) outside representative appointed by a majority of
the Board of Directors.
(v) As of the execution of this Agreement and in the event that
BankAmerica Ventures, the State of Wisconsin Investment Board ("SWIB") or
MSDW do not have a representative on the Company's Board of Directors, or
any committee thereof then the Company shall invite a representative of
BankAmerica Ventures, SWIB or MSDW, as the case may be, to attend all
meetings of its Board of Directors or any committee thereof in a nonvoting
observer capacity and, in this respect, shall give such representative
copies of all notices, minutes, consents, and other materials (the "BOARD
MATERIALS") that it provides to its directors at the same time as such
Board Materials are provided to any of its directors; provided, however,
that the Company reserves the right to withhold any information and to
exclude such representative of BankAmerica Ventures, SWIB or MSDW from any
meeting or portion thereof if the disclosure of such material or
discussion, in the opinion of counsel to the Company, would jeopardize the
Company's attorney client privilege. The right granted to BankAmerica
Ventures, SWIB and MSDW to attend meetings of the Company's Board of
Directors and to receive Board Materials shall not be assignable.
(c) Right of First Offer. Subject to the terms and conditions specified in
this Section 8(c), the Company hereby grants to each Purchaser a right of first
offer to purchase its Pro Rata Share (as hereinafter defined) (in whole or in
part) with respect to future sales by the Company of its Future Shares (as
hereinafter defined). Each Purchaser shall be entitled to assign or apportion
the right of first offer hereby granted it among itself and its partners and
affiliates (including in the case of a venture capital fund other venture
capital funds affiliated with such fund) in such proportions as it deems
appropriate. For purposes of this Section 8(c), a Purchaser's "PRO RATA SHARE"
of Future Shares shall mean that number of Future Shares that equals the
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proportion that (x) the number of shares of Common Stock issued and held, or
issuable upon conversion of the Shares then held, by such Purchaser bears to (y)
the total number of shares of Common Stock of the Company then outstanding
(assuming full conversion of all convertible securities).
(i) Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of
its capital stock, including any debt securities convertible into equity
(collectively, "FUTURE SHARES"), the Company shall first make an offering
of such Future Shares to each Purchaser in accordance with the following
provisions:
(ii) The Company shall deliver a notice by confirmed facsimile
transmission, certified mail or a nationally recognized overnight courier
service ("NOTICE") to each of the Purchasers stating (i) its bona fide
intention to offer such Future Shares, (ii) the number of such Future
Shares to be offered, and (iii) the price and a summary of the terms, if
any, upon which it proposes to offer such Future Shares.
(iii) By written notification to the Company within ten (10) calendar
days after receipt of the Notice, each Purchaser may elect to purchase or
obtain, at the price and on the terms specified in the Notice, up to its
Pro Rata Share of such Future Shares. The Company shall promptly, in
writing, inform each Purchaser that elects to purchase all the shares
available to it (a "FULLY-EXERCISING PURCHASER") of any other Purchaser's
failure to do likewise. During the ten (10) day period commencing after
such information is given, each Fully-Exercising Purchaser may elect to
purchase that portion of the Future Shares for which Purchasers were
entitled to subscribe but that were not subscribed for by the Purchasers
that is equal to the proportion that the number of shares of Common Stock
issued and held, or issuable upon conversion of Shares then held, by such
Fully-Exercising Purchaser bears to the total number of shares of Common
Stock issued and held, or issuable upon conversion of the Shares then held,
by all Fully-Exercising Purchasers who wish to purchase some of the
unsubscribed Future Shares.
(iv) If all Future Shares that the Purchasers are entitled to obtain
pursuant to Section 8(c) are not elected to be obtained as provided herein,
the Company may, during the sixty (60) day period following the expiration
of the period provided in Section 8(c)(iii) hereof, offer the remaining
unsubscribed portion of such Future Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an
agreement for the sale of the Future Shares within such period, or if such
agreement is not consummated within sixty (60) days of the execution
thereof, the right provided hereunder shall be deemed to be revived and
such Future Shares shall not be offered unless first reoffered to the
Purchasers in accordance herewith.
(v) The right of first offer in this Section 8(c) shall not be
applicable (i) to any shares of Common Stock (including shares issued upon
exercise of stock options outstanding as of the date of this Agreement)
issuable or issued to employees, consultants or directors directly or
pursuant to stock option plans or arrangements approved by the Board of
Directors, including each board representative of the Purchasers, (ii) to
shares of Common Stock issued or issuable in a firm commitment underwritten
public offering, (iii) to shares of Common Stock issued or issuable upon
conversion of shares of Series A Participating Preferred Stock or Series B
Convertible Preferred Stock or as a dividend or distribution on the shares
of Series A Participating Preferred Stock or Series B Convertible Preferred
Stock, (iv) to securities issued or issuable to banks or equipment lessors,
provided such issuances are for other than primarily equity financing
purposes and provided such issuances are approved by the Board of
Directors, including each board representative of the Purchasers, (v) to
securities issued in connection with business combinations or corporate
partnering agreements approved by the Board of Directors, including each
board representative of the Purchasers, or (vi) to securities issued in
strategic financings accompanies by commercial development, joint ventures
or other related agreements approved by the Board of Directors, including
each board representative of the Purchasers.
(vi) The rights granted to the Purchasers under Section 8(c) hereof
may be assigned to any transferee or assignee who is (a) a subsidiary,
parent, general partner, limited partner, retired partner, member or
retired member of a Purchaser, (b) a Purchaser's ancestors, descendants or
spouse or to trusts for the benefit of such persons or such Purchaser or
(c) a client, employee or member of a Purchaser,
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provided that (i) such transfer may otherwise be effected in accordance
with applicable securities laws, (ii) the Company is given written notice
of any such transfer five (5) Business Days prior to the date of said
transfer, stating the name and address of said transferee or assignee and
identifying the securities with respect to which such registration rights
are being assigned and (iii) the transferee or assignee of such rights is
not deemed by the Board of Directors of the Company, in its reasonable
judgment, to be a competitor of the Company and provided further that the
transferee or assignee of such rights assumes in writing in a form
reasonably acceptable to the Company the obligations of the Purchasers
under this Agreement.
(d) Sonometrics License. The Company will use its best efforts to execute
an agreement to exclusively license or acquire, for an aggregate purchase price
no greater than $1,500,000, Sonometric's patent portfolio relating to technology
and methods for three dimensional digital ultrasound tracking. The Patent
Portfolio will include, but not be limited to the following: Patent Numbers
5,515,853, 5,779,638, 5,795,298, 5,797,849, 5,817,022 and 5,868,673 and all
currently active applications that are continuations, continuations-in-part, or
divisional properties, and all corresponding foreign-filed patents and patent
applications.
(e) Chief Executive Officer. In the event that a new Chief Executive
Officer, (who shall be acceptable to the Purchasers) shall have commenced
employment with the Company prior to the Closing, the Company shall use it best
efforts to retain such Chief Executive Officer through the Closing Date.
(f) Reverse Stock Split; Bylaws. The Company shall use its best efforts to
obtain stockholder approval to amend (i) the Certificate of Incorporation to
effect a five for one reverse stock split of the Company's Common Stock; and
(ii) the Bylaws to require the affirmative vote of the holders of at least a
majority of the voting power of all of the then outstanding shares entitled to
vote, voting together as a single class, to (I) increase the number of shares
reserved for issuance under the Company's Stock Plans, such that the quotient of
(A) the shares outstanding issued pursuant to the Company's Stock Plans plus the
shares available for issuance under the Company's Stock Plans plus additional
shares proposed to be issued under the Company's Stock Plans; divided by (B) the
total outstanding capital stock of the Company, including any outstanding
convertible preferred stock, on an as converted basis, is not greater than
thirty percent (30%); and (II) reprice any options granted after May 20, 1999 to
purchase shares of Common Stock under the Company's Stock Plans, provided that
the Company shall only reprice each options outstanding prior to May 20, 1999
one time.
(g) Reservation of Common Stock. The Company will at all times reserve and
keep available, solely for issuance and delivery upon the conversion of the
Shares and all Common Stock issuable from time to time upon such conversion.
(h) Proprietary Information and Inventions Agreement. The Company shall
require all employees and consultants to execute and deliver a Proprietary
Information and Inventions Agreement in a form which is acceptable to the
Purchasers.
(i) Qualified Small Business. The Company will use its best efforts to
comply with the reporting and recordkeeping requirements of Section 1202 of the
Code, any regulations promulgated thereunder and any similar state laws and
regulations, and agrees not to repurchase any stock of the Company if such
repurchase would cause the Shares not to so qualify as "Qualified Small Business
Stock." The Company further covenants to submit to its shareholders and to state
and federal taxation authorities such form and filings as may be required to
document such compliance, including the California Franchise Tax Board Form
3565, Small Business Stock Questionnaire, with its franchise or income tax
return for the current income year.
(j) Small Business Administration Matters.
(i) The proceeds from the issuance and sale of the Shares will be
used by the Company for working capital and other general corporate
purposes. The Company will provide to each Purchaser identified as a
licensed Small Business Investment Company on Schedule A hereto (each an
"SBIC INVESTOR"), and to the Small Business Administration (the "SBA"),
reasonable access to the Company's books and records for the purpose of
confirming the use of proceeds by the Company.
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(ii) For a period of one (1) year following the Closing (as defined
in the Purchase Agreement), the Company will not change the nature of its
business activity if such change would render the Company "ineligible" as
provided in Section 107.720 of Title 13 of the Federal Regulations.
(iii) So long as any SBIC Investor holds any securities of the
Company, the Company will at all times comply with the non-discrimination
requirements of Sections 112, 113 and 117 of Title 13 of the Federal
Regulations.
(iv) Within forty-five (45) days after the end of each fiscal year of
the Company, and at such other times as an SBIC Investor may reasonably
request in writing to the Company, the Company will deliver to such SBIC
Investor a written assessment in form and substance reasonably satisfactory
to such SBIC Investor, as to the economic impact of such SBIC Investor's
financing of the Company, specifying the full-time equivalent jobs created
or retained in connection with such investment, and the impact of such
financing on the Company's business in terms of profits and with respect to
taxes paid by the Company and its employees. The Company will promptly
provide each SBIC Investor who so requests in writing to the Company,
specifying in such written request the nature of such required information
in reasonable detail, such information as such SBIC Investor requests, in
order to permit such SBIC Investor to comply with such SBIC Investor's
obligations under the Small Business Act of 1958, as amended (the "SMALL
BUSINESS ACT"), and the regulations promulgated thereunder and related
thereto. Any submission of financial information pursuant to this Section
8(j) shall be under cover of a certificate executed by the Company's
President, Chief Executive Officer Chief Financial Officer or Treasurer,
certifying that such information (i) relates to the Company, (ii) to the
best of the Company's knowledge is accurate and (iii) if applicable, has
been audited by the Company's independent auditors.
(k) Regulatory Compliance Cooperation. In the event that any SBIC Investor
determines that it has a Regulatory Problem (as defined below), it shall have
the right to transfer its Shares in compliance with applicable state and federal
securities laws, but without regard to any other restrictions on transfer set
forth in this Agreement or the Rights Agreement (provided that the transferee
agrees to become a party to each such agreement), and the Company shall take all
such actions as are reasonably requested by such SBIC Investor in order to (i)
effectuate and facilitate any transfer by it of any securities of the Company
then held by it to any person designated by such SBIC Investor, (ii) permit such
SBIC Investor (or any of its affiliates) to exchange all or any portion of any
voting security then held by it on a share-for-share basis for shares of a
nonvoting security of the Company, which nonvoting security shall be identical
in all respects to the voting security exchanged for it, except that it shall be
nonvoting and shall be convertible into a voting security on such terms as are
requested by it in light of regulatory considerations then prevailing, and (iii)
amend this Agreement, as amended from time to time, to effectuate and reflect
the foregoing. The parties to this Agreement agree to vote all of the Company's
securities held by them in favor of such amendments and actions. For purposes of
this Agreement, a "REGULATORY PROBLEM" means any set of facts or circumstances
wherein it has been asserted by any governmental regulatory agency that an SBIC
Investor is not entitled to hold, or exercise any significant right with respect
to, the underlying securities into which the Shares are convertible.
(l) Proxy Statement. As promptly as practicable after the execution of this
Agreement, the Company shall prepare and file with the Commission preliminary
proxy materials which shall constitute the preliminary Proxy Statement in
connection with the sale of the Shares. As promptly as practicable after
comments are received from the Commission with respect to the preliminary proxy
materials, the Company shall file with the Commission the definitive Proxy
Statement, which Proxy Statement shall comply in all material respects with the
applicable requirements of the Exchange Act and Securities Act, respectively,
and the applicable rules and regulations of the Commission thereunder.
(i) The Company shall cause the Proxy Statement to be mailed to its
stockholders and, if necessary, after the Proxy Statement shall have been
so mailed, promptly circulate amended, supplemental or supplemented proxy
material and, if required in connection therewith, resolicit proxies.
(ii) The Company warrants that the information provided (or
incorporated by reference to filings made with the Commission by the
Company) in the Proxy Statement, on the date the Proxy Statement is
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filed with the Commission and on the date it is first mailed to the
Company's stockholders, shall not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Company shall notify Purchasers promptly of the
receipt of any comments by the Commission and of any request by the
Commission for amendments or supplements to the Proxy Statement, or for
additional information, and shall supply one another with copies of all
correspondence with the Commission with respect to any of the foregoing. If
at any time prior to the meeting of Stockholders to consider sale of the
Shares, any event should occur relating to the Company, its subsidiaries or
any of their respective affiliates, directors or officers which should be
described in an amendment or supplement to the Proxy Statement, the Company
shall promptly inform Purchasers. Whenever any event occurs which should be
described in an amendment or supplement to the Proxy Statement, the Company
shall, upon learning of such event, cooperate promptly to file and clear
with the Commission and, if applicable, mail such amendment or supplement
to the stockholders of the Company.
(iii) The Company shall use its best efforts to obtain approval for
quotation on the Nasdaq National Market, upon official notice of issuance,
of the Common Stock to be issued upon conversion of the Shares.
(iv) The Company shall make all necessary filings with respect to the
sale of Shares under the Securities Act and the Exchange Act and the rules
and regulations thereunder and under applicable blue sky or similar laws
and shall use their reasonable efforts to obtain required approvals and
clearances with respect thereto.
(m) Stockholder Approvals; Recommendations. The Company, acting through its
Board of Directors, shall (i) call, give notice of, convene and hold a special
meeting of the holders of Company Common Stock for the purpose of voting upon
the sale of the Shares (the "SPECIAL MEETING") and (ii) include in the Proxy
Statement the recommendation of its Board of Directors that holders of Common
Stock approve the sale of Shares at the Special Meeting. The Special Meeting
will be held as promptly as practicable. The Company shall ensure that the
Special Meeting is called, noticed, convened, held and conducted, and that all
proxies solicited, in connection with the Special Meeting are solicited in
compliance with all applicable laws, regulations, orders, judgments and decrees.
The Company shall not be permitted to delay, adjourn, postpone or reschedule the
Special Meeting, or delay the vote of the Company's stockholders on the sale of
Shares, without Purchasers' prior written consent (which consent will not be
unreasonably withheld or delayed if the need for the delay, adjournment,
postponement or rescheduling of the Special Meeting or the delay in such vote is
attributable solely to factors outside the Company's control). Notwithstanding
anything to the contrary contained in this Section 8(m), the Company's Board of
Directors shall not be permitted to withdraw or modify its recommendation in
favor of the sale of Shares.
(n) Notices of Certain Events. The Company hereto shall promptly notify
Purchasers of:
(i) the receipt by the Company of any notice or other communication
from any person alleging that the consent of such person is or may be
required in connection with the transactions contemplated by this
agreement;
(ii) the receipt by the Company of any notice or other communication
from any governmental entity in connection with the transactions
contemplated by this agreement;
(iii) the Company obtaining knowledge of any actions, suits, claims
investigations or proceedings commenced or threatened against, relating to
or involving or otherwise affecting the Company or Purchasers, as the case
may be, or any of their respective subsidiaries which relate to the
consummation of the transactions contemplated by this agreement; and
(iv) the Company obtaining knowledge of the occurrence, or failure to
occur, of any event which occurrence or failure to occur will be likely to
cause (A) any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect, or (B) any material failure
of any party to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it under
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this Agreement; provided, however, that no such notification shall affect
the representations, warranties or obligations of the parties or the
conditions to the obligations of the parties hereunder.
(o) Efforts. The Company shall, and shall cause its respective subsidiaries
to, cooperate and use their reasonable efforts to take, or cause to be taken,
all appropriate action, and to make, or cause to be made, all filings necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, their reasonable efforts to (i) obtain, prior to the Closing Date,
all licenses, permits, consents, approvals, authorizations, qualifications and
orders of governmental authorities and parties to contracts with the Company and
its subsidiaries and (ii) defend against and respond to any action, suit,
proceeding or investigation relating to the transactions contemplated by this
Agreement, in each case as are necessary for consummation of the transactions
contemplated by this Agreement and to fulfill the conditions to the sale of
Shares.
(p) No Solicitation.
(i) The Company agrees that until the Closing Date, the Company shall
not, directly or indirectly, and the Company shall ensure that its
Representatives (as defined below) do not, directly or indirectly: (i)
solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition (as defined below) or take any action that
could reasonably be expected to lead to an Acquisition Proposal (as defined
below); (ii) furnish any information regarding the Company or any direct or
indirect subsidiary of the Company to any Person in connection with or in
response to an Acquisition Proposal or potential Acquisition Proposal; or
(iii) engage in discussions with any Person (as defined below) with respect
to any Acquisition Proposal. The Company shall immediately cease and
discontinue, and the Company shall ensure that its Representatives
immediately cease and discontinue, any existing discussions with any Person
that relate to any Acquisition Proposal. For purposes of this Section 8(p):
(1) "ACQUISITION PROPOSAL" shall mean any offer, proposal or
inquiry contemplating or otherwise relating to any Acquisition
Transaction.
(2) "ACQUISITION TRANSACTION" shall mean any transaction (other
than as contemplated by the Purchase Agreement) involving:
(a) any merger, consolidation, amalgamation, share exchange,
business combination, issuance of securities, acquisition of
securities, tender offer, exchange offer or other similar transaction
(i) in which the Company is a constituent company, (ii) in which a
person or "group" (as defined in the Exchange Act of 1934, as amended
and the rules promulgated thereunder) of persons directly or
indirectly acquires the Company or more than 15% of the Company's
business or directly or indirectly acquires beneficial or record
ownership of securities representing, or exchangeable for or
convertible into, more than 15% of the outstanding securities of any
class of voting securities of the Company, or (iii) in which the
Company issues securities representing more than 15% of the
outstanding securities of any class of voting securities of the
Company;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 15% of the assets of the Company; or
(c) any liquidation or dissolution of the Company.
(3) "PERSON" shall mean any (i) individual, (ii) corporation,
limited liability company, partnership or other entity, or (iii)
governmental authority.
(4) "REPRESENTATIVES" shall mean officers, directors, employees,
agents, attorneys, accountants, advisors and representatives.
(ii) Neither the Board of Directors of the Company nor any committee
thereof shall (i) withdraw or modify, or propose or resolve to withdraw or
modify, in a manner adverse to Purchasers, the approval or recommendation
by such Board of Directors or any such committee of this Agreement or the
sale of
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Shares, (ii) approve or recommend, or propose to approve or recommend, any
Acquisition Proposal or (iii) enter into any agreement or letter of intent
with respect to any Acquisition Proposal.
(iii) In addition to the obligations of the Company set forth in
Sections 8(p)(i) and 8(p)(ii) above, the Company shall promptly advise
Purchasers orally and in writing of any request for information or of any
Acquisition Proposal, or any inquiry with respect to or which could
reasonably be expected to lead to any Acquisition Proposal, the material
terms and conditions of such request, Acquisition Proposal or inquiry, and
the identify of the person making any such Acquisition Proposal or inquiry.
The Company shall use its best efforts to keep Purchasers fully informed of
the status and details of any such request, Acquisition Proposal or
inquiry.
(iv) Notwithstanding the foregoing, if the Company receives a bona
fide, written, unsolicited offer to acquire all of the equity of the
Company or substantially all of the assets of the Company at a higher
valuation than that implied for the Company by this Agreement (a "HIGHER
OFFER") the Company may enter into a confidentiality agreement with,
provide non-public information to, or enter into discussions with, such
offeror. The Company shall inform the Purchasers immediately upon receipt
of the Higher Offer in writing of the identity of the offeror and the terms
and conditions of the Higher Offer. In the event that the Company shall
receive a Higher Offer prior to the Closing Date and consummate a sale of
securities or material assets to, or merge with or be acquired by, any
Person other than the Purchasers, then the Company shall pay to the
Purchasers, in proportion to the Purchaser's participation in the Bridge
Financing (as defined in Section 9(xvi) below, $1 million in cash upon the
closing of such transaction.
9. Closing Conditions.
(a) Conditions to Purchaser's Obligations at the Closing. The Purchaser's
obligation to purchase the Shares at the Closing is subject to the fulfillment
on or prior to the Closing of the following conditions, any one or more of which
may be waived in whole or in part by the Purchaser:
(i) Compliance with Laws. At the Closing, the sale and issuance of the
Shares shall be legally permitted by all laws and regulations to which the
Purchaser or the Company is subject.
(ii) Representations and Warranties. Each of the representations and
warranties of the Company set forth in Section 4 shall be true and correct
as if made on the Closing Date.
(iii) Performance. The Company shall have performed and complied with
all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the
Closing Date.
(iv) Compliance Certificate. The Chief Executive Officer of the
Company shall deliver to the Purchaser on the Closing Date a certificate
certifying that the conditions set forth in clauses (ii), (iii), (v) -
(vii), (x) - (xiii), (xiv), (xv) and (xviii) of this Section 9(a) have been
fulfilled.
(v) Stockholder Approval. The Company shall have satisfied the
stockholder approval requirement provisions of the Nasdaq Stock Market, or
any other exchange or market on which the Common Stock is then listed or
traded, with respect to the issuance of 20% or more of a company's capital
stock.
(vi) Increased Option Pool. The Company shall have received
stockholder approval to reserve an additional 4,000,0000 shares of Common
Stock to be available for grant to management and employees under the
Company's 1991 Stock Option Plan.
(vii) Certificate of Designation. The Certificate of Designation shall
have been duly filed with the Secretary of State of Delaware, and the
Company shall have delivered a copy thereof to the Purchasers certified as
filed by the office of the Secretary of State of Delaware.
(viii) Rights Agreement. The Company shall have executed and delivered
to the Purchasers the Rights Agreement.
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(ix) Voting Agreement. The Company and certain officers, directors,
and holders of the Company's outstanding Common Stock holding a minimum of
40% of the outstanding Common Stock shall have executed and delivered to
the Purchasers the Voting Agreement.
(x) Shareholders Rights Agreement. The Company shall have terminated
the existing Shareholders Rights Agreement dated June 13, 1995.
(xi) Preferred Shares Rights Agreement. Prior to the earlier of thirty
(30) days from the date hereof or the Closing Date, the Company shall have
taken all actions required under the Preferred Shares Rights Agreement
between the Company and Norwest Bank Minnesota, N.A. dated as of April 22,
1997 (the "RIGHTS PLAN") to permit the issuance of the Shares and the
consummation of the transactions contemplated by this Agreement, the
Certificate of Designation, the Voting Agreement and the Rights Agreement,
without the triggering of any rights thereunder. In addition the Company
shall have amended the Rights Plan to provide that the Shares held by the
Purchasers shall receive upon issuance of the Shares the same rights as the
holders of Common Stock under the Rights Plan.
(xii) Adverse Change. Since the date of the financial statements
included in the Company's Quarterly Report on Form 10-Q last filed prior to
the date of this Agreement, no event which had a Material Adverse Effect
and no material adverse change in the financial condition or prospects of
the Company shall have occurred.
(xiii) Absence of Litigation. There shall be no action, suit,
investigation or proceeding pending or threatened in any court or before an
arbitrator or governmental authority that could have a Material Adverse
Effect on the Company or the purchase of the Shares.
(xiv) Opinion of Counsel. The Company shall have delivered to the
Purchasers an opinion of counsel for the Company, dated as of the Closing
Date, in form and substance reasonably acceptable to the Purchasers.
(xv) Consents. The Company and the Purchasers shall have obtained all
consents (including all governmental and regulatory consents, approvals, or
authorizations required in connection with the valid execution and delivery
of this Agreement, the Voting Agreement and the Rights Agreement), permits
and waivers necessary or required to be obtained on or prior to the Closing
Date for consummation of the transactions contemplated hereby.
(xvi) Bridge Financing. The Company shall have obtained interim
financing of $3 million to fund its operations by May 21, 1999 (the "BRIDGE
FINANCING").
(xvii) Chief Executive Officer. The new Chief Executive Officer
acceptable to the Purchasers remains employed by the Company in such
capacity on the Closing Date.
(xviii) SBA Matters. The Company shall have executed and delivered to
the BankAmerica Ventures a Size Status Declaration on SBA Form 480 and an
Assurance of Compliance on SBA Form 652, and shall have provided to
BankAmerica Ventures, the information requested by BankAmerica Ventures
necessary for the preparation by BankAmerica Ventures of a Portfolio
Financing Report on SBA Form 1031.
(xix) Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated in connection with each
Purchaser's purchase of the Shares and all documents incident thereto shall
be reasonably satisfactory in form and substance to the Purchasers and the
Purchasers' counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may
reasonably request.
(xx) Delivery of Stock Certificate. The Company shall have caused the
delivery to the Purchasers of a stock certificate representing the
Purchasers' ownership of the Shares.
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(b) Conditions to Company's Obligations at the Closing. The Company's
obligation to sell and issue the Shares at the Closing is subject to the
fulfillment on or prior to the Closing of the following conditions, any one or
more of which may be waived in whole or in part by the Company:
(i) Compliance with Laws. At the Closing, sale and issuance of the
Shares shall be legally permitted by all laws and regulations to which the
Purchasers or the Company are subject.
(ii) Representations and Warranties. Each of the representations and
warranties of the Purchasers set forth in Sections 5 and 6 shall be true
and correct as if made on the Closing Date.
(iii) The Purchase Price. The Purchasers shall have delivered to the
Company the Purchase Price in accordance with Section 3 hereof.
(iv) Performance. The Purchasers shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with on or before the Closing
Date.
(v) Other Agreements. The Purchasers shall have executed and delivered
to the Company the Rights Agreement.
(vi) Consents. The Company and the Purchasers shall have obtained all
consents (including all governmental and regulatory consents, approvals, or
authorizations required in connection with the valid execution and delivery
of this Agreement, the Voting Agreement and the Rights Agreement), permits
and waivers necessary or required to be obtained on or prior to the Closing
Date for consummation of the transactions contemplated hereby.
(vii) Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated in connection with the
sale and issuance of the Shares and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Company and the
Company's counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may
reasonably request.
10. General Provisions.
(a) Notices. All notices and other communication required or appropriate to
be given hereunder shall be in writing and shall be delivered by hand or mailed
by certified mail, return receipt requested, or sent by telex or facsimile (in
which case a confirming copy shall also be sent by certified mail or courier),
to the following respective addresses or to such other addresses as may be
specified in any notice delivered or mailed as above provided:
(i) If to the Purchasers, to:
BankAmerica Ventures
950 Tower Lane, Suite 700
Foster City, California 94404
Telephone: (650) 378-6000
Facsimile: (650) 378-6040
Attention: Mark Brooks and Robert S. Fore
and
Morgan Stanley Dean Witter Venture Partners
1221 Avenue of America, 33rd floor
New York, NY 10020
Phone: 212-762-8683
Fax: 212-762-8424
Attention: Fazle Husain
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with a copy to:
Cooley Godward LLP
Five Palo Alto Square
Palo Alto, CA 94306-2155
Telephone: (650) 843-5000
Facsimile: (650) 857-0663
Attention: Julia L. Davidson, Esq.
and
Davis, Polk, Wardwell
450 Lexington Ave.
New York, NY 10017
Telephone 212-450-4350
Facsimile: 212-450-5515
Attention: John Bick, Esq.
(ii) If to the Company to:
Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, California 94086
Telephone: (408) 737-0505
Facsimile: (408) 737-1700
Attention: G. Michael Latta, Chief Financial Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 845-5000
Attention: Chris F. Fennell, Esq.
Any notice or other communication delivered by hand or mailed shall be deemed to
have been delivered on the date on which such notice or communication is
delivered by hand, or in the case of certified mail deposited with the
appropriate postal authorities on the date when such notice or communication is
actually received, and in any other case shall be deemed to have been delivered
on the date on which such notice or communication is actually received.
(b) Governing Law. The parties have agreed that this Agreement will be
governed by and construed in accordance with the laws of the State of
California.
(c) Amendments. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of a majority of the Shares and
Conversion Shares then outstanding. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
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(d) Assignment.
(i) Except as set forth in this Section 10(d), none of the rights or
obligations of the Company and each Purchaser may be assigned or
transferred without the prior written consent of the other party hereto.
(ii) The Company and each Purchaser may assign all of its rights and
obligations under this Agreement in connection with a merger or similar
reorganization or the sale of all or substantially all of its assets. This
Agreement shall survive any such merger or reorganization of the Company or
a Purchaser with or into, or such sale of assets to, another party and no
consent for such merger, reorganization or sale shall be required
hereunder.
(iii) Each Purchaser may assign its rights and obligations to a
subsidiary, parent, LLC, general partner, limited partner, retired partner,
member or retired member of a Purchaser, provided the assignee is not
deemed by the Board of Directors of the Company, in its reasonable
judgment, to be a competitor of the Company and provided further such
assignee agrees, prior to the transfer, in writing with the Company to
comply with all the provisions of this Agreement applicable to such
Purchaser.
(iv) This Agreement shall be binding upon and inure to the benefit of
the successors and permitted assigns of the parties. Any assignment not in
accordance with this Agreement shall be void.
(e) Expenses. The Company shall reimburse the Purchasers for all reasonable
legal, accounting and due diligence expenses incurred in connection with this
Agreement and the transactions contemplated hereby, regardless of whether or not
the Closing occurs.
(f) Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(g) Entire Agreement. This Agreement, the Voting Agreement and the Rights
Agreement, together with the Exhibits and other documents attached hereto and
thereto, constitute the entire contract between the parties with respect to the
subject matter hereof and thereof, and no party will be liable or bound to the
other in any manner by any representations, warranties or covenants except as
specifically set forth herein and therein.
(h) Titles. The titles of the Sections of this Agreement are inserted for
reference only, and are not to be considered as part of this Agreement in
construing this Agreement.
(i) Termination. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned, at any time prior to the Closing, whether
before or after approval of the sale of Shares by the stockholders of the
Company:
(i) by mutual consent of the Company and of a majority in interest of
Purchasers as set forth on Schedule A;
(ii) by either a majority in interest of Purchasers as set forth on
Schedule A or the Company, if the Closing shall not have occurred by
October 31, 1999 (unless the failure to consummate the sale of Shares is
attributable to a failure on the part of the party seeking to terminate
this Agreement to perform any material obligation required to be performed
by such party at or prior to the Closing);
(iii) by a majority in interest of Purchasers as set forth on Schedule
A, if the required approval of the Company's stockholders shall not have
been obtained by reason of the failure to obtain the required vote at a
duly held meeting of stockholders or at any adjournment thereof;
(iv) by either a majority in interest of Purchasers as set forth on
Schedule A or the Company, if there shall be any law or regulation of any
Governmental Entity that makes consummation of the purchase of the Shares
illegal or otherwise prohibited or if any judgment, injunction, order or
decree of any governmental entity prohibiting such transaction is entered
and such judgment, injunction, order or decree shall have become final and
nonappealable;
(v) by a majority in interest of Purchasers as set forth on Schedule
A, if there has been a breach of any covenant or a breach of any
representation or warranty on the part of the Company, such that the
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<PAGE> 130
closing conditions set forth in Section 9 would not be satisfied or if the
Company has not secured interim financing as specified in Section 9(xvi) by
May 21, 1999.
(j) Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 10(i) hereof by the Company, or a majority in
interest of Purchasers, written notice thereof shall forthwith be given to the
other party or parties specifying the provision hereof pursuant to which such
termination is made, and this Agreement shall become void and have no effect,
and there shall be no liability hereunder on the part of Purchasers. Nothing in
this Section 10(j) shall relieve any party to this Agreement of liability for
breach of this Agreement or for representations which were incorrect when made.
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<PAGE> 131
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first set forth above.
"COMPANY"
CARDIAC PATHWAYS CORPORATION
By: /s/ WILLIAM N. STARLING
------------------------------------
William N. Starling
President and Chief Executive
Officer
"PURCHASERS"
BANKAMERICA VENTURES
By: /s/ JAMES D. MURPHY
------------------------------------
Title: President and Managing
Director
MORGAN STANLEY VENTURE PARTNERS III,
L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By: /s/ FAZLE HUSAIN
------------------------------------
Name: Fazle Husain
Title: General Partner
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
MORGAN STANLEY VENTURE INVESTORS III,
L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By: /s/ FAZLE HUSAIN
------------------------------------
Name: Fazle Husain
Title: General Partner
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
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<PAGE> 132
MORGAN STANLEY VENTURE PARTNERS
ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By: /s/ FAZLE HUSAIN
------------------------------------
Name: Fazle Husain
Title: General Partner
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
VAN WAGONER CAPITAL MANAGEMENT
By: /s/ GARRETT R. VAN WAGONER
------------------------------------
Name: Garrett R. Van Wagoner
Title: President
Address: 345 California Street
San Francisco, CA
Fax: (415) 835-5050
STATE OF WISCONSIN INVESTMENT BOARD
By: /s/ JOHN F. NELSON
------------------------------------
Name: John Nelson
Title: Investment Director
Address:
Fax:
/s/ THOMAS FOGARTY
--------------------------------------
THOMAS FOGARTY
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<PAGE> 133
SCHEDULE A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
NUMBER OF
PURCHASERS SHARES
---------- ---------
<S> <C>
BankAmerica Ventures........................................ 10,000
Morgan Stanley Venture Partners III, L.P.................... 8,773
Morgan Stanley Venture Investors III, L.P................... 842
Morgan Stanley Venture Partners Entrepreneurs Fund, L.P..... 385
Van Wagoner Capital Management.............................. 5,000
State of Wisconsin Investment Board......................... 6,000
Thomas Fogarty.............................................. 500
</TABLE>
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<PAGE> 134
EXHIBIT A
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF CARDIAC PATHWAYS CORPORATION
The undersigned, William N. Starling and Chris F. Fennell do hereby
certify:
1. That they are the duly elected and acting President and Secretary,
respectively, of Cardiac Pathways Corporation, a Delaware corporation (the
"CORPORATION").
2. That pursuant to the authority conferred upon the Board of Directors by
the Restated Certificate of Incorporation of the said Corporation, the said
Board of Directors on May 16, 1999 adopted the following resolution creating a
series of 50,000 shares of Preferred Stock designated as Series B Convertible
Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the corporation by the Restated Certificate of Incorporation, the Board of
Directors does hereby provide for the issue of a series of Preferred Stock of
the Corporation and does hereby fix and herein state and express the
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of such series of Preferred Stock
as follows:
1. Designation and Amount. The shares of such series shall be designated as
"SERIES B CONVERTIBLE PREFERRED STOCK." The Series B Convertible Preferred Stock
shall have a par value of $.001 per share, and the number of shares constituting
such series shall be 50,000.
2. Proportional Adjustment. In the event the Corporation shall at any time
after the issuance of any share or shares of Series B Convertible Preferred
Stock (i) declare any dividend on the Common Stock of the Corporation ("COMMON
STOCK") payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the Corporation shall simultaneously effect a
proportional adjustment to the number of outstanding shares of Series B
Convertible Preferred Stock.
3. Dividends and Distributions.
(a) Subject to the prior and superior right of the holders of any shares of
any series of Preferred Stock ranking prior and superior to the shares of Series
B Convertible Preferred Stock with respect to dividends, the holders of shares
of Series B Convertible Preferred Stock shall be entitled to receive when, as
and if declared by the Board of Directors out of funds legally available for the
purpose, cumulative dividends payable in cash, in an amount per share (rounded
to the nearest cent) equal to 11% of the original Series B Convertible Preferred
Stock Purchase price, per annum.
(b) Dividend Rate Adjustment if Company Redemption Does Not Occur. If, upon
the request of the holders of a majority of the then outstanding shares of
Series B Convertible Preferred Stock, the Company does not redeem the Series B
Convertible Preferred Stock pursuant to Section 7 hereof, the cumulative
dividend payable on the Series B Convertible Preferred Stock shall be subject to
adjustment as follows:
(i) If this corporation has not conducted a Company Redemption prior
to May 31, 2004, at the beginning of each year after such date in which a
Company Redemption does not occur the dividend rate for the Series B
Convertible Preferred Stock shall forthwith be increased by six percentage
points.
(c) The holder of Series B Convertible Preferred Stock shall also be
entitled to participate pro rata in any dividends paid on the Common Stock on an
as-converted basis.
4. Voting Rights. The holders of shares of Series B Convertible Preferred
Stock shall have the following voting rights:
(a) Each share of Series B Convertible Preferred Stock shall entitle
the holder thereof to that number of votes on all matters submitted to a
vote of the stockholders of the Corporation equal to the
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<PAGE> 135
number of shares of Common Stock into which the Series B Convertible
Preferred Stock can be converted.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series B Convertible Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(c) Except as otherwise provided herein or by law, holders of Series B
Convertible Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
5. Reacquired Shares. Any shares of Series B Convertible Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein and, in the
Restated Certificate of Incorporation, as then amended.
6. Liquidation, Dissolution or Winding Up.
(a) Upon any liquidation, dissolution or winding up of the Corporation,
either voluntary or involuntary, the holders of Series B Convertible Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any assets to the holders of Series A Participating Preferred Stock or Common
Stock or any other class of capital stock of the corporation by reason of their
ownership thereof, an amount per share equal to the sum of (i) the price
originally paid for each outstanding share of Series B Convertible Preferred
Stock (the "ORIGINAL SERIES B ISSUE PRICE") and (ii) an amount equal to accrued
but unpaid dividends on such shares. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series B Convertible
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then the entire assets and funds of
this corporation legally available for distribution shall be distributed ratably
among the holders of the Series B Convertible Preferred Stock in proportion to
the preferential amount each such holder is otherwise entitled to receive.
(b) Upon the completion of the distribution required by subparagraph (a) of
this Section 6, the holders of Series A Participating Preferred Stock shall be
entitled to receive, an aggregate amount per share equal to 1000 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock plus an amount equal to any accrued and unpaid dividends on such shares of
Series A Participating Preferred Stock.
(c) Upon the completion of the distribution required by subparagraphs (a)
and (b) of this Section 6, the remaining assets of this corporation available
for distribution to stockholders shall be distributed among the holders of
Common Stock and the Series B Convertible Preferred Stock, pro rata based on the
number of shares of Common Stock (on an as-converted basis) held by each.
(d) For purposes of this Section 6, a liquidation, dissolution or winding
up of this corporation shall be deemed to be occasioned by, or to include, (A)
the acquisition of this corporation by another entity by means of any
transaction or series of related transactions (including, without limitation,
any reorganization, merger or consolidation) that results in the transfer of
fifty percent (50%) or more of the outstanding voting power of this corporation;
(B) a sale of all or substantially all of the assets of this corporation, or (C)
a sale or any transaction or series of transactions that result in a sale or
transfer of 50% or more of the outstanding voting power of the corporation.
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<PAGE> 136
(i) In any of such events, if the consideration received by this
corporation is other than cash, the value of such consideration will be
deemed its fair market value. Any securities shall be valued as follows:
(1) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (B) below:
(a) If traded on a securities exchange or through the Nasdaq
National Market, the value shall be deemed to be the average of the
closing prices of the securities on such quotation system over the
thirty (30) day period ending three (3) days prior to the closing;
(b) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
(c) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by this Corporation
and the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the voting power of all then outstanding shares of
Series B Convertible Preferred Stock.
(2) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an
affiliate or former affiliate) shall be to make an appropriate discount
from the market value determined as above in (1) (a), (b) or (c) to
reflect the approximate fair market value thereof, as mutually
determined by this corporation and the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the voting power of all then outstanding
shares of Series B Convertible Preferred Stock.
(3) In the event the requirements of this subsection 6(d) are not
complied with, this corporation shall forthwith either:
(a) cause such closing to be postponed until such time as the
requirements of this Section 6 have been complied with; or
(b)cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series B Convertible
Preferred Stock shall revert to and be the same as such rights,
preferences and privileges existing immediately prior to the date of
the first notice referred to in subsection 6(d)(4) hereof.
(4) This Corporation shall give each holder of record of Series B
Convertible Preferred Stock written notice of such impending transaction
not later than twenty (20) days prior to the stockholders' meeting
called to approve such transaction, if any, or twenty (20) days prior to
the closing of such transaction, whichever is earlier, and shall also
notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms
and conditions of the impending transaction and the provisions of this
Section 6, and this Corporation shall thereafter give such holders
prompt notice of any material changes. The transaction shall in no event
take place sooner than twenty (20) days after this Corporation has given
the first notice provided for herein or sooner than ten (10) days after
this Corporation has given notice of any material changes provided for
herein; provided, however, that such periods may be shortened upon the
written consent of the holders of Series B Convertible Preferred Stock
that are entitled to such notice rights or similar notice rights and
that represent at least sixty-six and two-thirds percent (66 2/3%) of
the voting power of all then outstanding shares of such Series B
Convertible Preferred Stock.
7. Redemption. The shares of Series B Convertible Preferred Stock shall be
redeemable.
(a) Optional Redemption. At any time after May 31, 2004, the holders of a
majority of the then outstanding shares of Series B Convertible Preferred Stock,
voting as a single class, may request that the Corporation redeem the
outstanding shares of Series B Convertible Preferred Stock. After receiving such
request, the Corporation, to the extent it then lawfully is able to do so, and
in its sole discretion, may redeem
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<PAGE> 137
the outstanding shares of Series B Convertible Preferred Stock (an "OPTIONAL
REDEMPTION") in whole, upon payment in cash in respect of each share redeemed of
an amount equal to the Original Series B Issue Price plus accrued but unpaid
dividends on such shares. Such amount is hereinafter referred to as the
"REDEMPTION PRICE" of the Series B Convertible Preferred Stock. Upon the
election to conduct an Optional Redemption, the Corporation shall promptly give
written notice of the redemption to each holder of record of Series B
Convertible Preferred Stock, postage prepaid at the post office address last
shown on the records of the Corporation.
(b) Redemption Date. The Corporation shall redeem the shares of Series B
Convertible Preferred Stock to be redeemed hereunder in two equal annual
installments, commencing with the first calendar quarter ending ninety (90) days
after the date notice of redemption is provided to the holders of Series B
Convertible Preferred Stock. Such date shall be a "REDEMPTION DATE" for the
Preferred Stock as described herein.
(c) At least thirty (30) days prior to the Redemption Date for the Series B
Convertible Preferred Stock, written notice shall be mailed, postage prepaid, to
each holder of record of Series B Convertible Preferred Stock to be redeemed, at
such holder's post office address last shown on the records of the Corporation,
notifying such holder of the redemption of such shares to be redeemed at that
time, specifying the Redemption Date, the Redemption Price, and calling upon
such holder to surrender to the Corporation, in the manner and at the place
designated, such holder's certificate or certificate's representing the shares
to be redeemed (such notice is hereinafter referred to as the "REDEMPTION
NOTICE"). On or after the Redemption Date, each holder of Series B Convertible
Preferred Stock to be redeemed shall surrender such holder's certificate or
certificates representing shares to the Corporation, in the manner and at the
place designated in the Redemption Notice, and thereupon the Redemption Price
for such shares shall be payable to the order of the person whose name appears
on such certificate or certificates as the owner of such shares and each
surrendered certificates shall be canceled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares. From and after the Redemption
Date, unless there shall have been a default in payment of the Redemption Price,
all rights of the holders of Series B Convertible Preferred Stock designated for
redemption in the Redemption Notice as holders of Series B Convertible Preferred
Stock (except the right to receive the Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to such
shares, and such shares shall not subsequently be transferred on the books of
the Corporation or be deemed to be outstanding for any purpose whatsoever.
(d) Insufficient Funds. If the funds of the Corporation legally available
for redemption of shares of Series B Convertible Preferred Stock on any
Redemption Date are insufficient to redeem the total number of shares of Series
B Convertible Preferred Stock to be redeemed on such date, those funds that are
legally available shall be used to redeem the maximum possible number of such
shares ratably among the holders of such shares to be redeemed. The shares of
Series B Convertible Preferred Stock not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of shares of the Series B Convertible Preferred Stock, such funds
shall immediately be used to redeem the balance of the shares which the
Corporation has become obligated to redeem, or elected to redeem, on any
Redemption Date but which it has not redeemed.
(e) Deposit of Redemption Price. On or prior to the Redemption Date, the
Corporation shall deposit the Redemption Price of all shares of Series B
Convertible Preferred Stock designated for redemption in the Redemption Notice
and not yet redeemed with a bank or trust company having aggregate capital and
surplus in excess of $100,000,000 as a trust fund for the benefit of the
respective holders of the shares designated for the redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or trust
company to pay the Redemption Price for such shares to their respective holders
on or after the Redemption Date, upon receipt of notification from the
Corporation that such holder has surrendered such holder's share certificate to
the Corporation pursuant to Section 7(c) above. Such instructions shall also
provide that any funds deposited by the Corporation pursuant to this Section
7(e) for the redemption of shares of subsequently converted into shares of
Common Stock no later than the fifth (5th) day preceding the Redemption Date
shall be returned to the Corporation forthwith upon such conversion. The balance
of any funds deposited by the Corporation
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<PAGE> 138
pursuant to this Section 7(e) remaining unclaimed at the expiration of two (2)
years following the Redemption Date shall be returned to the Corporation upon
its request expressed in a resolution of its Board of Directors.
8. Conversion. The holders of the Series B Convertible Preferred Stock
shall have conversion rights as follows (the "CONVERSION RIGHTS"):
(a) Right to Convert. Each share of Series B Convertible Preferred
Stock shall be convertible, at the option of the holder thereof, at any
time after the date of issuance of such share, at the office of this
Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
the Original Series B Issue Price by the Series B Conversion Price,
determined as hereafter provided, in effect on the date the certificate is
surrendered for conversion. The initial Series B Conversion Price per share
shall be the Original Series B Issue Price; provided, however, that the
Series B Conversion Price shall be subject to adjustment as set forth in
Section 8(d) and 8(e).
(b) Automatic Conversion. Each share of Series B Convertible Preferred
Stock, shall automatically be converted into shares of Common Stock at the
Series B Conversion Price at the time in effect upon the election of a
majority of the holders of Series B Convertible Preferred Stock.
(c) Mechanics of Conversion. Before any holder of Series B Convertible
Preferred Stock shall be entitled to convert into shares of Common Stock,
he or she shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this corporation or of any transfer agent for
the Series B Convertible Preferred Stock, and shall give written notice to
this Corporation at its principal corporate office of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued.
This Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series B Convertible Preferred
Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Series B Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with a sale to, or a
merger with, a third party, the conversion may, at the option of any holder
tendering Series B Convertible Preferred Stock for conversion, be
conditioned upon the closing of such sale to, or merger with, such third
party (as the case may be), in which event the person(s) entitled to
receive the Common Stock upon conversion of the Series B Convertible
Preferred Stock shall not be deemed to have converted such Series B
Convertible Preferred Stock until immediately prior to the closing of such
sale or merger.
(d) Conversion Price Adjustments of Preferred Stock for Certain
Dilutive Issuance, Stock Splits and Combinations. The Conversion Price of
the Series B Convertible Preferred Stock shall be subject to adjustment
from time to time as follows:
(i)
(1) If this corporation shall issue, after the date upon which
any shares of Series B Convertible Preferred Stock were first issued
(the "Purchase Date"), any Additional Stock (as defined below)
without consideration or for a consideration per share less than the
Conversion Price for the Series B Convertible Preferred Stock in
effect immediately prior to the issuance of such Additional Stock,
the Conversion Price for the Series B Convertible Preferred Stock in
effect immediately prior to each such issuance shall forthwith
(except as otherwise provided in this clause (i)) be adjusted to a
price determined by multiplying such Conversion Price by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance (including shares of
Common Stock deemed to be issued pursuant to Section 8(d)(i)(5)(a) or
(b)) plus the number of shares of Common Stock that
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<PAGE> 139
the aggregate consideration received by this Corporation for such
issuance would purchase at such Conversion Price; and the denominator
of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (including shares of Common Stock
deemed to be issued pursuant to Section 8(d)(i)(5)(a) or (b)) plus
the number of shares of such Additional Stock.
(2) No adjustment of the Conversion Price for the Series B
Convertible Preferred Stock shall be made in an amount less than one
cent per share, provided that any adjustments that are not required
to be made by reason of this sentence shall be carried forward and
shall be either taken into account in any subsequent adjustment made
prior to three (3) years from the date of the event giving rise to
the adjustment being carried forward, or shall be made at the end of
three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent
provided for in Sections 8(d)(i)(5)(c) and (5)(d), no adjustment of
such Conversion Price of the Series B Convertible Preferred Stock
pursuant to this subsection 8(d)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect
immediately prior to such adjustment.
(3) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of net cash paid
therefor (after deducting any reasonable discounts, commissions or
other expenses allowed, paid or incurred by this corporation for any
underwriting or otherwise in connection with the issuance and sale
thereof).
(4) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair value thereof as
determined in the reasonable good faith judgement of the Board of
Directors irrespective of any accounting treatment.
(5) In the case of the issuance (whether before, on or after the
applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities,
the following provisions shall apply for all purposes of this Section
8(d)(i) and Section 8(d)(ii).
(a) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the
passage of time, but without taking into account potential
antidilution adjustments) of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been issued
at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the
manner provided in Sections 8(d)(i)(3) and (d)(i)(4)), if any,
received by this Corporation upon the issuance of such options or
rights plus the minimum exercise price provided in such options
or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
(b) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of
time, but without taking into account potential antidilution
adjustments) for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to
the consideration, if any, received by this corporation for any
such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends),
plus the minimum additional consideration, if any, to be received
by this corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such
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securities or the exercise of any related options or rights (the
consideration in each case to be determined in the manner
provided in Sections 8(d)(i)(3) and (d)(i)(4)).
(c) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to this
Corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable
securities, including, but not limited to, a change resulting
from the antidilution provisions thereof (unless such options or
rights or convertible or exchangeable securities were merely
deemed to be included in the numerator and denominator for
purposes of determining the number of shares of Common Stock
outstanding for purposes of subsection 8(d)(i)(1)), the
Conversion Price of the Series B Convertible Preferred Stock, to
the extent in any way affected by or computed using such options,
rights or securities, shall be recomputed to reflect such change,
but no further adjustment shall be made for the actual issuance
of Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion or
exchange of such securities.
(d) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible
or exchangeable securities, the Conversion Price of the Series B
Convertible Preferred Stock, to the extent in any way affected by
or computed using such options, rights or securities or options
or rights related to such securities (unless such options or
rights were merely deemed to be included in the numerator and
denominator for purposes of determining the number of shares of
Common Stock outstanding for purposes of Section 8(d)(i)(1)),
shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable
securities that remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options
or rights related to such securities.
(e) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to Sections
8(d)(i)(5)(a) and (b) shall be appropriately adjusted to reflect
any change, termination or expiration of the type described in
either Section 8(d)(i)(5)(c) or (d).
(ii) "ADDITIONAL STOCK" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to Section 8(d)(i)(5)) by
this corporation after the Purchase Date other than:
(1) Common Stock issuable or issued pursuant to a transaction
described in subsection 8(d)(iii) hereof;
(2) shares of Common Stock issuable or issued to employees,
consultants or directors of this Corporation directly or pursuant to
a stock option plan or restricted stock plan approved by the Board of
Directors of this Corporation, including the representatives of the
Series B Convertible Preferred Stock, including all outstanding and
granted options;
(3) shares of Common Stock issuable or issued upon conversion of
the Series A Participating Preferred Stock or Series B Convertible
Preferred Stock or as dividends or distributions on the Series A
Participating Preferred Stock or Series B Convertible Preferred
Stock;
(4) shares of Common Stock issuable or issued upon exercise of
warrants issued to banks, equipment lessors or other venders, where
such Common Stock or warrants were approved by the Board of
Directors, including the representatives of the Series B Convertible
Preferred Stock; or
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(5) shares of Common Stock issuable or issued as consideration
for business combinations or corporate partnering agreements approved
by the Board of Directors, including the representatives of the
Series B Convertible Preferred Stock.
(iii) In the event this Corporation should at any time or from time
to time after the Purchase Date fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Common Stock or
the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common
Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of
Common Stock (hereinafter referred to as "COMMON STOCK EQUIVALENTS")
without payment of any consideration by such holder for the additional
shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise
thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the
Conversion Price of the Series B Convertible Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be increased
in proportion to such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to such Common Stock
Equivalents.
(iv) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Price for the Series B Convertible
Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding
shares.
(e) Other Distributions. In the event this Corporation shall declare a
distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding
cash dividends) or options or rights not referred to in Section 8(d)(iii),
then, in each such case for the purpose of this Section 8(e), the holders
of the Series B Convertible Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the
holders of the number of shares of Common Stock of this corporation into
which their shares of Series B Convertible Preferred Stock are convertible
as of the record date fixed for the determination of the holders of Common
Stock of this Corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there shall
be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere
in this Section 8 or in Section 6), provision shall be made so that the
holders of the Series B Convertible Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series B Convertible Preferred
Stock the number of shares of stock or other securities or property of this
corporation or otherwise to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such
case, appropriate adjustment shall be made in the application of the
provisions of this Section 8 with respect to the rights of the holders of
the Series B Convertible Preferred Stock after the recapitalization to the
end that the provisions of this Section 8 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series B Convertible Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
(g) No Impairment. This Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by this corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 8(h)
and in the taking of all such action as may be necessary or appropriate in
order to protect the Conversion Rights of the holders of the Series B
Convertible Preferred Stock against impairment.
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(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the conversion of any
share or shares of the Series B Convertible Preferred Stock, and the
number of shares of Common Stock to be issued shall be determined by
rounding to the nearest whole share. Such conversion shall be determined
on the basis of the total number of shares of Series B Convertible
Preferred Stock the holder is at the time converting into Common Stock
and such rounding shall apply to the number of shares of Common Stock
issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of the Series B Convertible Preferred Stock pursuant to
this Section 8, this Corporation, at its expense, shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series B Convertible Preferred
Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment
is based. This Corporation shall, upon the written request at any time
of any holder of Series B Convertible Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price for the Series B
Convertible Preferred Stock at the time in effect, and (C) the number of
shares of Common Stock and the amount, if any, of other property that at
the time would be received upon the conversion of a share of Series B
Convertible Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right,
this corporation shall mail to each holder of Series B Convertible
Preferred Stock, at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. This Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series B Convertible Preferred Stock, such
number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series
B Convertible Preferred Stock; and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of the Series B Convertible
Preferred Stock, in addition to such other remedies as shall be available
to the holder of such Series B Convertible Preferred Stock, this
corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain
the requisite stockholder approval of any necessary amendment to the
Corporation's Certificate of Incorporation.
(k) Notices. Any notice required by the provisions of this Section 8
to be given to the holders of shares of Series B Convertible Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at his address appearing on
the books of this corporation.
9. Protective Provisions. This Corporation shall not take any of the
following actions without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at least a majority of the then
outstanding shares of Series B Convertible Preferred Stock:
(a) Amend or repeal any provision, or add any provision to the
Corporation's Certificate of Incorporation or Bylaws which change the
rights of the Series B Convertible Preferred Stock;
(b) Increase or decrease (other than by redemption or conversion) the
total number of authorized shares of Preferred Stock or Common Stock;
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(c) Authorize or issue, or obligate itself to issue, any other
security, including any other security convertible into or exercisable for
any security having a preference over, or being on a parity with, the
Series B Convertible Preferred Stock with respect to voting, dividends,
redemption or upon liquidation;
(d) Issue any shares of Common Stock, other than
(i) shares of Common Stock issuable or issued to employees,
consultants or directors of this Corporation directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of
Directors of this Corporation, including the representatives of the
Series B Convertible Preferred Stock;
(ii) shares of Common Stock issuable or issued upon conversion of
the Series A Participating Preferred Stock or Series B Convertible
Preferred Stock or as dividends or distributions on the Series A
Participating Preferred Stock or Series B Convertible Preferred Stock;
(iii) shares of Common Stock issuable or issued upon exercise of
warrants issued to banks, equipment lessors or other venders, where such
Common Stock or warrants were approved by the Board of Directors,
including the representatives of the Series B Convertible Preferred
Stock; or
(iv) shares of Common Stock issuable or issued as consideration for
business combinations or corporate partnering agreements approved by the
Board of Directors, including the representatives of the Series B
Convertible Preferred Stock.
(e) Declare or pay any dividends on its Common Stock or redeem,
purchase or otherwise acquire (or pay into or set aside for a sinking fund
for such purpose) any share or shares of Common Stock; provided, however,
that this restriction shall not apply to the repurchase of shares of Common
stock from employees, officers, directors, consultants or other persons
performing services for this Corporation or any subsidiary pursuant to
agreements under which this Corporation has the option to repurchase such
shares at cost or at cost upon the occurrence of certain events, such as
the termination of employment;
(f) Sell, convey, or otherwise dispose of all or substantially all of
its property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect
any transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of this corporation is disposed of;
(g) Repurchase any series of Preferred Stock, other than a repurchase
pursuant to Section 7 hereof; or
(h) Increase or decrease the size of the Corporation's Board of
Directors.
RESOLVED FURTHER, that the President or any Vice President and the
Secretary or any Assistant Secretary of this corporation be, and they hereby
are, authorized and directed to prepare and file a Certificate of Designation of
Rights, Preferences and Privileges in accordance with the foregoing resolution
and the provisions of Delaware law and to take such actions as they may deem
necessary or appropriate to carry out the intent of the foregoing resolution."
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We further declare under penalty of perjury that the matters set forth in
the foregoing Certificate of Designation are true and correct of our own
knowledge.
Executed at Sunnyvale, California on May 20, 1999
--------------------------------------
William N. Starling
President and Chief Executive Officer
--------------------------------------
Chris F. Fennell, Secretary
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CERTIFICATE OF CORRECTION OF CERTIFICATE OF DESIGNATION
OF RIGHTS, PREFERENCES AND PRIVILEGES OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF CARDIAC PATHWAYS CORPORATION
Cardiac Pathways Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, hereby
certifies as follows:
A. The name of this corporation is Cardiac Pathways Corporation.
B. That a Certificate of Designation of Rights, Preferences and Privileges
of Series B Convertible Preferred Stock (the "Certificate") was filed by the
Secretary of State of Delaware on May 20, 1999 and that said Certificate
requires correction as permitted by Section 103(f) of the General Corporation
Law of the State of Delaware.
C. The inaccuracy or defect of said Certificate to be corrected is as
follows: The words "multiplied by 1000" were omitted from the first sentence of
Section 8(a) of the Certificate.
D. The text of Section 8(a) of the Certificate is hereby amended and
restated in its entirety to read as follows:
"(a) Right to Convert. Each share of Series B Convertible Preferred
Stock shall be convertible, at the option of the holder thereof, at any
time after the date of issuance of such share, at the office of this
Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
the Original Series B Issue Price multiplied by 1000, by the Series B
Conversion Price, determined as hereafter provided, in effect on the date
the certificate is surrendered for conversion. The initial Series B
Conversion Price per share shall be the Original Series B Issue Price;
provided, however, that the Series B Conversion Price shall be subject to
adjustment as set forth in Section 8(d) and 8(e)."
The undersigned officer of the corporation hereby acknowledges that the
above Certificate of Correction of Certificate of Designation of Rights,
Preferences and Privileges of Series B Convertible Preferred Stock is his act
and deed and that the facts stated therein are true.
--------------------------------------
Chris F. Fennell, Secretary
Dated: May 27, 1999
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EXHIBIT C
CARDIAC PATHWAYS CORPORATION
REGISTRATION RIGHTS AGREEMENT
This Agreement is made as of May 20, 1999 by and between Cardiac Pathways
Corporation, a Delaware corporation (the "COMPANY"), and the persons and
entities listed on the Schedule of Holders attached hereto as Schedule 1 (the
"HOLDERS").
WHEREAS, pursuant to a Stock Purchase Agreement (the "STOCK PURCHASE
AGREEMENT") of even date herewith between the Company, and the Holders, the
Company is selling up to 40,000 shares of Series B Convertible Preferred Stock
convertible into shares of the Company's Common Stock, as set forth in the Stock
Purchase Agreement (the "SHARES") to the Holders for the aggregate consideration
of between $25,000,000 and $40,000,000; and
WHEREAS, to induce the Holders to enter into the Stock Purchase Agreement,
the Company has agreed to provide the Holders with certain registration rights
with respect to the Shares pursuant to the terms and conditions of this
Agreement;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions set forth in this Agreement, the Company and the Holders agree as
follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
(a) Business Day. Each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York are authorized
or obligated by law or executive order to close.
(b) Exchange Act. The Securities Exchange Act of 1934, as amended, or
any similar federal statute and the rules and regulations of the SEC
promulgated thereunder.
(c) Losses. See Section 5(a) hereof.
(d) Prospectus. The prospectus included in any Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement,
including, without limitation, with respect to the terms of the offering of
any portion of the Registrable Securities covered by such Registration
Statement and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such Prospectus.
Such Prospectus and any amendments or supplements shall comply with the
Securities Act.
(e) Register. The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act, and the declaration or
ordering of the effectiveness of such registration statement by the SEC.
(f) Registrable Securities. The Shares or other securities issued or
issuable with respect to the Shares as a result of any conversion, stock
split, stock dividend, recapitalization, exchange, combination, merger,
consolidation, distribution or similar event.
(g) Registration Expenses. See Section 4 hereof.
(h) Registration Statement. Any registration statement of the Company
which covers any of the Registrable Securities pursuant to the provisions
of this Agreement, including the Prospectus, amendments and supplements to
such registration statement, including post-effective amendments, all
exhibits, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement. Such Registration
Statement and any amendments or supplements thereto shall comply with the
Securities Act.
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(i) Rule 144. Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.
(j) SEC. The Securities and Exchange Commission.
(k) Securities Act. The Securities Act of 1933, as amended, and the
rules and regulations promulgated by the SEC thereunder.
(l) Special Counsel. Cooley Godward LLP or such other successor
counsel as shall be specified by the BankAmerica Ventures on behalf of the
Holders as special counsel to the Holders, the fees and expenses of which
will be paid by the Company pursuant to Section 4 hereof.
2. Registration.
(a) Demand Registration.
(i) Request from Holders. If the Company shall receive at any time
after May 31, 2000 a written request from the Holders of forty five percent
(45%) of the Registrable Securities then outstanding that the Company file
a registration statement under the Securities Act covering the registration
of at least twenty percent (20%) of the Registrable Securities then
outstanding and having an aggregate offering price, net of underwriting
discounts and commissions, of at least $7,500,000, then the Company shall:
(1) within ten (10) days of the receipt thereof, give written
notice of such request to all Holders; and
(2) effect as soon as practicable, and in any event within sixty
(60) days of the receipt of such request, the registration under the
Securities Act of all Registrable Securities that the Holders request to
be registered, subject to the limitations of subsections 2(a)(ii),
2(a)(iii) and 2(a(iv), within twenty (20) days of the mailing of such
notice by the Company in accordance with Section 9(d).
(ii) Underwriting. If the Holders initiating the registration request
hereunder ("INITIATING HOLDERS") intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall
so advise the Company as a part of their request made pursuant to
subsection 2(a)(i) and the Company shall include such information in the
written notice referred to in subsection 2(a)(i)(1). The underwriter will
be selected by the Company and shall be reasonably acceptable to a majority
in interest of the Initiating Holders. In such event, the right of any
Holder to include his Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. Notwithstanding
any other provision of this Section 2(a), if the underwriter advises the
Initiating Holders in writing that marketing factors require a limitation
of the number of shares to be underwritten, then the Initiating Holders
shall so advise all Holders of Registrable Securities that would otherwise
be underwritten pursuant hereto, and the number of shares of Registrable
Securities that may be included in the underwriting shall be allocated
among all Holders electing to include shares in the offering, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount
of Registrable Securities of the Company owned by each Holder; provided,
however, that for purposes of making any such reduction, each Holder which
is an LLC or a partnership, together with the affiliates, partners and
retired partners of such Holder, the estates and family members of any such
partners and retired partners and their spouses, and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single
Holder of Registrable Securities and any pro-rata reduction with respect to
such Holder shall be based upon the aggregate amount of Registrable
Securities owned by all entities and individuals included in such Holder,
as defined in this proviso (and the aggregate amount so allocated to such
Holder shall be allocated among the entities and individuals included in
such Holder in such manner as such LLC or partnership shall
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reasonably determined. No Registrable Securities shall be excluded from the
underwriting until all other securities proposed to be included by the
Company and its stockholder have been excluded.
If any Holder of Registrable Securities disapproves of the terms of
the underwriting, such person may elect to withdraw therefrom by written
notice to the Company, the managing underwriter and the Initiating Holders.
The Registrable Securities and/or other securities so withdrawn shall also
be withdrawn from registration, and such Registrable Securities shall not
be transferred in a public distribution prior to 180 days after the
effective date of such registration, or such other shorter period of time
as the underwriters may permit. If by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders
may be included in such registration (up to the maximum of any limitation
then imposed by the underwriters), then the Company shall offer to all
Holders, if any, whose shares have been excluded from the registration by
the terms of the preceding paragraph, the right to include additional
Registrable Securities in the same proportion used in determining the
underwriter limitation in this Section 2(a) up to the limitation then
imposed by the underwriters.
(iii) Deferral. Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this
Section 2(a), a certificate from the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration
statement to be filed and it is therefore essential to defer the filing of
such registration statement, the Company shall have the right to defer
taking action with respect to such filing for a period of not more than
ninety (90) days after receipt of the request of the Initiating Holders;
provided, however, that the Company may not utilize this right more than
once in any twelve (12) month period.
(iv) Exceptions. In addition, the Company shall not be obligated to
effect, or to take any action to effect, any registration pursuant to this
Section 2(a):
(1) After the Company has effected two registrations pursuant to
this Section 2(a) and such registrations have been declared or ordered
effective;
(2) During the period starting with the date sixty (60) days prior
to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date
of, a registration subject to Section 2(b) hereof; provided that the
Company is actively employing in good faith all reasonable efforts to
cause such registration statement to be effective; or
(3) If the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 2(c) below.
(b) Company Registration.
(i) Notice of Registration. If at any time or from time to time, the
Company shall determine to register any of its securities, either for its
own account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, (ii) a registration
statement on Form S-4 relating to a merger or acquisition by or of the
Company or (iii) a registration relating solely to a Commission Rule 145
transaction, the Company will:
(1) promptly give to each Holder written notice thereof; and
(2) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting
involved in such registration, all the Registrable Securities specified
in a written request or requests made within twenty (20) days after
receipt of such written notice from the Company by any Holder, but only
to the extent that such inclusion will not diminish the number of
securities included by the Company or by holders of the Company's
securities who have demanded such registration.
(ii) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice
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given pursuant to Section 2(b)(i). In such event, the right of any Holder
to registration pursuant to Section 2(b) shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of
Registrable Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company (or by the holders who have
demanded such registration). Notwithstanding any other provision of this
Section 2(b), if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the number
of shares that may be included in the underwriting will be allocated,
first, to the Company; and second, to each of the Holders requesting
inclusion of their Registrable Securities in such registration statement on
a pro rata basis based on the total number of Registrable Securities held
by each such Holder; provided, however, that a minimum of twenty five
percent (25%) of the shares to be underwritten will be allocated to the
Holders requesting inclusion in such offering, on a pro rata basis and
provided further, that in the event of such limitation, no third party
other than a Holder invoking the right to register shares under this
Section 2(b) shall be entitled to sell shares in such offering. To
facilitate the allocation of shares in accordance with the above
provisions, the Company or the underwriters may round the number of shares
allocated to any Holder or other holder to the nearest 100 shares. For
purposes of making any pro rata reduction pursuant to the preceding
sentence, each Holder which is an LLC or a partnership together with the
affiliates, partners and retired partners of such Holder of Registrable
Securities and any pro-rata reduction with respect to such Holder shall be
based upon the aggregate amount of Registrable Securities owned by all
entities and individuals included in such Holder, as defined in this
sentence (and the aggregate amount so allocated to such Holder shall be
allocated among the entities and individuals included in such Holder in
such manner as such partnership shall reasonably determine).
The Company shall advise all Holders and other holders distributing
their securities through such underwriting of any such limitation, and the
number of shares of Registrable Securities and other securities that may be
included in the registration and underwriting shall be allocated among all
Holders and such other holders in proportion, as nearly as practicable, to
the respective amounts of Registrable Securities held by such Holders and
such other holders at the time of filing the registration statement. If any
Holder or holder disapproves of the terms of any such underwriting, he may
elect to withdraw therefrom by written notice to the Company and the
managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 180 days after the effective
date of the registration statement relating thereto, or such other shorter
period of time as the underwriters may require. If by the withdrawal of
such Registrable Securities a greater number of Registrable Securities held
by other Holders may be included in such registration (up to the maximum of
any limitation then imposed by the underwriters), then the Company shall
offer to all Holders, if any, whose shares have been excluded from the
registration by the terms of the preceding paragraph, the right to include
additional Registrable Securities in the same proportion used in
determining the underwriter limitation in this Section 2(b)(ii) up to the
limitation then imposed by the underwriters.
(iii) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2(b) prior to the effectiveness of such registration, whether or
not any Holder has elected to include securities in such registration.
(iv) Other Registration Rights. No Stockholder of the Company shall be
granted rights to participate in a Company registration that would reduce
the number of shares permitted to be included by the Holders of Registrable
Securities in such registration without the consent of holders of at least
sixty six and two thirds percent (66 2/3%) of the Registrable Securities.
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(c) Form S-3 Registration. If the Company shall receive at any time after
May 31, 2000 a written request or requests from the Holders of forty five
percent (45%) of the Registrable Securities then outstanding that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders, the Company will:
(i) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders; and
(ii) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such
written notice from the Company; provided, however, that the Company shall
not be obligated to effect any such registration, qualification or
compliance, pursuant to this Section 2(c): (1) if Form S-3 is not available
for such offering by the Holders; (2) if the Holders, together with the
holders of any other securities of the Company entitled to inclusion in
such registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $2,000,000; (3) if the
Company shall furnish to the Holders a certificate stating that in the good
faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such Form S-3
Registration to be effected at such time, in which event the Company shall
have the right to defer the filing of the Form S-3 registration statement
for a period of not more than one hundred twenty (120) days after receipt
of the request of the Holder or Holders under this Section 2(c); provided,
however, that the Company shall not utilize this right more than once in
any twelve (12) month period; (4) if the Company has, within the twelve
(12) month period preceding the date of such request, already effected one
(1) registration on Form S-3 for the Holders pursuant to this Section 2(c);
or (5) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or
compliance.
(d) "Market Stand-Off" Agreement. Each Holder of more than one percent (1%)
of the Company's outstanding securities hereby agrees that, during the period of
duration (not to exceed ninety (90) days) specified by the Company and an
underwriter of common stock or other securities of the Company, following the
effective date of a registration statement of the Company's securities filed
under the Securities Act, it shall not, to the extent requested by the Company
and such underwriter, directly or indirectly sell, offer to sell, contract to
sell (including, without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of (other than to donees who agree to
be similarly bound) any securities of the Company held by it at any time during
such period, except common stock included in such registration; provided,
however, that all officers, directors and employees of the Company enter into
similar agreements. In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
3. Registration Procedures. In connection with the Company's registration
obligations under Section 2 hereof, the Company shall effect such registrations
to permit the sale of the Registrable Securities in accordance with the intended
method or methods of disposition thereof and pursuant thereto the Company shall
as expeditiously as possible:
(a) Prepare and file with the SEC a Registration Statement or
Registration Statements on any appropriate form under the Securities Act
available for the sale of the Registrable Securities by the Holders in
accordance with the intended method or methods of distribution thereof, and
cause each such Registration Statement to become effective and remain
effective as provided herein; provided, that before filing any such
Registration Statement or Prospectus or any amendments or supplements
thereto (other than documents that would be incorporated or deemed to be
incorporated therein by reference and that the Company is required by
applicable securities laws or stock exchange requirements to file) the
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Company shall furnish to the Special Counsel copies of all such documents
proposed to be filed, which documents will be subject to the review of the
Special Counsel.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the applicable period
specified in Section 2; cause the related Prospectus to be timely
supplemented by any required Prospectus supplement, and as so supplemented
to be filed pursuant to Rule 424 (or any similar provisions then in force)
under the Securities Act; and comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Holders set forth in such
Registration Statement as so amended or such Prospectus as so supplemented.
(c) Notify the Holders and the Special Counsel promptly, and (if
requested by any such person) confirm such notice in writing, (i) when a
Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective, (ii) of any
request by the SEC or any other federal or state governmental authority
during the period of effectiveness of the Registration Statement for
amendments or supplements to a Registration Statement or related Prospectus
or for additional information, (iii) of the issuance by the SEC or any
other federal or state governmental authority of any stop order suspending
the effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for sale
in any jurisdiction or the initiation or threatening of any proceeding for
such purpose, (v) of the happening of any event which makes any statement
made in such Registration Statement or related Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in
any material respect or which requires the making of any changes in the
Registration Statement or Prospectus so that, in the case of the
Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
that in the case of the Prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, and (vi) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement
would be appropriate.
(d) Use every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement, or the lifting of
any suspension of the qualification (or exemption from qualification) of
any of the Registrable Securities for sale in any jurisdiction, at the
earliest possible moment.
(e) Subject to the last paragraph of this Section 3, if reasonably
requested by the Holders (i) promptly incorporate in a Prospectus
supplement or post-effective amendment such information as the Holders
agrees should be included therein as required by applicable law, (ii) make
all required filings of such Prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus
supplement or post-effective amendment, and (iii) supplement or make
amendments to any Registration Statement consistent with clause (i) or (ii)
above; provided, that the Company shall not be required to take any actions
under this Section 3(e) that are not, in the opinion of counsel for the
Company, necessary or advisable to comply with applicable law.
(f) Furnish to the Holders and the Special Counsel, without charge, at
least one conformed copy of the Registration Statement or Registration
Statements and any post-effective amendment thereto, including financial
statements, but excluding schedules, all documents incorporated or deemed
to be incorporated therein by reference and all exhibits (unless requested
in writing by the Holders or Special Counsel).
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(g) Promptly deliver to the Holders and the Special Counsel, without
charge, as many copies of the Prospectus or Prospectuses relating to such
Registrable Securities (including each preliminary prospectus) and any
amendment or supplement thereto as such persons may reasonably request; and
the Company hereby consents to the use of such Prospectus or each amendment
or supplement thereto by the Holders in connection with the offering and
sale of the Registrable Securities covered by such Prospectus or any
amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, to
register or qualify or cooperate with the Holders and the Special Counsel
in connection with the registration or qualification (or exemption from
such registration or qualification) of such Registrable Securities for
offer and sale under the securities or Blue Sky laws of such jurisdictions
within the United States as the Holders reasonably request in writing; keep
each such registration or qualification (or exemption therefrom) effective
during the period such Registration Statement is required to be kept
effective and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by the applicable Registration Statement; provided, that the
Company will not be required to (i) qualify generally to do business in any
jurisdiction where it is not then so qualified or (ii) take any action that
would subject it to general service of process in suits or to taxation in
any such jurisdiction where it is not then so subject.
(i) Cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies or authorities within the United States, except as
may be required solely as a consequence of the nature of a Holder, in which
case the Company will cooperate in all reasonable respects with the filing
of such Registration Statement and the granting of such approvals, as may
be necessary to enable the Holders or to consummate the disposition of such
Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)(v)
or 3(c)(vi) above, prepare a supplement or post-effective amendment to each
Registration Statement or a supplement to the related Prospectus or any
document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the
Registrable Securities being sold thereunder, such Prospectus will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(k) Notwithstanding anything in this Agreement to the contrary, a
Holder shall not be entitled to sell any of such Registrable Securities
pursuant to a Registration Statement or to receive a Prospectus relating
thereto unless such Holder (A) has at such time a current intent to sell
such Registrable Securities, and confirms such intent in writing, and (B)
has furnished the Company promptly after the Company's request, such
information regarding the Holder and the distribution of such Registrable
Securities as the Company may from time to time reasonably request. The
Company may refrain from filing a registration for any Holder's Registrable
Securities if it does not furnish such information provided above. Each of
the Holders agrees promptly to furnish to the Company all information
required to be disclosed in order to make the information previously
furnished to the Company by Holders not misleading with respect to such
Holder.
The Holders agree by acquisition of the Registrable Securities that,
upon receipt of any notice from the Company of (A) the happening of any
event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi) hereof or (B) that, in the reasonable judgment of the
Company, it is advisable to suspend use of the Prospectus for a discrete
period of time due to pending corporate developments, public filings with
the SEC or similar events, the Holders will forthwith discontinue
disposition of such Registrable Securities covered by such Registration
Statement or Prospectus until the Holders' receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 3(j) hereof, or
until it is advised in writing (the "Advice") by the Company that the use
of the applicable Prospectus may be resumed, and has received copies of any
additional or supplemental filings that are
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incorporated or deemed to be incorporated by reference in such Prospectus.
The Company shall use its reasonable efforts to insure that the use of the
Prospectus may be resumed as soon as practicable.
(l) Use its best efforts to furnish, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities
are being sold through underwriters, (i) an opinion, dated as of such date,
of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters
in an underwritten public offering, addressed to the Holders participating
in the offering, and (ii) a letter dated as of such date, from the
independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering addressed to
the Holder participating in the offering.
4. Registration Expenses. All fees and expenses incident to the Company's
performance of or compliance with this Agreement shall be borne by the Company
whether or not any of the Registration Statements become effective. Such fees
and expenses shall include, without limitation, (i) all registration and filing
fees (including, without limitation, fees and expenses (x) with respect to
filings required to be made with the National Association of Securities Dealers,
Inc. and (y) of compliance with federal securities or Blue Sky laws, (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities in a form eligible for deposit with The
Depository Trust Company), (iii) fees and disbursements of counsel for the
Company and the Special Counsel, and (iv) Securities Act liability insurance
obtained by the Company in its sole discretion. In addition, the Company shall
pay its internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, the fees and expenses incurred in connection
with the listing of the securities to be registered on any securities exchange
on which similar securities issued by the Company are then listed and rating
agency fees and the fees and expenses of any person, including special experts,
retained by the Company. Notwithstanding the provisions of this Section 4, the
Holders shall pay all registration expenses to the extent that the Company is
prohibited by applicable Blue Sky laws from paying for or on behalf of the
Holders.
All underwriting discounts, selling commissions and stock transfer taxes
applicable to the sale of the Registrable Securities if any, shall be paid by
the Holders.
5. Indemnification.
(a) Indemnification by the Company. The Company shall indemnify and hold
harmless, to the fullest extent permitted by law, BankAmerica Ventures ("BAV")
each of its officers, directors, partners and members and each selling Holder
and each person, if any, who controls such Holder (within the meaning of Section
15 of the Securities Act or Section 20(a) of the Exchange Act) from and against
all losses, liabilities, claims, damages and expenses (including but not limited
to reasonable attorney fees and any and all reasonable expenses whatsoever
incurred in investigating, preparing or defending against litigation, commenced
or threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation) (collectively, "LOSSES"), arising out of
or based upon any untrue or alleged untrue statement of a material fact
contained in any Registration Statement, Prospectus or form of Prospectus or in
any amendment or supplement thereto or in any preliminary prospectus, or arising
out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except insofar as the same are based solely upon information
furnished in writing to the Company by BAV or any Holder expressly for use
therein; provided, that the Company shall not be liable to BAV or any Holder (or
any person controlling any of the Holders) to the extent that any such Losses
arise out of or are based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any prospectus if either (A) (i) BAV or
any of the Holders failed to send or deliver a copy of the Prospectus with or
prior to the delivery of written confirmation of the sale by the Holders of a
Registrable Security to the person asserting the claim from which such Losses
arise and (ii) the Prospectus would have corrected such untrue statement or
alleged untrue statement or such omission or alleged omission, or (B) (x) such
untrue statement or alleged untrue statement, omission or alleged omission is
corrected in an amendment or supplement to the Prospectus and (y) having
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previously been furnished by or on behalf of the Company with copies of the
Prospectus as so amended or supplemented, the Holders thereafter fail to deliver
such Prospectus as so amended or supplemented, with or prior to the delivery of
written confirmation of the sale of a Registrable Security to the person
asserting the claim from which such Losses arise. The Company shall also
indemnify each underwriter and each person who controls such person (within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act) to the same extent as provided above with respect to the indemnification of
the Holder.
(b) Indemnification by Holder. In connection with any Registration
Statement in which the Holders are participating, BAV or the Holders shall
furnish to the Company in writing such information as the Company reasonably
requests for use in connection with any Registration Statement or Prospectus and
each Holder agrees to indemnify, to the fullest extent permitted by law, the
Company, its directors and officers and each other person who controls the
Company (within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), from and against all Losses in each case arising out of or
based upon any untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus or arising out of or based upon
any omission of a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
BAV or the Holders to the Company expressly for use in such Registration
Statement, Prospectus or preliminary prospectus. In no event shall the liability
of BAV or any of the Holders hereunder exceed the net proceeds received from
sales of its Registrable Securities. The Company shall be entitled to receive
indemnities from underwriters participating in the distribution to the same
extent as provided above with respect to information so furnished in writing by
such persons expressly for use in any Prospectus or Registration Statement.
(c) Conduct of Indemnification Proceedings. If any person shall be entitled
to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party shall
give prompt notice to the party from which such indemnity is sought (the
"INDEMNIFYING PARTY") of any claim or of the commencement of any proceeding with
respect to which such Indemnified Party seeks indemnification or contribution
pursuant hereto; provided, that the failure to so notify the Indemnifying Party
shall not relieve the Indemnified Party from any obligation or liability except
to the extent that the Indemnified Party has been prejudiced materially by such
failure. All such fees and expenses (including any fees and expenses incurred in
connection with investigating or preparing to defend such action or proceeding)
shall be paid to the Indemnified Party on a quarterly basis following written
notice thereof to the Indemnified Party (notwithstanding the absence of judicial
determination as to the propriety and enforceability of the Indemnified Party's
obligation to reimburse the Indemnified Party for such expense and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction). In case any such action is brought against an
Indemnified Party, the Indemnified Party shall be entitled to participate
therein and it may elect by written notice delivered to the Indemnified Party
within a reasonable period of time after receiving the aforesaid notice from
such Indemnified Party, to assume the defense thereof with counsel reasonably
satisfactory to such Indemnified Party. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant for
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
(d) Contribution. If the indemnification provided for in this Section 5 is
unavailable to an Indemnified Party under Section 5(a) or 5(b) hereof in respect
of any Losses or is insufficient to hold such Indemnified Party harmless, then
each applicable Indemnified Party, in lieu of indemnifying such Indemnified
Party, shall, jointly and severally, contribute to the amount paid or payable by
such Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnified Party or
indemnifying parties, on the one hand, and such Indemnified Party, on the other
hand, in connection with the actions, statements or omissions that resulted in
such Losses as well as any other relevant equitable considerations. The relative
fault of such Indemnified Party or indemnifying parties, on the one hand, and
such Indemnified Party, on the other hand, shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged
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omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnified Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include any
reasonable legal or other reasonable fees or expenses incurred by such party in
connection with any proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method or allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding this Section 5(d), if any of the Holders are the Indemnifying
Party, such Holders shall not be required to contribute any amount in excess of
the amount by which the net proceeds exceeds the amount of any damages which
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
The indemnity, contribution and expense reimbursement obligations of the
Company hereunder shall be in addition to any liability the Company may
otherwise have hereunder or otherwise. The provisions of this Section 5 shall
survive so long as Registrable Securities remain outstanding, notwithstanding
any termination of this Agreement.
6. Rule 144 Information Requirements. For so long as any Registrable
Securities are "restricted securities" under Rule 144, the Company agrees to
timely file the reports required to be filed by it under the Securities Act and
the Exchange Act.
7. Sale without Registration. The Holders agree to comply in all respects
with the provisions of this Section 7 so long as each certificate representing
the Shares is required to bear the legend in substantially the form set forth in
the Stock Purchase Agreement among the Holders and the Company (or any similar
legend). Prior to any proposed transfer of any Registrable Securities by the
Holders which shall not be registered under the Securities Act, the Holders
shall give written notice to the Company of its intention to effect such
transfer, accompanied by: (a) such information as is reasonably necessary in
order to establish that such transfer may be made without registration under the
Securities Act; and (b) at the expense of such Holder or such Holder's
transferee, an unqualified written opinion of legal counsel, satisfactory in
form and substance to the Company, to the effect that such transfer may be made
without registration under the Securities Act; provided that nothing contained
in this Section 7 shall relieve the Company from complying with its obligations
pursuant to Section 2 of this Agreement.
8. Transfer of Rights. The rights granted to the Holders under Section 2
hereof may be assigned to any transferee or assignee who is (a) a subsidiary,
parent, LLC, general partner, limited partner, retired partner, member or
retired member of a Holder, (b) a Holder's ancestors, descendants or spouse or
to trusts for the benefit of such persons or such Holder or (c) a client,
employee or member of BAV, provided that (i) such transfer may otherwise be
effected in accordance with applicable securities laws, (ii) the Company is
given written notice of any such transfer five (5) Business Days prior to the
date of said transfer, stating the name and address of said transferee or
assignee and identifying the securities with respect to which such registration
rights are being assigned and (iii) the transferee or assignee of such rights is
not deemed by the Board of Directors of the Company, in its reasonable judgment,
to be a competitor of the Company and provided further that the transferee or
assignee of such rights assumes in writing in a form reasonably acceptable to
the Company the obligations of the Holders under this Agreement. Notwithstanding
the above, BAV shall be permitted to transfer or assign its rights to Bank of
America Ventures, L.P. without the requirements set forth in Section 8.
9. Miscellaneous.
(a) Remedies. In the event of a breach by the Company of its obligations
under this Agreement, the Holders, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of their rights under this Agreement. The Company agrees
that monetary
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damages would not be adequate compensation for any loss incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect of
such breach, it shall waive the defense that a remedy at law would be adequate.
(b) No Conflicting Agreements. The Company has not, as of the date hereof,
and shall not, on or after the date of this Agreement, enter into any agreement
with respect to its securities which materially conflicts with the rights
granted to the Holders in this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the Company has obtained the written consent of a majority of the
Holders.
(d) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing and shall be deemed given (i) when made, if
made by hand delivery, (ii) upon confirmation, if made by telecopier or (iii)
one business day after being deposited with a reputable next-day courier,
postage prepaid, to the parties as follows:
(i) if to the Holders, c/o BankAmerica Ventures, 950 Tower Lane, Suite
700, Foster City, California 94404, Attention: Mark Brooks and Robert S.
Fore, or to such other address as a Holder may hereafter furnish to the
Company in writing in accordance herewith, with a copy to Julia Davidson,
Cooley Godward LLP, Five Palo Alto Square, Palo Alto, CA 94306-2155.
(ii) if to the Company, to Cardiac Pathways Corporation, 995 Benecia
Avenue, Sunnyvale, California 94086, Attention: G. Michael Latta, Chief
Financial Officer, or to such other address as the Company may hereafter
furnish to BAV in writing in accordance herewith, with a copy to Chris F.
Fennell, Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304-1050.
(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be original and all of which taken together
shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS.
(i) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
(j) Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and is intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and the registration rights granted by the
Company with respect to the Shares. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein,
with respect to the registration rights granted by the Company with
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respect to the Shares. This Agreement supersedes all prior agreements and
understandings among the parties with respect to such registration rights.
(k) Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the prevailing party, as determined by the court, shall be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
(l) Further Assurances. Each of the parties hereto shall use all reasonable
efforts to take, or cause to be taken, all appropriate action, do or cause to be
done all things reasonably necessary, proper or advisable under applicable law,
and execute and deliver such documents and other papers, as may be required to
carry out the provisions of this Agreement and the other documents contemplated
hereby and consummate and make effective the transactions contemplated hereby.
(m) Termination. This Agreement and the obligations of the parties
hereunder shall terminate upon the earlier of (i) May 20, 2004, or (ii) or when
all of the Registrable Securities have been sold or cease to be Registrable
Securities.
(n) Actions by the Holders. Any action to be taken by the Holders pursuant
to the Agreement may be taken by the Holders of a majority of the Registrable
Securities.
The foregoing Registration Rights Agreement is hereby executed as of the
date first above written.
"COMPANY"
CARDIAC PATHWAYS CORPORATION
By:
------------------------------------
William N. Starling
President and Chief Executive Officer
"HOLDERS"
BANKAMERICA VENTURES
By:
------------------------------------
Title:
-----------------------------------
MORGAN STANLEY VENTURE PARTNERS III,
L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By:
------------------------------------
Name:
Title:
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
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MORGAN STANLEY VENTURE INVESTORS III,
L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By:
------------------------------------
Name:
Title:
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
MORGAN STANLEY VENTURE PARTNERS
ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners
III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital
III, Inc.,
its Institutional Managing Member
By:
------------------------------------
Name:
Title:
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
VAN WAGONER CAPITAL MANAGEMENT
By:
------------------------------------
Name:
Title:
Address:
Fax: (415) 835-5050
STATE OF WISCONSIN INVESTMENT BOARD
By:
------------------------------------
Name: John Nelson
Title: Investment Director
Address:
Fax:
--------------------------------------
THOMAS FOGARTY
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<PAGE> 159
SCHEDULE 1
SCHEDULE OF HOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF REGISTRABLE
HOLDER AND BENEFICIAL OWNER NOMINEE AND RECORD HOLDER SECURITIES
--------------------------- ------------------------- ----------------
<S> <C> <C>
BankAmerica Ventures................................... 10,000
Morgan Stanley Venture Partners III, L.P............... 8,773
Morgan Stanley Venture Investors III, L.P.............. 842
Morgan Stanley Venture Partners Entrepreneurs Fund,
L.P. ................................................ 385
Van Wagoner Capital Management......................... 5,000
State of Wisconsin Investment Board.................... 6,000
Thomas Fogarty......................................... 500
</TABLE>
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<PAGE> 160
EXHIBIT D
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of May 11,
1999 between Cardiac Pathways Corporation, a Delaware corporation ("COMPANY"),
and the undersigned stockholder ("STOCKHOLDER") of the Company, a Delaware
corporation.
RECITALS
A. Concurrently with the execution of this Agreement, the Company and
BankAmerica Ventures ("BAV") have entered into a Series B Convertible Preferred
Stock Purchase Agreement of even date herewith (the "PURCHASE AGREEMENT") which
provides for the purchase of the Company's Series B Convertible Preferred Stock
(the "FINANCING").
B. The Stockholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")) of such number of shares of the outstanding Common Stock of the Company
as is indicated on the final page of this Agreement.
C. Company desires the Stockholder to agree, and the Stockholder is willing
to agree to vote the Shares and any other such shares of capital stock of the
Company so as to facilitate consummation of the Financing.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, the parties agree as follows:
1. Certain Definitions
For purposes of this Voting Agreement:
(a) "ACQUISITION PROPOSAL" shall mean any offer, proposal or inquiry
contemplating or otherwise relating to any Acquisition Transaction.
(b) "ACQUISITION TRANSACTION" shall mean any transaction (other than
as contemplated by the Purchase Agreement) involving:
(1) any merger, consolidation, amalgamation, share exchange,
business combination, issuance of securities, acquisition of securities,
tender offer, exchange offer or other similar transaction (i) in which
the Company is a constituent company, (ii) in which a person or "group"
(as defined in the Exchange Act of 1934, as amended and the rules
promulgated thereunder) of persons directly or indirectly acquires the
Company or more than 20% of the Company's business or directly or
indirectly acquires beneficial or record ownership of securities
representing, or exchangeable for or convertible into, more than 20% of
the outstanding securities of any class of voting securities of the
Company, or (iii) in which the Company issues securities representing
more than 20% of the outstanding securities of any class of voting
securities of the Company;
(2) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 20% of the assets of the Company; or
(3) any liquidation or dissolution of the Company.
(c) "COMPANY COMMON STOCK" shall mean the common stock, par value
$. per share, of the Company.
(d) "EXPIRATION DATE" shall mean the earlier of (i) the date upon
which the Purchase Agreement is validly terminated, or (ii) the date upon
which the closing (as defined in the Purchase Agreement, hereinafter, the
"Closing") occurs.
(e) Stockholder shall be deemed to "OWN" or to have acquired
"OWNERSHIP" of a security if Stockholder: (i) is the record owner of such
security; or (ii) is the "beneficial owner" (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934) of such security.
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<PAGE> 161
(f) "PERSON" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(g) "REPRESENTATIVES" shall mean officers, directors, employees,
agents, attorneys, accountants, advisors and representatives.
(h) "SHARES" shall mean: (i) all securities of the Company (including
all shares of Company Common Stock and all options, warrants and other
rights to acquire shares of Company Common Stock) Owned by Stockholder as
of the date of this Agreement; and (ii) all additional securities of the
Company (including all additional shares of Company Common Stock and all
additional options, warrants and other rights to acquire shares of Company
Common Stock) of which Stockholder acquires Ownership during the period
from the date of this Agreement through the Expiration Date.
(i) A Person shall be deemed to have a effected a "TRANSFER" of a
security if such Person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment contemplating the possible sale of, pledge of, encumbrance
of, grant of an option with respect to, transfer of or disposition of such
security or any interest therein.
2. Agreement to Vote Shares. From the date of this Agreement to the
Expiration Date, at every meeting of the stockholders of the Company called with
respect to any of the following, and at every adjournment thereof, and on every
action or approval by written consent of the Stockholders of the Company with
respect to any of the following, Stockholder shall vote the Shares: (i) in favor
of approval of the Purchase Agreement and the Financing and any matter that
could reasonably be expected to facilitate the Financing; and (ii) against (a)
approval of any proposal made in opposition to or competition with consummation
of the Financing; (b) any liquidation or winding up of the Company; and (c) any
action that would make consummation of the financing unfeasible (each of the
foregoing is hereinafter referred to as an "OPPOSING PROPOSAL"). Stockholder
agrees not to take any actions contrary to Stockholder's obligations under this
Agreement.
3. Irrevocable Proxy. Contemporaneously with the execution of this Voting
Agreement: (i) Stockholder shall deliver to the Company a proxy in the form
attached to this Voting Agreement as EXHIBIT A, which shall be irrevocable to
the fullest extent permitted by law, with respect to the shares referred to
therein (the "PROXY"); and (ii) Stockholder shall cause to be delivered to the
Company an additional proxy (in the form attached hereto as Exhibit A) executed
on behalf of the record owner of any outstanding shares of Company Common Stock
that are owned beneficially (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934), but not of record, by Stockholder.
4. Transfer of Shares.
4.1 Transferee of Shares to be Bound by this Agreement. Stockholder agrees
that, during the period from the date of this Voting Agreement through the
Expiration Date, Stockholder shall not cause or permit any Transfer of any of
the Shares to be effected unless each Person to which any of such Shares, or any
interest in any of such Shares, is or may be transferred shall have: (a)
executed a counterpart of this Voting Agreement and a proxy in the form attached
hereto as Exhibit A; and (b) agreed to hold such Shares (or interest in such
Shares) subject to all of the terms and provisions of this Voting Agreement.
4.2 Transfer of Voting Rights. Stockholder agrees that, during the period
from the date of this Voting Agreement through the Expiration Date, Stockholder
shall ensure that: (a) none of the Shares is deposited into a voting trust; and
(b) no proxy is granted, and no voting agreement or similar agreement is entered
into, with respect to any of the Shares.
5. No Solicitation. Stockholder agrees that, during the period from the
date of this Voting Agreement through the Expiration Date, Stockholder shall
not, directly or indirectly, and Stockholder shall ensure that his
Representatives do not, directly or indirectly: (i) solicit, initiate, encourage
or induce the making, submission or announcement of any Acquisition or take any
action that could reasonably be expected to lead to an Acquisition Proposal;
(ii) furnish any information regarding the Company or any direct or indirect
subsidiary
A-58
<PAGE> 162
of the Company to any Person in connection with or in response to an Acquisition
Proposal or potential Acquisition Proposal; or (iii) engage in discussions with
any Person with respect to any Acquisition Proposal. Stockholder shall
immediately cease and discontinue, and Stockholder shall ensure that his
Representatives immediately cease and discontinue, any existing discussions with
any Person that relate to any Acquisition Proposal.
6. Representations, Warranties and Covenants of the
Stockholder. Stockholder hereby represents, warrants and covenants to Parent as
follows:
6.1 Ownership of Shares. Stockholder (i) is the beneficial owner of the
Shares, which at the date hereof and at all times up until the Expiration Date
will be free and clear of any liens, claims, options, charges or other
encumbrances; (ii) does not beneficially own any shares of capital stock of the
Company other than the Shares (excluding shares as to which Stockholder
currently disclaims beneficial ownership in accordance with applicable law); and
(iii) has full power and authority to make, enter into and carry out the terms
of this Agreement and the Proxy. This Voting Agreement and the Proxy have been
duly executed and delivered by Stockholder and constitute legal, valid and
binding obligations of Stockholder, enforceable against Stockholder in
accordance with their terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
6.2 No Conflicts of Consents.
(a) The execution and delivery of this Voting Agreement and the Proxy by
Stockholder do not, and the performance of this Voting Agreement and the Proxy
by Stockholder will not: (i) conflict with or violate any law, rule, regulation,
order, decree or judgment applicable to Stockholder or by which he or any of his
properties is or may be bound or affected; or (ii) result in or constitute (with
or without notice or lapse of time) any breach of or default under, or give to
any other Person (with or without notice or lapse of time) any right of
termination, amendment, acceleration or cancellation of, or result (with or
without notice or lapse of time) in the creation of any encumbrance or
restriction on any of the Shares pursuant to, any contract to which Stockholder
is a party or by which Stockholder or any of his affiliates or properties is or
may be bound or affected.
(b) The execution and delivery of this Voting Agreement and the Proxy by
Stockholder do not, and the performance of this Voting Agreement and the Proxy
by Stockholder will not, require any consent or approval of any Person.
6.3 Accuracy of Representations. The representations and warranties
contained in this Voting Agreement are accurate in all respects as of the date
of this Voting Agreement, will be accurate in all respects at all times through
the Expiration Date and will be accurate in all respects as of the date of the
Closing as if made on that date.
6.4 No Proxy Solicitations. Stockholder will not, and will not permit any
entity under Stockholder's control to: (i) solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation 14A
under the Exchange Act) with respect to an Opposing Proposal or otherwise
encourage or assist any party in taking or planning any action that would
compete with, restrain or otherwise serve to interfere with or inhibit the
timely consummation of the Financing; (ii) initiate a Stockholders' vote or
action by written consent of the Company Stockholders with respect to an
Opposing Proposal; or (iii) become a member of a "group" (as such term is used
in Section 13(d) of the Exchange Act) with respect to any voting securities of
the Company with respect to an Opposing Proposal.
7. Additional Documents. Stockholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Parent and Stockholder, as the case may be, to carry out
the intent of this Agreement.
8. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Closing Date of the Financing (as defined in the Purchase Agreement.
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<PAGE> 163
9. Legend. Immediately after the execution of this Voting Agreement (and
from time to time upon the acquisition by Stockholder of Ownership of any shares
of Company Common Stock prior to the Expiration Date), Stockholder shall ensure
that each certificate evidencing any outstanding shares of Company Common Stock
or other securities of the Company Owned by Stockholder bears a legend in the
following form:
THE SECURITY OR SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
EXCHANGED OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH
THE TERMS AND PROVISIONS OF THE VOTING AGREEMENT DATED AS OF MAY 12, 1999
BETWEEN THE ISSUER AND THE STOCKHOLDER, AS IT MAY BE AMENDED, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
10. Miscellaneous.
10.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
10.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, either this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without prior written consent of the other. Without limiting any
of the restrictions set forth in Section 4 or elsewhere in this Voting
Agreement, this Voting Agreement shall be binding upon any Person to whom any
Shares are transferred. Nothing in this Voting Agreement is intended to confer
on any Person (other than the Company and its successors and assigns) any rights
or remedies of any nature.
10.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
10.4 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Parent will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at law
or in equity.
10.5 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, facsimile, or sent by mail (registered or
certified mail, postage prepaid, return receipt requested) or overnight courier
(prepaid) to the respective parties as follows:
If to the Company to:
Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, California 94086
Telephone: (408) 737-0505
Facsimile: (408) 737-1700
Attention: G. Michael Latta, Chief Financial Officer
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<PAGE> 164
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 845-5000
Attention: Chris F. Fennell, Esq.
If to the Stockholder:
At the address provided on Signature Page
or to such other address or facsimile numbers as any party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address or facsimile number shall only be effective upon receipt.
10.6 Governing Law; Venue.
(a) This Agreement shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of California.
(b) Any legal action or other legal proceeding relating to this Voting
Agreement or the Proxy or the enforcement of any provision of this Voting
Agreement or the Proxy may be brought or otherwise commenced in any state or
federal court located in the County of Santa Clara, California. Stockholder:
(i) expressly and irrevocably consents and submits to the
jurisdiction of each state and federal court located in the County of Santa
Clara, California (and each appellate court located in the State of
California), in connection with any such legal proceeding;
(ii) agrees that service of any process, summons, notice or document
by U.S. mail addressed to him at the address set forth on the signature
page attached hereto shall constitute effective service of such process,
summons, notice or document for purposes of any such legal proceeding;
(iii) agrees that each state and federal court located in the County
of Santa Clara, California, shall be deemed to be a convenient forum; and
(iv) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or federal
court located in the County of Santa Clara, California, any claim that
Stockholder is not subject personally to the jurisdiction of such court,
that such legal proceeding has been brought in an inconvenient forum, that
the venue of such proceeding is improper or that this Voting Agreement or
the subject matter of this Voting Agreement may not be enforced in or by
such court.
Nothing contained in this Section 10.6 shall be deemed to limit or otherwise
affect the right of the Company to commence any legal proceeding or otherwise
proceed against Stockholder in any other forum or jurisdiction.
(c) STOCKHOLDER IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL IN CONNECTION
WITH ANY LEGAL PROCEEDING RELATING TO THIS VOTING AGREEMENT OR THE PROXY OR THE
ENFORCEMENT OF ANY PROVISION OF THIS VOTING AGREEMENT OR THE PROXY.
10.7 Entire Agreement. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such subject
matter.
10.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
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<PAGE> 165
10.9 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction of interpretation of this Agreement.
10.10 Attorneys' Fees. If any legal action or other legal proceeding
relating to this Voting Agreement or the enforcement of any provision of this
Voting Agreement is brought against Stockholder, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements (in
addition to any other relief to which the prevailing party may be entitled).
10.11 Waiver. No failure on the part of the Company to exercise any power,
right, privilege or remedy under this Voting Agreement, and no delay on the part
of the Company in exercising any power, right, privilege or remedy under this
Voting Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege or
remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy. The Company shall not be deemed to have
waived any claim available to the Company arising out of this Voting Agreement,
or any power, right, privilege or remedy of the Company under this Voting
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of the Company; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date and year first above written.
CARDIAC PATHWAYS CORPORATION
By:
--------------------------------------
Name: William Starling
Title: President and Chief Executive
Officer
STOCKHOLDER
--------------------------------------
Name:
Stockholder's Address for Notice:
--------------------------------------
--------------------------------------
--------------------------------------
Facsimile Number:
Shares beneficially owned:
________________ shares of Common
Stock
A-62
<PAGE> 166
EXHIBIT A
IRREVOCABLE PROXY
The undersigned Stockholder of Cardiac Pathways Corporation, a Delaware
corporation ("COMPANY"), hereby irrevocably appoints the William Starling and G.
Michael Latta, and each of them, as the sole and exclusive attorneys and proxies
of the undersigned, with full power of substitution and resubstitution, to the
full extent of the undersigned's rights with respect to (i) the shares of
capital stock of Company beneficially owned by the undersigned, which shares are
listed on the final page of this Proxy, (ii) any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof,
and (iii) any and all other shares of capital stock of the Company which the
undersigned may acquire on or after the date hereof, until such time as that
certain Series B Convertible Preferred Stock Purchase Agreement (the "PURCHASE
AGREEMENT"), among the Company and BankAmerica Ventures ("BAV"), which provides
for the purchase of the Company's Series B Convertible Preferred Stock (the
"FINANCING"), shall be terminated in accordance with its terms or the Closing
(as defined in the Purchase Agreement) occurs (the "EXPIRATION DATE"). (The
shares of capital stock of Company referred to in clauses (i), (ii) and (iii)
above are collectively referred to as the "Shares"). Upon the execution hereof,
all prior proxies given by the undersigned with respect to the Shares are hereby
revoked and no subsequent proxies will be given.
This Proxy is irrevocable, is coupled with an interest, is granted pursuant
to the Voting Agreement dated as of May 11, 1999 between Company and the
undersigned Stockholder (the "VOTING AGREEMENT"), and is granted in
consideration of BAV entering into the Purchase Agreement. The attorneys and
proxies named above will be empowered at any time prior to the Expiration Date
to exercise all voting and other rights (including, without limitation, the
power to execute and deliver written consents with respect to the Shares) of the
undersigned at every annual, special or adjourned meeting of Company
stockholders, and in every written consent in lieu of such a meeting, or
otherwise, (i) in favor of approval of the Purchase Agreement and the Financing
and any matter that could reasonably be expected to facilitate the Financing,
and (ii) against (a) approval of any proposal made in opposition to or
competition with the consummation of the Financing, (b) any liquidation or
winding up of the Company and (c) any action that would make the consummation of
the Financing unfeasible.
The attorneys and proxies named above may only exercise this Proxy to vote
the Shares subject hereto at any time prior to the Expiration Date at every
annual, special or adjourned meeting of the Stockholders of Company and in every
written consent in lieu of such meeting or otherwise, (i) in favor of approval
of the Purchase Agreement and the Financing and any matter that could reasonably
be expected to facilitate the Financing, and (ii) against (a) approval of any
proposal made in opposition to or competition with consummation of the
Financing, (b) any liquidation or winding up of the Company, and (c) any action
that would make the consummation of the Financing unfeasible, and may not
exercise this Proxy on any other matter. The undersigned Stockholder may vote
the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
heirs, estates, executors, personal representatives, successors and assigns of
the undersigned (including any transferee of any shares).
This Proxy is irrevocable.
If any provision of this proxy or any part of any such provision is held
under any circumstances to be invalid or unenforceable in any jurisdiction, then
(a) such provision or part thereof shall, with respect to such circumstances and
in such jurisdiction, be deemed amended to conform to applicable laws so as to
be valid and enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances and
in such jurisdiction shall not affect the validity or enforceability of such
provision or part thereof under any other circumstances or in any other
jurisdiction, and (c) the invalidity or unenforceability of such provision or
part thereof shall not affect the validity or enforceability of the remainder of
such provision or the validity or enforceability of any other provision of this
proxy. Each provision of this proxy is separable from every other provision of
this proxy, and each part of each provision of this proxy is separable from
every other part of such provision.
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<PAGE> 167
This proxy shall terminate upon the earlier of the valid termination of the
Purchase Agreement or the closing of the Financing.
Dated: May 11, 1999
Signature of Stockholder:
Print Name of Stockholder:
Shares beneficially owned: shares of Common Stock
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<PAGE> 168
APPENDIX B
SECURITIES PURCHASE AGREEMENT
DATED AS OF
MAY 20, 1999
AMONG
CARDIAC PATHWAYS CORPORATION
AND
THE PURCHASERS LISTED ON THE
SIGNATURE PAGES HEREOF
<PAGE> 169
TABLE OF CONTENTS
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ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions................................... B-1
ARTICLE 2
PURCHASE AND SALE OF SECURITIES
SECTION 2.01. Commitments to Purchase....................... B-3
SECTION 2.02. The Closings.................................. B-3
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Organization, Standing, etc................... B-3
SECTION 3.02. Authorization; Noncontravention............... B-4
SECTION 3.03. Binding Effect................................ B-4
SECTION 3.04. Capitalization................................ B-4
SECTION 3.05. Litigation, Proceedings; No Defaults.......... B-5
SECTION 3.06. Investment Company............................ B-5
SECTION 3.07. Governmental Regulation....................... B-5
SECTION 3.08. Solicitation; Access to Information........... B-5
SECTION 3.09. Qualified Small Business...................... B-5
SECTION 3.10. Small Business Concern........................ B-5
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
SECTION 4.01. Private Placement............................. B-6
SECTION 4.02. Authority; No Other Action.................... B-6
SECTION 4.03. Margin Compliance............................. B-6
SECTION 4.04. Source of Funds............................... B-6
ARTICLE 5
CONDITIONS PRECEDENT TO CLOSING
SECTION 5.01. Conditions to Purchaser's Obligations......... B-6
SECTION 5.02. Conditions to Issuer's Obligations............ B-7
ARTICLE 6
COVENANTS
SECTION 6.01. Incorporation of Affirmative Covenants from
the Credit Agreement...................................... B-8
SECTION 6.02. Incorporation of Negative Covenants from the
Credit Agreement.......................................... B-8
SECTION 6.03. Furnishing of Information..................... B-8
SECTION 6.04. Use of Proceeds............................... B-8
SECTION 6.05. Notice of Shareholder Meetings................ B-8
SECTION 6.06. Capitalization................................ B-8
SECTION 6.07. Qualified Small Business...................... B-8
SECTION 6.08. Small Business Administration Matters......... B-9
SECTION 6.09. Regulatory Compliance Cooperation............. B-9
SECTION 6.10. Board Observer Rights......................... B-9
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ARTICLE 7
LIMITATION ON TRANSFERS
SECTION 7.01. Restrictions on Transfer...................... B-10
SECTION 7.02. Restrictive Legends........................... B-10
SECTION 7.03. Notice of Proposed Transfers.................. B-10
ARTICLE 8
CONVERSION OF SECURITIES
SECTION 8.01. Right to Convert Securities................... B-10
SECTION 8.02. Conversion of Securities...................... B-11
SECTION 8.03. Equity Securities............................. B-11
SECTION 8.04. Registration Rights........................... B-11
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices....................................... B-11
SECTION 9.02. No Waivers; Amendments........................ B-11
SECTION 9.03. Expenses; Documentary Taxes................... B-12
SECTION 9.04. Payment....................................... B-12
SECTION 9.05. Termination................................... B-12
SECTION 9.06. Successors and Assigns........................ B-12
SECTION 9.07. California Law................................ B-12
SECTION 9.08. Counterparts; Effectiveness................... B-12
SECTION 9.09. Entire Agreement.............................. B-12
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Schedule I -- Small Business Investment Companies......................... B-24
Exhibit A -- Form of Senior Convertible Floating Rate Bridge Note........ B-25
Exhibit B -- Certificate of Designation.................................. B-32
Exhibit C -- Form of Warrant............................................. B-33
Exhibit D -- Form of Security Agreement.................................. B-45
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SECURITIES PURCHASE AGREEMENT
AGREEMENT dated as of May 20, 1999 among Cardiac Pathways Corporation, a
Delaware corporation (the "ISSUER"), and the Purchasers listed on the signature
pages hereof (the "PURCHASERS"). The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) Terms defined in the Credit Agreement
referred to below and not otherwise defined herein have, as used herein, the
respective meanings provided for therein.
(b) The following additional terms, as used herein, have the following
meanings:
"AFFILIATE", as applied to any Person, means any other Person directly or
indirectly controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, "CONTROL" (including, with
correlative meanings, the terms "CONTROLLING", "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH"), as applied to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting securities, by
contract or otherwise.
"AGREEMENT" means this Agreement, as the same may be amended from time to
time.
"BAV" means BankAmerica Ventures, a California corporation.
"BRIDGE SECURITIES" means the Issuer's Senior Convertible Floating Rate
Bridge Notes substantially in the form set forth in Exhibit A hereto.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in San Francisco and the City of New York are authorized
by law to close.
"CERTIFICATE OF DESIGNATION" means the Certificate of Designation of the
Issuer substantially in the form of Exhibit B hereto, setting forth the terms of
the Preferred Stock.
"CLOSING" and "CLOSING DATE" have the meanings set forth in Section
2.02(a).
"COLLATERAL AGENT" means BankAmerica Ventures as collateral agent under the
Collateral Documents.
"COLLATERAL DOCUMENTS" means the Security Agreement and any other agreement
pursuant to which the Issuer or any of its Subsidiaries provides a Lien on its
assets in favor of the Collateral Agent for the benefit of the Purchasers, and
all supplementary assignments, security agreements, pledge agreements,
acknowledgments or other documents delivered or to be delivered pursuant to the
terms hereof or of any Collateral Document.
"CODE" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Issuer, par value $.001 per
share.
"CREDIT AGREEMENT" means the Loan and Security Agreement dated as of May
15, 1998, between the Issuer, and Silicon Valley Bank, together with the related
documents thereto, including without limitation any security documents, in each
case as in effect on May 17, 1999.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FINANCING DOCUMENTS" means this Agreement, the Bridge Securities and the
Collateral Documents.
"ISSUER" has the meaning set forth in the first paragraph of this
Agreement.
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"ISSUER'S COUNSEL" means Wilson Sonsini Goodrich & Rosati.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, any Person shall be deemed to own subject to
any Lien any asset that it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"MSVP" means the collective reference to Morgan Stanley Venture Partners
III, L.P., Morgan Stanley Venture Investors III, L.P. and The Morgan Stanley
Venture Partners Entrepreneur Fund, L.P., each a Delaware limited partnership.
"OTHER FINANCING DOCUMENTS" means the Preferred Stock Purchase Agreement,
the Registration Rights Agreement and the Voting Agreement.
"PERMITTED TRANSFEREE" means a Person that is an Affiliate of a Purchaser
(or, with respect to any Purchaser that is a trust, a successor trust,
Affiliate, or beneficiary thereof) and to which such Purchaser transfers Bridge
Securities.
"PERSON" means an individual or a corporation, partnership, limited
liability company, association, trust, or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"PREFERRED STOCK" means the Series B Convertible Preferred Stock of the
Issuer as set forth in the Certificate of Designation.
"PREFERRED STOCK PURCHASE AGREEMENT" means the Series B Convertible
Preferred Stock Purchase Agreement dated as of May 20, 1999 among the Issuer and
the purchasers listed therein, as the same may be amended from time to time.
"PURCHASER" means the Purchaser or Purchasers listed on the signature pages
hereto together with any Permitted Transferee.
"REGULATION D" has the meaning set forth in Section 3.08 hereof.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of May 20, 1999 among the Issuer and the holders listed therein, as the
same may be amended from time to time.
"REQUIRED PURCHASERS" means at any time prior to the Closing Date,
Purchasers who have agreed to purchase, or, at any time after the Closing Date,
holders of more than, 50% of the aggregate principal amount of the Bridge
Securities.
"SECURITIES" means the Bridge Securities and the Preferred Stock issuable
upon conversion of the Bridge Securities.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENT" means the Security Agreement dated as of May 20, 1999
between the Issuer and the Collateral Agent, substantially in the form of
Exhibit D.
"SUBSIDIARY" means, with respect to any Person, any corporation or other
entity of which a majority of the capital stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at the time directly or
indirectly owned by such Person.
"SWIB" means State of Wisconsin Investment Board.
"TRANSFER" means any disposition of Securities that would constitute a sale
thereof under the Securities Act.
"VOTING AGREEMENT" means the Voting Agreement dated as of May 20, 1999
between the Issuer and the stockholder listed therein, as the same may be
amended from time to time.
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"WARRANT" means warrants exercisable for shares of Preferred Stock,
substantially in the form of Exhibit C hereto.
"WARRANT PURCHASE PRICE" means $1.00.
ARTICLE 2
PURCHASE AND SALE OF SECURITIES
SECTION 2.01 Commitments to Purchase. Upon the basis of the
representations and warranties herein contained of each Purchaser, the Issuer
agrees to issue and sell to each Purchaser listed on the signature pages hereto
and each Purchaser, upon the basis of the representations and warranties herein
contained, but subject to the terms and conditions hereinafter stated, agrees
severally but not jointly, to purchase from the Issuer on each Closing Date the
Bridge Securities in the principal amount and at the price as is set forth below
such Purchaser's name on the signature pages hereof in respect of such Closing
Date.
SECTION 2.02 The Closings. (a) The purchases and sales of the Securities
will take place at two closings (individually, a "Closing") at the offices of
Davis Polk & Wardwell, or at such other location as the Issuer and the
Purchasers shall agree. The initial Closing shall be held on a date as soon as
practicable after all conditions to the obligation of the Purchasers to purchase
the Securities hereunder specified in Section 5.01(a)(i) have been fulfilled or
waived. The second closing (if any) shall be held on a date as soon as
practicable after all considerations to the obligations of the Purchasers to
purchase the Securities hereunder specified in Section 5.01(b) have been
fulfilled or waived. The Issuer shall notify each of the Purchasers of the date
and time of the initial Closing (and the second Closing) not less than two
Business Days prior to such date (or within such other time period as the
parties mutually agree), and each Closing shall occur on such date or such other
date as the parties hereto agree. Such notice shall also specify the principal
amount and purchase price of the Bridge Securities to be purchased by such
Purchaser at such Closing. The maximum principal amount of Bridge Securities to
be purchased by each Purchaser hereunder at each of the Closings shall be as set
forth on the signature pages hereof, and the price of all Bridge Securities
purchased hereunder shall be the same as that set forth on the signature pages
hereof. The date and time of each Closing is referred to herein as the "CLOSING
DATE".
(b) On each Closing Date, each Purchaser shall deliver to the Issuer, by
wire transfer to the account number of the Issuer listed on the signature pages
hereof in immediately available funds or by federal funds check, an amount equal
to the aggregate purchase price of the Bridge Securities being purchased by such
Purchaser from the Issuer on such Closing Date.
(c) At each Closing, the Issuer shall deliver to each Purchaser, against
payment of the purchase price therefor, (i) one or more certificates evidencing
the Bridge Securities being purchased by such Purchaser at such Closing, in
definitive form and registered in such name or names, and in such denominations,
as such Purchaser shall request not later than one Business Day prior to the
applicable Closing Date. The authorized minimum denomination for the Bridge
Securities upon original issuance thereof is $250,000 and any larger multiple of
$100,000.
(d) The second Closing shall be held not later than the date specified by
the Required Purchasers in the notice delivered to the Issuer pursuant to
Section 5.01(b).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
The Issuer represents and warrants to each Purchaser as follows:
SECTION 3.01 Organization, Standing, etc. The Issuer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as
conducted to date.
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SECTION 3.02 Authorization; Noncontravention. The execution, delivery and
performance by the Issuer of this Agreement and the Bridge Securities are within
the Issuer's corporate powers, have been duly authorized by all necessary
corporate action, require no action by or in respect of, or filing with, any
governmental body, agency or official other than such actions or filings which
have been taken or made or will be taken or made on or prior to the time
required under any such agreement (except the failure either singly or in the
aggregate to take such actions and make such filings which would not have any
bearing on the validity and enforceability of this Agreement) and do not
contravene or constitute a default under (i) any provision of applicable law or
regulation (including Regulations T, U and X of the Board of Governors of the
Federal Reserve System (the "FEDERAL RESERVE BOARD")), (ii) the certificate of
incorporation or bylaws of the Issuer or (iii) any material agreement, judgment,
injunction, order, decree or other instrument binding upon the Issuer or result
in the creation or imposition of any Lien on any asset of the Issuer or any of
its Subsidiaries.
SECTION 3.03 Binding Effect. This Agreement has been duly executed and
delivered by the Issuer and constitutes a valid and binding agreement of the
Issuer (except to the extent that rights to indemnity in respect of liabilities
under federal and state securities laws provided in the Agreement may be limited
under such laws), and the Bridge Securities, when executed and delivered by the
Issuer in accordance with this Agreement, will constitute valid and binding
obligations of the Issuer.
SECTION 3.04 Capitalization. (a) The authorized capital stock of the
Issuer consists of 30,000,000 shares of Common Stock, $.001 par value per share,
and 5,000,000 shares of Preferred Stock, $.001 par value per share, of which
50,000 shares have been designated Series A Participating Preferred Stock,
30,000 shares have been designated Series B Convertible Preferred Stock and
4,920,000 are undesignated. As of the date hereof, (i) 10,038,578 shares of
Common Stock, all of which are validly issued, fully paid and nonassessable, no
shares of Series A Participating Preferred Stock and no shares of Series B
Convertible Preferred Stock were issued and outstanding; (ii) no shares were
held in treasury by the Issuer or by any subsidiaries of the Issuer; (iii)
2,866,629 shares of Common Stock were reserved for issuance under the Issuer's
stock plans (including (A) 1,442,440 shares of Common Stock reserved for
issuance under the Issuer's 1991 Stock Option Plan, 1,067,591 shares of which
were subject to outstanding options and 374,849 of which were reserved for
future grants, (B) 60,000 shares of Common Stock were reserved for issuance
under the Issuer's 1996 Director Option Plan, 33,000 shares of which were
subject to outstanding options and 27,000 of which were reserved for future
grants, (C) 400,000 shares of Common Stock were reserved for issuance under the
Issuer's 1998 Non-Statutory Stock Option Plan, 143,818 of which were subject to
outstanding options and 256,182 shares of which were available for future
grants, (D) 920,506 shares of Common Stock were reserved for issuance under the
Issuer's 1998 Employee Stock Purchase Plan, 40,506 shares of which were
available for future purchase in fiscal 1999 and 880,000 of which may be
purchased in maximum amounts of 200,000 shares per fiscal year commencing July
1, 1999 and (E) 43,683 shares were subject to an outstanding nonstatutory option
granted outside of the plans); and (iv) 143,141 shares of Common Stock and
related Preferred Stock Purchase Rights were subject to outstanding warrants to
purchase such shares. All shares of the Issuer's Common Stock subject to
issuance as specified above, on the terms and conditions specified in the
instruments pursuant to which they are issuable, shall be duly authorized,
validly issued, fully paid and nonassessable. There are no obligations,
contingent or otherwise, of the Issuer or any of its subsidiaries to repurchase,
redeem or otherwise acquire any shares of the Issuer's capital stock or the
capital stock of any of the Issuer's subsidiaries or make any investment (in the
form of a loan, capital contribution or otherwise) in any such subsidiary or any
other entity other than as contemplated by this Agreement. All of the
outstanding shares of capital stock of each Subsidiary of the Issuer are duly
authorized, validly issued, fully paid and nonassessable, and all such shares
(other than directors' qualifying shares) are owned by the Issuer or another
subsidiary of the Issuer free and clear of all security interests, liens,
claims, pledges, agreements, limitations on the Issuer's voting rights, charges
or other encumbrances of any nature. The Common Stock is quoted on the Nasdaq
National Market.
(b) The Preferred Stock, when issued and delivered to the Purchasers in
accordance with this Agreement, shall be entitled to the benefits set forth in
the certificate of incorporation of the Issuer and the Certificate of
Designation. Upon any conversion of Bridge Securities into Preferred Stock in
accordance with this Agreement, all of such shares shall be validly issued,
fully paid and nonassessable and free and clear of
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any Lien or other right or claim. The issuance of such shares of Preferred Stock
is not subject to any preemptive or similar rights and holders of such shares of
Preferred Stock will not be entitled to any preemptive or similar rights. Except
as set forth in Section 3.04(a) and as provided in Article 8, immediately
following the initial Closing Date, the Issuer will have outstanding no other
shares of capital stock and no securities convertible into or exchangeable for,
or options or other rights to acquire from the Issuer, or other obligations of
the Issuer to issue, directly or indirectly, any shares of capital stock of the
Issuer.
SECTION 3.05. Litigation, Proceedings; No Defaults. (a) There is no action,
suit or proceeding pending against, or to the best knowledge of the Issuer
threatened against or affecting, the Issuer or any of its Subsidiaries before
any court or arbitrator or any governmental body, agency or official which
could, with reasonable likelihood (individually or in the aggregate) materially
adversely affect the business, financial position, results of operations or
prospects of the Issuer and its Subsidiaries, taken as a whole, or which in any
manner draws into question the validity of this Agreement, the Securities, or
any of the other documents delivered or to be delivered by the Issuer pursuant
hereto or thereto.
(b) The Issuer is not in violation of its certificate of incorporation or
bylaws or in violation, breach or default under any provision of applicable law
or regulation or of any agreement, judgment, injunction, order, decree or other
instrument to which it is a party or which is binding upon it, which violation,
breach or default (i) would affect the validity or enforceability of this
Agreement, the Securities or any other agreement, instrument or document
executed or to be executed by the Issuer pursuant hereto or thereto or (ii)
would (individually or in the aggregate) impair the ability of the Issuer to
perform in any material respect the obligations which it has under this
Agreement, the Securities, or any such other agreement, instrument or document.
SECTION 3.06. Investment Company. The Issuer is not, and after giving
effect to the sale and issuance of the Bridge Securities (and any conversion
thereof into the Preferred Stock or other equity securities of the Issuer), will
not be, an "investment company" within the meaning of the Investment Company Act
of 1940, as amended.
SECTION 3.07. Governmental Regulation. Except as required pursuant to the
Securities Act, the Exchange Act and state securities laws, the Issuer is not
subject to any Federal or state law or regulation limiting its ability to issue
and perform its obligations under the terms of the Securities.
SECTION 3.08. Solicitation; Access to Information. (a) No form of general
solicitation or general advertising was used by the Issuer or, to the best of
its knowledge, any other Person acting on its behalf, in respect of the
Securities or in connection with the offer and sale of the Securities. Neither
the Issuer nor any Person acting on behalf of the Issuer has, either directly or
indirectly, sold or offered for sale to any Person any of the Securities or any
other similar security of the Issuer except as contemplated by this Agreement.
(b) The Issuer has not offered any Securities to any Person unless
immediately prior to making such offer the Issuer had reasonable grounds to
believe and did believe that such Person was an "Accredited investor" as defined
in Regulation D ("REGULATION D") under the Securities Act, and, as of the date
hereof, the Issuer has no reason to believe that such Person is not an
"Accredited investor" as so defined.
SECTION 3.09. Qualified Small Business. The Issuer is a "qualified small
business" within the meaning of Section 1202(d) of the Code as of the date
hereof. The Issuer further represents and warrants that, as of the date hereof,
it meets the "active business requirement" of Section 1202(e) of the Code and it
has made no "significant redemptions" within the meaning of Section
1202(c)(3)(B) of the Code.
SECTION 3.10. Small Business Concern. The Issuer, together with its
"affiliates" (as that term is defined in Section 121.103 of Title 13 of the Code
of Federal Regulations (the "FEDERAL REGULATIONS")), is a "small business
concern" within the meaning of the Small Business Investment Act of 1958, as
amended (the "SMALL BUSINESS ACT"), and Part 121 of Title 13 of the Federal
Regulations. The information delivered by the Issuer to each Purchaser on SBA
Forms 480, 652 and 1031 of the Small Business Administration (the "SBA")
delivered in connection herewith is accurate and complete. The Issuer is not
ineligible for financing by any SBIC Investor pursuant to Section 107.720 of
Title 13 of the Federal Regulations. The Issuer acknowledges that BankAmerica
Ventures is a Federal licensee under the Small Business Act.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Each Purchaser severally, and not jointly, hereby represents and warrants
to the Issuer as follows:
SECTION 4.01. Private Placement. (a) Such Purchaser understands that (i)
the offering and sale of the Securities is intended to be exempt from
registration under the Securities Act pursuant to Section 4(2) of the Securities
Act, and (ii) there is no existing public or other market for the Securities and
there can be no assurance that any Purchaser will be able to sell or dispose of
such Purchaser's Securities.
(b) The Securities to be acquired by such Purchaser pursuant to this
Agreement are being acquired for its own account and without a view to the
public distribution of such Securities or any interest therein; provided that
each Purchaser shall have the right at all times to sell or otherwise dispose of
all or any part of the Securities so acquired by such Purchaser pursuant to a
registration, or exemption therefrom, under the Securities Act.
(c) Such Purchaser is an "Accredited investor" as such term is defined in
Regulation D.
(d) Such Purchaser is not a broker-dealer subject to Regulation T of the
Federal Reserve Board.
(e) Such Purchaser has sufficient knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Securities and such Purchaser is capable of bearing the
economic risks of such investment, including a complete loss of its investment
in the Securities.
(f) Such Purchaser has been given the opportunity to ask questions of, and
receive answers from, the Issuer concerning the terms and conditions of the
Securities and other related matters. Each Purchaser further represents and
warrants to the Issuer that the Issuer has made available to such Purchaser or
its agents all documents and information relating to an investment in the
Securities requested by or on behalf of such Purchaser. In evaluating the
suitability of an investment in the Securities, the Purchaser has not relied
upon any other representations or other information (whether oral or written)
made by or on behalf of the Issuer other than as contemplated by the two
preceding sentences.
SECTION 4.02. Authority; No Other Action. (a) The execution, delivery and
performance of this Agreement are within such Purchaser's powers (corporate or
otherwise) and have been duly authorized on its part by all requisite action
(corporate or otherwise).
(b) No action by or in respect of, or filing with, any governmental
authority, agency or official is required for the execution, delivery and
performance of this Agreement by such Purchaser, other than a "control
certificate" to be filed with the SBA within 30 days of the initial Closing
Date.
SECTION 4.03. Margin Compliance. Such Purchaser is not relying, directly or
indirectly, on any "margin stock" (as defined in Regulation U of the Federal
Reserve Board) as collateral for the Securities.
SECTION 4.04 Source of Funds. If any part of the funds to be used to
purchase the Securities constitutes assets of any employee benefit plan within
the meaning of Section 3 of ERISA, such Securities are being purchased pursuant
to an available exemption from the provisions of Section 406 of ERISA and
Section 4975 of the Code.
ARTICLE 5
CONDITIONS PRECEDENT TO CLOSING
SECTION 5.01 Conditions to Purchaser's Obligations. (a) The obligation of
each Purchaser to purchase the Securities to be purchased by it hereunder on
each Closing Date is subject to the satisfaction, simultaneously with or prior
to such Closing Date, of the following conditions:
(i) The representations and warranties of the Issuer contained herein
shall be true and correct in all material respects on and as of such
Closing Date as if made on and as of such date;
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(ii) Each of the Purchasers shall have received duly executed
counterparts of each Financing Document and each Other Financing Document;
(iii) No Event of Default (within the meaning of the Credit Agreement)
shall have occurred and be continuing;
(iv) The Collateral Agent shall have received all signed UCC financing
statements reasonably requested by the Collateral Agent to perfect its
security interests in the Collateral and evidence satisfactory to the
Collateral Agent that arrangements satisfactory to it have been made for
filing such UCC financing statements on or promptly after the Closing Date;
(v) The Collateral Agent shall have received all signed UCC-3
termination statements from Silicon Valley Bank together with a payoff
letter in connection with the repayment of the loans outstanding under the
Credit Agreement;
(vi) Each of the Purchasers shall have received the Warrants to
purchase the number of shares of Preferred Stock set forth below such
Purchaser's name on the signature pages hereof and such Purchaser shall
have paid to the Issuer the Warrant Purchase Price in respect thereof;
(vii) The Issuer shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it at or prior to such Closing Date;
(viii) Each of the Purchasers shall have received duly executed
certificates representing the Bridge Securities being purchased by such
Purchaser pursuant hereto;
(ix) Such Purchaser's purchase of and payment for the Securities shall
not be prohibited by any applicable law, court order or governmental
regulation;
(x) Each Purchaser shall have received a certificate dated such
Closing Date signed by an executive officer of the Issuer to the effect set
forth in subsections 5.01(a)(i) and 5.01(a)(iii);
(xi) Each Purchaser shall have received an opinion, dated such Closing
Date, of Issuer's Counsel, substantially in the form of Exhibit E hereto;
(xii) The Purchasers shall have received all documents reasonably
requested by the Purchasers relating to the existence of the Issuer, the
corporate authority for entering into, and the validity of, this Agreement,
the Bridge Securities and any other matters relevant hereto and thereto,
all in form and substance reasonably satisfactory to the Purchasers; and
(xiii) The Issuer shall have executed and delivered to the Purchasers
a Size Status Declaration on SBA Form 480 and an Assurance of Compliance on
SBA Form 652, and shall have provided to BAV, the information requested by
the Purchasers necessary for the preparation by BAV of a Portfolio
Financing Report on SBA Form 1031.
(b) The obligation of each Purchaser to purchase the Securities to be
purchased by it hereunder on the second Closing Date is subject to the
satisfaction, at or prior to the second Closing Date, of the following
additional condition: The Required Purchasers shall have delivered a notice to
the Issuer requesting that the Issuer issue to each Purchaser Securities in the
amounts set forth below such Purchaser's name on the signature pages hereof no
later than two Business Days after delivery of such notice.
SECTION 5.02 Conditions to Issuer's Obligations. The obligations of the
Issuer to issue and sell the Securities pursuant to this Agreement on each
Closing Date to any Purchaser are subject to the satisfaction, at or prior to
such Closing Date, of the following conditions:
(a) The representations and warranties of such Purchaser contained
herein shall be true and correct in all material respects on and as of the
Closing Date as if made on and as of such date;
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(b) Such Purchaser shall have performed and complied in all material
respects with all agreements required by this Agreement to be performed or
complied with by such Purchaser at or prior to such Closing Date; and
(c) The issue and sale of the Securities by the Issuer shall not be
prohibited by any applicable law, court order or governmental regulation.
ARTICLE 6
COVENANTS
SECTION 6.01. Incorporation of Affirmative Covenants from the Credit
Agreement. The Issuer shall, and (where contemplated by the Credit Agreement)
shall cause each of its Subsidiaries to, comply with the affirmative covenants
set forth in Article 6 of the Credit Agreement other than those set forth in
Sections 6.09, 6.10 and 6.11 thereof.
SECTION 6.02. Incorporation of Negative Covenants from the Credit
Agreement. The Issuer shall not, nor shall it permit its Subsidiaries to violate
any of the negative covenants set forth in Article 7 of the Credit Agreement.
SECTION 6.03. Furnishing of Information. As long as any Purchaser or any
Permitted Transferee owns any Securities, the Issuer will furnish to such
Purchaser any documents filed by the Issuer pursuant to Section 13, 14 or 15(d)
of the Exchange Act and all annual, quarterly or other reports furnished to the
Issuer's public securityholders and such additional information regarding the
financial position or business of the Issuer and its Subsidiaries as such
Purchaser may reasonably request; provided that if the Issuer is not subject to
the requirements of Section 13, 14 or 15(d) of the Exchange Act, the Issuer will
promptly furnish to such Purchaser:
(a) As soon as available and in any event within 90 days after the end
of each fiscal year of the Issuer, audited consolidated financial
statements of the Issuer for such fiscal year prepared in accordance with
GAAP, consistently applied, setting forth in comparative form the figures
for the previous fiscal year, all reported on in a manner acceptable to the
Commission by an independent public accountant of nationally recognized
standing, and accompanied by a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" comparable to that which the
Issuer would have been required to include in reports filed under Section
13 of the Exchange Act.
(b) As soon as available and in any event within 45 days after the end
of each of the first three quarters of each fiscal year of the Issuer,
unaudited consolidated financial statements of the Issuer for such fiscal
quarter and for the portion of the Issuer's fiscal year ended at the end of
such quarter, setting forth in each case in comparative form the figures
for the corresponding quarter and the corresponding portion of the Issuer's
previous fiscal year, all certified (subject to normal year-end audit
adjustments) as to fairness of presentation, generally accepted accounting
principles and consistency by the principal financial and accounting
officers of the Issuer.
SECTION 6.04. Use of Proceeds. The proceeds from the issuance and sale of
the Securities by the Issuer pursuant to this Agreement will be used solely to
general corporate purposes in the ordinary course of business as listed on
Schedule II hereto.
SECTION 6.05. Notice of Shareholder Meetings. The Issuer shall not hold any
meeting of its shareholders to approve the Transaction unless it has given each
Purchaser notice thereof at least 5 Business Days prior to the record date for
shareholders eligible to vote at such shareholder meeting.
SECTION 6.06. Capitalization. The Issuer shall not issue any capital stock
or otherwise permit any change to its capitalization from that described in
Section 3.04 hereof except as contemplated by the Other Financing Documents.
SECTION 6.07. Qualified Small Business. The Issuer will use its best
efforts to comply with the reporting and recordkeeping requirements of Section
1202 of the Code, any regulations promulgated
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thereunder and any similar state laws and regulations. The Issuer further
covenants to submit to its shareholders and to state and federal taxation
authorities such forms and filings as may be required to document such
compliance, including the California Franchise Tax Board Form 3565, Small
Business Stock Questionnaire, with its franchise or income tax return for the
current income year.
SECTION 6.08. Small Business Administration Matters
(a) The Issuer will provide to each Purchaser identified as a licensed
Small Business Investment Company on Schedule I hereto (each an "SBIC
INVESTOR"), and to the Small Business Administration (the "SBA"), reasonable
access to the Issuer's books and records for the purpose of confirming the use
of proceeds by the Issuer.
(b) For a period of one year following the Closing, the Issuer will not
change the nature of its business activity if such change would render the
Issuer "ineligible" as provided in Section 107.720 of Title 13 of the Federal
Regulations.
(c) So long as any SBIC Investor holds any securities of the Issuer, the
Issuer will at all times comply with the non-discrimination requirements of
Sections 112, 113 and 117 of Title 13 of the Federal Regulations.
(d) Within 45 days after the end of each fiscal year of the Issuer, and at
such other times as an SBIC Investor may reasonably request in writing to the
Issuer, the Issuer will deliver to such SBIC Investor a written assessment in
form and substance reasonably satisfactory to such SIBC Investor as to the
economic impact of such SBIC Investor's financing of the Issuer, specifying the
full-time equivalent jobs created or retained in connection with such
investment, and the impact of such financing on the Issuer's business in terms
of profits and with respect to taxes paid by the Issuer and its employees. The
Issuer will promptly provide each SBIC Investor who so requests in writing to
the Issuer, specifying in such written request the nature of such required
information in reasonable detail, such information as such SBIC Investor
requests, in order to permit such SBIC Investor to comply with such SBIC
Investor's obligations under the Small Business Act of 1958, as amended (the
"SMALL BUSINESS ACT"), and the regulations promulgated thereunder and related
thereto. Any submission of financial information pursuant to this Section
6.08(d) shall be under cover of a certificate executed by the Issuer's
president, chief executive officer, chief financial officer or treasurer,
certifying that such information (i) relates to the Issuer, (ii) to the best of
the Issuer's knowledge is accurate and (iii) if applicable, has been audited by
the Issuer's independent auditors.
SECTION 6.09. Regulatory Compliance Cooperation. In the event that any SBIC
Investor determines that it has a Regulatory Problem (as defined below), it
shall have the right to transfer its Securities in compliance with applicable
state and federal securities laws, but without regard to any other restrictions
on transfer set forth in this Agreement (provided that the transferee agrees to
become a party to each such agreement), and the Issuer shall take all such
actions as are reasonably requested by such SBIC Investor in order to (i)
effectuate and facilitate any transfer by it of any securities of the Issuer
then held by it to any person designated by such SBIC Investor, (ii) permit such
SBIC Investor (or any of its affiliates) to exchange all or any portion of any
voting security then held by it on a share-for-share basis for shares of a
nonvoting security of the Issuer, which nonvoting security shall be identical in
all respects to the voting security exchanged for it, except that it shall be
nonvoting and shall be convertible into a voting security on such terms as are
requested by it in light of regulatory considerations then prevailing, and (iii)
amend this Agreement, as amended from time to time, to effectuate and reflect
the foregoing. The parties to this Agreement agree to vote all of the Issuer's
securities held by them in favor of such amendments and actions. For purposes of
this Agreement, a "REGULATORY PROBLEM" means any set of facts or circumstances
wherein it has been asserted by any governmental regulatory agency that an SBIC
Investor is not entitled to hold, or exercise any significant right with respect
to, the underlying securities into which the Bridge Securities are convertible.
SECTION 6.10. Board Observer Rights. The Issuer shall invite a
representative of each of BAV, MSDWV and SWIB to attend all meetings of its
Board of Directors in a nonvoting observer capacity and, in this respect, shall
give each such representative copies of all notices, minutes, consents, and
other materials (the "BOARD MATERIALS") that it provides to its directors at the
same time as such Board Materials are provided to any of its directors;
provided, however, that the Issuer may withhold any information and exclude
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any such representative of BAV, MSDWV and SWIB from any meeting or portion
thereof if the disclosure of such material or discussion, in the opinion of
counsel to the Issuer, would jeopardize the Issuer's attorney client privilege.
The right granted to each of BAV, MSDWV and SWIB to attend meetings of the
Issuer's Board of Directors and to receive Board Materials shall not be
assignable.
ARTICLE 7
LIMITATION ON TRANSFERS
SECTION 7.01. Restrictions on Transfer. From and after the Closing Date and
their respective dates of issuance, as the case may be, neither the Securities,
nor any interest therein shall be transferable except that from and after
October 31, 1999, such Securities or interests therein shall be transferable
upon the conditions specified in Sections 7.02 and 7.03, which conditions are
intended to ensure compliance with the provisions of the Securities Act in
respect of the Transfer of any of the Securities, or any interest therein. Each
Purchaser will cause any proposed transferee of the Securities (or any interest
therein) held by it to agree to take and hold such Securities (or any interest
therein) subject to the provisions and upon the conditions specified in Sections
7.02 and 7.03.
SECTION 7.02. Restrictive Legends. (a) Each certificate for Securities
issued to a Purchaser or to a subsequent transferee shall (unless otherwise
permitted by the provisions of Section 7.02(b) or Section 7.03 include a legend
in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT IN
COMPLIANCE THEREWITH. THIS SECURITY ALSO IS SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF MAY
20, 1999, A COPY OF WHICH MAY BE OBTAINED FROM CARDIAC PATHWAYS CORPORATION.
(b) Subject to Section 7.03, any holders of Securities registered pursuant
to the Securities Act and qualified under applicable state securities laws may
exchange such Securities, as the case may be, upon transfer for new securities
that shall not bear the legend set forth in Section 7.02(a).
SECTION 7.03. Notice of Proposed Transfers. At least ten Business Days
prior to any proposed Transfer (other than transfers by MSVP or BAV of some or
all of the Securities (or interests therein) purchased by it hereunder pursuant
to participation agreements or secondary note purchase agreements) of any
Securities, the holder thereof shall give written notice to the Issuer of such
holder's intention to effect such Transfer, setting forth the manner and
circumstances of the proposed Transfer in reasonable detail. Such proposed
Transfer (other than transfers to Permitted Transferees) may be effected only if
the Issuer shall have received such notice of Transfer accompanied by (i) an
opinion of counsel reasonably satisfactory to the Issuer, addressed to the
Issuer, to the effect that the proposed Transfer of the Securities may be
effected without registration under the Securities Act, (ii) representation
letters in form and substance reasonably satisfactory to the Issuer to ensure
compliance with the provisions of the Securities Act, and (iii) letters in form
and substance reasonably satisfactory to the Issuer from each such transferee
stating such transferee's agreement to be bound by the terms of this Article 7.
Each certificate evidencing the Securities transferred as above provided shall
bear the legend set forth in Section 7.02(a) except that such certificate shall
not bear such legend if the opinion of counsel referred to above is to the
further effect that neither such legend nor the restrictions on Transfer in
Sections 7.02 and 7.03 are required in order to ensure compliance with the
provisions of the Securities Act.
ARTICLE 8
CONVERSION OF SECURITIES
SECTION 8.01. Right to Convert Securities. Subject to and upon compliance
with the provisions of this Article 8, all outstanding Bridge Securities are
convertible at the option of the Required Purchasers, at any time through the
close of business on May 20, 2000, into fully paid and nonassessable shares of
Preferred
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Stock in accordance with the terms of the Preferred Stock Purchase Agreement;
provided that prior to the satisfaction of any stockholder approval requirement
of the Nasdaq National Market with respect to the issuance of the Bridge
Securities, under no circumstance shall the Required Purchasers be permitted to
convert the Bridge Securities into Preferred Stock.
SECTION 8.02. Conversion of Securities. (a) In order to convert the
Securities, the Required Purchasers shall deliver to the Issuer an irrevocable
Notice of Conversion setting forth the principal amount of Securities
outstanding as of such date, the accrued but unpaid interest thereon as of such
date, together with the name or names, if other than any Purchaser, in which the
shares of Preferred Stock should be issued upon conversion and surrender to the
Issuer of all the outstanding Securities, duly endorsed or assigned to the
Issuer or in blank. The number of shares of Preferred Stock to be delivered upon
conversion of the Securities shall be determined by reference to the number
obtained by dividing (i) the aggregate principal amount of all the Securities,
plus accrued but unpaid interest thereon as of the Conversion Date (as defined
below) by (ii) the "Per Share Purchase Price" of the Preferred Stock determined
in accordance with the Preferred Stock Purchase Agreement.
(b) The Issuer's delivery upon conversion of the fixed number of shares of
Preferred Stock into which the Securities are convertible (together with the
cash payment, if any, in lieu of fractional shares) shall be deemed to satisfy
the Issuer's obligation to pay the principal amount at maturity of the portion
of Securities so converted and any unpaid interest accrued on such Securities at
the time of such conversion.
SECTION 8.03. Equity Securities. (a) The Issuer shall reserve, free from
pre-emptive rights, out of its authorized but unissued shares, sufficient shares
to provide for the conversion of the Securities from time to time as such
Securities are presented for conversion.
(b) If any shares of Preferred Stock to be reserved for the purpose of
delivery upon conversion of Securities hereunder require registration with or
approval of any governmental authority under any Federal or state law before
such shares may be validly issued or delivered upon conversion, then the Issuer
covenants that it will in good faith and as expeditiously as possible endeavor
to secure such registration or approval, as the case may be, provided, however,
that nothing in this Section 8.03 shall be deemed to affect in any way the
obligations of the Issuer to convert Securities into Preferred Stock as provided
in this Article 8.
(c) The Issuer covenants that all shares of Preferred Stock which may be
issued upon conversion of Securities will upon issue be fully paid and
non-assessable by the Issuer and free of pre-emptive rights.
SECTION 8.04 Registration Rights. The Issuer agrees that each Purchaser
shall be entitled to the benefits of the Registration Rights Agreement with
respect to any Preferred Stock issued upon conversion of Bridge Securities and
that any Preferred Stock received by such Purchaser upon conversion of
Securities pursuant to this Article 8 shall be deemed to be "Registrable
Securities" within the meaning of the Registration Rights Agreement.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including telex, telecopier or similar
writing) and shall be given to such party at its address, telex or telecopier
number set forth on the signature pages hereof, or such other address, telex or
telecopier number as such party may hereinafter specify for the purpose to the
party giving such notice. Each such notice, request or other communication shall
be effective (i) if given by telex or telecopy, when such telex or telecopy is
transmitted to the telex or telecopy number specified in this Section and the
appropriate answerback is received or, (ii) if given by mail, 72 hours after
such communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or, (iii) if given by any other means, when delivered at
the address specified in this Section 9.01.
SECTION 9.02. No Waivers; Amendments. (a) No failure or delay on the part
of any party in exercising any right, power or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise
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<PAGE> 182
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
(b) Any provision of this Agreement may be amended or waived if, but only
if, such amendment or waiver is in writing and is signed by the Issuer and the
Required Purchasers; provided that no such amendment or waiver shall, unless
signed by all of the Purchasers, (i) change the amount or terms of any Bridge
Securities to be purchased by any Purchaser pursuant to this Agreement, (ii)
extend the period of time during which the Purchasers shall be obligated to
purchase Bridge Securities pursuant to this Agreement or (iii) change the number
of Purchasers that shall be required for the Purchasers or any of them to take
any action under this Section 9.02(b) or any other provision of this Agreement.
SECTION 9.03. Expenses; Documentary Taxes. The Issuer shall pay all
reasonable fees and disbursements of Special Counsel in connection with the
purchase and sale of the Bridge Securities as contemplated by this Agreement or
any amendments thereto. In addition, the Issuer shall pay any and all stamp,
transfer and other similar taxes payable or determined to be payable in
connection with the execution and delivery of this Agreement or any Securities
or the issuance of the Securities.
SECTION 9.04. Payment. The Issuer agrees that, so long as any Purchaser
hereunder shall own any Securities purchased by it from the Issuer hereunder,
the Issuer will make payments to such Purchaser of all amounts due thereon by
wire transfer by 1:00 p.m. Eastern Time, on the date of payment to such
Purchaser's account as specified beneath such Purchaser's name on the signature
pages hereof or to such other account or in such other similar manner as such
Purchaser may designate to the Issuer in writing.
SECTION 9.05. Termination. This Agreement may be terminated by the Required
Purchasers, on behalf of all the Purchasers at 5:00 p.m. on May 20, 1999, unless
the conditions to the Purchasers obligations hereunder are satisfied or waived
by such date.
SECTION 9.06. Successors and Assigns. (a) Except as expressly provided in
this Agreement, the rights and obligations of any Purchaser under this Agreement
may not be assigned to any Person and this Agreement shall not be construed so
as to confer any right or benefit upon any Person other than the parties to this
Agreement, and their respective successors and assigns. This Agreement shall be
binding upon the Issuer and each Purchaser and their respective successors and
assigns. Notwithstanding the foregoing, each of BAV and MSVP may sell interests
in the Securities pursuant to participation agreements or secondary note
purchase agreements and the purchasers of such interests shall be entitled to
the rights of a Purchaser hereunder to the extent provided in such participation
agreements/secondary note purchase agreements.
(b) All provisions hereunder purporting to give rights to the Purchasers
shall extend to and include those entities receiving beneficial interest of the
Securities at such Closing Date.
SECTION 9.07. California Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of California. Each of the
parties hereto agrees to submit to the jurisdiction of the courts of the State
of New York in any action or proceeding arising out of or relating to this
Agreement.
SECTION 9.08. Counterparts; Effectiveness. This Agreement may be executed
in any number of counterparts each of which shall be an original with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when the Issuer shall have executed
counterparts hereof and received counterparts hereof signed by all of the
parties hereto.
SECTION 9.09. Entire Agreement. This Agreement constitutes the entire
agreement and understanding among the parties hereto and supersedes any and all
prior agreements and understandings, written or oral, relating to the subject
matter hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers (or, in the case of
parties that are not corporations, other authorized persons), as of the date
first above written.
CARDIAC PATHWAYS CORPORATION
By: /s/ WILLIAM N. STARLING
------------------------------------
Title: President and CEO
Address: 995 Benecia Avenue
Sunnyvale, CA 94086
Account No.:
B-13
<PAGE> 184
PURCHASERS:
MORGAN STANLEY VENTURE PARTNERS III, L.P.
By: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital III, Inc.,
its Institutional Managing Member
By: /s/ FAZLE HUSAIN
--------------------------------------------------------
Title: General Partner
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
The Purchaser represents and warrants that it is one or more of the
following (please check appropriate box)
[ ] (1) A bank as defined in Section 3(a)(2) of the Securities Act, acting
in either its individual or fiduciary capacity.
[ ] (2) An insurance company as defined in Section 2(13) of the Securities
Act.
[ ] (3) An investment company registered under the Investment Company Act
of 1940.
[ ] (4) A business development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940.
[ ] (5) A Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
[ ] (6) An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974 and (i) the decision to make an
investment in the Securities was made by a plan fiduciary, as defined in Section
3(21) of such Act, which fiduciary is either a bank, insurance company or
registered investment advisor, or such plan has total assets in excess of
$5,000,000.
[ ] (7) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
[ ] (8) A not-for-profit organization described n Section 501(c)(3) of the
Code with total assets in excess of $5,000,000.
[ ] (9) A natural person (i.e., not a corporation, trust or partnership)
whose individual net worth (total assets less total liabilities), or joint net
worth with spouse, is in excess of $1,000,000.
[ ] (10) A trust, the trustee of which is a bank as defined in Section
3(a)(2) of the Securities Act acting in its fiduciary capacity.
[X] (11) An entity (other than a trust) in which ALL of the equity owners
(i.e., partners or shareholders) are accredited investors pursuant to any of the
paragraphs above.
[ ] (12) A trust which its grantor may revoke at any time and over whose
assets its grantor retains sole investment control and the grantor is an
accredited investor pursuant to paragraph (9) above.
[X] (13) A corporation, trust or partnership and the total purchase price
of Securities purchased by such entity does not exceed 20% of the undersigned's
net worth at the time of sale. The undersigned has not been formed for the
specific purpose of acquiring the Securities.
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<PAGE> 185
[ ] (14) Any director, executive officer or general partner of the Issuer
or any director, executive officer or general partner of the Issuer.
Designated Bank:
Address:
Account No.:
Attention:
INITIAL CLOSING DATE
<TABLE>
<CAPTION>
PRINCIPAL AGGREGATE
SECURITIES AMOUNT PURCHASE PRICE WARRANTS
---------- ----------- -------------- --------
<S> <C> <C> <C>
Bridge Securities.................... $877,305.00 $877,305.00 87.7305
</TABLE>
SECOND CLOSING DATE
<TABLE>
<CAPTION>
PRINCIPAL AGGREGATE
SECURITIES AMOUNT PURCHASE PRICE WARRANTS
---------- ----------- -------------- --------
<S> <C> <C> <C>
Bridge Securities.................... $877,305.00 $877,305.00 87.7305
</TABLE>
B-15
<PAGE> 186
MORGAN STANLEY VENTURE INVESTORS III, L.P.
By: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital III, Inc.,
its Institutional Managing Member
By: /s/ FAZLE HUSAIN
---------------------------------------------------------
Title: General Partner
Address: 1221 Avenue of the Americas
New York, New York 10020
Fax: (212) 762-8424
The Purchaser represents and warrants that it is one or more of the
following (please check appropriate box)
[ ] (1) A bank as defined in Section 3(a)(2) of the Securities Act, acting
in either its individual or fiduciary capacity.
[ ] (2) An insurance company as defined in Section 2(13) of the Securities
Act.
[ ] (3) An investment company registered under the Investment Company Act
of 1940.
[ ] (4) A business development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940.
[ ] (5) A Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
[ ] (6) An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974 and (i) the decision to make an
investment in the Securities was made by a plan fiduciary, as defined in Section
3(21) of such Act, which fiduciary is either a bank, insurance company or
registered investment advisor, or such plan has total assets in excess of
$5,000,000.
[ ] (7) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
[ ] (8) A not-for-profit organization described n Section 501(c)(3) of the
Code with total assets in excess of $5,000,000.
[ ] (9) A natural person (i.e., not a corporation, trust or partnership)
whose individual net worth (total assets less total liabilities), or joint net
worth with spouse, is in excess of $1,000,000.
[ ] (10) A trust, the trustee of which is a bank as defined in Section
3(a)(2) of the Securities Act acting in its fiduciary capacity.
[X] (11) An entity (other than a trust) in which ALL of the equity owners
(i.e., partners or shareholders) are accredited investors pursuant to any of the
paragraphs above.
[ ] (12) A trust which its grantor may revoke at any time and over whose
assets its grantor retains sole investment control and the grantor is an
accredited investor pursuant to paragraph (9) above.
[X] (13) A corporation, trust or partnership and the total purchase price
of Securities purchased by such entity does not exceed 20% of the undersigned's
net worth at the time of sale. The undersigned has not been formed for the
specific purpose of acquiring the Securities.
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<PAGE> 187
[ ] (14) Any director, executive officer or general partner of the Issuer
or any director, executive officer or general partner of the Issuer.
Designated Bank:
Address:
Account No.:
Attention:
INITIAL CLOSING DATE
<TABLE>
<CAPTION>
SECURITIES PRINCIPAL AMOUNT AGGREGATE PURCHASE PRICE WARRANTS
---------- ---------------- ------------------------ --------
<S> <C> <C> <C>
Bridge Securities.......... $84,237.00 $84,237.00 8.4237
</TABLE>
SECOND CLOSING DATE
<TABLE>
<CAPTION>
SECURITIES PRINCIPAL AMOUNT AGGREGATE PURCHASE PRICE WARRANTS
---------- ---------------- ------------------------ --------
<S> <C> <C> <C>
Bridge Securities.......... $84,237.00 $84,237.00 8.4237
</TABLE>
B-17
<PAGE> 188
THE MORGAN STANLEY VENTURE PARTNERS
ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital III, Inc.,
its Institutional Managing Member
By: /s/ FAZLE HUSAIN
---------------------------------
Title: General Partner
Address: 1221 Avenue of the
Americas
New York, New York
10020
Fax: (212) 762-8424
The Purchaser represents and warrants that it is one or more of the
following (please check appropriate box)
[ ] (1) A bank as defined in Section 3(a)(2) of the Securities Act, acting
in either its individual or fiduciary capacity.
[ ] (2) An insurance company as defined in Section 2(13) of the Securities
Act.
[ ] (3) An investment company registered under the Investment Company Act
of 1940.
[ ] (4) A business development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940.
[ ] (5) A Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
[ ] (6) An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974 and (i) the decision to make an
investment in the Securities was made by a plan fiduciary, as defined in Section
3(21) of such Act, which fiduciary is either a bank, insurance company or
registered investment advisor, or such plan has total assets in excess of
$5,000,000.
[ ] (7) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
[ ] (8) A not-for-profit organization described n Section 501(c)(3) of the
Code with total assets in excess of $5,000,000.
[ ] (9) A natural person (i.e., not a corporation, trust or partnership)
whose individual net worth (total assets less total liabilities), or joint net
worth with spouse, is in excess of $1,000,000.
[ ] (10) A trust, the trustee of which is a bank as defined in Section
3(a)(2) of the Securities Act acting in its fiduciary capacity.
[X] (11) An entity (other than a trust) in which ALL of the equity owners
(i.e., partners or shareholders) are accredited investors pursuant to any of the
paragraphs above.
[ ] (12) A trust which its grantor may revoke at any time and over whose
assets its grantor retains sole investment control and the grantor is an
accredited investor pursuant to paragraph (9) above.
[X] (13) A corporation, trust or partnership and the total purchase price
of Securities purchased by such entity does not exceed 20% of the undersigned's
net worth at the time of sale. The undersigned has not been formed for the
specific purpose of acquiring the Securities.
B-18
<PAGE> 189
[ ] (14) Any director, executive officer or general partner of the Issuer
or any director, executive officer or general partner of the Issuer.
Designated Bank:
Address:
Account No.:
Attention:
INITIAL CLOSING DATE
<TABLE>
<CAPTION>
SECURITIES PRINCIPAL AMOUNT AGGREGATE PURCHASE PRICE WARRANTS
---------- ---------------- ------------------------ --------
<S> <C> <C> <C>
Bridge Securities.......... $38,458.00 $38,458.00 3.8458
</TABLE>
SECOND CLOSING DATE
<TABLE>
<CAPTION>
SECURITIES PRINCIPAL AMOUNT AGGREGATE PURCHASE PRICE WARRANTS
---------- ---------------- ------------------------ --------
<S> <C> <C> <C>
Bridge Securities.......... $38,458.00 $38,458.00 3.8458
</TABLE>
B-19
<PAGE> 190
BANKAMERICA VENTURES
By: /s/ JAMES D. MURPHY
--------------------------------------------------------
Title: President and Managing Director
Address: 950 Tower Lane, Suite 700
Foster City, CA 94404
Fax: (650) 378-6040
The Purchaser represents and warrants that it is one or more of the
following (please check appropriate box)
[ ] (1) A bank as defined in Section 3(a)(2) of the Securities Act, acting
in either its individual or fiduciary capacity.
[ ] (2) An insurance company as defined in Section 2(13) of the Securities
Act.
[ ] (3) An investment company registered under the Investment Company Act
of 1940.
[ ] (4) A business development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940.
[X] (5) A Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
[ ] (6) An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974 and (i) the decision to make an
investment in the Securities was made by a plan fiduciary, as defined in Section
3(21) of such Act, which fiduciary is either a bank, insurance company or
registered investment advisor, or such plan has total assets in excess of
$5,000,000.
[ ] (7) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
[ ] (8) A not-for-profit organization described n Section 501(c)(3) of the
Code with total assets in excess of $5,000,000.
[ ] (9) A natural person (i.e., not a corporation, trust or partnership)
whose individual net worth (total assets less total liabilities), or joint net
worth with spouse, is in excess of $1,000,000.
[ ] (10) A trust, the trustee of which is a bank as defined in Section
3(a)(2) of the Securities Act acting in its fiduciary capacity.
[ ] (11) An entity (other than a trust) in which ALL of the equity owners
(i.e., partners or shareholders) are accredited investors pursuant to any of the
paragraphs above.
[ ] (12) A trust which its grantor may revoke at any time and over whose
assets its grantor retains sole investment control and the grantor is an
accredited investor pursuant to paragraph (9) above.
[ ] (13) A corporation, trust or partnership and the total purchase price
of Securities purchased by such entity does not exceed 20% of the undersigned's
net worth at the time of sale. The undersigned has not been formed for the
specific purpose of acquiring the Securities.
B-20
<PAGE> 191
[ ] (14) Any director, executive officer or general partner of the Issuer
or any director, executive officer or general partner of the Issuer.
Designated Bank:
Address:
Account No.:
Attention:
INITIAL CLOSING DATE
<TABLE>
<CAPTION>
PRINCIPAL AGGREGATE
SECURITIES AMOUNT PURCHASE PRICE WARRANTS
---------- ----------- -------------- --------
<S> <C> <C> <C>
Bridge Securities.................... $ 1,400,000 $ 1,400,000 140
</TABLE>
SECOND CLOSING DATE
<TABLE>
<CAPTION>
PRINCIPAL AGGREGATE
SECURITIES AMOUNT PURCHASE PRICE WARRANTS
---------- ----------- -------------- --------
<S> <C> <C> <C>
Bridge Securities.................... $ 1,400,000 $ 1,400,000 140
</TABLE>
B-21
<PAGE> 192
STATE OF WISCONSIN INVESTMENT BOARD
By: /s/ JOHN NELSON
--------------------------------------------------------
Title: Investment Director
Address: 121 East Wilson Street
Madison, WI 53702
Fax: (608) 266-2436
The Purchaser represents and warrants that it is one or more of the
following (please check appropriate box)
[ ] (1) A bank as defined in Section 3(a)(2) of the Securities Act, acting
in either its individual or fiduciary capacity.
[ ] (2) An insurance company as defined in Section 2(13) of the Securities
Act.
[ ] (3) An investment company registered under the Investment Company Act
of 1940.
[ ] (4) A business development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940.
[ ] (5) A Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
[ ] (6) An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974 and (i) the decision to make an
investment in the Securities was made by a plan fiduciary, as defined in Section
3(21) of such Act, which fiduciary is either a bank, insurance company or
registered investment advisor, or such plan has total assets in excess of
$5,000,000.
[ ] (7) A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
[X] (8) A not-for-profit organization described n Section 501(c)(3) of the
Code with total assets in excess of $5,000,000.
[ ] (9) A natural person (i.e., not a corporation, trust or partnership)
whose individual net worth (total assets less total liabilities), or joint net
worth with spouse, is in excess of $1,000,000.
[ ] (10) A trust, the trustee of which is a bank as defined in Section
3(a)(2) of the Securities Act acting in its fiduciary capacity.
[ ] (11) An entity (other than a trust) in which ALL of the equity owners
(i.e., partners or shareholders) are accredited investors pursuant to any of the
paragraphs above.
[ ] (12) A trust which its grantor may revoke at any time and over whose
assets its grantor retains sole investment control and the grantor is an
accredited investor pursuant to paragraph (9) above.
[ ] (13) A corporation, trust or partnership and the total purchase price
of Securities purchased by such entity does not exceed 20% of the undersigned's
net worth at the time of sale. The undersigned has not been formed for the
specific purpose of acquiring the Securities.
B-22
<PAGE> 193
[ ] (14) Any director, executive officer or general partner of the Issuer
or any director, executive officer or general partner of the Issuer.
Designated Bank:
Address:
Account No.:
Attention:
INITIAL CLOSING DATE
<TABLE>
<CAPTION>
PRINCIPAL AGGREGATE
SECURITIES AMOUNT PURCHASE PRICE WARRANTS
---------- --------- -------------- --------
<S> <C> <C> <C>
Bridge Securities...................... $600,000 $600,000 60
</TABLE>
SECOND CLOSING DATE
<TABLE>
<CAPTION>
PRINCIPAL AGGREGATE
SECURITIES AMOUNT PURCHASE PRICE WARRANTS
---------- --------- -------------- --------
<S> <C> <C> <C>
Bridge Securities...................... $600,000 $600,000 60
</TABLE>
B-23
<PAGE> 194
SCHEDULE I
SMALL BUSINESS INVESTMENT COMPANIES
BANKAMERICA VENTURES
B-24
<PAGE> 195
EXHIBIT A
FORM OF
SENIOR CONVERTIBLE FLOATING RATE BRIDGE NOTE
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT IN
COMPLIANCE THEREWITH. THIS SECURITY ALSO IS SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF MAY
20, 1999, A COPY OF WHICH MAY BE OBTAINED FROM CARDIAC PATHWAYS CORPORATION.
No. $[Principal Amount]
CARDIAC PATHWAYS CORPORATION
SENIOR CONVERTIBLE FLOATING RATE BRIDGE NOTE
Cardiac Pathways Corporation, a Delaware corporation (together with its
successors and assigns the "ISSUER"), for value received hereby promises to pay
to (the "HOLDER") and its successors, transferees and assigns the
principal sum of [Principal Amount] by wire transfer of immediately available
funds to the Holder's account (the "BANK ACCOUNT") at a bank in the United
States specified on Schedule I hereto, as amended from time to time, on the
Stated Maturity Date, in such coin or currency of the United States of America
as at the time of payment shall be legal tender for the payment of public and
private debts, and to pay interest, quarterly in arrears, on August , November
, February and May (unless such day is not a Business Day, in which event
on the next succeeding Business Day) (each an "INTEREST PAYMENT DATE") of each
year in which this Note remains outstanding, commencing with August , 1999, on
the unpaid principal sum hereof outstanding in like coin or currency, at the
rates per annum set forth below, by wire transfer of immediately available funds
to the Bank Account from the most recent Interest Payment Date to which interest
has been paid on this Note until payment in full of the principal sum hereof has
been made.
The interest rate shall be a floating rate per annum (the "INTEREST RATE")
equal to the sum of (i) the variable rate of interest announced by Silicon
Valley Bank as its "prime rate" in effect from time to time plus (ii) 2.00%.
Further, the Issuer shall pay interest on overdue principal at a rate per
annum 5% above the rate borne by the Notes at the time the same became overdue
(the "OVERDUE RATE"), and interest on overdue installments of interest, to the
extent lawful, at the Overdue Rate, it being understood that the payment of
interest on interest may result in the compounding of interest.
The Issuer may, at its option and in its sole discretion, in lieu of the
payment in whole or in part of interest in cash on this Note, on any Interest
Payment Date, pay interest on this Note through the issuance of additional Notes
("ADDITIONAL SECURITIES"). Such Additional Securities shall be in an aggregate
principal amount equal to the amount of interest that would be payable with
respect to this Note on such Interest Payment Date (less any cash interest
payments, if any) and such Additional Securities shall be identical to the Notes
otherwise issued. Such Additional Securities shall be issued only in
denominations of $1,000 and multiples thereof. Any interest due and payable in
Additional Securities which cannot be paid in Notes because such Note would have
a denomination less than $1,000 shall be paid in cash. Except as expressly
provided herein, the term "NOTES" shall include all Additional Securities that
may be issued pursuant to this paragraph.
Interest on this Note will be calculated on the basis of a 360 day year,
based on the actual number of days elapsed.
Notwithstanding anything herein to the contrary, the interest or any amount
deemed to be interest payable by the Issuer with respect to this Note shall not
exceed the maximum amount permitted by applicable law and, to the extent that
any payments in excess of such permitted amount are received by the Holder, such
B-25
<PAGE> 196
excess shall be considered payments in respect of the principal amount of this
Note. All sums paid or agreed to be paid to the Holder for the use, forbearance
or retention of the indebtedness of the Issuer to the Holder shall, to the
extent permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full of the
principal so that the interest on account of such indebtedness shall not exceed
the maximum amount permitted by applicable law.
This Note is one of a duly authorized issue of senior convertible floating
rate bridge notes of the Issuer (the "NOTES") referred to in the Securities
Purchase Agreement dated as of May , 1999 among the Issuer and the Purchasers
listed on the signature pages thereto (the "PURCHASE AGREEMENT"). The Notes are
subject to the terms and conditions of the Purchase Agreement. The Notes are
transferable and assignable to one or more purchasers (in denominations of
$250,000 or any larger multiple of $100,000), in accordance with the limitations
set forth in the Purchase Agreement. The Issuer agrees to issue from time to
time replacement Notes in the form hereof to facilitate such transfers and
assignments. In addition, after delivery of an indemnity in form and substance
satisfactory to the Issuer, the Issuer also agrees to issue replacement Notes
for Notes which have been lost, stolen, mutilated or destroyed.
The Issuer shall keep at its principal office a register (the "REGISTER")
in which shall be entered the names and addresses of the registered holders of
the Notes and particulars of the respective Notes held by them and of all
transfers of such Notes. References to the "HOLDER" or "HOLDERS" shall mean the
Person listed in the Register as the payee of any Note unless the payee shall
have presented such Note to the Issuer for transfer and the transferee shall
have been entered in the Register as a subsequent holder, in which case the term
shall mean such subsequent holder. The ownership of the Notes shall be proven by
the Register. For the purpose of paying interest and principal on the Notes, the
Issuer shall be entitled to rely on the names and addresses in the Register and
notwithstanding anything to the contrary contained in this Note, no Event of
Default shall occur under Section 4(a) or 4(b) if payment of interest and
principal is made in accordance with the names and addresses and particulars
contained in the Register.
SECTION 1. Certain Terms Defined. Terms defined in the Credit Agreement and
not otherwise defined herein have, as used herein, the respective meanings
provided for therein. The following additional terms (except as otherwise
expressly provided or unless the context otherwise clearly requires) for all
purposes of this Note shall have the respective meanings specified below. All
accounting terms used herein and not expressly defined shall have the meanings
given to them in accordance with generally accepted accounting principles, and
the term "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" shall mean such accounting
principles which are generally accepted as of the date hereof. The terms defined
in this Section 1 include the plural as well as the singular.
"AFFILIATE" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in San Francisco and the City of New York are authorized
by law to close.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's capital stock whether now outstanding or issued after the date of this
Note, including, without limitation, all Common Stock and Preferred Stock.
"CERTIFICATE OF DESIGNATION" means the Certificate of Designation of the
Issuer substantially in the form of Exhibit B to the Purchase Agreement, setting
forth the terms of the Preferred Stock.
"COMMISSION" means the Securities and Exchange Commission.
B-26
<PAGE> 197
"COMMON STOCK" means, with respect to any Person, any and all shares,
interests, participations and other equivalents (however designated) of such
person's common stock, whether now outstanding or issued after the date of this
Note, and includes, without limitation, all series and classes of such common
stock.
"CREDIT AGREEMENT" shall have the meaning set forth in the Purchase
Agreement.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Issuer against fluctuations in currency values.
"DEBT" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments,
(iii) all obligations of such Person in respect of letters of credit or other
similar instruments (or reimbursement obligations with respect thereto), (iv)
all obligations of such Person to pay the deferred purchase price of property or
services, except Trade Payables, (v) all obligations of such Person as lessee
under capital leases, (vi) all Debt of others secured by a Lien on any asset of
such Person, whether or not such Debt is assumed by such Person, and (vii) all
Debt of others Guaranteed by such Person and (viii) to the extent not otherwise
included, obligations under Currency Agreements and Interest Rate Agreements.
"DERIVATIVES OBLIGATIONS" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cross-currency rate swap transaction, currency option or
any other similar transaction (including any option with respect to any of the
foregoing transactions) or any combination of the foregoing transactions.
"EVENT OF DEFAULT" means any event or condition specified as such in
Section 4 which shall have continued for the period of time, if any, therein
designated.
"INTEREST RATE AGREEMENT" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge arrangement, to or under which the Issuer is a
party or a beneficiary on the date hereof or becomes a party or a beneficiary
hereafter.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Note, the Issuer shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"MATERIAL FINANCIAL OBLIGATION" means a principal or face amount of Debt
and/or payment obligations in respect of any Derivative Obligations of the
Issuer and/or one or more if to Subsidiaries, arising in one or more related or
unrelated transactions, exceeding in the aggregate $250,000.
"PERMITTED LIEN" has the meaning set forth in the Credit Agreement.
"PERSON" means an individual, a corporation, a partnership, limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"PREFERRED STOCK" means the Series B Convertible Preferred Stock of the
Issuer as set forth in the Certificate of Designation.
"PREFERRED STOCK PURCHASE AGREEMENT" means the Series B Convertible
Preferred Stock Purchase Agreement dated as of May 20, 1999 among the Issuer and
the purchasers listed therein.
"REGISTRATION RIGHTS" shall have the meaning set forth in the Purchase
Agreement.
"STATED MATURITY DATE" means May 20, 2000.
"SUBSIDIARY" means, with respect to any Person, any corporation or other
entity of which a majority of the Capital Stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at the time directly or
indirectly owned by such Person.
B-27
<PAGE> 198
"TRANSACTION" means the purchase of up to $40 million aggregate preference
amount of the Issuer's Series B Convertible Preferred Stock by the purchasers
listed on the signature pages of the Preferred Stock Purchase Agreement.
"TRADE PAYABLES" means accounts payable or any other indebtedness or
monetary obligations to trade creditors created or assumed by the Issuer or any
Subsidiary of the Issuer in the ordinary course of business in connection with
the obtaining of materials or services.
"WARRANTS" means warrants exercisable for shares of Preferred Stock,
substantially in the form of Exhibit C to the Purchase Agreement.
SECTION 2. Payment of Principal and Interest. No provision of this Note
shall alter or impair the obligations of the Issuer, which are absolute and
unconditional, to pay the principal of and interest on this Note at the place,
times, and rate, and in the currency, herein prescribed.
SECTION 3. Covenants. The Issuer will comply with the covenants set forth
in Article 6 of the Purchase Agreement.
SECTION 4. Events of Default and Remedies.
(a) Event of Default Defined; Acceleration of Maturity; Waiver of
Default. In case one or more of the following Events of Default (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) shall have occurred and be continuing:
(i) default in the payment of any interest (including the payment of
interest in Additional Securities in lieu of a cash payment) upon any of
the Notes as and when the same shall become due and payable; or
(ii) default in the payment of all or any part of the principal on any
of the Notes as and when the same shall become due and payable, at
maturity, upon any redemption, by declaration or otherwise; or
(iii) failure on the part of the Issuer duly to observe or perform any
other of the covenants or agreements on the part of the Issuer contained in
the Notes or the Purchase Agreement for a period of 10 days after the date
on which written notice specifying such failure, stating that such notice
is a "Notice of Default" hereunder and demanding that the Issuer remedy the
same, shall have been given by registered or certified mail, return receipt
requested, to the Issuer by the holders of at least a majority in aggregate
principal amount of the Notes at the time outstanding; or
(iv) the Issuer or any Subsidiary shall fail to make any payment in
respect of any Material Financial Obligation when due, giving effect to any
applicable grace period;
(v) a judgment or order (not covered by insurance) for the payment of
money shall be rendered against the Issuer or any Subsidiary of the Issuer
in excess of $250,000 individually or $250,000 in the aggregate for all
such judgments or orders against all such Persons (treating any
deductibles, self insurance or retention as not so covered) that shall not
be discharged, and all such judgments and orders remain outstanding and
there shall be any period of 30 consecutive days following entry of the
judgment or order in excess of $250,000 or the judgment or order which
causes the aggregate amount described above to exceed $250,000 during which
a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; or
(vi) an involuntary case or other proceeding shall be commenced
against the Issuer or any of its Subsidiaries seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days; or an order for relief shall be entered
against the Issuer or any of its Subsidiaries under the federal bankruptcy
laws as now or hereafter in effect;
B-28
<PAGE> 199
(vii) the Issuer or any of its Subsidiaries shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now
or hereafter in effect, or consent to the entry of an order for relief in
an involuntary case under any such law, or consent to the appointment or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Issuer or any of its Subsidiaries
or for any substantial part of the property of the Issuer or any of its
Subsidiaries, or the Issuer or any of its Subsidiaries shall make any
general assignment for the benefit of creditors;
(viii) any representation, warranty, certification or statement made
by the Issuer in the Purchase Agreement or in any certificate, financial
statement or other document delivered pursuant to the Purchase Agreement
shall be inaccurate or incorrect in any material respect when made;
(ix) any Lien created by any of the Collateral Documents shall at any
time fail to constitute a valid and perfected Lien on all of the Collateral
purported to be subject to such Lien, subject to no prior or equal Lien
(except Permitted Liens) or the Issuer or any Subsidiary shall so assert in
writing;
(x) Thomas M. Prescott shall cease to be chief executive officer of
the Issuer;
(xi) the shareholders of the Issuer shall fail to approve the
Transaction by October 31, 1999;
(xii) the shareholders of the Issuer shall, by affirmative vote at any
time, fail to approve the Transaction;
(xiii) Issuer shall have accepted a Higher Offer as defined in the
Preferred Stock Purchase Agreement;
(xiv) the Preferred Stock Purchase Agreement shall have been
terminated for any other reason;
then, and in each and every such case (other than an Event of Default specified
in Section 4(a)(vi) or 4(a)(vii) hereof), unless the principal of all of the
Notes shall have already become due and payable, (x) the holders of not less
than 25% in aggregate principal amount of the Notes then outstanding, by notice
in writing to the Issuer (the "ACCELERATION NOTICE"), may declare the entire
principal amount of the Notes and the interest accrued thereon to be due and
payable immediately, and upon any such declaration the same shall become
immediately due and payable and (y) the Issuer shall issue to each Holder,
Warrants exercisable for a number of shares of Preferred Stock that is
calculated by dividing the aggregate principal amount of the Notes held by such
Holder by the product of 10,000 and the average of the trading price of the
Issuer's Common Stock, as reported on the Nasdaq National Market for the 10
Business Days immediately preceding the date of the Acceleration Notice. If an
Event of Default specified in Section 4(a)(vi) or 4(a)(vii) occurs, the
principal of and accrued interest on the Notes shall become and be immediately
due and payable without any declaration or other act on the part of any
Noteholder.
The foregoing paragraph, however, is subject to the condition that if, at
any time after the principal of the Notes shall have been so declared due and
payable, and before any judgment or decree for the payment of the moneys due
shall have been obtained or entered as hereinafter provided, the Issuer shall
pay or shall deposit in trust for the benefit of the Noteholders a sum
sufficient to pay all matured installments of interest upon all the Notes and
the principal of any and all Notes which shall have become due otherwise than by
acceleration (with interest upon such principal and, to the extent that payment
of such interest is enforceable under applicable law, on overdue installments of
interest, at the same rate as the rate of interest specified in the Notes, to
the date of such payment or deposit), and if any and all defaults and Events of
Default under this Note, other than the non-payment of the principal of the
Notes which shall have become due by acceleration, shall have been cured, waived
or otherwise remedied as provided herein; then and in every such case, the
Holders of a majority in aggregate principal amount of the Notes then
outstanding, by written notice to the Issuer, may waive all defaults and rescind
and annul such declaration and its consequences, but no such waiver or
rescission and annulment shall extend to or shall affect any subsequent default
or shall impair any right consequent thereon.
(b) Powers and Remedies Cumulative; Delay or Omission Not Waiver of
Default. No right or remedy herein conferred upon or reserved to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right
B-29
<PAGE> 200
and remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
No delay or omission of the Holders to exercise any right or power accruing
upon any Event of Default occurring and continuing as aforesaid shall impair any
such right or power or shall be construed to be a waiver of any such Event of
Default or an acquiescence therein; and every power and remedy given by the
Notes or by law may be exercised from time to time, and as often as shall be
deemed expedient, by the Holders.
(c) Waiver of Past Defaults. Prior to the declaration of the acceleration
of maturity of the Notes as provided in Section 4(a), the Holders of a majority
in aggregate principal amount of the Notes at the time outstanding, may on
behalf of the Holders of all the Notes waive any past default or Event of
Default hereunder and its consequences, except a default (A) in the payment of
principal of or interest on any of the Notes or (B) in respect of a covenant or
provision hereof which cannot be modified or amended without the consent of the
Holder of each Note affected. In the case of any such waiver, the Issuer, and
the Holders of the Notes shall be restored to their former positions and rights
hereunder, respectively; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
Upon any such waiver, such default shall cease to exist and be deemed to
have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured, and not to have occurred for every
purpose of this Note; but no such waiver shall extend to any subsequent or other
default or Event of Default or impair any right consequent thereon.
SECTION 5. Ranking of Notes. The Issuer covenants and agrees to ensure that
the obligations of the Issuer under the Bridge Securities constitute direct and
unconditional general obligations of the Issuer ranking in priority of payment
and as to security prior to all other secured and unsubordinated Debt of the
Issuer.
SECTION 6. Modification of Notes. The Notes may be modified without prior
notice to any Holder but with the written consent of the Holders of a majority
in principal amount of the Notes then outstanding. Subject to Section 4(a) and
Section 4(c), the Holders of a majority in principal amount of the Notes then
outstanding may waive compliance by the Issuer of any provision of the Notes
without prior notice to any Holder. However, without the consent of each Holder
affected, an amendment, supplement or waiver may not (i) reduce the amount of
Notes whose Holders must consent to an amendment, supplement or waiver, (ii)
reduce the rate or extend the time for payment for interest on any Note, (iii)
reduce the principal amount of or extend the fixed maturity of any Note or alter
the redemption provisions with respect thereto or (iv) make any Note payable in
money or property other than as stated in the Notes.
The Required Purchasers have the right to convert the principal amount of
all outstanding Notes into fully paid and nonassessable shares of Preferred
Stock in accordance with the provisions set forth in Article 8 of the Purchase
Agreement.
SECTION 7. Miscellaneous. This Note shall be deemed to be a contract under
the laws of the State of California, and for all purposes shall be construed in
accordance with the laws of said State, except as may otherwise be required by
mandatory provisions of law. The parties hereto, including all guarantors or
endorsers, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance and
enforcement of this Note, except as specifically provided herein, and assent to
extensions of the time of payment, or forbearance or other indulgence without
notice. The Holder of this Note by acceptance of this Note agrees to be bound by
the provisions of this Note which are expressly binding on such Holder. In
determining whether the Holders of the requisite aggregate principal amount of
Notes have concurred in any direction, consent or waiver as provided under the
Notes, Notes which are owned by the Issuer or any Subsidiary or any other
obligor on the Notes shall be disregarded and deemed not to be outstanding for
the purpose of any such determination. The Section headings herein are for
convenience only and shall not affect the construction hereof.
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IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed under its corporate seal.
Dated:
[Seal]
CARDIAC PATHWAYS CORPORATION
By:
------------------------------------
Chief Financial Officer
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EXHIBIT B
CARDIAC PATHWAYS CORPORATION
CERTIFICATE OF DESIGNATION
(SEE EXHIBIT A TO APPENDIX A)
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EXHIBIT C
CARDIAC PATHWAYS CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF
PREFERRED STOCK OF CARDIAC PATHWAYS CORPORATION
NO. WARRANT TO PURCHASE SHARES
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT
IN COMPLIANCE THEREWITH. NOTWITHSTANDING ANY OTHER PROVISIONS CONTAINED
HEREIN, NO TRANSFER, HYPOTHECATION OR OTHER DISPOSITION OF THIS WARRANT OR
OF THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT, OR OF ANY
INTEREST IN EITHER THEREOF, INCLUDING ANY EXERCISE OF THIS WARRANT IN FAVOR
OF ANY PERSON OTHER THAN THE HOLDER OR ANY AFFILIATE THEREOF, SHALL BE
VALID OR EFFECTIVE UNLESS REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
FOR VALUE RECEIVED, CARDIAC PATHWAYS CORPORATION, a Delaware corporation
(the "COMPANY"), hereby certifies that [HOLDER], its successor or permitted
assigns (the "HOLDER"), is entitled, subject to the provisions of this Warrant,
to purchase from the Company, at the times specified herein,
fully paid and non-assessable shares of Preferred Stock of the Company, par
value $0.001 per share (the "COMMON STOCK"), at a purchase price per share equal
to the Exercise Price (as hereinafter defined). The number of shares of Common
Stock to be received upon the exercise of this Warrant and the price to be paid
for a share of Common Stock are subject to adjustment from time to time as
hereinafter set forth.
1. Definitions. (a) The following terms, as used herein, have the following
meanings:
"AFFILIATE" shall have the meaning given to such term in Rule 12b-2
promulgated under the Securities and Exchange Act of 1934, as amended.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in San Francisco and the City of New York are authorized
by law to close.
"CERTIFICATE OF DESIGNATION" means the Certificate of Designation of the
Issuer substantially in the form of Exhibit B to the Securities Purchase
Agreement.
"COMMON STOCK" means the Common Stock, par value $.001 per share, of the
Company.
"CURRENT MARKET PRICE PER PREFERRED SHARE" shall have the meaning set forth
in Section 8(f).
"DULY ENDORSED" means duly endorsed in blank by the Person or Persons in
whose name a stock certificate is registered or accompanied by a duly executed
stock assignment separate from the certificate with the signature(s) thereon
guaranteed by a commercial bank or trust company or a member of a national
securities exchange or of the National Association of Securities Dealers, Inc.
"EXERCISE PRICE" means the product of 1,000 and (i) in the case of Warrants
issued on the Closing Date (as defined in the Securities Purchase Agreement),
$1.00 or (ii) in the case of Warrants issued in connection with the delivery of
an Acceleration Notice (as defined in the Bridge Securities), the average of the
trading price of the Common Stock, as reported on the Nasdaq National Market for
the 10 Business Days immediately preceding the delivery of such Acceleration
Notice, such Exercise Price to be adjusted from time to time as provided herein.
"EXPIRATION DATE" means May 31, 2004 at 5:00 p.m. New York City time.
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"PERSON" means an individual, partnership, limited liability company,
corporation, trust, joint stock company, association, joint venture, or any
other entity or organization, including a government or political subdivision or
an agency or instrumentality thereof.
"PREFERRED STOCK" means the Series B Convertible Preferred Stock of the
Company as set forth in the Certificate of Designation.
"PRINCIPAL HOLDER" means the original Holder of this Warrant on the date of
issue, or if such original Holder so elects, any transferee of all or any
portion of this Warrant whom such original Holder shall have designated by
written notice to the Company as the successor Principal Holder. Any successor
Principal Holder designated pursuant to the immediately preceding sentence shall
also have the right upon any subsequent transfer to designate a successor
Principal Holder in the manner described above.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase Agreement
dated as of May 20, 1999 among the Company and the Securityholders listed on the
signature pages thereto, providing for the purchase and issuance of the Bridge
Securities and this Warrant.
"WARRANT SHARES" means the shares of Preferred Stock deliverable upon
exercise of this Warrant, as adjusted from time to time.
(b) Capitalized terms used but not defined herein shall have the meanings
assigned to such terms in the Securities Purchase Agreement.
2. Exercise of Warrant.
(a) The Holder is entitled to exercise this Warrant in whole or in
part at any time, or from time to time, until the Expiration Date or, if
such day is not a Business Day, then on the next succeeding day that shall
be a Business Day. To exercise this Warrant, the Holder shall execute and
deliver to the Company a Warrant Exercise Notice substantially in the form
annexed hereto. No earlier than ten days after delivery of the Warrant
Exercise Notice, the Holder shall deliver to the Company this Warrant
Certificate, including the Warrant Exercise Subscription Form forming a
part hereof duly executed by the Holder, together with payment of the
applicable Exercise Price or an election of net issuance of Warrant Shares.
Upon such delivery and payment or election of net issuance, the Holder
shall be deemed to be the holder of record of the Warrant Shares subject to
such exercise or election, notwithstanding that the stock transfer books of
the Company shall then be closed or that certificates representing such
Warrant Shares shall not then be actually delivered to the Holder.
(b) In the event of cash exercise by the Holder, the Exercise Price
may be paid in cash or by certified or official bank check or bank
cashier's check payable to the order of the Company or by any combination
of such cash or check. The Company shall pay any and all documentary, stamp
or similar issue or transfer taxes payable in respect of the issue or
delivery of the Warrant Shares. In the event of election by the Holder of
net issuance of the Warrant Shares, the Company, upon receipt of notice of
election of net issuance, shall issue to the Holder a number of shares of
Preferred Stock having an aggregate Current Market Price Per Preferred
Share equal to the aggregate Current Market Price Per Preferred Share of
the Warrant Shares issuable upon exercise less the aggregate Exercise Price
for such Warrant Shares.
(c) If the Holder exercises this Warrant in part, this Warrant
Certificate shall be surrendered by the Holder to the Company and a new
Warrant Certificate of the same tenor and for the unexercised number of
Warrant Shares shall be executed by the Company. The Company shall register
the new Warrant Certificate in the name of the Holder or in such name or
names of its transferee pursuant to paragraph 6 hereof as may be directed
in writing by the Holder and deliver the new Warrant Certificate to the
Person or Persons entitled to receive the same.
(d) Upon surrender of this Warrant Certificate in conformity with the
foregoing provisions, the Company shall transfer to the Holder of this
Warrant Certificate appropriate evidence of ownership of the shares of
Preferred Stock or other securities or property (including any money) to
which the Holder is entitled, registered or otherwise placed in, or payable
to the order of, the name or names of the Holder or
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such transferee as may be directed in writing by the Holder, and shall
deliver such evidence of ownership and any other securities or property
(including any money) to the Person or Persons entitled to receive the
same, together with an amount in cash in lieu of any fraction of a share as
provided in paragraph 5 below.
3. Restrictive Legend. Certificates representing shares of Preferred Stock
issued pursuant to this Warrant shall bear a legend substantially in the form of
the legend set forth on the first page of this Warrant Certificate to the extent
that and for so long as such legend is required pursuant to the Securities
Purchase Agreement.
4. Reservation of Shares. The Company hereby agrees that at all times there
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of its authorized but unissued shares of Preferred Stock or other
securities of the Company from time to time issuable upon exercise of this
Warrant as will be sufficient to permit the exercise in full of this Warrant.
All such shares shall be duly authorized and, when issued upon such exercise,
shall be validly issued, fully paid and non-assessable, free and clear of all
liens, security interests, charges and other encumbrances or restrictions on
sale and free and clear of all preemptive rights, except to the extent set forth
in the Preferred Stock Purchase Agreement.
5. Fractional Shares. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant and in lieu of delivery
of any such fractional share upon any exercise hereof, the Company shall pay to
the Holder an amount in cash equal to such fraction multiplied by the Current
Market Price Per Preferred Share at the date of such exercise.
6. Exchange, Transfer or Assignment of Warrant.
(a) This Warrant Certificate and all rights hereunder are not
transferable by the registered holder hereof except to any Person who,
prior to such transfer, agrees in writing, in form and substance reasonably
satisfactory to the Company, to be bound by the terms of the Securities
Purchase Agreement in accordance with the provisions thereof. Each taker
and holder of this Warrant Certificate by taking or holding the same,
consents and agrees that the registered holder hereof may be treated by the
Company and all other persons dealing with this Warrant Certificate as the
absolute owner hereof for any purpose and as the person entitled to
exercise the rights represented hereby.
(b) Subject to compliance with the Securities Purchase Agreement, the
Holder of this Warrant shall be entitled, without obtaining the consent of
the Company to assign and transfer this Warrant, at any time in whole or
from time to time in part, to any Person or Persons. Subject to the
preceding sentence, upon surrender of this Warrant to the Company, together
with the attached Warrant Assignment Form duly executed, the Company shall,
without charge, execute and deliver a new Warrant in the name of the
assignee or assignees named in such instrument of assignment and, if the
Holder's entire interest is not being assigned, in the name of the Holder
and this Warrant shall promptly be canceled.
7. Loss or Destruction of Warrant. Upon receipt by the Company of evidence
satisfactory to it (in the exercise of its reasonable discretion) of the loss,
theft, destruction or mutilation of this Warrant Certificate, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant Certificate, if mutilated, the
Company shall execute and deliver a new Warrant Certificate of like tenor and
date.
8. Anti-dilution Provisions.
(a) In case the Company shall at any time after the date hereof (i)
declare a dividend or make a distribution on Preferred Stock payable in
Preferred Stock, (ii) subdivide or split the outstanding Preferred Stock,
(iii) combine or reclassify the outstanding Preferred Stock into a smaller
number of shares, or (iv) issue any shares of its capital stock in a
reclassification of Preferred Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the
continuing corporation), the Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date of
such subdivision, split, combination or reclassification shall be
proportionately
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adjusted so that, giving effect to paragraph 8(i), the exercise of this
Warrant after such time shall entitle the holder to receive the aggregate
number of shares of Preferred Stock or other securities of the Company (or
shares of any security into which such shares of Preferred Stock have been
reclassified pursuant to clause 8(a)(iii) or 8(a)(iv) above) which, if this
Warrant had been exercised immediately prior to such time, such holder
would have owned upon such exercise and been entitled to receive by virtue
of such dividend, distribution, subdivision, split, combination or
reclassification. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall issue or sell any Preferred Stock (other
than Preferred Stock issued (i) upon exercise of the Warrants, (ii)
pursuant to any Preferred Stock related employee compensation plan of the
Company approved by the Company's Board of Directors or (iii) upon exercise
or conversion of any security the issuance of which caused an adjustment
under paragraphs 8(c) or 8(d) hereof) without consideration or for a
consideration per share less than the Current Market Price Per Preferred
Share, the Exercise Price to be in effect after such issuance or sale shall
be determined by multiplying the Exercise Price in effect immediately prior
to such issuance or sale by a fraction, the numerator of which shall be the
sum of (x) the number of shares of Preferred Stock outstanding immediately
prior to the time of such issuance or sale multiplied by the Current Market
Price Per Preferred Share immediately prior to such issuance or sale and
(y) the aggregate consideration, if any, to be received by the Company upon
such issuance or sale, and the denominator of which shall be the product of
the aggregate number of shares of Preferred Stock outstanding immediately
after such issuance or sale and the Current Market Price Per Preferred
Share immediately prior to such issuance or sale. In case any portion of
the consideration to be received by the Company shall be in a form other
than cash, the fair market value of such noncash consideration shall be
utilized in the foregoing computation. Such fair market value shall be
determined by the Board of Directors of the Company; provided that if the
Principal Holder shall object to any such determination, the Board of
Directors shall retain an independent appraiser reasonably satisfactory to
the Principal Holder to determine such fair market value. The Holder shall
be notified promptly of any consideration other than cash to be received by
the Company and furnished with a description of the consideration and the
fair market value thereof, as determined by the Board of Directors.
(c) In case the Company shall fix a record date for the issuance of
rights, options or warrants to the holders of its Preferred Stock or other
securities entitling such holders to subscribe for or purchase for a period
expiring within 60 days of such record date shares of Preferred Stock (or
securities convertible into share of Preferred Stock) at a price per share
of Preferred Stock (or having a conversion price per share of Preferred
Stock, if a security convertible into shares of Preferred Stock) less than
the Current Market Price Per Preferred Share on such record date, the
maximum number of shares of Preferred Stock issuable upon exercise of such
rights, options or warrants (or conversion of such convertible securities)
shall be deemed to have been issued and outstanding as of such record date
and the Exercise Price shall be adjusted pursuant to paragraph 8(b) hereof,
as though such maximum number of shares of Preferred Stock had been so
issued for an aggregate consideration payable by the holders of such
rights, options, warrants or convertible securities prior to their receipt
of such shares of Preferred Stock. In case any portion of such
consideration shall be in a form other than cash, the fair market value of
such noncash consideration shall be determined as set forth in paragraph
8(b) hereof. Such adjustment shall be made successively whenever such
record date is fixed; and in the event that such rights, options or
warrants are not so issued or expire unexercised, or in the event of a
change in the number of shares of Preferred Stock to which the holders of
such rights, options or warrants are entitled (other than pursuant to
adjustment provisions therein comparable to those contained in this
paragraph 8), the Exercise Price shall again be adjusted to be the Exercise
Price which would then be in effect if such record date had not been fixed,
in the former event, or the Exercise Price which would then be in effect if
such holder had initially been entitled to such changed number of shares of
Preferred Stock, in the latter event.
(d) In case the Company shall issue rights, options (other than
options issued pursuant to a plan described in clause 8(b)(i)) or warrants
entitling the holders thereof to subscribe for or purchase Preferred Stock
(or securities convertible into shares of Preferred Stock) or shall issue
convertible
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securities, and the price per share of Preferred Stock of such rights,
options, warrants or convertible securities (including, in the case of
rights, options or warrants, the price at which they may be exercised) is
less than the Current Market Price Per Preferred Share, the maximum number
of shares of Preferred Stock issuable upon exercise of such rights, options
or warrants or upon conversion of such convertible securities shall be
deemed to have been issued and outstanding as of the date of such sale or
issuance, and the Exercise Price shall be adjusted pursuant to paragraph
8(b) hereof as though such maximum number of shares of Preferred Stock had
been so issued for an aggregate consideration equal to the aggregate
consideration paid for such rights, options, warrants or convertible
securities and the aggregate consideration payable by the holders of such
rights, options, warrants or convertible securities prior to their receipt
of such shares of Preferred Stock. In case any portion of such
consideration shall be in a form other than cash, the fair market value of
such noncash consideration shall be determined as set forth in paragraph
8(b) hereof. Such adjustment shall be made successively whenever such
rights, options, warrants or convertible securities are issued; and in the
event that such rights, options or warrants expire unexercised, or in the
event of a change in the number of shares of Preferred Stock to which the
holders of such rights, options, warrants or convertible securities are
entitled (other than pursuant to adjustment provisions therein comparable
to those contained in this paragraph 8), the Exercise Price shall again be
adjusted to be the Exercise Price which would then be in effect if such
rights, options, warrants or convertible securities had not been issued, in
the former event, or the Exercise Price which would then be in effect if
such holders had initially been entitled to such changed number of shares
of Preferred Stock, in the latter event. No adjustment of the Exercise
Price shall be made pursuant to this paragraph 8(d) to the extent that the
Exercise Price shall have been adjusted pursuant to paragraph 8(c) upon the
setting of any record date relating to such rights, options, warrants or
convertible securities and such adjustment fully reflects the number of
shares of Preferred Stock to which the holders of such rights, options,
warrants or convertible securities are entitled and the price payable
therefor.
(e) In case the Company shall fix a record date for the making of a
distribution to holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is
the continuing corporation) of evidences of indebtedness, assets or other
property (other than dividends payable in Preferred Stock or rights,
options or warrants referred to in, and for which an adjustment is made
pursuant to, paragraph 8(c) hereof), the Exercise Price to be in effect
after such record date shall be determined by multiplying the Exercise
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the Current Market Price Per Preferred Share on
such record date, less the fair market value (determined as set forth in
paragraph 8(b) hereof) of the portion of the assets, other property or
evidence of indebtedness so to be distributed which is applicable to one
share of Preferred Stock, and the denominator of which shall be such
Current Market Price Per Preferred Share. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that
such distribution is not so made, the Exercise Price shall again be
adjusted to be the Exercise Price which would then be in effect if such
record date had not been fixed.
(f) For the purpose of any computation under paragraph 5 or paragraph
8(b), 8(c), 8(d) or 8(e) hereof, on any determination date the Current
Market Price Per Preferred Share shall be deemed to be the average
(weighted by daily trading volume) of the Daily Prices (as defined below)
per share of the applicable class of Common Stock into which the Preferred
stock is convertible for the 20 consecutive trading days immediately prior
to such date. "DAILY PRICE" means the last reported sale price on such day
on the National Market of the NASDAQ Stock Market ("NASDAQ"); or (A) if the
shares of such class of Common Stock then are not traded on the NASDAQ
National Market, the average of the highest reported bid and lowest
reported asked price on such day as reported by NASDAQ. If on any
determination date the shares of such class of Common Stock are not quoted
by any such organization, the Current Market Price Per Price Share shall be
the fair market value of such shares of Common Stock on such determination
date as determined by the Board of Directors. If the Principal Holder shall
object to any determination by the Board of Directors of the Current Market
Price Per Preferred Share, the Current Market Price Per Preferred Share
shall be the fair market value per share of the applicable class of Common
Stock as determined by an independent appraiser retained by the Company at
its expense and reasonably acceptable to the Principal Holder. For purposes
of any computation under this
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paragraph 8, the number of shares of Preferred Stock outstanding at any
given time shall not include shares owned or held by or for the account of
the Company.
(g) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least one percent in
such price; provided that any adjustments which by reason of this paragraph
8(g) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this paragraph
8 shall be made to the nearest one tenth of a cent or to the nearest
hundredth of a share, as the case may be.
(h) In the event that, at any time as a result of the provisions of
this paragraph 8, the holder of this Warrant upon subsequent exercise shall
become entitled to receive any shares of capital stock of the Company other
than Preferred Stock, the number of such other shares so receivable upon
exercise of this Warrant shall thereafter be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable
to the provisions contained herein.
(i) Upon each adjustment of the Exercise Price as a result of the
calculations made in paragraphs 8(a), 8(b), 8(c), 8(d) or 8(e) hereof, the
number of shares for which this Warrant is exercisable immediately prior to
the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Exercise Price, that number of shares of
Preferred Stock obtained by (i) multiplying the number of shares covered by
this Warrant immediately prior to this adjustment of the number of shares
by the Exercise Price in effect immediately prior to such adjustment of the
Exercise Price and (ii) dividing the product so obtained by the Exercise
Price in effect immediately after such adjustment of the Exercise Price.
9. Consolidation, Merger, or Sale of Assets. In case of any consolidation
of the Company with, or merger of the Company into, any other Person, any merger
of another Person into the Company (other than a merger which does not result in
any reclassification, conversion, exchange or cancellation of outstanding shares
of Preferred Stock or Common Stock) or any sale or transfer of all or
substantially all of the assets of the Company or of the Person formed by such
consolidation or resulting from such merger or which acquires such assets, as
the case may be, the Holder shall have the right thereafter to exercise this
Warrant for the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a holder of the
number of shares of Preferred Stock for which this Warrant may have been
exercised immediately prior to such consolidation, merger, sale or transfer,
assuming (i) such holder of Preferred Stock is not a Person with which the
Company consolidated or into which the Company merged or which merged into the
Company or to which such sale or transfer was made, as the case may be
("CONSTITUENT PERSON"), or an Affiliate of a constituent Person and (ii) in the
case of a consolidation merger, sale or transfer which includes an election as
to the consideration to be received by the holders, such holder of Preferred
Stock failed to exercise its rights of election, as to the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer (provided that if the kind or amount of securities, cash and
other property receivable upon such consolidation, merger, sale or transfer is
not the same for each share of Preferred Stock held immediately prior to such
consolidation, merger, sale or transfer by other than a constituent Person or an
Affiliate thereof and in respect of which such rights of election shall not have
been exercised ("NON-ELECTING SHARE"), then for the purpose of this paragraph 9
the kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by each non-electing share shall be
deemed to be the kind and amount so receivable per share by a plurality of the
non-electing shares). Adjustments for events subsequent to the effective date of
such a consolidation, merger and sale of assets shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Warrant. In any such
event, effective provisions shall be made in the certificate or articles of
incorporation of the resulting or surviving corporation, in any contract of
sale, conveyance, lease or transfer, or otherwise so that the provisions set
forth herein for the protection of the rights of the Holder shall thereafter
continue to be applicable; and any such resulting or surviving corporation shall
expressly assume the obligation to deliver, upon exercise, such shares of stock,
other securities, cash and property. The provisions of this paragraph 9 shall
similarly apply to successive consolidations, mergers, sales, leases or
transfers.
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10. Notices. Any notice, demand or delivery authorized by this Warrant
Certificate shall be in writing and shall be given to the Holder, the Company or
the Shareholder Representative, as the case may be, at its address (or
telecopier number) set forth below, or such other address (or telecopier number)
as shall have been furnished to the party giving or making such notice, demand
or delivery:
If to the Company:
Cardiac Pathways Corporation
995 Benecia Avenue
Sunnyvale, California 94086
Telecopy: 408-737-0505
Attention: G. Michael Latta, Chief Financial Officer
If to the Holder: to its address specified on the signature page hereof
Each such notice, demand or delivery shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the intended recipient confirms the receipt of such telecopy or (ii)
if given by any other means, when received at the address specified herein.
11. Rights of the Holder. Prior to the exercise of any Warrant, the Holder
shall not, by virtue hereof, be entitled to any rights of a shareholder of the
Company, including, without limitation, the right to vote, to receive dividends
or other distributions, to exercise any preemptive right or to receive any
notice of meetings of shareholders or any notice of any proceedings of the
Company except as may be specifically provided for herein.
12. GOVERNING LAW. THIS WARRANT CERTIFICATE AND ALL RIGHTS ARISING
HEREUNDER SHALL BE CONSTRUED AND DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS
OF THE STATE OF CALIFORNIA, AND THE PERFORMANCE THEREOF SHALL BE GOVERNED AND
ENFORCED IN ACCORDANCE WITH SUCH LAWS.
13. Amendments; Waivers. Any provision of this Warrant Certificate may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Holder and the Company, or in the
case of a waiver, by the party against whom the waiver is to be effective. No
failure or delay by either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
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IN WITNESS WHEREOF, the Company has duly caused this Warrant Certificate to
be signed by its duly authorized officer and to be dated as of May 20, 1999.
CARDIAC PATHWAYS CORPORATION
By:
------------------------------------
Name:
Title:
Acknowledged and Agreed:
[HOLDER]
By:
--------------------------------------------------------
Title:
[ADDRESS]
[ADDRESS]
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<PAGE> 211
WARRANT EXERCISE NOTICE
(To be delivered prior to exercise of the Warrant
by execution of the Warrant Exercise Subscription Form)
To: CARDIAC PATHWAYS CORPORATION
The undersigned hereby notifies you of its intention to exercise the
Warrant to purchase shares of Preferred Stock, par value $0.001 per share, of
Cardiac Pathways Corporation. The undersigned intends to exercise the Warrant to
purchase shares (the "SHARES") at $ per Share (the Exercise
Price currently in effect pursuant to the Warrant).
[ ] The undersigned intends to pay the aggregate Exercise Price for the
Shares in cash, certified or official bank or bank cashier's check (or a
combination of cash and check) as indicated below.
[ ] The undersigned elects to have a number of shares of Preferred Stock
having an aggregate Current Market Price Per Preferred Share equal to the
aggregate Current Market Price Per Preferred Share of the Shares issuable upon
exercise less the aggregate Exercise Price for such Shares.
Date:
--------------------------------------
(Signature of Holder)
--------------------------------------
(Street Address)
--------------------------------------
(City) (State) (Zip Code)
Payment: $ cash
$ check
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WARRANT EXERCISE SUBSCRIPTION FORM
(To be executed only upon exercise of the Warrant
after delivery of Warrant Exercise Notice)
To: Cardiac Pathways Corporation
The undersigned irrevocably exercises the Warrant for the purchase of
shares (the "SHARES") of Preferred Stock, par value $.01 per
share, of Cardiac Pathways Corporation (the "COMPANY") at $ per Share (the
Exercise Price currently in effect pursuant to the Warrant) and either (1)
herewith makes payment of $ (such payment being made in cash or by
certified or official bank or bank cashier's check payable to the order of the
Company or by any permitted combination of such cash or check), or (2) has
elected for net issuance of the Shares, all on the terms and conditions
specified in the within Warrant Certificate, surrenders this Warrant Certificate
and all right, title and interest therein to the Company and directs that the
Shares deliverable upon the exercise of this Warrant be registered or placed in
the name and at the address specified below and delivered thereto.
Date:
--------------------------------------
(Signature of Holder)
--------------------------------------
(Street Address)
--------------------------------------
(City) (State) (Zip Code)
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Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised portion of the Warrant evidenced by the within Warrant
Certificate to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
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WARRANT ASSIGNMENT FORM
Dated ,
FOR VALUE RECEIVED, hereby sells,
assigns and transfers unto (the "ASSIGNEE"),
(please type or print in block letters)
(insert address)
its right to purchase up to shares of Preferred Stock represented
by this Warrant and does hereby irrevocably constitute and appoint
Attorney-in-Fact, to transfer the same
on the books of the Company, with full power of substitution in the premises.
Signature:
--------------------------------
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EXHIBIT D
SECURITY AGREEMENT
AGREEMENT dated as of May 20, 1999, between CARDIAC PATHWAYS CORPORATION, a
Delaware corporation (together with its successors, the "COMPANY"), and
BankAmerica Ventures, as Collateral Agent (the "COLLATERAL AGENT") for the
Purchasers referred to below.
WITNESSETH:
WHEREAS the Company, and the purchasers listed therein (the "PURCHASERS"),
are parties to a Securities Purchase Agreement of even date herewith (as the
same may be amended from time to time, the Securities Purchase Agreement"); and
WHEREAS, in order to induce said purchasers to enter into the Securities
Purchase Agreement, the Company has agreed to grant a continuing security
interest in and to the Collateral (as hereafter defined) to secure its
obligations under the Bridge Securities referred to in the Securities Purchase
Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. Definitions. Terms defined in the Securities Purchase Agreement
and not otherwise defined herein have, as used herein, the respective meanings
provided for therein. The following additional terms, as used herein, have the
following respective meanings:
"ACCOUNTS" means all "accounts" (as defined in the UCC) now owned or
hereafter acquired by the Company, and shall also mean and include all accounts
receivable, contract rights, book debts, notes, drafts and other obligations or
indebtedness owing to the Company arising from the sale, lease or exchange of
goods or other property by it and/or the performance of services by it
(including, without limitation, any such obligation which might be characterized
as an account, contract right or general intangible under the Uniform Commercial
Code in effect in any jurisdiction) and all of the Company's rights in, to and
under all purchase orders for goods, services or other property, and all of the
Company's rights to any goods, services or other property represented by any of
the foregoing (including returned or repossessed goods and unpaid sellers'
rights of rescission, replevin, reclamation and rights to stoppage in transit)
and all monies due to or to become due to the Company under all contracts for
the sale, lease or exchange of goods or other property and/or the performance of
services by it (whether or not yet earned by performance on the part of the
Company), in each case whether now existing or hereafter arising or acquired
including, without limitation, the right to receive the proceeds of said
purchase orders and contracts and all collateral security and guarantees of any
kind given by any Person with respect to any of the foregoing.
"COLLATERAL" has the meaning specified in Section 3.
"COLLATERAL ACCOUNT" has the meaning specified in Section 5.
"COMMODITY ACCOUNT" means an account maintained by a commodity intermediary
in which a commodity contract is carried for a commodity customer.
"COMMODITY CONTRACT" means a commodity futures contract, an option on a
commodity futures contract, a commodity option, or other contract that, in each
case, is:
(i) traded on or subject to the rules of a board of trade that has
been designated as a contract market for such a contract pursuant to the
federal commodities laws; or
(ii) traded on a foreign commodity board of trade, exchange, or
market, and is carried on the books of a commodity intermediary for a
commodity customer.
"COPYRIGHT LICENSE" means, any agreement now or hereafter in existence
granting to the Company, or pursuant to which the Company has granted to any
other Person, any right to use, copy, reproduce, distribute,
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prepare derivative works, display or publish any records or other materials on
which a Copyright is in existence or may come into existence, including, without
limitation, any agreement identified in Schedule 1 to a Copyright Security
Agreement.
"COPYRIGHTS" means all the following: (i) all copyrights under the laws of
the United States or any other country (whether or not the underlying works of
authorship have been published), all registrations and recordings thereof, all
copyrightable works of authorship (whether or not published), and all
applications for copyrights under the laws of the United States or any other
country, including, without limitation, registrations, recordings and
applications in the United States Copyright Office or in any similar office or
agency of the United States, any State thereof or any other country or any
political subdivision thereof, including, without limitation, those described in
Schedule 1 to the Copyright Security Agreement, (ii) all renewals thereof, (iii)
all claims for, and rights to sue for, past or future infringements of any of
the foregoing, and (iv) all income, royalties, damages and payments now or
hereafter due or payable with respect to any of the foregoing, including,
without limitation, damages and payments for past or future infringements
thereof.
"COPYRIGHT SECURITY AGREEMENT" means, with respect to the Company, a
Copyright Security Agreement, substantially in the form of Exhibit B hereto,
executed and delivered by the Company in favor of the Agent, for the benefit of
the Secured Parties, as amended from time to time.
"CREDIT AGREEMENT" means the Loan and Security Agreement dated as of May
15, 1998 between the Company and Silicon Valley Bank, together with the related
documents thereto, including without limitation, any security documents, in each
case as in effect on May 17, 1999.
"DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like account
maintained with a bank, savings and loan association, credit union or like
organization, other than an account evidenced by a negotiable certificate of
deposit.
"DOCUMENTS" means all "documents" (as defined in the UCC) or other receipts
covering, evidencing or representing goods, now owned or hereafter acquired by
the Company.
"EQUIPMENT" means all "equipment" (as defined in the UCC) now owned or
hereafter acquired by the Company, including without limitation all motor
vehicles, trucks, trailers, railcars and barges, and all accessions thereto.
"FINANCIAL ASSET" means:
(i) a Security;
(ii) an obligation of a person or a share, participation, or other
interest in a person or in property or an enterprise of a person, which is,
or is of a type, dealt in or traded on financial markets, or which is
recognized in any area in which it is issued or dealt in as a medium for
investment; or
(iii) any property that is held by a securities intermediary for
another person in a Securities Account if the securities intermediary has
expressly agreed with the other person that the property is to be treated
as a financial asset under Article 8 of the UCC.
As context requires, the term means either the interest itself or the means by
which a person's claim to it is evidenced, including a certificated or
uncertificated Security, a Security certificate, or a Security Entitlement.
"GENERAL INTANGIBLES" means all "general intangibles" (as defined in the
UCC) now owned or hereafter acquired by the Company, including, without
limitation, (i) all obligations or indebtedness owing to the Company (other than
Accounts) from whatever source arising, (ii) all Patents, Patent Licenses,
trademarks, trademark licenses, rights in intellectual property, goodwill, trade
names, service marks, trade secrets, copyrights, permits and licenses, (iii) all
rights or claims in respect of refunds for taxes paid and (iv) all rights in
respect of any pension plan or similar arrangement maintained for employees of
any member of the Controlled Group.
"INSTRUMENTS" means all "instruments", "chattel paper" or "letters of
credit" (each as defined in the UCC) evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise
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supporting the payment of, any of the Accounts, including (but not limited to)
promissory notes, drafts, bills of exchange and trade acceptances, now owned or
hereafter acquired by the Company.
"INVESTMENT PROPERTY" means all (i) Securities, whether certificated or
uncertificated, (ii) Security Entitlements, (iii) Securities Accounts, (iv)
Commodity Contracts and (v) Commodity Accounts now owned or hereafter acquired
by the Company.
"INVENTORY" means all "inventory" (as defined in the UCC), now owned or
hereafter acquired by the Company, wherever located, and shall also mean and
include, without limitation, all raw materials and other materials and supplies,
work-in-process and finished goods and any products made or processed therefrom
and all substances, if any, commingled therewith or added thereto.
"LIQUID INVESTMENTS" has the meaning specified in Section 5(d).
"PATENT LICENSE" means, with respect to the Issuer, any agreement now or
hereafter in existence granting to the Issuer, or pursuant to which the Company
has granted to any other person, any right with respect to any Patent or any
invention now or hereafter in existence, whether patentable or not, whether a
patent or application for patent is in existence on such invention or not, and
whether a patent or application for patent on such invention may come into
existence.
"PATENTS" means, with respect to the Issuer, all of the following: (i) all
letters patent and design letters patent of the United States or any other
country and all applications for letters patent and design letters patent of the
United States or any other country, including, without limitation, applications
in the United States Patent and Trademark Office or in any similar office or
agency of the United States, any state thereof, the District of Columbia or any
other country or any political subdivision of any of the foregoing, including,
without limitation, those described in the Perfection Certificate of the Issuer,
(ii) all reissues, divisions, continuations, continuations-in-part, renewals and
extensions of any of the foregoing, (iii) all claims for, and rights to sue for,
past or future infringements of any of the foregoing and (iv) all income,
royalties, damages and payments now or hereafter due or payable with respect to
any of the foregoing, including, without limitation, damages and payments for
past or future infringements thereof.
"PATENT SECURITY AGREEMENT" means, with respect to the Issuer, the Patent
Security Agreement executed and delivered by the Issuer in favor of the
Collateral Agent, for the benefit of the Secured Parties, substantially in the
form of Exhibit D hereto, as the same may be amended from time to time.
"PERFECTION CERTIFICATE" means a certificate substantially in the form of
Exhibit A hereto, completed and supplemented with the schedules and attachments
contemplated thereby to the satisfaction of the Collateral Agent, and duly
executed by the chief executive officer and the chief legal officer of the
Company.
"PERMITTED LIENS" means the Security Interests and the Liens on the
Collateral permitted to be created, to be assumed or to exist pursuant to
Section 7.5 of the Credit Agreement.
"PROCEEDS" means all proceeds of, and all other profits, products, rents or
receipts, in whatever form, arising from the collection, sale, lease, exchange,
assignment, licensing or other disposition of, or other realization upon,
collateral, including without limitation all claims of the Company against third
parties for loss of, damage to or destruction of, or for proceeds payable under,
or unearned premiums with respect to, policies of insurance in respect of, any
collateral, and any condemnation or requisition payments with respect to any
collateral, in each case whether now existing or hereafter arising.
"SECURED OBLIGATIONS" means the obligations secured under this Agreement
including (a) all principal of and interest (including, without limitation, any
interest which accrues after the commencement of any case, proceeding or other
action relating to the bankruptcy, insolvency or reorganization of the Company,
whether or not allowed or allowable as a claim in any such proceeding) on the
Bridge Securities, (b) all other amounts payable by the Company hereunder or
under the Credit Agreement and (c) any renewals or extensions of any of the
foregoing.
"SECURED PARTIES" means the Purchasers and the Collateral Agent.
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"SECURITIES ACCOUNT" means an account to which a Financial Asset is or may
be credited in accordance with an agreement under which the person maintaining
the account undertakes to treat the person for whom the account is maintained as
entitled to exercise the rights that comprise the Financial Asset.
"SECURITY" means an obligation of an issuer or a share, participation, or
other interest in an issuer or in property or an enterprise of an issuer:
(i) which is represented by a Security certificate in bearer or
registered form, or the transfer of which may be registered upon books
maintained for that purpose by or on behalf of the issuer;
(ii) which is one of a class or series or by its terms is divisible
into a class or series of shares, participations, interests, or
obligations; and
(iii) which:
(A) is, or is of a type, dealt in or traded on securities exchanges
or securities markets; or
(B) is a medium for investment and by its terms expressly provides
that it is a security governed by Article 8 of the UCC.
"SECURITY ENTITLEMENT" means the rights and property interest of an
entitlement holder with respect to a Financial Asset specified in Part 5 of
Article 8 of the UCC.
"SECURITY INTERESTS" means the security interests in the Collateral granted
hereunder securing the Secured Obligations.
"TRADEMARK LICENSE" means, with respect to the Issuer, any agreement now or
hereafter in existence granting to the Issuer, or pursuant to which the Issuer
has granted to any other Person, any right to use any Trademark.
"TRADEMARKS" means, with respect to the Issuer, all of the following: (i)
all trademarks, trade names, corporate names, company names, business names,
fictitious business names, trade styles, service marks, logos, brand names,
trade dress, prints and labels on which any of the foregoing have appeared or
appear, package and other designs, and any other source or business identifiers,
and general intangibles of like nature, and the rights in any of the foregoing
which arise under applicable law, (ii) the goodwill of the business symbolized
thereby or associated with each of them, (iii) all registrations and
applications in the United States Patent and Trademark Office or in a similar
office or agency of the United States, any State thereof, the District of
Columbia or any other country or any political subdivision of any of the
foregoing, (iv) all reissues, extensions and renewals of any of the foregoing,
(v) all claims for, and rights to sue for, past or future infringements of any
of the foregoing and (vi) all income, royalties, damages and payments now or
hereafter due or payable with respect to any of the foregoing, including,
without limitation, damages and payments for past or future infringements
thereof.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of California; provided that if by reason of mandatory provisions of
law, the perfection or the effect of perfection or non-perfection of the
Security Interest in any Collateral is governed by the Uniform Commercial Code
as in effect in a jurisdiction other than California, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or non-
perfection.
SECTION 2. Representations and Warranties. The Company represents and
warrants as follows:
(a) The Company has good and marketable title to all of the
Collateral, free and clear of any Liens other than Permitted Liens. The
Company has taken all actions necessary under the UCC to perfect its
interest in any Accounts purchased or otherwise acquired by it, as against
its assignors and creditors of its assignors.
(b) The Company has not performed any acts which might prevent the
Collateral Agent from enforcing any of the terms of this Agreement or which
would limit the Collateral Agent in any such enforcement. Other than
financing statements or other similar or equivalent documents or
instruments
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with respect to the Security Interests and Permitted Liens, no financing
statement, mortgage, security agreement or similar or equivalent document
or instrument covering all or any part of the Collateral is on file or of
record in any jurisdiction in which such filing or recording would be
effective to perfect a Lien on such Collateral. No Collateral is in the
possession of any Person (other than the Company) asserting any claim
thereto or security interest therein, except that the Collateral Agent or
its designee may have possession of Collateral as contemplated hereby.
(c) On or before the Closing Date, the Company shall deliver the
Perfection Certificate to the Collateral Agent. The information specified
therein shall be correct and complete. Within 60 days after the date of the
first Borrowing, the Company shall furnish to the Collateral Agent file
search reports from each UCC filing office specified in Schedule 7 to the
Perfection Certificate confirming the filing information set forth in such
Schedule.
(d) The Security Interests constitute valid security interests under
the UCC securing the Secured Obligations. When UCC financing statements in
the form specified in Exhibit A shall have been filed in the offices
specified in the Perfection Certificate, the Security Interests shall
constitute perfected security interests in the Collateral (except Inventory
in transit) to the extent that a security interest therein may be perfected
by filing pursuant to the UCC, prior to all other Liens and rights of
others therein except for Permitted Liens. When a Patent Security Agreement
has been recorded with the United States Patent and Trademark Office, the
Security Interests shall constitute perfected Security Interests in all
right, title and interest of the Issuer in the Patents listed in Schedule 1
to such Agreement, prior to all other Liens and rights of others therein
except for Permitted Liens. When notice of the Security Interest in the
Collateral Account has been given to Citibank, N.A., the Security Interest
in the Collateral Account will constitute a perfected Security Interest in
the Collateral Account.
(e) If and when any Financial Asset or Security Entitlement is held in
the Collateral Account, the Collateral Agent will have "control" (as
defined in Article 8 of the UCC) thereof and will be a "protected
purchaser" (as defined in said Article 8) thereof.
(f) The Inventory and Equipment are insured in accordance with the
requirements of the Credit Agreement.
(g) All Inventory has or will have been produced in compliance with
the applicable requirements of the Fair Labor Standards Act, as amended.
SECTION 3. The Security Interests. (a) In order to secure the full and
punctual payment of the Secured Obligations in accordance with the terms
thereof, and to secure the performance of all the Company's obligations
hereunder and under the Bridge Securities, the Company grants to the Collateral
Agent for the ratable benefit of the Secured Parties a continuing security
interest in and to all of the following property of the Company, whether now
owned or existing or hereafter acquired or arising and regardless of where
located (all being collectively referred to as the "COLLATERAL"):
(i) Accounts;
(ii) Documents;
(iii) Equipment;
(iv) General Intangibles;
(v) Instruments;
(vi) Inventory;
(vii) Investment Property;
(viii) All Deposit Accounts, including the Collateral Account, all
cash deposited therein from time to time, the Liquid Investments made
pursuant to Section 5(d) and other monies and property of any kind of the
Company in the possession or under the control of the Collateral Agent;
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(ix) All books and records (including, without limitation, customer
lists, credit files, computer programs, printouts and other computer
materials and records) of the Company pertaining to any of the Collateral;
and
(x) All Proceeds of the Collateral described in Clauses 3(a)(i)
through 3(a)(ix) hereof.
(b) The Security Interests are granted as security only and shall not
subject the Collateral Agent or any Secured Party to, or transfer or in any way
affect or modify, any obligation or liability of the Company with respect to any
of the Collateral or any transaction in connection therewith.
SECTION 4. Further Assurances; Covenants. (a) The Company will not change
its name, identity or corporate structure in any manner unless it shall have
given the Collateral Agent at least 30 days' prior notice thereof and delivered
an opinion of counsel with respect thereto in accordance with Section 4(l). The
Company will not change the location of (i) its chief executive office or chief
place of business or (ii) the locations where it keeps or holds any Collateral
or any records relating thereto from the applicable location described in the
Perfection Certificate unless it shall have given the Collateral Agent at least
30 days' prior notice thereof and delivered an opinion of counsel with respect
thereto in accordance with Section 4(l). The Company shall not in any event
change the location of any Collateral if such change would cause the Security
Interests in such Collateral to lapse or cease to be perfected.
(b) The Company will, from time to time, at its expense, execute, deliver,
file and record any statement, assignment, instrument, document, agreement or
other paper and take any other action, (including, without limitation, any
filings of financing or continuation statements under the UCC) that from time to
time may be necessary or desirable, or that the Collateral Agent may request, in
order to create, preserve, perfect, confirm or validate the Security Interests
or to enable the Secured Parties to obtain the full benefits of this Agreement,
or to enable the Collateral Agent to exercise and enforce any of its rights,
powers and remedies hereunder with respect to any of the Collateral. To the
extent permitted by applicable law, the Company hereby authorizes the Collateral
Agent to execute and file financing statements or continuation statements
without the Company's signature appearing thereon. The Company agrees that a
carbon, photographic, photostatic or other reproduction of this Agreement or of
a financing statement is sufficient as a financing statement. The Company shall
pay the costs of, or incidental to, any recording or filing of any financing or
continuation statements concerning the Collateral.
(c) If any Collateral is at any time in the possession or control of any
warehouseman, bailee or any of the Company's agents or processors, the Company
shall notify such warehouseman, bailee, agent or processor of the Security
Interests created hereby and to hold all such Collateral for the Collateral
Agent's account subject to the Collateral Agent's instructions.
(d) The Company shall keep full and accurate books and records relating to
the Collateral, and stamp or otherwise mark such books and records in such
manner as the Required Lenders may reasonably require in order to reflect the
Security Interests.
(e) The Company will immediately deliver and pledge each Instrument to the
Collateral Agent, appropriately endorsed to the Collateral Agent, provided that
so long as no Event of Default (as defined in the Bridge Securities) shall have
occurred and be continuing, the Company may retain for collection in the
ordinary course any Instruments (other than checks and drafts constituting
payments in respect of Accounts, as to which the provisions of Section 5(b)
shall apply) received by it in the ordinary course of business and the
Collateral Agent shall, promptly upon request of the Company, make appropriate
arrangements for making any other Instrument pledged by the Company available to
it for purposes of presentation, collection or renewal (any such arrangement to
be effected, to the extent deemed appropriate to the Collateral Agent, against
trust receipt or like document).
(f) The Company shall use its best efforts to cause to be collected from
its account debtors, as and when due, any and all amounts owing under or on
account of each Account (including, without limitation, Accounts which are
delinquent, such Accounts to be collected in accordance with lawful collection
procedures) and shall apply forthwith upon receipt thereof all such amounts as
are so collected to the outstanding balance of such Account. Subject to the
rights of the Secured Parties hereunder if an Event of Default shall have
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occurred and be continuing, the Company may allow in the ordinary course of
business as adjustments to amounts owing under its Accounts (i) an extension or
renewal of the time or times of payment, or settlement for less than the total
unpaid balance, which the Company finds appropriate in accordance with sound
business judgment and (ii) a refund or credit due as a result of returned or
damaged merchandise, all in accordance with the Company's ordinary course of
business consistent with its historical collection practices. The costs and
expenses (including, without limitation, attorney's fees) of collection, whether
incurred by the Company or the Collateral Agent, shall be borne by the Company.
(g) Upon the occurrence and during the continuance of any Event of Default,
upon request of the Required Purchasers through the Collateral Agent, the
Company will promptly notify (and the Company hereby authorizes the Collateral
Agent so to notify) each account debtor in respect of any Account or Instrument
that such Collateral has been assigned to the Collateral Agent hereunder, and
that any payments due or to become due in respect of such Collateral are to be
made directly to the Collateral Agent or its designee.
(h) The Company shall, (i) on or prior to the date of the first Borrowing,
in the case of Equipment now owned and (ii) within 10 days of acquiring any
other Equipment, deliver to the Collateral Agent any and all certificates of
title, applications for title or similar evidence of ownership of such Equipment
and shall cause the Collateral Agent to be named as lienholder on any such
certificate of title or other evidence of ownership. The Company shall promptly
inform the Collateral Agent of any additions to or deletions from the Equipment
and shall not permit any such items to become a fixture to real estate or an
accession to other personal property.
(i) Without the prior written consent of the Required Lenders, the Company
will not sell, lease, exchange, assign or otherwise dispose of, or grant any
option with respect to, any Collateral except that, subject to the rights of the
Secured Parties hereunder if an Event of Default shall have occurred and be
continuing, the Company may sell, lease or exchange Inventory and surplus or
worn-out Equipment in the ordinary course of business, whereupon, in the case of
such a sale or exchange, the Security Interests created hereby in such item (but
not in any Proceeds arising from such sale or exchange) shall cease immediately
without any further action on the part of the Collateral Agent.
(j) Prior to the Closing Date under the Securities Purchase Agreement, the
Company will cause the Collateral Agent to be named as an insured party and loss
payee on each insurance policy covering risks relating to any of its Inventory
and Equipment. The Company will deliver to the Collateral Agent, upon request of
the Collateral Agent, the insurance policies for such insurance or certificates
of insurance evidencing such coverage. Each such insurance policy shall include
effective waivers by the insurer of all claims for insurance premiums against
the Secured Parties, provide for coverage to the Collateral Agent regardless of
any breach by the Company of any warranty or representation made therein, not be
subject to co-insurance, provide that all insurance proceeds in excess of
$50,000 per claim shall be adjusted with and payable to the Collateral Agent and
provide that no cancellation, termination or material modification thereof shall
be effective until at least 30 days after receipt by the Collateral Agent of
notice thereof. The Company hereby appoints the Collateral Agent as its
attorney-in-fact to make proof of loss, claim for insurance and adjustments with
insurers, and to execute or endorse all documents, checks or drafts in
connection with payments made as a result of any insurance policies.
(k) The Company will, promptly upon request, provide to the Collateral
Agent all information and evidence it may reasonably request concerning the
Collateral to enable the Collateral Agent to enforce the provisions of this
Agreement.
(l) Not more than six months nor less than 30 days prior to each date on
which the Company proposes to take any action contemplated by Section 4(a), the
Company shall, at its cost and expense, cause to be delivered to the Purchasers
an opinion of counsel, satisfactory to the Collateral Agent, substantially in
the form of Exhibit B hereto, to the effect that all financing statements and
amendments or supplements thereto, continuation statements and other documents
required to be recorded or filed in order to perfect and protect the Security
Interests for a period, specified in such opinion, continuing until a date not
earlier than eighteen months from the date of such opinion, against all
creditors of and purchasers from the Company have been
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filed in each filing office necessary for such purpose and that all filing fees
and taxes, if any, payable in connection with such filings have been paid in
full.
(m) The Issuer agrees to notify the Collateral Agent immediately upon
filing any application for, or otherwise acquiring ownership of or a
registration relating to, any copyright, Patent or Trademark. At any time and
from time to time thereafter, the Collateral Agent may (and shall upon
instruction from the Required Lenders) require either Company to, at its expense
and upon the request of the Collateral Agent, file (as appropriate) the Patent
Security Agreement and the Trademark Security Agreement with the United States
Patent and Trademark Office and a copyright security agreement (in form and
substance satisfactory to the Collateral Agent) with the United States Copyright
Office, and take such other actions as may be necessary or reasonably desirable,
or that the Collateral Agent may reasonably request, in order to create and
perfect the security interests in such Patents, Trademarks or copyrights, as the
case may be. The Issuer shall notify the Collateral Agent immediately if it
knows that any application or registration relating to any Patent or Trademark
may become abandoned or dedicated to the public (other than applications or
registrations (x) with respect to any such Patents or Trademarks that are no
longer used or useful in the business of the Issuer or whose minimal value does
not reasonably justify the cost of maintaining such registration or application,
or (y) that have been refused by the applicable patent or trademark registry) or
of any adverse determination or development (including the institution of, or
any such determination or development in, any proceeding in the United States
Patent and Trademark Office, or any court) regarding the Issuer's ownership of
any Patent or Trademark, its right to register the same, or to keep and maintain
the same. In the event that any right to any Patent, Patent License, Trademark
or Trademark License of either Company is infringed, misappropriated or diluted
by a third party, the Issuer shall notify the Collateral Agent promptly after it
learns thereof and shall, unless the Issuer shall reasonably determine that any
such action would be of negligible economic value, promptly sue for
infringement, misappropriation or dilution and to recover any and all damages
for such infringement, misappropriation or dilution, and take such other actions
as the Issuer shall reasonably deem appropriate under the circumstances to
protect such Patent, Patent License, Trademark or Trademark License. In no event
shall either Company, either by itself or through any agent, employee or
licensee, file an application for the registration of any Patent or Trademark
with the United States Patent and Trademark Office, or with any similar office
or agency of the United States, any State thereof, the District of Columbia or
with any similar office or agency in any other country or any political
subdivision thereof, unless not less than 10 days prior thereto it informs the
Collateral Agent, and, upon request of the Collateral Agent, executes and
delivers any and all agreements, instruments, documents and papers the
Collateral Agent may request to evidence the Security Interests in such Patent
or Trademark and the goodwill and general intangibles of the Issuer relating
thereto or represented thereby, and the Issuer hereby constitutes the Collateral
Agent its attorney-in-fact to execute and file all such writings for the
foregoing purposes, all acts of such attorney being hereby ratified and
confirmed; such power being coupled with an interest, shall be irrevocable until
the Secured Obligations are paid in full.
(n) From time to time upon request by the Collateral Agent, the Company
shall, at its cost and expense, cause to be delivered to the Purchasers an
opinion of counsel satisfactory to the Collateral Agent as to such matters
relating to the transactions contemplated hereby as the Required Purchasers may
reasonably request.
SECTION 5. Collateral Account. (a) There is hereby established with the
Collateral Agent a collateral account (the "COLLATERAL ACCOUNT") in the name and
under the control of the Collateral Agent into which there shall be deposited
(i) from time to time the cash proceeds of the Collateral required to be
delivered to the Collateral Agent pursuant to subsection 5(b) hereof or any
other provision of this Agreement and (ii) the cash proceeds of the Securities
issued and sold pursuant to the Securities Purchase Agreement. Any income
received by the Collateral Agent with respect to the balance from time to time
standing to the credit of the Collateral Account, including any interest or
capital gains on Liquid Investments, shall remain, or be deposited, in the
Collateral Account. All right, title and interest in and to the cash amounts on
deposit from time to time in the Collateral Account together with any Liquid
Investments from time to time made pursuant to subsection 5(d) hereof shall vest
in the Collateral Agent, shall constitute part of the Collateral hereunder and
shall not constitute payment of the Secured Obligations until applied thereto as
hereinafter provided.
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<PAGE> 223
(b) The Company shall instruct all account debtors and other Persons
obligated in respect of all Accounts to make all payments in respect of the
Accounts either (i) directly to the Collateral Agent (by instructing that such
payments be remitted to a post office box which shall be in the name and under
the control of the Collateral Agent) or (ii) to one or more other banks in any
state (other than Louisiana) in the United States (by instructing that such
payments be remitted to a post office box which shall be in the name and under
the control of such bank) under a Lockbox Letter substantially in the form of
Exhibit C hereto duly executed by the Company and such bank or under other
arrangements, in form and substance satisfactory to the Collateral Agent,
pursuant to which the Company shall have irrevocably instructed such other bank
(and such other bank shall have agreed) to remit all proceeds of such payments
directly to the Collateral Agent for deposit into the Collateral Account or as
the Collateral Agent may otherwise instruct such bank. All such payments made to
the Collateral Agent shall be deposited in the Collateral Account. In addition
to the foregoing, the Company agrees that if the proceeds of any Collateral
hereunder (including the payments made in respect of Accounts) shall be received
by it, the Company shall as promptly as possible deposit such proceeds into the
Collateral Account. Until so deposited, all such proceeds shall be held in trust
by the Company for and as the property of the Secured Parties and shall not be
commingled with any other funds or property of the Company.
(c) The balance from time to time standing to the credit of the Collateral
Account shall, except upon the occurrence and continuation of an Event of
Default, be distributed to the Company upon the order of the Company. If
immediately available cash on deposit in the Collateral Account is not
sufficient to make any distribution to the Company referred to in the previous
sentence of this Section 5(c), the Collateral Agent shall liquidate as promptly
as practicable Liquid Investments as required to obtain sufficient cash to make
such distribution and, notwithstanding any other provision of this Section 5,
such distribution shall not be made until such liquidation has taken place. Upon
the occurrence and continuation of an Event of Default, the Collateral Agent
shall, if so instructed by the Required Lenders, apply or cause to be applied
(subject to collection) any or all of the balance from time to time standing to
the credit of the Collateral Account in the manner specified in Section 9.
(d) Amounts on deposit in the Collateral Account shall be invested and
re-invested from time to time in such Liquid Investments as the Company shall
determine, which Liquid Investments shall be held in the name and be under the
control of the Collateral Agent, provided that, if an Event of Default has
occurred and is continuing, the Collateral Agent shall, if instructed by the
Required Lenders, liquidate any such Liquid Securities and apply or cause to be
applied the proceeds thereof to the payment of the Secured Obligations in the
manner specified in Section 9. For this purpose, "LIQUID INVESTMENTS" means the
investments listed in clauses (b) and (c) of the definition of "PERMITTED
INVESTMENTS" in the Credit Agreement; provided that (x) each Liquid Investment
shall mature within 30 days after it is acquired by the Collateral Agent and (y)
in order to provide the Collateral Agent, for the benefit of the Secured
Parties, with a perfected security interest therein, each Liquid Investment
shall be either:
(i) evidenced by negotiable certificates or instruments, or if
non-negotiable then issued in the name of the Collateral Agent, which
(together with any appropriate instruments of transfer) are delivered to,
and held by, the Collateral Agent or an agent thereof (which shall not be
the Company or any of its Affiliates) in the State of New York; or
(ii) in book-entry form and issued by the United States and subject
to pledge under applicable state law and Treasury regulations and as to
which (in the opinion of counsel to the Collateral Agent) appropriate
measures shall have been taken for perfection of the Security Interests.
SECTION 6. General Authority. The Company hereby irrevocably appoints the
Collateral Agent its true and lawful attorney, with full power of substitution,
in the name of the Company, the Collateral Agent, the Secured Parties or
otherwise, for the sole use and benefit of the Secured Parties, but at the
Company's expense, to the extent permitted by law to exercise, at any time and
from time to time while an Event of
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Default has occurred and is continuing, all or any of the following powers with
respect to all or any of the Collateral:
(a) to demand, sue for, collect, receive and give acquittance for any
and all monies due or to become due thereon or by virtue thereof,
(b) to settle, compromise, compound, prosecute or defend any action or
proceeding with respect thereto,
(c) to sell, transfer, assign or otherwise deal in or with the same or
the proceeds or avails thereof, as fully and effectually as if the
Collateral Agent were the absolute owner thereof, and
(d) to extend the time of payment of any or all thereof and to make
any allowance and other adjustments with reference thereto;
provided that the Collateral Agent shall give the Company not less than ten
days' prior notice of the time and place of any sale or other intended
disposition of any of the Collateral, except any Collateral which is perishable
or threatens to decline speedily in value or is of a type customarily sold on a
recognized market. The Collateral Agent and the Company agree that such notice
constitutes "reasonable notification" within the meaning of Section 9-504(3) of
the UCC.
SECTION 7. Remedies upon Event of Default. (a) If any Event of Default has
occurred and is continuing, the Collateral Agent may exercise on behalf of the
Secured Parties all rights of a secured party under the UCC (whether or not in
effect in the jurisdiction where such rights are exercised) and, in addition,
the Collateral Agent may, without being required to give any notice, except as
herein provided or as may be required by mandatory provisions of law, (i)
withdraw all cash and Liquid Investments in the Collateral Account and apply
such cash and Liquid Investments and other cash, if any, then held by it as
Collateral as specified in Section 9 and (ii) if there shall be no such cash or
Liquid Investments or if such cash and Liquid Investments shall be insufficient
to pay all the Secured Obligations in full, sell the Collateral or any part
thereof at public or private sale, for cash, upon credit or for future delivery,
and at such price or prices as the Collateral Agent may deem satisfactory. Any
Secured Party may be the purchaser of any or all of the Collateral so sold at
any public sale (or, if the Collateral is of a type customarily sold in a
recognized market or is of a type which is the subject of widely distributed
standard price quotations, at any private sale). The Company will execute and
deliver such documents and take such other action as the Collateral Agent deems
necessary or advisable in order that any such sale may be made in compliance
with law. Upon any such sale the Collateral Agent shall have the right to
deliver, assign and transfer to the purchaser thereof the Collateral so sold.
Each purchaser at any such sale shall hold the Collateral so sold to it
absolutely and free from any claim or right of whatsoever kind, including any
equity or right of redemption of the Company which may be waived, and the
Company, to the extent permitted by law, hereby specifically waives all rights
of redemption, stay or appraisal which it has or may have under any law now
existing or hereafter adopted. The notice (if any) of such sale required by
Section 6 shall (A) in the case of a public sale, state the time and place fixed
for such sale, and (B) in the case of a private sale, state the day after which
such sale may be consummated. Any such public sale shall be held at such time or
times within ordinary business hours and at such place or places as the
Collateral Agent may fix in the notice of such sale. At any such sale the
Collateral may be sold in one lot as an entirety or in separate parcels, as the
Collateral Agent may determine. The Collateral Agent shall not be obligated to
make any such sale pursuant to any such notice. The Collateral Agent may,
without notice or publication, adjourn any public or private sale or cause the
same to be adjourned from time to time by announcement at the time and place
fixed for the sale, and such sale may be made at any time or place to which the
same may be so adjourned. In the case of any sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold may be
retained by the Collateral Agent until the selling price is paid by the
purchaser thereof, but the Collateral Agent shall not incur any liability in the
case of the failure of such purchaser to take up and pay for the Collateral so
sold and, in the case of any such failure, such Collateral may again be sold
upon like notice. The Collateral Agent, instead of exercising the power of sale
herein conferred upon it, may proceed by a suit or suits at law or in equity to
foreclose the Security Interests and sell the Collateral, or any portion
thereof, under a judgment or decree of a court or courts of competent
jurisdiction.
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(b) For the purpose of enforcing any and all rights and remedies under this
Agreement the Collateral Agent may (i) require the Company to, and the Company
agrees that it will, at its expense and upon the request of the Collateral
Agent, forthwith assemble all or any part of the Collateral as directed by the
Collateral Agent and make it available at a place designated by the Collateral
Agent which is, in its opinion, reasonably convenient to the Collateral Agent
and the Company, whether at the premises of the Company or otherwise, (ii) to
the extent permitted by applicable law, enter, with or without process of law
and without breach of the peace, any premise where any of the Collateral is or
may be located, and without charge or liability to it seize and remove such
Collateral from such premises, (iii) have access to and use the Company's books
and records relating to the Collateral and (iv) prior to the disposition of the
Collateral, store or transfer it without charge in or by means of any storage or
transportation facility owned or leased by the Company, process, repair or
recondition it or otherwise prepare it for disposition in any manner and to the
extent the Collateral Agent deems appropriate and, in connection with such
preparation and disposition, use without charge any trademark, trade name,
copyright, patent or technical process used by the Company. The Collateral Agent
may also render any or all of the Collateral unusable at the Company's premises
and may dispose of such Collateral on such premises without liability for rent
or costs.
SECTION 8. Limitation on Duty of Collateral Agent in Respect of
Collateral. Beyond the exercise of reasonable care in the custody thereof, the
Collateral Agent shall have no duty as to any Collateral in its possession or
control or in the possession or control of any agent or bailee or any income
thereon or as to the preservation of rights against prior parties or any other
rights pertaining thereto. The Collateral Agent shall be deemed to have
exercised reasonable care in the custody of the Collateral in its possession if
the Collateral is accorded treatment substantially equal to that which it
accords its own property, and shall not be liable or responsible for any loss or
damage to any of the Collateral, or for any diminution in the value thereof, by
reason of the act or omission of any warehouseman, carrier, forwarding agency,
consignee or other agent or bailee selected by the Collateral Agent in good
faith.
SECTION 9. Application of Proceeds. Upon the occurrence and during the
continuance of an Event of Default, the proceeds of any sale of, or other
realization upon, all or any part of the Collateral and any cash held in the
Collateral Account shall be applied by the Collateral Agent in the following
order of priorities:
FIRST, to pay the expenses of such sale or other realization,
including reasonable compensation to agents and counsel for the Collateral
Agent, and all expenses, liabilities and advances incurred or made by the
Collateral Agent in connection therewith, and any other unreimbursed
expenses for which any Secured Party is to be reimbursed pursuant to the
Securities Purchase Agreement or Section 12 hereof;
SECOND, to pay ratably the unpaid principal of the Secured
Obligations;
THIRD, to pay ratably the unpaid interest accrued on the Secured
Obligations in accordance with the provisions of the Bridge Securities and
this Agreement;
FOURTH, to pay ratably all other Secured Obligations, until all
Secured Obligations shall have been paid in full; and
FINALLY, to pay to the Company or its successors or assigns, or as a
court of competent jurisdiction may direct, any surplus then remaining from
such proceeds.
The Collateral Agent may make distributions hereunder in cash or in kind or, on
a ratable basis, in any combination thereof.
SECTION 10. Concerning the Collateral Agent. (a) The Collateral Agent is
authorized to take all such action as is provided to be taken by it as
Collateral Agent hereunder and all other action reasonably incidental thereto.
As to any matters not expressly provided for herein (including, without
limitation, the timing and methods of realization upon the Collateral) the
Collateral Agent shall act or refrain from acting in accordance with written
instructions from the Required Purchasers or, in the absence of such
instructions, in accordance with its discretion.
(b) The Collateral Agent shall not be responsible for the existence,
genuineness or value of any of the Collateral or for the validity,
perfection, priority or enforceability of the Security Interests in any of
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the Collateral, whether impaired by operation of law or by reason of any
action or omission to act on its part hereunder. The Collateral Agent shall
have no duty to ascertain or inquire as to the performance or observance of
any of the terms of this Agreement by the Company.
(c) BankAmerica Ventures and its affiliates may accept deposits from,
lend money to, and generally engage in any kind of business with the
Company or any subsidiary or affiliate of the Company as if it were not the
Collateral Agent hereunder.
(d) The obligations of the Collateral Agent hereunder are only those
expressly set forth herein. without limiting the generality of the
foregoing, the Collateral Agent shall not be required to take any action
with respect to any Event of Default, except as expressly provided herein.
(e) The Collateral Agent may consult with legal counsel, independent
public accountants and other experts selected by it and shall not be liable
for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts.
(f) Neither the Collateral Agent nor any director, officer, agent, or
employee of the Collateral Agent shall be liable for any action taken or
not taken by it in connection herewith (i) with the consent or at the
request of any Purchaser of any requests made in accordance with Section
10(a), the Required Purchaser or (ii) in the absence of its own gross
negligence or willful misconduct. Neither the Collateral Agent, nor any of
its affiliates, nor any of their respective directors, officers, agents or
employees, shall be responsible for or have any duty to ascertain, inquire
into or verify (i) any statement, warranty or representation made in
connection with this Agreement; (ii) the performance or observance of any
of the covenants or agreements of the Company; or (iii) the validity,
effectiveness or genuiness of this Agreement or any instrument or writing
furnished in connection herewith. The Collateral Agent shall not incur any
liability by acting in reliance upon any notice, consent, certificate,
statement, or other writing (which may be a bank wire, telex or similar
writing) believed by it to be genuine or to be signed by the proper party
or parties. The Collateral Agent shall not be responsible for the
existence, genuiness or value of any of the Collateral. The Collateral
Agent shall have no duty to ascertain or inquire as to the performance or
observance of any of the terms of this Agreement by the Company.
(g) Each Secured Party shall, ratably in accordance with the amount of
its Obligations, indemnify the Collateral Agent, its affiliates and their
respective directors, officers, agents and employees (to the extent not
reimbursed by the Assignor) against any cost, expense (including counsel
fees and disbursements), claim, demand, action, loss or liability (except
such as result from the indemnitees' gross negligence or willful
misconduct) that such indemnitees may suffer or incur in connection with
this Agreement or any action taken or omitted by such indemnitees hereunder
or thereunder.
(h) The Collateral Agent may resign at any time by giving written
notice of its resignation to the Secured Parties and the Company. Upon any
such resignation, the Purchasers shall have the right to appoint a
successor Collateral Agent (a "SUCCESSOR AGENT"). If no Successor Agent
shall have been so appointed by the Purchasers, and shall have accepted
such appointment, within 30 days after the retiring Security Agent's giving
of notice of resignation, then the retiring Collateral Agent may, on behalf
of the Secured Parties, appoint a Successor Agent. Upon the acceptance of
its appointment as Collateral Agent hereunder by a Successor Agent, such
Successor Agent shall thereupon succeed to and become vested with all the
rights and duties of the retiring Collateral Agent, and the retiring
Security Agent shall be discharged from its duties and obligations
hereunder. After any retiring Collateral Agent's resignation hereunder as
Collateral Agent, the provisions of this Section shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was
Collateral Agent.
(i) In order to comply with any legal requirement in any jurisdiction,
the Collateral Agent may at any time appoint another bank or trust company
or one or more other persons, either to act as co-agent or co-agents,
jointly with the Collateral Agent, or to act as separate agent or agents on
behalf of the Secured Parties with such power and authority as may be
necessary for the effectual operation of the provisions hereof and may be
specified in the instrument of appointment (which may, in the discretion of
the
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Collateral Agent, include provisions for the protection of such co-agent or
separate agent similar to the provisions of this Section 10).
(j) Each Purchaser irrevocably appoints and authorizes the Collateral
Agent to enter into and act as its agent in connection with the Financing
Documents and to take such action as agent on its behalf and to exercise
such powers under the Financing Documents as are delegated to it by the
terms hereof or thereof, together with such powers as are incidental
thereto.
SECTION 11. Expenses. If the Company fails to comply with the provisions of
the Bridge Securities or this Agreement, such that the value of any Collateral
or the validity, perfection, rank or value of any Security Interest is thereby
diminished or potentially diminished or put at risk, the Collateral Agent if
requested by the Required Purchasers may, but shall not be required to, effect
such compliance on behalf of the Company, and the Company shall reimburse the
Collateral Agent for the costs thereof on demand. All insurance expenses and all
expenses of protecting, storing, warehousing, appraising, insuring, handling,
maintaining, and shipping the Collateral, any and all excise, property, sales,
and use taxes imposed by any state, federal, or local authority on any of the
Collateral, or in respect of periodic appraisals and inspections of the
Collateral to the extent the same may be requested by the Required Purchasers
from time to time, or in respect of the sale or other disposition thereof shall
be borne and paid by the Company; and if the Company fails to promptly pay any
portion thereof when due, any Secured Party may, at its option, but shall not be
required to, pay the same and charge the Company's account therefor, and the
Company agrees to reimburse such Secured Party therefor on demand. All sums so
paid or incurred by any Secured Party for any of the foregoing and any and all
other sums for which the Company may become liable hereunder and all costs and
expenses (including attorneys' fees, legal expenses and court costs) reasonably
incurred by any Secured Party in enforcing or protecting the Security Interests
or any of their rights or remedies under this Agreement, shall, together with
interest thereon until paid at the rate otherwise applicable to the Bridge
Securities plus 5%, be additional Secured Obligations hereunder.
SECTION 12. Termination of Security Interests; Release of Collateral. Upon
the repayment in full of all Secured Obligations, the Security Interests shall
terminate and all rights to the Collateral shall revert to the Company. At any
time and from time to time prior to such termination of the Security Interests,
the Collateral Agent may release any of the Collateral with the prior written
consent of the Required Purchasers. Upon any such termination of the Security
Interests or release of Collateral, the Collateral Agent will, at the expense of
the Company, execute and deliver to the Company such documents as the Company
shall reasonably request to evidence the termination of the Security Interests
or the release of such Collateral, as the case may be.
SECTION 13. Notices. All notices, communications and distributions
hereunder shall be given in accordance with Section 9.01 of the Securities
Purchase Agreement.
SECTION 14. Waivers, Non-Exclusive Remedies. No failure on the part of the
Collateral Agent to exercise, and no delay in exercising and no course of
dealing with respect to, any right under this Agreement shall operate as a
waiver thereof; nor shall any single or partial exercise by the Collateral Agent
of any right under the Credit Agreement or this Agreement preclude any other or
further exercise thereof or the exercise of any other right. The rights in this
Agreement and the Credit Agreement are cumulative and are not exclusive of any
other remedies provided by law.
SECTION 15. Successors and Assigns. This Agreement is for the benefit of
the Secured Parties and their successors and assigns, and in the event of an
assignment of all or any of the Secured Obligations, the rights hereunder, to
the extent applicable to the indebtedness so assigned, shall be automatically
transferred with such indebtedness. This Agreement shall be binding on the
Company and its successors and assigns.
SECTION 16. Changes in Writing. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only in
writing signed by the Company and the Collateral Agent with the consent of the
Required Purchasers.
SECTION 17. California Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of California, except as otherwise
required by mandatory provisions of law and except to
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the extent that remedies provided by the laws of any jurisdiction other than
California are governed by the laws of such jurisdiction.
SECTION 18. Severability. If any provision hereof is invalid or
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Secured Parties in
order to carry out the intentions of the parties hereto as nearly as may be
possible; and (ii) the invalidity or unenforceability of any provision hereof in
any jurisdiction shall not affect the validity or enforceability of such
provision in any other jurisdiction.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
CARDIAC PATHWAYS CORPORATION
By:
--------------------------------------
Title: President and CEO
BANKAMERICA VENTURES, as
Collateral Agent
By:
--------------------------------------
Title: Managing Director
PURCHASERS
MORGAN STANLEY VENTURE PARTNERS III, L.P.
By: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital III, Inc.,
its Institutional Managing Member
By:
- ----------------------------------------------------
Title: General Partner
MORGAN STANLEY VENTURE INVESTORS III, L.P.
By: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital III, Inc.,
its Institutional Managing Member
By:
- ----------------------------------------------------
Title: General Partner
THE MORGAN STANLEY VENTURE PARTNERS
ENTREPRENEUR FUND, L.P.
By: Morgan Stanley Venture Partners III, L.L.C.
its General Partner
By: Morgan Stanley Venture Capital III, Inc.,
its Institutional Managing Member
By:
- ----------------------------------------------------
Title: General Partner
BANKAMERICA VENTURES
By:
- ----------------------------------------------------
Title: Managing Director
STATE OF WISCONSIN INVESTMENT BOARD
By:
- ----------------------------------------------------
Title: Investment Director
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EXHIBIT A
PERFECTION CERTIFICATE
The undersigned, the chief executive officer and chief legal officer of
CARDIAC PATHWAYS CORPORATION, a Delaware corporation (the "COMPANY"), hereby
certify with reference to the Security Agreement dated as of ,
19 between the Company and [ ], as Collateral Agent (terms
defined therein being used herein as therein defined), to the Secured Parties as
follows:
1. Names. (a) The exact corporate name of the Company as it appears in its
certificate of incorporation is as follows:
(b) Specified below is each other corporate name the Company has had since
its organization, together with the date of the relevant change:
(c) Except as specified in Schedule 1, the Company has not changed its
identity or corporate structure in any way within the past five years.
[Changes in identity or corporate structure would include mergers,
consolidations and acquisitions, as well as any change in the form, nature
or jurisdiction of corporate organization. If any such change has occurred,
include in Schedule 1 the information required by paragraphs 1, 2 and 3 of
this certificate as to each acquiree or constituent party to a merger or
consolidation.]
(d) The following is a list of all other names (including trade names or
similar appellations) used by the Company or any of its divisions or other
business units at any time during the past five years:
2. Current Locations. (a) The chief executive office of the Company is
located at the following address:
MAILING ADDRESS COUNTY STATE
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(b) The following are all the locations where the Company maintains any
books or records relating to any Accounts:
MAILING ADDRESS COUNTY STATE
(c) The following are all the places of business of the Company not
identified above:
MAILING ADDRESS COUNTY STATE
(d) The following are all the locations where the Company maintains any
Inventory not identified above:
MAILING ADDRESS COUNTY STATE
(e) The following are the names and addresses of all Persons other than the
Company which have possession of any of the Company's Inventory:
MAILING ADDRESS COUNTY STATE
3. Prior Locations. (a) Specified below is the information required by
subparagraphs 2(a), 2(b) and 2(c) above with respect to each location or place
of business maintained by the Company at any time during the past five years:
(b) Specified below is the information required by subparagraphs 2(d) and
2(e) above with respect to each location or bailee where or with whom Inventory
has been lodged at any time during the past four months:
4. Unusual Transactions. Except as specified in Schedule 4, all Accounts
have been originated by the Company and all Inventory and Equipment has been
acquired by the Company in the ordinary course of its business.
5. File Search Reports. Attached hereto as Schedule 5(A) is a true copy of
a file search report from the Uniform Commercial Code filing officer in each
jurisdiction identified in paragraph 2 or 3 above with respect to each name
specified in paragraph 1 above. Attached hereto as Schedule 5(B) is a true copy
of each financing statement or other filing identified in such file search
reports.
6. UCC Filings. A duly signed financing statement on Form UCC-1 in
substantially the form of Schedule 6(A) hereto has been duly filed in the
Uniform Commercial Code filing office in each jurisdiction identified in
paragraph 2 hereof. Attached hereto as Schedule 6(B) is a true copy of each such
filing duly acknowledged by the filing officer.
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7. Schedule of Filings. Attached hereto as Schedule 7 is a schedule setting
forth filing information with respect to the filings described in paragraph 6
above.
8. Filing Fees. All filing fees and taxes payable in connection with the
filings described in paragraph 6 above have been paid.
IN WITNESS WHEREOF, we have hereunto set our hands this day of
, 19 .
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
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<PAGE> 233
SCHEDULE 6(A)
DESCRIPTION OF COLLATERAL
All accounts, chattel paper, contract rights, documents, equipment, deposit
accounts, general intangibles, inventory and investment property, now owned or
hereafter acquired, wherever located, and all proceeds thereof.
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<PAGE> 234
SCHEDULE 7
SCHEDULE OF FILINGS
<TABLE>
<CAPTION>
DEBTOR FILING OFFICER FILE NUMBER DATE OF FILING(1)
- ------ -------------- ----------- -----------------
<S> <C> <C> <C>
</TABLE>
- ---------------
(1) Indicate lapse date, if other than fifth anniversary.
B-64
<PAGE> 235
EXHIBIT C
[FORM OF LOCKBOX LETTER]
, 19
[Name and Address of Lockbox Bank]
Re: CARDIAC PATHWAY CORPORATION
Gentlemen:
We hereby notify you that effective , 19 , we have transferred
exclusive ownership and control of our lock-box account[s] No[s]. (the
"LOCKBOX ACCOUNT[S]") maintained with you under the terms of the [Lockbox
Agreement] attached hereto as Exhibit A (the "LOCKBOX ACCOUNT[S]") to
[ ], as Collateral Agent (the "COLLATERAL AGENT").
We hereby irrevocably instruct you to make all payments to be made by you
out of or in connection with the Lockbox Account[s] (i) to the Collateral Agent
for credit to account no. maintained by it at its office at
[ ] or (ii) as you may otherwise be instructed by the Collateral
Agent.
We also hereby notify you that the Collateral Agent shall be irrevocably
entitled to exercise any and all rights in respect of or in connection with the
Lockbox Account[s], including, without limitation, the right to specify when
payments are to be made out of or in connection with the Lockbox Account[s].
All funds deposited into the Lockbox Account[s] will not be subject to
deductions, set-off, banker's lien or any other right in favor of any other
person than the Collateral Agent, except that you may set-off against the
Lockbox Account[s] the face amount of any check deposited in and credited to
such Lockbox Account[s] which is subsequently returned for any reason. Your
compensation for providing the services contemplated herein shall be as mutually
agreed between you and us from time to time and we will continue to pay such
compensation.
Please confirm your acknowledgment of and agreement to the foregoing
instructions by signing in the space provided below.
Very truly yours,
CARDIAC PATHWAYS CORPORATION
By:
------------------------------------
Name:
Title:
Acknowledged and agreed to
as of this day of ,
19 .
[LOCKBOX BANK]
By:
----------------------------------
Name:
Title:
B-65
<PAGE> 236
EXHIBIT D
PATENT SECURITY AGREEMENT
(PATENTS, PATENT APPLICATIONS AND PATENT LICENSES)
WHEREAS, Cardiac Pathways Corporation, a Delaware corporation (herein
referred to as "GRANTOR"), owns the Patents listed on Schedule 1 annexed hereto,
and is a party to the Patent Licenses listed on Schedule 1 annexed hereto;
WHEREAS, the Grantor and the purchasers listed therein are parties to a
Securities Purchase Agreement of even date herewith (as the same may be amended
and in effect from time to time among said parties and such lenders (the
"Lenders") as may from time to time be parties thereto, the "Securities Purchase
Agreement"), pursuant to which the Grantor has agreed to issue certain Senior
Convertible Floating Rate Bridge Notes (the "Bridge Securities");
WHEREAS, pursuant to the terms of the Security Agreement of even date
herewith (as said Agreement may be amended and in effect from time to time, the
"Security Agreement") between Grantor, and BankAmerica Ventures, as collateral
agent for the secured parties referred to therein (in such capacity, together
with its successors in such capacity pursuant to the terms of such Security
Agreement, the "Grantee"), Grantor has granted to Grantee for the ratable
benefit of such secured parties a security interest in substantially all the
assets of the Grantor including all right, title and interest of Grantor in, to
and under all Grantor's Patents (as defined in the Security Agreement), together
with any reissue, continuation, continuation-in-part or extension thereof, all
Grantor's Patent applications and all Grantor's Patent Licenses (as defined in
the Security Agreement), whether presently existing or hereafter arising or
acquired, and all products and proceeds thereof, including any and all causes of
action which may exist by reason of infringement thereof for the full term of
the Patents, to secure the payment of all amounts owing by the Grantor under the
Bridge Securities issued pursuant to Securities Purchase Agreement and the other
Financing Documents referred to therein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor does hereby grant to
Grantee a continuing security interest in all of Grantor's right, title and
interest in, to and under the following (all of the following items or types of
property being herein collectively referred to as the "Patent Collateral"),
whether presently existing or hereafter arising or acquired:
(i) each Patent and Patent application, including each Patent and
Patent application referred to in Schedule 1 annexed hereto;
(ii) each Patent License, including each Patent License listed on
Schedule 1 annexed hereto; and
(iii) all products and proceeds of the foregoing, including any claim
by Grantor against third parties for past, present or future infringement
of any Patent, including any Patent referred to in Schedule 1 annexed
hereto, and any Patent licensed under any Patent License, including any
Patent License listed on Schedule 1 annexed hereto.
This security interest is granted in conjunction with the security
interests granted to the Grantee pursuant to the Security Agreement. Grantor
does hereby further acknowledge and affirm that the rights and remedies of
Grantee with respect to the security interest in the Patent Collateral made and
granted hereby are more fully set forth in the Security Agreement, the terms and
provisions of which are incorporated by reference herein as if fully set forth
herein.
B-66
<PAGE> 237
IN WITNESS WHEREOF, Grantor has caused this Patent Security Agreement to be
duly executed by its officer thereunto duly authorized as of the th day of
, .
CARDIAC PATHWAYS CORPORATION
By:
Name:
Title:
Acknowledged:
BANKAMERICA VENTURES,
as Collateral Agent
By:
Name:
Title:
B-67
<PAGE> 238
<TABLE>
<S> <C>
STATE OF D
COUNTY OF C ss.:
</TABLE>
On the th day of , before me personally came ,
to me personally known and known to me to be the person described in and who
executed the foregoing instrument as of Cardiac Pathways Corporation,
who being by me duly sworn, did depose and say that he resides at ,
; that he is of Cardiac Pathways Corporation, the
corporation described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that the said instrument was signed and sealed on behalf of
said corporation by order of its Board of Directors; that he signed his name
thereto by like order; and that he acknowledged said instrument to be the free
act and deed of said corporation.
--------------------------------------
Notary Public
Notary Public, State of New York
My commission expires:
- ---------------------------------------------------------
B-68
<PAGE> 239
EXHIBIT E
TRADEMARK SECURITY AGREEMENT
(TRADEMARKS, TRADEMARK APPLICATIONS
AND TRADEMARK LICENSES)
WHEREAS, Cardiac Pathways Corporation, a Delaware corporation (herein
referred to as "GRANTOR"), owns the Trademarks listed on Schedule 1 annexed
hereto, and is a party to the Trademark Licenses listed on Schedule 1 annexed
hereto;
WHEREAS, the Grantor and the purchasers listed therein are parties to a
Securities Purchase Agreement of even date herewith (as the same may be amended
and in effect from time to time among said parties and such lenders (the
"LENDERS") as may from time to time be parties thereto, the "SECURITIES PURCHASE
AGREEMENT"), pursuant to which the Grantor has agreed to issue certain Senior
Convertible Floating Rate Bridge Notes (the "BRIDGE SECURITIES");
WHEREAS, pursuant to the terms of the Security Agreement of even date
herewith (as said Agreement may be amended and in effect from time to time, the
"SECURITY AGREEMENT") between Grantor, and BankAmerica Ventures, as collateral
agent for the secured parties referred to therein (in such capacity, together
with its successors in such capacity pursuant to the terms of such Security
Agreement, the "GRANTEE"), Grantor has granted to Grantee for the ratable
benefit of such secured parties a security interest in substantially all the
assets of the Grantor including all right, title and interest of Grantor in, to
and under all Grantor's Trademarks (as defined in the Security Agreement),
together with any reissue, continuation, continuation-in-part or extension
thereof, all Grantor's Trademark applications and all Grantor's Trademark
Licenses (as defined in the Security Agreement), whether presently existing or
hereafter arising or acquired, together with the goodwill of the business
connected with the use of, or symbolized by, the Trademarks and the applications
therefor and the registrations thereof, and all products and proceeds thereof,
including any and all causes of action which may exist by reason of infringement
or dilution thereof or injury to the associated goodwill, for the full term of
the Trademarks, to secure the payment of all amounts owing by the Grantor under
the Financing Documents;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor does hereby grant to
Grantee a continuing security interest in all of Grantor's right, title and
interest in, to and under the following (all of the following items or types of
property being herein collectively referred to as the "TRADEMARK COLLATERAL"),
whether presently existing or hereafter arising or acquired:
(i) each Trademark, including each Trademark application referred to
in Schedule 1 annexed hereto, and all of the goodwill of the business
connected with the use of, or symbolized by, each such Trademark;
(ii) each Trademark License, including each Trademark License listed
on Schedule 1 annexed hereto, and all of the goodwill of the business
connected with the use of, or symbolized by, each such Trademark licensed
pursuant thereto; and
(iii) all products and proceeds of the foregoing, including any claim
by Grantor against third parties for past, present or future infringement
or dilution of any Trademark, including any Trademark referred to in
Schedule 1 annexed hereto, and any Trademark licensed under any Trademark
License, including any Trademark License listed on Schedule 1 annexed
hereto, or for injury to the goodwill associated with any of the foregoing.
This security interest is granted in conjunction with the security
interests granted to the Grantee pursuant to the Security Agreement. Grantor
does hereby further acknowledge and affirm that the rights and remedies of
Grantee with respect to the security interest in the Trademark Collateral made
and granted hereby are more fully set forth in the Security Agreement, the terms
and provisions of which are incorporated by reference herein as if fully set
forth herein.
B-69
<PAGE> 240
IN WITNESS WHEREOF, Grantor has caused this Trademark Security Agreement to
be duly executed by its officer thereunto duly authorized as of the th day
of , .
CARDIAC PATHWAYS CORPORATION
By:
--------------------------------------
Name:
Title:
Acknowledged:
BANKAMERICA VENTURES,
as Collateral Agent
By:
- ----------------------------------------------------
Name:
Title:
B-70
<PAGE> 241
<TABLE>
<S> <C>
STATE OF NEW YORK D
COUNTY OF NEW YORK C ss.:
</TABLE>
On the th day of , before me personally came
, to me personally known and known to me to be the person
described in and who executed the foregoing instrument as [ ]
of Cardiac Pathways Corporation, who being by me duly sworn, did depose and say
that he resides at , ; that he is
[ ] of Cardiac Pathways Corporation, the corporation
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that the said instrument was signed and sealed on behalf of said
corporation by order of its Board of Directors; that he signed his name thereto
by like order; and that he acknowledged said instrument to be the free act and
deed of said corporation.
--------------------------------------
Notary Public
Notary Public, State of New York
My commission expires:
- ---------------------------------------------------------
B-71
<PAGE> 242
SCHEDULE 1 TO
TRADEMARK SECURITY AGREEMENT
TRADEMARKS AND TRADEMARK REGISTRATIONS
<TABLE>
<CAPTION>
REG. NO. REG. DATE
-------- ---------
<S> <C> <C>
Trademark..........................................
</TABLE>
TRADEMARK APPLICATIONS
<TABLE>
<CAPTION>
MARK DATE FILED SERIAL NO.
---- ---------- ----------
<S> <C> <C>
</TABLE>
TRADEMARK LICENSES
<TABLE>
<CAPTION>
AGREEMENT PARTIES DATE OF AGREEMENT SUBJECT MATTER
--------- ------- ----------------- --------------
<S> <C> <C> <C> <C>
As Licensee...............
As Licensor...............
</TABLE>
B-72
<PAGE> 243
COPYRIGHT SECURITY AGREEMENT
(COPYRIGHTS, COPYRIGHT REGISTRATIONS, COPYRIGHT
APPLICATIONS AND COPYRIGHT LICENSES)
WHEREAS, Cardiac Pathways Corporation, a Delaware corporation (herein
referred to as the "COMPANY") owns, or in the case of licenses, is a party to,
the Copyright Collateral (as defined below);
WHEREAS, the Company, and the purchasers listed therein are parties to a
Securities Purchase Agreement of even date herewith (as the same may be amended
and in effect from time to time among said parties and such lenders (the
"LENDERS") as may from time to time be parties thereto, the "SECURITIES PURCHASE
AGREEMENT"), pursuant to which the Company has agreed to issue certain Senior
Convertible Floating Rate Bridge Notes (the "BRIDGE SECURITIES");
WHEREAS, pursuant to the terms of the Security Agreement of even date
herewith (as said Agreement may be amended and in effect from time to time, the
"SECURITY AGREEMENT") between the Company, and BankAmerica Ventures, as
collateral agent for the secured parties referred to therein (in such capacity,
together with its successors in such capacity pursuant to the terms of such
Security Agreement, the "GRANTEE"), the Company has granted to Grantee for the
ratable benefit of such secured parties a security interest in substantially all
the assets of the Company including all right, title and interest of Grantor in,
to and under the Copyright Collateral (as defined below), whether now owned or
existing or hereafter acquired or arising, to secure the Secured Obligations (as
defined in the Security Agreement);
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company does hereby grant to
the Grantee, to secure the Secured Obligations, a continuing security interest
in all of the Company's right, title and interest in, to and under the following
(all of the following items or types of property being herein collectively
referred to as the "COPYRIGHT COLLATERAL"), whether now owned or existing or
hereafter acquired or arising:
(i) each Copyright (as defined in the Security Agreement) owned by the
Company, including, without limitation, each Copyright registration or
application therefor referred to in Schedule 1 hereto;
(ii) each Copyright License (as defined in the Security Agreement) to
which the Company is a party, including, without limitation, each Copyright
License identified in Schedule 1 hereto; and
(iii) all proceeds of and revenues from, accounts and general
intangibles arising out of, the foregoing, including, without limitation,
all proceeds of and revenues from any claim by the Company against third
parties for past, present or future infringement of any Copyright,
including, without limitation, any Copyright owned by the Company referred
to in Schedule 1, and all rights and benefits of the Company under any
Copyright License, including, without limitation, any Copyright License
identified in Schedule 1 hereto.
The Company hereby irrevocably constitutes and appoints the Grantee and any
officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full power and authority in the name of the Company
or in its name, from time to time, in the Grantee's discretion, so long as any
Event of Default shall have occurred and be continuing, to take with respect to
the Copyright Collateral any and all appropriate action which the Company might
take with respect to the Copyright Collateral and to execute any and all
documents and instruments which may be necessary or desirable to carry out the
terms of this Copyright Security Agreement and to accomplish the purposes
hereof.
Except to the extent permitted in the Security Agreement or the Credit
Agreement, the Company agrees not to sell, license, exchange, assign or
otherwise transfer or dispose of, or grant any rights with respect to, or
mortgage or otherwise encumber, any of the foregoing Copyright Collateral.
The foregoing security interest is granted in conjunction with the security
interests granted by the Company to the Grantee pursuant to the Security
Agreement. The Company does hereby further acknowledge and affirm that the
rights and remedies of the Grantee with respect to the security interest in the
B-73
<PAGE> 244
Copyright Collateral granted hereby are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated by reference
herein as if fully set forth herein.
IN WITNESS WHEREOF, the Company has caused this Copyright Security
Agreement to be duly executed by its officer thereunto duly authorized as of the
day of , .
CARDIAC PATHWAYS CORPORATION
By:
------------------------------------
Name:
Title:
Acknowledged:
BANKAMERICA VENTURES, as Collateral Agent
By:
--------------------------------------------------------
Name:
Title:
B-74
<PAGE> 245
<TABLE>
<S> <C>
STATE OF CALIFORNIA D
COUNTY OF LOS ANGELES C ss.:
</TABLE>
I, , a Notary Public in and for said County, in the
State aforesaid, DO HEREBY CERTIFY, that ,
of Cardiac Pathways Corporation (the "Company"), personally
known to me to be the same person whose name is subscribed to the foregoing
instrument as such , appeared before me this day in person
and acknowledged that (s)he signed, executed and delivered the said instrument
as her/his own free and voluntary act and as the free and voluntary act of said
Company, for the uses and purposes therein set forth being duly authorized so to
do.
GIVEN under my hand and Notarial Seal this day of ,
.
[Seal]
- --------------------------------------
Signature of notary public
My Commission expires
B-75
<PAGE> 246
SCHEDULE 1 TO COPYRIGHT
SECURITY AGREEMENT
CARDIAC PATHWAYS CORPORATION
U.S. COPYRIGHT REGISTRATIONS
<TABLE>
<CAPTION>
REGISTRATION REGISTRATION EXPIRATION
NO. DATE TITLE DATE
------------ ------------ -------- ----------
<S> <C> <C> <C>
None.......................................
</TABLE>
PENDING U.S. COPYRIGHT REGISTRATION APPLICATIONS
<TABLE>
<CAPTION>
EXPIRATION
SERIAL NO. FILING DATE TITLE DATE
---------- ----------- -------- ----------
<S> <C> <C> <C>
None.......................................
</TABLE>
U.S. COPYRIGHT LICENSES
<TABLE>
<CAPTION>
EXPIRATION
LICENSOR LICENSEE SUBJECT MATTER EFFECTIVE DATE DATE
-------- -------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
None.......................
</TABLE>
B-76
<PAGE> 247
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF CARDIAC PATHWAYS CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Cardiac Pathways Corporation, a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement each dated June 22, 1999 and hereby appoints
Thomas Prescott and Michael Latta or either of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned to represent the undersigned at the Special Meeting of
Stockholders of Cardiac Pathways Corporation to be held on July 20, 1999 at
12:00 p.m., local time, at the Cardiac Pathways Corporation's principal
executive offices located at 995 Benecia Avenue, Sunnyvale, California 94086 and
at any postponement or adjournment thereof, and to vote all shares of Common
Stock which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth on the reverse.
SEE REVERSE SIDE
<PAGE> 248
[X] PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED "FOR" PROPOSALS 1, 2, 3 AND 4 AND AS THE PROXY HOLDERS DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
1. Proposal to approve the amendment and restatement of the Cardiac Pathways
certificate of incorporation to effect a one-for-five reverse stock split of
the outstanding common stock. [ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal to approve the amendment and restatement of the Cardiac Pathways
certificate of incorporation to provide for an increase in the number of
authorized shares of common stock to 75,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to approve the sale of up to 40,000 shares of series B convertible
preferred stock and the issuance of Cardiac Pathways common stock in excess
of 20% of the outstanding common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to approve an amendment of Cardiac Pathways 1991 Stock Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 4,000,000 shares and increase the share limitations under the
Plan for purposes of Section 162(m) of the Internal Revenue Code of 1986, as
amended.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW
PLEASE SIGN EXACTLY AS YOUR
NAME APPEARS HEREON. IF THE
STOCK IS REGISTERED IN THE
NAMES OF TWO OR MORE PERSONS,
EACH SHOULD SIGN. EXECUTORS,
ADMINISTRATORS, TRUSTEES,
GUARDIANS AND ATTORNEYS-IN-FACT
SHOULD ADD THEIR TITLES. IF
SIGNER IS A CORPORATION, PLEASE
GIVE FULL CORPORATE NAME AND
HAVE A DULY AUTHORIZED OFFICER
SIGN, STATING TITLE. IF SIGNER
IS A PARTNERSHIP, PLEASE SIGN
IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
PLEASE SIGN, DATE AND PROMPTLY
RETURN THIS PROXY IN THE
ENCLOSED RETURN ENVELOPE WHICH
IS POSTAGE PREPAID IF MAILED IN
THE UNITED STATES.
SIGNATURE: ____________________ DATE: ___________
SIGNATURE: ____________________ DATE:____________
<PAGE> 249
CARDIAC PATHWAYS CORPORATION
1991 STOCK PLAN
(AS AMENDED APRIL 1996)
(AS FURTHER AMENDED OCTOBER 1997)
(AS FURTHER AMENDED OCTOBER 1998)
(AS FURTHER AMENDED NOVEMBER 1998)
(AS FURTHER AMENDED MAY 1999)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. CERTAIN DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Cardiac Pathways Corporation, a California
corporation.
(g) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services. The term Consultant shall not include directors
who are not compensated for their services or are paid only a director's fee by
the Company.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means that the
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted 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. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other
<PAGE> 250
personal leave approved by an authorized representative of the Company. For
purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
(i) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "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.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(n) "OPTION" means a stock option granted pursuant to the Plan.
(o) "OPTIONED STOCK" means the Common Stock subject to an Option.
(p) "OPTIONEE" means an Employee or Consultant who receives an
Option.
(q) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
-2-
<PAGE> 251
(r) "PLAN" means this 1991 Stock Plan.
(s) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(t) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(u) "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 14 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 6,567,030 shares of Common Stock. The shares may be
authorized, but unissued, or re-acquired Common Stock.
If an Option or Stock Purchase Right should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3,
the Plan may be administered by different bodies with respect to directors,
officers who are not directors, and Employees who are neither directors nor
officers.
(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS
SUBJECT TO SECTION 16(b). With respect to Option or Stock Purchase Right grants
made to Employees who are also officers or directors subject to Section 16 of
the Exchange Act, the Plan shall be administered by (A) the Board, if the Board
may administer the Plan in a manner complying with the rules under Rule 16b-3
relating to the disinterested administration of employee benefit plans under
which Section 16(b) exempt discretionary grants and awards of equity securities
are to be made, or (B) a Committee designated by the Board to administer the
Plan, which Committee shall be constituted to comply with the rules under Rule
16b-3 relating to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made. Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint
additional members, remove members (with or without cause) and substitute new
members, fill vacancies (however caused), and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the rules under Rule 16b-3 relating to the disinterested
administration of employee benefit plans under which Section 16(b) exempt
discretionary grants and awards of equity securities are to be made.
-3-
<PAGE> 252
(iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With respect
to Option or Stock Purchase Right grants made to Employees or Consultants who
are neither directors nor officers of the Company, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board, which
committee shall be constituted to satisfy the legal requirements relating to the
administration of incentive stock plans of California corporate and securities
laws and the Code (the "Applicable Laws"). Once appointed, such Committee shall
serve in its designated capacity until otherwise directed by the Board. The
Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, 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, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award 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 (including, but not
limited to, the share price and any restriction or limitation or waiver of
forfeiture restrictions regarding any Option or other award and/or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator shall determine, in its sole discretion;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under subsection 10(f) instead of Common Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election of the
participant (including providing for and determining the amount, if any, of any
deemed earnings on any deferred amount during any deferral period);
(ix) 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
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declined since the date the Option was granted; provided, however, that the
Administrator must seek the prior consent of the Board of Directors and
stockholders of the Company to effect such action; and
(x) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all Optionees
and any other holders of any Options.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if he is otherwise eligible, be granted additional
Options or Stock Purchase Rights.
6. LIMITATIONS.
(a) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted. If
an Option is granted hereunder that is part Incentive Stock Option and part
Nonstatutory Stock Option due to becoming first exercisable in any calendar year
in excess of $100,000, the Incentive Stock Option portion of such Option shall
become exercisable first in such calendar year, and the Nonstatutory Stock
Option portion shall commence becoming exercisable once the $100,000 limit has
been reached.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
employment or consulting relationship with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
employment or consulting relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options and
Stock Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 2,000,000 Shares.
(ii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 14.
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(iii) If an Option or Stock Purchase Right is cancelled in the
same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 14), the cancelled Option or
Stock Purchase Right will be counted against the limit set forth in subsection
(i) above. For this purpose, if the exercise price of an Option or Stock
Purchase Right is reduced, the transaction will be treated as a cancellation of
the Option or Stock Purchase Right and the grant of a new Option or Stock
Purchase Right.
7. 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 as described in Section 20 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 16 of the Plan.
8. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an INCENTIVE STOCK OPTION
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a NONSTATUTORY STOCK OPTION, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(b) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
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(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) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option, and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
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 stock
certificate evidencing such 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 Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend
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or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be 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 EMPLOYMENT OR CONSULTING RELATIONSHIP. Upon
termination of an Optionee's Continuous Status as an Employee, other than upon
the Optionee's death or Disability, the Optionee may exercise his or her Option
within such period of time as is specified in the option agreement to the extent
that he or she is entitled to exercise it on the date of termination (but in no
event later than the expiration of the term of such Option). 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. In the case of an
Incentive Stock Option, such period of time for exercise shall not exceed three
(3) months from the date of termination. If, on the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable 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.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, the Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. In such event, an Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option
beginning three months and one day following such change of status.
(c) DISABILITY OF OPTIONEE. Upon termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of the Optionee's
total and permanent disability (as defined in Section 22(e)(3) of the Code), the
Optionee may exercise his or her Option at any time within twelve (12) months
from the date of termination, but only to the extent that the Optionee is
entitled to exercise it on the date of termination (and in no event later than
the expiration of the term of the Option). If, on the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable 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. Upon the death of an Optionee, the Option may
be exercised at any time within twelve (12) months following the date of death
(but in no event later than the expiration of the term of such Option), 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 Optionee would have
been entitled to exercise the Option on the date of death. If, at the time of
death, the Optionee is not entitled to exercise his or her entire Option, the
Shares covered by the unexercisable portion of the Option shall immediately
revert to the Plan. If the Optionee's estate or the person who
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acquires the right to exercise the Option by bequest or inheritance does not
exercise the Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) RULE 16B-3. Options granted to persons subject to Section 16 of
the Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 50% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
(b) REPURCHASE OPTION. Unless the Administrator determines otherwise,
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the Committee
may determine.
(c) RULE 16B-3. Stock Purchase Rights granted to persons subject to
Section 16 of the Exchange Act, and Shares purchased by such persons in
connection with Stock Purchase Rights, shall be subject to any restrictions
applicable thereto in compliance with Rule 16b-3. Such persons may only purchase
Shares pursuant to the grant of a Stock Purchase Right, and may only sell Shares
purchased pursuant to the grant of a Stock Purchase Right, during such time or
times as are permitted by Rule 16b-3.
(d) OTHER PROVISIONS. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by
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the Administrator in its sole discretion. In addition, the provisions of
Restricted Stock purchase agreements need not be the same with respect to each
purchaser.
(e) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. An Option or
Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
13. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option, or the Shares to be issued in connection with the Stock Purchase Right,
if any, 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 (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Right as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is subject to Section 16 of the Exchange Act, the
election must comply with the applicable provisions of Rule 16b-3 and shall be
subject to such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act with respect to Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock
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Purchase Right is exercised, but such Optionee shall be unconditionally
obligated to tender back to the Company the proper number of Shares on the Tax
Date.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(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 and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall have the right to exercise the Option
or Stock Purchase Right as to all of the Optioned Stock, including Shares as to
which it would not otherwise be exercisable. If an Option or Stock Purchase
Right is exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or
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Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets was not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option or Stock Purchase Right, for each
Share of Optioned Stock subject to the Option or Stock Purchase Right, to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
15. TIME OF GRANTING OPTIONS. The date of grant of an Option or Stock
Purchase Right shall, for all purposes, be the date on which the Administrator
makes the determination granting such Option or Stock Purchase Right, or such
other date as is determined by the Board. Notice of the determination shall be
given to each Employee or Consultant to whom an Option or Stock Purchase Right
is so granted within a reasonable time after the date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act or with Section 422 of the Code (or any other applicable law or
regulation, including the requirements of the NASD of an established stock
exchange), the Company shall obtain stockholder approval of any Plan amendment
in such a manner and to such a degree as required.
17. CONDITIONS UPON ISSUANCE OF SHARES. 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 pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, 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.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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
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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.
19. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Board shall approve from time to time.
20. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law. In
addition, should the Administrator determine that it is appropriate to reduce
the exercise price of any Option pursuant to Section 4(b)(ix) of the Plan, the
Administrator shall seek the prior consent of the stockholders to effect such
action.
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